HSBC 2007 Annual Report Download - page 197

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and regulations of the Federal Reserve Board, the
Office of the Comptroller of the Currency (‘OCC’)
and the Federal Deposit Insurance Corporation
(‘FDIC’) govern many aspects of HSBC’s US
business.
HSBC and its US operations are subject to
supervision, regulation and examination by the
Federal Reserve Board because HSBC is a ‘bank
holding company’ under the US Bank Holding
Company Act of 1956 (‘BHCA’). HSBC and HSBC
North America Holdings Inc. (‘HNAH’), formed to
hold HSBC’s US and Canadian operations, are ‘bank
holding companies’ by virtue of their ownership and
control of HSBC Bank USA, N.A. (‘HSBC Bank
USA’), HSBC National Bank USA (‘HSBC Bank
Maryland’), and HSBC Trust Company (Delaware),
N.A. (‘HSBC Bank Delaware’). These three banks
are nationally chartered FDIC-insured, full-service
commercial banks and members of the Federal
Reserve System. HSBC also owns HSBC Bank
Nevada, N.A. (‘HSBC Bank Nevada’), a nationally
chartered bank limited to credit card activities which
is also a member of the Federal Reserve System.
These four banks are subject to regulation,
supervision and examination by the OCC and, as
their deposits are insured by the FDIC, they are
subject to relevant FDIC regulation. Both HSBC and
HNAH are registered as financial holding companies
(‘FHC’s) under the BHCA, enabling them to offer a
broad range of financial products and services
through their subsidiaries. HSBC’s and HNAH’s
ability to engage in expanded financial activities as
FHCs depends upon HSBC and HNAH continuing
to meet certain criteria set forth in the BHCA,
including requirements that their US depository
institution subsidiaries, HSBC Bank USA, HSBC
Bank Maryland, HSBC Bank Nevada and HSBC
Bank Delaware, be ‘well capitalised’ and ‘well
managed’, and that such institutions have achieved at
least a satisfactory record in meeting community
credit needs during their most recent examinations
pursuant to the Community Reinvestment Act. These
requirements also apply to Wells Fargo HSBC Trade
Bank, N.A., in which HSBC and HNAH have a
20 per cent voting interest in equity capital and a
40 per cent economic interest. Each of these
depository institutions achieved at least the required
rating during their most recent examinations. At
31 December 2007, HSBC Bank USA, HSBC Bank
Maryland, HSBC Bank Nevada, HSBC Bank
Delaware and Wells Fargo HSBC Trade Bank, N.A.
were each well capitalised and well managed under
Federal Reserve Board regulations.
In general, under the BHCA, an FHC would be
required, upon notice by the Federal Reserve Board,
to enter into an agreement with the Federal Reserve
Board to correct any failure to comply with the
requirements to maintain FHC status. Until such
deficiencies are corrected, the Federal Reserve
Board may impose limitations on the US activities of
an FHC and depository institutions under its control.
If such deficiencies are not corrected, the Federal
Reserve Board may require an FHC to divest its
control of any subsidiary depository institution or to
desist from certain financial activities in the US.
HSBC and HNAH are generally prohibited
under the BHCA from acquiring, directly or
indirectly, ownership or control of more than 5 per
cent of any class of voting shares of, or substantially
all the assets of, or exercising control over, any US
bank, bank holding company or many other types
of depository institutions and/or their holding
companies without the prior approval of the Federal
Reserve Board and potentially other US banking
regulatory agencies.
The Gramm-Leach-Bliley Act of 1999
(‘GLBA’) and the regulations issued thereunder
contained a number of other provisions that affect
HSBC’s operations and the operations of all
financial institutions. One such provision contained
detailed requirements relating to the financial
privacy of consumers. In addition, the so-called
‘push-out’ provisions of GLBA removed the blanket
exemption from registration for securities activities
conducted in banks (including HSBC Bank USA)
under the Exchange Act of 1934, as amended. New
rules have been published to implement these
changes and, when effective, will allow banks to
continue to avoid registration as a broker or dealer
only if they conduct securities activities that fall
within a set of defined exceptions. A narrowed
‘dealer’ definition took effect in September 2003,
and a narrowed ‘broker’ definition will take effect
for each bank on the first day of its fiscal year
following 30 September 2008. Pursuant to the new
regulations, it is likely that certain securities
activities currently conducted by HSBC Bank USA
will need to be restructured or transferred to one or
more US-registered broker-dealer affiliates effective
from 1 January 2009.
The US is party to the 1988 Basel I Capital
Accord, and US banking regulatory authorities have
adopted capital requirements for US banks and bank
holding companies that are generally consistent with
the Accord.
The authorities have now published, on
7 December 2007, their final Basel II rules for credit
and operational risk. These require mandated
banking groups, which include HNAH, to have fully