This is the seventh in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This seventh article covers foreign banks operating in the U.S. either by branches or subsidiaries. The last article covered national banks. Future articles will cover additional types of banks.
It’s human nature to think the grass is greener on the other side. You might even think that theory holds true for banks. After all, some branches of foreign banks have offered deals. Both State Bank of India and Bank of China have been in that category. Then there are subsidiaries of foreign banks like BBVA Compass and HSBC that have offered appealing deposit deals.
So what do you need to know about putting your money in a foreign bank? According to a regulatory guide to foreign banks in the United States by PriceWaterhouseCoopers, as of June 30, 2007, 205 foreign banking organizations from 59 countries had established in the United States representative offices, branches, agencies or banking subsidiaries.
Foreign banking organizations (FBOs) operate a variety of banking institutions in the U.S.: branches, agencies, and U.S.-or state-chartered Edge Act and Agreement corporations and banks. These banks have a huge footprint on the American economy, as of 2012, they accounted for 22% of total bank assets – about $3.5 trillion, according to Kevin Corder, a professor with Department of Political Science at Western Michigan University.
Given their significance, U.S. regulators have a say in supervision. Do realize though, that the regulations they must comply with depend on much, like whether its U.S. units are chartered in the U.S. or overseas. That’s something you should be sure to know before you put your money in that bank.
These institutions offer many of the services of others, like loans, (short and long-term), investments and take deposits.
Foreign bank branches and agencies are legal entities of their parent companies and not freestanding entities in the U.S. They also do not have any capital of their own and have their own set of regulators that can be a bit different from other U.S. banks. However, Edge and Agreement corporations and foreign banks’ U.S. subsidiaries can stand on their own as legal entities with U.S. or state charters and their own capital. Foreign bank branches and agencies operating in the U.S. have access to Federal Reserve services and privileges under the same rules and at the same prices as other depository institutions.
If you decide to use a foreign bank know that the Federal Reserve or other banking supervisors are looking out for you. If they find that a foreign bank has problems with compliance, or engages in unsound banking practices, they have the authority to take various measures to address them. In the worst case scenario, the U.S. activities of a foreign banking institution can be terminated and they can be booted out of the country.
DepositAccounts.com, through an email interview, asked Corder to sort through the jargon and answer possible concerns you might have. For example, if you open a CD at one of these banks, even if it is FDIC insured are they any risks compared to a domestic bank with a domestic parent company? "FDIC-insured is FDIC-insured. It doesn’t matter whether the parent is domestic or foreign," says Corder.
What is most likely to be different about these institutions? "While it will look just like a domestic bank IF it is FDIC-insured - a lot of (small) foreign branches operate as uninsured state-regulated banks, but these branches don't accept retail deposits - only wholesale deposits from financial institutions or other firms."
When trouble hits the parent foreign bank how can this affect me and how can I protect myself? "The foreign parent can transfer funds from a US branch or subsidiary and that happened during the US financial crisis, but reversed during the European sovereign debt crisis as money flowed back in to the US. Just as with domestic banks, make sure the account is FDIC-insured."
What’s the track record of these institutions? "Foreign banking was trivial to nothing prior to the 1970s but there was slow growth after that until the 2003-7 period when foreign bank activity rose sharply - to where it is today at 20-25 percent of bank assets. Depositors have not been hurt in the past by these banks. Some U.S. depositors have been burned by foreign deposits in foreign banks on foreign soil - when domestic depositors were made whole but foreign depositors (including US citizens) were not. That happened with a Bankhaus Herstatt in Germany in the 1970s and Iceland recently. Consumer-protecting regulations have changed over the years like for other institutions, there is more scrutiny from the CFPB.
I like some of the deals I see these banks offering, what’s most important for me to understand? "FDIC insurance is FDIC insurance, no matter who owns the bank."