Risk Management Manual of Examination Policies - FDIC

INTERNATIONAL BANKING Section 11.1
The existence of cross-border organizations compounds the
difficulty of the supervisory oversight process because they
generally are not as transparent as a U.S. company, and
U.S. bank supervisors may be unable to evaluate their
ownership structure or to conduct on-site evaluations of the
foreign entities.
Complex PBOs also could be part of privately held multinational
conglomerates that service a particular business
sector or geographic region. These privately held PBOs
often are the most challenging to understand because
public information on their ownership structure,
operations, and affiliations is scarce. Conversely, PBOs
can be part of large multi-national conglomerates that are
publicly traded and where financial services are typically
not a main activity of the enterprise. In these structures,
information on ownership, operations, and affiliations is
more readily obtainable.
Supervisory Risks
PBOs present supervisory risks similar to those arising
from a chain banking organization (CBO) with the added
dimension that part of the chain is in a foreign country.
From a regulatory perspective, the risks presented by PBOs
may be greater than those presented by domestic CBOs
because a portion of the PBO structure is subject to the
laws and jurisdiction of one or more foreign countries.
The fundamental risk posed by PBOs is that they may act in
a de facto organizational structure that, because it is not
formalized, is not subject to comprehensive consolidated
supervision. The Core Principles 11 of the Basel Committee
on Banking Supervision requires banks to be supervised on
a consolidated basis to minimize the leveraging of capital,
ensure that risks are managed on a group-wide basis, and
mitigate the risk of contagion within a banking group.
However, the beneficial owner(s) of a PBO may be an
individual, family, group of persons acting in concert, or a
holding company 12 that is seeking entry into the U.S.
market, but is not subject to comprehensive consolidated
supervision by their home country supervisors before
establishing a banking presence in the U.S.
The lack of a globally-accepted supervisory approach to
evaluate risk on an organization-wide basis makes it more
difficult to obtain information from foreign regulatory
agencies; and, coordinated examinations of the U.S.
depository institution and the foreign bank may not be a
viable option. Therefore, relationships between the U.S.
11 Basel Committee on Banking Supervision Core Principles,
Cross-Sectoral Comparison. November 2001.
12 A “holding company” excludes any entity that is part of a
“recognized financial group.”
depository institution and the foreign bank may be harder to
understand and monitor.
PBOs may foster other management and supervisory risks:
• Concentrations of risk on a group level may be
inadequately monitored or managed, exposing the
entire organization to excessive risk in the event of an
external shock affecting a specific market or sector.
• Officers and directors of the U.S. depository
institution may be unable or unwilling to exercise
independent control to ensure that transactions with
the foreign bank or affiliates are legitimate and comply
with applicable laws and regulations. As a result, the
U.S. depository institution may be the conduit or
participant in a transaction that violates U.S. law or the
laws of a foreign country; or, that is designed to prefer
a foreign bank or non-bank entity in the group to the
detriment of the U.S. depository institution.
• The home country of the foreign bank may have
insufficient mechanisms or authority to monitor
changes in ownership or to ensure arm’s-length intercompany
transactions between the foreign bank and
other members of the group, including the U.S.
depository institution, or monitor concentrations of
loans or transactions with third parties that may
present safety and soundness concerns to the group.
• Money-laundering concerns may be heightened due to
the potential lack of arm’s-length transactions between
the U.S. depository institution and the foreign bank.
Specifically, the flow of funds through wires, pouch
activity, and correspondent accounts may be subject to
less internal scrutiny by the U.S. depository institution
than usually is warranted. This risk is greatly
increased when the foreign bank is located in an
offshore jurisdiction or other jurisdiction that limits
exchange of information through bank secrecy laws,
especially if the jurisdiction has been designated as a
“non-cooperating country or territory” or the
jurisdiction or the foreign bank has been found to be a
money-laundering concern under the International
Money Laundering Abatement and Financial Anti-
Terrorism Act of 2001.
• Securities, custodial, and trust transactions may be
preferential to the extent that assets, earnings, and
losses are artificially allocated among the parallel
banks. Similarly, low-quality assets and problem
loans can be shifted among parallel banks to
manipulate earnings or losses and avoid regulatory
scrutiny. In addition, the common owners or the
foreign bank might pressure the U.S. depository
institution to provide liquidity or credit support in
excess of legal limits to the foreign bank if it were
experiencing financial difficulties.
International Banking (12-04) 11.1-26 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation