Most foreign bank holding companies are foreign banking organizations, that is banks abroad. They are usually the major banks in their home countries. They are supervised by foreign banking authorities. They have recognized reputations. For these reasons, the Board has not been confronted with serious problems in supervising U.S. activities of these bank holding companies.

Mr. ROSENTHAL. Let me ask you one question. When you say they are supervised by foreign banking authorities, is that supervision of the same character and stringency as the type of supervision I would like to think we have here?

Mr. WALLICH. We are proud to think that ours is more intensive, and there is a specific difference in that ours rests on examination, typically annual, of a bank, going through their books, going through their portfolio. Few other countries do that.

It also must be recognized that we have a very large number of banks, and among those you might always find some that need this kind of attention. Foreign banking systems are much more concentrated as a rule than ours. Nevertheless, I think you can say a lot on behalf of American bank supervision.

When we are we dealing with foreign individuals, certain supervisory problems do arise. One supervisory problem relates to the initial entry of foreign investors trying to acquire or establish a bank. The other relates to the continuing operations of their banks. On the question of entry, I might just note that the principal problem is to ascertain the financial strengths and reputation of the would-be foreign owners. This is not a unique problem internationally. It is a problem that faces the Office of the Comptroller of the Currency when foreign investors seek to charter a national bank. It is a problem encountered by all three Federal banking agencies under the Change in Bank Control Act when there is an effort of a foreign investor to acquire more than 10 percent of an existing bank and become a large, distinguished shareholder.

The relevant banking agency has to determine the investor's condition, and status and the ability to make such a determination is necessarily complicated by distance and differences in foreign conditions and standards.

On the second question of continuing supervision of foreign individuals, there is the problem of assuring that the bank is managed well and that it is not used for the benefit of the foreign owners to the detriment of the condition of the bank. Individual investors, by comparison with banking organizations, may not have the same interest in preserving the banking reputation.

The first line of defense on this point is to limit entry to persons of undoubted integrity and banking experience. On the whole, as described earlier, the banks owned by foreign individuals have been managed well and have posed few supervisory problems. However, there have been exceptions.

If I may turn to Federal Reserve procedures on applications made by foreigners seeking to acquire U.S. banking organizations, we have the Bank Holding Company Act which provides several criteria that the Board is required to consider in judging all bank holding company applications. These are, first, the financial and managerial resources of the acquiring company and the bank to be acquired; second, the future prospects of each; third, the conven

ience and needs of the community to be served; and fourth, the effects of the proposal on competition.

Similar criteria are to be considered by the banking agencies under the Change in Bank Control Act. These criteria apply both to foreign and domestic acquisitions.

When an application is received by the Federal Reserve from foreign banking organizations or foreign individuals or foreign bank holding companies, the same general procedures are followed, and the same general information is required as if domestic organizations or domestic individuals were involved. Also, a concerted effort is made to obtain additional information that will enable an evaluation of the applying foreign banking organization to be viewed against the environment in which it operates in its home country. In the case of foreign individuals, they are required to submit financial statements and other information sufficient to assess their ability to manage a banking organization and to stand behind the acquired bank.

Contact is usually made with the appropriate foreign supervisory authority about the condition and reputation of the foreign applicant. When a foreign banking organization is involved, this procedure is in keeping with a broad agreement reached among the central banks and bank supervisory authorities of the G-10 countries and Switzerland that the foreign banks operating within their territories should be adequately supervised institutions in their home countries and that the home country supervisors should supervise the activities of their banks on a consolidated basis.

Now I come to the main acquisitions that are listed in your statement, Mr. Chairman. The three cases are, first, the Crocker National Corp. acquired by Midland Bank Ltd.; second, Financial General Bankshares acquired by a group of Middle Eastern investors; third, the acquisition of Long Island Trust Co. Bancorporation by Banca Commerciale Italiana. My remarks will be confined to the highlights of each case. More details are contained in the Board's orders approving these acquisitions, which is included in my testimony.

In early 1981, Midland Bank, one of the major London clearing banks, applied to acquire a majority interest in Crocker National Corp., whose principal subsidiary bank and principal asset is Crocker National Bank. At the time Midland had total deposits of $55 billion and was the third largest bank in the United Kingdom. Crocker National Bank had total assets of $19 billion and was the fourth largest bank in California and the twelfth largest in the United States.

Under the proposal, Midland Bank would immediately acquire 51 percent of the stock of Crocker National Corp. with the intention of ultimately acquiring 57 percent. The end result of the acquisition would be an infusion of $495 million in new capital into the Crocker National Corp.

At the time of the application Midland Bank had no operating banking presence in the United States. Its only representation was as a part owner of European American Bank and Trust Co., a consortium bank in New York owned by six banks from different European countries.

Although the acquisition of a large U.S. bank was involved, there were virtually no issues presented by the application under the criteria specified in the Bank Holding Company Act. There were no adverse competitive factors in the application since Midland Bank had no direct banking operations in California or elsewhere in the United States. Midland Bank was in strong financial condition, and its reputation as an international bank was undoubted. The proposed capital infusion was regarded as a factor weighing in favor of the approval.

In approving the bank acquisition the Board had also to consider the other activities of the Midland Bank organization in the United States and their consistency with the requirements of the Bank Holding Company Act. As a result the Board order approving the bank holding company formation required that Midland divest its 20 percent interest in European American Bank on the grounds that retention would be inconsistent with the policy underlying section 3(d) of the act. Under that section bank holding companies are effectively barred from acquiring more than 5 percent of the shares of a bank in another State. The Board also denied an exemption from the prohibitions of section 4 of the act for the activities of the U.S. subsidiary of Thomas Cook Ltd. That company provides retail and wholesale travel services in the United States, an activity which the Board has found as not closely related to banking.

I next will turn to Financial General Bankshares. Financial General Bankshares is a multi-State bank holding company with 12 banks located in the District of Columbia and the States of Maryland, New York, Tennessee, and Virginia. In November 1978 the first applications to acquire this holding company were made by Credit and Commerce American Holdings of the Netherlands Antilles and Credit and Commerce American Investment of the Netherlands. The two applicant companies were formed by a group of individual investors from several Middle Eastern countries for the purpose of the acquisition. A protracted process ensued.

The proposed acquisition was at first opposed by existing management of Financial General and its subsidiary banks. Moreover, two of the State banking supervisors involved, Virginia and Tennessee, recommended denial on the grounds that the acquisition would be detrimental to the convenience and needs of the communities served. In addition the attorney general of the State of Maryland issued an opinion that Maryland State law precluded a Maryland banking institution from being subject to an unfriendly affiliation. In these circumstances, the Board dismissed the first applications on the grounds that it was prohibited from approving a proposal that would violate State law.

These complications were subsequently resolved, and a new application was filed in November 1980. While a number of technical issues remained, the principal issue for the Board then became the identity of the purchasers, their reputation and their financial strength, and what those attributes meant for the future operations of the bank holding company.

The Middle Eastern investor group consisted of 14 individuals and companies from Saudi Arabia, the United Arab Emirates, and Kuwait. The group included eight individuals, three personal holding companies, two government-owned companies, and one private

company. In the course of processing the application, a meeting was held at the Board's offices which was attended by representatives of the investor group, counsel for the applicants, and representatives of the State banking departments involved, and the Comptroller of the Currency.

The information developed at this meeting became part of the record on which the Board based its decision. In making that decision the Board took special care to review the financial resources of all the investors. The information submitted demonstrated that all the investors possessed sufficient financial resources to make the acquisition and to provide future support if needed.

The financial factors relating to the acquisition of Financial General were considered to be consistent with approval. As far as management was concerned the investors did not propose to take an active role themselves. Rather, they proposed to have all the director and top management positions filled by qualified Americans. The Board carefully reviewed the composition of the proposed board of directors of Financial General and the proposed senior management and satisfied itself about their qualifications.

The Board approved the acquisition on August 25, 1981. The transaction was consummated in April 1982, and the name of the organization was subsequently changed to First American Bankshares.

Mr. ROSENTHAL. Mr. Wallich, can you tell us just a little bit how you checked to verify the backgrounds, the character, the integrity, the financial resources of the individuals?

Mr. WALLICH. The Board worked very hard at this because, as my testimony says, this is a crucial matter. We used all the resources of the U.S. Government, not only those of the Federal Reserve Board, and we developed information from a very broad informational source.

We also, of course, obtained bank statements. We obtained the financial statements of the individuals, and these were certified by local accountants who in turn were certified by familiar named accountants of the Big Eight.

So we did what I think is humanly possible to develop detailed information on these individuals. In human affairs nothing is ever completely sure, but a credit check of this kind is of course not an unfamiliar thing. It happens all the time in business. The people involved here are businessmen. They are looked at often by the business community. So it by no means is impossible to get a full dosier on them.

Mr. ROSENTHAL. It interests me that they formed two groups, one in the Netherlands Antilles and one in the Netherlands. Did you look into that at all? Were you able to get any information from the Netherlands Antilles?

Mr. WALLICH. This is a familiar device relating to, as I understand it—and I am not a tax expert-two separate tax treaties that the United States has with the Netherlands Antilles on one side and Holland on the other.

Mr. ROSENTHAL. That is what I was coming to. These individuals, would they be able to avoid U.S. taxes that U.S. citizens would have to pay?

Mr. WALLICH. They would not be able to do anything that somebody in the situation would not be able to do.

Mr. ROSENTHAL. That is, if they use the Netherlands Antilles.

Mr. WALLICH. A U.S. citizen may not be able to do that because he is subject to a different home tax law. However, if one starts out as a foreigner, these opportunities are open. I cannot speak with authority to this, Mr. Chairman. I am not a tax lawyer. All I can tell you is that it is a familiar, frequently used technique.

Mr. ROSENTHAL. I am just curious as to whether there is a loss to the U.S. Treasury in tax payments as a result of these individuals becoming shareholders.

Mr. WALLICH. The U.S. Treasury negotiated these tax treaties, so there are probably some losses and some gains.

Mr. ROSENTHAL. The Treasury is trying to renegotiate all those treaties. You still have not told us the extent of your investigation of the character and integrity of the individuals. You told us you used all the resources that are at your command, both foreign and domestic, and many U.S. agencies. However, why is that kind of an investigation less fulfilling than if you had to make an investigation of a U.S. citizen?

Mr. WALLICH. I would think it certainly involved a greater effort and more input of resources than one would on a U.S. citizen. Admittedly, abroad it is less easy to get a clear picture.

Mr. ROSENTHAL. Did you send any people overseas to the home countries of these folks?

Mr. WALLICH. I do not recall.

Mr. ROSENTHAL. I still do not understand exactly what you did do.

Mr. WALLICH. Some sources of information close up if one refers to them publicly. So just allow me to say that we used all sources that were at our disposal. I think a very unusual effort was put into this because of the importance of getting a clear picture. After putting it all together and getting the cross-checks, we arrived at the conclusion that these were satisfactory.

Mr. ROSENTHAL. In other words you did not send any investigators out to interview these people or to look into their backgrounds or anything like that.

Mr. WALLICH. We saw some of them in Washington. We had a meeting which the law did not call for, but we thought it was desirable. They were represented by counsel and in part appeared in person.

Mr. ROSENTHAL. Did you ask them any personal questions at the meeting?

Mr. WALLICH. There is a detailed record of the whole thing which became part of the record of the proceedings.

Mr. ROSENTHAL. Please continue with your statement.

Mr. WALLICH. I now turn to Litco, which in a sense I think presents the most important issues for the Congress to think about. In December 1981 Banca Commerciale Italiana [BCI] applied to the Board to acquire Litco, the Long Island Trust Co. Bancorporation of New York, a bank holding company owning all of the shares of Long Island Trust Co. Long Island Trust Co. had about $1.1 billion in assets, and its business orientation was primarily directed to domestic business in the Metropolitan New York area.

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