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March 23, 1 979
Intern ational Banking Regs
The Federal Reserve last month
proposed revisions to several international-banking regulations - those
covering international activities of Edge
Corporations (Regulation K), member
banks (Regulation M), and foreign investments by bank holding companies
(Regulation V). The proposed revisions
would consolidate all internationalbanking regulations into a single regulation entitled International Banking
Operations (proposed Regulation K),
and in that way would facilitate the
banking industry's understanding of,
and compliance with, the Fed's regulatory requirements.
The principal impetus came from the
passage of the International Banking
Act (IBA) of 1978, which directed the
Federal Reserve to modify its regulations covering Edge Corporations.
(These corporations are owned by
banks, are chartered and regulated by
the Federal Reserve, and are limited in
their activities to the field of international finance.) EdgeCorporations may
be established in multiple locations in
the United States, and thus they give
banks a way of providing their customers with international-banking services
from offices outside their home state of
operation.
EdgeCorporation regs
The Congressional intent regarding
Edges was specifically stated in the
International Banking Act. The IBA
stated that Edge Corporations shou Id be
better able to "facilitate and stimulate
the export of
goods," and should
be better able to "stimulate competition in the provision of international
banking and financing services
throughout the United States."
u.s.
To achieve these purposes, the Federal
Reserve has proposed a major amendment of its regulations to distinguish a
new class of Edge customers. A corporation would tentatively be defined as
principally engaged in foreign trade if
two-thirds or more of its purchases or
sales are pirectly attributable to foreign
commerce. For this class of customers,
an Edge Corporation cou Id extend
loans and accept deposits, without
regard to whether specific transactions
were trade-related. Past regulatory
practice, requiring each Edge deposit
and loan transaction to be linked to
foreign trade, placed a regulatory
burden on both the banks and the
Federal Reserve. The proposed
revisions would help alleviate this
problem.
In addition, the new regulations would
permit Edge Corporations to finance
the production of U.S. goods designated for export. Previously, Edge
Corporations could finance only the
shipment and storage of export goods,
and not their production. This proposed change would enhance their
flexibility in financing
exports,
since a customer could then obtain
both pre-export and export financing
from an Edge Corporation.
u.s.
A second important proposal would
allow Edge Corporations to establ ish
domestic branches. Edgescurrently
may establ ish foreign branches, but a
bank must establish separate Edge
Corporations if it wants to conduct
international transactions in multiple
locations in the United States. A few
large banks maintain individual Edge
Corporations in several cities in the
United States. Thus, the current re(continued on page 2)
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Corporations to incur the expense and
inconvenience of incorporating individual entities. Moreover, each Edge's
loan limit for individual borrowers is
based on its own capital, and this restriction has inhibited participation in
major transactions in the past.
With domestic branches permitted, the
competitive position of Edge Corporations shou Id be enhanced. In that situation, a bank could consolidate its Edge
Corporations into a single entity with a
lending limit based on a larger capital
base. Greater lending limits would
make Edge Corporations more competitive in major credit transactions. In
addition, a wider range of smaller
banks could become involved in
foreign-trade financing. They might not
be able to afford multiple Edge Corporations, but they would be able to
establ ish domestic branches of Edge
Corporations currently in operation.
Domestic branching by a greater number of institutions offering internationalbanking services should facilitate
competition in that area.
Tho
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involved another important related
change -th e abolition of the statutory
minimum reserve requirement of 10
percent on total Edge Corporation
deposits, regardless of composition of
the deposits. The new reserve requirements will be at levels comparable to
member-bank requirements. Since
member-bank requirements are well
below 10 percent for time and savings
deposits, this change will make Edge
Corporations better able to compete
for such deposits.
Foreign-investment regs
The Federal Reserve Act and the Bank
Holding Company Act give the Federal Reserve broad authority to approve
foreign investments by member banks,
bank holding companies, and Edge
Corporations. The investments are
generally limited to banking and
financial activities; however, the
Federal Reserve in the past has permitted u. S. banking institutions to invest
in a range of activities abroad, so that
they could compete better with foreign
banks and thereby support the growth
of U.S. foreign commerce.
As part of its current review, the
Federal Reserve is proposing changes
in its approval procedures for foreign
investments. Under the proposed regulations, the Federal Reserve will give
its consent to all investments in any
foreign banking or financial institution
in amounts up to $2 million, or 5 percent of the investing institution's
capital and surplus. In those cases
where an investment reaches 10 percent of the foreign institution's capital
and surplus, the investing institution
2
'vVGuldbe required to provide 60 days
written notice before implementation.
At the end of that period, the investment would be automatically approved unless the Federal Reserve
disapproved the investment or requested a full application.
For largerforeign investments, orfor
investments in nonfinancial entities, a
formal application would be required.
To facilitate investors' planning, the
Federal Reserve has included in the
proposed regulation a list of the types
of investments which it had previously
approved - but has made it clear that
the list does not necessarily limit the
types of corporations in which a bank
might invest. Investments in areas not
covered by the list wou Id be approved
in cases where the investing bank could
show that a proposal is of a financial
nature, and is a normal activity for
banks in the country involved.
Other issues
The Federal Reserve has also requested public comment on two issues on
which it has not yet taken a position.
First, i nternational-banki ng regu lations
in the past have prohibited foreign subsidiaries of banks, bank holding companies, and Edge Corporations from
lending to U.S. residents for domestic
pu rposes, as a means of keepi ng foreign
subsidiaries from circumventing domestic banking regulations. But the
increasing integration of world financial and banking markets, with corporations maintaining borrowing and
depositing facilities in several countries, has reduced the distinction
between purely domestic and foreign
customers, and thus has made this pro-
3
hibition difficult to interpret. Secondly:
there is the question of whether Edge
Corporations should be permitted to
become member banks - a question
which the International Banking Act
requires the Federal Reserve to consider.
With the development of new regu lations, the Federal Reserve hopes to
meet several national goals which
Congress intended toachieve through
last year's legislation. In Congress' eyes,
Edge Corporations shou Id have powers
sufficiently broad to enable them to
compete with foreign banks in the United States as well as abroad, and to
provide all segments of the
economya means of financing international
trade - exports in particular. In addition, Congress intended that Edge
Corporations should help foster the
participation of regional and smaller
banks in international banking and
finance, and also should help stimulate
competition in making those services
available throughout the United States.
u.s.
Henry S.Tell'weU
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BANKINGDATA-TWELfTH FEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
Selected
Assetsandliabilities
large Commercial8anks
Amount
Outstanding
3/7/79
Change
from
2/28/79
Loans(gross,adjusted)and investments*
Loans(gross,adjusted)- total#
Commercial and industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits- total#
Demand deposits- adjusted
Savingsdeposits - total
Time deposits- total#
Individuals, part. & corp.
(LargenegotiableCD's)
122,166
99,956
28,993
35,423
20,434
1,787
7,708
14,502
40,163
29,654
29,677
50,662
41,170
18,460
Weekended
3/7/79
620
574
184
71
+
20
+
125
+
52
+
6
319
813
+
115
+
257
189
284
W=ekended
2/28/79
of Daily Figures
MemberBankReserve
Position
ExcessReserves(+ )/Deficiency (- )
+
+
Changefrom
year ago @
Dollar
Percent
NA
NA
Comparable
year-agoperiod
7
82
75
20
112
92
89
9
80
+ 1,649
+ 1,995
+ 1,328
Borrowings
Net free reserves(+ )/Net borrowed(- )
FederalFunds- Sevenlarge Banks
Net interbank transactions
[Purchases(+ )/Sales(-)]
Net, U.s. Securitiesdealer transactions
[Loans(+ )/Borrowings(-)]
+
482
+
364
+
657
* Excludestradingaccountsecurities.
# Includesitemsnotshownseparately.
@ Historicaldataarenotstrictlycomparable
dueto changesin the reportingpanel;however,adjustments
havebeenappliedto 1978datato removeasmuchaspossibletheeffectsof thechanges
in coverage.
In
addition,for someitems,historicaldataarenotavailabledueto definitionalchanges.
Editorialcommentsmaybeaddressed
to the editor(WilliamBurke)or to theauthor....
Freecopiesof this and other FederalReserve
publicationscanbeobtainedbycallingor writing the Public
InfonnationSection,FederalReserve
Bankof SanFrancisco,P.O.Box7702,SanFrancisco
94120.Phone
(415)544-2'484.
@FedFRASER