Edge Act
Encyclopedia
The Edge Act is a 1919 amendment to the United States Federal Reserve Act of 1913,
codified as:
SUBCHAPTER II -- Organization of Corporations to do Foreign Banking, Sections 611-631
which allows National Bank
s to engage in international banking through federally chartered subsidiaries. The Act is named after Walter Evans Edge
, a U.S. Senator from New Jersey
who sponsored the original legislation for these types of subsidiaries. The impetus for the act was to give U.S. firms more flexibility to compete with foreign firms.
is a subsidiary of a Bank or Bank Holding Company or Financial Holding Company, that is chartered by the Federal Reserve under Section 25A of the Federal Reserve Act
, as amended in 1916 and 1919, to engage in foreign banking activities. The Federal Reserve Board authorizes U.S. and foreign banking and financial organizations to establish Edge Act Corporations. It also regulates and examines the foreign activities of Edge Act Corporations and their subsidiaries. Foreign banks operating in the U.S. are permitted to organize and own an Edge Act Corporation. An Edge Act Corporation is useful because, among other things, it separates the risks of domestic operations from those of international. Prior to 1919, U.S. institutions were not permitted to own foreign banks. An EAC can own branches in the U.S., but may only conduct transactions directly linked to international trade.
An Agreement Corporation is chartered by a state to engage in international banking (essentially a state-chartered EAC, so named because the corporation enters into an "agreement" with the Fed's Board of Governors to limit its activities to those of an Edge Act Corporation, as if organized under Section 25A of the Federal Reserve Act. In reality, state supervision is superfluous, so Edge Act Corporations (rather than Agreement Corporations) are the vehicles of choice for international banking and financing operations.
Investment Edges expand the types of companies in which their parent banks may invest. By law, U.S. banks may invest abroad only in other banking organizations. However an Edge Act Corporation may invest in any type of foreign company, as long as it does not engage in business in the United States, including making any domestic loans. Banking Edges extend the geographic reach of their parents because an Edge was not considered a bank and hence was not subject to the same interstate banking prohibitions. Thus in the 1960s, the trend was for banks from outside the state of New York
to form Banking Edges and locate them in New York City
for conducting international banking and for trading in foreign exchange. In the 1970s and 1980s, the trend was toward expansion into regional financial centers, such as Miami, Chicago, and San Francisco.
Legislation in the mid-1990s, providing for the removal of Federal Interstate Branching, restrictions undermined the appeal of Banking Edges, and their relative importance in international banking has therefore declined. Major disadvantages of a Banking Edge, compared with an agency, are the smaller size of its loans (due to its smaller capital base, compared with that of the agency's parent bank) and the limitation of domestic lending ability to international or foreign business transactions. Of the 82 Edge and Agreement Corporations in operation at year-end 1999, 27 were Banking Edges located mostly in New York City and Miami with total assets of $18 billion.
In 1999, these institutions accounted for 81.6 percent of all assets (source: Board of Governors, Federal Reserve System
).
In official documents, reference to an Edge Act Corporation typically mentions the state or city where it is domiciled.
codified as:
SUBCHAPTER II -- Organization of Corporations to do Foreign Banking, Sections 611-631
which allows National Bank
National bank
In banking, the term national bank carries several meanings:* especially in developing countries, a bank owned by the state* an ordinary private bank which operates nationally...
s to engage in international banking through federally chartered subsidiaries. The Act is named after Walter Evans Edge
Walter Evans Edge
Walter Evans Edge was an American politician. A Republican, he was twice the Governor of New Jersey, from 1917 to 1919 and again from 1944 to 1947, serving as governor during both World War I and World War II...
, a U.S. Senator from New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
who sponsored the original legislation for these types of subsidiaries. The impetus for the act was to give U.S. firms more flexibility to compete with foreign firms.
Edge Act Corporation (EAC)
An Edge Act CorporationEdge Act Corporation
An Edge Act Corporation is a corporation chartered by the Federal Reserve of the United States under the Edge Act to engage in international banking operations. The Federal Reserve Board acts upon applications by U.S. and foreign banking organizations to establish Edge corporations...
is a subsidiary of a Bank or Bank Holding Company or Financial Holding Company, that is chartered by the Federal Reserve under Section 25A of the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
, as amended in 1916 and 1919, to engage in foreign banking activities. The Federal Reserve Board authorizes U.S. and foreign banking and financial organizations to establish Edge Act Corporations. It also regulates and examines the foreign activities of Edge Act Corporations and their subsidiaries. Foreign banks operating in the U.S. are permitted to organize and own an Edge Act Corporation. An Edge Act Corporation is useful because, among other things, it separates the risks of domestic operations from those of international. Prior to 1919, U.S. institutions were not permitted to own foreign banks. An EAC can own branches in the U.S., but may only conduct transactions directly linked to international trade.
Structure
By virtue of historical developments and funding considerations, an Edge Act Corporation is a domestic subsidiary that is generally held by a U.S. Member Bank; however, it may also be held directly by the Bank Holding Company or Financial Holding Company. As of the International Banking Act of 1978 (IBA), an Edge Act Corporation may also be held by a Foreign Bank.Types
- Banking Edge or Agreement Corporation, which is directly under control of a U.S. Member Bank or Bank Holding Company, can receive deposits (without Federal Deposit Insurance CorporationFederal Deposit Insurance CorporationThe Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
coverage) from, and make loans to, companies engaging in international business. This structure allows foreign branches of U.S. Banks.
- Investment Edge or Agreement Corporation functions as an investment company, taking equity positions in foreign commercial and industrial organizations;
An Agreement Corporation is chartered by a state to engage in international banking (essentially a state-chartered EAC, so named because the corporation enters into an "agreement" with the Fed's Board of Governors to limit its activities to those of an Edge Act Corporation, as if organized under Section 25A of the Federal Reserve Act. In reality, state supervision is superfluous, so Edge Act Corporations (rather than Agreement Corporations) are the vehicles of choice for international banking and financing operations.
Investment Edges expand the types of companies in which their parent banks may invest. By law, U.S. banks may invest abroad only in other banking organizations. However an Edge Act Corporation may invest in any type of foreign company, as long as it does not engage in business in the United States, including making any domestic loans. Banking Edges extend the geographic reach of their parents because an Edge was not considered a bank and hence was not subject to the same interstate banking prohibitions. Thus in the 1960s, the trend was for banks from outside the state of New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
to form Banking Edges and locate them in New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
for conducting international banking and for trading in foreign exchange. In the 1970s and 1980s, the trend was toward expansion into regional financial centers, such as Miami, Chicago, and San Francisco.
Legislation in the mid-1990s, providing for the removal of Federal Interstate Branching, restrictions undermined the appeal of Banking Edges, and their relative importance in international banking has therefore declined. Major disadvantages of a Banking Edge, compared with an agency, are the smaller size of its loans (due to its smaller capital base, compared with that of the agency's parent bank) and the limitation of domestic lending ability to international or foreign business transactions. Of the 82 Edge and Agreement Corporations in operation at year-end 1999, 27 were Banking Edges located mostly in New York City and Miami with total assets of $18 billion.
Largest Edges
As of 1999, the three largest Edges were all holding companies under the Federal Reserve Regulatory District of New York.- HSBC International Finance Corporation, a Financial Edge (Wilmington, Delaware)
- HSBC Holdings plc (London)
- Citibank International, a Banking Edge (Miami)
- Citigroup Inc. (New York)
- Banco Santander International, a Banking Edge (Miami)
- Banco Santander Central Hispano, S.A. (Madrid)
In 1999, these institutions accounted for 81.6 percent of all assets (source: Board of Governors, Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
).
In official documents, reference to an Edge Act Corporation typically mentions the state or city where it is domiciled.