View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

November 28,1975

Emerging Titan
In recent years, the West Coast has
grown into a major international
financial center, second in the
United States only to New York.
Many are aware of the growth, but
few know how rapid the growth
has actually been, and how high a
stature the West Coast has already
attained in world banking.
Record of growth

Foreign banking activities of West
Coast banks were quite modest a
half-decade ago. At the end of
1969, only five West Coast banks had
more than $100 million in foreign
assets, for a total of $7 billion in all;
five years later, by the end of
1974, there were eleven such banks
with aggregate foreign assets of
$32 billion. Claims on foreigners
booked at West Coast banks' head
offices were only about $1.5
billion in the mid-1960's, and
remained fairly flat until the early
1970's, as a result of U.S. controls
over capital outflows. Since then,
such claims have grown by leaps
and bounds to reach a total of $8.5
billion, accounting for 19 percent
of the national total, while banking
liabilities to foreigners totaled
$7.2 billion, accounting for 7 per­
cent of the national total, at the
end of 1974.
In addition to international­
banking activities at head offices,
rapid growth is evident in the
expansion on the West Coast of
Edge Act corporations—bank affil­
iates designed specifically for the
financing of foreign trade and
investment. In number, Edge
corporations have increased from
1



3 a decade ago to 22 today; in
volume of assets, they have
expanded 15-fold just since 1968 to
reach $1 billion today. Of the
total, 13 are banking corporations
and 9 are investment corpora­
tions, with the banking Edges
accounting for the vast bulk of the
$1 billion in assets. All except one
of the banking Edges are subsidi­
aries of banks outside the
region—8 from New York, 3 from
Chicago, and one from Boston.
Even more striking is the vastly
increased presence abroad of 18
West Coast banks, with 130 foreign
branches and about 60 foreign
representative offices. Their $33
billion in foreign-branch assets
represents a 7-fold increase in just
6 years' time. (Bank of America
alone has 104 branches and 12 rep
offices, and these account for 38
percent of its total deposits.)
West Coast banks also have invest­
ed substantial sums in partly- or
wholly-owned foreign affiliates,
which are engaged in such activities
as merchant banking, investment
banking, leasing, factoring, mort­
gages and trusts.
This expansion of West Coast
banks in foreign markets has been
paralleled by the growth of foreign
banks on the West Coast. Califor­
nia alone now has 15 statechartered foreign banks with
total assets of $4.5 billion, plus 43
agencies with total assets of $8.3
billion, compared to 6 statechartered foreign banks with only
about $450 million in total assets
and 7 agencies with only $300
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

million in total assets just ten
years ago. Represented in one form
or another are major banks from
15 foreign countries in practically
every continent—with Japanese
banks heading the list in terms of
total assets, followed by British
banks and Canadian banks.
Recent problems

Despite the phenomenal growth
of the past decade, West Coast
banks have been hard pressed to
adjust to the extraordinary turbu­
lence of the past two years. Banks
at the beginning of 1974 faced the
petrodollar-recycling problem
and, in addition, the lifting of U.S.
capital controls as well as the
simultaneous liberalization of
controls by other major industrial
nations. Then, in May and June,
came the Franklin National and
Herstatt debacles, which led to
concern by the world's central
bankers about the headlong pace of
banks' overseas-expansion pro­
grams. Throughout all of this
period, inflation reigned ramp­
ant, with soaring interest rates and
the shriveling of the international
bond market. Finally, the world­
wide boom ended in the most
severe recession of the past
generation, resulting in a wide­
spread fear of a collapse of the
international financial system.
These conflicting developments
were amply reflected in the West
Coast banking scene. Total claims
on foreigners rose at a hectic pace
during the first half of 1974,
dropped sharply during the crisis­
laden third quarter, but then
2



resumed growth, so that claims at
the end of this September stood at
35 percent above a year ago.
In contrast, overseas-branch activi­
ty of West Coast banks has failed
to expand at all this year, after
steady growth during most of
1974. For somewhat unclear rea­
sons, West Coast banks in 1975 have
chosen to expand foreign loans in
their head offices' portfolios, while
other U.S. banks have done so
through their foreign branches.
Engine of growth

The phenomenal growth of interna­
tional banking on the West Coast
during the past ten years is an
integral part of the international­
ization of banking the world over.
Confronted with the rapid expan­
sion of international trade, the
spread of multinational corpora­
tions, and the breakdown of
national barriers to international
capital movements, institutions
in the wholesale-banking business
have had little choice but to lift
their eyes beyond their national
borders with regard to both the
placement and the gathering of
funds. In just a few years, banking
operations on the West Coast
have been fundamentally and
irrevocably transformed.
The rewards for success have been
substantial. At the national level,
international earnings of a selected
group of U.S. banks have in­
creased roughly ten times as fast as
their domestic earnings in recent

years. Moreover, foreign loan-loss
ratios of U.S. banks over a period of
thirteen years have been found to
be generally smaller than their
domestic loan-loss ratios. Thus,
the profit instinct, rather than the
herd instinct, has been behind
banks' overseas-expansion
drive.
Moreover, West Coast banks
have their own strong reasons for
expansion. Aside from the un­
derlying strength of the regional
economy, international banking
has benefited from the rapid
growth of West Coast trade, espe­
cially trade with the booming
Orient. Between 1967 and 1974, the
total value of West Coast foreign
trade (exports plus imports) rose 31
/2
times to $37 billion—at a com­
pounded growth rate of 24 percent
per year, which must have made
foreign trade the fastest growing
industry in the West. Two-thirds of
this trade was conducted with
Pacific Basin countries; indeed,
Japan alone accounted for almost
one-half of all West Coast foreign
trade during this period. As this
expansion continued, financiers
could see no reason why such
business should be financed in
New York, London or elsewhere,
and not right here where trade
was being conducted.
Nothing attracts like success.
Despite several recessions, the
West Coast grew significantly
over the past decade. From 1967 to
1974, manufacturing production

3




in the Western states grew at 5.6
percent per year, and personal
income at 9.3 percent a year.
Financial resources and expertise
from all over the world poured
in, to assist in the financing of that
growth and in the strengthening
and broadening of the base for a
rising international financial center.
International finance fed on
domestic finance and in turn
contributed to the growth of
domestic finance—in a sort of
symbiotic growth process analo­
gous to orchards and apiaries pros­
pering together. Besides financial
resources, a host of human re­
sources have also been attracted
to the region. Bankers, lawyers,
accountants, foreign-exchange
dealers, investment counselors,
data-processing specialists, busi­
ness analysts have brought with
them uncounted years of training
and experience—a major capital
investment in human resources.
The growth of their services plus
the great expansion of financial
resources add up to the rise of the
West Coast as a major international
financial center.
Undoubtedly, the recent world­
wide business recession with a tenpercent decline in the volume of
world trade has temporarily chilled
the environment for growth. But the
bulbs of further expansion are in
place. As trade and finance revive
from the severe wintry climate
that has beset the world economy
in the last two years, the West
Coast can look forward to re­
newed growth in its international
financial activities.
Hang-Sheng Cheng

uo}8uiqse/v\ • M l • uoSa.io • epeASN . oqepi
Glf
•

E I U J O p |B 3

.

EUOZUy

•

B>|S E|V

Q
vO

M BM EJ-l

7 J|E3 /0 3 S p u e jj UE$

ZSL ON llWH3d

aivd
aovisod *sn

1IVW SSV1D 1SHIJ

U p jITO §® ^ J

BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Amount
Outstanding
11/12/75

Change
from
11/05/75

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Com mercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
O ther securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits—total*
States and political subdivisions
Savings deposits
O ther time deposits^
Large negotiable C D ’s

87,637
65,935
2,760
22,767
19,629
10,070
8,869
12,833
87,530
24,899
321
60,457
5,697
21,407
29,940
15,609

+ 1,128
+ 1,040
+ 1,072
12
+
8
8
+
77
+
11
514
68
210
+ 176
108
+ 120
+ 215
+ 151

Weekly Averages
of Daily Figures

W eek ended
11/12/75

Selected Assets and Liabilities
Large Commercial Banks

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free (+) / Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+) / Net sales (-)
Transactions of U.S. security dealers
Net loans (+) / Net borrowings (-)

+

57
1
56

+
+

Change from
year ago
Dollar
Percent
+ 2,996
1,197
+
735
1,242
319
+
273
+ 4,232
39
+ 6,543
+ 1,576
28
+ 4,696
+
42
+ 3,397
+ 1,327
+
362

+

-

W eek ended
11/05/75

-

+
-

+
+
-

+
+
-

+
+
+
+
+

3.54
1.78
36.30
5.17
1.60
2.79
91.27
0.30
8.08
6.76
8.02
8.42
0.74
18.86
4.64
2.37

Comparable
year-ago period

+

118
1
117

-

95
172
77

2,578

+

786

+

646

1,843

+

370

+

665

♦Includes items not shown separately. ^Individuals, partnerships and corporations.

Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 397-1137.