Related Organizations

Foreign Subsidiaries

In general, a foreign subsidiary is a bank or other company that is separately incorporated from its parent and is domiciled in a foreign country. A bank can establish a foreign subsidiary by owning more than 50 percent of its voting stock, directly or through the bank’s affiliates, or by demonstrating its control in other ways. The FRB’s Regulation K requires a member bank to hold its interest in a foreign non-banking subsidiary through an Edge Act or Agreement Corporation. In contrast, a member bank may own a foreign bank directly.

A bank might choose to own a foreign subsidiary rather than a foreign branch for several reasons. The subsidiary structure helps protect a parent bank from the subsidiary’s legal liabilities. In some countries that prohibit foreign branching, a bank can operate a financial subsidiary. These subsidiaries can often engage in broader activities than a branch. For example, if permitted by local law, a subsidiary generally might perform merchant banking activities, whereas a branch could not perform under either U.S. or foreign law. Whereas a branch is precluded from underwriting many types of securities, a merchant bank may be able to underwrite any type. Initially, subsidiaries were set up to attract retail business, such as deposits and loans, as well as for trade finance. Now, subsidiaries are often specialized entities that conduct activities that the parent bank cannot.

For foreign subsidiaries, the bank should have on file (in addition to audited financial information prepared for management):

A foreign subsidiary which is a financial subsidiary is subject to 12 CFR 5.39, but not Regulation K.

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