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Fed Approves First Chinese Purchase of U.S. Bank

May 10, 2012
BRG Financial Services alert

On May 9, 2012, the Board of Governors of the Federal Reserve System (FRB) approved state-owned Industrial and Commercial Bank of China Ltd. (ICBC) to acquire the U.S. subsidiary of the Bank of East Asia. After numerous obstacles and delays, this marked the first such U.S. approval for a Chinese firm since the Bank Holding Act of 1956 was amended by the Foreign Bank Supervision Enhancement Act of 1991 (FBSEA).

The FBSEA, which increased federal supervision of foreign banks operating in the United States, requires the FRB to make a finding that a foreign bank seeking to acquire control of a U.S. bank is subject to comprehensive supervision or regulation on a consolidated basis (CCS) by its home country supervisor. ICBC is China’s largest bank and is 70-percent owned by the government of China. ICBC's total assets are placed at an estimated $2.5 trillion. It is the first large Chinese state-owned lender to acquire control of a U.S. bank.

By purchasing a majority stake of 80 percent in the Bank of East Asia, ICBC will become a holding company along with China Investment Corporation and Central Huijin Investment Ltd. ICBC will be granted bank holding status and license to operate in the United States. ICBC will have ten branches in California and three in New York.

The FRB previously made a “limited” CCS determination regarding Chinese banks establishing U.S. branches. The first such approval for a Chinese bank since the FBSEA occurred in November 2007, when the FRB approved an application by China Merchants Bank Co., Ltd. (CMB) to establish a branch in New York, New York. CMB at the time was the sixth-largest bank in China, with total assets of approximately $145.6 billion. It is indirectly controlled by the Government of China through a number of wholly owned companies.

Before approving ICBC’s acquisition of the Bank of East Asia, the FRB performed an extensive analysis on the CCS of ICBC by the China Banking Regulatory Commission and other regulatory authorities.

This decision should create opportunities for other Chinese banks to acquire regional banks in order to establish themselves in the United States. This also opens the door for Chinese banks and their holding companies that are subject to the Bank Holding Act to be granted bank holding status in the United States.

To learn more about the implications of the FRB's decision, please contact Walter J. Mix, III. Mr. Mix heads the financial services practice at Berkeley Research Group. He is a former commissioner of the California Department of Financial Institutions, where he oversaw foreign banks moving into the United States. He previously served as a banking executive at Union Bank of California.

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