What is an Agency Bank?

The term "agency bank" can be used to describe a bank acting as an agent on behalf of an individual or another financial institution. When operating as agents of other banks, agency banks are incorporated domestically in the United States to provide foreign banks with access to the US financial market. Their activities on their own are limited, as they are created solely to act as agents, not independent banks.

An agency bank does not accept deposits or make loans. It processes payments and activities on behalf of the foreign bank. It also issues American Depository Receipts (ADRs), allowing people to trade foreign stock on the US stock market. ADRs represent stock shares held in trust by the parent bank. People can buy and trade ADRs in US currency, receive dividends in US dollars, and avoid risks posed by currency fluctuations and the cost of currency conversions. ADRs are traded just like other types of securities on the US stock market.

Using an agency bank allows a foreign bank to engage in financial activity on US soil. People in the United States who want to do business with the parent bank can do so through the agent, with representatives at the agency bank taking care of issues like currency exchange, transfers of funds, and so forth. In addition to providing access to the financial industry in the United States, the agency bank also creates a method for investors in the US to access securities and other opportunities overseas with limited risk.

This type of bank is usually clearly identified in the name so consumers do not confuse it with a traditional depository institution where they can open accounts and use the bank for deposits, withdrawals, and financing. The parent bank is often referenced or named outright in the title so people know which bank it is associated with. Generally, large foreign banks use agency banks, because they are the most interested in expanding their financial activities and they can trade on the reputation of their names to build up business in the United States.

Like other banks incorporated in the United States, an agency bank is subject to financial regulation. The financial regulations in the parent bank's home nation are not applied, although the bank may need to take special steps to satisfy regulators in both countries since the agency bank is a subsidiary of the overseas original.