Federal Reserve’s Chinese Bank Determination Has Broader Implications

The Federal Reserve’s decision this week to confer Comprehensive Consolidated Supervision (“CCS”) status to three state-owned Chinese banks has been long awaited and paves the way for major Chinese banks to enter retail commercial banking in the United States by acquiring U.S. banks. We view the Federal Reserve’s decision, which is the first CCS determination with respect to a major jurisdiction in nearly 10 years, as encouraging for banks from other emerging economies that wish to expand their activities in the United States by acquiring U.S. banks or electing to become financial holding companies (“FHCs”). Since many developed economies have attained CCS status, the key markets that might, over time, indirectly benefit from the China CCS determination include Dubai, India, Malaysia, Saudi Arabia, Singapore and South Africa. Brazilian and Mexican banks already benefit from earlier CCS determinations. There are, however, a few lessons to be learned from the Chinese experience, which we take to mean that CCS determinations will require patience and persistence. These lessons are:

• A willingness on the part of the Chinese government and major Chinese banks to make the CCS determination a policy priority across a range of trade, economic and strategic relationships;
• A willingness to invest in smaller U.S. community and regional banks by Chinese banks with a traditional commercial banking profile;
• A strong, reciprocal desire by U.S. financial institutions to enter or expand their presence in the Chinese market;
• A determined effort on the part of the Chinese government and Chinese regulatory authorities to enhance their overall supervisory framework, as well as their anti-money laundering controls; and
• An appreciation that, in today’s environment, CCS determinations may be incremental and more likely to be made on a bank-by-bank basis (or at least with respect to similar banks in the same country).

The Federal Reserve’s unanimous approvals for the three Chinese banks closely followed high-level meetings between senior U.S. and Chinese government officials as well as the conclusion of the U.S.–China Strategic and Economic Dialogue during which the “United States recognize[d] and welcome[d] the further substantial progress made by China in the area of [CCS]” and committed to “act expeditiously” on pending applications by Chinese banks. China has reciprocally committed to allow foreign investors to hold up to a 49 percent equity stake in securities joint ventures and futures broker joint ventures.

The full memorandum, which describes the transactions and the Federal Reserve’s actions in greater detail, is available here.