Casey Questions Federal Reserve Decision to Allow State-Owned Chinese Banks to Operate In the U.S.

In Letter to Chairman Bernanke, Senator Expresses Concern about Potential Impact on U.S. Banks

State-Owned Chinese Banks Could Undercut U.S. Banking System

Washington DC- Today, U.S. Senator Bob Casey (D-PA) raised questions about the Federal Reserve’s recent decision to allow three Chinese, state-owned, banks to begin to offer or expand retail banking services in the United States.

In a letter to Federal Reserve Chairman Ben Bernanke, Casey raised questions about the scrutiny given to these banks before approval and whether having the existence of state-owned, Chinese banks would undermine the private U.S. banking system.

“China has a long and well documented record of undercutting U.S. companies and workers,” Casey said. “China’s history of flouting international trade rules requires that any involvement in the U.S. banking system needs close scrutiny,”

The Fed board announced Wednesday it was approving the application of the Industrial and Commerce Bank of China Limited, China's largest bank, and two other Chinese firms to purchase The Bank of East Asia U.S.A., which operates in New York and California.

The Fed also approved an application by the Bank of China to set up a branch in Chicago and an application by the Agricultural Bank of China Limited to establish a branch in New York City.

In his letter, Senator Casey wrote: “I am concerned that unlike many foreign-owned banks that operate in the United States, these institutions are largely state-owned by the government of China, and the CIC is a state-owned investment fund. In all three banks, the government owns at least 70 percent and no investor other than the Government of China owns more than 5 percent of the shares. This state-run ownership raises a number of concerns regarding their operations in the United States. In particular, I worry that these banks and their U.S. subsidiaries will use their state-support as a way to underprice U.S. banks that abide by U.S. law and do not have the support of a sovereign country behind them.” 

The full text of Senator Casey’s letter to Chairman Bernanke can be seen below:

May 10, 2012

The Honorable Ben S. Bernanke

Chairman, Board of Governors of the Federal Reserve System

Dear Chairman Bernanke:

I am writing today with questions regarding the recent announcement of approval for three Chinese banks to begin to offer or expand retail and commercial banking services in the United States.   Without close scrutiny, I worry that investment by state-owned banks into the U.S. economy could negatively impact the U.S. banking sector.

As you know, on May 9, 2012, the Federal Reserve approved the Industrial & Commercial Bank of China (ICBC) to make an 80 percent investment in a bank operating in New York and California. The ICBC, one of the largest banks in the world, is partnering with the China Investment Corporation (CIC), China’s state-owned sovereign wealth fund in this transaction. Additionally, the Agricultural Bank of China (ABC) will open a New York branch and the Bank of China will open a branch in Chicago, its fourth branch in the United States. It is my understanding that each of these branches will offer services to U.S. customers in the retail and commercial sectors, as well as trade financing and other services.

I am concerned that unlike many foreign-owned banks that operate in the United States, these institutions are largely state-owned by the government of China, and the CIC is a state-owned investment fund. In all three banks, the government owns at least 70 percent and no investor other than the Government of China owns more than 5 percent of the shares. This state-run ownership raises a number of concerns regarding their operations in the United States. In particular, I worry that these banks and their U.S. subsidiaries will use their state-support as a way to underprice U.S. banks that abide by U.S. law and do not have the support of a sovereign country behind them.  I understand as a member of the international Financial Stability Board the Federal Reserve is interested in promoting efficient global markets and therefore would assumedly look favorably on deals such as these with the Chinese.  However, China has been shown to aggressively use its government-backed enterprises to underprice and drive out competition.  Did you consider the impact these state-run institutions would have on our domestic banks?

In previous cases involving U.S. investment in China, U.S. firms have faced insurmountable hurdles in gaining access to information in the event of a legal dispute. Did the Chinese government make any promises regarding transparency of financial information of Chinese banks which will now be operating in the U.S.? While it is my understanding that a foreign government does not fall under the jurisdiction of the Federal Reserve based on the language in the Bank Holding Act, to what extent will the Fed have legal recourse to gain access to financial data for state-owned banks from China? Have these banks complied with all data requests to date?

Additionally, I have questions about the timing of the announcement. These approvals came very quickly after the U.S. gained concessions on foreign ownership of brokerages in China. Given this sequence, I think it’s important to understand the relationship, if any, between approval of these licenses and the prospect for expanded ownership stakes in Chinese firms opened up by the recently concluded Strategic and Economic Dialogue. 

I look forward to discussing these issues further when you testify before the Joint Economic Committee on June 7, 2012.