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Federal Reserve Bank of Dallas
DALLAS. TEXAS

75222

Circular No. 79-15
January 24, 1979
PROPOSAL TO PERMIT BANKS TO ESTABLISH
INTERNATIONAL BANKING FACILITIES IN NEW YORK CITY
TO ALL BANKS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System made public
on December 14, 1978, a summary of the issues involved in a proposal by the
New York Clearing House Association to permit banks to establish International
Banking Facilities (IBFs) in New York City.
The Clearing House proposal seeks an exemption from reserve require­
ments and interest rate ceilings for funds maintained with IBFs. The proposal
contemplates that an IBF:
1.

Would be allowed to accept funds only from foreign
customers, the IBF1s own U.S. head office (a U.S. bank)
or from other IBFs;

2.

Could offer only obligations subject to withdrawal
on
call (after a specified notice period), or obligations
with a fixed maturity and a minimum maturity of one day;

3.

Would not be authorized to offer deposits subject to
immediate withdrawal or to offer negotiable CDs.

The Board has stated that "Establishment of IBFs would be expected
to result in the creation of a new dollar deposit in this country competitive
with Euro-dollars but subject to U.S. laws and hence not subject to 'foreign
country risk1___
Obligations issued by IBFs probably would carry somewhat
higher yields than comparable deposits at domestic offices of member banks
because of
the absence of reserve requirements. As a result,
foreigners might
shift funds from other international banking centers and from
banking offices
in the United States to IBFs. Moreover, U.S. corporations...might be encour­
aged by favorable terms to find ways of placing funds with IBFs."
The Board is concerned about the implications of possible deposit
shifts to IBFs for measuring the monetary aggregates, the level of required
reserves and competitive relationships; implications of IBFs on the avail­
ability of credit domestically; and the possible effects of IBFs on foreign
exchange rates and on the relative positions of banks and their foreign and
domestic customers.

Banks and others are encouraged to use the follow ing incoming W A T S numbers in contacting this Bank:
1-8 0 0 -4 9 2 -4 4 0 3 (intrastate) and 1 -8 0 0 -5 2 7 -4 9 7 0 (interstate). F o r calls placed locally, please use 651 plus
the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

-2-

The Board is also interested in whether the minimum maturity of
accounts at IBFs--should they be established--should be for one day or longer;
whether reserve requirements should be applied to head office borrowings from
an IBF, and, if so, at what rate; and what implications IBFs would have for
competitive balance among banks.
Interested persons are invited to submit their comments and opinions
about the proposal to permit banks to establish International Banking Facilities
in New York City to the Secretary, Board of Governors of the Federal Reserve
System, Washington, D. C. 20551. Comments should be in writing and must be re­
ceived no later than March 15, 1979.
The Board's explanation of the proposal is printed on the following
pages. Questions concerning this matter should be directed to Joseph E. Burns,
Senior Vice President of this Bank, at Ext. 6296.
Sincerely yours,
Robert H. Boykin
First Vice President

INTERNATIONAL BANKING FACILITIES

The Board of Governors has been asked to consider a proposal by
the New York Clearing House Association that the Board amend Regulations D
and Q to provide that deposits of specially designated International Banking
Facilities (IBFs) be exempt from reserve requirements and interest rate
regulations.

These facilities would be operated separately from other offices

of the bank.

The Clearing House maintains that such an action, coupled with

special State and local tax treatment of IBFs, would:

enhance the role of

major domestic monetary centers as international banking centers by attracting
business from abroad; stimulate local economies by providing new jobs and
raise local tax revenues; and lower bank costs and improve bank efficiency.
The State of New York has enacted a law giving eventual tax-free status to
IBFs, but this is contingent on favorable reserve requirement and interest
rate action at the Federal level.

So far as is known, no other State has

taken similar action.
The Clearing House proposal contemplates that an IBF would be
allowed to accept funds only from foreign customers, the facility's own U.S.
head office, and other IBFs.

It could offer only obligations subject to

withdrawal on call (after a specified notice period) or fixed-maturity
obligations with a minimum maturity of one business day; IBFs would not be
authorized to offer deposits subject to immediate withdrawal or negotiable CDs.

-

2

-

If funds placed with IBFs were regarded as deposits upon which the
reserve requirement would be set at 0 percent, they would be subject to the
3 percent statutory minimum average reserve requirement on the sum of a
member bank's domestic time deposits.

Since the 3 percent minimum could reduce

the attractiveness of the proposal for many member banks, as an alternative
consideration might be given to exempting obligations of IBFs from deposit treatment,
similar to the treatment accorded Federal funds borrowings and certain repurchase
agreements.
IBFs could not advance credit to U.S. customers, except to other IBFs
or to their own head offices; and advances to own head offices would be subject
to the same reserve requirement that is imposed under Regulation M on net
borrowings by member banks from their own foreign branches (which is zero at
present).
Establishment of IBFs would be expected to result in the creation of a new
dollar deposit in this country competitive with Euro-dollars but subject to
U.S. laws and hence not subject to the "foreign country risk" generally attached
to dollar deposits in banks outside the United States.

Obligations issued by

IBFs probably would carry somewhat higher yields than comparable deposits at domestic
offices of member banks because of the absence of reserve requirements.

As a

result, foreigners might shift funds from other international banking centers and
from banking offices in the United States to IBFs.

Moreover, U.S. corporations—

particularly those with foreign affiliates--might be encouraged by favorable
terms to find ways of placing funds with IBFs.

-3 Implications for Deposit Holdings
Various deposit shifts are likely to occur as a result of creation
of an IBF.

Foreign-owned Euro-dollar deposits may shift to an IBF.

In

addition, existing foreign deposits held in U.S. banking offices would might
also be eligible to move into an IBF.

Foreign demand deposits in the United States

total $18 billion, while foreign-owned time deposits amount to $12-1/2 billion.
It is difficult to estimate the extent to which foreign deposits might
be transferred to IBF facilities.

The amount of funds shifted from U.S. offices

would depend in part on whether drafts could be written on IBF accounts or
whether other means could be employed for using IBF accounts for ordinary
transactions purposes.

For example, although the proposal states that IBFs

would not f e allowed to offer deposits subject to immediate withdrawal, IBFs
i
might instead offer accounts on which drafts could be written that are payable
the next business day--in much the same way as many Euro-dollar transactions
are currently settled.
The volume of funds placed in IBFs would also be affected by whether
the facility is available to foreign subsidiaries of U.S. corporations.
Domestic companies would not be able to place funds directly with IBFs, but
could do so indirectly through a foreign affiliate.

Even if IBF accounts were

not used directly for transactions purposes, some U.S. depositors— with foreign
affiliates--might find short-term IBF obligations to be an attractive cash
management instrument and might substitute IBF obligations for other short­
term investments--such as RPs--and for demand deposits.
The availability of IBF accounts to various types of depositors has
implications for measures of the monetary aggregates; for the level of required

-4-

reserves; and for competitive relationships among foreign corporations,
U.S. corporations with foreign subsidiaries, and other U.S. corporations.
Whether foreign subsidiaries of U.S. companies should be permitted to hold
funds in an IBF, or whether minimum maturities of funds placed in an IBF
should be seven days rather than one day, would affect deposit holdings and
competitive relationships.

A 7-day minimum maturity would, for example, reduce

the difference between time accounts in IBF's and minimum maturity time deposits
in domestic banks.

Implications for Credit Availability
Currently, credit extended to foreigners (including their own foreign
branches) by banking offices in the United States is estimated to exceed
deposit and nondeposit liabilities to foreigners by about $20 billion.
However, it cannot be determined a priori whether the amount of
foreign loans that could be shifted to IBFs from domestic offices would be
larger or smaller than the amount of deposit and nondeposit funds that would be
shifted, and thus it cannot be determined whether the availability ofdomestic
credit

to

domestic sectors would be affected.
In the final analysis the impact on the

credit

to

availability of

domestic sectors will depend on the degree to which IBFs

to domestic markets.

arelinked

If no restrictions are applied to funds channeled from

IBFs to domestic U.S. offices of the parent bank as would be the case with a
zero reserve requirement on head office borrowings from the IBF, there would
be no, or little, impact on the availability of domestic bank credit from
creation of an IBF.

Any difference between the volume of domestic deposits

shifted to IBFs and the volume of foreign loans shifted from domestic offices
could be reflected in transactions by IBFs with their domestic offices.

-5-

Alternatively, should reserve requirements apply to funds channeled
from IBFs to domestic U.S. offices of

theparent

bank, there wouldbe greater

scope for a spread to develop between

therates at which IBFs would lend to
1/

head offices or other IBFs and the Federal funds rate.-

The larger the

reserve requirement the less closely would IBFs tend to be linked to domestic
money markets, and the more likely that variations in flows of funds from
domestic deposits to IBFs would be reflected in variations in their foreign
lending.

Implications for Foreign Exchange Rates
The same general considerations would affect the extent
shifts of funds from
rate for the dollar.

U.S.

offices to

to which

IBFswould have an impact on the exchange

By establishing a zero, or low, reserve requirement on

lending by IBFs to domestic

U.S.

offices of the parent bank, the Board could

minimize any possible adverse effect on the exchange rate that might otherwise
result from a difference between the volume of deposits in domestic offices
shifted to IBFs and the volume of foreign credits in the loan portfolios of
those domestic offices that was shifted to IBFs.

The Board's policy regarding

reserve requirements on lending to domestic offices would thus likely receive
increased attention if IBFs were established.
It may be noted that if IBF obligations were regarded as an
especially attractive dollar asset, there might be an incentive for some
foreign investors to shift funds from money market instruments denominated

1/ The Federal funds rate and the rate for loans by one IBF to another
would tend to be equal in the absence of restrictions on flows of funds
between IBFs and head offices; there would be no differences in country
risk on loans in each market as there currently is between interbank
Euro-dollar loans and Federal funds loans.

-6­
in foreign currencies to IBFs.

As the IBFs advanced these funds to domestic

U.S. offices, there would be a tendency for some modest strengthening in the
exchange rate for the dollar.

The Effects of Competitive Balance among Banks
IBFs could affect the relative positions of banks, as well as of
their foreign and domestic customers.

The Board recognizes that if IBFs are

to be established on a nationwide basis, adequate time would be needed to
permit an opportunity for changes in State laws and regulations.

The Board

also recognizes that IBFs might also be operated by banks outside New York
through Edge Corporations in New York.

Various locations and modes of

operations may have differing impacts on banking institutions under current
circumstances.

The Board is considering the proposal and its desirability in light
of its impact on monetary conditions, regulatory control, competitive balance
and other factors.
Comment is invited from all parties on issues raised by the proposal.
The Board would be particularly interested in views on the minimum maturity
of accounts that might be held in an IBF, on reserve requirements applicable to
head office borrowings from an IBF, on the advisability of making obligations
offered by the facility available to foreign subsidiaries of U.S. corporations,
on implications for competitive balance among banks, on the length of time that
might be required for changes in State laws and regulations and the lead time
that member banks would reasonably need in order to establish IBFs.

Conment

should be sent by March 15, 1979 to the Secretary of the Board, Board of Governors
of the Federal Reserve System, Washington, D.C.

20551.
December 14, 1978


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102