Academic journal article Federal Reserve Bulletin

J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the Federal Reserve System

Academic journal article Federal Reserve Bulletin

J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the Federal Reserve System

Article excerpt

Statement by J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer and Regulatory Affairs of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, May 23, 1991.

I am pleased to appear today before this subcommittee to describe the Federal Reserve's experience with the Bank of Credit and Commerce International (BCCI) and to express the Federal Reserve's support for S.1019, the Foreign Bank Supervision Enhancement Act. As its name implies, this legislation is intended to strengthen the supervision and regulation of foreign banks operating in the United States.


Foreign bank operations in this country are large--accounting for about 21 percent of U.S. banking assets--and growing. Experience with fraud and other criminal activity at a small number of foreign banks over the past several years has convinced the Board that greater and better coordinated attention needs to be paid by state and federal regulators to the U.S. offices of these institutions. Although the problems do not at this time appear to be widespread in relation to the overall presence of foreign banks in the United States, recent experience in other areas of the financial services industry demonstrates that regulators cannot prudently ignore any early-warning signs of trouble.

For this reason, and in light of the Board's continuing strong interest in ensuring that sound prudential and supervisory policies are in place for all banking institutions in the United States, the Board has proposed legislation to fill gaps in the supervisory and regulatory framework governing foreign bank operations in this country. The proposals are intended to help ensure that the banking policies established by the Congress are implemented in a fair and uniform manner with respect to all entities conducting a banking business in the United States and that the sizable foreign bank community in this country adheres to legal requirements and operates in a safe and sound manner.

To this end, S.1019 would establish uniform federal standards for entry and expansion of foreign banks in the United States, including, importantly, a requirement of consolidated home country supervision and the application of the same financial, managerial, and operational standards that govern U.S. banks. The proposal would also grant regulators the power to terminate the activities of a foreign bank that is engaging in illegal, unsafe, or unsound practices and provide regulators with the information-gathering tools necessary to carry out their supervisory responsibilities. The proposal would clarify the Board's examination authority over foreign banks by providing that it may coordinate examinations of all U.S. offices of a foreign bank.

This legislation draws on the Board's overall experience in regulating foreign banks operating in this country, as well as its review of the loan practices of the Atlanta agency of Banca Nazionale del Lavoro and the U.S. activities of the BCCI, including its acquisition of First American Bankshares, a U.S. bank holding company, and its conviction for money laundering.

With regard to the BCCI case, the Board was concerned about the relationship of the BCCI to First American from the beginning. In the application by a group of Middle Eastern investors to acquire First American and at a hearing called by the Board on the matter in 1981, the Board received numerous assurances that the BCCI would not fund the acquisition and would have no relationship with First American other than serving as investment adviser to the investing shareholders.

In the years immediately after the acquisition, the Board had no indication that the BCCI had financed the acquisition of First American or that other assurances given to the Board had not been honored. Shortly after the BCCI was indicted for money laundering in 1988, the Federal Reserve began a special inquiry into any linkage between the BCCI and First American. …

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