Foreign Bank Supervision Enhancement Act (FBSEA)

What Is the Foreign Bank Supervision Enhancement Act (FBSEA)?

The Foreign Bank Supervision Enhancement Act (FBSEA) is an act enacted on Dec. 19, 1991, to increase the Federal Reserve's authority over foreign banks seeking entry into the United States. Part of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, the act enabled the Fed to not only supervise authorization of foreign banks applying for operating ability in the U.S. but also for existing foreign banks already operating within the country.

Key Takeaways

  • The Foreign Bank Supervision Enhancement Act (FBSEA) was enacted in 1991 and increased the Federal Reserve's authority over foreign banks seeking to operate in the United States.
  • FBSEA allowed for the Fed to supervise authorization of foreign banks applying for operating status in the U.S. as well as for existing foreign banks already operating in the U.S.
  • Foreign banks were allowed to operate in the U.S. without any federal regulation until the International Banking Act of 1978. This act limited foreign banks' geographic expansion and banking activities.
  • The Foreign Bank Supervision Enhancement Act (FBSEA) was passed due to highly publicized banking scandals at the time.

Understanding the Foreign Bank Supervision Enhancement Act (FBSEA)

Foreign banks were able to operate within the United States free of federal regulation until the International Banking Act of 1978 was passed. When enacted, the act limited foreign banks' geographic expansion and banking activities to similar U.S.-based banks and required foreign banks to carry adequate reserves.

By the time the Foreign Bank Supervision Enhancement Act (FBSEA) was passed, more than 280 foreign banks were operating in the U.S., holding more than $626 billion in assets, or 18% of all banking assets in the U.S.

The Foreign Bank Supervision Enhancement Act (FBSEA) was in large part a response to several highly publicized scandals at the time. The international banking community responded by revisiting international banking activities.

The value of all deposits in commercial banks in the U.S. as of October 2021 was $17.6 trillion.

The passage of FBSEA in 1991 altered the manner in which foreign bank operations were regulated in the U.S., thereby demanding heightened levels of accountability from all foreign participants.

These changes reflected a growing international consensus that each nation should regulate its market to make market access dependent on the structure of bank regulation in the international bank's home country.

At the time of passage in 1991, the U.S. was the first major marketplace to adopt new international standards, which likely went a long way in solidifying the U.S. as a driver for international banking orthodoxy.

Foreign Bank Supervision Enhancement Act (FBSEA) Regulations

The Foreign Bank Supervision Enhancement Act (FBSEA) amended the International Banking Act of 1978 and with it laid out a variety of regulatory rules. Foreign banks are not allowed to establish a State branch or agency or obtain ownership of a commercial lending company without approval from the Federal Reserve Board first.

The Fed is also allowed to terminate a foreign bank's license at any time if it finds that the bank has committed violations or if its banking practices are inappropriate. The act also states that the Fed can turn down acquisition applications if the foreign bank "is not subject to comprehensive litigation on a consolidated basis in its home country."

FBSEA includes a variety of other regulations imposed on foreign banks, many of which enhance other banking acts, such as the Bank Holding Company Act of 1956, the Home Mortgage Disclosure Act of 1974, and the Federal Deposit Insurance Act.

How Are Foreign Banks Regulated?

Foreign banks need to obtain licenses from state banking authorities to be allowed to operate in a specific state. Some are also licensed by the Office of the Comptroller of the Currency (OCC), while older operating branches fall under the Federal Deposit Insurance Corporation (FDIC).

What Is the Difference Between Banking Regulation and Banking Supervision?

Banking regulation refers to written laws that banks must abide by. These rules define the expected practices and behavior of banks as laid out in law drafted by federal and state agencies. Banking supervision is the enforcement of these written laws.

What Is the Point of Supervising a Bank?

Banks are supervised in order to ensure they are following the written banking laws of a nation or state. The goal is to protect the banking system and through that, the money of a nation's citizens. Banking supervision checks to see if banks are incorporating appropriate risk management, careful lending practices, maintaining enough reserves, and implementing measures to prevent fraud.

Article Sources

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  1. Federal Reserve Bank of St. Louis. "The Foreign Bank Supervision Enhancement Act of 1991," Page 1. Accessed Oct. 19, 2021.

  2. Federal Reserve Bank of St. Louis. "Deposits, All Commercial Banks." Accessed Oct. 19, 2021.

  3. Congress.gov. "H.R.2432 - Foreign Bank Supervision Enhancement Act of 1991." Accessed Oct. 19, 2021.

  4. Federal Reserve. "Foreign Banking Organizations." Accessed Oct. 19, 2021.