China Investment Corp., or CIC, and other Chinese entities were permitted to acquire an 80% stake in New York's Bank of East Asia (U.S.A.) NA. CIC manages a portion of China's huge foreign exchange reserves.

The Fed action Wednesday was the first time U.S. banking regulators allowed Chinese majority ownership of a U.S. bank, although Chinese companies have been permitted to own minority stakes and Chinese banks have been permitted to set up branches here.

Bank of East Asia has been owned by Hong Kong-based Bank of East Asia Ltd. and subsidiary East Asia Holding Co. The two bank holding companies will continue to own 20% of the voting shares of the bank after the transaction.

BEA (U.S.A.) has total consolidated assets of about $780 million and deposits of about $621 million. It focuses on retail and commercial banking in the U.S. and operates 13 branches in New York and California.

The 80% ownership will be spread among CIC, CIC-controlled Central Huijin Investment Ltd. and state-owned Industrial and Commercial Bank of China Co. Ltd. To win approval, each entity was required to become a bank holding company subject to Fed oversight.

BEA Ltd. has an option to sell the remaining shares of BEA (U.S.A.) to ICBC, beginning 18 months after consummation of the transaction.

Separately Wednesday, the Fed also allowed the Agricultural Bank of China Ltd. to establish a branch in New York and the Bank of China Ltd. to have a branch in Chicago.

In carrying out its obligation to judge whether China's regulatory and accounting standards are adequate, the Fed conceded that China was deemed "materially noncompliant" in two of 30 areas of financial stability ranked by the International Monetary Fund, but it noted that the U.S. has also received the same two noncompliant findings and that China's ranking surpassed both the U.K. and Germany.

The Fed added that the country's adherence to international capital standards is "in satisfactory compliance with the Basel Core Principles" despite having areas that need "further improvement."

The Fed dismissed calls for a public hearing on the acquisition on grounds that the large volume of public comments submitted in regards to the deal was sufficient to air most conceivable concerns about it.

Many of those concerns were addressed in the 64 footnotes included in the Fed's 32-page order. The Fed noted that China bank regulators have signed on to international agreements designed to combat money laundering and terrorist financing. It also noted that ICBC already operates a state-licensed branch in New York City and owns New York-based Industrial and Commercial Bank of China Financial Services LLC.

ICBC, with total assets of about $2.5 trillion, is the largest bank in China. The government of China owns about 71% of ICBC's shares through the Ministry of Finance, CIC and Central Huijin.

The Fed dismissed suggestion that the government of China must itself become a U.S. bank holding company because it controls the sovereign wealth fund on grounds that foreign governments are not "companies" for purposes of the Bank Holding Company Act and, therefore, are not covered.

Regarding complaints that the acquisition raised national security concerns, the Fed said "other U.S. agencies," namely, the Committee on Foreign Investment in the United States, has responsibility for reviewing national security issues raised by foreign acquisitions of U.S. companies.

ICBC and the Bank of China were represented by White & Case LLP partners Francis Zou, John Reiss, Ernie Patrikis and Steve Teichman. "The ICBC approval positions the bank to provide financial services to middle- and small-size firms and individuals," Patrikis said.

The additional approval of the Bank of China's Chicago branch shows the Fed is willing to let Chinese banks offer wholesale financial services more widely in the United States, he added.

The approvals come a week after the U.S. and China's economic dialogue in China. The countries agreed to alleviate a number of sensitive issues regarding investments within each other's borders. In a statement U.S. officials said they "welcome foreign investment in all sectors, including the financial sector." They pledged to apply the same prudential and regulatory standards to applications made by Chinese banks and other financial firms as they do to other foreign financial institutions.

"A signal has been sent that the U.S. banking market is continuing to open for branching and acquisitions and other equity investments by mainland Chinese banks in particular and international banks in general," Patrikis said. "Chinese banks have sufficient market capitalizations and liquidity to bolster bank finance in U.S. financial markets."