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
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
10:00 A.M.
TUESDAY, DECEMBER 5, 1995
2128 RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, 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 foreign banking
organizations 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 3) 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, to the Federal Reserve Bank of New York, a loss exceeding $1
billion as a result of trading activities conducted at its New York branch from 1983 to September 1995.
The FDIC was informed of this information by the Federal Reserve Bank of New York on September 22,
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
RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
DAIWA BANK AND
THE SUPERVISION OF FOREIGN BANKS
OPERATING IN THE
UNITED STATES
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
10:00 A.M.
TUESDAY, DECEMBER 5, 1995
2128 RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, 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 foreign banking
organizations 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 3) 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, to the Federal Reserve Bank of New York, a loss exceeding $1
billion as a result of trading activities conducted at its New York branch from 1983 to September 1995.
The FDIC was informed of this information by the Federal Reserve Bank of New York on September 22,
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. The Banking Bureau of the Japanese Ministry of Finance was informed of the losses on
August 8, 1995, but unfortunately did not share that information with U.S. regulatory authorities.
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.
On October 5, 1995, following the issuance of joint cease and desist orders relative to trading losses
incurred by the Daiwa branch in New York and the commencement of governmental investigations,
Daiwa disclosed to the regulators that, wholly apart from more than $1 billion in trading losses of Daiwa's
New York branch, 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 the books and records of Daiwa Trust; (2) were not
reported on its financial statements; 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 Subcommittee, 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 845
separately licensed foreign banking organizations, owned by foreign parent banks, 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 72.0 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 and the OTS.
Of the 845 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 United
States, which include 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 10.1 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 53 insured foreign banking organizations
operating in the United States, 45 banks and thrifts and eight branches, which had total assets of $194.7
billion, or 18 percent of total foreign banking assets. Of these 53 organizations, the OCC primarily
supervises 34, with total assets of $130.2 billion; the Federal Reserve primarily supervises eight, with
total assets of $42.1 billion; and the OTS primarily supervises two subsidiaries of bank holding companies
with total assets of $10.4 billion and nine subsidiaries of thrift holding companies with total assets of $12
billion.
August 8, 1995, but unfortunately did not share that information with U.S. regulatory authorities.
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.
On October 5, 1995, following the issuance of joint cease and desist orders relative to trading losses
incurred by the Daiwa branch in New York and the commencement of governmental investigations,
Daiwa disclosed to the regulators that, wholly apart from more than $1 billion in trading losses of Daiwa's
New York branch, 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 the books and records of Daiwa Trust; (2) were not
reported on its financial statements; 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 Subcommittee, 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 845
separately licensed foreign banking organizations, owned by foreign parent banks, 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 72.0 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 and the OTS.
Of the 845 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 United
States, which include 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 10.1 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 53 insured foreign banking organizations
operating in the United States, 45 banks and thrifts and eight branches, which had total assets of $194.7
billion, or 18 percent of total foreign banking assets. Of these 53 organizations, the OCC primarily
supervises 34, with total assets of $130.2 billion; the Federal Reserve primarily supervises eight, with
total assets of $42.1 billion; and the OTS primarily supervises two subsidiaries of bank holding companies
with total assets of $10.4 billion and nine subsidiaries of thrift holding companies with total assets of $12
billion.