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Will Chinese banks get lumped in with rat poison-laced pet food and lead-pigmented Polly Pocket Lip Gloss Studio playsets? We may find out from the Federal Reserve in the next month or two.
The Fed is currently weighing applications to open full-fledged branch operations in New York from China Merchants Bank and the Industrial and Commercial Bank of China. Why is this important? Since the Foreign Banks Supervision Enhancement Act of 1991 was implemented, no China-based bank has been allowed to open a branch in the United States.
Holding up the gravy train for Chinese banks is a thorny little issue called "comprehensive consolidated supervision," which is broadly defined by the Fed as "whether the foreign bank is supervised or regulated in such a manner that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank ... to assess the foreign bank's overall financial condition and compliance with law and regulation."
Basically, U.S. regulators feel that the China Banking Regulatory Commission is, to be polite, inadequate. And they have good reason. Just earlier this month, seven underground Chinese banking operations were uncovered. The clients included, unbelievably, some large state-owned enterprises. The credit rating agencies are wary also, stating that China's banks lag behind many developed and developing markets in the quality of risk management, internal controls, and asset quality—which means, in banking, just about the whole operation.
Despite all this, Washington may be ready to open the spigots. Two weeks ago the New York state banking department approved the bank's branching license. Any Fed decision would trump that. But banking lawyers are saying New York's go-ahead could be a sign that the Fed has already decided to give China Merchants thumbs up. I wouldn't count out a recall, though, especially if any Fed staffers find funny stuff in their toothpaste.
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