TESTIMONY OF
RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
DAIWA BANK AND
THE SUPERVISION OF FOREIGN BANKS
OPERATING IN THE
UNITED STATES
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
U.S. SENATE
2:00 P.M.
MONDAY, NOVEMBER 27, 1995
106 DIRKSEN SENATE OFFICE BUILDING
Mr. Chairman and members of the Committee, I appreciate the opportunity to testify on the role of the
Federal Deposit Insurance Corporation (the "FDIC") in supervising a segment of foreign bank operations
in the United States, and, in particular, the Daiwa Bank Trust Company ("Daiwa Trust"), the only insured
U.S. subsidiary of The Daiwa Bank, Limited ("Daiwa"). The FDIC has evaluated the problems and trading
losses of Daiwa Trust in close cooperation with the New York State Banking Department ("NYSBD"), the
state chartering authority. In evaluating the implications of a broader range of problems stemming from
the larger trading losses first reported at the New York branch of Daiwa, the FDIC has also worked
closely with the Federal Reserve Bank of New York and the Board of Governors of the Federal Reserve
System ("Federal Reserve"), which has primary supervisory authority, along with the NYSBD, over that
branch. The Federal Reserve has umbrella supervisory authority over all foreign banking operations in
the United States. Acting together, the Federal Reserve, the NYSBD, and the FDIC concluded that the
conduct of Daiwa and Daiwa Trust with respect to the separate losses in each institution stemming from
unauthorized bond trading activities and the response, given the continuing safety and soundness
concerns, of Daiwa and Daiwa Trust officials to those losses and to internal control deficiencies identified
at Daiwa, was highly inappropriate and that the only suitable response to that misconduct was to
terminate Daiwa's privilege to conduct banking business in the United States.
The problems at Daiwa's New York branch and Daiwa Trust were of three types: 1) the unauthorized
activities of traders, 2) the significant deficiencies in internal controls for monitoring compliance with laws
and regulations and risks, and 2) the long-term, conscious effort by senior managers to deceive
regulators concerning losses stemming from trading activities. Simple fraud was therefore compounded
by collusion, which made the detection of various fraudulent acts more difficult to discover.
On September 18, 1995, Daiwa reported a loss exceeding $1 billion as a result of trading activities
conducted at its New York branch from 1983 to September 1995. These losses were not reflected in the
books and records of Daiwa or in its financial statements, and their existence was concealed through
liquidations of securities held in Daiwa's custody accounts and falsification of its custody records.
Daiwa has indicated that, while its senior management learned about the trading losses at the New York
branch on July 24, 1995, the senior management of Daiwa and its New York branch directed that those
losses be concealed from U.S. bank regulatory and law enforcement authorities as well as the public for
almost two months and also directed the continuation of transactions designed to avoid the disclosure of
Daiwa's losses.
In addition, the senior management of the New York branch of Daiwa undertook a series of actions in
RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
DAIWA BANK AND
THE SUPERVISION OF FOREIGN BANKS
OPERATING IN THE
UNITED STATES
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
U.S. SENATE
2:00 P.M.
MONDAY, NOVEMBER 27, 1995
106 DIRKSEN SENATE OFFICE BUILDING
Mr. Chairman and members of the Committee, I appreciate the opportunity to testify on the role of the
Federal Deposit Insurance Corporation (the "FDIC") in supervising a segment of foreign bank operations
in the United States, and, in particular, the Daiwa Bank Trust Company ("Daiwa Trust"), the only insured
U.S. subsidiary of The Daiwa Bank, Limited ("Daiwa"). The FDIC has evaluated the problems and trading
losses of Daiwa Trust in close cooperation with the New York State Banking Department ("NYSBD"), the
state chartering authority. In evaluating the implications of a broader range of problems stemming from
the larger trading losses first reported at the New York branch of Daiwa, the FDIC has also worked
closely with the Federal Reserve Bank of New York and the Board of Governors of the Federal Reserve
System ("Federal Reserve"), which has primary supervisory authority, along with the NYSBD, over that
branch. The Federal Reserve has umbrella supervisory authority over all foreign banking operations in
the United States. Acting together, the Federal Reserve, the NYSBD, and the FDIC concluded that the
conduct of Daiwa and Daiwa Trust with respect to the separate losses in each institution stemming from
unauthorized bond trading activities and the response, given the continuing safety and soundness
concerns, of Daiwa and Daiwa Trust officials to those losses and to internal control deficiencies identified
at Daiwa, was highly inappropriate and that the only suitable response to that misconduct was to
terminate Daiwa's privilege to conduct banking business in the United States.
The problems at Daiwa's New York branch and Daiwa Trust were of three types: 1) the unauthorized
activities of traders, 2) the significant deficiencies in internal controls for monitoring compliance with laws
and regulations and risks, and 2) the long-term, conscious effort by senior managers to deceive
regulators concerning losses stemming from trading activities. Simple fraud was therefore compounded
by collusion, which made the detection of various fraudulent acts more difficult to discover.
On September 18, 1995, Daiwa reported a loss exceeding $1 billion as a result of trading activities
conducted at its New York branch from 1983 to September 1995. These losses were not reflected in the
books and records of Daiwa or in its financial statements, and their existence was concealed through
liquidations of securities held in Daiwa's custody accounts and falsification of its custody records.
Daiwa has indicated that, while its senior management learned about the trading losses at the New York
branch on July 24, 1995, the senior management of Daiwa and its New York branch directed that those
losses be concealed from U.S. bank regulatory and law enforcement authorities as well as the public for
almost two months and also directed the continuation of transactions designed to avoid the disclosure of
Daiwa's losses.
In addition, the senior management of the New York branch of Daiwa undertook a series of actions in
1992 and 1993 designed to deceive bank examiners regarding Daiwa's trading activities, including
providing written notice to the Federal Reserve that actions had been taken to separate the custody and
trading functions at the branch, while continuing to operate without such controls in place.
In early October, 1995, following the commencement of governmental investigations and the issuance of
joint cease and desist orders into trading losses incurred by the Daiwa branch in New York, Daiwa
reported that Daiwa Trust incurred net losses of approximately $97 million as a result of trading activities,
at least some of them unauthorized, during the approximate period of 1984 through 1987. These trading
losses: (1) were not reported on its books and records; (2) were not reported on the financial statements
of Daiwa Trust; and (3) were concealed from federal and state examiners and regulatory authorities
through a series of transactions with off-shore entities. In addition, the senior management of Daiwa and
Daiwa Trust participated in the falsification of records and concealment of those trading losses.
The FDIC's deposit insurance funds will not suffer any loss from the problems at Daiwa Trust. As of
September 30, 1995, Daiwa Trust had total assets of $1.1 billion and held approximately $134 million in
insured deposits -- only 18.3 percent of its total deposits. Daiwa Trust's $97 million in trading losses, at
least some of which were the result of unauthorized trading by Daiwa Trust employees, were absorbed by
Daiwa in connection with its transactions to conceal the losses. Daiwa Trust is presently well capitalized,
and all present indications are that the value of its assets are more than sufficient to satisfy all its
liabilities, including its liabilities to depositors.
In response to the invitation from the Committee, this testimony describes foreign bank organizations that
operate in our country and the FDIC's role in supervising them. It discusses the FDIC's recent actions
against Daiwa Trust, in cooperation with other bank regulators. It presents a range of supervisory issues
raised by the experience with Daiwa and Daiwa Trust. Finally, it discusses the FDIC's continuing
response to those issues.
U.S.- BASED FOREIGN BANK OPERATIONS SUPERVISED BY THE FDIC
The Federal Reserve, the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the
FDIC, and state bank supervisory authorities have varying degrees of supervisory authority for the United
States operations of foreign banking organizations. As Chart 1 and Table 1 summarize, there were 836
separately licensed foreign banking organizations operating in the United States as of June 30, 1995. As
of that date, these foreign banking organizations had total assets of about $1.1 trillion, of which 72.8
percent were in 689 uninsured foreign banking organizations supervised by the Federal Reserve, the
applicable state licensing authorities, and, to a lesser extent, the OCC.
Of the 836 total foreign banking organizations in the United States, 18 percent are insured. The FDIC has
primary federal supervisory responsibility over 12 percent of foreign banking organizations in the Unites
States, which include over 68 foreign bank subsidiaries and 35 state-licensed branches. As Chart 2
illustrates, the 103 foreign bank organizations, which the FDIC supervises, had total assets of $109.6
billion as of June 30, 1995, or 10.2 percent of the total foreign banking assets in the United States. The
FDIC shares supervisory responsibility for these organizations with the applicable state authorities. In
addition, the FDIC has a role in insuring the deposits of the remaining 44 insured foreign banking
organizations operating in the United States, 36 banks and thrifts and 8 branches, which had total assets
of $182.7 billion, or 17 percent of total foreign banking assets. Of these 44 organizations, the OCC
primarily supervises 34, with total assets of $130.2 billion; the Federal Reserve primarily supervises 8,
with total assets of $42.1 billion; and the OTS primarily supervises 2 with total assets of $10.4 billion.
As Chart 3 reflects, all FDIC-insured financial institutions in the United States have estimated total insured
deposits of $2.6 trillion as of June 30, 1995. Of this amount, an estimated $117 billion, or 4.5% of total
insured deposits, are held by insured foreign banking organizations. As such, the direct potential risk to
the FDIC insurance funds represented by all foreign bank organizations operating in the United States is
not large.
U.S. OPERATIONS OF DAIWA
providing written notice to the Federal Reserve that actions had been taken to separate the custody and
trading functions at the branch, while continuing to operate without such controls in place.
In early October, 1995, following the commencement of governmental investigations and the issuance of
joint cease and desist orders into trading losses incurred by the Daiwa branch in New York, Daiwa
reported that Daiwa Trust incurred net losses of approximately $97 million as a result of trading activities,
at least some of them unauthorized, during the approximate period of 1984 through 1987. These trading
losses: (1) were not reported on its books and records; (2) were not reported on the financial statements
of Daiwa Trust; and (3) were concealed from federal and state examiners and regulatory authorities
through a series of transactions with off-shore entities. In addition, the senior management of Daiwa and
Daiwa Trust participated in the falsification of records and concealment of those trading losses.
The FDIC's deposit insurance funds will not suffer any loss from the problems at Daiwa Trust. As of
September 30, 1995, Daiwa Trust had total assets of $1.1 billion and held approximately $134 million in
insured deposits -- only 18.3 percent of its total deposits. Daiwa Trust's $97 million in trading losses, at
least some of which were the result of unauthorized trading by Daiwa Trust employees, were absorbed by
Daiwa in connection with its transactions to conceal the losses. Daiwa Trust is presently well capitalized,
and all present indications are that the value of its assets are more than sufficient to satisfy all its
liabilities, including its liabilities to depositors.
In response to the invitation from the Committee, this testimony describes foreign bank organizations that
operate in our country and the FDIC's role in supervising them. It discusses the FDIC's recent actions
against Daiwa Trust, in cooperation with other bank regulators. It presents a range of supervisory issues
raised by the experience with Daiwa and Daiwa Trust. Finally, it discusses the FDIC's continuing
response to those issues.
U.S.- BASED FOREIGN BANK OPERATIONS SUPERVISED BY THE FDIC
The Federal Reserve, the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the
FDIC, and state bank supervisory authorities have varying degrees of supervisory authority for the United
States operations of foreign banking organizations. As Chart 1 and Table 1 summarize, there were 836
separately licensed foreign banking organizations operating in the United States as of June 30, 1995. As
of that date, these foreign banking organizations had total assets of about $1.1 trillion, of which 72.8
percent were in 689 uninsured foreign banking organizations supervised by the Federal Reserve, the
applicable state licensing authorities, and, to a lesser extent, the OCC.
Of the 836 total foreign banking organizations in the United States, 18 percent are insured. The FDIC has
primary federal supervisory responsibility over 12 percent of foreign banking organizations in the Unites
States, which include over 68 foreign bank subsidiaries and 35 state-licensed branches. As Chart 2
illustrates, the 103 foreign bank organizations, which the FDIC supervises, had total assets of $109.6
billion as of June 30, 1995, or 10.2 percent of the total foreign banking assets in the United States. The
FDIC shares supervisory responsibility for these organizations with the applicable state authorities. In
addition, the FDIC has a role in insuring the deposits of the remaining 44 insured foreign banking
organizations operating in the United States, 36 banks and thrifts and 8 branches, which had total assets
of $182.7 billion, or 17 percent of total foreign banking assets. Of these 44 organizations, the OCC
primarily supervises 34, with total assets of $130.2 billion; the Federal Reserve primarily supervises 8,
with total assets of $42.1 billion; and the OTS primarily supervises 2 with total assets of $10.4 billion.
As Chart 3 reflects, all FDIC-insured financial institutions in the United States have estimated total insured
deposits of $2.6 trillion as of June 30, 1995. Of this amount, an estimated $117 billion, or 4.5% of total
insured deposits, are held by insured foreign banking organizations. As such, the direct potential risk to
the FDIC insurance funds represented by all foreign bank organizations operating in the United States is
not large.
U.S. OPERATIONS OF DAIWA