For immediate release

The Federal Reserve Board announced today its approval of the application of Housing & Commercial Bank, Seoul, Korea, to establish a state-licensed branch in New York, New York. Attached is the Board's Order relating to this action.

Housing & Commercial Bank Seoul, Korea Order Approving Establishment of a Branch

Housing & Commercial Bank, Seoul, Korea ("Bank"), a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 7(d) of the IBA (12 U.S.C. � 3105(d)) to establish a state-licensed branch in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991 ("FBSEA"), which amended the IBA, provides that a foreign bank must obtain the approval of the Board to establish a branch in the United States. Notice of the application, affording interested persons an opportunity to submit comments, has been published in a newspaper of general circulation in New York (The New York Times, September 30, 1996). The time for filing comments has expired, and the Board has considered the application and all comments received. Bank, with total assets of approximately $35 billion as of year-end 1996, is the ninth largest bank in Korea. Founded by the Korean government in 1967 to support funding for low- and medium-income housing, Bank now engages in a wide range of commercial banking activities. In addition to its network of more than 400 domestic branches, Bank has six domestic subsidiaries involved in construction, leasing, investment management, loan financing, and real estate management and brokerage. Outside of Korea, Bank operates a branch in Tokyo and seven representative offices. Bank would be a "qualifying foreign banking organization" under Regulation K after establishment of the proposed branch (12 C.F.R. 211.23(b)). Bank seeks to upgrade its existing representative office in New York to a state-licensed branch that would offer a wide range of wholesale banking services, including acceptance of wholesale deposits, commercial lending, trade finance, and mortgage finance. In order to approve an application by a foreign bank to establish a branch in the United States, the IBA and Regulation K require the Board to determine that the foreign bank applicant engages directly in the business of banking outside of the United States and has furnished to the Board the information it needs to assess the application adequately. The Board also generally must determine that the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor (12 U.S.C. � 3105(d)(2); 12 C.F.R. 211.24(c)(1)(i)).1 The Board also may take into account additional standards set forth in the IBA and Regulation K (12 U.S.C. � 3105(d)(3)-(4); 12 C.F.R. 211.24(c)(2)). The IBA recently was amended to include a limited exception to the general requirement relating to comprehensive, consolidated supervision (12 U.S.C. � 3105(d)(6)). This exception provides that, if the Board is unable to find that a foreign bank seeking to establish a branch, agency, or commercial lending company is subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, the Board may nevertheless approve an application by such foreign bank if: (i) the appropriate authorities in the home country of the foreign bank are actively working to establish arrangements for the consolidated supervision of such bank; and (ii) all other factors are consistent with approval (12 U.S.C. � 3105(d)(6)(A)). In deciding whether to exercise its discretion to approve an application under authority of this exception, the Board shall also consider whether the foreign bank has adopted and implements procedures to combat money laundering (12 U.S.C. � 3105(d)(6)(B)). The Board also may take into account whether the home country of the foreign bank is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering (12 U.S.C. � 3105(d)(6)(B)). Bank engages directly in the business of banking outside the United States through its banking operations in Korea. Bank also has provided the Board with the information necessary to assess the application through submissions that address the relevant issues. With respect to supervision by Bank's home country authorities, the Board has considered the following information. Under the current legislative regime, Bank is chartered under the Korea Housing Bank Act which designates the Ministry of Finance and Economy ("Ministry") as Bank's primary supervisor. The Ministry often delegates its supervisory powers to the Office of Bank Supervision and Examination ("OBSE") of the Bank of Korea, which also has a supervisory role in relation to Bank. In addition, Bank is under the supervision of the Board of Audit and Inspection ("BAI"), an independent agency of the Korean government that examines the records of certain government-invested institutions. The Board previously has determined, in connection with an application involving another specially chartered Korean bank, that this bank was subject to home country supervision on a comprehensive, consolidated basis.2 Bank is supervised by the Korean authorities on substantially the same terms and conditions as the other Korean bank.3 Recently, however, the Korean financial system has experienced difficulties arising primarily from large credit exposures to certain business conglomerates. The Korean authorities have concluded that these difficulties were, at least in part, the result of gaps in the supervisory system, primarily relating to credit assessment and approval processes. The Korean government and supervisory authorities have taken steps to seek to close these gaps by, among other things, setting new limits on exposures to the largest Korean business conglomerates and requiring that Korean banks establish credit committee systems to diversify authority for credit decisions. In addition, the Korean government is considering the proposal of new legislation that would transfer supervisory authority for all Korean financial institutions to a new entity. With regard to measures to prevent money laundering, although the Korean government has not formally adopted the recommendations of the Financial Action Task Force ("FATF") regarding the prevention and detection of money laundering, certain Korean laws and regulations contain provisions that parallel certain of the FATF recommendations. The Emergency Presidential Order on Real Name Financial Transactions and the Protection of Confidentiality, for example, which became effective in August 1993, requires banks to conduct all financial transactions with customers on a real-name basis and to confirm customers' identity before engaging in any transactions. In addition, in September 1994, the OBSE issued guidelines ("OBSE Guidelines") which, among other things, prohibit Korean financial institutions from participating in or aiding money laundering. Under the OBSE Guidelines, Korean financial institutions are required to establish internal policies and procedures to prevent money laundering and to review these controls as part of the internal audit. Bank has implemented policies and procedures to ensure compliance with Korean law and the OBSE Guidelines. Bank's employees are prohibited from conducting any banking transaction without verifying the true identity of the customer. In addition, Bank's branch managers are required to report any breach of the OBSE Guidelines to Bank's auditing department which must report any material breach of the OBSE Guidelines to the OBSE and the BAI. Furthermore, employees with knowledge or suspicion of the use of funds for illicit activities are required to report in writing to a public prosecutor's office. Based on all the facts of record, the Board has determined that Bank's home country authorities are actively working to establish arrangements for the consolidated supervision of Bank, and that considerations relating to the steps taken by Bank and its home country to combat money laundering are consistent with approval under this standard. The Board also has taken into account the additional standards set forth in the IBA (12 U.S.C. � 3105(d)(3)-(4); 12 C.F.R. 211.24(c)(2)). Bank has received the consent of the Ministry to establish the proposed branch. Managerial and financial considerations are consistent with approval, and Bank appears to have the experience and capacity to support the proposed branch. Bank must comply with the minimum capital standards of the Basle Capital Accord ("Accord"), as implemented by Korea. Bank's capital is in excess of the minimum levels that would be required by the Accord and is considered equivalent to capital that would be required of a U.S. banking organization. With regard to access to information, the Board has reviewed the restrictions on disclosure in relevant jurisdictions in which Bank operates and has communicated with relevant government authorities about access to information. Bank has committed to make available to the Board such information on the operations of Bank and any affiliate of Bank that the Board deems necessary to determine and enforce compliance with the IBA, the Bank Holding Company Act, and other applicable federal law. To the extent that the provision of such information may be prohibited or impeded by law or otherwise, Bank has committed to cooperate with the Board to obtain any necessary consents or waivers that might be required from third parties in connection with disclosure of certain information. In addition, subject to certain conditions, the Ministry may share information on Bank's operations with other supervisors, including the Board. In light of these commitments and other facts of record, and subject to the condition described below, the Board has concluded that Bank has provided adequate assurances of access to any necessary information the Board may request. On the basis of all the facts of record, and subject to the commitments made by Bank, as well as the terms and conditions set forth in this order, the Board has determined that Bank's application to establish a state-licensed branch should be, and hereby is, approved. Should any restrictions on access to information on the operations or activities of Bank and its affiliates subsequently interfere with the Board's ability to obtain information to determine and enforce compliance by Bank or its affiliates with applicable federal law, the Board may require termination of any of Bank's direct or indirect activities in the United States. Approval of this application is also specifically conditioned on Bank's compliance with the commitments made in connection with this application and with the conditions in this order.4 The commitments and conditions referred to above are conditions imposed in writing by the Board in connection with its decision, and may be enforced in proceedings under applicable law against Bank, its offices, and its affiliates.

By order of the Board of Governors,5 effective September 17, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

Footnotes 1 Regulation K provides that a foreign bank will be considered to be subject to comprehensive supervision or regulation on a consolidated basis if the Board determines that the bank is supervised and regulated in such a manner that its home country supervisor receives sufficient information on the foreign bank's worldwide operations, including the relationship of the foreign bank to any affiliate, to assess the overall financial condition of the foreign bank and its compliance with law and regulation (12 C.F.R. 211.24(c)(1)(ii)). In assessing this standard, the Board considers, among other factors, the extent to which the home country supervisors: (i) ensure that the bank has adequate procedures for monitoring and controlling its activities worldwide; (ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit reports, or otherwise; (iii) obtain information on the dealings with and relationship between the bank and its affiliates, both foreign and domestic; (iv) receive from the bank financial reports that are consolidated on a worldwide basis, or comparable information that permits analysis of the bank's financial condition on a worldwide consolidated basis; and (v) evaluate prudential standards, such as capital adequacy and risk asset exposure, on a worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential and other elements may inform the Board's determination. 2 Korea Development Bank, 82 Federal Reserve Bulletin 969 (1996) (bank under supervision of Ministry, OBSE, and BAI). The Board also has considered the application of another specially chartered bank that was under the primary supervision of the Ministry, which also delegated its supervisory authority with regard to that bank to the OBSE. However, because it was a privately owned bank, that bank was not supervised by the BAI. See Korea Long Term Credit Bank, 82 Federal Reserve Bulletin 767 (1996). 3 In brief, Bank is currently required to submit periodic reports and financial statements to the Ministry or the OBSE providing information on, among other things, capital adequacy, credit exposures, adequacy of internal controls, and the operations of subsidiaries and foreign offices. Bank is also subject to examination of head office and branches by both the OBSE and the BAI. The Ministry, the OBSE, and the BAI each have enforcement powers over Bank. In addition, Bank's annual internal audit reports are forwarded to the Korean authorities, and external audits also are conducted of its operations. Recent legislation in Korea provides that Bank will be treated as a commercial bank and become subject to the supervision of the OBSE. This action is expected by year-end. The Board also has previously determined, in connection with applications involving other Korean banks subject to supervision by the OBSE, that these banks were subject to supervision on a comprehensive, consolidated basis. See, e.g., Shinhan Bank, 82 Federal Reserve Bulletin 951 (1996); Donghwa Bank, 81 Federal Reserve Bulletin 744 (1995). 4 The Board's authority to approve establishment of the proposed office parallels the continuing authority of the State of New York to license offices of a foreign bank. The Board's approval of this application does not supplant the authority of the State of New York and its agent, the New York State Banking Department, to license the proposed office of Bank in accordance with any terms or conditions that the New York State Banking Department may impose. 5 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley and Phillips. Absent and not voting: Governor Meyer.

Return to top

1997 Orders on banking applications