What is an Agreement Corporation

An agreement corporation is a type of bank chartered by a state to engage in international banking. The bank agrees with the Federal Reserve Board (FRB) to limit its activities to those allowed an Edge Act corporation.

BREAKING DOWN Agreement Corporation

Until 1913, U.S. banks were prohibited from opening branches abroad or from financing foreign trade. However, as the 20th century dawned, the U.S. saw itself becoming a leader of world industry, and the need for domestic banks to finance foreign trade, make loans to foreign governments, open overseas branches and generally conduct business abroad became clear.

In 1916, Congress passed the Agreement Corporation Act, which gave national banks the right to invest, either collectively or individually, 10% of their capital, and any surplus exceeding $1 million, in state-chartered banks and corporations that would conduct international business. The state-chartered bank had to enter into an agreement with the FRB to be bound by its rules and regulations. It was from this agreement stipulation that the name "agreement corporation" was taken.

The Edge Act

The Agreement Corporation Act produced little activity; in the three years after its passage, only one American bank had formed an agreement corporation, and that bank was an especially large and powerful one. It’s believed that most American banks couldn’t bear either the costs or the risks of expanding operations abroad under the Agreement Corporation Act.

So, in 1919 Congress passed the Edge Act, an amendment to the 1913 Federal Reserve Act, which authorized the FRB to charter corporations to engage in international banking. This step was taken in order to increase feasibility for more American banks to invest in overseas expansions.

Essentially, an Edge Act corporation (EAC) is a federally chartered agreement corporation; the Edge Act renders superfluous the state supervision required to run state-chartered agreement corporations. Both agreement corporations and EACs are governed by Edge Act restrictions, and most banks and holding companies wishing to engage in foreign trade choose to charter an EAC. An EAC may have domestic branches, but can only engage in activities directly tied to foreign trade. Foreign banks that operate in the U.S. may also charter an EAC. Among other benefits, EACs protect a bank from the risk of expanding overseas because they separate the risks of international operations from those of domestic operations.

Both laws have undergone many changes since passage, and many of their restrictions have been relaxed.