What Is an Agreement Corporation?

An agreement corporation is a type of bank that is permitted by a state to engage in international banking.

The term is derived from the fact that, in order to receive this permission, the banks in question have to agree to limit their activities to those allowed under the Agreement Corporation Act, which was passed in 1916.

Key Takeaways

  • Agreement corporations are banks permitted to engage in international commerce.
  • The term is seldom used today, as it relates to a 1916 law which has since been replaced with more recent legislation.
  • Whereas in the early 20th century American banks were reluctant to lend internationally, they are today among the most active participants in international commerce.

Understanding Agreement Corporations

Until 1913, banks in the United States were prohibited from opening branches overseas or financing foreign projects. However, as the country increasingly became a major international exporter, the government came to recognize the need for American banks to open up operations abroad.

To this end, Congress passed the Agreement Corporation Act in 1916. This new law authorized American banks to invest 10% of their capital into state-chartered banks and corporations permitted to finance projects internationally. The state-chartered bank would need to enter into an agreement with the Federal Reserve, agreeing to be bound by the rules and regulations set out in the Act. It was from these agreements that the term "agreement corporation" arose.

At first, few companies came forward to participate in this new program. In the three years after its passage, only one American bank had formed an agreement corporation. For most banks, the costs and risk of expanding operations under the Act simply were not justified in light of the potential rewards.

To address this situation, Congress passed an amendment to the Federal Reserve Act in 1919. This new law, known as the Edge Act, authorized the Federal Reserve to charter new banks expressly oriented toward international lending. These new companies, known as Edge Act corporations (EACs), helped open the door for increased international involvement of American banks writ large.

Real World Example of an Agreement Corporation

The Edge Act effectively removed the requirement for state supervision over agreement corporations. Instead, these corporations came under the oversight of the Edge Act, and thus of the Federal Reserve. American banks created new EAC vehicles in which to focus their international banking operations. This allowed them to segregate the risks of international lending from their core domestic banking activities.

Since the passage of the Edge Act in 1919, the laws surrounding international banking have further evolved in the direction of promoting international commerce. Today, American banks are among the world's most active participants in international lending.