Revised Examination Guidelines for Representative Offices of Foreign Banks

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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 19-15

December 12, 2019

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT: Revised Examination Guidelines for Representative Offices of

Foreign Banks

Applicability: This guidance applies to U.S. representative offices of foreign banks supervised

by the Federal Reserve.

Purpose

The Federal Reserve is issuing this letter to provide revised examination guidelines and

to update the examination frequency for U.S. representative offices of foreign banks. The

Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 extended the

examination frequency for U.S. branches and agencies of foreign banking organizations (FBOs)

with less than $3 billion in total assets meeting certain criteria.1 Because the overall supervisory

strategy for a U.S. branch or agency of an FBO often incorporates a review of an institution’s

representative offices, the Federal Reserve is extending the examination frequency for all types

of representative offices.

Examination Cycle Guidelines

U.S. representative offices of FBOs engage in diverse activities ranging from liaison,

marketing, and research functions to operational activities such as loan production,

administrative, and certain trading related functions. If the FBO has a U.S. banking presence, the

Responsible Reserve Bank2 should incorporate the representative office in the overall

supervisory strategy for the entire U.S. operations of the FBO. U.S. representative offices should

be examined every 24 months unless the FBO’s U.S. operations and the type(s) of activities

conducted at the representative office warrant more frequent examinations.3 However, whenever

1 Refer to SR letter 18-7, “Updates to the Expanded Examination Cycle for Certain State Member Banks and U.S

ions of the FBO. U.S. representative offices should

be examined every 24 months unless the FBO’s U.S. operations and the type(s) of activities

conducted at the representative office warrant more frequent examinations.3 However, whenever

1 Refer to SR letter 18-7, “Updates to the Expanded Examination Cycle for Certain State Member Banks and U.S.

Branches and Agencies of Foreign Banking Organizations,” that announced the extension of the examination cycle

for branches and agencies that meet certain criteria to 18-months. See also 12 U.S.C. 1820(d)

2 Per SR letter 05-27, “Responsible Reserve Bank and Inter-District Coordination,” the Responsible Reserve Bank

for an FBO “typically will be the district where the Federal Reserve has the most direct involvement in the conduct

of day-to-day supervision of the U.S. banking operations of the organization.”

3 A de novo representative office of an FBO should be examined within 12 months of commencing operations.

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possible, the representative office(s) should be examined concurrently with any related U.S.

branches or agencies.

Documentation of Supervisory Findings and Rating

At the conclusion of each examination, examiners should document their findings and

assign a rating. As discussed below, the type of documentation and rating should vary

depending on the representative office’s activities and the significance of supervisory concerns.

If the representative office engages in loan production, trading related functions, or

performs risk management functions on behalf of another office (domestic or foreign), examiners

should complete a Report of Examination that comments on the Risk Management, Operational

Controls, and Compliance elements of the office’s control environment. The report should

include the assignment of Risk Management, Operational Controls, and Compliance component

ratings and a composite rating based on the “1 through 5” rating scales for U.S

nother office (domestic or foreign), examiners

should complete a Report of Examination that comments on the Risk Management, Operational

Controls, and Compliance elements of the office’s control environment. The report should

include the assignment of Risk Management, Operational Controls, and Compliance component

ratings and a composite rating based on the “1 through 5” rating scales for U.S. branches and

agencies of FBOs in SR letter 00-14,“Enhancements to the Interagency Program for Supervising

the U.S. Operations of Foreign Banking Organizations.” The composite rating should take into

consideration the individual component ratings for Risk Management, Operational Controls, and

Compliance.

If the representative office engages only in traditional marketing and liaison activities,

examiners do not need to complete a formal examination report. The examination of such an

office generally would include a review of its activities, a general assessment of its management

and oversight, and a review of its compliance with applicable laws and regulations, including any

conditions placed on its operations or activities as part of the Board’s approval of its

establishment.4 In most cases, supervisory findings for a representative office engaging in

traditional marketing and liaison activities can be documented in a memorandum to file and

communicated to the representative office’s management with a brief letter. If the examination

raises significant supervisory concerns, examiners should document the concerns in the

supervisory letter. In both situations, examiners should assign a composite rating for the office,

using the “1 through 5” scale for the Compliance rating for U.S. branches and agencies of FBOs

in SR letter 00-14.

Implementation

As of the date of this letter, Reserve Banks should implement a 24-month examination

cycle and the other guidelines outlined in this letter for all U.S. representative offices of FBOs.

The Federal Reserve maintains the authority to examine the U.S

the office,

using the “1 through 5” scale for the Compliance rating for U.S. branches and agencies of FBOs

in SR letter 00-14.

Implementation

As of the date of this letter, Reserve Banks should implement a 24-month examination

cycle and the other guidelines outlined in this letter for all U.S. representative offices of FBOs.

The Federal Reserve maintains the authority to examine the U.S. representative offices of FBOs

more frequently, and Reserve Banks should exercise this authority as necessary. Factors that

4 For a representative office that conducts private banking related activities, the examiner’s compliance review must

contain an evaluation of the representative office’s due diligence practices and procedures, including a complete

description of the representative office’s role in soliciting and screening clients. See 12 C.F.R. 211.24(j) (requiring

every representative office of a foreign bank operating in the U.S. to develop and provide for the continued

administration of a program reasonably designed to assure and monitor compliance with the Bank Secrecy Act and

its implementing regulations, including regulations requiring the implementation of a customer identification

program).

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may lead to an annual or more frequent examination cycle include, but are not limited to, the

following:

• State law examination requirements;

• The relative importance and role of the office to the FBO’s entire U.S. operations and

the type(s) of activities conducted or the number of employees at a particular office;

or

• Supervisory concerns about the condition of the foreign bank.

Reserve Banks should coordinate examinations with their state regulatory counterparts.

Reserve Banks should distribute this letter to Federal Reserve-supervised representative

offices of foreign banks, as well as to appropriate supervisory and examination staff

ies conducted or the number of employees at a particular office;

or

• Supervisory concerns about the condition of the foreign bank.

Reserve Banks should coordinate examinations with their state regulatory counterparts.

Reserve Banks should distribute this letter to Federal Reserve-supervised representative

offices of foreign banks, as well as to appropriate supervisory and examination staff. Questions

regarding this letter should be directed to the following staff: Kwayne Jennings, Manager, at

(202) 452-3088; Mark Baker, Lead Financial Institution and Policy Analyst, at (202) 452-3798;

or Tudor Rus, Lead Financial and Policy Analyst at (202) 475-6359. In addition, questions may

be sent via the Board’s public website.5

Michael S. Gibson

Director

Cross References:

• SR letter 18-7, “Updates to the Expanded Examination Cycle for Certain State Member

Banks and U.S. Branches and Agencies of Foreign Banking Organizations”

• SR letter 05-27, “Responsible Reserve Bank and Inter-District Coordination”

• SR letter 00-14, “Enhancements to the Interagency Program for Supervising the U.S.

Operations of Foreign Banking Organizations”

Supersedes:

• SR letter 97-9, “Revised Examination Guidelines for Representative Offices of Foreign

Banks”

5 See http://www.federalreserve.gov/apps/contactus/feedback.aspx