Edge Act and agreement corporations

Edge Act and agreement corporations are subsidiaries of American banks that are physically located in the United States, but they engage in international banking operations. The Edge Act of 1919 allows American banks to perform as holding companies and to own stock of foreign banks. Thus, these banks can provide loans and other banking services for American-owned companies in most countries around the world. Edge Act corporations are domestic subsidiaries of banking organizations chartered by the Federal Reserve Board; agreement corporations are Edge Act equivalents chartered by individual states. Both types of subsidiaries may not only perform international banking operations, but they may also finance foreign industrial projects through long-term loans or equity participation.

Types of activities Edge Act and agreement corporations typically engage in three types of activities: international banking, international financing, and holding companies. In their capacity as international banking corporations, Edge Act and agreement corporations may hold demand and time deposits of foreign parties. They can make loans, but these loans to any single borrower cannot exceed 10 percent of their capital and surplus. They can also open or confirm letters of credit, make loans or advances to finance foreign trade, create bankers' acceptances, receive items for collection, remit funds abroad, buy or sell securities, issue certain guarantees, and engage in foreign-exchange transactions.

In their capacity as international financing corporations, Edge Act and agreement corporations invest in the stock of nonbank financial concerns, development corporations, or commercial and industrial companies. Certainly, such investments require the prior specific consent of the Federal Reserve Board or state banking authorities under certain circumstances. Edge Act subsidiaries have financed some foreign finance companies and official development corporations. In most cases, however, they finance commercial and industrial companies directly through loans and equity contributions. The major purpose of such financing activities is to provide promising foreign companies with capital at an early or important stage.

In their capacity as holding companies, Edge Act and agreement corporations can own shares of foreign banking subsidiaries and affiliates. Member banks of the Federal Reserve System are not permitted to own shares of foreign banking subsidiaries. A foreign banking subsidiary may be more advantageous than a branch for two reasons. First, foreign branches are allowed to carry on only the activities allowed to their parent banks in the USA. Second, certain countries do not permit nondomestic banks to open branches in their territory. In other instances, Edge Act and agreement corporations have been the instrument through which US banks have acquired equity interests in well-known foreign banks.

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