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Resesurch D epairtaeim it 1 su m m rsu m cE sc® December 20,1974 san m The Federal Reserve this month submitted to Congress the Foreign Bank Act of 1974— legislation that would extend Federal regulation to all foreign banks operating inside the United States. Foreign banks at present are primarily subject to state (not Federal) regulation, with the state controlling entry and specify ing the rights of such organizations. In some states, entry is prohibited; but in others, foreign banks have been able to develop significant operations which extend across state lines. There are now 60 foreign banks with domestic assets of $38 billion operating in the United States. It is believed that this sector is now large enough that foreign banks' rights should be brought into line with those of domestic banks. The object of the proposed legislation is to establish Federal control on the basis of nondiscriminatory national treatment, with foreign and domes tic banks having substantially the same rights and privileges. Extending control At present, the only foreign banks under Federal regulation are those controlling state-chartered subsidi ary banks. These banks must register as bank holding companies with the Federal Reserve System. The Bank Holding Company Act prevents bank holding companies (domestic or foreign) from acquiring newlychartered banks in more than one state, but the Act does not cover 1 state licensed branches or agencies. Therefore, foreign banks can form branches or agencies in more than one state. Since these offices may make loans and (in the case of branches) accept domestic deposits, they can be used to develop a multi state banking network of the type denied to domestic banking organizations. The proposed legislation would redefine "bank" to bring foreign branches and agencies under the Holding Company Act. This means that foreign banks would not be able to expand their banking business across state lines. However, the Act would permit interstate bank acquisitions if an individual state's law specifically allows such entry— a significant provision for domestic as well as foreign banks, since Cali fornia and New York have been considering legislation to permit a limited number of acquisitions by out-of-state bank holding companies. At the same time, foreign banks would obtain certain advantages by being brought under the Holding Company Act. They would then be able to enter approved nonbanking fields— leasing, mortgage banking, and so on—to which interstate barriers do not apply. Domestic bank holding companies have been able to build up their nonbanking business in recent years, and foreign banks would be able to do the same under the proposed legislation. (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. Federal licensing The Foreign Bank Act would require all foreign banking organizations in the future to obtain licenses from the Comptroller of the Currency, no matter whether they plan to operate under state or Federal law. Before granting a license, the Comptroller would consult with the Federal Reserve Board of Governors— and also with the Secretary of State, in order to ensure the coordination of domestic banking policy with foreign policy. Otherchanges would facilitate the operation of foreign-controlled, Federally chartered, bank subsidi aries and branches. Currently almost all foreign bank subsidiaries have state charters because of certain restrictive provisions of the National Bank Act. The new law, by permit ting foreign citizens to serve as directors of national banks, would make national charters a feasible alternative to state charters. A separate provision would allow foreign banks for the first time to open Federal branches. This provi sion is important because the lending limits of a branch would be based on the size of the foreign parent bank, whereas the lending 2 limits of a subsidiary bank are determined by the (much smaller) corporate capital and surplus of the subsidiary. Approval of applications for National-bank charters or Federal branch licenses would rest with the Comptroller of the Currency, the supervising agency for National banks. Meanwhile, applications for mergers and acquisitions within each state would continue to be determined by state law, as is the case with domestic banks. In a branch-banking state such as California, a foreign-controlled bank thus could branch freely, but in a unit-banking state such as Illinois, it would be limited to the single location permitted local banks. The proposed Foreign Bank Act allows foreign banks to keep all their existing branches, agencies and subsidiaries;that is, they will have "grandfather rights." Future acquisi tions would be limited to each bank's principal state of operations, although mergers and branching of grandfathered offices in other states would be permitted in accordance with state banking law. Grand fathering of existing operations is generally consistent with past legislative practice and conforms to existing treaties of foreign com merce. Liberal grandfather rights do not change the main goal of the proposed legislation, which is to ensure that the same rules govern both foreign-bank and domesticbank expansion within this country. Other proposals Under the Federal Reserve proposal, foreign banks would be able to form Edge Act corporations for interna tional-trade purposes in more than one state. This privilege is already available to domestic U.S. banks, and it would benefit the foreign banks in view of their expertise in financing international trade. Foreign branches and agencies also would be able to obtain FDIC insurance coverage on their deposits, thus permitting them to compete on an equal basis for domestic business. But at the same time, Federal Reserve membership would be required for all foreign banks whose worldwide assets are greater than $500 million. The foreign banks already operating here are generally banks of the size where an equivalent domestic bank would be a member. This requirement would put the foreign banks on an equal footing with domestic banks, and more importantly, would ensure 3 that their future growth takes place under the effective monetary control of the Federal Reserve System. C= 3 In sum, the Foreign Bank Act of 1974 establishes a principle of equal or nondiscriminatory treatment for foreign and domestic banks, so that both groups would have similar powers and privileges. The bill would probably have little immedi ate impact on domestic retail banking operations. Most foreignbanking activities are located in New York and California, and to a smaller extent in Chicago. Moreover, foreign banks would continue to emphasize international banking, essentially in the same locations where they are now operating. In the future, foreign banks would operate within the same regulatory framework which governs the activi ties of domestic banks. The growth of foreign banks in the U.S. market would then depend upon their relative competitive skills, and not upon regulatory advantages. Inter nationally, the Foreign Bank Act would serve as a model for non discriminatory treatment of U.S. banks, thus encouraging the growth of international-banking competition. Robert Johnston m u ojSujq seM • q ejn • uoSaJO • epeA8|\| . ogepi MBMEH • E jU J O p | B 3 . E U O Z Ijy • B > |S E |V •1IIE") 'O D S I3 U E JJ U E S ISL ON llWR3d aivd 3DVlSOd S fl 1IVW SSV1D 1SUIJ p n s r a p i g d f e Q ILpjn8®8®^[ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Amount Outstanding 12/04/74 Change from 11/27/74 Change from year ago Dollar Percent Loans (gross, adjusted) and investments* Loans (gross, adjusted)— total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)— total* Demand deposits (adjusted) U.S. Government deposits Time deposits— total* States and political subdivisions Savings deposits Other time deposits}: Large negotiable CD's 85,621 67,832 2,074 24,295 19,953 9,787 5,084 12,705 81,172 23,203 455 55,936 5,635 17,998 28,999 15,892 + 1 ,476 + 977 + 652 + 160 — 18 + 17 + 441 + 58 + 332 + 15 + 16 + 97 43 — 19 + 139 + 292 + 8,288 + 9,374 + 860 + 3,743 + 1,809 + 800 -1,238 + 152 + 8,137 + 852 25 + 7,085 - 165 + 368 + 6,499 + 5,291 Weekly Averages of Daily Figures Week ended Week ended 12/04/74 11/27/74 Selected Assets and Liabilities Large Commercial Banks + + + + + + - + + + — + - + + + 10.72 16.04 70.84 18.21 9.97 8.90 19.58 1.21 11.14 3.81 5.21 14.50 2.84 2.09 28.88 49.91 Comparable year-ago period Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrowed ( —) 52 148 96 61 275 214 88 293 -2 0 5 + 1,690 + 1,241 + 820 + + - - - Federal Funds— Seven Large Banks Interbank Federal fund transactions Net purchases ( + ) / Net sales (—) Transactions of U.S. security dealers Net loans ( + ) / Net borrowings ( —) 736 521 17 *lncludes items not shown separately. Jlndividuals, partnerships and corporations. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137.