FDIC Improvement Act of 1991: Impact on Foreign Banks

By Kelly, Edward J.,, III | American Banker, December 16, 1991 | Go to article overview

FDIC Improvement Act of 1991: Impact on Foreign Banks


Kelly, Edward J.,, III, American Banker


Although Congress has rejected the broad banking reform package proposed by the administration early this year, it enacted comparatively narrow legislation - the Federal Deposit Insurance Corporation Improvement Act of 1991 - on Nov. 27.

The act contains numerous provisions of particular interest to Japanese and other foreign commercial banking organizations that have representative offices, agencies, branches, commercial lending offices, or banking subsidiaries in the United States.

Although it is impossible to predict all the ways this act will affect foreign banks, some trends are visible. The BCCI and Banco Nationale scandals have motivated U.S. banking regulators, particularly the Federal Reserve Board, to increase general oversight of foreign banks and to become more inquisitive - if not, in fact, suspicious - about the activities and ownership structure of foreign banks.

For foreign banks, at least, the 1990s are likely to be an era of heightened and more intrusive regulation by U.S. banking regulators.

Many elements of the reform package that would have affected foreign banks in general, and Japanese banks in particular, have not been enacted into law. These include:

* Various provisions requiring foreign banks to roll up their branches in order to take advantage of new powers or to branch interstate.

* Termination of grandfathered securities affiliates.

* Elimination of the exemption from registration under the securities laws for securities issued by branches, the Fair Trade in Financial Services Act, and elimination of the bank exemption from the broker registration requirement of the securities laws.

Some of these proposals, however, are hardy Washington perennials. The fact that they have failed to pass during this congressional term is no assurance that they will not return during a future session.

In particular, the conferees agreed that the Fair Trade in Financial Services Act would be reconsidered during the next congressional session. Moreover, the requirement to conduct a study on the desirability of a general branch office roll-up will keep this idea on the legislative and regulatory agenda.

The improvement act contains numerous provisions inspired by the BCCI scandal and designed to heighten the oversight of foreign banks.

Capital Restoration

The act mandates adoption of a capital-restoration plan whenever an insured depositary institution becomes "undercapitalized." To be accepted by the regulators, this plan must be guaranteed by any "company having control" of the insured depository institution until such time as the insured institution has satisfied all applicable capital standards for four consecutive quarters.

The act limits the aggregate liability of the controlling company to the lesser of 5% of the depository institution's total assets at the time it became under capitalized or "the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards with respect to such institution as of the time the institution fails to comply with a plan under this subsection."

If the controlling company cannot or is unwilling to guarantee the capital-restoration plan, it may - among other things - apparently be required to divest itself of the insured bank or to forego paying dividends.

The controlling company capital restoration liability will concern foreign banks that intend to make either minority or controlling investments in United States bank holding companies. Certain investments, which are intended to be passive minority investments - from the perspective of the foreign bank - may be deemed to be "controlling" investments by the FDIC.

The Federal Reserve Board gives a broad meaning to the word "control." It may determine that a company controls a bank even in circumstances in which that company directly or indirectly owns or controls much less than 25% of the capital of that bank. …

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