Introduction

On May 9, 2012, the Board of Governors of the Federal Reserve System ("Federal Reserve") announced its approval of an application submitted by Industrial and Commercial Bank of China Limited ("ICBC"), China Investment Corporation ("CIC"), and Central Huijin Investment Ltd. ("Huijin"), all based in the People's Republic of China, to become bank holding companies pursuant to Section 3 of the Bank Holding Company Act of 1956, as amended ("BHCA"). ICBC, CIC, and Huijin had applied to acquire up to 80% of the voting shares of The Bank of East Asia (U.S.A.) National Association ("BEA-USA"), located in New York City.¹

ICBC is China's largest bank, with total assets of approximately $2.5 trillion, while CIC and Huijin are Chinese government-owned investment companies that do not directly engage in the business of banking and do not intervene in the day-to-day business operations of the financial institutions in which they invest.² The Federal Reserve's unprecedented approval of a controlling investment in a U.S. bank by these mainland Chinese entities paves the way for future Chinese bank holding companies and potentially other foreign-based bank holding companies seeking to establish subsidiary banking operations in the U.S. More immediately, the Federal Reserve's action marks a significant milestone for the Chinese government in gaining international recognition as having a comprehensive, consolidated supervision ("CCS") regulatory regime over its banks. From a competitive perspective, the Federal Reserve's approval of the ICBC application has profound implications for U.S., Asian, and European financial institutions, and should be well understood by the international financial community.

The ICBC Application

The ICBC, CIC, and Huijin application (the "ICBC application") had been pending review and approval for more than a year.³ The Federal Reserve's decision to approve the ICBC application exemplifies the significant and notable progress made by China in strengthening its bank regulatory regime in the almost decade-long timeframe that the Chinese Banking Regulatory Commission ("CBRC"), the primary supervisor of Chinese banks, has been established.

In addressing each of the statutory factors that the Federal Reserve must take into account when determining whether to approve a bank holding company application under Section 3 of the BHCA⁴ two notable features of the Federal Reserve's approval of the ICBC application, as discussed in more detail below, are:

• the Federal Reserve's unprecedented recognition of China's bank regulatory regime as a home country supervisor that meets the CCS standard, whereas previously the Federal Reserve had approved applications from Chinese banks to establish U.S. branches (rather than U.S. bank subsidiaries) under a lower standard than the CCS standard, based on a determination that China was actively working to establish arrangements for the consolidated supervision of its banks;⁵ and
• the Federal Reserve's continuing development of the analysis applicable to the "financial stability standard" for bank holding company applications, as provided by the Dodd-Frank Act,⁶ which requires the Federal Reserve to consider "the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system."⁷

Federal Reserve's Unprecedented Recognition of Mainland Chinese Regulatory Authorities as Having Comprehensive, Consolidated Supervision Over Chinese Banks

Section 3 of the BHCA requires the Federal Reserve to disapprove an application submitted by a foreign bank to become a bank holding company if "the foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in the bank's home country."⁸ Until now, this statutory requirement has served as an impediment for mainland Chinese banks seeking to become full-fledged bank holding companies of U.S. banks. The Federal Reserve's approval of the ICBC application represents a major legal and policy development at the agency, as well as for the U.S. and Chinese banking systems.

Since the creation of the CBRC in April 2003 as the primary banking supervisor in China,⁹ the Federal Reserve had approved applications from mainland Chinese banks to establish U.S. branches under a lower standard than the CCS standard. This lower standard was permissible for only certain applications to establish U.S. banking offices submitted by foreign banks (namely, branch, agency, and commercial lending company applications), and relied on the rationale that China's banking supervisory authorities were "at a minimum, actively working to establish arrangements for the consolidated supervision of" the Chinese applicant banks.¹⁰ In these prior limited-scope approvals, the Federal Reserve noted its continuing coordination with "the appropriate supervisory authorities in China to understand their system for the consolidated supervision of" Chinese banks.¹¹ The Federal Reserve's approval of ICBC's acquisition of BEA-USA marks the first time that the Federal Reserve has issued an unqualified acknowledgement that the Chinese bank regulatory regime meets the CCS standard. The Federal Reserve's action therefore removes the impediment preventing mainland Chinese banks — since the BHCA was amended by the Foreign Bank Supervision Enhancement Act of 1991 — from establishing a bank subsidiary in the U.S.

In the ICBC approval, the Federal Reserve noted the marked improvements demonstrated by the CBRC, as the principal supervisory authority of Chinese banks (including their foreign subsidiaries and affiliates) for all matters other than anti-money laundering ("AML"), in the agency's supervisory structure, staffing, and internal operations. The Federal Reserve also referenced the CBRC's enhanced supervisory programs and development of new policies and procedures to create a framework for the consolidated supervision of the largest banks in China. Finally, the Federal Reserve addressed the satisfactory nature of China's regulatory regime regarding AML and suspicious activity reporting, as implemented by the People's Bank of China ("PBOC"), which supervises and examines Chinese banks with respect to AML and coordinates efforts among other agencies.

Such observations regarding the marked improvements in China's bank regulatory regime within the last decade, along with recently published third-party data from the International Monetary Fund and World Bank that acknowledged the general adherence of China's overall regulatory and supervisory framework to international standards,¹² supported the Federal Reserve's finding that ICBC is subject to CCS by its home country supervisors.

Federal Reserve's Determination That ICBC's Acquisition of BEA-USA Would Not Lead to an Increased Concentration Risk to the Stability of the U.S. Banking or Financial System

In connection with its approval of the ICBC application, the Federal Reserve also addressed the relatively new "financial stability standard" applicable to bank holding company applications pursuant to the Dodd-Frank Act.¹³ The Federal Reserve explained that it expects, generally, to find a significant adverse effect on the financial stability of the U.S. banking or financial system "if the failure of the resulting firm, or its inability to conduct regular-course-of-business transactions, would likely impair financial intermediation or financial market functioning so as to inflict material damage on the broader economy."¹⁴ The Federal Reserve contrasted these types of situations that would prevent it from approving a bank holding company application with other types of transactions that "likely would have only a de minimis impact on an institution's systemic footprint and, therefore, are not likely to raise concerns about financial stability."¹⁵ In its analysis under this framework, the Federal Reserve concluded that ICBC's acquisition of BEA-USA would have a de minimis impact on ICBC's systemic footprint in light of BEA-USA's relatively small size and because ICBC's acquisition of BEA-USA (which is a traditional commercial bank that focuses largely on commercial lending) would not add any significant complexity to the overall operations of ICBC. The Federal Reserve also noted that the extent of BEA-USA's interconnectedness with the U.S. financial system and its contribution to the complexity of the U.S. financial system are both sufficiently small to be considered de minimis. Thus, the Federal Reserve concluded that the ICBC application did not raise financial stability concerns precluding its approval.

Approval of the ICBC application marks an unprecedented policy action taken by the Federal Reserve that effectively opens the door for greater participation in the U.S. banking market by mainland Chinese banks seeking to follow in ICBC's footsteps. As noted, separate Federal Reserve actions taken on the same day as the ICBC approval included the agency's approval of separate branch applications submitted by China's third and fourth largest banks.¹⁶ The increased participation in the U.S. banking market by foreign banks in recent years can be expected to increase more rapidly, given the implications of the ICBC approval on similarly situated Chinese banks, as well as other foreign banks seeking to establish subsidiary banking operations in the U.S.

Footnotes

^{1 In separate actions also taken on the same day by the Federal Reserve, the Federal Reserve announced its approval of: (1) a branch application by Bank of China Limited, Beijing, People's Republic of China, to establish a branch in Chicago, Illinois; and (2) a branch application by Agricultural Bank of China Limited, Beijing, People's Republic of China, to establish a branch in New York, New York.}

^{2 CIC and Huijin were capitalized by the Chinese government to invest the government's foreign exchange reserves. CIC's assets are primarily comprised of long-term equity investments and financial assets such as equities and fixed-income securities. Huijin invests solely in the shares of Chinese financial institutions; its chartering document does not permit it to conduct any other commercial activities or interfere in the day-to-day business of the financial institutions it controls.}

^{3 See 76 Fed. Reg. 21367 (April 15, 2011). ICBC had previously been granted approval by the Federal Reserve in 1997 to establish a representative office in New York, New York (see Board Order dated January 27, 1997), and then ICBC was granted approval in 2008 to establish a branch in New York, New York (see Board Order dated August 5, 2008).}

^{4 Statutory considerations required under Section 3 of the BHCA relate to: (1) competitive factors; (2) banking and community factors; (3) supervisory factors; (4) treatment of certain bank stock loans, which was not at issue in the ICBC application; (5) managerial resources; (6) money laundering; and (7) financial stability. 12 U.S.C. § 1842(c).}

^{5 See 12 U.S.C. § 3105(d)(6). The Federal Reserve had previously approved applications from Chinese banks, including ICBC, to establish U.S. branches under a lower standard than the CCS standard, i.e., that the Chinese banking authority, as the home country supervisor in each case, was actively working to establish arrangements for the consolidated supervision of the bank. See China Merchants Bank Co., Limited, 94 Federal Reserve Bulletin C24 (2008); Industrial and Commercial Bank of China Limited, 94 Federal Reserve Bulletin C114 (2008); China Construction Bank Corporation, 95 Federal Reserve Bulletin B54 (2009); and Bank of Communications Co., Ltd. (order dated April 8, 2011), 97 Federal Reserve Bulletin 49 (2nd Quar. 2011).}

^{6 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).}

^{7 Id. at Section 604(d), codified at 12 U.S.C. § 1842(c)(7).}

^{8 12 U.S.C. § 1842(c)(3)(B).}

^{9 Before April 2003, the People's Bank of China ("PBOC") acted both as China's central bank and its primary banking supervisor, including oversight of anti-money laundering matters. In April 2003, the CBRC was established as the primary banking supervisor and assumed the majority of the PBOC's regulatory functions. The PBOC maintained its roles as China's central bank and the primary supervisor for anti-money laundering matters.}

^{10 See, e.g., Bank of Communications Co., Ltd. (order dated April 8, 2011), 97 Federal Reserve Bulletin 49 (2nd Quar. 2011).}

^{11 Id.}

^{12 ICBC Approval, p. 17, fn. 32, referencing IMF, People's Republic of China, Financial System Stability Assessment (June 24, 2011), available at http://www.imf.org/external/pubs/ft/scr/2011/cr11321.pdf ; and IMF and World Bank, People's Republic of China: Detailed Assessment Report of Observance with Basel Core Principles for Effective Banking Supervision (April 2012) ("DAR"), available at http://www.imf.org/external/pubs/ft/scr/2012/cr1278.pdf .}

^{13 As required by Section 604(d) of the Dodd-Frank Act, codified at 12 U.S.C. § 1842(c)(7). The standard became effective on July 21, 2011.}

^{14 ICBC approval, p. 29.}

^{15 Id.}

^{16 See supra, fn. 1.}

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