Perspectives on Foreign Banking in the United States
Foreign Banking in the United States
Perspectives on Foreign Banking in the United States
Henry C. Wallich 0
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Perspectives on Foreign Banking in the
THE GROWTH OF FOREIGN BANKING
Foreign banking has had a great expansion in the United States.
This evolution has been accompanied by a variety of questions and
concerns on the part of the public, American legislators and regulators, and
American bankers. Many of these concerns have been allayed by the
passage of the International Banking Act.1 Some nevertheless remain.
To evaluate them, I will begin by setting forth the benefits that foreign
banks have brought to the United States. Then I will take a look at the
principles that have guided and, I believe, should continue to guide
United States' policy in this regard.
Foreign banks have made major contributions to the American
financial scene. Over the last nine years, the number of foreign banking
offices in the United States has grown from about 120 to just over 500.
The volume of their assets has grown from about $30 billion to about
$290 billion.2 This means a rise from less than four percent of total
* Member, Board of Governors of the Federal Reserve System.
t The original manuscript was submitted for publication in 1983.
International Banking Act of 1978, Pub. L. No. 95-369, 92 Stat. 607 (1979) (codified in
scattered sections of 12 U.S.C. (1982)).
2 The author obtained these figures from unpublished tabulations. For comparable data
coverbanking assets to about fifteen percent over these nine years. If we apply
these ratios to the foreign banks' share in the assets of all depositary
institutions, the increase has been from about 2.5% to about 10%.
Given the prospect for increasing "homogenization" of depositary
institutions in the United States, the more broadly based ratios are perhaps
the more meaningful ones.
In evaluating growth of a market share, one should bear in mind
that growth, after overcoming some initial obstacle, tends to accelerate to
a maximum and then to slow down. Growth rates are highest when they
Branches and agencies $22.2 76 $148.0 322 $125.8 246
Subsidiary U.S. banks 4.7 34 65.4 104 60.7 70
Total 26.9 110 213.4 426 186.5 316
Percent of domestic
banking industry' 3.6 .8 12.5 2.8 8.9 2.0
I The denominator is total domestic assets of all U.S. insured commercial banks, plus those
of U.S. branches and agencies of foreign banks.
are measured from a small base. For example, penetration of foreign
markets by American banks abroad, which, of course, began long before
foreign banks started to expand intensively in the United States, now has
slowed. I expect that the progress of foreign banking activity in the
United States will follow a similar pattern.
Foreign banks, and their home countries, have benefited from entry
into the United States in ways as varied as their reasons for entering.
Foreign banks have been better able to serve their home-country
customers as the latter expanded their international operations. They have
gained direct access to the largest economy in the world. In some cases,
they have made attractive acquisitions by being able to buy the stocks of
American banks at depressed prices. And, before the passage of the
International Banking Act, and in a small degree even thereafter, foreign
banks have enjoyed competitive advantages with respect to American
banks regarding interstate banking. Through grandfathering-the
practice of allowing the continuance of already existing institutions and
arrangements that otherwise would violate new law and regulation-some
of these earlier advantages have been preserved.
II. THE BENEFITS BROUGHT BY FOREIGN BANKING
Foreign banks have brought many important benefits to the United
States. In the domestic sphere, they have brought innovation and
increased competition. For example, they have introduced new pricing
techniques. At a time when prime-rate pricing of loans had become
increasingly less consonant with the realities of the marketplace and,
unfortunately, with the realities of inflation, foreign banks helped to bring
about alternative pricing techniques, such as pricing on the London
Interbank Offer Rate (LIBOR) and other money-market rates. Also, at a
time when the capital position of many large American banks was
becoming increasingly strained, foreign banks contributed to the
capitalization of several United States banks through acquisition. Even when
foreign banks entered as branches and agencies rather than through
acquisition, they nevertheless contributed, by virtue of their home-office
capital, to the total capital base underlying the structure of bank deposits
in the United States. In some cases, foreign banks also have played a
significant role in meeting banking needs of particular ethnic groups in
the United States.
Before the passage of the International Banking Act, it was
sometimes thought that foreign banks, by taking advantage of the opportunity
for multi-state operations, might spearhead a relaxation of restraints on
the geographic expansion of American banks. While the International
Banking Act took the opposite approach, by limiting multi-state
activities of foreign banks rather than easing restraints on American banks, the
continuing wide-ranging discussion of the McFadden Act may have
gained impetus from the earlier example of foreign bank multi-state
In addition, foreign banks have on occasion helped to resolve
problems created by American law with respect to the acquisition of
problem banks. Large problem banks in some cases could not have been
acquired by American banks because of the prohibition on interstate
mergers and acquisitions, or because of the limitation on anti-competitive
mergers and acquisitions within individual states. I must add that this
represents only a relative benefit for the United States, given that it
provided a solution to a problem that was clearly of American making.
Foreign banks have also brought advantages to the United States in
the international sphere. In trying to create a stronger dollar base for
their own international operations, foreign banks have helped to solidify
the international role of the dollar. The strengthening of the commercial
role of the dollar and the enhancement of American banking markets as
world financial centers, together with the implied expression of
confidence in the dollar and in the United States' economy generally, are
heartening, even though under a regime of floating exchange rates the
United States no longer has a strong interest in the reserve currency role
as such of the dollar. Together with the expansion of American banking
abroad, the growth of foreign banking in the United States has helped to
round out the process of integration of the United States into the world's
III. A DOLLAR BASE
Since creation of a dollar base is so often mentioned as an important
motive for entry into the United States by a foreign bank, I will digress
for a moment on this topic. It is, of course, understandable and, indeed,
desirable for a nondollar bank that makes dollar loans and issues dollar
liabilities in international markets to seek reliable access to dollar
funding. A presence in United States financial markets can be helpful in this
regard. Whether that presence is in the form of a subsidiary, a branch, or
an agency, the entity can have access to a very large and flexible market.
The flow of funds into this market comes from many sources and
provides very elastic accommodation to a reputable borrower.
United States subsidiaries of foreign banks have access to the
discount window of the Federal Reserve like other American banks. Since
the passage of the International Banking Act, United States branches and
agencies of foreign banks also have had access to the discount window.
Access of agencies and branches is governed by the principle of "national
treatment" which means that foreign banks' access will be on the same
terms as access of a domestic bank. These entities, like their United
States counterparts, can use the discount window to meet short-term
liquidity needs after reasonable alternative sources of funds have been fully
used. As a practical matter, foreign-related institutions have rarely had
the need to turn to the discount window. They cannot expect to draw on
this source, for instance, to meet obligations of a foreign parent or head
office. Indeed, where United States-chartered subsidiaries of foreign
banks are concerned, as is the case of domestic bank holding company
subsidiaries, the regulatory authorities expect the parent to be a source of
strength to its subsidiary bank in the United States. United States
regulatory authorities seek to maintain information adequate to demonstrate
that this is the case. Flows of funds between the foreign parent and its
United States subsidiary are monitored through the confidential Y-8F
report while a similar confidential schedule in the quarterly condition
report is maintained for branches and agencies.
IV. NATIONAL TREATMENT
The openness of the American economy to foreign banks is
exemplified by the principle of national treatment underlying the International
Banking Act. Foreign banks are allowed to do in the United States what
American banks are allowed to do. The United States does not place
greater limitations on foreign banks than on domestic banks, as some
countries do, sometimes to the extent of totally excluding foreign banks
from the local market.
National treatment, nevertheless, cannot cross every T and dot
every I. The practice of grandfathering has given some foreign banks
competitive advantages with respect to American banks and foreign
banks entering after the date of the International Banking Act. More
liberal bank legislation and regulation abroad, moreover, can carry over
to the benefit of foreign bank operation in the United States. Differences
in capital ratios, in reserve requirements, and in the scope of permissible
activities may affect funding costs and competitive relationships of their
foreign subsidiaries and branches. Perfection must not be looked for in
The United States treats foreign banks in the way it does because it
is beneficial to the United States. The benefits that I have listed do not
depend on reciprocity. It is sometimes thought that "concessions" made
to foreigners are beneficial only if matched by reciprocal concessions
from the other side. This may be a concept carried over from reciprocal
trade negotiations, in which concessions of hopefully equal value are
exchanged. But while reciprocity may be an effective technique for
extracting benefits for American exporters and for the American economy,
it is not a proper rationale for either United States trade policy or
banking policy. The benefits to the United States of buying foreign goods and
foreign banking services are the same, whether or not there is reciprocity.
The American consumer receives cheaper and better goods and services.
American producers and bankers are led to concentrate on activities in
which they are more productive. A foreign country refusing to offer
reciprocity in the treatment of foreign goods and services injures primarily
itself. In principle, absence of reciprocity is not an economically valid
reason to provide less than national treatment to foreign goods and
foreign banking services.
Nevertheless, the absence of reciprocity in offering national
treatment is not optimal. The country denying such reciprocity to the United
States damages not only itself but also American exporters and American
banks. Such a country fails to make its fair contribution to the
achievement of an integrated world economy. Its action creates disappointment
and frustration because a constructive policy on the part of the United
States did not encounter a response in kind.
Under the law, responsibility for the supervision of bank holding
companies has been assigned to the Federal Reserve Board.' That
responsibility runs to all bank holding companies whether domestically or
The Board outlined its approach to the supervision of foreign bank
holding companies in a policy statement issued in February 1979.' The
central theme of that statement is that the Board's primary concerns are
with the operations and activities conducted in the United States and
that its supervisory efforts would be so directed. The Board's interest in
the foreign parent organization or the foreign owners lies principally in
their capability to serve as a continuing source of strength to the banking
operations in the United States.
Since that statement appeared three and one-half years ago, the
Board has implemented it in several ways.5 First, before approving the
3 12 U.S.C. § 1841 et seq. (1982).
4 Press Release of the Board of Governors of the Federal Reserve System (Feb. 23, 1979),
reprinted in 1 FED. RESERVE REG. SERVICE 4-835.
5 12 C.F.R. § 255.5(b) (1983) as authorized by the Bank Holding Company Act of 1982, 12
establishment of a foreign bank holding company, the Board assures
itself of the financial and managerial resources of the foreign organization.
Second, the Board has established annual reporting requirements
through which foreign bank holding companies submit information that
permits the Board to appraise the financial condition of the foreign
organization on a continuing basis. Third, a reporting system has been put
in place that monitors transactions between the United States bank and
the foreign parent organization on a quarterly basis. Fourth, foreign
bank holding companies are required to report any nonbank activities
commenced in the United States and the authority under which they are
A primary supervisory tool in the case of domestic bank holding
companies is the examination or inspection process. It is also an
important supervisory tool in the case of foreign bank holding companies,
although there are some differences in the ways it is employed.
For the most part, foreign bank holding companies are foreign
banking organizations. As such, they are usually the major banks in their
home countries, they are supervised by foreign banking authorities, and
they have a recognized reputation in the international market place.
These banks acknowledge that they are guests in this country and are
anxious to remain in good standing by adhering to the rules and
regulations to which they are subject. For these reasons, the Board has not
been confronted with serious problems in supervising the United States
activities of these companies.
By contrast, where United States banks are controlled by foreign
individuals, certain supervisory problems do arise. One relates to the
initial entry of the foreign investors in seeking to acquire or establish a
bank. Another problem relates to the supervision of the continuing
operations of those banks, once they have been acquired. It should be noted
that these problems also exist when domestic individuals acquire banks.
On the whole, the banks owned by foreign individuals have been
managed well and have posed few supervisory problems; however, there
have been exceptions.
CONCERNS ABOUT FOREIGN BANKING
Occasional disappointment and frustration about foreign reaction to
United States entry policies would be less serious if other circumstances
that cast a shadow upon the very open policy of the United States in the
U.S.C. § 1844(c) (1982) and the International Banking Act of 1978, 12 U.S.C. §§ 3106, 3108(a)
banking area did not exist. Banking, whether we like it or not, is a
sensitive business. That is documented by the heavy regulation imposed in
the United States and elsewhere, to a degree. Foreign ownership touches
particularly sensitive nerves in many places. Some in Congress and
various elements in industry and the general public are concerned that,
despite the International Banking Act, foreign banks may continue to enjoy
legal advantages over American banks. These groups fear that in some
cases a foreign owner may abuse his bank for the benefit of his other
business interests. They believe that some foreign banks may be less
responsive to the needs of local communities and other customers that
were served by the bank before it came under foreign control. With the
advent of control over banks by foreign governments that may employ
these banks in pursuit of political objectives, new concerns could arise.
The available evidence goes far to allay many of these concerns.
Such attentions are mainly directed toward that portion of foreign
banking activity in the United States that is conducted through United
Stateschartered subsidiaries. This amounts to about one-quarter of the total,
whereas the remaining three-quarters is conducted through agencies and
branches. The United States-chartered subsidiaries in many instances do
a retail business, which serves to focus most of the existing uneasiness on
them. By contrast, agencies and branches deal principally at a wholesale
level. Nonetheless, the evidence concerning foreign owned or controlled
banks seems to show that the concerns I have mentioned generally have
not materialized. On the contrary, foreign banks appear to be very
sensitive to the need to be good financial citizens.
The findings show that banks taken over by foreign interests
generally have become stronger banks, although on average they are less
strong than American-owned banks because many of them were problem
institutions when acquired. The evidence shows further that profitability
improved after foreign takeover, although for the same reason it
averaged below the profitability of domestically owned banks. Lending
activity as a whole was approximately in line with that of their domestic
competitors. Moreover, there was no evidence that the acquired banks
are less responsive to consumer needs. Purchases of state and municipal
securities declined relative to those of domestically owned banks, but this
may reflect a lesser need for tax-exempt income because of low earnings.6
Nevertheless, recent acquisitions of large American banks by foreign
6 Houpt, supra note 2, at 149-56.
bank holding companies have caused concern at the regulatory and
supervisory and also at the congressional level. In approving the
acquisition of Crocker National Corporation by Midland Bank Limited, the
Federal Reserve Board noted that ". . . there is no statutory authority
in the Bank Holding Company Act for taking into account the
nationality of the acquiring company and that the Community Reinvestment
Act 7 does not apply to a transaction where the acquiring banking
organization has no presence in the U.S."8 Therefore, the Board looked only at
the merits of the case and did not consider nationality as a material
factor in arriving at its decision.
For three months during 1980, a congressionally imposed
moratorium on foreign acquisitions was in effect. Legislative interest in the
banking field currently focuses primarily on domestic matters because of
the rapid evolution that is under way in the field of financial services.
But an underlying concern about large acquisitions undoubtedly exists,
and not only in Congress. It is nourished not only by past and possibly
prospective developments, but also by the evidence that some countries
are less open to foreign banks than the United States. Only a few
countries, to be sure, close themselves altogether to foreign banking. On the
other hand, it is doubtful whether many foreign countries, or indeed any,
would permit the acquisition of one of their largest banks by an
American bank. Of course, in many countries the majority of the banking
business is conducted by a very small number of banks. Foreign acquisition
of one such bank is not the same thing as acquisition of a bank of equal
size in the United States. Smaller countries may have regulatory
concerns, or concerns involving monetary and foreign-exchange policy, that
would apply in the United States only to a lesser degree if at all. But
there can be no doubt that such attitudes abroad can create pressures
toward imposing restrictions on acquisitions of large United States banks
Various suggestions to restrict foreign acquisitions of American
banks have been made. A limit might be placed on the size of the bank
to be acquired or on the proportion of foreign penetration in particular
markets, or a public benefits test might be imposed. A reciprocity test
also might be applied, based on the ability of American banks to make
equivalent acquisitions in the foreign country. To my mind, none of
these proposals are persuasive in themselves. But I cannot deny that
7 Community Reinvestment Act of 1977, Pub. L. No. 95-128, 91 Stat. 1147 (1978) (12 U.S.C.
§§ 2901-2905 (1982)).
8 67 Fed. Reserve Bull. 729, 731 (1981).
they seem to become more persuasive in the absence of reciprocal
national treatment of American banks in foreign markets.
The United States Treasury prepared a study of the treatment of
American banks abroad, in response to a provision of the International
Banking Act requiring that the matter be studied. This provision was the
very moderate reaction of American legislators to the issue of
reciprocity. The overall finding of the study regarding treatment of American
banks abroad was generally favorable although it was noted that some
variation exists among countries in the treatment of American and
foreign banks. I should think that particular instances of discriminatory
treatment as between domestic and foreign banks, in general, or domestic
and American banks only, could more appropriately be dealt with in
bilateral negotiations rather than by some form of unilateral action by the
VIII. FOREIGN GOVERNMENT OWNERSHIP
Still another cloud on the horizon has developed in the form of the
potential growth of foreign-government-owned banking entities in the
United States. In 1982, the French government nationalized all banks of
some size in addition to the "big three" that previously had been
nationalized. In 1982, the government of Mexico nationalized its entire
banking system. Early in 1983, Spain nationalized a number of banks owned
by a group that was encountering difficulties.
The Federal Reserve Board faced the issue of
foreign-governmentowned banking entities-by no means for the first time-in connection
with the acquisition of Long Island Trust Company by Banca
CommercialeItaliana. That bank is owned, in major part, by Istitutoper la
Ricostruzione Industriale (IRI), an Italian-government-controlled holding
company which owns two other commercial banks each of which has a
banking presence in the United States, as well as over 100 subsidiaries
engaged in nonbanking activities. As in some earlier cases, the Board did
not apply the Bank Holding Company Act to the applicant's government
owners and approved the acquisition.
The Board, however, noted several significant and complex
problems. Where the applicant is owned by a government agency, or by
a government directly, that is engaged in a wide range of banking and
commercial-industrial activities, there may be problems of compatibility
of these cross-industry links with one of the stated purposes of the Bank
Holding Company Act-that of maintaining a separation between
commerce and banking in the United States. Similarly, common ownership
by a government or its agencies of multiple banking organizations, even
though organized under separate corporate and management structures,
but operating in the United States in different states, could raise issues of
compatibility with the interstate banking limitations of the Bank Holding
Company Act and the International Banking Act.
The Board examined whether a government or governmental
corporation should be regarded a a bank holding company under the Bank
Holding Company Act. It defined two key issues: (1) whether a
foreigngovernment-owned bank is in fact operated independently from other
banks and commercial enterprises that are subject to common
government ownership, and (2) the conditions under which the Act's focus on
prohibiting the potential for conflicts of interest and concentration of
resources would require application of the Bank Holding Company Act
because of the fact of common ownership. The Board noted the
possibility that applying the Bank Holding Company Act could have a
restrictive impact on the ability of foreign-government-owned banks to operate
in the United States if the n4nbank prohibitions of the Act were to be
rigidly applied, and noted tlxkinternational economic policy issues that
would be raised in this conteW.
In approving the applications, the Board concluded that the
complex issues raised by applying the Bank Holding Company Act would
best be resolved in a Congressional framework which would allow
broader international economic policy considerations to bear on
examination and, hopefully, resolution of these problems.
While major unresolved issues of the kind here discussed were
coming into clearer focus, it nevertheless can be said that in an economic
sense the spread of international banking has moved in a constructive
Greater integration of national economies into the world economy
helps to increase productivity and promotes economic growth all around.
National banking systems have been in the vanguard of this integrating
movement at a time when in other fields there are rumblings of
protectionism. It is important that these gains not be undermined by the
irruption of protectionism into financial fields.