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February 1 3, 1981
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Fromthe Caymans
Students, teachers and textbook writers now
have another international acronym to worry
about-I B F. (It means International Banking
Facility.) Like SDR (Special Drawing Rights),
BIS (Bank for International Settlement), FAS8
(Financial Accounting Standard #8) and
CHIPS (Clearing House Interbank Payments
System), IBF is one of those acronyms which
international finance specialists deal with
every day, but which the man-in-the-street
fi nds fraught with mystery.
Actually, IBFs represent an important innovation in international banking. If implemented, they could have a significant impact
on the conduct of international banking in the
United States and abroad. Indeed, some observers worry that IBFs could have adverse
effects on the conduct of u. s. domestic monetary and banking pol icy.
Background
Two months ago, the Federal Reserve Board
of Governors submitted a proposal for public
comment, which would permit U.S. banking
institutions to establish International Banking
Facilities within the nation's borders for the
conduct of international banking activities,
i.e., lending to and borrowing from non-U. S.
residents. Many U.S. banks actually have
been engaged in such activities since the
1960s. However, they have operated either
through full-service branches in foreign financial centers (such as London, Frankfurt,
Tokyo, Hong Kong, and Singapore) or
through so-called "shell branches." The latter
are I itfle more than name plates at offshore
islands (such as the Bahamas and Cayman
Islands), with business conducted in the u. s.
but assigned to "shell branch" books maintained at head offices.
With IBFs, activities of this type would be
brought back to U.S. soil. Like a "shell
branch," an IBF would not be a full-service
branch; it would need no separate office
space, polished marble columns, carpeted
floors, attentive tellers, nor other paraphernal ia usually associated with banking offices.
Indeed, it could be just a set of accounts
segregated on the books of a depository institution for specifically designated categories
of customers and types of transactions.
The idea originated with the New York Clearing House Association, which in 1 978 proposed the establishment of IBFs with (a)
exemption of IBF income from New York
State taxes, and (b) exemption of IBF deposits
from Federal Reserve reserve requirements
and interest-rate limitations. In June 1978, the
state legislature passed legislation incorporating the Clearing House proposal, and the
Clearing House subsequently asked the Federal Reserve to make the necessary regulatory
changes. In December 1 980, the Board of
Governors approved a proposal to amend
Federal Reserve regulations for the establishment of IBFs, and invited public comments prior to final promulgation.
Proposalprovisions
Under the proposal, IBFs could be established by all U.S. depository institutions (including banks and thrift institutions), Edge
Corporations (U.s.-chartered corporations
authorized to engage in international banking operations), and U.S. branches and agencies offoreign banks. These IBFs could accept
time deposits and borrow funds from foreign
residents or other IBFs, free of Federal Reserve reserve requirements and interest-rate
limitations. They could then use the funds for
extending credit to foreign residents, other
IBFs, or to the U.S. offices of IBF parent
institutions.
With IBFs, banking offices in the U.S. could
compete with banks abroad on an equal footing in the international market, which doesn't
involve the reserve requirements and interest
rate limitations found in the domestic market. Thus, IBFs would be able to offer nonresident customers better terms than are
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Ooinions
expressed in this newsletter do not
j:eflect the views of the management
of the Federal Reserve Bank of San Francisco,
nor of the Board of Covernors of the Federa!
Reserve Systern.
imposed on the offices' Eurocurrency
borrowings.
available to domestic customers, on both
deposits and loans. But to preserve the integrity of domestic banking regulations, IBFs
would have to be insulated from the domestic
banking market as a means of forestalling
"leakages."
Up to now, only New York State has adopted
legislation exempting IBF income from state
income taxes. To permit time for other states
to adoptsimilar legislation, the Federal Reserve has proposed delaying implementation
of the arrangement until October 1 of this
year.
To this end, IBFs would be permitted to accept only non-negotiable time deposits from
non-U.S. residents (including foreign affiliates of U.S. corporations), other IBFs and IBF
parent institutions. These deposits would be
subject to a two-day minimum maturity or
required notice period prior to withdrawal. In
addition, the minimum size of deposits or
withdrawals would be set at $500,000 to
keep IBF deposits from being used for transaction purposes. (Under an alternative proposal, the minimum average daily balance
would be set at $500,000 and the minimum
size of transaction at $1 00,000.) Besides offering time deposits, IBFs could borrow from
the interbank market outside this country,
from other IBFs inside the country, and also
from parent institutions. All such borrowings
would be exempt from Federal Reserve reserve requirements.
Major issues
Public benefits. IBF proponents argue that
such facilities, by expanding internationalbanking activities in this country, would lead
to increased employment, higher Federal tax
revenues, and greater efficiency of U.S.
banks. The magnitude of these benefits
would depend upon how much business actually shifted from overseas to this country. In
June 1 980, claims of U.S. banks' foreign
branches on non-U.s. residents amounted to
$221 billion, with Caribbean shell branches
accounting for $94 billion of the total. Because of the many locational factors involved, it would be difficult to estimate precisely how much of this business IBFs would
attract to the United States-or to gauge the
employment and tax-revenue effects of such
shifts. But IBF proponents see another advantage: the measure might induce U.S. branches and agencies of foreign banks to retain
their international-banking operations in this
country. Under the International Banking Act
of 1 978 and the Monetary Control Act of
1 980, these branches and agencies are subject to the same reserve requirements as U.s.
banks. Thus, without IBFs, U.S..branches and
agencies of foreign banks might be tempted
to shift their international-banking operations
away from their u.s. offices.
On the asset side, IBFs would be permitted to
extend credit to non-U. S. residents, in the
form of loans or investments, for financing
operations outside the United States. For instance, a foreign subsidiary of a u.s. corporation could borrow only if the loan proceeds
were used to finance the borrower's foreign
operations. Advances to u.s. offices of parent
institutions would be subject to the same
reserve requirements as those currently
Competitive impact. To date, no other state
outside New York has passed legislation to
exempt IBFs from state income taxes. As
noted above, the Federal Reserve has proposed postponing the IBF startup until October, to allow time for other states to pass
similar legislation. But New York has other
factors besides tax considerations in its favor.
2
would have an incentive to shift funds into
I B Fs-for instance, through real or bogus
foreign subsidiaries or affiliates. In their view,
large shifts of this sort would tend to subvert
u.s. bank reserve requirements; moreover,
any shifts from reservable accounts to nonreservable accounts would tend to stimulate
an inflationary monetary expansion.
For example, it is a focal point for the clearing
and settlement of international payments,
conducted through the Clearing House of
Interbank Payments Systems (CHIPS). Membership in CHIPS is limited to banks located
in New York, including Edge Corporations of
regional banks. Banks outside New York genera"y incur higher costs because of their need
to clear and settle international payments and
receipts through either thei r Edge Corporations or their New York correspondents.
Moreover, Edge Corporations don't enjoy as
much international prestige as their parent
banks, because of their limited separate capitalization. Hence, the establishment of IBFs
could increase New York's advantage in international banking relative to the rest of the
country.
Defenders of the IBF proposal, on the other
hand, pointoutthat IBFs would compete with
existing international-banking offices located
in foreign financial centers, including "she"
branches," and that U.S. residents already
possessfree access to such facilities. IBFs
would alter only the location and not the
accessibility of such facilities. Hence, the
monetary-policy impact might be relatively
small, according to this line of reasoning.
Monetary-policy impact
Prospects
Although the Federal Reserve hopes to insulate IBFsfrom the domestic banking business,
non-resident deposits currently in U.s. banks
nonetheless would be free to shift to IBFs. In
June 1980, non-resident demanddeposits
(inclu9ing those of foreign banks and official
institutions) amounted to nearly $21 billion,
and non-resident time deposits to about $30
billion. Given the proposed restrictions on
time deposits, non-residents are not likely to
shift much of the demand deposits used for
transactions purposes to IBFs, but they certainly would have an incentive to shift time
deposits. A one-time shift of this type would
cause little problem for u. S. monetary policy,
as the resultant reduction in required reserves
could be offset by Federal Reserve openmarket operations. Nor would it cause much
difficulty for domestic credit availability,
because funds shifted to IBFs could be easily
redirected back to the u.s. market through
the Eurodo"ar market. Such interbank fund
flows are routine and do occur in very large
volumes.
If serious objections don't arise during the
public-comment period, IBFs might be in
operation next October. This development
would, for the first time, make it possible for
deposit-taking institutions in this country to
compete on an equal basis with u.s. and
foreign banking offices located abroad, insofar as reserve requirements and interest-rate
limitations are concerned.
No one knows whether the establ ishment of
IBFs would lead to a massive shift of international banking business to the United
States. But there is no question that such a
development would give further impetus to
the growth of international banking in this
country.
Hang-ShengCheng
Some critics are concerned that the planned
separation of IBFsfrom domestic banking
could not be watertight. They argue that U.S.
residents, faced with higher interest rates on
IBF deposits than on domestic deposits,
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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollaramountsin millions)
SelectedAssetsandLiabilities
largeCommercialBanks
Loans(gross,
adjusted)
andinvestments*
Loans(gross,adjusted)- total#
Commercialandindustrial
Realestate
Loansto individuals
Securities
loans
U.S.Treasury
securities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savings
deposits- total
Timedeposits- total#
Individuals,part.& corp.
(Largenegotiable
CD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
Excess
Reserves
(+ )/Deficiency(- )
Borrowings
Netfreereserves
(+ )/Netborrowed(
-)
Amount
Outstanding
Change
from
1/28/81
1/21/81
Changefrom
yearago
Dollar
Percent
146,951
124,417
37,012
50,764
23,729
1,473
6,792
15,742
40,007
28,976
28,947
76,696
67,055
30,290
183
98
23
82
30
12
2
87
-1,896
-1,253
- 201
1,178
1,176
671
9,801
10,008
3,585
6,625
704
520
407
200
3,339
3,135
817
17,596
16,818
8,967
-
Weekended
Weekended
1/28/81
1/21/81
n.a.
n.a.
259
321
n.a.
n.a.
7.1
8.7
10.7
15.0
- 2.9
54.6
- 5.7
1.3
7.7
- 9.8
2.9
29.8
33.5
42.1
Comparable
year-ago
period
-
10
336
346
* Excludes
tradingaccountsecurities.
# Includesitemsnotshownseparately.
Editorialcommentsmaybeaddressed
to theeditor(WilliamBurke)or to theauthor.... Freecopiesof this
andotherFederalReserve
publications
canbeobtainedbycallingor writingthePublicInformationSection,
FederalReserve
Bankof SanFrancisco,
P.O.Box7702,SanFrancisco
94120.Phone(415)544-2184.
@FedFRASER