What Is Regulation K?
Regulation K is one of the regulations set forth by the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC). This regulation provides governance on a range of issues as it relates international banking, including the international banking front in the United States, offering guidelines for bank holding companies that engage in international trade, and also foreign banks located domestically. It limits the kinds of business, financial practices, and transactions that banks, holding companies, and foreign banks located domestically can participate in.
- Regulation K provides governance on international banking matters, including both domestic companies involved internationally as well as foreign banks located domestically.
- Regulation K consists of four parts that outline its scope on international institutions and transactions.
- Part A deals with how U.S. banks operate internationally, Part B addresses foreign banks operating in the U.S., Part C addresses export trading companies, and Part D addresses international lending regulations.
How Regulation K Works
Regulation K is one of a handful of Federal Reserve Regulations. The Federal Reserve Regulations are rules put in place to regulate the practices of banking and lending institutions. Of the over 30 regulations under the Federal Reserve Regulations, Regulation K is the primary one that oversees matters regarding international and foreign transactions and institutions. The primary purpose of most regulations is to protect individual consumers against financial practices that are deceptive, potentially financially harmful, and/or violate individual privacy rights.
Regulation K: The Specifics
According to the Board of Governors of the Federal Reserve System, Regulation K governs "the international banking operations of U.S. banking organizations and operations of foreign banks in the United States." This includes procedures for U.S. banks to establish foreign branches as well as investing in foreign organizations.
Regulation K allows corporations that qualify under the Edge Act to participate in a wide variety of global banking practices. It also allows domestic banks to own entire nonfinancial foreign business entities. Reserve requirements are also imposed on Edge Act corporations under this statute.
As a comprehensive international banking regulation, Regulation K is divided into four primary parts:
- Part A addresses the international operations of U.S. banking entities. It defines what activities and investments are permissible for U.S. banks setting up foreign branches in other countries, sets lending limits and capital requirements for these organizations, and creates rules for supervision and reporting of these foreign branches.
- Part B addresses the operations of foreign banks conducting business within the United States, including what activities these banks are permitted to engage in. It also sets guidelines for disclosure of what these foreign banks report back on to supervisors, and rules of evaluation in their domestic operations.
- Part C addresses export trading companies (ETC), regulating investments, credit lines, and disclosure procedures.
- Part D addresses international lending and is also known as the "International Lending Upservision" subpart of Regulation K. It is responsible for governing credit lines extended internationally, including allocation transfer risk reserve, reporting, fees, as well as other kinds of disclosure.