A by-product of the globalization process: the rise of cross-border bank mergers and acquisitions: the U.S. regulatory framework

This Article examines the U.S. regulatory framework as it pertains to foreign bank acquisitions of U.S. banking interests, particularly from the “regulatory approval” perspective. Over the past two decades, the United States has endeavored to establish a domestic “level playing field” for the U.S.-based operations of U.S. and foreign banking institutions through the legal and practical imposition of a “national treatment” approach. The U.S. banking authorities have also used an international standards-based “gateway” for foreign banking institutions to initially enter the United States. In order to provide some practical insights and reference points, this Article endeavors to address these issues in the context of two recently completed foreign bank M&A transactions in the United States. This Article then considers the issue of access to “nonbank,” but financially related, activities for banking institutions in the United States as a result of, and motivating factor behind, foreign bank M&As of U.S. banking institutions and other U.S. financial institutions. In this context, the possible relevant implications of the most recent U.S. banking reform legislation is considered. The Article concludes with selective observations.

INTRODUCTION

One of the more visible and significant dimensions of the ongoing “globalization”(1) of financial markets and capital flows(2) is the rise of major domestic and cross-border bank mergers and acquisitions (M&As) that have substantial regional and global financial and legal implications.(3) This current global “urge to merge” in banking may emanate from a number of specific catalysts, including reactions to financial sector crises and restructurings,(4) global market strategic positioning,(5) severe competitive pressures on a cross-financial industry basis,(6) and furtherance of regional, subregional, and cross-cultural trading and investment areas.(7)

One effect of the global bank M&A trend is the consolidation of numerous U.S. and foreign banking institutions into an “elite corps” of global banking conglomerates,(8) and another effect is the dramatic reconfiguration of the actual global playing field for other nonbank financial conglomerates.(9) The ongoing series of cross-border bank M&As has also created the need for greater international cooperation among bank and nonbank financial regulatory and supervisory authorities, and for appropriate and applicable international bank regulatory/supervisory standards.(10) In this sense, bank regulatory/supervisory processes are becoming increasingly “globalized.”(11)

In one respect, the globalization of bank regulatory/supervisory processes is accelerating a convergence of banking laws and regulations and an international standardization of supervisory practices. In another respect, the complexities and compressions resulting from the globalization of such processes are pushing the bank regulators/supervisors and management of the major global banking organizations into an evolving “public-private partnership.”(12) Although outside the scope of this Article, it is suggested that this unfolding “regulatory market partnership” is being further fostered by the U.S. efforts to promote (bilaterally, regionally, and globally) the liberalization of cross-border financial services and investment.(13)

In any event, there is little question that U.S. and foreign bank regulatory authorities have encouraged, or have acquiesced to, domestic and global banking consolidation, in part because consolidation may facilitate enhanced diversification, recapitalization, and investment in information technology. An additional rationale may also be that the “playing field” will be easier to regulate and supervise with fewer and more visible global banking organizations.(14) Yet, notwithstanding the perceived benefits of global banking consolidation, the regulatory environment promises to become increasingly complex and challenging from the perspectives of effective bank risk management and other prudential concerns, such as capital adequacy.(15)

It is this “regulatory environment” that is the primary focus of this Article. Whether or not one accepts the premise of an unfolding “regulatory market partnership,” the practical cooperative dynamics among bank regulatory authorities and bank management and their lawyers are a critical determination in the success of modern cross-border bank M&As. By analogy, similar cooperative dynamics were required and developed during the 1980s in the global development of securitization markets(16) and in the 1990s rise of global securities transactions.(17)

This Article examines the U.S. regulatory framework as it pertains to foreign bank acquisitions of U.S. banking interests, particularly from the “regulatory approval” perspective. Over the past two decades, the United States has endeavored to establish a domestic “level playing field” for the U.S.-based operations of U.S. and foreign banking organizations by the legal and practical imposition of a “national treatment” approach. The U.S. banking authorities have also used an international standards-based (but domestically applied) “gateway” for foreign banking organizations to initially enter the United States

The actual U.S. regulatory framework pertaining to foreign bank M&As of U.S. bank holding companies (BHCs), subsidiary banks, and nonbank affiliates entails various general considerations that might be applicable for cross-border M&As in other jurisdictions/regions and various particularized considerations that make the U.S. process oriented towards U.S. peculiarities.(18)

Furthermore, there are numerous issues in the approval process for a foreign bank to surmount in obtaining U.S. banking authority approval to conduct M&A of U.S. banking and nonbank affiliate interests. These general and other selective regulatory issues are considered next.

In order to provide some practical insights and reference points, this Article endeavors to address the issues raised above in the context of two recently completed foreign bank M&A transactions in the United States that rank in the “top 25” bank M&As by announced transaction value: (i) the Deutsche Bank AG acquisition of Bankers Trust Corporation (BT Corporation)(19) and (ii) the Hong Kong Shanghai Banking Corporation (HSBC) acquisition of Republic New York Corporation (RNYC),(20) both recently approved by the U.S. Federal Reserve Board (FRB).(21)

This Article then directs itself to the issue of foreign bank access to “nonbank” but financially related activities as a result of, and motivating factor behind, foreign bank acquisitions of U.S. banking and nonbank affiliate interests. In this context, the possible relevant implications of the most recent U.S. bank reform legislation are considered. The Article concludes with selective observations.

THE STARTING POINT OF THE U.S. REGULATORY CONTEXT: TENSIONS BETWEEN DOMESTIC AND INTERNATIONAL CONSIDERATIONS

The U.S. financial system, though the major financial system in the world, historically has been parochial in character and approach.(22) Although some U.S. banking organizations have broad and long-standing international experience, most have little or no international interest or presence. Further, the development of the U.S. bank regulatory framework proceeded through the mid-1970s with little, if any, concern for foreign banking operations in the United States.(23)

A “LEVEL DOMESTIC PLATING FIELD” AND THE “NATIONAL TREATMENT” APPROACH

In the 1970s, however, foreign banks began to increase their presence in the United States through subsidiaries (i.e., distinct and separate corporate entities from the parent bank with separate capitalization), branches, agencies, and representative offices (i.e., extensions of the parent bank). Foreign banks also established various investment companies under New York state banking laws and so-called “Edge Act” companies under federal law to conduct international banking business in the United States. It was only in the mid-1970s that foreign banks found their way onto the federal regulators’ “radar screen” when the FRB determined substantial increases in foreign bank activities in the United States. Although no “alarm bells” went off, the FRB’s review of such activities at that time did indicate that there essentially was no federal regulation of foreign banks in the United States and that, as a result, these banks had a competitive advantage over domestic banking institutions. This observation led to federal legislation regulating foreign banks in 1978.(24)

The International Banking Act of 1978 (IBA),(25) the first significant legislation affecting foreign bank operations in the United States, established a federal regulatory scheme for foreign banks based on a “national treatment” paradigm. Among other things, this scheme addressed the following:

* authority of foreign banks to establish branches and agencies under federal law,

* restrictions on interstate deposit-taking activities by foreign banks,

* reserve requirements on foreign bank U.S. branches and agencies,

* deposit insurance requirements for foreign bank branches conducting retail banking business,

* nonbank activity restrictions on foreign bank U.S. branches and agencies, and

* provision to foreign bank branches and agencies of access to the Federal Reserve discount window.

The IBA, in particular, made substantial progress towards granting (or, in reality, imposing) “national treatment” as to foreign bank operations, and providing generally equal “competitive treatment” to foreign banks regarding their range of activities in the United States. Based on this policy of “national treatment,” the IBA attempted to adapt the dual banking system (i.e., authorizing banks to be chartered by either state or federal authorities) to foreign bank operations in the United States.(26)

The IBA was largely successful in this regard, but it still left foreign banks free of certain federal requirements imposed on U.S. banks. For instance, the IBA did not require prior FRB review of foreign bank entry into the U.S. market in the form of a branch, agency, or representative office, and further did not permit a federal role in the termination of a state-licensed branch or agency of a foreign bank. The supervision of foreign bank branches and agencies under the IBA was primarily the responsibility of the state licensing authority and the U.S. Office of the Comptroller of the Currency (OCC), responsible for supervising national banks.(27)

Thus, foreign bank operations in the United States were historically subject to a patchwork regulatory scheme involving both federal and state banking agencies under the IBA, although the IBA provided for general FRB oversight. This scheme worked reasonably well until several distinct events focused regulatory and congressional attention on the apparent need to subject foreign banks to an umbrella of federal regulation and supervision. These events involved global and financial crises in the 1980s and fraud or criminal activity by some foreign banks in the 1980s. The “Third World Debt Crises” and the subsequent domestic savings and loan and bank crises caused U.S. lawmakers and bank regulators to push for a broader and stricter prudential regulatory and supervisory framework for banking institutions.(28) The Congressional mandate was not simply to establish such a framework rooted in domestic standards but was one founded on “international standards.”(29) As such, in the 1980s, the U.S. banking regulators became highly influential in developing an international prudential framework (e.g., through efforts of the Basle Committee on Banking Supervision (Basle Committee) as to risk-based capital adequacy, consolidated supervision, and anti-money laundering standards).(30)

As to the concern for foreign bank criminal activities, the most notable example was the Bank of Credit and Commerce International (BCCI) debacle and its global fallout. Not only did this scandal heighten federal regulatory concerns for rising criminal activities such as money laundering,(31) but also further sensitized the FRB to the possible consequences of a relative absence of global consolidated supervision for global banking organizations.(32) The BCCI debacle in particular spurred the FRB to believe that prior federal review of foreign bank entry and expansion in the U.S. markets was necessary, and that a federal role in terminating a branch or agency of a foreign bank for unsafe and unsound practices was very desirable.(33) In May 1991, the FRB submitted legislative proposals to Congress that were substantially enacted as the Foreign Bank Supervision Enhancement Act of 1991 (FBSEA).(34)

The FBSEA amended the IBA and included many FRB recommendations on consolidated supervision of global banking organizations that were subsequently incorporated into global supervisory standards established by the Basle Committee.(35) The FBSEA established minimum standards for foreign bank entry and expansion into the United States and strengthened federal supervision and regulation of foreign banks’ U.S. banking interests. Under the FBSEA, foreign banks planning to enter or to expand their operations in the United States have been subjected to higher levels of scrutiny. The FBSEA reaffirmed the FRB as the primary banking authority for approving foreign bank applications to establish U.S. offices or acquire U.S. bank subsidiaries and/or nonbank affiliates.(36) As such, foreign banks may now engage in activities through a variety of entities, including branches,(37) agencies,(38) commercial lending companies,(39) representative offices,(40) so-called “Edge Act” corporations,(41) and bank subsidiaries.(42) A typical sophisticated foreign banking organization with substantial U.S. operations will generally have several branches, agencies, and representative offices that may be located in more than one state, and may own or control one or more subsidiary banks and nonbank affiliates.

Under the FBSEA, foreign bank branches, agencies, and representative offices are closely regulated and supervised by the OCC (for federally chartered branches and agencies) or the appropriate state banking authority (for state chartered offices).(43) Foreign banks may obtain access to the U.S. payment and settlement system through their branches and agencies. In addition to these entities, a typical foreign bank with wholesale operations in the United States will also have U.S. bank subsidiaries that may engage in permissible banking activities, and nonbank subsidiaries that engage in activities “closely related” to banking that affiliates of U.S. banks are permitted to conduct. For instance, foreign banks qualifying as BHCs are permitted to own so-called “section 20 subsidiaries,” which are authorized to engage in debt and equity securities underwriting activities, subject to revenue limitations and FRB firewall regulations.(44) The enactment of the Gramm-Leach-Bliley Act of 1999 has, for U.S. and foreign banks electing to be and so qualifying as “financial holding companies” under Title I of that legislation, significantly liberalizing opportunities to engage in securities and other traditionally nonbank activities and arguably diminishing the utility of employing section 20 subsidiaries to conduct nonbank securities activities.(45)

The FRB, as “umbrella supervisor” over foreign bank operations in the United States, has broad authority under the FBSEA for regulation and supervision of all foreign banks seeking to establish U.S. banking interests, whether chartered by state or federal banking authorities. This requirement was intended to give the FRB the primary role in determining whether foreign banks could engage in U.S. banking activities through branches, agencies, and commercial lending companies. Foreign banks also conducted U.S. operations by establishing Edge Act corporations and U.S. subsidiary banks, which have always been more directly subject to FRB regulation and supervision, as the FRB is the Edge Act chartering authority and primary BHC supervisory authority.(46)

The FRB issued substantive interim rules in April 1992 amending Regulation K (International Banking Operations) and Regulation Y (Bank Holding Companies and Change in Bank Control) to implement significant portions of the FBSEA.(47) The interim rules amended Regulation K to (i) provide for the exercise of FRB responsibilities for the approval, examination, and termination of foreign bank operations in the United States

Foreign banks desiring to own or control U.S. subsidiary banks and nonbank affiliates are required to obtain FRB approval under the Bank Holding Company Act (BHCA). If a foreign bank is a BHC because it controls a U.S. bank, then it must also obtain FRB prior approval to acquire more than five percent of any class of voting shares of any other U.S. bank. Additionally, in all cases, the FRB is responsible for approving, regulating, and supervising the foreign bank acquisition of U.S. BHCs with U.S. nonbank affiliate operations.(49) Therefore, following enactment of the FBSEA, foreign banks desiring to enter or expand their operations in the United States have been subjected to higher levels of scrutiny by the FRB during the application process and to a very broad and rigorous supervisory and enforcement umbrella.

The FRB previously issued a policy statement in 1979 on the regulation and supervision of foreign banking organizations that control U.S. subsidiary banks, and the policies set forth in this statement provide the general framework within which the FRB reviews foreign bank acquisitions of U.S. banks and BHCs.(50) As previously mentioned, the FRB has endorsed the principle of “national treatment” (i.e., equality of competitive opportunity) as the basis for regulating and supervising foreign bank entry and subsequent operations in the United States, and otherwise administering the IBA and BHCA. The FRB will generally subject the U.S. operations of foreign banks to the same degree of regulation and supervision as U.S. banks and BHGs, but will not extend U.S. bank supervisory standards extraterritorially to foreign banks and their parent companies. The FRB’s supervisory concerns for foreign bank operations and activities outside the United States are generally limited to their possible effects on the ability of those banks to support their operations inside the United States.(51)

Notably, concerns over the “burdensome” restrictions on expansion into certain nonbanking activities in the United States and continued failures to reform the Glass-Steagall Act, caused many foreign banking organizations to consider the option of “debanking” (i.e., closing all branches and agencies in the United States and relinquishing the licenses to operate these entities, thus losing access to the U.S. payment and settlement system and the ability to accept deposits). For instance, some European banks considered “debanking” following their acquisitions by foreign companies (usually insurance companies in this context) with substantial U.S. operations that did not conform to U.S. restrictions on the bank’s nonbank activities.(52) Other foreign banks pursued the “debanking” option because of the owner’s perceived inability to comply with the “qualified foreign banking organization” (QFBO)(53) requirement that in order to maintain banking offices in the United States, the global business of a bank and its affiliates must consist predominantly of banking and other financial activities.(54)

Thus, during the 1980s and early 1990s, the FRB emerged as the paramount regulator/supervisor of foreign bank activities in the United States (utilizing a “ratcheted-up” national treatment standard of supervision and enforcement) and also as a “prime mover” behind the global initiative to establish international supervisory standards for banking institutions. Additionally, in the early 1990s and throughout that decade, significant U.S. trade policy initiatives emerged to foster greater liberalization in cross-border provisions of financial institutions.(55) Although these policy objectives of enhanced prudential supervision based on international standards and liberalization have not yet been formally linked, the U.S. regulatory environment and attitude toward foreign banking activities of U.S. banks abroad and of foreign banking activities in the United States cannot help but be influenced or at least challenged by such objectives.(56)

A “WINDOW” OF ENTRY BASED ON INTERNATIONAL STANDARDS OF “CONSOLIDATED SUPERVISION” AS APPLIED BY U.S. AUTHORITIES

One possible way of reconciling the potentially conflicting needs of enhanced prudential supervision and liberalization is to have a transparent regulatory “window entry” for foreign banking institutions based on international standards. A foreign bank must obtain FRB prior approval to acquire, directly or indirectly, control of a U.S. bank. If a foreign bank is a BHC because it controls a U.S. bank, then it must also obtain FRB prior approval to acquire more than five percent of any class of voting shares of any other U.S. bank. If a foreign bank applies to acquire a U.S. bank and become a BHC, the FRB will review, among other things, the ability of the foreign bank to be a source of financial and managerial strength to support the U.S. subsidiary bank. In this regard:

The [FRB] will analyze the financial condition of the foreign organization,

evaluate the record and integrity of management, assess the role and

standing of the bank in its home country, and request the views of the bank

regulatory authorities in the home country. In connection with its

financial analysis, the [FRB] will require sufficient information to permit

an assessment of the financial strength and operating performance of the

foreign organization. Information will consist of reports prepared in

accordance with local practices together with an explanation and

reconciliation of major differences between local accounting standards and

U.S. generally accepted accounting procedures including full information on

earnings, capital, charge-offs, and reserves. The [FRB] will also continue

to work with bank supervisory authorities of other major countries to

improve overall cooperation with international bank regulation.(57)

In addition to criteria concerning the financial condition and managerial resources of the applicant acquiring institution, the FRB must determine that the foreign banking organization acquiring the U.S. bank or BHC is subject to comprehensive consolidated supervision by home country supervisory authorities.(58)

The notion of “consolidated supervision” is substantially derived from FRB policy and incorporated into Basle (now “Basel”) Committee international supervisory standards. The “comprehensive and consolidated supervision” standard as implemented by FRB regulations generally prohibits the FRB from approving an application by a foreign bank to acquire a U.S. bank or BHC (or to establish a U.S. branch or agency) unless it determines that:

* the foreign bank and any foreign bank parent engages directly in the business of banking outside the United States and is subject to comprehensive consolidated supervision or regulation by its home country supervisory authorities

* the foreign bank has provided the information that the FRB requires in order to assess the application.(59)

The aspect of the consolidated supervision standard that generated the most controversy from foreign banks and commentators at the outset was the requirement to provide adequate assurances of access to information. This aspect is primarily intended to address foreign bank operations in “bank secrecy” jurisdictions, or jurisdictions whose laws intentionally restrict access to information in efforts to attract “offshore” banking business. The standard is not intended to require that the FRB routinely access customer or counterparty information, however

In determining whether the applicant foreign bank is subject to comprehensive consolidated supervision, the FRB will determine whether the relevant home country authorities receive sufficient information on the bank’s global operations to determine its overall financial condition and compliance with laws and regulations. The FRB will therefore review whether the relevant home country authorities:

* evaluate prudential standards, such as capital adequacy and risk asset exposures, on a global basis

* receive financial reports from the bank that are consolidated on a global basis, or comparable information that facilitates analysis of the bank’s financial condition on a global consolidated basis

* obtain information on the transactions and relationships between the bank and its affiliates within and outside of the home country

* obtain information on the condition of the bank and its subsidiaries and offices outside the home country by virtue of regular examination reports, audit reports, or other reports

* ensure that the bank has sufficient procedures for monitoring and controlling its activities on a global basis.

These factors represent “indicia” of comprehensive consolidated supervision: no one factor is in and of itself determinative, and the FRB may consider other elements in rendering this determination.(61)

At the outset, FRB policy was to apply the “comprehensive consolidated supervision” standard to each foreign bank seeking to establish offices or expand activities in the United States under the banking laws, so the first approval from a particular country would not necessarily open the door for other banks from that country. The FRB subjected this standard and other foreign bank application requirements to fairly rigorous scrutiny in the initial years following the enactment of FBSEA, the degree of which generally depended on the applicant and home country involved.(62) The FRB scrutiny of foreign bank applications and lengthy delays for issuing notices of approval or otherwise resulted in political uproar from the foreign banking community, which claimed that the “national treatment” standard was not being dutifully applied. Thus, FRB regulatory scrutiny of this factor is still conducted in a country-by-country analysis, with country analyses of most relevant jurisdictions having already been conducted by the FRB in review of previous applications.

The FRB, as a practical matter, generally makes determinations of comprehensive consolidated supervision for individual banks, but foreign bank applicants chartered in the same country generally rely on information previously submitted and reviewed by the FRB on comprehensive consolidated supervision in that country. The FRB usually requires subsequent applicants to describe the extent to which bank supervision previously evaluated applies to them and whether that system has changed since the FRB earlier reviewed it. The FRB generally follows the same approach with regard to descriptions of “bank secrecy” laws in various jurisdictions. Therefore, notwithstanding observable changes in the quality and quantity of consolidated supervision in various countries, the FRB is unlikely to subject this factor to rigorous scrutiny if a given home country supervisory regime has previously been reviewed.(63)

The “comprehensive consolidated supervision” standard is also required in FRB approvals of foreign bank branches, agencies, and commercial lending companies in the United States, although certain differences may exist in this respect.(64) For instance, the IBA includes a limited exception to the comprehensive consolidated supervision requirement. This exception provides that, if the FRB is unable to determine that a foreign bank seeking to establish a branch, agency, or commercial lending company is subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, the FRB may still approve an application by the foreign bank if the appropriate authorities in the home country of the foreign bank are actively working to establish arrangements for the consolidated supervision of such bank

The FRB has in various orders approving foreign bank M&As and applications to commence U.S. bank and nonbank activities reviewed this factor and generally relied on previous determinations in subsequent orders for foreign bank applicants from the same jurisdiction. Thus, it is somewhat unclear how much scrutiny the FRB actually applies to this requirement. For instance, in the HSBC Order, the FRB observed that it previously determined in other orders involving United Kingdom banks that such banks were indeed subject to home country supervision on a consolidated basis,(66) and that these requirements were again met in connection with a prior application involving HSBC.(67) The FRB concluded that the comprehensive consolidated supervision requirements were met in this proposal.(68) In the Deutsche Bank Order, the FRB also relied on previous orders involving certain German commercial banks where it determined that such banks were indeed subject to comprehensive consolidated supervision by the home country authorities.(69) The FRB determined that Deutsche Bank was supervised on substantially the same terms and conditions as the other German banks,(70) and that the comprehensive consolidated supervision requirements were also met in this proposal.(71) Thus, so long as the foreign bank’s home country jurisdiction has a regulatory and supervisory framework in place, this factor may not necessarily present a substantial hurdle to foreign banks conducting U.S. bank M&A transactions.

The FRB will also determine that the foreign bank has provided adequate assurances that it will make available to the FRB such information on its operations and activities, and those of its affiliates, that the FRB deems appropriate to determine and enforce compliance with the BHCA, IBA, and other federal laws. The FRB will expect the applicant to commit to cooperate with the FRB to obtain any waivers or exemptions that may be necessary to enable the applicant to make any such information available to the FRB. The FRB will review relevant provisions of confidentiality, secrecy, and other laws in the jurisdictions in which the applicant and its affiliates have material operations.(72)

THE U.S. REGULATORY PROCESS FOR FOREIGN BANK M&As OF U.S. BHCs, SUBSIDIARY BANKS, AND NONBANK AFFILIATES

For the legal practitioner, debate concerning the efficacy and wisdom of the “consolidated supervision” threshold standard has taken a “backseat” to the practicalities of the actual application and overall regulatory process as it may effect the results of a particular proposed cross-border bank M&A transaction. A significant question is whether the regulatory processes reasonably “accommodate” effectuating such complex transactions? Obviously, in part, the answer to this question will depend upon the “negotiating” skills of the bank management, lawyers, and other professionals involved in a given trasaction to create a cooperative and constructive interaction with the regulators on a basis of professional trust, respect, and confidence. Although the regulatory and supervisory principles are well established, the actual details of importance in approving a particular foreign bank M&A transaction may depend on particular issues that are of “direct interest” to the FRB and other banking authorities at the time of the application. For instance, in evaluating the foreign bank’s financial strength, the FRB will require specific information related to risk-managed loans, in terms of loan balances, reserves and reserve ratios, and details of write-offs, recoveries, and provisions, for possible loan losses. In addition, some of the more notable issues that have attracted FRB attention with regard to foreign bank M&A transactions include, but are certainly not limited to, anti-money laundering and bank secrecy measures, financial derivatives transactions, foreign accounting standards, and the quality and scope of bank risk management systems for credit risk, market risk, and other risk categories. The FRB’s evaluation of these factors will undoubtedly involve subjective analyses, and require close attention and strategic negotiating on the part of foreign bank management, lawyers, and other professionals involved in a given proposed transaction. The subjective particularities of and dynamics between the FRB, home country authorities, bank management, and professionals in negotiating such transactions is outside the scope of this Article

IN GENERAL

The foreign bank M&A application processes entail an elaborate statutory and administrative framework. Also, though not dealt with specifically in this Article, it should be noted that foreign banks conducting M&As with U.S. banks and nonbank financial institutions will generally subject the bank to the U.S. supervisory framework for foreign banks with U.S. operations. The Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations, established originally in March 1995,(73) enhanced in 1998,(74) and further revised in October 2000,(75) applies to all foreign banking organizations with a U.S. banking presence in the form of branches, agencies, Edge Act and Agreement corporations, commercial lending companies, and subsidiary banks.

M&A Application Contents

The FRB Orders noted above respecting the HSBC and Deutsche Bank acquisitions addressed some or all of the following components:(76)

* FRB approval under section 3 of the BHCA(77) to acquire all the voting shares of a domestic BHC and its wholly owned subsidiary banks (national banks)

* FRB approval under section 4(c)(8) of the BHCA(78) and relevant provisions of Regulation Y(79) to acquire the nonbank subsidiaries of the domestic BHC and thereby engage in permissible nonbanking activities

* FRB approval to acquire the foreign operations and Edge Act corporations of the domestic BHC under section 4(c)(13) of the BHGA(80) and section 25A of the Federal Reserve Act,(81) and relevant provisions of FRB Regulation K

* FRB approval to acquire the corporate subsidiary of a state member bank under section 25 of the Federal Reserve Act(83) and relevant provisions of Regulation K

* FRB approval under the Bank Merger Act(84) to merge with a state member bank that is the primary U.S. banking subsidiary of the foreign BHC

* New York State Banking Department approval to convert from a national charter to a New York state charter, and FRB approval under section 9 of the Federal Reserve Act(85) to obtain Federal Reserve System membership for the converted bank

* In the case of foreign bank acquisitions of other foreign banks, FRB approval to retain ownership interests in U.S. nonbank subsidiaries of the foreign banking organization.(86)

FRB M&A Application and Approval Processes

As to the actual application and approval processes, the following items as addressed throughout the entirety of the HSBC and Deutsche Bank orders are relevant:(87)

* Notice of the M&A proposal is published in the Federal Register, and interested persons are afforded opportunity to submit comments

* After the time for filing comments expires, the FRB considers the proposal and all comments received in light of the factors considered under the BHCA (as implemented by the FBSEA and IBA), the Federal Reserve Act, and the Bank Merger Act

* The FRB reviews factors required under BHCA:

i. competitive effects of the proposal in the relevant geographic markets

ii. financial and managerial resources and future prospects of the companies and banks involved in the proposal

iii. the convenience and needs of the community to be served, including the records of performance under the Community Reinvestment Act(88) of the insured depository institutions involved in the transaction

iv. the availability of information needed to determine and enforce compliance with the BHCA and other applicable federal banking laws

v. whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor (as discussed above)

vi. in cases involving interstate bank acquisitions, the concentration of deposits in the nation and relevant individual states, and compliance with other provisions of section 3(d) of the BHCA.

The FRB will consider these factors in light of a comprehensive record, including information provided by the applicant, confidential supervisory and examination information, and publicly reported financial and other information. The FRB may also consider information collected from the primary home country supervisory authority and various federal and state agencies, and information provided by public commentators in connection with the proposal.

SELECTED ISSUES

The foreign bank M&A application and approval processes raise a number of particular issues that could be of global interest when viewing the recent worldwide bank M&A phenomenon. Although these issues have broad implications beyond the particular U.S. context, their practical elaboration becomes embroiled in very specific U.S. legislative and administrative considerations.

Competitive Considerations

The FRB is prohibited from approving a proposed bank M&A that would result in a monopoly.(89) The FRB is prohibited from approving a proposed bank M&A that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal are clearly outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs of the community to be served.(90) In evaluating the competitive considerations, the FRB will consider (i) the scope of banking operations of applicant and acquiree

Financial and Managerial Resources

In evaluating financial and managerial resources, the FRB will consider the terms and financing arrangements of the proposed M&A transaction.(93) The FRB will also consider the proposed structure of the combined organization, including any proposed restructuring of the current operations of the acquiree, and various commitments made by the applicant under the proposal.(94) The FRB will further consider confidential examination and other supervisory information assessing the financial and managerial strength of the applicant and its subsidiaries, and of the acquiree and its subsidiaries.(95)

Financial Factors

In evaluating financial factors in expansion proposals by banking organizations, the FRB considers capital adequacy to be particularly important.(96) The FRB will expect foreign banking organizations contemplating U.S. expansion to maintain strong capital levels substantially in excess of the minimum levels specified in the relevant U.S. capital adequacy regulations.(97) The applicant’s capital ratios must therefore exceed the minimum levels that would be required under the Basle Capital Accord of 1988, as amended, and as implemented by the home country authorities, and be considered equivalent to the capital levels normally required of a U.S. banking organization. The key issue here is whether the FRB actually determines that a foreign bank’s capital exceeds these minimum standards, or simply relies on statements of the foreign bank and its home country supervisory authority in this respect. The FRB apparently may rely on home country supervisory authority declarations of capital adequacy in this regard, even if such reliance may be less than justifiable.(98) Additionally, the FRB must determine that the proposed transaction itself will not materially affect the capital position of the applicant or acquiree and should be expected not to have a significantly adverse effect on the financial resources of the applicant.(99)

Managerial Factors

The FRB will consider the managerial resources of the applicant and acquiree in light of all facts in the record, including confidential examination and other supervisory information.(100) The FRB will take into account the applicant’s record of existing U.S. subsidiary banks, branches, and representative offices. In reviewing financial and managerial resources, the FRB may review matters raised by the public comments received or on its own volition. For instance, in the HSBC Order, the FRB reviewed the U.S. acquiree bank’s purchase of mortgage-backed securities issued by a subprime lender, in terms of whether these transactions raised negative connotations about the loan portfolio management practices of the target. The FRB also considered information regarding charges of securities fraud filed against the owner and founder of a customer of the securities subsidiary of the acquiree, which resulted in the suspension of the CEO of the subsidiary and revocation of management in a division of that subsidiary. Additionally, the FRB may coordinate a review of such matters with the functional regulatory agencies of the subsidiary and other appropriate law enforcement authorities.(101)

Public Comments on Financial and Managerial Resources

The FRB may accept and review public comments on the financial and managerial resources components of the proposed M&A transaction. For instance, in the Deutsche Bank Order, the FRB reviewed certain allegations raised by commentators in opposition to the proposed transaction, including that: (i) Deutsche Bank’s financial resources were impaired by the Holocaust-related class action lawsuits filed against the bank

Convenience and Needs Factor (Community Reinvestment Act Analysis)

The FRB will also consider the “convenience and needs” of the communities to be served in connection with the proposed M&A transaction.(105) Under this rubric, the FRB takes into account the records of the relevant depository institutions under the Community Reinvestment Act (CRA).

The FRB, in evaluating bank M&A and expansion proposals, is required to “take into account an institution’s record of meeting the credit needs of its entire community, including low- and moderate-income (“LMI”) neighborhoods.”(106)

In effect, the CRA is a significant example of the intrusion of governmental social policies into banking regulation. When the CRA was enacted in 1978, it was viewed by many as a final act of a fading liberal tradition in Congress, and otherwise to be of little practical significance.(107) The CRA legislation was very general in wording and was thought to address the specific discriminating lending practices of “redlining” poor and minority communities. With the arrival of the “Reagan Era,” the conventional wisdom was that CRA issues would fade away. Ironically, however, the CRA found an evolutionary life in the hands of the regulators and community-action groups. This involvement manifested itself in various application and supervisory processes, including the foreign bank M&A processes.

The FRB will consider the CRA performance records of the U.S. depository institution subsidiaries of the applicant foreign bank and U.S. acquiree BHC or bank in light of all the facts in the record, including public comments on the proposal.(108) The FRB will place significant emphasis on the most recent CRA performance review, with the understanding that the CRA examination is often a “controlling factor” in the consideration of an institution’s CRA record.(109) The FRB will review CRA examinations conducted by itself, the OCC, and state banking authorities (i.e., the New York State Banking Department).(110)

In the HSBC and Deutsche Bank Orders, the FRB closely scrutinized the CRA performances of all relevant institutions, and reviewed all public comments received on the proposal with specific regard to CRA performance. In the HSBC Order, numerous persons submitted written comments on the effect of the M&A proposal on the convenience and needs of the affected communities and the CRA performance records of the depository institutions involved. Several of these parties argued that HSBC and RNYC had inadequate records of meeting the needs of their communities, particularly in communities with high LMI and minority populations. Some of these parties urged the FRB not to approve the proposal unless HSBC specifically committed to improve aspects of its CRA-related programs, including community and development lending and affordable mortgage and consumer banking products.(111) In response to these arguments, the FRB devoted enormous and critical attention to the CRA performance examinations of HSBC and all U.S. banking interests concerned.(112) In the Deutsche Bank Order, the FRB closely evaluated the CRA examinations and performance of BT Corporation’s U.S. banking interests before approving that transaction.(113) Thus, the CRA clearly affords a substantial political and/or regulatory hurdle for foreign banks seeking to merge with or acquire U.S. banking interests.

FRB Jurisdiction to Review “Matters of Public Concern”

The FRB may or may not have jurisdiction to review other “matters of public concern” in connection with a proposed foreign bank M&A transaction. For instance, in the Deutsche Bank Order, the FRB reviewed allegations raised by commenters about certain activities of Deutsche Bank during World War II related to class action lawsuits alleging that the bank, before and during World War II, (i) collaborated with the Nazi regime to confiscate and liquidate Jewish assets, (ii) financed and controlled other companies that used slave or forced labor, and (iii) may have handled gold stolen by the Nazi regime.(114) Some commenters urged the FRB to investigate these alleged activities and produce an accounting of any assets wrongfully retained by Deutsche Bank and any profits realized from companies controlled or financed by it that used slave labor. Other commenters urged the FRB to withhold approval of the M&A transaction until the asset conversion and slave labor issues were resolved and appropriate restitution and compensation were made. The FRB reviewed actions taken by Deutsche Bank to address its Holocaust-related activities, and sought guidance from the U.S. State Department on the legitimacy of these efforts.(115) The FRB then reviewed its own authority under the federal banking laws, and regarding whether the matters raised by the commenters were within the scope of factors that the FRB was authorized to consider in connection with a foreign bank M&A transaction. The FRB concluded that many of these matters involved “subjects of public concern that are not within the [FRB’s] limited jurisdiction to adjudicate or do not relate to the factors that the [FRB] may consider when reviewing an application or notice under the BHC Act.”(116) The FRB opined that the factors it is authorized to consider when reviewing an application or notice under the BHCA are limited by the provisions of that Act, and that its limited jurisdiction did not authorize it to adjudicate disputes involving an applicant that do not arise under laws administered and enforced by it.(117) Thus, the FRB concluded that these matters would not result in denial of the application.(118)

Interstate M&A Analysis

The FRB may approve an application by a BHC to acquire control of a bank located in a state other than the home state of the BHC if certain conditions are met.(119) The FRB may not approve such a proposal if, after consummation, the applicant would control more than ten percent of the total deposits of insured depository institutions in the United States.(120) In addition, the FRB may not approve such a proposal if, on consummation of the proposal, the applicant would control thirty percent or more of the total deposits of insured depository institutions in any state in which both the applicant and the organization to be acquired operate an insured depository institution, or such higher or lower percentage established by state law.(121) The applicant must also be “adequately capitalized” and “adequately managed,” as defined by applicable banking law.(122) Finally, the state banks must have been in existence and operated continuously for at least the period of time required by applicable state laws.(123)

International Operations of the U.S. Acquiree

The FRB will also review all factors required to be considered under the Federal Reserve Act, the BHCA, and Regulation K(124) to ensure that proposed M&A transactions may be approved under (i) section 4(c)(13) of the BHCA (i.e., for the applicant to acquire the non-U.S. operations of the acquiree)

Requests for Public Hearings

Third parties may request the FRB to hold a public meeting or hearing on a proposed M&A transaction. The FRB is not required to hold such a public hearing or meeting, however, unless the appropriate supervisory authority of the bank to be acquired makes a timely written recommendation of denial of the bank’s M&A application.(130) The FRB has the discretion to hold a public meeting or hearing on a bank M&A application, however, if deemed necessary or appropriate to clarify issues of fact related to the application and to provide an opportunity for testimony.(131) Third parties may also request that the FRB provide a hearing in connection with a proposed transaction if there are disputed issues of material fact that cannot be resolved in some other manner.(132) The FRB will review such requests and consider them in acting on the application, and determine whether the written comments adequately present their views and identify disputed issues of fact which are material to the FRB’s decision that would be clarified by a public meeting or hearing.(133)

Delaying Action or Extending Comment Periods on Proposals

Third parties may also request that the FRB delay action on or extend comment periods for responding to a proposed M&A transaction. For instance, in the Deutsche Bank Order, the FRB observed that various commenters urged that the FRB delay action or extend the comment period on the proposal until (i) pending Holocaust-related litigation and issues were resolved

FRB Approval of M&A Applications and Notices

FRB approvals of foreign bank M&A transactions will also generally be conditioned on compliance with all commitments made in connection with the application and notice, and on the FRB’s access to information on the activities or operations of the applicant foreign bank and any of its affiliates that the FRB determines to be appropriate to ensure compliance by the applicant and its affiliates with federal laws. The FRB’s approval of the nonbanking activities of a proposed M&A transaction will generally be subject to all conditions set forth in Regulation Y(136) or an applicable FRB order, and the FRB’s authority to require modifications or termination of such activities as the FRB deems necessary to ensure compliance with, and to prevent the evasion of, the BHCA and FRB regulations and orders pertaining to such activities. These commitments and conditions are deemed to be conditions set forth in writing by the FRB and may be enforced in judicial proceedings.

THE ISSUE OF ACCESS TO AN INCREASING RANGE OF NONBANKING FINANCIAL ACTIVITIES

The ability to engage in an increasing range of permissible U.S. non-banking activities is a significant motivating factor for many proposed foreign bank M&A transactions involving U.S. banks and nonbank financial institutions.

TRADITIONAL LIMITATIONS

U.S. and foreign bank nonbanking activities conducted in the United States have traditionally been limited by significant U.S. legislative and regulatory restrictions under the Glass-Steagall Act and BHCA. If a foreign bank applies to acquire domestic BHC nonbanking subsidiaries, and thereby proposes to engage in nonbanking activities authorized under Regulation Y, the foreign bank must obtain FRB approval to engage in nonbanking activities. The FRB will examine whether the proposed activities are “closely related” to banking under section 4(c)(8) of the BHCA, and render authorizations through FRB orders or periodic amendments to Regulation Y.(137) The FRB will also determine that the acquisition and the performance of nonbank activities by the applicant foreign bank would be a “proper incident” to banking. The FRB must also determine that the proposed transactions “can reasonably be expected to produce benefits to the public … that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.”(138)

In evaluating these factors, the FRB will consider the financial condition and managerial resources of the applicant and its subsidiaries, including the companies to be acquired, and the effect of the proposed transaction on those resources. The FRB has authorized foreign bank applicants to engage in nonbanking activities by referencing prior FRB orders, and requiring compliance with all terms and conditions in such orders, and also imposed additional conditions on, or require certain commitments from, the applicant in carrying out such activities.(139) For instance, in reviewing the “financial resources” component in connection with proposed nonbank activities, the FRB will review the capitalization of the applicant to determine if it is in accordance with the standards established by previous FRB orders. This determination is based on all facts of the record, including projections of the volume of bank-ineligible securities underwriting and dealing activities proposed to be conducted by the applicant.(140) The FRB will also review the anticipated financial benefits to be derived from the transaction, as articulated by the applicant.(141)

In reviewing the “managerial resources” component for such activities, the FRB will examine whether the applicant has established appropriate policies and procedures to ensure compliance with prior FRB orders, including computer, audit, and accounting systems, internal risk management controls, and the necessary operational and managerial infrastructure.(142) The FRB will further consider the competitive effects of the proposed acquisition by the applicant of the nonbanking subsidiaries of the acquiree in light of all facts of the record, including public comments received. In this respect, the FRB will consider the scope of markets in which the subsidiaries compete (national, regional, concentrated or unconcentrated, number of competitors), and the markets in particular nonbanking activities proposed by the applicant.

The FRB continues routinely to authorize foreign banks to engage in many innovative nonbank activities. For instance, the FRB recently authorized a foreign bank to engage in “private investment fund” activities that consisted of serving as the investment adviser to and the general partner of, and the holding and placing of equity interests in, certain private investment funds for investment only in securities and other instruments that the applicant would be permitted to hold directly under U.S. banking laws.(143)

GRAMM-LEACH-BLILEY ACT OF 1999(144)

Title I of the GLBA: Overview

The range of permissible non-bank activities available to both U.S. and foreign banks has expanded significantly with the enactment of the Gramm-Leach-Bliley Act of 1999 (GLBA),(145) a defining piece of “financial modernization” legislation.(146) The GLBA is undoubtedly the most comprehensive statutory revision affecting the banking industry since the 1930s banking legislative package.(147) Title I of the GLBA repeals critical sections of the Glass-Steagall Act and establishes, among other things, significant provisions which enable certain qualifying institutions that elect to become “financial holding companies” (FHCs) under GLBA processes to engage in a wide range of new and expanded non-bank activities through newly permissible cross-industry affiliations, including “merchant banking” activities.(148) The GLBA establishes the FRB as the “umbrella” regulatory supervisory authority for FHCs, and reserves direct functional regulation and supervision of the bank and non-bank component entities within FHC structures to their respective authorities.(149) The GLBA generally authorizes BHCs and foreign banks meeting certain qualification standards and thereafter electing to become FHCs to engage in a wide range of securities, insurance, and other activities that are determined to be “financial in nature” or “incidental to a financial activity,” or “complimentary to” existing financial activities.(150) The GLBA allows the FRB and Treasury to expand the list of financial activities otherwise permissible for FHCs on the FRB’s own volition or at the request of “any interested party.”(151)

The FRB issued an interim rule on FHC activities to establish: (i) the activities in which an FHC may engage

Notably, the GLBA authorizes securities underwriting, dealing, and market-making activities for FHCs in broad form and without regard as to whether these activities may be conducted by a bank. These activities include underwriting or distributing shares of open-end investment companies (mutual funds), an activity that was not previously authorized for BHCs. The securities underwriting activities conducted under GLBA authority instead of section BHCA section 4(c)(8) authority are not subject to the revenue limitations applicable to BHC section 20 subsidiaries, and dealing activities are not subject to the five percent percentage limitations on ownership of voting securities under the BHCA. The FRB determined that the section 20 “operating standards” do not apply to FHCs engaging in securities underwriting, dealing, and market-making activities under GLBA authority with several notable exceptions involving applicability of Federal Reserve Act provisions dealing with “affiliate transactions.”(156)

The GLBA also allows FHCs to engage in “merchant banking” activities, which involve the direct or indirect acquisition of shares, assets, or ownership interests of a company engaged in an activity that is impermissible for a FHC, whether or not that interest results in “control” of the company.(157) The FRB and Treasury have jointly adopted an interim rule that will govern merchant banking investments made by FHCs as part of a “bona fide” securities underwriting or merchant of investment banking activity,(158) and proposed for comment a proposal that would amend the FRB’s consolidated capital requirements for BHCs to apply a fifty percent capital charge to all investments made, directly or indirectly, by a BHC in, among other entities, nonfinancial companies under the GLBA merchant banking authority.(159)

FHC Election Process

The GLBA defines an FHC as a BHC that meets certain eligibility requirements. In order for an existing BHC to elect conversion to FHC status, the GLBA initially requires the BHC to certify that all “depository institutions” (i.e., banks) controlled by the BHC are “well capitalized” and “well managed.”(160) The GLBA authorizes the FRB to impose limitations on, among other things, the conduct or activities of any FHC that controls a depository institution that does not remain both “well capitalized” and “well managed” following election to FHC status.(161) The activities of BHCs and foreign banks that do not elect FHC status continue to be limited to currently authorized BHC non-bank activities.

Thus, Title I of the GLBA establishes a process for domestic BHCs and foreign banks electing to become or to be treated as FHCs to engage in various affiliations and non-bank activities that may have been wholly or substantially precluded under prior U.S. banking and financial laws. In most cases, an FHC may engage in or acquire the shares of a company engaged in financial activities without obtaining prior FRB approval

In January 2000, the FRB released an interim rule (FHC Interim Rule) to address, among other things, the procedures for submitting such FHC elections and the precise criteria regarding the “well capitalized, …. well managed,” and CRA requirements that BHCs and foreign banks must meet to qualify as FHCs.(162) The FHC Interim Rule specifically established requirements for a foreign bank to be treated as a FHC. These requirements are based on the general premise that a foreign bank that is a BHC because it owns a U.S. subsidiary bank must comply with the same requirements as any other BHC that elects to become an FHC. In issuing the Interim Rule, the FRB observed that most foreign banks operate through branches, agencies, and commercial lending companies that are part of the foreign bank itself, as opposed to owning U.S. subsidiary banks.(163) The FRB underscored that such foreign banks, in addition to those foreign banks already owning U.S. subsidiary banks, could elect to be treated as FHCs.(164)

The GLBA specifically requires the FRB to apply “‘comparable capital and management standards to a foreign bank that operates a branch… in the United States giving due regard to the principle of national treatment and equality of competitive opportunity.'”(165) The FRB emphasized that, without these provisions, a foreign bank could engage in securities and insurance M&As without meeting standards required of U.S. banks, simply because the foreign bank conducted its U.S. banking business through a branch, as opposed to a U.S. subsidiary bank.(166) Thus, the FRB regulations adopted interim standards and procedures that established a “flexible approach” for carrying out the GLBA mandate for comparable capital and management standards while simultaneously ensuring national treatment and competitive equality for foreign banks operating in the United States.(167)

The FRB introduced specific regulations applicable to foreign banks in this regard, including:

* the requirements to be treated as an FHC(168)

* the process for election to be treated as an FHC(169)

* the process for that election to become effective(170)

* the consequences for failing to continue to meet applicable capital and management standards(171)

* the consequences of an insured branch failing to maintain a satisfactory or better rating under the CRA.(272)

In determining whether a foreign bank is “well capitalized” and “well managed” under the GLBA under these standards, the FRB will consider:

the foreign bank’s composition of capital, accounting standards, long-term

debt ratings, reliance on government support to meet capital standards, the

extent to which the foreign bank is subject to comprehensive consolidated

supervision, and other factors that may affect the analysis of capital and

management. The [FRB] will consult with the home country supervisor for the

foreign bank as appropriate.(173)

The FRB also asserted that, “most foreign banks that elect to be treated as [FHCs] will be subject to comprehensive consolidated supervision. An election by a foreign bank that is not subject to comprehensive consolidated supervision will receive a more detailed review.”(174)

In February 2000, the FRB issued supervisory guidance which addressed: (i) how a BHC or foreign bank that is covered by the BHCA may elect to become an FHC by filing a declaration

* the risk-based and leverage capital ratios of the foreign bank itself as of the end of the most recent quarter and as of the close of the most recent audited reporting period

* a certification that the foreign bank meets the standards of “well capitalized” as established in 12 C.F.R. sections 225.90(b)(1)(i)-(iii) or section 225.90(b)(2) in Regulation Y as of the date the foreign bank or company files the FHC election

* a certification that the foreign bank is “well managed” as defined in 12 C.ER. sections 225.90(1)-(2) of Regulation Y as of the date the foreign bank or company files its election.(179)

The “well capitalized” and “well managed” standards apply to each foreign bank that has U.S. operations in branches, agencies, or commercial lending company subsidiaries and that is part of a Foreign Banking Organization (FBO) seeking certification to become an FHC.(180) With respect to the “well capitalized” component, the FRB determined that for foreign banks where the appropriate home country authorities have adopted riskbased capital standards that are consistent with those established under the Basle Capital Accord, their Tier 1 and total risk-based capital ratios are required to be at least six percent and ten percent, respectively, and the foreign bank’s ratio of Tier 1 capital to total assets (i.e., the leverage ratio) must be at least three percent.(181) The FRB will then determine the comparability of the foreign bank’s capital.(182) With respect to the “well managed” component, the FRB determined that foreign banks would meet the criteria if: (i) each of the U.S. banking offices (i.e., depository institutions, branches, agencies, and commercial lending subsidiaries) of the foreign bank received at least a “satisfactory composite” rating on the most recent examination

Interestingly, the “foreign bank” FHC criteria were subjected to harsh criticism on the premise that they subjected foreign banks to unequal treatment that was inconsistent with U.S. foreign bank legislation. In response to such claims, the FRB adopted amendments to the FHC Interim Rule in March 2000 after processing initial FHC elections filed by foreign banks under the Rule.(186) The FRB amendments apparendy made an appreciable difference in processing FHC elections of several foreign banking organizations. As of March 23, 2000, the list of foreign bank elections expanded to include Deutsche Bank AG and Credit Suisse Group, respectively.(187) A significant number of FBOs effectively elected to become or be treated as FHCs in March 2000. This list has since grown tremendously, and as of January 2001, includes HSBC Holdings Plc. and many other large FBOs.(188)

CONCLUDING OBSERVATIONS

There is little question that multinational corporations and other global users of financial services expect banking organizations to serve their interests on a worldwide basis, and to maintain the expertise to structure financial products as necessary to facilitate any transaction within any industry and legal jurisdiction. The essence of survival of any global banking organization is likely to be dependent on maintaining and sustaining significant balance sheets, capital reserves, and comprehensive risk management systems. More importantly, survival will also likely be dependent on the acquisition and retention of expertise in not only global bank and nonbank operations, global M&A advisory services, and sophisticated financial instrument and structured transaction capabilities that predominate the global financial markets.(189)

For the legal practitioner, the cross-border bank M&A process will most likely continue to be fraught with “environmental dimensions” that may render otherwise viable transactions difficult to consummate at best. This Article has attempted to provide a perspective on the relevant, current (but evolving) U.S. regulatory environment. Other “environmental dimensions” introducing difficulties might include, for instance, the differences in and between the “commercial banking” and “investment banking” cultures, on a domestic and cross-border basis, coupled with the organizational complexity, cost and transactional detail involved with integrating these cultures. These and other “environmental dimensions” undoubtedly have disrupted, and will continue to disrupt, the smooth consummation of many U.S. or foreign bank M&As. Moreover, the post-integration phases of recent foreign bank M&As may demonstrate that, notwithstanding bank management enthusiasm for M&As, the interests of shareholders in the acquiring companies may not necessarily be advanced by such transactions. These latter dimensions, however, are outside the scope of this Article.

As to the practical lawyering aspects vis-a-vis the regulatory process, a cooperative dynamic between bank regulatory authorities and lawyers advising foreign bank clients is essential. In the broader, global picture, however, the key challenge will be how best to facilitate the “regulatory market partnership” to the cross-border bank M&A context, consistent with the global pressures for greater liberalization in the financial services area and the global need for “safety and sound” banking systems.

(1.) On discussion of the globalization process, see, inter alia, JAN AART SCOLTE, GLOBALIZATION: A CRITICAL INTRODUCTION (2000) (containing a comprehensive bibliography). See also, Professor Joseph J. Norton, Inaugural Speech at the University of Hong Kong, Globalisation, Legal Education and Greater China: Whither Hong Kong SAR in the New Millennium? (Oct. 21, 1999) (on file with The Business Lawyer, University of Maryland School of Law)

(2.) See INTERNATIONAL MONETARY FUND, INTERNATIONAL CAPITAL MARKETS: DEVELOPMENT, PROSPECTS AND KEY POLICY ISSUES, ch. II (2000) [hereinafter IMF ANNUAL CAPITAL MARKETS REPORT]

(3.) See, for example, the Deutsche Bank and HSBC transactions discussed infra text accompanying notes 73-136. In addition, such cross-border M&As are relevant to the emerging market context. See IMF ANNUAL CAPITAL MARKETS REPORT, supra note 2, chs. III, VI.

(4.) See, e.g., MARIO GIAVANOLI & GREGOR HEINRICH, INTERNATIONAL BANK INSOLVENCIES 308 (1999)

(5.) See generally Northern Light, Special Editions: Bank Mergers, available at <http:// www.northernlight.com/bankmerger> (containing Wall Street to Journal abstracts and other information on recent bank M&As). Another helpful cite on recent bank mergers, particularly as to the United States, is the American Banker, available at <http://www.americanbanker.com>.

(6.) Id.

(7.) On these global issues, see, inter alia, ERNST PREEG, GROUP OF THIRTY, CHARTING A COURSE FOR THE MULTILATERAL TRADE SYSTEM: THE SEATTLE MINISTERIAL MEETING AND BEYOND (Occasional Paper No. 61, 1999), available at <http://www.groupso.org/ publications/allPubs/pubs99.htm>. For a Western Hemisphere context, see, inter alia, Joseph J. Norton, Doing Business under FTAA: Reflections of a U.S. Business Lawyer, 6 NAFTA L. & Bus. REV. OF AM. — (forthcoming Summer Issue 2000) (issue not yet in print as of Jan. 23, 2001).

(8.) See Joseph J. Norton, “Qualified Self-Regulation” in the New International Financial Architecture, 2 J. INT’L BANKING REG. 9 (2000) (presenting the thesis that a new “elite corps” of global financial institutions is developing by virtue of marketplace and regulatory realities being shaped, in part, by the globalization processes).

(9.) See, e.g., BASLE COMMITTEE ON BANKING SUPERVISION, INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS & INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (“JOINT FORUM”, RISK CONCENTRATIONS PRINCIPLES 5-9 (Dec. 1999), available at <http://www.bis.org/publ/index.htm>

(10.) See generally JOSEPH J. NORTON, DEVISING INTERNATIONAL BANKING SUPERVISORY STANDARDS (1995).

(11.) See generally SIR ANDREW LARGE, GROUP OF THIRTY, THE FUTURE OF GLOBAL FINANCIAL REGULATION (Occasional Paper No. 57, 1998)

(12.) See Joseph J. Norton & Christopher D. Olive, The Ongoing Process of International Bank Regulatory and Supervisory Convergence: A New Regulatory-Market “Partnership,” 16 ANN. REV. BANKING L. 227 (1997).

(13.) For instance, consider the NAFTA context. See, e.g., NAFTA AND BEYOND (Joseph J. Norton et al. eds., 1995).

(14.) See Norton, supra note 8

(15.) See, e.g., BASLE COMMITTEE ON BANKING SUPERVISION, PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK (Sept. 2000), available at <http://www.bis.org/publ/index.htm>.

(16.) On the securitization phenomenon see, inter alia, INTERNATIONAL ASSET SECURITIZATION (Joseph J. Norton et al. eds., 1995).

(17.) On the growth of and regulatory adaptation to global securities transactions, see, inter alia, MARC I. STEINBERG, INTERNATIONAL SECURITIES LAW (1999).

(18.) The primary U.S. bank regulatory and supervisory authority for foreign bank operations and M&As involving U.S. banking interests is the U.S. Board of Governors of the Federal Reserve System (the U.S. Federal Reserve Board).

(19.) In the Deutsche Bank-AG Bankers Trust Corporation transaction, Deutsche Bank, a foreign banking organization, requested approval to become a U.S. bank holding company under the Bank Holding Company Act of 1956 as amended (BHCA) by acquiring all of the voting shares of Bankers Trust Corporation, New York (BT Corporation) and its wholly owned subsidiary banks. Deutsche Bank proposed to acquire BT Corporation by merging an indirect wholly owned acquisition subsidiary with and into BT Corporation, with BT Corporation as the surviving company. Deutsche Bank further proposed to hold BT Corporation through an intermediate holding company in the United States. Deutsche Bank also requested approval to acquire BT Corporation’s nonbanking subsidiaries and engage in various permissible nonbanking activities, including: (i) extending credit and servicing loans

(20.) In the HSBC-RNYC transaction, HSBC’s U.S. BHCs established pursuant to and regulated by the FRB under the BHCA requested approval for a series of M&A transactions to acquire all the voting shares of RNYC and its wholly-owned subsidiary banks, Republic National Bank of New York (Republic Bank) and Republic Bank California National Association (Republic California). HSBC proposed to acquire RNYC by merging an indirect, wholly owned acquisition subsidiary with and into RNYC, with RNYC remaining as the surviving corporation. HSBC proposed to hold the corporation resulting from the RNYC merger through an intermediate holding company The BHCs also requested approval to acquire the nonbanking subsidiaries of RNYC and engage in permissible nonbanking activities. The nonbanking activities engaged in by RNYC included factoring

(21.) See SNL Securities, Chart, BANK MERGERS AND ACQUISITIONS, Oct. 2000 (chart of “top 25” bank M&A transactions by announced transaction value). The authors note that the consummation of the proposed acquisition by Mizuho Holdings, Inc., a corporation formed under the laws of Japan (Mizuho Holdings), of the Dai-Ichi Kangyo Bank, Ltd. (DKB), The Fuji Bank, Ltd. (Fuji), and The Industrial Bank of Japan (IBJ), all of Tokyo, Japan, would form the largest banking organization in the world, with assets in excess of U.S. $1.4 trillion. As part of this transaction, Mizuho Holdings requested FRB approval under the BHCA to become a BHC by indirectly acquiring U.S. subsidiary banks of DKB, Fuji, and IBJ. Mizuho Holdings further requested FRB approval to acquire U.S. nonbank subsidiaries of DKB, Fuji, and IBJ under applicable sections of the BHCA. The FRB has approved these proposed formation and acquisition transactions in a recent FRB order. See Federal Reserve Board, Mizuho Holdings, Inc. (In Formation), Order Approving Formation of a Bank Holding Company and Acquisition of Nonbanking Companies (effective Sept. 5, 2000), available at <http://www.federalreserve.gov/BoardDocs/press/bhc/2000/20000905/>. The Mizuho Holdings Order is not examined as part of this Article because the transaction has not yet been consummated. Many of the same issues explored in this Article, however, are also applicable in this proposed transaction.

(22.) See, e.g, J.J. NORTON & S. C. WHITLEY, BANKING LAW MANUAL chs. 1-3 (1997).

(23.) Until the enactment of the International Banking Act of 1978 (discussed infra), regulation and supervision of foreign banks operating in the United States was the sole responsibility of state banking authorities. Foreign banks desiring to establish a direct U.S. presence obtained state licenses. See, e.g., U.S. GENERAL ACCOUNTING OFFICE, FOREIGN BANKS: ASSESSING THEIR ROLE IN THE U.S. BANKING SYSTEM 47 (GAO/GGD-96-26, 1996) [hereinafter GAO REPORT].

(24.) See, e.g., Daniel B. Gail, Joseph J. Norton & Michael K. O’Neal, The Foreign Banking Supervision Act of 1991: Expanding the Umbrella of “Supervisory Reregulation,” 26 INT’L LAW. 993, 994-95 (1992).

(25.) See Pub. L. No. 95-369, 92 Stat. 607, 1407 (1978) (codified as amended at 12 U.S.C. [subsections] 3101-3111).

(26.) See GAO REPORT, supra note 23, at 16-17.

(27.) Id.

(28.) See, e.g., G. N. OLSON, BANKS IN DISTRESS: LESSONS FROM THE U.S. EXPERIENCE OF THE 1980S (2000).

(29.) See David S. Holland, Foreign Bank Capital and the United States Federal Reserve Board, 20 INT’L LAW. 785, 788 (1986).

(30.) See, e.g., Joseph J. Norton, Capital Adequacy Standards: A Legitimate Regulatory Concern for Prudential Supervision of Banking Activities?, 49 OHIO ST. L.J. 1299 (1989).

(31.) See, e.g., Duncan E. Alford, Basle Committee Minimum Standards: International Regulatory Response to the Failure of BCCI, 26 GEO. WASH. J. INT’L L. & ECON. 241 (1992).

(32.) BCCI was not subject to comprehensive consolidated supervision, but the absence of such supervision was not necessarily the original issue that attracted FRB attention in this regard. The FRB had determined after the collapse of BCCI that it had acquired control of First American Bankshares in 1981 without prior FRB approval, in violation of the Bank Holding Company Act of 1956. See, e.g., John Walker & Brendan Gormley, Multinational Banks Face Tougher Scrutiny, INT’L FIN. L. REV., Mar. 1996, at 41.

(33.) Notably, neither U.S. depositors nor the Federal Deposit Insurance Corporation (FDIC) lost funds in the BCCI collapse, but the U.S. Congress requested the FRB to propose legislation to regulate the expansion of foreign banks in the United States. See id.

(34.) See Pub. L. No. 102-242, 105 Stat. 2236, 2286 (1991) (codified as amended at 12 U.S.C. [subsections] 3101-3111).

(35.) See BASLE COMMITTEE ON BANKING SUPERVISION, MINIMUM STANDARDS FOR THE SUPERVISION OF INTERNATIONAL BANKING GROUPS AND THEIR CROSS-BORDER ESTABLISHMENTS (June 1992), available at <http://www.bis.org/publ/index.htm>. The Basle Minimum Standards established four principles for determining whether a bank is subject to consolidated supervision. First, the home country supervisor of a global bank should be able to perform consolidated supervision. Second, an international bank should be required to obtain the approval of the home country and the host country. Third, supervisory authorities should be able to collect information on the cross-border banking establishments of the banks for which they are the home country supervisor. Fourth, if a host country authority determines that one of the above three principles are not met, then it may impose restrictive measures as necessary to satisfy its prudential concerns, including prohibition of banking establishments. See Walker & Gormley, supra note 32, at 44 illus. 2.

(36.) FRB approval is required to establish any foreign banking institution in the United States. The FRB is also mandated by the FBSEA to coordinate with other federal and state banking authorities to ensure that foreign bank branches and agencies are subject to examination. In addition, foreign banks must obtain regulatory approval from the OCC or state banking authority when establishing new branches and agencies. Branches and agencies have no capital of their own, but if they are federally licensed, there is a requirement to deposit cash or eligible securities at approved depository banks to satisfy the “capital equivalency requirement” set forth in the IBA. State-licensed branches and agencies must also meet this requirement as defined by relevant state laws. See generally U.S. GENERAL ACCOUNTING OFFICE, INTERNATIONAL BANKING: STRENGTHENING THE FRAMEWORK FOR SUPERVISING INTERNATIONAL BANKS 51-53 (GAO/GGD-94-68, 1994) (reviewing FBSEA provisions)[hereinafter GAO REPORT 94-68].

(37.) Foreign bank “branches” are generally the most popular form chosen by foreign banks to do business in the United States. Branch powers resemble those of full-service U.S. banks. Branches can generally engage in the full range of commercial banking business, including receipt of wholesale deposits, making loans, issuing letters of credit, financial trading activities, and the like. Branches are subject to capital equivalency and reserve requirements and lending limits, and have access to the Federal Reserve discount window, clearing services, and wire transfer services. See 12 U.S.C. [subsections] 3102(b), 3104(c) (1994). Branches not insured by the FDIC prior to December 19, 1991 generally may not accept domestic retail deposits. See 12 U.S.C. [sections] 3104(d) (1994).

(38.) Foreign bank “agencies” can generally engage in the same activities as branches, such as making loans, buying, selling, paying, and collecting bills of exchange, issuing letters of credit, and the like, but similarly to branches are subject to lending limitations and otherwise limited to powers authorized under federal law. See 12 U.S.C. [subsections] 3102(b), 3105(h)(1) (1994). Generally

(39.) Foreign bank “commercial lending companies” (CLCs) are companies organized under state law that maintain credit balances and make commercial loans. See 12 U.S.C. 2 3101 (9) (1994). For instance, a CLC organized as an investment company under article XII of the New York State Banking Law may, among other things, (i) borrow funds

(40.) The foreign bank “representative office” is probably best defined as an office that is not a branch, agency, or bank subsidiary of the foreign bank. See 12 U.S.C. 2 3101(15) (1994). Representative offices are authorized to engage in more limited representational and administrative functions, and generally represent the form used for initial entry by foreign banks into the United States. Although the IBA defines branches and agencies in terms of what they are authorized to do, the Act does not address the permissible activities of the representative office. The representative office may generally conduct representational and administrative work on behalf of the foreign bank (i.e., loan production, research, back office operations, customer relations), but cannot engage directly in banking activities (i.e., these offices cannot render or implement any credit or other business decisions related to banking). State law determines where representative offices may be located. The FBSEA granted FRB the authority to approve the establishment of representative offices, and further established that permissible activities of representative offices is governed by both state and federal law.

(41.) Edge Act corporations are chartered by the FRB primarily to engage in international banking and financial activities, such as accepting deposits to finance projects outside the United States and providing international payment and settlement services. See 12 U.S.C. [subsections] 611-633 (1994 & Supp. IV 1998).

(42.) Foreign banks may own or control U.S. subsidiary banks with assets and liabilities distinct from those of the parent. U.S. subsidiary banks of foreign banks are either federally-chartered or state-chartered and therefore may conduct any banking activities authorized under state or federal law, including retail deposit-taking and fiduciary activities. A foreign bank may own a federally-chartered subsidiary bank in any U.S. state, or a state-chartered bank subsidiary in any state in which ownership is authorized. See 12 U.S.C. 22 21, 24 (1994). U.S. subsidiary banks are viewed as separate legal entities from the foreign bank parent, and as such must maintain separate capital requirements, FDIC deposit insurance (if federally chartered or planning to accept retail deposits), and their directors and officers must meet certain citizenship and residency requirements. See 12 U.S.C. 22 51(a), 72, 3104 (1994). U.S. subsidiary banks of foreign banks are also subject to limitations on loans to affiliates, and Community Reinvestment Act requirements. See 12 U.S.C. 22 [subsections] 371c to 371c-1 (1994)

(43.) Foreign bank U.S. branches and agencies may be either federally-chartered and thereby regulated and supervised by the OCC, or state-chartered and thereby regulated and supervised by the respective state banking authority. The majority of foreign bank U.S. branches and agencies are state chartered. See, e.g., U.S. GENERAL ACCOUNTING OFFICE, FOREIGN BANKS: IMPLEMENTATION OF THE FOREIGN BANK SUPERVISION ENHANCEMENT ACT OF 1991 4 (GAO/GGD-96-187, 1996) (observing that as of December 1995 there were 473 state-chartered and 72 federally-chartered foreign bank U.S. branches and agencies) [hereinafter GENERAL ACCOUNTING OFFICE REPORT].

(44.) Section 20 of the Glass-Steagall Act prohibited the affiliation of a bank with a company that is “principally engaged” in underwriting or dealing in securities. 12 U.S.C. [sections] 377 (1994). By 1989, the FRB approved applications by BHCs to engage in underwriting and dealing in any type of debt or equity securities except open-end mutual funds. Section 20 subsidiaries were subject to a “revenue test” that was designed to ensure that such firms would not be “engaged primarily” in underwriting and dealing in securities. The revenue test was modified several times so as to limit so-called “bank-ineligible” securities underwriting and dealing activities to less than 25 percent of the total revenues of the section 20 subsidiary. The FRB further applied various prudential “firewalls,” later modified as more basic “operating standards,” to BHCs engaged in securities underwriting and dealing activities through section 20 subsidiaries. As of September 30, 2000, various foreign banking organizations were authorized to conduct U.S. section 20 activities. See, e.g., Federal Reserve Board, Section 20 Securities Subsidiaries (last visited Jan. 21, 2000), available at <http://www.bog.frb.fed.us/ GeneralInfo/Subsidiaries/DETAULT.HTM>

(45.) The Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338, 1341 (1999) (codified at scattered sections of 12 U.S.C.) and its impact on regulatory aspects of foreign bank M&As in the United States is discussed further in this Article, infra, text accompanying notes 145-59.

(46.) Foreign banks have always been required to obtain FRB approval for the establishment or acquisition of bank subsidiaries under the BHCA.

(47.) Regulation–International Banking Operations and Regulation Y–Bank Holding Companies and Change in Bank Control, 57 Fed. Reg. 12,992 (1992) (codified as amended at 12 C.F.R. pts. 211,225, 263, 265) (interim rule).

(48.) The FRB adopted final rules amending Regulations K and Y in November 1992 that were substantially identical to the interim rules.

(49.) See GENERAL ACCOUNTING OFFICE REPORT, supra note 43, at 5.

(50.) See FEDERAL RESERVE BOARD, BHC SUPERVISION MANUAL, Foreign Banking organizations, Policy Statement on the Supervision and Regulation of Foreign Banking Organizations, [sections] 2100.1.1, at I [hereinafter FRB Foreign Bank Supervision Policy Statement].

(51.) See id.

(52.) The Glass-Steagall Act and BHCA severely impacted certain foreign banks with significant insurance operations and U.S. activities, and forced them to consider “debanking” as an option. In particular, several European banks publicly considered “debanking” following mergers and acquisitions of non-U.S. companies with substantial U.S. operations that failed to conform with restrictions applicable to such banks’ U.S. activities and operations. The European banks were faced with the prospect of divesting the highly profitable but nonconforming U.S. operations of the newly acquired company or “debanking.” The “debanking” option avoided divestiture and further rendered permissible additional activities and reduced supervision without terminating such profitable activities. Several foreign banks, particularly ING and Bank Indosuez, pursued the “debanking” option because of the inability to conform to the requirement that in order to maintain banking offices in the United States, the global business of a non-U.S, bank and its affiliates must consist primarily of banking and other financial activities, known as the “qualified foreign banking organization” (QFBO) requirement. See, e.g., Marc Cohen & Soo Yim, Debanking: A Strategic Option for Foreign Banks in the US, INT’L FIN. L. REV., May 1996, at 13-15

(53.) The FRB has exempted most foreign banking organizations, called “qualified foreign banking organizations,” from certain regulations. For a QFBO to qualify for exemptions, more than one-half of its worldwide business must be banking, and more than one-half of its banking activities must be outside of the United States. See 12 CFR [sections] 211.23 (2000). QFBOs may conduct any activity outside of the United States, and under certain conditions, may own voting shares of any foreign company operating in the United States. Id. Rules regarding QFBOs are set forth in FRB Regulation K, 12 C.F.R. pt. 225 (2000).

(54.) See Cohen & Yim, supra note 52, at 13.

(55.) See PREEG, supra note 7.

(56.) See generally MICHAEL GRUSON & RALPH REISNER, REGULATION OF FOREIGN BANKS: UNITED STATES AND INTERNATIONAL (2 vols.) (3d ed. 2000).

(57.) See FRB Foreign Bank Supervision Policy Statement, supra note 50, [sections] 2100.1.1, at 1-2.

(58.) For foreign banks already operating in the United States, the FBSEA provides the FRB with authority to terminate, or recommend that the OCC terminate, a foreign bank’s U.S. offices if the foreign bank is not subject to comprehensive consolidated supervision by its home country authorities. See GAO REPORT 94-68, supra note 36, at 52.

(59.) Id.

(60.) See Ann E. Misback, The Foreign Bank Supervision Enhancement Act of 1991, 79 FED. RES. BULL. 1, 7 (1993).

(61.) See 12 U.S.C. [sections] 1843(c)(3)(A) (1994)

(62.) See, e.g., Connie M. Friesen & David Nissenbaum, Foreign Banks: Use of Alternative Structures–Part II, in REV. OF BANKING & FIN. SERVICES., Nov. 1995, at 223 (reviewing FRB implementation of FBSEA and ensuing “debanking” trend and observing that by early 1995 only fourteen nations were recognized to have met this standard)

(63.) A related question is, in analyzing this factor, whether the FRB will conduct a meaningful, timely, and critical review of the home country supervisory framework to ensure that the framework exists “on paper,” or also review the relevant implementation and enforcement of that framework over time? Several prior FRB orders in the context of cross-border M&As suggest that the FRB may review the relevant home country framework in a somewhat cursory manner, as if to ensure it actually exists “on paper,” as opposed to reviewing the actual implementation and enforcement of that framework. For instance, the FRB reviewed bank regulatory and supervisory frameworks of Mexico and Japan in connection with a Mexican bank’s acquisition of another Mexican bank that itself held conducted operations in the United States through a U.S. BHC and U.S. subsidiary bank and a Japanese bank’s acquisition of a U.S. bank. In the relevant orders approving these transactions, the FRB reviewed the home country bank regulatory and supervisory framework legal requirements and declared that, based on “all the facts of record,” the supervisory factor had been met in each instance. Federal Reserve Board, Grupo Financiero Banamex Accival, S.A. de C.V., Banco National de Mexico, S.A., Banamex USA Bancorp, Order Approving the Formation of a Bank Holding Company and a Proposal to Engage in Certain Securities Activities, 82 FED. RES. BULL. 1047, 1049 (Nov. 1996) [hereinafter Banacci-Banamex-CCB Order]

(64.) Foreign banks must obtain prior approval of the FRB and the respective licensing authority to establish a branch, agency, or commercial lending company. Prior to the FBSEA, only approval of the licensing authority was required. See 12 U.S.C. [sections] 3105(d)(1) (1991)

(65.) See 12 U.S.C. [sections] 3105(d)(6)(A) (1994 & Supp. IV 1998). In deciding whether or not to exercise this discretion to approve such an application, the FRB must also consider whether the foreign bank has adopted and implemented procedures to combat money laundering, and whether the home country is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering. See 12 U.S.C. [sections] 3105(d)(6)(B)(1994 & Supp. IV 1998).

(66.) See HSBC Order, supra note 20, at 28-29 & n.48.

(67.) Id. at 29 & n.49.

(68.) Id. at 29.

(69.) See Deutsche Bank Order, supra note 19, at 20 n.34.

(70.) Id. at 20.

(71.) Id.

(72.) See HSBC order, supra note 20, at 30 n.50.

(73.) See Federal Reserve Board Division of Banking Supervision & Regulation, Enhanced Framework for Supervising the U.S. Operations of Foreign Banking Organizations, SR 95-22 (SUP.IB) (Mar. 31, 1995), available at <http://www.bog.frb.fed.us/boarddocs/ SRLETTERS/1995/sr9522.htm>.

(74.) See Federal Reserve Board Division of Banking Supervision & Regulation, Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations, SR 98-13 (SUP.IB) (June 3, 1998), available at <http://www.federal reserve.gov/boarddocs/SRLETTERS/1998/SR9813.HTM>. The FRB introduced these enhancements to the FBO Supervision Program to more closely align it with the FRB’s Framework for Risk-Focused Supervision of Large Complex Institutions. See Federal Reserve Bank Division of Banking Supervision & Regulation, Risk-Focused Framework for Large Complex Institutions, SR 97-24 (SUP) (Oct. 27, 1997), available at <http://www.bog.frb.fed.us/ boarddocs/SRLETTERS/1997/SR9724.HTM>. Notably, the FRB has modified this guidance to some extent for certain banking organizations designated as “large complex banking organizations” (LCBOs) to establish a public-private partnership between the FRB, foreign banking authorities, and LCBO management designed to ensure closer consolidated supervision of LCBO global activities. The FRB guidance on LCBOs certainly applies to foreign banking organizations that are recognized as meeting LCBO criteria. See FRB Division of Banking Supervision & Regulation, Risk-Focused Supervision of Large Complex Banking Organizations, SR 99-15 (SUP) (June 23, 1999), available at <http://www.bog.frb.fed.us/ boarddocs/SRLETTERS/1999/SR9915.HTM>.

(75.) See Federal Reserve Board Division of Banking Supervision & Regulation, Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations, SR 00-14 (Oct. 23, 2000), available at <http://www.federalreserve.gov/ BoardDocs/SRLETTERS.2000.SR0014.HTM> (superceding SR 95-22, supra note 73 and SR 98-13, supra note 74).

(76.) See HSBC Order, supra note 20, at 1-2

(77.) See 12 U.S.C. [sections] 1842 (1994).

(78.) See id. [sections] 1843(c)(8) (1994 & Supp. IV 1998).

(79.) See 12 C.F.R. [sections] 225.24 (2000).

(80.) See 12 U.S.C. [sections] 1843(c)(13) (1994).

(81.) See 12 U.S.C. [sub sections] 611-633 (1994 and Supp. IV 1998).

(82.) See 12 C.F.R. pt. 211 (2000) (Regulation K).

(83.) See 12 U.S.C. [sub sections] 601-633 (1994 and Supp. IV 1998).

(84.) See id. [sections] 1828(c) (1994).

(85.) See id. [sub sections] 321-338a.

(86.) The scenario contemplated here is when a foreign bank-owned or controlled BHC acquires indirect ownership interests in nonbank subsidiaries as a result of acquisition through public tender offer of the majority of the voting shares of a foreign banking organization. The subsidiaries may be controlled in reliance on “grandfather rights” established under section 8(c) of the IBA which terminate upon completion of the foreign BHC’s acquisition of the foreign banking organization. The foreign BHC and foreign banking organization must conform all activities conducted in reliance on section 8(c) of the IBA to the requirements of the BHCA within two years of the date that the foreign bank-owned or controlled BHC acquired the foreign banking organization. See 12 U.S.C. [sections] 3106(c)(2) (1994).

(87.) See generally HSBC Order, supra note 20

(88.) See 12 U.S.C. [sub sections] 2901- 2907 (1994).

(89.) See id. [sections] 1842(c)(1)(A).

(90.) See id. [sections] 1842(c)(1)(B).

(91.) See 1984 Merger Guidelines, 49 Fed. Reg. 26,823, 26,830 (1984).

(92.) See HSBC Order, supra note 20, at 7 n.17

(93.) See, e.g., HSBC Order, supra note 20, at 8

(94.) See, e.g., HSBC Order, supra note 20, at 8

(95.) See, e.g., HSBC Order, supra note 20, at 8.

(96.) Id. at 8 n. 18 (citing Chemical Banking Corporation, 82 FED. RES. BULL. 239 (1996)).

(97.) Id.

(98.) For instance, in the mid-1990s, it was highly likely that many (if not all) of the major Mexican and Japanese banks were significantly undercapitalized. FRB nonetheless summarily determined that several of these banks conducting U.S. bank M&As maintained adequate capital levels, when reliance on home country supervisory information in this regard may have been less than justifiable. See generally Banacci-Banamex-CCB Order, supra note 63

(99.) See HSBC Order, supra note 20, at 9.

(100.) Id.

(101.) Id. at 9 & n.20.

(102.) See Deutsche Bank Order, supra note 19, at 7 n. 13.

(103.) Id. at 9 n. 16.

(104.) Id.

(105.) See HSBC Order, supra note 20, at 10.

(106.) Id.

(107.) See, e.g., Peter P. Swire, Safe Harbors and a Proposal to Improve the Community Reinvestment Act, 79 VA. L. REV. 349 (1993)

(108.) See HSBC Order, supra note 20, at 10.

(109.) See id. at 11 n.21 (citing Interagency Questions and Answers Regarding Community Reinvestment, 64 Fed. Reg. 23,641 (1999)). On the Community Reinvestment Act and other “fair lending” regulations/practices, see generally Joseph J. Norton, “Fair Lending” Requirements: The Intervention of a Governmental Social Agenda into Bank Supervision and Regulation, 49 CONSUMER FIN. L. Q. REP. 17 (1995).

(110.) See Deutsche Bank Order, supra note 19, at 10.

(111.) See HSBC Order, supra note 20, at 10.

(112.) Id. at 11-28.

(113.) See Deutsche Bank Order, supra note 19, at 10-15.

(114.) Id. at 16.

(115.) Id. at 16-18.

(116.) Id. at 19.

(117. Id. at 19 n.32 (citations omitted).

(118.) Id. at 19.

(119.) For purposes of the BHCA, a BHC’s home state is that state in which the total deposits of all banking subsidiaries of such company were the largest on July 1, 1966, or the date on which the company became a BHC, whichever is later. See 12 U.S.C. [sections] 1841(o)(4)(C) (1994).

(120.) See id. [sections] 1842(d)(2)(A).

(121.) See id. [sections] 1842(d)(2)(B)-(D).

(122.) See id. [sections] 1842(d)(1)(A-B).

(123.) See id.

(124.) HSBC Order, supra note 20, at 33.

(125.) See id. at 32.

(126.) Id.

(127.) Id. at 32-33.

(128.) See Deutsche Bank Order, supra note 19, at 28 n.45.

(129.) Id.

(130.) See HSBC Order, supra note 20, at 33 n.55.

(131.) Id. (citing 12 C.F.R. [sections] 225.16(e) (1999)).

(132.) See 12 U.S.C. [sections] 1843(c)(8) (1994 and Supp. IV 1998)

(133.) See HSBC Order, supra note 20, at 33-34 n.55.

(134.) See Deutsche Bank Order, supra note 19, at 29 n.47.

(135.) Id.

(136.) See 12 C.F.R. [subsections] 225.7, 225.25(c) (1999).

(137.) For instance, the FRB previously determined by regulation or order that the following activities, among others, were permissible under section 4(c)(8) of the BHCA: (i) extending credit and activities related to extending credit (servicing loans)

(138.) See 12 U.S.C. [sections] 1843(c)(8) (1994 and Supp. IV 1998).

(139.) For instance, in the HSBC-RNYC transaction, HSBC acquired a nonbank subsidiary of RNYC that engaged in underwriting and dealing in “bank-ineligible” securities (section 20 activities), but agreed and elected that upon consummation of the transaction, RNYC would cease engaging in section 20 activities, and HSBC would conduct all forthcoming section 20 activities through its own previously existing subsidiary. See HSBC Order, supra note 20, at 30 n.52.

(140.) See BNP Order, supra note 137, at 7.

(141.) See Deutsche Bank Order, supra note 19, at 26.

(142.) See BNP Order, supra note 137, at 7.

(143.) Id. at 6 n.9. These investment funds included limited partnerships and similar investment vehicles such as limited liability companies. The applicant also proposed to act as a commodity pool operator (CPO) under the Commodity Exchange Act for private investment funds organized as commodity pools that invest in assets which the applicant would be authorized to hold directly under the BHCA.

(144.) The following text is intended to be an overview of selective FRB actions with respect to foreign banks under the Gramm-Leach-Bliley Act of 1999. See, e.g., MICHAEL GRUSON, THE 1999 U.S. BANKING LAW REFORM AND FOREIGN BANKS (CCLS Yearbook 2000).

(145.) Pub. L. No. 106-102, 113 Stat. 1338 (1999).

(146.) For over two decades there has been active (and, at times, conflicting) discussions among politicians, regulators, industry leaders, and academics for “modernizing” the Glass-Steagall Act, BHCA, and related banking and financial services laws in order to make them more responsive to deregulatory, “internationalizing” (now dubbed “globalizing”), and internal and external competitive pressures. These efforts were waylaid by major domestic thrift and bank industry crises, unresolved regulatory “turf battles,” fundamental divisions within banking industry special interests groups and between them and similar securities and insurance industry interests, and ongoing popular suspicion of the motives of the banking industry. Numerous bills were submitted to the U.S. Congress to address such “modernization” issues from 1984 through the Autumn of 1999, but most of these legislative modernization efforts proved futile, notwithstanding legislative liberalizations in the area of domestic geographic restrictions. The nomenclature of the GLBA as “financial modernization” legislation may be somewhat misplaced, however. The regulatory complexity and fragmentation was largely left untouched, and significant erosion of the statutory barriers respecting banking vis-a-vis securities and insurance activities had already occurred through progressive regulatory actions and practices and through major federal judicial decisions. See, e.g., Joseph J. Norton, The Glass-Steagall and Related Legislative Rearm in the United States–Non Legislative Bank Reregulation and Modernization–The Recent Comptroller of the Currency’s Op-Sub Regulation, 14 BANKING & FIN. L. REV. 1 (1999). Additionally, despite relentless efforts of certain Congressmen, the socially-oriented and industry despised CRA survived largely intact, and is in fact a central tenet of the new GLBA framework.

(147.) Notably, one could argue that a primary underpinning of the GLBA was to legitimize the recent Travelers-Citicorp mega-cross industry merger, resulting in the consolidated entity called Citigroup. See Federal Reserve Board, Travelers Group, Inc. and Citicorp, Order Approving Formation of a Bank Holding Company and Notice to Engage in Nonbanking Activities, 84 FED. RES. BULL. 985 (effective Sept. 23, 1998) [hereinafter Travelers-Citicorp Order]. This controversial and dramatic merger of U.S. banking conglomerates, while effected with significant regulatory assistance, was entered into without any legal basis and with a five-year “window” of regulatory forbearance for the merger participants to obtain legislative go-ahead.

(148.) The merchant banking provisions of the GLBA provide additional authority to FHCs to make equity investments in non-financial companies. The FRB has adopted an interim rule implementing the merchant banking authority, proposed regulations to impose special capital requirements for such activities, and issued supervisory guidance for such activities. See, e.g., FRB Division of Banking Supervision & Regulation, Supervisory Guidance on Equity Investment and Merchant Banking Activities, SR 00-09 (SPE) (June 22, 2000), available at <http://www.federalreserve.gov/boarddocs/SRLetters/2000/sr0009.htm>.

(149.) See Federal Reserve Banking Division of Banking Supervision & Regulation, Framework for Financial Holding Company Supervision, SR 00-13 (SUP) (Aug. 15, 2000), available at <http://www.federalreserve.gov/boarddocs/srletters/2000/sr0013.htm.>.

(150.) See Bank Holding Companies and Change in Bank Control, 65 Fed. Reg. 3,785, 3,786 (2000) (interim rule with request for public comments) [hereinafter FHC Interim Rule]. On a general history of the Glass-Steagall Act, see, inter alia, Joseph J. Norton, Up Against “The Wall”: Glass-Steagall and the Dilemma of a Deregulated Banking Environment, 42 BUS. LAW. 327 (1987).

(151.) In making this determination, the FRB must consult with the Treasury and consider four factors: (i) the purposes of the GLBA and BHCA

(152.) See id.

(153.) See 12 U.S.C. [sections] 1843(c)(13)(1994).

(154.) Interim Rule on FHC Activities, supra note 151, at 14,435.

(155.) The Federal Reserve Bank Interim Rule on FHC Activities lists three activities that have been determined by the FRB to be usual in connection with the transaction of banking or other financial operations abroad as set forth in Regulation K (12 C.F.R. [sections] 211.5(d) (2000)) that are not otherwise permissible for a BHC under Regulation Y or included on the GLBA list of activities. These activities include management consulting services, operating a travel agency, and organizing, sponsoring, or managing a mutual fund. The remaining activities listed in section 211.5(d) have additionally been (i) authorized for FHCs under the GLBA (such as underwriting, distributing, and dealing in securities and underwriting certain types of insurance)

(156.) See Bank Holding Companies and Change in Bank Control

(157.) See Bank Holding Companies and Change in Bank Control, 65 Fed. Reg. 16,460, 16,463 (2000) (amending Regulation Y) (interim rule with request for public comments).

(158.) Id at 16,460.

(159.) See Bank Holding Companies and Change in Bank Control, 65 Fed. Reg. 16,480 (2000) (proposed rule with request for public comments).

(160.) With respect to foreign banks that operate branches or agencies or own or control a commercial lending company in the United States, the GLBA requires the FRB to apply comparable capital and management standards that give due regard to the principle of national treatment and equality of competitive opportunity. See FHC Interim Rule on FHC Activity’s, supra note 151, at 3,786.

(161.) Id.

(162.) The FHC Interim Rule also addressed the limitations that the FRB will apply to domestic and foreign banks electing to become FHCs for failing to maintain compliance with the applicable “well capitalized,” “well managed,” and CRA requirements. Id.

(163.) Id. at 3,788.

(164.) Id.

(165.) Id. (quoting the GLBA).

(166.) Id.

(167.) Id.

(168.) See 12 C.ER. [sections] 225.90 (2000). The new section provides two methods under which a foreign bank may be considered “well capitalized.” The first method requires the foreign bank’s Tier 1 risk-based capital ratios, as determined under its home country standard, to be at least 6 percent for Tier 1 capital to total risk-based assets and 10 percent for total capital to risk-based assets. See FHC Interim Rule on FHC Activities, supra note 151, at 3,789. This method applies to foreign banks whose home country supervisory authorities follow risk-based capital requirements “consistent with” the Basle Capital Accord. The FRB further proposed a “leverage ratio” (i.e., ratio of Tier 1 capital to total assets) of 3 percent for comment. See id. The second method, applicable to foreign banks whose home country authorities have not adopted the Basle Capital Accord standards, and any other foreign bank organizations that do not meet the standards set forth under the first method, must obtain a prior determination from the FRB that its capital is “comparable” to the capital required of a U.S. bank. Id. The “well managed” standard requires that each U.S. branch, agency, and commercial lending company of a foreign bank organization receive at least a satisfactory rating at the most recent examination, and that the home country supervisory authority considers the “overall operations of the foreign bank to be satisfactory.” Id.

(169.) See 12 C.ER. [sections] 225.91 (2000).

(170.) See id. [sections] 225.92.

(171.) See id. [sections] 225.93.

(172.) See id. [sections] 225.94.

(173.) See FHCInterim Rule on FHC Activities, supra note 151, at 3,789.

(174.) Id.

(175.) See FRB Division of Banking Supervision & Regulation, Procedures to Become a Financial Holding Company and Guidance Regarding the Initial Monitoring of Acquisitions and the Commencement of New Activities by Financial Holding Companies, SR 00-01 (SUP) (Feb. 8, 2000), available at <http://www.bog.frb.fed.us/boarddocs/SRLETTERS/2000/ sr0001.HTM>.

(176.) See id. at 3.

(177.) See id. at 3 n.5.

(178.) Id. at 3.

(179.) Id.

(180.) Id. at 3-4.

(181.) Id. at 4.

(182.) Id.

(183.) Id.

(184.) Id.

(185.) Id.

(186.) The amendments generally covered three areas regarding foreign bank FHC elections. First, the FRB amendments established that elections filed by foreign banks that meet the Rule’s “well capitalized” and “well managed” standards become effective on the 31st day after filing unless the FRB determined the election to be ineffective or the foreign bank agrees to extend the review period. The FHC Interim Rule formerly provided that a foreign bank FHC election would not be effective until the FRB rendered an affirmative finding that the foreign bank’s capital and management met standards “comparable to” those applied to U.S. banks owned by domestic BHCs. The FRB opined that its “experience [in]… reviewing and acting on the elections filed by foreign banks” that meet the standards defined in the FHC Interim Rule “indicates that such elections may be reviewed and comparable standards may be applied within a 31 day notice period.” See Bank Holding Companies and Change in Bank Control, 65 Fed. Reg. 15,054 (2000) (amending FHC Interim Rule as incorporated in Regulation Y, 12 C.ER. pt. 225) (interim rule with request for public comments). Thus, based on this “experience” and to “accommodate concerns expressed regarding the difference in process applicable to foreign banks,” the FRB amended the FHC Interim Rule to make the processing of elections by foreign banks “parallel” to that of domestic BHCs. Id. The FRB retained the right to determine an FHC election ineffective because: (i) capital is not comparable to the capital required for a U.S. bank owned by an FHC, or (ii) the FRB lacks sufficient information to determine whether or not a foreign bank meets the standards. Id. The FRB emphasized that if a foreign bank does not meet the FHC Interim Rule requirements, it may file a pre-clearance request for a specific determination on whether its capital and management are “comparable” in this respect. Id. Second, the FRB amendments established that all U.S. depository institution subsidiaries, such as thrift and nonbank trust companies, of electing foreign banks that do not otherwise have a U.S. subsidiary bank meet the same requirements as depository institution subsidiaries of BHCs. Id. The FHC Interim Rule formerly required only that a foreign bank and its U.S. branches, agencies, and commercial lending company subsidiaries, be “well capitalized” and “well managed” for the foreign bank to be treated as an FHC. This amendment was introduced to make the requirements for foreign banks “consistent with” the requirements for domestic BHCs. Id. Third, the FRB amendments “encouraged” foreign banks chartered in countries where no other bank from that country has received a “comprehensive consolidated supervision” determination from the FRB to use the “pre-clearance” processes provided in the FHC Interim Rule if making an FHC election. Id. The FHC Interim Rule authorizes a foreign bank or company to request review of its qualifications to be treated as an FHC prior to filing its official election. The FRB specifically sought comment on whether the “comprehensive consolidated supervision” standard should be required “in connection with comparability determinations on capital and management.” Id. at 15,053.

(187.) See Federal Reserve Board, Bank Holding Companies and Foreign Banking Organizations Which Have Effectively Elected to Become or be Treated as Financial Holding Companies as of March 23, 2000 (Mar. 23, 2000) (the FRB list includes only “top tier” foreign bank filers, in that some of these companies have “second-tier” BHCs or foreign banks that have also elected to become or to be treated as FHCs), available at <http://www.federalreserve.gove/boarddocs/press/boardacts/2000/200003232 /default.htm>.

(188.) See Federal Reserve Board, Financial Holding Companies as of January 19, 2001 (last modified Jan. 19, 2001) <http://www.federalreserve.gov/GeneralInfo/FHC/default.htm>.

(189.) An interesting preliminary observation regarding global bank consolidation concerns the purpose of consolidation, particularly regarding domestic banking consolidation events. For instance, the “Western” banking organizations have arguably realigned to transform themselves into stronger financial institutions, whereas certain foreign banks have arguably realigned because of survival concerns following restructuring and to facilitate the recognition of nonperforming loans and the pressures of global competition and cost reduction. Additionally, for the global bank, investment banking, M&A advisory, and OTC derivatives business lines will likely continue to be significant profit centers, as traditional banking activities decline even further in importance as revenue sources. The value of the global banking franchise may no longer necessarily be a function of asset size, but may increasingly be measured against market positions and profitability in these business lines. Moreover, without appropriate investments in information technology, global banks will likely be unable to perform comprehensive data processing, and will lack the infrastructure to implement meaningful risk management and internal control systems or provide lending and other financial services in an efficient and global manner. Thus, many banking organizations may simply have no choice but to merge with or acquire these components through cross-border M&A transactions.

By Joseph J. Norton and Christopher D. Olive(*) (*) Mr. Norton received his S.J.D. from the University of Michigan and his D. Phil. from Oxford University. He is the James L. Walsh Distinguished Faculty Fellow and Professor of Financial Institution Law, SMU School of Law, Dallas, Texas and the Sir John Lubbock Professor of Banking Law, Centre for Commercial Law Studies, University of London. Mr. Norton was the Vice Chancellor’s Distinguished Visiting Professor of Law, University of Hong Kong (1999-2000). Mr. Olive received his J. D. from the SMU School of Law and his LL.M (Banking & Finance Law) from the University of London. He is an Associate at Jones, Day, Reavis & Pogue, Dallas, Texas, and a Fellow, SMU Institute of International Banking and Finance, Dallas, Texas. This Article is an expanded version of a recent presentation made by Professor Norton at a conference on “Cross-border Mergers and Acquisitions” (RIZ, Cologne, March 24-25, 2000), subsequently amended as of October 1, 2000. Unless otherwise indicated herein, this Article is limited to events as of that date. This Article was reviewed by Mr. Paul Pilecki, Esq. The authors greatly appreciate the numerous substantive insights and comments (in particular, as to certain current regulatory practices and positions) furnished by Mr. Pilecki