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F e d e r a l R e se rv e December 14,1973 In a world of multinational corpo rations, multinational banks have a growing role to play, as is seen from the expanded scope of foreign-bank operations inside this country in recent years. Between 1965 and 1972, assets of foreign-bank agen cies and branches in the U.S. increased three-fold to about $13 billion. This growth does not com pare with the eight-fold expansion of American banks' branches over seas (to $75 billion), but it has created an important new force in the leading American financial centers. About 150 foreign banks now oper ate in the U.S., with their activities ranging in size from one-man representative offices, through agencies and subsidiaries with reg ular banking charters. (In fact, some subsidiaries now rank among the 100 or 200 largest American banks.) These institutions have come to the United States because they realize that they must operate inside the world's largest market if they are to offer a competitive range of inter national-banking services to their customers. The U.S. is a major trading nation and, despite the turmoil of the past several years, the dollar is still the principal currency used in inter national finance. A New York, San Francisco, or Los Angeles office, for example, permits direct participa tion in U.S. financial markets with resulting benefits in lower costs and saving of time. In dealing with their corporate customers, moreover, http://Traser.stlouisfed.org/ Federal Reserve Bank of St. Louis foreign banks are at a competitive disadvantage if they cannot offer those firms banking services in overseas as well as home markets. This consideration becomes in creasingly important as foreign manufacturing and trading firms expand their beachhead in the continent-sized American market. New York is the most important center of foreign banking, because it is the leading financial center for both domestic and international trade, and because it has obvious locational advantages for financing trade with Europe. California is next in importance, because of its ad vantages for financing Pacific trade as well as the large size of the state's economy. (Foreign-bank affiliates in California accounted for almost 6 percent of the state's $43 billion total business loans at mid-year.) With the easing of banking laws in other states, centers such as Chicago, Boston and Seattle can be expected to attract more foreign banks in the future. Types of activities The most common type of oper ation for a foreign bank is the representative office, but it also has the most limited functions. It cannot make loans or accept deposits. Basically, the representative office attempts to develop business which will be handled by the parent bank abroad. About 80 foreign banks have representatives in New York City, and another 20 have repre sentatives in either San Francisco or Los Angeles. A few offices also are (continued on page 2) F e d e r a l R e se rv e B arak ®ff Sam Fram cke® 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. located in Chicago, Dallas and Houston. To make loans in the U.S., a foreign bank must establish an agency or a branch— or a domestically-char tered commercial-bank subsidiary. The actual powers of an agency or branch vary from state to state, but the principal difference is that a branch can accept— and an agency cannot accept— domesticallyowned deposits. Under New York banking law, a branch of a foreign bank not only can accept deposits, both domestic and foreign-owned, but it also can make the same types of loans per mitted to domestic banks. Loan limits are determined by the size of the foreign head office, rather than by the size of the domestic branch or agency. Most loans are asso ciated with the financing of foreigntrade, but many agencies and branches also seek domestic busi ness in making loans and accepting deposits. Some New York City branches of foreign banks actively solicit consumer-type deposits and make instalment loans, while under California banking law, foreignbank offices are permitted only to accept foreign-owned deposits. Thus California offices operate like agencies in New York, and work primarily in foreign-trade financing. Subsidiaries of foreign banks are able to conduct a full domestic banking business in the states where they are chartered. (All http://iraser.stlouisfed.org/ Federal Reserve Bank of St. Louis foreign-controlled banks presently have state charters, because Federal law requires that ail directors of Federally chartered banks be U.S. citizens.) At present, subsidiaries are chartered in New York, Cal ifornia and Illinois. In California, where state-wide branch banking is permitted, five of the eleven foreign-controlled subsidiaries have developed branch networks and compete actively for consumer business, whereas the other six conduct a wholesale banking busi ness with a strong international emphasis. In Illinois, where branch ing is forbidden to all banks, each subsidiary is permitted only a single office which these institutions gen erally choose to locate in the financial district of Chicago. Regulatory differences Where foreign banks maintain only branches or agencies, they are sub ject only to state law. Foreign banks thus can operate branches or agen cies in more than one state, which means that they have a form of interstate banking open to them which is unavailable to domestic banks. (States can stop entry, of course, and at the moment, nine states forbid all foreign-bank offices.) In addition, they are not covered by the Glass-Steagall Act, which prevents domestic banks from engaging in investment bank ing. Thus, foreign banks can par ticipate in both commercial- and investment-banking functions. When foreign banks maintain sub sidiaries, they are subject to reg- ulation by the Federal Reserve System under the Bank Holding Company Act. This act prohibits the acquisition or formation of subsid iaries in more than one state. Sub sidiaries consequently do not have the interstate branching powers available to foreign branches and agencies, and because of this lim itation, they tend to concentrate in the largest financial centers. The Bank Holding Company Act brings both the banking and nonbanking subsidiaries of foreign banks under regulation. For example, the Federal Reserve Board, applying the prin ciples of the Glass-Steagall Act, recently required an Italian bank to divest itself of a one-third interest in a U.S. investment banking operation before being permitted to buy into a Chicago commercial bank. The Federal government does not possess statutory authority to gov ern all aspects of foreign-bank activities in this country. As a result, Federal efforts to negotiate with foreign governments to reduce bar riers against U.S. banks sometimes are impeded because the Federal government can not guarantee uniform regulations in all states. Many state banking superintendents are aware of this problem, and therefore attempt to keep national objectives in view when processing applications from foreign banking institutions. Last month, Congressman Patman introduced legislation to authorize Federal regulation in this area, which would require foreign banks to apply to the Treasury Depart ment for permission to establish new offices or continue present operations. Under the provisions of the Patman bill all foreign banking operations in the U.S. would be conducted through subsidiaries, rather than through a combination of branches, agencies and subsid iaries— in a sense, paralleling the type of system under which U.S. banks operate in most foreign countries. Only two types of sub sidiaries would be permitted any foreign bank under the Patman proposal: up to five federallychartered international-banking subsidiaries, and one state-char tered domestic bank. Bank holding companies could also be formed. The Federal Reserve System has been conducting its own study of the foreign-banking situation, in an attempt to develop a coordinated policy which would reconcile national and international needs with the interests of the individual states. The System became involved in this study partly because of its responsibilities under the Bank Holding Company Act, but also because of the growing importance of foreign banking for domestic financial activity and monetary pol icy. While further efforts are made to develop a national policy in this very complex field, multinational banking will continue to exert a growing influence on the domestic economy. Robert Johnston uojSuiqsC/W • q eifi • u o Sa jQ • epBAdN • oqepi nbaabh • eiujoji|B3 • euozuv • B>|se|v F ^ ® n sg | B 3 'O D S p U B J J U B S SL O N llW lttd > iu ® § ® ^ aivd 3C L S O d S T I IVV< .SV13JLSHU p j s p BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in m illions) Selected Assets and Liabilities Large Com m ercial Banks Loans adjusted and investments* Loans adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities Other securities Deposits (less cash items)— total* Dem and deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings O ther time I.P.C. State and political subdivisions (Large negotiable CD 's) W eekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free ( f ) / Net borrowed (— ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( f ) / Net sales (— ) Transactions: U.S. securities dealers Net loans ( -) / Net borrow ings (— ) Am ount O utstanding 11/28/73 76,117 57,977 1,337 20,001 18,004 8,878 5,934 12,206 71,684 21,805 474 48,224 17,479 22,053 5,579 10,461 Change from 11/21/73 + + + + + + + + + - 223 236 66 24 32 5 157 154 151 35 51 100 42 114 47 197 W eek ended 11/28/73 Change from year ago D o llar Percent + + + + + + + + + + + + 9,156 9,164 14 2,698 3,195 1,299 965 957 6,015 934 856 5,813 760 5,115 570 3,812 W eek ended 11/21/73 + + + + + + + + + + + + 13.67 18.77 1.04 15.59 21.52 17.14 13.99 8.51 9.16 4.48 64.36 13.71 4.17 30.20 11.38 57.33 Com parable year-ago period 12 19 7 89 88 + 1 - + 933 + 686 -2 1 8 - -2 1 9 + 172 - 21 - 10 64 74 *Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Digitized for f R A S E R istrative Services Department. Federal Reserve Bank of San Francisco, P.O. Box 7702, http://fraser.stloUiSflfiaOVg^ co ’ California 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis ® j
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