The following is a brief outline of the process involved in a bank duly chartered outside the U.S. for establishing banking operations in the United States, whether such operations be conducted through a foreign branch of the bank or through a new subsidiary operation of the bank organized or acquired for such purpose. It is assumed for purposes of this article that a domestic bank would be chartered either under Federal law or the laws of the State of California.

Please note that this document does not purport to be an all inclusive description of the subject matter of this article, nor is it presented as legal advice. it is a general description presented solely for informational purposes and the reader may not rely on it in any other maner.

Market Rationale

It is strategically advantageous for an overseas bank or other financial institution to establish banking operation in the United States, which is likely to be successful and profitable.

    As it has been for most of its history, the United States is a country of immigrant populations. In many cases, cities in the U.S. like Los Angeles, New York or Miami have populations of immigrant groups that rival those of some of the larger cities in their countries of origin. In other cases, the populations may not be as great but they are nevertheless significant. In just about all cases, the U.S. immigrant populations possess a purchasing power that is greater than the relative purchasing power of comparable populations in their country of origin. In some cases this is due to numbers, as with Hispanics; in others it is due to the degree of affluence, as with Indians. In most cases, the immigrant populations identify themselves as U.S. citizens or residents, but nevertheless maintain strong identification with their country of origin, brand names and institutions, particularly in the financial service field. Thus, there is a compelling basis for foreign banks to establish operations in the United States and particularly in the state of California, since a significant target population exist to ensure that the institution has a "built-in" market, in addition to the new business opportunities it can develop from the general populace.

Regulatory Overview

       In the United States banking institutions can be charted at the state level or the federal level. A state chartered bank is organized subject to the laws of its state of domicile and can operate only in that state. A federally chartered bank is organized under the federal laws of the United States and can open branches in any state of the Republic. Both types of banks, state chartered and federally chartered, are subject to supervision by the United States Federal Reserve Board ("FRB"). As a general rule, state chartered banks are smaller and tend to be independent or "community banks", while federally chartered banks are institutions with large capital bases such as Citibank or Bank of America. While approximately two-thirds of the banks in the United States are state chartered banks, federally chartered banks have by far the greater percentage of the United States banking capital.

      A foreign bank which wishes to operate in the United States has three options: open a branch, whether under state or federal law; charter a new bank in the United States which can be licensed either by the state or the federal government; or acquire an existing bank. When a new bank is created it is a subsidiary of the foreign bank and is subject to the laws of the state where it is organized. As noted above, the entity, whatever its legal form and irrespective of how acquired, would be subject to the supervision of the FRB. 

Opening A Federal Branch

      Banks organized under federal law are supervised by the Office of the Comptroller of the Currency ("OCC") and the FRB. A foreign bank which desires to establish a federal branch in the United States must obtain a license from the OCC under the regulations of the International Banking Act ("IBA") as applied by the Division of International Banking and Fiannce ("IBF"). The bank must also register with the FRB and comply with the terms, conditions and requirements that such agency may impose.         

 1. One of the principal determinations that the OCC makes is whether the foreign bank is       subject to extensive and consolidated supervision in the country of its origin. Therefore the OCC will examine at length the regulatory and supervisory structure of the country of origin and how it has been applied overall and to the applicant institution.

2. Another key point from IBF's perspective is the qualification and experience of the general manager for the United States branch. The regulators will want to see a seasoned banking executive at the helm of the U.S. branch or bank, and will also look at the depth of the rest of the U.S. bank's management, as well as the support that the U.S. bank receives from its parent's management team.

3. Under the IBF, a branch of a foreign bank cannot accept domestic deposits under $100,000. Federal deposit insurance (through the Federal Deposit Insurance Corporation or "FDIC") is not available to foreign banks in the United States. Therefore, under the IBF, a branch of a foreign bank cannot accept retail deposits from the public and as a general rule, branches of foreign banks limit their activities to larger commercial transactions.

4. Foreign banks can establish branches in the various states of the United States on the same basis that domestic banks can do so. The foreign bank can establish a new branch or it can purchase an existing operation that is already licensed.

5. The foreign bank must make a deposit of cash or investment grade securities for the porpose of satisfying the bank's obligations to third parties in the event that the bank would be liquidated. The deposit must be made with a bank that is member of the Federal Reserve System which is located in the state where the foreign bank has its operations. The amount of the deposit must be the minimum of:                              

  • the amount of capital which would be required of a domestic bank being established in  the same state, which in California would be approximately $5 to $10 million; or 
    • five percent (5%) of the bank's liabilities to third parties. 

    The process for obtaining a license to operate a foreign branch consists of three stages:

    1. The discussions and transactions prior to filing the formal application. The IBF requests that the foreign bank and its U. S. representatives meet with the IBF at its Washington, D.C. offices to discuss the foreign bank’s application, the requirements for receiving the requested license and how the bank will meet those requirements.

    2. The filing of the application for the license and the transactions which result in the issuance of a license by the OCC.

    3.The opening of the foreign branch’s operations.

          The process for obtaining a license to operate a foreign branch usually takes between 9 to 18 months. One of factors which would affect that time would be the investigation which the United States authorities would make regarding the ability of the regulatory system of the foreign bank's country of origin to supervise the foreign bank's operations in its country of origin and in the United States. 

     Obtaining a Federal Charter

          The stated policy of the OCC is to approve applications to establish national banks that have a reasonable chance of success, that will foster healthy competition and will be opearated in a safe and sound manner in reaching its decision, the OCC considers whether the proposed bank:

    1.  Has organizers who are familiar with the national banking laws and regulations;

    2.  Has competent management, including the board of directors, with ability and       experience relevant to the type of services to be provided;

    3.Has capitalization that is sufficient to support the projected volume and type of business;

    4.Can reasonably be expected to achieve and maintain profitability; and

    5.The risks to the FDIC and the bank.

          As is the case with the process for licensing a branch, the process to charter a bank begins with a meeting with the Licensing Staff of the OCC for the purpose of reviewing the procedures and requirements for obtaining the charter. Expedited review of the application can be sought. However, a bank that has no current U.S. operations would file under the OCC's standard submission guidelines. The OCC has a policy of making decision on standard filings within 120 days of submission or as soon as possible thereafter. The actual length of time will depend on many factors, key of which is whether the application has been well-researched and throughly prepared.

          Once the OCC completes its review, including any filed investigations, it will issue its preliminary approval and the organizers can begin to organize the bank according to the plan included in the application. The bank will not be able to commerce operations until the OCC grants final approval. As noted above, capital requirements are in the range of $5 to $10 million dollars. The actual amount will depend on a number of factors including the business plan presented by the applicant, the size and financial standing of the foreign parent and the comfort that the regulators have with the new bank's management and plan of operation.

    Chartering a California State Bank

           Banks organized under California law are supervised by the Department of Financial Institutions ("DFI"). The process for obtaining a state license for a foreign branch or organizing a new bank has certain elements in common with the federal proxess, but the state process will likely take less time and overall should be less expensive. The information which is presented to the state of California is generally not as extensive as the information which is presented to the federal authorities. 

          A state bank can usually be organized in 6 to 12 months.The bank would need to have a minimum capital of $5 to $10 million.The state bank would be able to operate only in the State of California and could not open branches in other states. If the foreign bank were to establish a state branch, such branch would not be able to receive deposits of less than $100,000 since, as noted above, that is prohibited under federal law.

          As an alternative to chartering a new bank, the foreign bank could seek to purchase a domestic bank (federal or state) already in existence.This option would of course have both its pluses and minuses. From the positive side, the acquisition of an existing bank would probably take less time then setting up a new bank once the target bank has been identified. Of course, significant time could be taken in finding the bank and negotiating with the current owners for the acquisition of the bank. The bank purchased could have an established clientele with deposits, loans, credit cards and other services that would be a source of revenues. The bank might also have branches, the equipment necessary to operate a bank, employees and the management necessary to successfully manage the bank. An ideal situation would be to find a bank that already serves the foreign bank’s target market sector.

          On the negative side, purchasing an existing bank could involve a larger investment of capital than establishing a new bank since the price to be paid for the bank would take into consideration the bank's capital, plus a premium for the economic value of buying the bank as a going concern. If the bank were already well establised and successful, it is likely that its owner would seek a higher price. The purchase of a financial services company always implies certain risks due to the potential for undisclosed or contingent liabilities which are not always discovered during the legal and accounting due deligence investigations, as well as the ability of the bank to be able to collect on its outstanding loan portfolio. Certain steps can be taken to minimize the risks primarily through extensive due diligence investigations prior to the acquisition, and by the use of mehcanisms in the purchase contract to limit the buyer's exposure such as indemnification from the seller or the retention of a part of the purchase price to protect the buyer against obligations that are not discoverd until after the close of the acquisition.

          A variation of the purchase scenario would be the acquisition of a license shell. This could be either a bank that effectively has ceased operations but still maintains its license or a bank that is bankrupt and in the process of being rehabilatated. Obvioulsy, great care would need to be taken in purchasing a bank that is insovent and such approach would work only if the buyer could obtain court or regulatory assurance that the insolvent banks' liabilities were properly  provided for and would not be imputed to the new buyer.