Related Organizations

Parallel-Owned Banking Organizations

Risks associated with parallel-owned banking groups arise from transactions with foreign affiliates that may be difficult to detect since the foreign affiliates do not receive direct U.S. supervisory oversight and the parallel-owned banking group’s corporate structure limits comprehensive, consolidated home country supervision. Identifying and monitoring these risks often presents special supervisory challenges for the OCC.

The fundamental risk presented by these organizations is that they may be acting in a de facto organizational structure that, because it is not formalized, is not subject to comprehensive consolidated supervision. In addition, it may be difficult to obtain information from foreign supervisory agencies, and coordinated examinations of the U.S. bank and the parallel-owned foreign bank(s) may not be a viable option. Also, parallel banking groups in the United States are not subject to the "Foreign Bank Supervision Enhancement Act of 1991," which amended the International Bank Act of 1978, 12 USC 3101-3111. This act requires that foreign banking organizations seeking entry into the United States must be subject to comprehensive, consolidated supervision by their home country supervisors before they establish a banking presence in the United States.

The following examples are some of the primary reasons that supervisory risks arise from parallel-owned banking organizations:

• Officers and directors of the U.S. depository institution may be unable or unwilling to exercise independent control to ensure that transactions with the foreign parallel bank or affiliates are legitimate and comply with applicable laws and regulations.

• Money-laundering concerns may be heightened because transactions between the U.S. depository institution and the foreign parallel bank may not take place at arm’s length.

• Securities, custodial, and trust transactions may be preferential to the extent that assets, earnings, and losses are artificially allocated among parallel banks. Similarly, low-quality assets and problem loans can be shifted among parallel banks to manipulate earnings or losses and avoid regulatory scrutiny.

• Political, legal, or economic events in the foreign country may affect the U.S. depository institution.

These and other risks are addressed more fully in the Joint Agency Statement on Parallel-Owned Banking Organizations, dated April 23, 2002.

When examiners identify a bank as part of a parallel banking relationship, the supervisory office is responsible for identifying in Examiner View the existence of the parallel banking relationship. If an institution is suspected of being a parallel bank, the examiner should contact International Banking & Finance (IB&F) to discuss the facts and circumstances surrounding the institution. IB&F, in consultation with the Law Department, will make the final determination as to whether a bank qualifies as a parallel bank under the guidelines. Likewise, any proposed modifications to existing parallel banking structures should be communicated to IB&F for their review and concurrence.

In developing the supervisory strategy for a U.S. national bank that is part of a parallel banking group, much consideration should be given to existing or possible risks arising from the lack of consolidated supervision for the parallel banking group, especially if the U.S. national bank is actively engaged in business activity with its foreign parallel bank. The examiner-in-charge of the U.S. parallel bank(s) will want to better understand the condition of the foreign parallel bank and be abreast of any supervisory concerns or developments in the home country. IB&F serves as the liaison with the foreign parallel bank’s home country supervisor to facilitate exchanging necessary information about the parallel banking relationship. This exchange is an integral part of the examination process for active parallel banking groups. Additionally, the examiners may need IB&F’s assistance in understanding political, legal, and economic developments in the foreign country that may affect the parallel U.S. bank. For example, events in the foreign country may trigger a rapid inflow or outflow of deposits at the U.S. bank, directly impacting its liquidity and risk perception, or reducing the foreign owner’s ability to serve as a source of strength to the U.S. bank.

When supervisory responsibility is shared with other regulatory agencies, examiners should follow the guidance on examination coordination found in the "Bank Supervision Process" booklet of theComptroller’s Handbook. Whenever possible, the consolidated parallel banking group’s U.S. operations should be reviewed concurrently.

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