Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 97-9 (SUP)
April 9, 1997

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Revised Examination Guidelines for Representative Offices of Foreign Banks

                        U.S. representative offices of foreign banks engage in diverse activities ranging from liaison, marketing, and research functions to operational kinds of activities including loan production and certain trading related functions.  While the number of individuals employed at representative offices engaged in the more traditional marketing and liaison activities tends to be quite limited (i.e., usually fewer than five employees), those offices engaged in loan production or trading activities tend to be staffed by a sizable number of employees.

                        In view of the significant differences in the breadth and nature of activities conducted by individual representative offices, as well as the number of the employees delivering the services, System examiners are instructed, beginning in 1997, to conduct examinations of representative offices under the following guidelines:

  1. If the foreign bank has a U.S. banking presence, the representative office should be incorporated in the overall supervisory strategy for the U.S. operations of the foreign banking organization ("FBO") and its examination directed by the designated responsible Reserve Bank.  Whenever possible, the representative office(s) should be examined concurrently with any related U.S. branches or agencies.  The method of examination would vary as follows:

    1. If the representative office engages in activities such as loan production or trading related functions, the operations of the representative office must be reviewed in the context of the Risk Management, Operational Controls, and Compliance elements of the ROCA rating system.  The Report of Examination of Representative Offices of Foreign Banks should be prepared for the representative office under the "ROC" framework and transmitted in the same manner as other reports of examination for the U.S. operations of the FBO.  

    2. If the office is believed to be engaged only in the more traditional marketing and liaison activities, verification of that fact should be made. The examination of such an office generally would include a review of the activities conducted, a general assessment of its management and supervision, and a review of whether the office is in 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.1 The number of individuals employed by the office and its expenses for the last two years also should be reviewed.  Completion of a formal examination report normally would not be required; a memorandum to files and a brief letter to management of the representative office would be sufficient unless significant supervisory concerns were raised.  Normally, such examinations would be brief and take less than a day to complete unless significant issues arise.  

    3. The examination of a representative office that serves as a regional administrative office must include a description of the activities conducted by the office, an assessment of the risk management practices and controls applied by the office to the U.S. operations that it oversees, and a general assessment of the office's management and supervision.  A brief examination report should be prepared.  

  2. If the foreign bank does not have a U.S. banking presence, examinations should be conducted as follows:

    1. If the representative office has a large number of employees or is known to engage in the wider-ranging activities noted above, the office should be examined annually under the Risk Management, Operational Controls, and Compliance elements of the ROCA rating system.  

    2. If the representative office operates with only a limited number of employees and is engaged in the more traditional types of activities, the examination generally would be conducted every 24 months in accordance with 1(b) above.

                        If you have any questions, please contact Betsy Cross, Manager, International Examination and Regulatory Policy Section at (202) 452-2574.


Richard Spillenkothen
Director


Supercedes: SR 95-25(SUP.IB)
SR 93-50(IB)
SR 92-36(IB)


Footnotes

1.   In representative offices that conduct private banking related activities, the compliance review must contain an evaluation of due diligence practices and procedures, including a complete description of the representative office's role in soliciting and screening clients.  Return to text


SR letters | 1997