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FEDERAL RESERVE BANK O F NEW YORK Circular No. 7516 "j December 3, 1974J t Proposed Legislation To Regulate Foreign Banking Organizations Operating in the United States To Branches and Agencies of Foreign Banking Corporations, and Others Concerned, in the Second Federal Reserve District: F ollow ing is the text o f a statem ent issued today by the B oard o f G overn ors o f the Federal Reserve System: The Board o f Governors o f the Federal Reserve System today sent to Congress proposed legislation to establish a national policy on foreign banks operating in the United States, and a system o f Federal regulation and supervision o f those operations. The proposed legislation would standardize the status o f foreign banks operating in the United States and place them basically under the same rules and regulations that must be observed by domestic banks. Foreign banking in the United States has grown from $6.5 billion in assets in 1966 to $38 billion as o f the end o f 1973. There are currently more than 60 foreign banks with U.S. operations. In explaining the basic reasons for recommending the adoption o f the proposed legislation, the Board included the following statement in its transmittal to Congress: “ Foreign banks have in recent years been coming to the United States in increasing numbers and operating through branches, agencies, and subsidiary banks. The scale and nature o f foreign bank activities through these facilities is now significant in terms o f competition within the banking industry and o f the functioning o f money and credit markets. This movement by foreign banks into the United States is part o f the broader development o f multinational banking in which United States banks are deeply involved through their extensive operations overseas. The multinational banking system that has evolved as a result o f the establishment by the world’s leading commercial banks o f banking and financing facilities on a global basis is now a key element in the world’s financial system. Its function ing has far-reaching ramifications for international financial policy and for the economic and financial policies o f individual nations.” At present, foreign banks operating in this country do so on terms determined almost exclusively by State laws. Among the conditions that have resulted from this are the following: A prohibition o f foreign banking in some states and its permission in others; multi-state banking by foreign-owned organizations; lack o f constraints on nonbanking activities by foreign banks; the fact that few foreign banks are members o f the Federal Reserve Svstem. although they are for the most part large banks (all but a few large domestic banks are members), thus excluding a growing sector o f money and credit from the direct influence o f Federal Reserve monetary policy; the fact that the Federal Government can play only a limited role in foreign bank operations in the United States, although this has important implications for U.S. foreign relations. The proposed legislation would standardize the status o f foreign banks, their branches and agencies, on the basis o f nondiscriminatory national treatment, aimed at providing foreign banks with the same opportunities to conduct activities in this country as are available to domestic banks and subjecting them to the same rules. The legislation would also provide for a Federal role in licensing and supervising foreign bank operations. The Comptroller o f the Currency would issue licenses for all foreign banking facilities in the United States upon approval o f the Secretary o f the Treasury. The Comptroller would also supervise foreign-owned national banks and Federally insured branches o f foreign banks. The Federal Reserve would exercise supervisory authority under the Federal Reserve Act and the Bank Holding Company Act. (Over) The Federal Deposit Insurance Corporation would be required to submit proposals to extend its deposit insurance, now covering subsidiaries o f foreign banks, to branches and agencies. The proposed legislation culminates months o f extensive work by a special Federal Reserve Steering Committee on International Banking Regulation headed by George W. Mitchell, Vice Chairman o f the Board. The main provisions o f the proposal are: 1. Coverage: The Bank Holding Company Act would be redefined to include branches and agencies — as well as subsidiaries which are presently covered — o f foreign banks, bringing nearly all foreign banks with depository and lending functions in the United States under the Bank Holding Company Act. 2. Equality of Treatment: In addition to bringing virtually all foreign bank operations in the United States under the Bank Holding Company Act, equality o f treatment with respect to domestic banking would be provided by facilitating foreign ownership o f national banks, enabling licensing o f a Federally chartered branch, permitting foreign banks to own Edge Act Corporations, by requiring Federal Reserve membership in most instances and by FDIC insurance o f deposits in branches and agencies. 3. Entiy: The National Banking Act would be amended to permit up to half o f the directors o f a national bank — all o f whose directors must now be U.S. citizens — to be foreigners. The Comptroller would also be empowered to license branches o f foreign banks to conduct a banking business in any State on the same basis as a national bank. 4. Edge Corporations: The section o f the Federal Reserve Act dealing with establishment o f Edge Act Corporations — subsidiaries o f member banks in the United States that deal with foreign financial transactions — would be amended to allow foreign banks to conduct foreign business throughout the United States on the same basis as domestic banks, without majority control by U.S. citizens. 5. Federal Reserve Membership: Membership would be required for branches, agencies, and subsidiaries o f a foreign bank where the parent foreign bank had worldwide assets exceeding $500 million. 6. Grandfathering: Multi-state banking operations o f foreign banks, in duction o f the legislation, would be permanently grandfathered and could accordance with State law. Nonbanking interests o f foreign banks covered permanently grandfathered if in operation as o f the date o f introduction securities affiliates o f foreign banks in the United States. operation as o f the date o f intro be expanded where existing, in by the legislation would also be o f the legislation. This includes C opies o f the B oard o f G ov ern ors’ transm ittal letter to C ongress, a sum m ary o f the p rop osed legislation, B an k in g and the text o f the draft bill will be furnished upon request directed to ou r A p p lica tion s D epartm ent. ALFRE D H AYES, President. Foreign
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