In light of the “living will” resolution plan requirements that were recently promulgated as part of the 2010 Dodd-Frank legislation, large foreign banks doing business in the U.S. should pay close attention to applicable ring-fencing regimes in the U.S. such as the New York bank insolvency law, which includes a ring-fencing provision.
The New York law allows the superintendent of the New York State Department of Financial Services to seize certain assets of foreign banks doing business in New York for the benefit of creditors of their New York branches and agencies. The law doesn’t apply to domestic U.S. banks, which are subject to receivership by the Federal Deposit Insurance Corp. To underscore the effectiveness of the New York law, every liquidation of a foreign branch or agency ever completed under the law has resulted in every New York creditor of such branch or agency having claims paid in full.
If the superintendent determines that, among other things, a foreign banking organization, called an FBO, is in liquidation either in its home country or elsewhere or that there is reason to doubt an FBO’s ability or willingness to pay the claims of its New York creditors, he may, at his discretion, take possession of the “business and property” in New York of any FBO that has been licensed in New York. “Business and property” in New York State includes all property of the FBO (a) located anywhere in the world that constitutes part of the business of the New York branch or agency and (b) located within New York regardless of whether it is part of the business of the New York branch or agency.
Upon taking possession of such property, title to the acquired property vests with the superintendent by operation of law and the superintendent then begins the process of liquidating the “business and property” in accordance New York banking law.
The superintendent is required to notify anyone who may have a claim against the FBO to present such claim for consideration. New York law permits the superintendent to accept only those claims of the FBO’s creditors that arise out of transactions that were “had” with the FBO’s New York branches and agencies. The superintendent is also not permitted to accept any claim which would not represent an enforceable legal obligation against such branch or agency if such branch or agency were a separate and independent legal entity or any claim that is not reflected in the books and records of the branch or agency or that are not presented with sufficient documentary evidence from the creditor.
New York law requires a lengthy and detailed statutorily mandated process of accepting and prioritizing claims, which is administered by the superintendent and overseen by the New York courts. After all permitted New York claims have been paid, any remaining assets are then turned over to other U.S.-based offices of the foreign bank that are being liquidated in the U.S. After all U.S. claims have been paid, any remaining assets are then turned over to the principal office of the FBO or its home country liquidator/receiver.
The superintendent may, at his discretion, repudiate certain contracts, including qualified financial contracts, or “QFCs” (other than those subject to a multi-branch netting agreement) and real estate leases to which the New York branch or agency of an FBO is a party. Perfected security interests are not disturbed by the New York law. If a party to a QFC with the branch or agency has a valid lien or security interest related to such QFC, they may retain that collateral to satisfy claims against the branch or agency. The superintendent’s taking possession and liquidation of an FBO puts into effect an automatic stay with respect to certain actions and proceedings. This stay does not affect, among other things, perfected security interests, rights of set-off or automatic terminations of QFCs.
At its most benign, the NY ring-fencing statute becomes an added wrinkle in liquidations involving the branches and agencies of foreign banks in New York. At a more practical level, it often acts to tie up the assets of liquidating foreign banks in New York for lengthy periods of time, thereby depriving the home country liquidator and its creditors of much needed liquidity while providing recognized creditors of the New York branch or agency with ample assets against which to assert their claims.