Federal Reserve Allows First Chinese Government Takeover of U.S. Bank
Monday, May 14, 2012
In a “watershed moment” for the U.S. banking industry, the Federal Reserve has approved the first takeover of an American financial institution by the Chinese government.
Industrial & Commercial Bank of China Ltd. (ICBC), which is owned by the Communist government of China, will buy a controlling stake (80%) in the U.S. unit of Hong Kong-based Bank of East Asia Ltd., giving it ownership of 10 branches in California and three in New York.
“The deal is insignificant to ICBC’s operations but the implications are profound as it opens up the U.S. market to further expansion from ICBC,” Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., told Bloomberg News.
Werner called the decision by the Fed, which required approval from the U.S. Department of Justice, “a watershed moment, as it makes possible greater participation from other Chinese banks” in the U.S. banking sector.
ICBC has assets totaling $2.5 trillion and subsidiaries or branches throughout Asia as well as in Germany.
ICBC is one of the largest banks in the world, with $238 billion in market capitalization. But its strength and stability may be questionable, according to Bloomberg columnist Jonathan Weil.
“Much of [ICBC’s] capital consists of the remnants of bad loans dating to the 1990s,” wrote Weil.
“Either the Chinese government has become extremely skilled at lending in a very short time, and Chinese borrowers have become even better at repaying. Or the numbers are too good to be true, in which case the quality of the bank’s capital matters a great deal, as a gauge of its ability to absorb losses,” he added.
To Learn More:
ICBC Gets Fed Nod as Chinese Banks Seek U.S. Growth (by Jeran Wittenstein and Dakin Campbell, Bloomberg News)
Fed Clears China’s First US Bank Takeover (Agence France-Presse)
China’s Big Banks Look More Like Paper Tigers (by Jonathan Weil, Bloomberg)
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