Fed OKs China-controlled banks as holding companies

WASHINGTON (Reuters) - The Federal Reserve on Wednesday approved applications by three big Chinese government-controlled banks to set up branches and take stakes in U.S. banks after deciding they were adequately regulated in their home market.

The U.S. central bank said Industrial and Commercial Bank of China Ltd (ICBC), the biggest bank in China and 70.7 percent owned by the government of China, will become a bank holding company.

In addition, China Investment Corporation (CIC), an investment vehicle set up by the Chinese government to invest its massive foreign exchange reserves, and another company that CIC controls called Huijin Investment Ltd. will be allowed to become bank holdings companies.

They will become holding companies by taking control of The Bank of East Asia (U.S.A.) in New York, the first time a Chinese bank has been approved to acquire a U.S. bank.

ICBC has total assets worth an estimated $2.5 trillion.

Karen Petrou, a banking analyst with Washington Research Group, said that by becoming bank holding companies, the Chinese firms will be "ring fenced" from their home-country supervisors and will be subject to U.S. law and supervision.

The announcement comes days after the annual Strategic and Economic Dialogue talks in Beijing where U.S. officials said China agreed to raise foreign ownership limits in domestic joint venture firms that trade in commodity and financial futures.

The Fed decision said it had concluded that ICBC was subject to comprehensive, consolidated supervision by Chinese regulators, a finding that was necessary before Chinese banks could be permitted to take U.S. deposits or own U.S. banks.

China has amassed huge foreign exchange reserves, largely in the form of U.S. dollars, through the persistent annual surpluses that it runs up on bilateral trade with the United States.

Petrou noted that the fact CIC invests those reserves for China may have made the proposal for it to become a holding company look attractive to U.S. investors, but said that was not a key factor.

In other decisions, the Fed approved a bid by Bank of China Ltd, the third largest Chinese bank, to expand its U.S. presence by setting up a branch in Chicago. The bank, which is 71 percent-owned by the Chinese government, already has two branches in New York and a limited branch in Los Angeles.

Bank of China Ltd has assets of $1.87 trillion.

The fourth largest bank in China, Agricultural Bank of China Ltd, was given Fed approval to set up a branch in New York. It is 83 percent-owned by the government of China and has assets of $1.85 trillion.

(Editing by Andrew Hay, Gary Crosse)