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Federal Reserve approves China's bank takeover

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FRB Order No. 2012-4 - 1 - (May 9, 2012)

 

FEDERAL RESERVE SYSTEM

 

Industrial and Commercial Bank of China Limited

China Investment Corporation

Central Huijin Investment Ltd.

Beijing, People’s Republic of China

Order Approving Acquisition of Shares of a Bank

 

Industrial and Commercial Bank of China Limited (“ICBC”), China Investment Corporation (“CIC”), and Central Huijin Investment Ltd. (“Huijin”), all of Beijing, People’s Republic of China (collectively, “Applicants”), have requested the Board’s approval to become bank holding companies under section 3 of the Bank Holding Company Act of 1956, as amended (“BHC Act”),1 by acquiring up to 80 percent of the voting shares of The Bank of East Asia (U.S.A.) National Association (“BEA-USA”), New York, New York.

 

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (76 Federal Register 21367 (April 15, 2011)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

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Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (76 Federal Register 21367 (April 15, 2011)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

 

ICBC, with total assets of approximately $2.5 trillion, is the largest bank in China.3 The government of China owns approximately 70.7 percent of ICBC’s shares through the Ministry of Finance and CIC and Huijin.4 No other shareholder owns more than 5 percent of ICBC’s shares.

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The Bank of East Asia, Limited (“BEA”), Hong Kong SAR, People’s Republic of China, and its subsidiary, East Asia Holding Company, Inc. (“EAHC”), New York, New York, both bank holding companies, currently own all the voting shares of BEA-USA and will continue to own 20 percent of the voting shares of the bank after the proposed transaction. BEA and EAHC will continue to be bank holding companies with respect to BEA-USA. BEA has an option to sell the remaining shares of BEA-USA to ICBC, beginning 18 months after consummation of the transaction.

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The Bank of East Asia Limited (Chinese: 東亞銀行有限公司) (SEHK: 0023, OTC Pink: BKEAY) often abbreviated to BEA, is the largest independent local bank and the third largest bank in Hong Kong. Its chairman and chief executive is Sir David Li. Its head office is in Central.

 

It was founded in Hong Kong in 1918 by the grandfather, Li Koon-chun (李冠春), and great uncle of the present chairman, David Li. Today the company has a market capitalization of HK$68.4 billion (US$8.5 billion), as at 27 February 2011, with consolidated assets of US$50.85 billion (as at 30 June 2008). It is listed on the Hong Kong Stock Exchange as BEA. The Bank of East Asia has 91 retail branches in Hong Kong, as well as 60 in mainland China and around 30 in the United States, Canada and Britain. Worldwide, the bank employs more than 10,800 people.

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ICBC engages primarily in retail and commercial banking throughout China, including Hong Kong SAR and Macau SAR. Outside China, ICBC operates subsidiary banks in Canada, Indonesia, Kazakhstan, Luxembourg, Malaysia, Thailand, Russia, the United Arab Emirates, and the United Kingdom and operates branches in a number of countries, including Australia, Germany, India, Japan, Luxembourg, Pakistan, Singapore, South Korea, Vietnam, Qatar, and the United Arab Emirates. In the United States, ICBC operates an uninsured state-licensed branch in New York City and owns Industrial and Commercial Bank of China Financial Services LLC (“ICBCFS”), New York, New York, a registered broker-dealer that engages in securities brokerage and riskless principal activities.5 ICBC is a qualifying foreign banking organization and upon consummation of the proposal, it would continue to meet the requirements for a qualifying foreign banking organization under Regulation K.

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CIC is an investment vehicle organized by the Chinese government for the purpose of investing its foreign exchange reserves. CIC controls Huijin, a Chinese government-owned investment company organized to invest in Chinese financial institutions.7 In addition to ICBC, Huijin owns controlling interests in two Chinese banks that operate banking offices in the United States: Bank of China Limited and China Construction Bank Corporation, both also of Beijing.8 Under the International Banking Act, any foreign bank that operates a branch, agency, or commercial lending company in the United States, and any company that controls the foreign bank, is subject to the BHC Act as if the foreign bank or company were a bank holding company.9 As a result, CIC and Huijin are subject to the BHC Act as if they were bank holding companies.10 Through the proposed acquisition of BEA-USA, Applicants would become bank holding companies under the BHC Act.

 

BEA-USA, with total consolidated assets of approximately $780 million and deposits of approximately $621 million,11 engages in retail and commercial banking in the United States. BEA-USA operates 13 branches in New York and California.

 

Competitive Considerations

 

The Board has considered the competitive effects of the proposal in light of all the facts of the record. Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be in furtherance of any attempt to monopolize the business of banking in any relevant banking market. The BHC Act also prohibits the Board from approving a proposal that would substantially lessen competition in any relevant banking market, unless the anticompetitive effects of the proposal clearly are outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs of the community to be served.

 

BEA-USA operates in New York and in California. As noted, Bank of China Limited maintains insured branches in New York City that compete directly with BEA-USA in the metropolitan New York-New Jersey-Pennsylvania-Connecticut (“Metropolitan New York”) banking market.13 CIC also owns a noncontrolling interest in Morgan Stanley, which competes in that market. The Board has reviewed the competitive effects of the proposal in the Metropolitan New York banking market in light of all the facts of record. In particular, the Board has considered the number of competitors that would remain in the banking market, the relative shares of total deposits in depository institutions in the market (“market deposits”) controlled by relevant institutions,14 and the concentration level of market deposits and the increase in that level as measured by the Herfindahl-Hirschman Index (“HHI”) under the Department of Justice Merger Guidelines (“DOJ Guidelines”) as if CIC controlled Morgan Stanley.

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