2004 Overseas Offices Report

BACKGROUND

The New York State Banking Department has historically played a pre-eminent role in international bank regulation due in no small part to its 154-year history of overseeing banks located in New York, a major global financial center.  As of December 31, 2003, New York State-chartered banks held over $400 billion in assets overseas and recorded over $ 34 trillion (notional value) in off-balance sheet items in their overseas offices. It has been determined that it is best to examine and monitor international exposures, especially those centered around trading and other financial markets activities, on-site where the activities are taking place. Although the complexion of NYS chartered institutions overseas has changed significantly with the recent conversion of our largest bank (JPMorgan/Chase) to a national charter, the New York State Banking Department still has considerable overseas assets under its supervision and holds a unique position amongst state banking agencies. We have recently added to our supervisory responsibility the consolidated and worldwide activity of American Express Company (total assets over $175 billion), with our designation as the equivalent supervisor under the requirements of the European Conglomerates Directive. We also continue to supervise the international banking activities of General Electric Capital, Merrill Lynch, Brown Brothers Harriman and The Bank of New York, which together total nearly $100 billion.

The Department also licenses and supervises most of the foreign banking activity in the United States with over 80% of all foreign bank office assets in the United States under the New York license with total assets approaching $1 trillion. This represents a massive investment in New York from banks in over 50 different countries and (according to statistics compiled by the Institute of International Bankers) accounts for 60 thousand jobs. This type of foreign investment in New York places a responsibility upon the Department to deliver financial supervision and regulation that will be recognized and respected around the globe. 

In order to better enable it to monitor these overseas activities, the Department established an office in London, England in 1974 and from May 1998 thru July of 2004, operated a sister office in Tokyo, Japan.  The closing of the Asian office was made in recognition of several mergers and consolidations in the U.S. and Asia which altered the cost/benefit ratio of maintaining the district office.  However, the Department continues to benefit from its international presence and, although the Asian District office has closed, it will maintain the lines of communication developed by that office and, where appropriate, will continue the sharing of information with the Asian financial regulators, regarding those institutions where mutual responsibility is shared. The European District Office is in the process of absorbing these duties and going forward will operate as the Department’s single Overseas Office.

In the past, the European and Asian district offices have enabled the Department to better assess the changing political, economic and regulatory conditions overseas, as well as maintain strong relationships with local banking supervisors and properly assess the financial condition and stability of foreign banking organizations. The Overseas Office will continue to play a crucial role in fulfilling the Department’s international responsibilities. Not only are there the statutory safety and soundness mandate, but should the Department fail to live up to its responsibilities, the likely result would be a steady shift to the federal license and an erosion of New York State’s ability to influence the economic future of the State.

Overseas District Office

As previously noted, with the closing of the office in Tokyo, the European District Office has become the single Overseas District Office. The mission of the Overseas Office continues to be the same now as that established for the European and Asian district offices:

1.    To perform safety and soundness examinations of overseas branches and/or subsidiaries of New York State-chartered banking organizations;

2.    To interact with the head offices of foreign banking institutions that have operations in the State of New York; 

3.    To interact with local country regulators and governmental bodies to develop relationships that enhance the understanding of banking activities in the respective countries; and,

4.    To foster closer relationships between the Banking Department and local country regulatory agencies that would aid in strategic information sharing and effective consolidated supervision of banks conducting cross-border operations. 

When the Department established its overseas office in London in 1974, it was in response to the growing importance of the European operations of several of our largest New York State-chartered banks. Not only was London considered the premier European center of trade, commerce and, most importantly banking and finance but throughout the 1970’s and 1980’s, no fewer than 10 New York State-chartered banks and Article XII investment companies conducted operations in London and/or on the European continent. 

Since that time, due mostly to mergers and reorganizations, the number of New York banking organizations with European operations has dropped to five but the size and complexity of the operations have increased and remain of paramount importance to the institutions and thus to the Department. London remains today one of the major financial centers of the world and the European center for banking and trading in foreign exchange, precious metals, equities and derivatives. Hence, a physical presence in London is still a necessity, but it should be noted that, as the single Overseas Office, its responsibilities are much wider.

In 1998, a second overseas office was opened in Tokyo to perform a similar function in the Asia/Pacific region. Many of the foreign banking operations licensed to conduct business in New York State are headquartered in the Asia-Pacific region. Indeed, some of the largest banking companies in the world are headquartered in the Asia-Pacific region.  

Hence, the Asia District office developed strong relationships with the local area banking regulators and governmental agencies, which allowed the Department to obtain real time information on developing issues that would impact either New York State licensed banks operating in the Asia-Pacific region or foreign headquartered banks licensed to operate in the State of New York.

The Department is committed to continue and nurture these relationships and will coordinate this effort via the Overseas Office in London.

International Regulatory Relationships

Due to its location in London, the European District Office has had its longest relationship with the local UK bank regulatory agencies, initially with the Bank of England and now with its successor, the Financial Services Authority. The Department’s close relationship with the English authorities led to the formulation of a formal information sharing agreement with the Bank of England in 1997, which was assumed by their successor, the UK Financial Services Authority. This accord served as a model for future information sharing agreements that have provided access by the Department to bank records in a number of European countries, including France, Germany, Hungary and the Czech Republic. Currently negotiations are continuing with several other countries to develop formalized arrangements. This information sharing has been a benefit not only in securing information on New York State-chartered banks operating abroad but also in obtaining information on the condition of European-based banks, which are licensed to conduct business in New York State.

In Asia the Department has developed strong working relationships with a large number of Bank regulatory agencies, including Japan, Korea, India, Hong Kong and Singapore.  Although these relationships tend to be less formal than the European protocols, they have resulted in useful sharing of information on individual institutions as well as on local and regional economic trends. 

With the closure of the Asian District Office, the newly combined “Overseas Office” will maintain these relationships and coordinate the examinations of all overseas operations of State-chartered financial institutions whether they be located in Europe or Asia.

STAFF RESOURCES

The staff of the Overseas Offices has fluctuated based upon the perceived examination and administrative needs of the offices.  Although at the time of the closure of the Asian Office, each office was headed by a Director, assisted by three bank examiners and one local office manager, the staffing level of the remaining office remains the same as it was previously. The members of the Asian staff either were reassigned within the Department or left the Department. One examiner from that office was transferred to London, to fill a pending staff vacancy in that office. 

The major activity revolves around the examination of the branch operations and banking subsidiaries of the New York State-chartered banking organizations operating in 13 European and 9 Asian nations. Significant foreign subsidiaries are generally examined every 24 months unless circumstances warrant additional scrutiny or an extension to the examination schedule. Certain branches and subsidiaries of New York State-chartered banks are under continuous supervision in accordance with the “Central Point of Contact” program. The scope and frequency of these examinations is determined by a central point of contact in New York. 

During calendar year 2004, the regulatory staff (exclusive of the director) spent approximately 74% of their time in the supervisory process, planning and performing on-site examinations.  We expect that percentage to increase over the coming year. The remainder of their time was spent on administrative issues including supervisory coordination and information sharing with US and local country regulators. Over the past year, the staff has performed or participated in 15 examinations and visitations in eight different countries.

INFORMATION SHARING & SUPERVISORY COORDINATION ACTIVITIES

As part of the mission to develop sound working relationships with local regulators, the director and staff meet regularly with local European banking regulators. Over the past year the director has met with regulators from eleven countries (6 European and 5 Asian) to discuss general banking issues and/or specific supervisory and examination issues. In addition, as part of the examination process, meetings are held with host country counterparts at the commencement of each examination to assess the overall financial environment in which the entity is operating as well as any specific regulatory concerns involving the New York State-chartered subsidiary and/or the parent organization. At the conclusion of each examination the host regulators are also updated on the examination findings. Such meetings are extremely beneficial in helping to meet the goal of true “consolidated supervision” and to address any local issues that may be affecting the subsidiaries of New York State-chartered banks. Maintaining ongoing communication with the other European regulators, a key Department goal, is made much easier by our presence overseas. 

In addition, the director takes part in regular meetings with a working group of the Group de Contact that focuses on specific subsidiaries of New York State-chartered banking organizations. Participation with this group has provided us with access to the full Group de Contact, a regulatory forum for the 25 European Union member countries.

Such interaction with fellow regulators has resulted in formal and informal agreements with several regulatory bodies that enable the flow of useful information relating to our New York State-chartered institutions and provides a forum to discuss the interest and views of New York State in the formation of banking and economic policy in Europe. 

BUDGET OF THE OVERSEAS OFFICES

European and Asian District Offices 

The operations of the European and Asian District Offices are funded entirely by general and specific assessments paid by the banking industry to the Department. 

The total cost of operating the European and Asian District offices during 2004 was $1,971,063 and $664,970 respectively, broken down as follows: