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FRBSF WEEKLY LETTER January 25, 1991 Slower Growth for Foreign Banks? u.s. Foreign bank activity in the grew steadily over the 1980s. Foreign-owned banks' assets booked in the U.S. reached $866 billion in 1990, and their share of u.S. banking assets grew from about 18 percent to nearly 22 percent in the last five years. According to a recent study of foreign competition in the bankrng industry, "only one broad industry group-leather goods" has a higher percent of foreign ownership than the service-oriented banking industry. The strong growth of foreign banks has raised questions about the relative competitiveness of foreign and domestic banks in the U.S. and about whether foreign banks in the u.S. will continue to expand at a faster pace than domestic banks. While a number of factors, such as relative economic conditions, trade patterns, exchange rates, and interest rates, will playa role, in this Weekly Letter the focus is on two regu latory developments that may slow the future growth of foreign-owned banks in the u.S. Competition c2p ~I r/ Foreign banks are important competitors for many banks. They provide a significant portion of the trade and direct foreign investment fi ." 'n in the u.S. For example, they issuE\ov~ 60 percent f the dollar volume of commercia:t .' ~-,.."..,ffrcredit. Their expertise in this area and their established customer relationships often give them an advantage over domestic banks. U.s. Japanese lead expansion Based on the common measures of market presence-assets and commercial loansforeign-owned banks (including commercial banks, as well as agencies and branches of foreign-owned banks) have grown twice as fast as banks over the last five years. U.s. Most of the foreign-bank expansion in the U.s. has been by Japanese-owned banks. Over t~e last five years their total assets booked in the US_ climbed from $184 billion to nearly $420 billion, and their market share soared from 6.1 percent to 10.5 percent (see Chart). While other foreignowned banks also increased the ir assets du ri Ilg this period, from $365 to $448 billion, tlleir market share actually declined from 12 percent to 11.3 percent. The figures are even more dramatic for the commercial lending componentoi assets, where Japanese banks have increased t~ei r market share by over 9 percent, to 15.4 percent. Forelgn-Owlled Bank Market Share in the U.S. Percent of As.eta 25 20 Total Foreign Share 15 Other Foreign (Less Japanese) ShClre -------------- -------------:;:..::::-r- ~- ....--- 10 Their strong credit ratings also helped establish them as leaders in the credit enhancement markets. Again, they issue more than half of the standby letters of credit which "guarantee" commercial paper, loans, bonds, or asset-backed securities. WESTERn BAnKinG - Japanese Share 5 - ----- ~ 0+--,--,---,----,----,---,---,---, 1982 1983 1984 1985 1986 1987 19188 Source: Call Report., FRBSF. "989 1990P Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. !t is published in the Weekly Letter on the fourth Friday of January, April, July, and October. FRBSF Regulatory constraints Given the significant role of japanese-owned banks in the U.S., together with the probability that European banks will concentrate on financial integration and the "opening" of Eastern European markets, the focus on japanese banks seems to be the key. Regulatory developments in japan may have begun to limit japanese-owned banks' future expansion in the u.s. The most recent (preliminary) data show a slight decline in japaneseowned banks' market share in the u.s. At a minimum, it suggests a slowdown in the rapid growth of japanese-owned bank market share in 1990. One factor that may slow the growth of japaneseowned banks in the u.s. is the liberalization of interest rate ceilings on retail deposits in japan. This regulatory reform probably will increase japanese banks' reliance on domestic funding, just as deregulation of retail deposits (NOWs, MMDAs, savings and time certificates) in the u.s. allowed major U.s. banks to substitute retaii deposits for wholesale funding (large CDs and other borrowings, and Eurodollar borrowings). In other words,eliminating these regulatory ceilings should reduce japanese-owned banks' need to raise funds in offshore markets to fund an excess of domestic loans. Henry Terrell, a Senior Economist with the Federal Reserve Board recently presented evidence supporting this hypothesis. In congressional testimony he noted that the growth of japanese banks in the U.S. was not funded by raising low-cost funds in japan and lending them through their affiliates in the u.s. Instead, Terrell indicated that aggregate net sources of funds data show just the opposite pattern. He noted that interest rate controls led to a shortage of deposits in japan, which created incentives for japanese banks to shift . assets overseas and to fund them there as well. japanese banks' overseas operation, including their u.s. affiliates, were actually net lenders of funds to their parents, not net borrowers. This is also consistent with the observation that japanese banks' u.s. affiliates raised most of their funds in the u.s. He also provided evidence that as deregulation has proceeded, japanese banks have reduced their head office borrowings from overseas affiliates. Therefore, liberalization of deposit interest rate ceilings in japan could increase their domestic deposits and thereby slow the growth of japanese-owned bank assets in the u.s. Capitalization More stringent international capital standards and risk-based capital requirements also are likely to constrain foreign and domestic banks alike in their ability to expand rapidly. Indeed, in a recent Loan Officer Survey conducted by the Federal Reserve, foreign-owned agencies and branches "put somewhat more emphasis on their capital positions as an element in their decision to exercise more [credit] restraint." Moreover, in the case of japanese banks, the sharp decline in the japanese stock market has reduced the value of japanese banks' "hidden reserves;' or unrealized gains on equity investments, thus lowering their market capitalization, and probably fUithei constraining their grovvth prospects. Summary These regulatory developments may signal slower growth ahead for foreign banks in the u.s. liberalization of japanese deposit interest rate controls should increase the proportion of domestic banking activity and interbank transactions that can be funded in japan, and reduce the need to shift business to the u.s. Still, while this may affect the asset growth of japanese banks, it may have a smaller impact on the amount of credit extended to borrowers in the u.s. At the same time, more stringent capital standards and the reduction in "hidden reserves" are likely to limit the ability of japanese banks to increase loans and assets as rapidly as they have in recent years. Thus, while foreign banks will continue to be a significant presence in U.S. banking markets, recent regulatory developments are likely to reduce their appetite for further rapid expansion in the u.s. Gary C. Zimmerman Economist REGIONAL BANK DATA SEPTEMBER 30, 1990 (Not SeasonaLLy Adjusted, Preliminary Data) DISTRICT ALASKA -------ASSETS ARIZONA CALIF. -------- -------- HAWAII IDAHO -------- -------- NEVADA OREGON UTAH WASH. TOTAL FOREIGN DOMESTIC 485,738 41,804 443,934 4,445 1 4,444 29,629 N/A 29,629 337,044 39,078 297,966 17,392 2,297 15,095 8,425 N/A 8,425 14,259 N/A 14,259 23,269 N/A 23,269 11,592 90 11,502 39,684 338 39,346 LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL 353,696 34,942 318,754 154,952 76,736 56,810 5,793 374 1,955 7 1,949 765 708 280 4 N/A 18,852 N/A 18,852 6,812 3,504 5,062 464 11 253,633 33,645 219,988 118,127 52,220 31,262 2,811 356 10,225 1,163 9,061 4,326 2,758 1,302 45 0 5,734 N/A 5,734 1,545 1,475 1,588 756 N/A 10,371 N/A 10,371 2,577 1,440 5,908 23 N/A 16,090 N/A 16,090 5,352 5,374 3,339 411 6 7,374 N/A 7,374 2,783 1,697 2,128 148 N/A 29,462 127 29,335 12,665 7,562 5,942 1,130 0 SECURITIES TOTAL U.S. T.S. SECONDARY MARKET OTHER SEC. 44,251 13,155 19,465 11,631 1,790 1,091 278 422 4,478 1,470 1,862 1,146 21,708 5,946 10,554 5,209 3,585 1,263 1,527 795 1,606 410 728 469 1,789 666 3,520 703 1,662 1,155 2,144 497 1,137 511 3,631 1,128 1,244 1,259 454,541 412,736 386,385 35,002 351,383 3,965 3,964 3,497 1 3,496 27,617 27,617 25,190 N/A 25,190 316,181 277,103 267,428 32,439 234,990 16,379 14,082 15,328 2,138 13,190 7,865 7,865 6,738 N/A 6,738 13,170 13,170 8,582 N/A 8,582 21,637 21,637 18,074 N/A 18,074 10,783 10,693 9,284 90 9,194 36,945 36,606 32,263 335 31,928 79,218 272,165 32,979 68,275 31,604 79,903 59,111 1,005 2,491 259 464 374 724 652 4,374 20,816 2,297 4,605 1,358 10,102 2,436 56,407 178,583 20,811 46,801 22,065 45,280 43,481 2,218 10,972 1,294 2,136 1,444 1,813 4,283 1,136 5,602 759 1,050 392 2,699 685 2,092 6,490 901 1,864 862 1,224 1,640 3,386 14,689 2,301 3,556 1,444 5,562 1,818 1,700 7,493 1,101 1,527 835 3,179 846 6,900 25,029 3,257 6,272 2,832 9,321 3,269 44,237 31,197 7,654 1,860 2,012 666 28,909 20,863 5,663 561 1,013 148 1,043 560 91 1,332 809 144 3,441 2,739 431 9,682 150,361 7,515 1,963, 335 56,965 136 42 3,850 1,088 239 2 , "I.e..n 'uu 66 2,818 1,631 232 58,198 424 480 39 533 27 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 2.16 1.09 0.24 0.60 2.04 -.39 2.01 0.64 1.17 0.11 0.45 N/A 3.54 2.07 2.06 4.15 2.14 -.03 2.23 1.11 0.12 0.49 1.96 -1.1 1.45 0.05 -.01 -.09 0.51 -.06 1.59 0.24 0.08 0.22 0.59 -.07 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 4.40 4.00 5.19 3.54 5.58 4.91 6.82 5.01 1.85 48.7 7.90 13.2 12.6 2.00 10.6 4.41 3.57 5.53 2.93 7.17 1.08 0.70 1.03 2.12 5.71 TOTAL INTEREST FEES & CHARGES 41,023 34,190 1,m 340 289 16 2,295 1,890 120 28,525 23,618 1,215 TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER 35,071 18,998 6,402 2,401 7,270 274 147 62 8 57 2,352 1,090 457 259 545 5,917 2,066 4,004 66 17 50 1.10 17.1 4.16 1.51 13.8 4.33 LIABILITIES TOTAL DOMESTIC DEPOSITS TOTAL FOREIGN DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME OTHER BORROWINGS EQU ITY CAP ITAL LOAN LOSS RESERVE LOAN COMMITTHENTS LOANS SOLD INCOME EXPENSES INCOME BEFORE TAXES TAXES NET INCOME ROA (%) ROE (%) NET INTEREST MARGIN (%) 199,189 648 474 o nt:1/. ~f\l7"'" ., on., "',''1.1 , .,c: OQn ,..,.." 302 19 . 307 2.30 3.27 0.39 1.83 4.94 0.41 1.44 0.50 0.20 0.51 1.14 0.35 1.95 0.92 0.52 1.65 1.20 0.31 1.46 0.43 0.37 0.19 0.91 0.80 1.85 1.97 2.50 1.80 1.26 8.84 3.07 9.17 11.5 0.41 2.97 4.48 2.76 1.59 2.48 3.80 6.41 2.54 2.42 2.65 3.02 3.90 2.51 2.12 2.97 1,259 1,121 27 662 589 33 1,918 1,568 42 1,829 1,569 106 940 827 49 3,256 2,719 169 24,205 13,282 4,485 1,547 4,891 1,032 653 192 17 170 556 336 87 12 120 1,576 688 148 294 445 1,517 865 292 83 276 826 466 126 52 182 2,734 1,470 552 129 584 -58 -23 -34 4,289 1,565 2,868 227 82 146 106 34 73 342 121 221 312 95 217 111 33 79 521 142 385 -.15 -2.2 3.60 1.13 18.3 4.07 1.15 19.2 3.68 1.17 17.3 4.06 2.01 27.1 8.01 1.26 17.7 4.09 0.90 13 4.14 1.31 18.8 4.24 I~, Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor or to the author.... Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974-2246. OUt>6 v::> 'OJSPUI?J:I UI?5 wa x09 'O"d O)SI)UOJ::J UOS JO ~uo8 a"Jasa~ IOJapa::J ~uew~Jodaa lpJOeSe~ DEPOSITORy iNSTITUTIONS REQUIRED TO HOLD RESERVES UITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COMBINED MARKET TOTAL FOR NOVEMBER 1990, BY REGION DISTRICT ALASKA ARIZONA CALIF DEPOSIT TYPE CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU TOTAL DEPOSITS 51 45 92 3 6330 50 33 66 31 32 65 44 54 74 99 59 36 90 76 95 80 94 86 59 92 72 86 45 52 4 92 4 4 58 36 6 49 38 12 61 36 2 2474 3 39 59 2 69 28 93 4 73 26 53 38 82 18 42 55 83 16 DEMAND NOW SAVINGS MMDA SMALL TIME LARGE TIME CB = COMMERCIAL BANKS; 5 4 7 17 2 3 2 SL 422 0 1 5 35 3 62 7 2 816 3 3 = SAVINGS 15 6 1 5 11 6 5 9 25 10 30 1 3 4 IDAHO HAWAII & LOANS AND SAVINGS BANKS; CU OREGON NEVADA UTAH WASH CB SL CU CB SL CU CB SL CU CB SL CU 3 4 1 8710 92 1 77 11 94 6 84 14 83 10 72 22 6 95 1 4 7914 7 56 25 20 84 12 4 5738 5 81 14 5 79 93 9 0 6928 99 1 76 15 66 18 82 16 46 51 65 34 3 2 4 7 88 9 3 = CREDIT 11 0 2 6 UNIONS; 4 0 9 16 2 3 0 8 13 3 5 84 3 13 58 5 37 84 6 10 761410 7911 10 CB SL CU 5637 92 5 64 24 46 21 68 30 43 53 49 50 7 3 12 33 2 4 1 MAY NOT SUM TO 1OO~ DUE TO ROUNDING DISTRICT ARIZ CALIF HAWAII IDAHO OREGON UTAH WASH 6.20 6.19 6.09 6.11 6.09 6.05 5.77 5.76 5.90 6.30 6.28 6.25 5.72 5.72 5.63 5.96 5.95 5.96 6.47 6.35 6.23 6.26 5.98 5.99 5.86 6.11 6.05 SEP90 OCT9O NOV9O 7.58 7.53 7.40 7.16 7.11 6.99 6.90 6.71 6.65 7.54 7.46 7.34 6.72 6.67 6.67 7.47 7.41 7.29 7.16 7.17 6.94 7.50 7.41 7.23 6.91 6.95 6.90 SEP90 OCT9O NOV9O 7.88 7.81 7.69 7.62 7.61 7.48 7.36 7.43 7.39 7.72 7.67 7.61 7.91 7.95 7.82 7.93 7.89 7.78 7.51 7.48 7.27 7.85 7.75 7.56 7.66 7.59 7.58 9.77 59 10.82 50 11.51 9 10.36 103 10.31 36 10.64 5 9.72 78 10.75 32 10.44 6 10.59 234 11.11 51 10.53 5 9.72 78 12.02 52 N/A N/A 9.96 133 N/A N/A 10.88 5 10.48 69 10.96 31 10.81 6 9.93 11.63 43 11.82 21 10.11 89 8.66 18 11.35 5 11.62 15.69 18.23 12.23 15.98 12.63 16.75 18.00 13.29 19.79 19.44 N/A N/A N/A 11.18 14.11 19.24 11.56 15.05 21.00 11.47 14.89 17.93 TYPE OF ACCOUNT OR LOAN DATE US MONEY MARKET DEPOSIT ACCOUNTS SEP90 OCT90 NOV90 92 TO 182 DAYS CERTIFICATES 2-1/2 YEARS AND OVER CERTIFICATES ----------------------------------------------------------------------------------------------------------------------------- COMMERCIAL, SHORT-TERM' COMMERCIAL, LONG-TERH* LOANS TO FARMERS* CONSUMER, AUTOMOBILE CONSUMER, PERSONAL CONSUMER, CREDIT CMOS AVE. AVE. AVE. AVE. AVE. AVE. RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) AVE. RATE AVE. RATE AVE. RATE 18.75 12.00 13.50 N/A 68 ----------------------------------------------------------------------------------------------------------------------------SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON iNTEREST RATES ON SELECTED ACCOUNTS. , DATA ARE COMPOUNDED ANNUAL RATES.
@FedFRASER