SIC 6081 Branches and Agencies of Foreign Banks
SIC 6081
This industry category includes establishments operating as branches or agencies of foreign banks that specialize in commercial loans, especially in trade finance. They typically fund themselves via large-denomination interbank deposits, rather than through smaller denomination retail deposits. Federally licensed agencies of foreign banks may not accept deposits. Federal branches may accept deposits; however, if they choose to accept deposits in denominations of $100,000 or less, federal deposit insurance is required. Establishments that are owned by foreign banks but primarily engaged in accepting retail deposits from the general public in the United States are classified as commercial banks.
522293
International Trade Financing
522110
Commercial Banking
522298
All Other Nondepository Credit Intermediation
Historically, banks that were chartered in a particular country conducted most of their business in that domestic market. The long period of prosperity in the 1960s and early 1970s, however, led to substantial increases in global operations of industrial and commercial companies. This, in turn, caused an increase in international banking activity, because banks tend to follow their customers. Since the early 1980s, however, financial institutions in the United States and in other nations have rapidly expanded their overseas offices.
Foreign banking increased steadily during the late 1990s and the first half of the 2000s. In 1997, foreign banks held $1.12 trillion in assets in the United States. By June, 2002, assets had grown to $1.34 trillion, and at the end of 2004, foreign banks had assets totaling $1.55 trillion in the United States. Of the 476 foreign banking organizations operating in the United States at the end of 2004, almost 80 percent functioned as branches or agencies. According to the Conference of State Bank Supervisors, 85 percent of foreign banking firms are state-regulated and account for approximately 83 percent of all foreign banking assets in the United States. Foreign banking in the United States is dominated by banks based in Europe (France, Germany, and the United Kingdom) and Japan.
Following the terrorist attacks of September 11, 2001, foreign banks came under significant scrutiny as the United States aggressively sought out any foreign banking organizations that aided terrorist activities.
Foreign banks operate in the United States through five types of banking offices: branches, agencies, investment companies, "edge" or "agreement" corporations, and commercial banks.
Historically, foreign banks have opened limited branches in more than one state with relative ease, and nearly half of the foreign banks with U.S. offices have established multistate banking facilities. To enter the U.S. financial markets, most foreign banks initially opened offices in New York City; the institutions then opened offices in other parts of the country, particularly in places where a bank's home-country customers had trade or financial relationships. The International Banking Act (IBA) and the Foreign Bank Supervision Act of 1991 govern the establishment of branches at the federal level (licensed by the Comptroller of the Currency) in any state that does not prohibit such a branch. Foreign banks may also obtain branching licenses from certain states. These states usually require the foreign banks to have their deposits insured by the Federal Deposit Insurance Corporation (FDIC). State law also generally requires the foreign bank's home country to offer reciprocity to U.S. banks seeking to branch into that nation. The IBA grandfathers existing multistate branching networks of foreign banks; however, establishing branches in more than one state is prohibited. State banking regulators supervise about 83 percent of all the U.S. assets of foreign banks. In 2004, New York accounted for more than 22 percent of all foreign branch and agency locations and 75 percent of foreign bank assets in the United States. Illinois accounted for about 10 percent, with the remaining foreign assets scattered primarily in California, Michigan, Connecticut, Florida, and North Carolina. Another fifteen states also had a foreign banking presence.
A more limited type of banking than that provided by a branch may be engaged in by a foreign bank through an agency. For the most part, agencies and branches offer similar services and enjoy similar powers; however, agencies are not permitted to accept domestic deposits. They can accept credit balances of customers in connection with international activities. Although agencies may not accept domestic deposits, they have more flexibility than branches because they are not subject to reserve requirements or to loan limits for a single borrower. Federal agencies would be subject to loan limits for a single borrower, and they would be required to keep on deposit with a member bank investment securities and deposits equal to the amount of capital that would be required if the agency were being established as a national bank at that location.
Unlike the other types of U.S. offices, which are separate institutions, agencies and branches are integral parts of their parent banks. Both agencies and branches may conduct full-scale lending operations. Agencies and branches generally are wholesale banking offices; that is, their customers are chiefly banks and other nonbank businesses rather than individuals, and they compete primarily with large U.S. banks. In the mid-2000s, agencies and branches of foreign banks held more than 75 percent of all assets held by foreign banks in the United States. Whereas branch operations increased activities in the United States during the late 1990s and early 2000s, the more restrictive structure of foreign bank agencies declined. Nearly half of the credit extended by the agencies and branches was in the form of business loans, with about one-quarter of these loans representing lending to non-U.S. residents.
New York State permits the organization of investment companies by foreign banks. Investment companies, like agencies, may not accept domestic deposits but can hold customers' credit balances. They are subject to neither reserve requirements nor limits on loans to a single borrower and operate essentially as commercial finance companies.
The International Banking Act (IBA) allowed foreign banks to own, with the prior approval of the Board of Governors of the Federal Reserve System, a majority of the stock of an edge corporation. Furthermore, the IBA repealed the stipulation that edge corporation directors be U.S. citizens. Edge corporations are similar to agencies in that they may not accept domestic deposits but may hold credit balances pursuant to international business. They are chartered by the Board of Governors of the Federal Reserve System and may be domiciled anywhere in the United States. Additionally, a bank may establish more than one edge corporation in more than one state. Agreement corporations are state-chartered corporations that have entered an agreement with the Federal Reserve Board to limit their activities to those of an edge corporation.
In contrast to agencies and branches, many commercial bank subsidiaries are retail banks whose customers include many individuals and smaller businesses. Unlike agencies and branches, these banks are engaged in consumer and real estate lending in about the same proportions as domestically owned commercial banks. In California and New York in particular, foreign banks have acquired subsidiary commercial banks with large retail branch networks. In the early 2000s, 79 foreign commercial banks operated in the United States.
The Bank Holding Company Act (BHCA) regulates the foreign ownership of a United States bank. Any company—including partnerships, but excluding individuals—that owns 25 percent of a U.S. bank is considered a bank holding company and must apply, pursuant to the terms in Section 3 of the BHCA, for permission from the Federal Reserve System to acquire that bank. The tests required by the BHCA relate to competition and the public interest. These requirements are less likely to present problems for a foreign bank holding company, because an application to acquire a U.S. bank is not likely to have an anticompetitive effect unless the holding company already owns another U.S. bank or is in a consortium or joint venture with U.S. banks, or unless the bank to be acquired is active in international banking.
There are several other ways in which foreign banks or individuals can participate in a less direct way in U.S. banking markets. For example, they can purchase less than a controlling interest in a U.S. bank merely as an investment. Another way for interested parties to participate is through a correspondent relationship, whereby a U.S. bank will perform various services for the foreign institution. A final approach available to foreign banks and individuals is the representative office. A representative office is merely an office of a representative of the foreign bank. Technically, such an office cannot engage in banking...
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