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INTERNATIONAL BANKING ACT OF 1977
HEARINGS
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
NINETY-FIFTH CONGRESS
FIRST SESSION
ON
H.R. 7325
A BILL TO PROVIDE FOR FEDERAL REGULATION OF PARTICIPATION BY FOREIGN BANKS IN DO)IES'l'IC FINANCIAL
MARKETS
JULY 12, 13, AND 19, 1977
Printed for the use of the
Committee on Banking, Finance and Urban Affairs
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Federal Reserve Bank of St. Louis
CALIF. SUPREME
COURT llRR•\RY
SEP 2 2 1977
DEPOSI I oi;·,.
HASTINGS ANNEX
INTERNATIONAL BANKING ACT OF 1977
HEARINGS
BEFORE THE
SUBCOMMI'ITEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
NINETY-FIFTH CONGRESS
FIRST SESSION
ON
H.R. 7325
A BILL TO PROVIDE FOR FEDERAL REGULA.TIOX OF PARTICIPATION BY FOREIGN BANKS IN DOMESTIC FINANCIAL
MARKETS
JULY 12, 13, A.ND 19, 1977
Printed for the use of the
Committee on Banking, Finance and Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
93-081 0
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Federal Reserve Bank of St. Louis
WASHINGTON : 1977
HOUSE COMMITTEE O~ BANKING, FINANCE AND URBAN AFFAIRS
HENRY S. REUSS, Wisconsin, Chairman
THOMAS L. ASHLEY, Ohio
J. WILLIAM STANTON, Ohio
WILLIAM S. MOORHEAD, Pennsylvania
GARRY BROWN, Michigan
FERNAND J. ST GERMAIN, Rhode Island
CHALMERS P. WYLIE, Ohio
HENRY B. GONZALEZ, Texas
JOHN H. ROUSSELOT, California
JOSEPH G. MINISH, New Jersey
STEWART B. McKINNEY, Connecticut
FRANK ANNUNZIO, Illinois
GEORGE HANSEN, Idaho
JAMES M. HANLEY, New York
HENRY J. HYDE, Illinois
FARREN J. MITCHELL, Maryland
RICHARD KELLY, Florida
WALTER E. FAUNTROY,
CHARLES E. GRASSLEY, Iowa
MILLICENT FENWICK, New Jersey
District of Columbia
STEPHEN L. NEAL, North Carolina
JIM LEACH, Iowa
JERRY M. PATTERSON, California
NEWTON I. STEERS, JR., Maryland
JAMES J. BLANCHARD, Michigan
THOMAS B. EVANS, JR., Delaware
CARROLL HUBBARD, JR., Kentucky
BRUCE F. CAPUTO, New York
JOHN J. LAFALCE, New York
HAROLD C. HOLLENBECK, New Jersey
GLADYS NOON SPELLMAN, Maryland
LES AuCOIN, Oregon
PAULE. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
CLIFFORD ALLEN, Tennessee
NORMAN E. D'AMOURS, New Hampshire
STANLEY N. LUNDINE, New York
HERMAN BADILLO, New York
EDWARD W. PATTISON, New York
JOHN J. CAVANAUGH, Nebraska
MARY ROSE OAKAR, Ohio
JIM MATTOX, Texas
BRUCE F. VENTO, Minnesota
DOUG BARNARD, Georgia
WES WATKINS, Oklahoma
PAUL NELSON, Olerk and Stat! Director
WILLIAM P. DIXON, General CounBel
MICHAEL P. FLAHERTY, Counsel
GRASTY CREWS II, CounBel
MERCER L. JACKSON, Minority Staff Director
GRAHAM T. NORTHUP, Deputy Minority Staff Director
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION
AND INSURANCE
FERNAND J. ST GERMAIN, Rhode Island, Chairman
JOHN H. ROUSSELOT, California
FRANK ANNUNZIO, Illinois
CHALMERS P. WYLIE, Ohio
JAMES M. HANLEY, New York
GARRY BROWN, Michigan
CARROLL HUBBARD, JR., Kentucky
HENRY J. HYDE, Illlnois
JERRY M. PATTERSON, California
GEORGE HANSEN, Idaho
BUTLER DERRICK, South Carolina
JIM LEACH, Iowa
THOMAS L. ASHLEY, Ohio
NORMAN E. D'AMOURS, New Hampshire
JOHN J. LAFALCE, New York
CLIFFORD ALLEN, Te.nnessee
JOHN J. CAVANAUGH, Nebraska
MARY ROSE OAKAR, Ohio
JIM MATTOX, Texas
RICHARD L. STILL, Subcommittee Staff Director
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Federal Reserve Bank of St. Louis
{II)
CONTENTS
Page
Hearings held onJuly 12, 1977 ..............................................................................................................
July 13, 1977 ..............................................................................................................
July 19, 1977 ..............................................................................................................
Text of H.R. 7325 .............................................................................................................
1
261
335
3
STATEMENTS
Bench, Robert; Associate Deputy Comptroller for International Banking, Office
of the Comptroller of the Currency ........................................................................ .
Bloom, Hon. Robert, First Deputy Comptroller for Policy, Office of the Comptroller of the Currency ............................................................................................... .
601
~s:i ~~~~~.~~. ~~~:.:-~~.~.-~~~.~~~~.~~~. ~~.~~~~
~w;;rs~~p~~'!!i
De Luca, Mario R., executive vice president, Banco di Roma (Bank of Rome),
chairman, Institute of Foreign Bankers; accompanied by Isao Ichikawa,
general manager, Mitsubishi Bank, Ltd., Tokyo; Rudolph Kuchler, senior vice·
president, Union Bank of Switzerland; and Steuart L. Pittman, counsel for
the institute ................................................................................................................. .
Dowd, James E., president, Boston Stock Exchange, Inc ....................................... .
Fabre, Paul, deputy managing director, French Bankers Association; accompanied by William D. Rogers, partner, Arnold & Porter ........................................ .
Gardner, Hon. Stephen S., Vice Chairman, Board of Governors of the Federal
Reserve System ........................................................................................................... .
Jang, Dr. Wolfgang, member of the board, Commerzbank AG ............................. .
Kuchler, Rudolph, senior vice president, Union Bank of Switzerland ................ .
Lee, John F., executive vice president, New York Clearing House Association.
LeMaistre, Hon. George A., Chairman, Federal Deposit Insurance Corporation .
O'Brien, Edward I., president, Securities Industry Association; accompanied by
James W. Walker, Jr., executive vice president ................................................... .
O'Brien, Rt. Hon., Lord of Lothbury, president, British Bankers Association ... .
Palmer, Robert B., vice president, Banker's Association for Foreign Trade;
accompanied by James B. Sommers, chairman, Committee on Foreign Banking in the United States; and Thomas L. Farmer, general counsel ................. .
Perry, Hart, president, SoGen-Swiss International Corp ........................................ .
Pittman, Steuart, counsel, Institute of Foreign Bankers ....................................... .
Rosenblum, Kenneth I., senior vice president and general counsel, Midwest
Stock Exchange, Inc ................................................................................................... .
Solonom, Hon. Anthony M., Under Secretary for Monetary Affairs, Department
of the Treasury; accompanied by Stephen J. Friedman, Deputy Assistant
Secretary (Designate) for Capital Markets ............................................................. .
Whitesell, William E., secretary of banking, Commonwealth of Pennsylvania,
member, Federal Legislation Committee, Conference of State Bank Supervisors; accompanied by Alex Neale, vice president ·and director of Federal
legislation of the conference ..................................................................................... .
ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD
Bankers' Association for Foreign Trade, prepared statement on behalf by
Robert B. Palmer, vice president..............................................................................
Bank Hapolaim B.M., statement presented on behalf by firm of Stroock &
Stroock & Lavan ..........................................................................................................
Bloom, Hon. Robert, prepared statement ...................................................................
Boeker, Hon. Paul H., prepared statement.................................................................
Boston Stock Exchange, Inc., prepared statement on behalf by Hames E. Dowd,
president ........................................................................................................................
Busbee, Hon. George, Governor, State of Georgia, statement ................................
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Federal Reserve Bank of St. Louis
(iii)
573
274
445
430
337
36
338
534
294
546
207
336
374
431
539
431
262
306
379
616
577
275
388
604
IV
Page
Conference of State Bank Supervisors, prepared statement presented on behalf
by William E. Whitesell, member ............................................................................ .
Dowd, James E., prepared statement presented on behalf of the Boston Stock
Exchange, Inc .............................................................................................................. .
European Economic Community Banking Federation, statement ....................... .
Federal Deposit Insurance Corporation, statement presented on behalf by Hon.
George A. LeMaistre, Chairman ............................................................................. .
Gardner, Hon Stephen S.:
Compendium of supporting materials submitted ............................................. .
Letters containing Chairman St Germain's written questions to Governor
Gardner re H.R. 7325; Chairman Arthur F. Burns support of the "International Banking Act of 1977"; Governor Gardner's reply to Chairman St
Germain's questions; and answers to questions raised by Congressmen
Frank Annunzio and Clifford Allen ................................................................ .
Response to question of Congressman Clifford Allen ...................................... .
Statistical appendix to statement ....................................................................... .
Institute of Foreign Bankers, statements .................................................................. .
Lee, John F., prepared statement presented on behalfofthe New York Clearing
House Association ...................................................................................................... .
LeMaistre, Chairman George A.:
Prepared statement ................................................................................................ .
Response to request for information byChairman Fernand J. St Germain ............................................................... .
Congressman Chalmers P. Wylie ................................................................. .
Midwest Stock Exchange, Inc., prepared statement on behalf by Michael E.
Tobin, president ..........................................................................,.............................. ..
Meale, Alexander W., letter, dated July 22, 1977, on behalf of Mr. Whitesell,
responding to information requested by Chairman St Germain ...................... ..
New York Clearing House Association, prepared statement on behalf by John
F. Lee, executive vice president ............................................................................... .
O'Brien, Edward I.:
1~!1testo1!!i!:;t;;;;;i;ti~~··M;~~~~~d~~··r~;··st~dy··~d·ri~~i~~
on Bank Securities Activities," publication submitted ............................... .
Palmer, Robert B., prepared statement presented on behalf of the Bankers'
Association for Foreign Trade .................................................................................. .
Perry, Hart
Prepared statement, with attachment, presented on behalf of the SoGenSwiss International Corp ................................................................................... .
Prepared testimony for oral delivery .................................................................. .
Statement on "Access to European Stock Exchanges" .................................... .
Rousselot, Hon. John H., ranking minority member, opening statement ........... .
SoGen-Swiss International Corp., prepared statement on behalf by Hart Perry,
president ...................................................................................................................... ..
Solomon, Hon. Anthony M., prepared statement .................................................... .
State Department, statement presented on behalf by Hon. Paul H. Boeker,
Deputy assistant Secretary for Economic and Business Affairs ....................... .
Stroock & Stroock & Lavan, statement presented on behalf of the Bank
Hapoalim B.M .............................................................................................................. .
Tobin, Michael E., prepared statement presented on behalf of the Midwest
Stock Exchange, Inc ................................................................................................... .
Treasury Department, statement presented on behalf by Hon. Anthony M.
Solomon, Under Secretary for Monetary Affairs ................................................ ..
Whitesell, William E., prepared statement presented on behalf of the Conference of State Bank Supervisors ................................................................................ .
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Federal Reserve Bank of St. Louis
309
388
341
550
98
164
157
42
448
296
550
590
599
424
325
296
211
214
379
398
438
433
35
398
266
275
616
424
266
309
APPENDIXES
APPENDIX A
QUESTIONS SUBMITI'ED BY LETrER FROM CHAIRMAN ST GERMAIN REGARDING H.R. 7325,
"THE INTERNATIONAL BANKING ACT OF 1977," WITH ATTACHED REPLIES FROM THE
FOLLOWING WITNESSES
Page
Bloom, Hon. Robert, First Deputy for Policy, Office of the Comptroller of the
Currency ....................................................................................................................... .
~~J~~o!;p;~%!i ~ts:le ~~~.~~. ~~~.~.~~::.~~~. ~~~.~.~~~. ~~~. ~~~~.~~~.~
Dowd, James E., president, Boston Stock Exchange, Inc., Boston, Mass ............ ..
Farmer, Thomas L., general counsel, Bankers' Association for Foreign Trade
(representing a panel consisting of Robert B. Palmer and James B. Sommers ..
Lee, John F., executive vice president, New York Clearing House Association.
LeMaistre, Hon. George A., Chairman, Federal Deposit Insurance Corporation .
O'Brien, Edward I., president, Securities Industry Association, Washington, D.C
O'Brien, Rt. Hon., Lord of Lothbury, president, British Bankers' Association,
London, England (representing a panel of the European Economic Community consisting of Dr. Wolfgang Jahn and Paul Fabre) .......................................... ..
Perry, Hart, president, SoGen-Swiss, New York, N.Y ............................................ ..
Pittman, Steuart L., counsel, Institute of Foreign Bankers (representing Marion
R. de Luca ..................................................................................................................... .
Solomon, Hon. Anthony M., Under Secretary for Monetary Affairs, Department
of the Treasury .......................................................................................................... ..
Whitesell, William E., secretary of banking, Commonwealth of Pennsylvania,
member, Federal Legislation Committee, Conference of State Bank Supervisors ................................................................................................................................. .
APPENDIX
746
668
721
712
675
738
625
687
731
750
635
680
B
THE FOLLOWING LETTERS WERE SUBMITTED FOR INCLUSION IN THE RECORD:
Ekblom, H. E., chairman and chief executive officer, European American Bank,
New York, N.Y., dated July 20, 1977 .......................................................................
Hallingby, Paul, Jr., chairman, White, Weld & Co., Inc., New York, N.Y., dated
July 12, 1977 .................................................................................................................
Probst, Hon. Raymond, Ambassador of Switzerland, Washington, D.C., dated
July 25, 1977, with attachment, in response to attached correspondence of
Chairman St Germain, dated July 29, 1977 ............................................................
Williams, Hon. Harold M., Chairman, Securities and Exchange Commission,
dated July 21, 1977, in response to attached correspondence of Chairman St
Germain, dated July 19, 1977 ....................................................................................
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Federal Reserve Bank of St. Louis
(v)
775
771
765
763
INTERNATIONAL BANKING ACT OF 1977
TUESDAY, JULY 12, 1977
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE OF THE
CoMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2120, Rayburn House Office Building, Hon. Fernand J. St Germain
(chairman of the subcommittee), presiding.
Present: Representatives St Germain, Annunzio, Hanley, Derrick,
LaFalce, Allen, Cavanaugh, Oakar, Rousselot, Hyde, Hansen, and
Leach.
Mr. 8T GERMAIN. The subcommittee will come to order.
Today the Subcommittee on Financial Institutions Supervision,
Regulation and Insurance opens 3 days of hearings on the provisions of H.R. 7325, the International Banking Act of 1977.
Chairman Reuss and I, on May 23, were joined by 19 of our
colleagues serving on the Committee on Banking, Finance and
Urban Affairs as sponsors of this bill, virtually identical to. H.R.
13876, which passed the House by voice vote on July 29 of last year.
The Senate Subcommittee on Financial Institutions held hearings
on the proposal, but due to the shortage of time remaining in the
94th Congress, the subcommittee was unable to make its recommendations to the full committee and hence it is necessary for us once
again to resume the consideration of this most important regulatory
measure requested by the Board of Governors of the Federal Reserve repeatedly since 1974.
The sponsors of the present bill also served as sponsors in the
94th Congress when, after the conclusion of the FINE Study conducted by this subcommittee, it became apparent to those of us who
participated in those hearings that the time had indeed arrived to
establish at long last a national policy with regard to the operations
of foreign banks in the United States.
That policy has as its admittedly oversimplified goal the placing
of foreign bank operations under the same type of Federal banking
and monetary regulation that affects comparable domestic banks. It
should be emphasized that after extended hearings in the 94th
Congress beginning with the FINE Study Discussion Principles, the
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Federal Reserve Bank of St. Louis
(1)
2
full committee, by a vote of 29 to 3, concurred in the judgment
reached by the measure's original cosponsors.
During the intervening year, understandably, considerable apprehension has been voiced by an increasing number of individuals and
the foreign institutions they represent as to the impact of this bill's
provisions on their existing or, and I must emphasize, their contemplated future operations in the United States.
[A copy of H.R. 7325 follows:]
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Federal Reserve Bank of St. Louis
3
9
m:~~!~~:ss ff. R. 7325
IN THE HOUSE OF REPRESENTATIVES
MAY 23,1977
Mr. ·ST GERMAIN ( for himself, Mr. REuss, Mr. ASHLEY, Mr. MOORHEAD of Pennsylvania, Mr. GoNZALEZ, Mr. MINISH, Mr. ANNUNZIO, Mr. HANLEY, Mr.
MITCHELL of Maryland, Mr. NEAL, Mr. PATl'ERSON of California, Mr.
BLANCHARD, Mrs. SPELLMAN, Mr. DERmcx:, Mr. HANNAFORD, Mr. ALLEN,
Mr. D'AxoURB, Mr. BADILLO, Mr. 'STANTON, Mr. WYLIE, and Mr. HYDE)
introduced the following bill; which was referred to the Committee on
Banking, Finance. and Urban Affairs
ABILL
To provide for Federal regulation of participation by foreign
banks' in domestic financial markets.
1
Be it enacted by the Senate and House of_Representa-
2
tives of the United States of America in Oongreas assembled,
3
SHORT TITLE AND DEFINITIONS
4
5
6
SECTION 1.
(a) This Act may be cited as the "Inter-
national Banking Act of 1977".
(b) For the purposes of this Act---
7
·( 1) "agency" means any office or any place of busi-
8
ness of a foreign bank located in any State of the United
9
States at which credit balances are maintained incidental
10
to or arising out of the exercise of banking powers, but
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Federal Reserve Bank of St. Louis
4
2
1
at which deposits may not be accepted from citizens or
2
residents of the United States;
( 2) "Board" means the Board of Governors of the
3
4
Federal Reserve System;
( 3)
5
"branch" means any office or any place of busi-
6
ness of a foreign bank located in any State of the United
7
States at which deposits are received and checks are
8
paid or money is lent;
( 4) "Comptroller" means the Comptroller· of the
9
10
Currency;
11
(5) "Federal agency" means an agency of a foreign
12
bank established and operating under section 4 of this
13
Act;
14
(6) "Federal branch''. means a branch of a foreign
15
bank established and operating under section 4 of this
16
Act;
17
(7) "foreign bank" means any institution that (1)
18
is organized under the laws of a foreign country, a terri-
19
tory of the United States, Puerto Rico, Guam, American
20
Samoa, or the Virgin Islands, and (2) either (A)
21
principally conducts its banking business outside the
22
United States or (B) is a subsidiary, as that term is
23
defined in the Bank Holding Company Act of 1956,
24
of any institution which, on a consolidated basis,
25
principally conducts its banking business outside the
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Federal Reserve Bank of St. Louis
5
3
1
United States. For the purposes of this Act, the term
2
"foreign ·bank" includes, without limitation, foreign
3
commercial banks, foreign merchant banks and other
4
foreign institutions that engage in banking activities
5
usual in connection with the business of banking in the
6
countries where such foreign institlJ.tions are organized
7
or operating;
8
(8) "foreign country" means any country other
9
than the Unit.ed States, and includes any colony, de-
10
pendency, or possession of any such country;
11
(9) "commercial lending company" means any in-
12
stitution, other than a bank or an organization operating
13
under section 25 of the Federal Reserve Aet, organized
14
under the laws of any State of the United States, or the
15
District of Columbia which maintains credit balances
16
incidental to or arising out of the exercise of banking
17
powers and engages in the business of tnaking commer-
18
cial loans;
( 10) "State" means any State of the United States
19
21)
or the District of Columbia; and
21
(11) the terms "bank", "bank holding company",
22
"company", "control", and "subsidiary" as used in this
23
Act shall have the same meanings assigned to those
24
terms in the Bank Holding Company Act of 1956,
25
and the terms "controlled" and "co~trolling" as used in
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Federal Reserve Bank of St. Louis
6
4
1
this Act shall be construed consistently with the term
2
"control" as defined in section 2 of the Bank Holding
3
Company Act of 1956.
4
ESTABLISHMENT OF NATIONAL BANKS
5
SEO. 2. Section 5146 of the Revised Statutes (12
6
U.S.C. 72) is amended by striking out the period at the end
7 of the first sentence and adding the following new provision:
8
",
except that in the case of an association which is a sub-
.9 sidiary or affiliate. of a foreign bank, the Comptroller of the
10 Currency may in his discretion waive the requirement of
n
citizenship in the case of not more than a minority of the
12 · total number of directors.".
13
14
EDGE CORPORATIONS
SEO. 3. (a) The second sentence of the fourth p!lra-
15 grapn of sectfon 25 (a) of the Federal Reserve Act ( 12
16
U.S.C. 614) is am.ended by striking out", all of whom shall
17 be citizens of the United States" after "to elect or appoint
18 directors".
19
(b) The first sentence of the sixth paragraph of section
20
25 (a) of the Federal Reserve Act (12 U.S.C. 615 (a))
21 is amended by inserting "except with the approval of the
22
Board of Governors of the Federal Reserve System," after
23
"but in no event".
24
( c) The second proviso of the first sentence of the
25 twelfth paragraph of section 25 (a) of the Federal Reserve
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Federal Reserve Bank of St. Louis
7
5
1 Act (12 U.S.O. 618) is amended by inserting ", except
2 with the approval of the Board of Governors of the Federal
3 Reserve System" after "That".
4
( d) The thirteenth paragraph of section 25 (a) of
5 the Federal Reserve Act (12 U.S.O. 619) is deleted and
6 the following paragraph is inserted in lieu thereof:
7
"Except as otherwise provided in thlsection, a majority
8 of the shares of the capital stock of any such corporation
9 shall at all times be held and owned by citizens of the United
10 States, by corporations the controlling interest in which is
11 owned by citizens of the United Stat.es, chartered under the
12 laws of the United States or of a Staie of the United States,
13 or by firms or companies, the controlling interest in which is
14 owned by citizens of the United Stat.es. Notwithstanding any
15 other provisions of this section, any foreign bank or any bank
16 organized under the laws of the United St.ates, any State of
17 the United States, or the District of Columbia, the· control18 ling interest in which is owned by a foreign bank, group of
19 foreign banks, or institution organized under the laws of a
20 foreign country which owns or controls a foreign bank may,
21 with the prior approval of the Board .of Governors of the
22 Federal Reserve System and upon such terms and conditions
23
and subject to such rules and regulations as the Board of
24
Governors of the Federal Reserve System may prescribe,
25
own and hold 50 per centum or more of the shares of tl1e
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Federal Reserve Bank of St. Louis
8
G
1 capital stock of any corporation organized under this section,
2 and any such corporation shall be subject to the same pro3
Yisions of law as any other corporation organized under this
4 section. For the purposes of the preceding sentence of this
5
paragraph the terms 'controls' and 'controlling interest' shall
6
be cons,trued consistently with the definition of 'control' in
7 section 2 of the Bank Holding Company Act of 1956, and
8 the term 'foreign bank' shall have the meaning assigned to it
9 in the International Banking Act of 1977.".
10
FEDERAL BRANCHES AND AGENCIES
11
SEC. 4. (a) Except as provided in section 5, n foreign
12 bank may, with the approval of the Comptroller, establish
13 a Federal branch or ag-ency in any State in which ( 1) it
14 is not operating a branch or agency pursuant to State law
15 and (2) the establishment of a branch or agency, as the
16 case may be, by a foreign bank is not prohibited by State
17 law.
18
(b) In establishing and operating a Federal branch or
19 agency, a foreign bank shall be subject to such rules, regu20 lations, and orders as the Comptroller considers appropriate
21 to carry out this section, which shall include provisions for
22
service of process and maintenance of branch and agency
23 accounts separate from those of the parent bank. Except ·as
24 otherwise specifically provided in this Act or in rules, regu-
25 lation, or orders adopted by the Comptroller under this sec-
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Federal Reserve Bank of St. Louis
9
7
1 tion, operations of a foreign bank at a Federal Branch or
2 agency shall be conducted with the same rights and privi3 leges
4
as a national bank at the same location and shall be
11ubject to all the .same duties, restrictions, penalties, liabili-
5 ties, conditions, and. limitations that would apply under the
6
Ntitional Bank Act to a national bank- doing business at the
7 same location; except that ( 1) · the requirements of section
8 5240 of the Revised Statutes {12 U.S.C. 481) shall be met
9 with respect to a Federal branch or agency if it is examined
10 at least once in each calendar year; , ( 2) any limitation or
11 restriction based on the capital stock and surplus of
a
na-
12 tional bank shall be deemed to refer, as applied to a Fed-
13 eral branch or agency, to the dollar equivalent of the capital
14 stock and surplus of the parent bank, and if the parent bank
15 uas more than one Federal branch or agency the accounts of
16 all such branches and agencies shall be aggregated in de17 termining compliance with the limitation; (3) a Federal
18 branch or agency shall ·not be required to become a mem19 her •bank; as that term is defined in section 1 of the Fed-
20 eral Reserve Act; and (4) a Federal branch or agency
21 shall not be required to become an .insured bank as that
22 t.erm is defined in section 3 (h) of the Federal DepQsit In23
24
sura.nce Act.
( c) In acting on any application to establish a Fed-
25 enil branch or agency, the Comptroller shall take into ac'-
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Federal Reserve Bank of St. Louis
10
8
1 count the effects of the proposal on competition in the
2 domestic and foreign commerce of the United States, the
3 financial and managerial resources and future prospects of
4 the applicant foreign bank and the branch or agency, and
5
6
the convenience and needs of the community to be served.
( d)
Notwithstanding any other provision of this sec-
7 tion, a foreign bank shall not engage in the business of
8 receiving deposits or exercising fiduciary powers at any
9 Federal agency. A foreign bank may, however, maintain
10 at a Federal agency for the account of others credit balances
11 incidental to, or arising out of, the exercise of its lawful
12 powers.
13
(e) No foreign bank may maintain both a Federal
14 branch ,and a Federal agency in the same State.
15
(f) Any branch or agency operated by 'a fo,reign bank
16 in a State pursuant to State law and any commercial lend17 ing company controlled by a foreign bank may be converted
18 into a Federal branch or agency with the approval of the
19 Comptroller. In the event of any conversion pursuant to
20 this subsection, all .of the liabilities of . such foreign bank
21 · previously· payable at the State brancl:x or agency,· ·or all oi
22
the liabilities of the commercial lending .. company, shall
23
thereafter be payable by such foreign bank at the branch or
24 agency established under this subsection.
25
(g) ( 1) Upon the opening of a ]federal branch .or
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Federal Reserve Bank of St. Louis
11
9
1 agency in any St.ate and thereafter, a foreign bank, in addi2
tion to any deposit requirements imposed under section
3 6 (a) of the International Banking Act of 1977, shall keep
4 on deposit, in accordance with such rules and regulations as
5
the Comptroller may prescribe, with a member bank desig-
6 nated by such foreign bank, dollar deposits or investment
7 securities of the type that may be held by national banks
8 for their own accounts pursuant to paragraph "Seventh" of
9 section 5136 of the Revised Statutes, as amended, in
an
10 amount as hereinafter set forth. Such depository bank shall
11 be located in the State where such branch or agency is
12 located and shall be approved by the Comptroller if it is a
13 national bank and by the Board of Governors of the Federal
14 Reserve System if it is a State bank.
15
(2) The aggregate amount of deposited investment
16
securities (calculated on the basis of principal amount or
17 market value, whichever is lower) and dollar deposits for
18 each branch or agency established and operating under this
19 section shall be not less than the greater of ( 1) that amount
20 of capital (but not surplus) which would be required of a
21 national bank being organized at this location, or ( 2) 5 per
22 centum of the total liabilities of such branch or agency, in23 eluding acceptances, but excluding (A) accrued expenses,
24
and (B) amounts due and other liabilities to offices, branches,
25
agencies, and subsidiaries of such foreign bank. The Comp-
93-031 0 - 77 - 2
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Federal Reserve Bank of St. Louis
12
10
l
troller may require that the assets deposited pursuant to this
2 subsection shall be maintained in such amounts as he may
3. fro~ time to time deem necessary or desirable, for the main-
4 tenan~e of a sound financial condition, the protection of
5 • depositors, and the public interest, but such additional amount
6 shall in no event be greater than would be required to con'l form to generally accepted banking practices as manifested
s by banks in the area in which the branch or agency is located.
9
( 3) The deposit shall be maintained with any such
10 member ba.nk pursuant to a deposit agreement in such form
11 and containing such limitations and conditions as the Oomp12 troller may prescribe. So long as it continues business in the
13- ordinary course such foreign bank shall, however, be per14 mitted to collect income on the securities and funds so. de-
15 posited and from time to time examine and exchange such
16 securities.
17
(h) A foreign bank with a Federal branch or agency
18 operating in
any State may ( 1) with the prior approval of
19 the Comptroller establish and operate additional branches
20 or agencies in the State in which such branch or ,agency is
21, located .op the same terms and conditions and subject to the
22 same limitations and restrictions as are applicable to the
23 establishment of branches by a national bank if the principal
24 office of such national bank were located at the same place
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Federal Reserve Bank of St. Louis
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11
1 as the initial branch or agency iu such Stnte of such foreign
2
bank and (2) change the designation of its initial branch
3
or agency to nny other branch or agency subject to the same
4 limitations and restrictions as are applicable to a change i~
5
the designation of th~ principal office of a national b~nk if
6 such principal office were located at th~ same place as such
7 initial branch or agency.
8
(i) Authority to operate a Federal branch or ·agency
9
shall terminate when the parent foreign bank volunuirilY,
10 relinquishes it or when such parent foreign bank is dissolved_
11
or its authority or existence is otherwise t~minated or can-
12 celed in the country of its organization. If ( 1): at any time
13 the Comptroller is of the opini~n or has reasonable c~use
14 to believe that such foreign -bank has violated or f~ed to
15 comply with any of the provisions of this section or any ~f
16 the rules, regulations, or orders of .~e Comptroller made
17 pursuant to this section, or (2) a conserv.ato.r _is app(?inted
18 for such foreign ba~k or a similar proceeding is_ i~iti~ted in
19 the foreign bank's country of organi~ation, the Comptroller
20 shall have the power, after opportunity for. hearing•. to r~-.
21 voke the foreign bank's authority to operate _a Federal bran~
22 or agency. The Comptroller may, in his discretion, waive
23 such opportunity for hearing if he determines. su~h- waiver
24 to be in the public interest. The· Comptrolle~ may restore
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Federal Reserve Bank of St. Louis
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12
1 any such authority upon due proof of compliance with the
2 provisions of this section and the rules, regulations, or orders
3 of the Comptroller made pursuant to this section.
4
(j) Whenever the Comptroller revokes a foreign bank's
5 authority to operate a Federal branch or agency or when-
6
ever any creditor of any such foreign bank shall have O'b-
7 tained a judgment against it arising out of a transaction with
8 a Federal branch or agency in any court of record of the
9 United States or any State of the United States and made
10 application, accompanied by a certificate from the clerk of
11 the court stating that such judgment has been rendered and
12 has remained unpaid for the space of thirty days, or when13 ever the Comptroller shall become satisfied that such foreign
14 bank is insolvent, he may, after due consideration of its
15 affairs, in any such case, appoint a receiver who shall take
16 possession of all the property and assets of such foreign
17 bank in the United States and exercise the same rights, privi18 leges, powers, and authority with respect thereto as are now
19 exercised by receivers of national banks appointed by the
20 Comptroller.
21
22
INTERSTATE BANKING OPERATIONS
SEC. 5. (a) Except as provided by subsection (b) , no
23 foreign bank may operate a branch, agency, commercial
24 lending company subsidiary, or bank subsidiary outside its25 borne State unless ( 1) in the case of a Federal or State
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Federal Reserve Bank of St. Louis
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13
1 branch, the State is one in which it could operate a branch
2 if it were a national bank located in its home State, (2) in
3
the case of a State branch, agency, or commercial lending
4 company, it is approved by the regulatory authority of the
5
State in which such State branch, agency, or commercial
6
lending company is to be operated, and ( 3) in the case of a
7
1!,ederal branch or agency, its operation is not prohibited by
8 the State in which it is to be operated, and (4) in the case
9
of a bank, its acquisition would be permissible under section
10 3 of the Bank Holding Company Act of 1956 if the foreign
11
bank were a bank holding company the operations of whose
12 banking subsidiaries were principally conducted in the for13 eign bank's home State.
14
(b) Unless its.authority to do so is lawfully revoked
15 otherwise than pursuant to this section, a foreign bank may
16
continue to operate, outside its home State, any branch,
17 agency, or commercial lending company subsidiary, or bank
18 subsidiary whose operation was lawfully commenced, or
19 whose establishment had been approved by the appropriate
20 State authority, prior to May 1, 1976.
21
(c) For the purposes of this section, the home State of
22 u foreign bank23
( 1 ) which has no branch or subsidiary bank in the
24
United States, but which has an agency or commercial
25
lending company
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Federal Reserve Bank of St. Louis
mone or more States,
is whichever
16
14
1
of saeh Stat.es is determined by election of the bank,
2
or, .in default of such election, by the. Board of Gov-
3
ernors of the Federal Reserve Syst.em.
( 2) which has a branch or subsidiary bank in one
4
5
Stat.e only, is that State.
6
· ( 3) which has a branch or subsidiary bank in more
7
than one State, is whichever of such State is det.ermined
8
by election of the bank, or, in default of such election,
9
by the B~'ard of Governors of the Federal Reserve
10
Syst.em.
11 An initial election under this· subsection shall be made by
12 means of
,a
written declaration filed with the Board of Gov-
13 ernors of the Federal Reserve System not more than one
14 year after the date of enactment of this Act by the foreign
15 bank concerned. After the home State of a fore!gn bank has
16 been· determined pursuant to this subsection, it may be
17 changed only by the Board of Governors of the Federal
18 -Reserve System, either upon ·the appliootion of the bank, or
19 upon its own motion, for cause shown. Any foreign bank
20 that does not maintain a branch, agency, or commercial lend21 ing company subsidiary, or that is not a bank hoMing com-
22 pany or a subsidiary. thereof on the date of enactment of this
23 Act, Rhall have its home State deemed to be the State in
24 -which it· eRtablishes its initial branch, agency, commercial
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Federal Reserve Bank of St. Louis
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15
1 lending company subsidiary, or bank subsidiary (including
2 · any commercial lending company subsidiary or ba.nk sub3
sidiary acquired by a company of which it is
a subsidiary)
4 in the United States.
5
6
ACCEPTANCE OF DEPOSITS
SEC. 6. (a) No branch may accept deposits of United
7 States citizens, residents, or businesses whose principal place
8 of business is in the United St.ates unless the branch main9 tains with the Federal Deposit Insurance Corporation a
10 surety bond or pledge of assets. The amounts and types of
11 such bonds and assets shall be determined under such rules
12 as the Federal Deposit Insurance Corporation may prescribe
13 for the purpose of protecting such deposits to the same extent
14 and in the same amount that the deposits would be protected
15 under the Federal Deposit Insurance Act if the branch were
16 an insured bank under that Act. Liabilities t.o offices,
17 branches, agencies, subsidiaries, and affiliates of a foreign
18 bank shall not be treated as deposits in a branch of isuch
19 foreign bank for the purposes of this section.
20
(b) This section does not apply t.o any bank organized
21 under the laws of Puert.o Rico, nor does it prohibit , any
22 branch or agency from maintaining credit balances for the
23
account of customers inctdental to, or arising out of, thi
24
exercise of its lawful powers.
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Federal Reserve Bank of St. Louis
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16
1
(c) With respect to branches in existence on the date
2 of enactment of this title, this section shall take effect J anu3 ary 1, 1978.
4
5
6
.A.UTHORITY OF FEDERAL RESERVE SYSTEM
SEC.
7. (a.) (1) Except as provided in paragraphs
( 2) ·and ( 3) of this subsection, subsections (a) , (b) , (c) ,
7 (d), (f), (g), (i), (j), (k), and the second sentence of
8 subsection ( e) of section 19 of the Federal Reserve Act
.9 shall apply to every branch and agency of a foreign bank
I
10 and every commercial lending conipany controlled by one or
11 more foreign banks or ·by one or more foreign companies
12 that control a foreign bank in the same manner and to the
13 same extent as if the branch, agency, or commercial lending
14 company were a member bank as that term is defined in
15 section 1 of the Federal Reserve Act; but the Board either
16 by general or specific regulation or ruling may waive the
17 minimum and maximum reserve ratios prescribed under sec18 tion 19 of the Federal Reserve Act and may prescribe any
19 other ratio, not more than 22 per centum, for any obligation
20 of any such branch, agency, or commercial lending com21 pany that the Board may deem reasonable and appropriate
22 to effectuate monetary policy objectives, taking into consider23 ation the character of business conducted by such institu24 tions and the need to maintain vigorous and fair competition
25 between and among such institutions and member banks. The
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Federal Reserve Bank of St. Louis
19
17
1 Board may impose reserve requirements on branches, agen-
2 cies, and commercial lending companies in such graduated
3
manner as it deems reasonable and appropriate.
4
(2) A branch or agency shall be subject to this sub-
5
section only if (A) its parent foreign bank has total world-
6
wide consolidated bank assets in excess of $1,000,000,000;
7
(B) its parent foreign bank is controlled by a foreign corn-
s
pany which owns or controls foreign banks that in the aggre-
9 gate have total worldwide consolidated bank assets in exccsg
10 of $1,000,000,000; or (C) its parent foreign bank is con-11 trolled by a group of foreign companies that own or control
12 foreign banks that in the aggregate have total worldwide
13 consolidated bank assets in excess of $1,000,000,000.
14.
( 3) A commercial lending company shall be subject
15
to this subsection only if it is controlled (A) by a foreign
16 bank that has total worldwide consolidated bank assets in
17 excess of $1,000,000,000; (B) by a group of foreign banks
18
that, in the aggregate, have total worldwide consolidated
19
bank assets in excess of $1,000,000,000; (C) by a foreign
20 company that owns or controls a foreign bank or banks that
21 in the aggregate have total worldwide consolidated bank
22 assets in excess of $1,000,000,000; or (D) by a group of
23
foreign companies that own or control a foreign bank or
24 banks that in the aggregate have total worldwide consoli-
25 dated bank assets in excess of $1,000,000,000.
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Federal Reserve Bank of St. Louis
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18
1
·(b) Section 13 of the Federal Reserve Act is amended
2 by adding at the end thereof the following new paragraph:
3
"Subject to such restrictions, limitations, and regulations
4 as may be imposed by the Board of Governors of the .Fed5
eral ReserYe System, each Federal Reserve bank may re.:.
6 ceive deposits from, discount paper endorsed by, and make
7 advances to any branch or agency of a foreign bank, and any
8 commercial lending company in the same manner ~nd to the
9
same extent that it may exercise such powers with respect
10 to a member bank if such branch, agency, or commercial
11 lending company is maintaining reserves with such Reserve
12 bank pursuant to section 7 of the International Banking
13 Act of 1977. In exercising any such powers with respect to
14 any such branch agency, or commercial lending company
15
each Federal Reserve bank shall give due regard to account
16 balances being maintained by such branch, agency, or com-
17 mercial lending company with such Reserve bank and the
18 proportion of any such branch, agency, or commercial lending
19 company's assets being held as reserves under section 7 of
20 the International Banking Act of 1977. For the purposes of
21
this paragraph, the terms 'branch,' 'agency,' 'foreign bank,'
22 and 'commercial lending company' shall have the same
23
meanings assigned to them in section 1 of the International
24 Banking Act of 1977.".
25
( c) Each branch or agency of a foreign bank, other
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Federal Reserve Bank of St. Louis
,21
19
1 than a Federal branch or agency, and each commercial lend2
ing company controlled by one or more foreign banks or by
3 one or more foreign companies that control a foreign bank,
4
shall be subject to ( 1) paragraphs 7, 8, and 20 and the
5 reporting requirements of paragraph G of section 9 of the
6
Federal Reserve Act (12 U.S.C. 325, 326, 335, and 324),
7
(2) subparagraph (a) of section 11 of the Federal Reserve
8 Act (12 U.S.C. 248 (a)), and (3) paragraph (5) of sec9
tion 21 of the Federal Reserve Act· ( 12 U.S.C. 483), to the
10 same extent and in the same manner as if the branch, agency,
11
or commercial lending company were a State member bank.
12 In addition to any requirements imposed under section 4 of
13 this Act, each Federal branch and agency shall be subject
14 to subparagraph (a) of section 11 of the Federal Reserve
15 Act (1.2 U.S.C. 248 (a)) and to paragraph 5 of section 21
16 of the Federal Reserve Act ( 12 U.S.C. 483) to the same
17 extent and in the same manner as if it were a member bank.
18
( d) Each branch or agency of a foreign bank established
19
or operating pursuant to State law and each commercial
20 lending company controlled by one or more foreign banks
21 or by one or more foreign companies that control a foreign
22 bank shall also be subject to such other duties, restrictions,
23 conditions, limitations, or civil penalties or liabilities appli24 cable under the Federal Reserve Act to a State member
25 bank, which the Board, by regulation or order, determines
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Federal Reserve Bank of St. Louis
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20
1 appropriate to insure the safety and soundness of banking
2
operations, or to maintain competitive equality with State
3 member b11;nks, or to otherwise carry out the purposes of
4
this Act except that ( 1) the Board may niake such exemp-
5 tions or exceptions from such duties, restrictions, conditions,
6
limitations, or civil penalties or liabilities that it deems
7 to be reasonable and ap.propriate in light of the different
8
organizational structure or character of business conducted
9
by such branches, agencies or commercial lending companies,
10 and (2) any limitation or restriction based on the capital
11
stock and surplus of a member bank shall be deemed to
12
refer, as applied to a branch or agency, to the dollar equiv-
13 alent of the capital stock and surplus of its parent foreign
14 ·bank, and if the parent foreign bank has more than one
15 branch or agency the accounts of all such branches and
16 agencies, including Federal branches and agencies, ~h!lll ·be
17 aggregated in determining compliance with the limitation
18 or restriction.
19
( e) No foreign bank may, after the date of enactment
20 of this Act, establish any branch or agency pursuant to State
21 law and no foreign bank, group of foreign banks, or one or
22
more foreign companies that control a foreign bank may
23
acquire control of a commercial lending company without
24
first obtaining approval of the Board of Governors of the
25
Federal Reserve System. Whenever the Board receives an
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Federal Reserve Bank of St. Louis
23
21
1 application from any such foreign bank, group of foreign
2 banks, or foreign companies to establish a branch or agency,
3 or to control a commercial lending company, the Board shall
4 send a copy to the Secretary of State, the Secretary of the
5,
Treasury and the bank supervisory authority of the Stnte
6
where the branch or agency or commercial lending company
1· is to be located and shall allow thirty days within which their
8 views and recommendations may be submitted. In acting on
9 any such application, the Board shall take into account the
10 effects of the proposal on competition in the domestic and
11 foreign commerce of the United States, the financial and
12 managerial resources and future prospects of the applicant
13 foreign bank, group of foreign banks, or one or more foreign
14 companies and the branch, agency, or commercial lending
15 company concerned, and the convenience and needs of the
16 community to be served.
17
18
NONBANKING ACTIVITIES
SEC. 8. (a) Except as otherwise provided in this sec-
19 tion ( 1) any foreign bank that maintains a branch or
20 agency in a State, (2) any foreign hank or foreign company
21 controlling a foreign bank that controls a commercial lend22 ing company organized under State law, and (3) any com23 pany of which any foreign bank or company ref erred to in
24
( 1) and ( 2) is a. subsidiary sh.all be subject to the provisions
25 of the Bank Holding Company Act of 1956, and to sections
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Federal Reserve Bank of St. Louis
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22
I
10b and 106 of the Bank Holding Company Act Amend-
2 ments of 1970 in the same manner and to the same extent
3 that bank holding companies are subject thereto, except that
4 any such foreign bank or company shall not by reason of this
5 subsection be deemed a bank holding company for purposes
6 of section 3 of the Bank Holding Company Act of 1956.
7
(b) After December 31, 1985, no foreign bank or other
8 company to which subsection (a) applies on the date of
9 enactment of this Act may retain direct or indirect owner10 ship or control of any voting shares of any nonbanking
11 company in the United States that it owned, controlled, or
12 held with power to vote on the date of enactment of this
13 Act or engage in any nonbanking activities in the United
14 States in which it was engaged on such date unless author15 ized by subsection ( c) of this section or by the Board of
16
Governors of the Federal Reserve System under section 4
17 of the Bank Holding Company Act of 1956.
18
( c) After December 31, 1985, notwithstanding th.e pro-
19 hibitions of subsection (b) of this section, a foreign bank or
20 other company to which subsection (a) applies on the date
21 of enactment of this Act may continue to engage in non22 banking activities in tlie United States in which directly or
23 thro~gh an affiliate it was lawfully engaged on December 3,
24 1974 (or on a date subsequent to Decembei· 3, 1974, in the
25 case of activities carried on as the result of the direct or
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Federal Reserve Bank of St. Louis
25
23
1 indirect acquisition, pursuant to a binding written contract
2 entered into on or before December 3, 1974, of another
3 company engaged in such activities at the time of acquisition-)
4 and may retain direct or indirect ownership or control of any
5 voting shares of ap.y nonbanking company that it ( 1) owned,
6 controlled, or held with power to vote on December 3, 1974
7
(or on a date subsequent to December 3, 1974, if acquired
8 by a written contract entered into on O'r before such date)
9 and (2) that does not engage in any activities other than
10 those in which such foreign bank, company, or affiliate may
11 engage by virtue of this subsection or section 4 of the Bank
12 Holding Company Act of 1956; except that the Board by
13 order, after opportunity for hearing, may terminate the
14 authority conferred by this subsection ( c) on any such
15 foreign bank or company to engage directly or through an
16 affiliate in any activity otherwise permitted by this sub17 section (c) if it determines, having due regard to the pur18 poses of this Act and the Bank Holding Company Act of
19 1956, that such action is necessary to prevent undue con20 centration of resources, decreased or unfair competition,
21 conflicts of interest, or unsound banking practices in the
22 United States. Notwithstanding any exercise of the authority
23 conferred upon the Board by this subsection (c) , in the case
24 of any such foreign bank or company that eng11gcs directly
25 or indirectly through an affiliate in the business of underwrit-
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Federal Reserve Bank of St. Louis
26
24
1 ing, distributing, or otherwise buying or selling stocks, bonds,
2
and other securities in the United States, such foreign bank
3
or company may continue to engage in such business in the
4
United States to the extent not prohibited for national banks
5
by paragraph Seventh of section 5136 of the Revised Stat-
6 utes of the United States (12 U.S.C. 24) and, in addition,
7
may continue to engage in the United States in the business of
8
underwriting and distributing securities to the extent nece'Ssary
9
to participate in customary and usual syndicate activities in
10
the United States by the managing underwriters or other
11 underwriters on behalf of all syndicate members in con-
12 nection with underwritings of such securities so long as
13 the individual selling and distribution activities of any such
14 foreign bank or company (whether direct or indirect through
15 an affiliate) in connection with any such underwriting are
16
confined to jurisdictions other than the United States.
17 Nothing in this subsection ( c) shall be construed to au18 thorize any foreign bank or company referred to in this
19 subsection (c) , or any affiliate thereof, to engage in ac20 tivities authorized by this subsection (c) through the acquisi21 tion, pursuant to a contract entered into after December 3,
22 1974, of any interest in or the assets of a going concern
23 engaged in such activities. Any foreign bank or company
24
that is authorized to engage in any activity pursuant to
25 this subsection ( c) but, as a result of action of the Board,
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Federal Reserve Bank of St. Louis
27
25
1 is required to terminate such actiYity may retain the own-
2 ership of control of shares in any company carrying on such
3 activity for a period of two years from the date on which
4 its authority was so terminated by the Board. As used in
5
this subsection, the term "affiliate" shall mean any com-
6 pany more than 5 per centum of whose voting shares is
7 directly or indirectly owned or controlled or held with power
8
9
to vote by the specified foreign bank or company.
( d) Nothing in this section shall be construed to define
10 a branch or agency of a foreign bank or a commercial lend11 ing company controlled by a foreign bank or foreign com-
12 pany that controls a foreign llank as a "bank" for the pur13 poses of any_ provisions of the Bank Holding Company Act
14 of 1956, or section 105 of the Bank Holding Company Act
15 Amendments of 19?0, except that any such branch, agency
16 or commercial lending company subsidiary shall be deemed
17_ a "bank" or "banking subsidiary", as the case may be, for
18 the purposes of applying the prohibitions of section 106 of
19 the Bank Holding Company Act Amendments of 1970 and
20 the exemptions provided in sections 4 (c) ( 1) , 4 ( c) ( 2) ,
21 4 ( c) ( 3) , and 4 ( c) ( 4) of the Bank Holding Company Act
22 of 1956 (12 U.S.C. 1843 (c) (1), (2), (3), and (4)) to
23 any foreign bank or other company to which subsection (a)
24 applies.
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Federal Reserve Bank of St. Louis
28
2(i
1
2
GUIDELINES FOR FOREION BANK OPERATIONS
SEO. 9. (a) The Secretary of the Treasury in issuing
3 guidelines under this section, and the Federal regulatory
4 agencies in the administration of this Act, shall seek to
5 achieve a parity of treatment for foreign banks, branches,
6 agencies, and commercial lending companies relative to their
7 domestic counterparts. It is the purpose of this Act to estab8 lish a basic statutory framework :which, giving due consid9 · eration to the structure of our domestic monetary mechanisms
10 and our national interests, will, to the extent practical, allow
11 foreign banking institutions to have the same rights, duties
12 and privileges and he subject to the same limitations, restric13 tions, or conditions as our domestic banking institutions. It
14 is the intent of the Congress that this Act shall establish a
15 pattern for equitable treatment which State regulators may
16 adopt in their regulation of foreign hanking institutions.
17
(b) The Secretary of the Treasury shall issue . guide-
18 lines with respect to the banking operations of foreign banks,
19 companies, and individuals in the United States, in order to
20 assist Federal and State banking agencies in acting on appli21 cations by such foreign banks, companies, and individuals
22 to establish branches or agencies of foreign banks in any
23 St.ate or to acquire interests in banks, corporations organized
24 under sections 25 or 25 (a) of the Federal Reserve Act, or
25 commercial lending companies organized under State law.
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Federal Reserve Bank of St. Louis
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27
1
(c) In issuing guidelines under this section, the Secre-
2 tary of the Treasury shall endeavor to foster participation
3 by foreign interests in international financial markets in the
4 Unit.ed Stat.es to the maximum ext.ent consist.ent with main5 t.enance of fair and vigorous competition in such markets,
6 and with international econ-0mic policies of the United Stat.es,
7 iµcluding policies relating to the balance of trade, the bal8 ance of payments, the int.emational payments mechanism,
9 and the negotiation and implementation of reciprocal ar10 ra.ngements with other countries to strengthen int.emational
11 trade.
12
(d) Whenever the Comptroller of the Currency re-
13 ceives an application to establish a national bank that will
14. \ be controlled iby a foreign company or group of foreign
15 companies,
Ol"
a Federal branch or agency of a foreign
16 bank, he shall send a copy to the Secretary of State, the
17
Secretary of the Treasury, the Board of Governors of the
18 Federal Reserve System, and the -bank supervisory a.u19 thority of the State where the bank, branch, or agency is
20 ! to be located. He shall wait thirty days for such officials to
21 submit their views before acting on the application.
22
(e) Whenever a Stat.e bank supervisory authority re-
23 ceives an application to establish a branch or agency of a
24 foreign bank or to organize a bank or a commercial lending
25 company that will be controlled by a foreign company or
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Federal Reserve Bank of St. Louis
30
28
1 group of foreign companies, he s4all transmit a copy of such
2 application to the Secretary of the Treasury, the Secretary of
3 State, and the Board of Governors of the Federal Reserve
4
System, and shall allow a thirty-day period within which
5
their views and recommendations may be submitted.
6
(f) Whenever the Board of Governors of the Federal
7
RcseiTc System receives an application from a foreign com-
8
pany or group of foreign companies for approval under sec-
9
tion- 3 of the Bank Holding Company Act of 1956 ( 12
10
U.S.C. 1842) or receives an application from a foreign bank
11
under sections 25 or 25 (a) of the Federal Reserve Act and
12 whenever the responsible Federal banking agency under the
13 Rank Merger Act ( 12 U.S.C. 1828 ( c) ) receiYes an appli14 cation under that Act involving a bank that is controlled by
15 a foreign company or group of foreign companies, it shall
16 transmit a copy of such application to the Secretary of the
17 Treasury and the Secretary of State and allow a thirty-day
18 period within which their views and recommendations may
19 he submitted.
20
(g) ( 1) Every branch or agency of a foreign bank and
21 eYery commercial lending company controlled by one or more
22 foreign banks or by one or more foreign companies that con-
23 trol a foreign bank shall conduct its operations in the United
24 St.ates in full compliance with provisions of any law of the
25 United St.ates or any St.ate thereof which-
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Federal Reserve Bank of St. Louis
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29
1
(A) prohibit discrimination against any individual
2
or other person on the basis of the race, color, religion,
3
sex, marital status, age, or national origin of (i) such
4
indivrdual or other person or (ii) any officer, director,
5
employee, or creditor of, or any owner of any interest
6
in, such individual or other person; and
7
(B) apply to national banks or State-chartered
8
banks doing business in the State in which such branch
9
or agency or commercial lending company, as the case
10
may be, is doing business.
11
(2) Notwithstanding any other provision of law, no ap-
12
plication for a branch or agency under this Act shall be
13
approved by the Comptroller and no application referred to
14 in subsection (d) , (e) , or (f) of this section shall be
15 approved by the Comptroller, the Board of Governors of
16
the Federal Reserve System, or a State bank supervisory
17
authority, as the case may be, unless the entity making the
18
application has agreed to conduct all of its operations in the
19
United States in full compliance with provisions of any
20
law of the United States or any State thereof which-
21
(A) prohibit discrimination against individuals or
22
other pel'lsons on the basis of the race, color, religion,
23
sex, marital status, age, or national origin of (i) such
24
individual or other person or (ii) any officer, director,
25
employee, or creditor of, or any owner of any interest
26
in, such individual or other person; and
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Federal Reserve Bank of St. Louis
32
30
1
( B) apply to national banks or State-chartered
2
banks doing business in the State in which the entity
3
to be established is to do business.
4
REPRESENTATIVE OFFICES
5
SEC. 10. (a) Any foreign bank that maintains an office
6
other than a branch or agency in any State shall register
7
with the Secretary of the Treasury in accordance with
8
rules prescribed by him, within one hundred and eighty days
9
after the date of enactment of this Act or the date on which
10
11
the office is established, whichever is latet.
(b) This Act does not authorize· the establishment of
12 any such office in any State in contravention of State law.
13
14 ·
CEASE-AND-DESIST ORDERS
SEC. 11. Subsection (b) of section 8 of the Federal
15 Deposit Insurance Act (12 U.S.C. 1818 (b)) is amended
16
by adding at the end thereof the following new paragraphs:
17
" ( 4) This subsection and subsections (c) , ( d) , (h),
18
(i), (k), (1), (m), and (n) of this section shall apply to
19 any branch, agency, and any commercial lending company
20 controlled by one or more foreign banks or by one or
21 more foreign companies that control a foreign bank,
22 as those terms are defined in the Jntemational Bank-
23 ing Act of 1977, in the same manner as they apply to an
24 insured bank, and for that purpose the appropriate Federal
25 banking agency ~hall be the Comptroller of the Currency
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Federal Reserve Bank of St. Louis
33
31
1 with respect to a Federal branch or agency of a foreign
2 bank and the Board of Governors of the Federal Reserve
3 System with .respect to a branch, agency, or commercial
4
lending company subsidiary operating pursuant to State
5
law.
6
" ( 5) This subsection and subsections ( c) , ( d) , ( h) ,
7
(i), (k), (1), (m), and (n) of this section shall apply
8 to any foreign bank or company to which subsection (a)
9 of section 8 of the International Banking Act of 1977
10 applies and to any subsidiary (other than a bank) of any
11 such foreign bank or company in the same manner as they
12 apply to a bank holding company and any subsidiary there13 of ( other than a bank) under subparagraph · ( 3) of this sul,14 section. For the purposes of this subparagraph, the tem1
15 'subsidiary' shall have the meaning assigned to it in section 2
16 of the Bank Holding Company Act of 1956.".
17
18
REPULATION AND ENFORCEMENT
SEC, 12. (a) The Comptroller, the Board, and the
19 Secretary of the Treasury are authorized and empowered to
20 issue such rules, regulations, and orders as each of them may
21 deem necessary in order to perform their respective duties
22 and functions under this A~t and to administer and carry
23 out the provisions and purposes of this Act and prevent
24 evasions thereof.
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Federal Reserve Bank of St. Louis
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32
1
(b) Compliance with the requirements imposed under·
2 this Act shall be enforced under sec-tion 8 of the Federal
3 Deposit Insurance Act by the appropriate Federal bank4 ing agency as defined in that Act.
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Federal Reserve Bank of St. Louis
35
Mr. 8'r GERMAIN. In an effort to accommodate those who wish to
be heard, notwithstanding the considerable period of time devoted
to this one facet of international banking operations last year, the
subcommittee has elected to hold 3 full days of hearings to make
certain that a number of conflicting points of view will be presented
fully to the subcommittee by witnesses representing particular
viewpoints.
The subcommittee has, as well, encouraged the submission of
written statements and it is the intention of the Chair to defer for
at least 1 week after the final date of testimony, on July 19, before
scheduling a subcommittee markup, so that all members of the
subcommittee will have a full opportunity to consider a number of
proposed amendments to the bill, including suggestions for modifications submitted by the Federal financial regulatory agencies as
well as spokesmen for the administration. By adopting this procedure, it remains our hope that we will be able to complete final
action on this long-standing request of the Federal Reserve Board
prior to the end of the first session of the 95th Congress and, if not,
early in the second session.
Since each of the members of the subcommittee has been previously furnished copies of Vice Chairman Gardner's speech of May
2, 1977, renewing the request of the Board of Governors for this
legislation, and were furnished a section-by-section analysis of the
provisions of the bill contained in my floor remarks upon its
introduction on May 23, I will merely highlight what I believe to be
the compelling case for our consideration of the International
Banking Act at this time.
The continued rapid growth of foreign bank operations in the
United States with aggregate assets now totaling $76 billion-a 30
percent increase in the last 4 years-makes it imperative that the
Congress respond favorably to the request of the Federal Reserve
Board for appropriate legislation embodied in the provisions of H.R.
7325.
We can no longer accept the fact that there is a total absence of a
national policy and regulatory framework in the increasingly important area of foreign bank operations in the United States. The
growth of foreign assets from approximately $7 billion in 1965 to
more than $76 billion in a little over a 10-year period, involving
approximately 94 foreign banks operating over 210 banking facilities in this country, is clear evidence of the need for action and the
reason for the Federal Reserve Board's continued placing of this
legislation at the top of its priority list if it is to continue to
discharge its responsibility of ensuring a smooth functioning of our
own banking system, which requires the continued coordination of
policies with national monetary and regulatory authorities abroad.
Mr. Rousselot has been delayed at another hearing, and without
objection we shall at this point place his opening statement in the
record.
[The above referred to statement follows:]
OPENING STATEMENT OF HON. JOHN H. RoUSSELOT
Mr. Chairman:
As we open these hearings on H.R. 7325, the International Banking Act, I would
like to welcome Vice Chairman Gardner, Mr. Palmer, and Mr. O'Brien, and to
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Federal Reserve Bank of St. Louis
36
commend you, Mr. Chairman, for putting together what promises to be a very
informative set of hearings.
Since the bill before us is nearly identical to a bill which the House passed almost
a year ago, a few general observations would be in order at this time.
1. We can probably all agree that the basic objective of this legislation is to apply
to foreign banks doing business in this country the same restrictions and conditions
of doing business as apply to domestic banks. I would suggest to my colleagues that
the way to correct "inequities" should not always be to increase the degree of
regulation imposed upon foreign banks operating in this country. There may be
instances where we should pursue equity by reducing the degree of regulation of our
domestic banking s~m.
2. Last year my distinguished colleague from Georgia, Mr. Stephens, who regrettably has since retired offered an amendment to section 5 of H.R. 13876 which would
have eliminated the requirement that Federal statutes be changed to permit national banks-or State member banks-to branch across State lines before foreign
branches, agencies, or commercial lending companies would be permitted to do so.
The purpose of this amendment was to increase the opportunity for States such as
Georgia and Texas, which are interested in becoming international banking centers
to do so. States such as New York and California which have been traditional
international banking centers do not seek the unfair competitive advantage which
the present language appears to give them. The amendment was defeated last year
by a close vote of 185-205. I believe that the chances of passing this legislation would
be greatly enhanced by incorporating this amendment before the bill is reported.
3. Another amendment which Mr. Stephens offered last year was designed to
preserve the dual banking system by removing provisions which would extend the
authority of the Federal Reserve to set reserves for, to examine, and to approve the
establishment of, State-chartered foreign bank branches and agencies. I believe that
the extension of such Federal Reserve authority to State-chartered entities is
unwarranted in the absence of a clear showing that the States cannot properly and
adequately supervise foreign bank activities and urge that this amendment as well
be given serious consideration prior to Floor action.
Thank you, Mr. Chairman, for permitting me to make these comments.
Mr. ST GERMAIN. Governor Gardner, we have received your
testimony and we appreciate having it a little bit ahead of time. I
hope the Fed can continue this practice in the future. You may
proceed, Governor Gardner.
STATEMENT OF HON. STEPHEN S. GARDNER, VICE CHAIRMAN,
FEDERAL RESERVE BOARD
Governor GARDNER. Mr. Chairman, members of the subcommittee, it is a pleasure to testify in support of the International
Banking Act of 1977. This landmark legislation is very important to
American consumers and businesses, to Federal and State bank
regulatory authorities and legislators, to the management of monetary policy, and to U.S. relations with our trading partners. Without attempting to weigh the importance of each relative interest,
because all must be considered fairly, I would emphasize that the
bill is a domestic bank regulatory measure and should be so
characterized. The only unique thing about foreign bank offices in
this country is that they are owned and managed from abroad
mostly by large multinational banks with worldwide assets exceeding $1 billion. As these hearings will indicate, they are also a very
large and rapidly growing part of our domestic banking system.
Their banking services are sold to American consumers and
businesses and they compete directly with domestic banks that are
regulated and supervised under a comprehensive system of Federal
and State laws and regulations.
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Federal Reserve Bank of St. Louis
37
I am optimistic that these hearings will lead to the enactment of
a law that is fair and appropriate for all parties, embodying the
principle of national treatment for foreign banks and conforming
their regulation evenly and equitably to that imposed on similar
domestic banking organizations. My optimism is based on these
facts. Last year this committee did an outstanding job in proposing
an International Banking Act to the full House which passed as
H.R. 13867. The appropriate subcommittee of the Senate held a full
set of hearings on this proposal and was prevented from continuing
this work only because of the adjournment of the Congress. Further, proposals of this kind have been before the Congress and the
public since 1974, and there has been ample opportunity for the
Congress to hear all points of view germane to this bill.
Two things have happened in this process. First, the original
legislative proposals have been changed significantly to meet some
basic objections, and the Federal Reserve has recommended further
changes which, in our judgment, should meet the remaining points
of controversy. Second, those who foresaw a continued and rapid
growth of foreign bank operations in the United States have seen
their predictions fulfilled. Since the introduction of the Board's first
proposal in 1974, foreign bank operations in this country have
continued to grow in number, size, and importance. They have been
assuming an increasingly important share of the market for commercial and industrial loans, have been increasing their penetration into regional markets and retail banking services, and have
been active participants in domestic money markets. Our most
recent data show that 210 banking facilities are operated by 94
foreign banks in the United States. More than half of these foreign
banks operate across State lines: 22 foreign banks have banking
offices in three or more States and another 28 foreign banks have
banking dffices in two States, an advantage denied to domestic
banks. Foreign bank interest in the United States is growing at a
remariy rapid pace and even the most partisan of those who
oppose
y form of Federal regulation must grant that further
delay · surely complicate the work of the Congress in enacting
appro riate legislation.
Mr. 1Chairman, I am submitting with my testimony a statistical
appendix providing data on the growth of foreign bank operations
and a com~ndium of su:r.porting documents intended for the subcommittee s use. In today s statement, I would like to address those
provisions of the act that may be questioned by later witnesses.
As recently as 3 years ago, many held the belief that foreign
banks in our economy were highly specialized institutions operating
only in port and gateway cities where international trade was
important, and those opposed to legislation argued that their chartering and regulation could be left to the States. Such arguments
today, in view of the extraordinary expansion of these banks in the
context of the development of multinational banking, have been
thoroughly disproved.
The rapid expansion of multinational banking has been occurring
abroad as well as in the United States. The growth of this international financial community is testing the regulatory frameworks
and monetary system in many other countries. In Belgium, the
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Federal Reserve Bank of St. Louis
38
Netherlands, the United Kingdom and Canada, banking laws are
currently being revised. Other countries are reviewing their existing regulations and supervisory practices. The business this subcommittee is about is thus very common in other nations and it is an
entirely responsible and appropriate activity. For the United States
is alone among the leading trading nations of the western world, in
having virtually no national policy, monetary controls, or national
presence where foreign banks are concerned.
Over the past several years, as we have testified before, we have
generally found the banking authorities in other countries to be
sympathetic and understanding of the need to rationalize the treatment of foreign banks in our country with our domestic banking
system. Many foreign central bankers consider it surprising that
the United States does not have a national policy on foreign banks,
and, in particular, they recognize the logic of extending monetary
and credit controls to foreign banks operating within our borders,
and conducting transactions in our currency. This, of course, is a
fundamental reason for enacting this bill.
The subcommittee should not be misled by criticism from commercial bankers abroad. The objections to the legislation addressed
to those sections of the bill that would require divestitures or the
closing of existing facilities can be dealt with during the. legislative
process. Objections to the United States having appropriate powers
to guide monetary and credit policies within this country should not
be given undue weight.
In the Board's letter to you endorsing the present legislation,
there are included proposals for amendments addressed to the most
valid concerns of those opposing certain of its sections. I would like
to touch on these amendatory proposals and underline their
inportance to the success of the legislation before you.
I have referred to monetary policy controls, and your bill largely
accomplishes the objective of establishing for foreign banks a fair
equivalent to the monetary regulations that affect comparable
domestic banking institutions. The bill does not require formal
membership in the Federal Reserve System. It simply requires that
those foreign banks operating in the United States that have $1
billion or more in worldwide bank assets maintain reserves in the
same way as the largest U.S. banks, virtually all of which are
members of the Federal Reserve System.
There is, however, an omission in the present bill. The Statechartered subsidiaries of large foreign banks are exempted from
monetary controls. The Board believes that the appropriate test for
the imposition of monetary controls is the size and the ability of a
foreign bank to compete and participate through its U.S. affiliates
in our large money and credit markets. Thus, the Board recommends that section 7 of the bill be amended to require that Federal
Reserve monetary controls be applied to all the U.S. operations of a
foreign bank that has $1 billion or more in worldwide bank assets,
irrespective of whether they are conducted through agencies,
branches, subsidiary banks, or subsidiary New York investment
companies. If we omit one corporate form of organization from such
restrictions, the bill's purpose will be subverted and its effectiveness
severely reduced.
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Federal Reserve Bank of St. Louis
39
Consistent with national treatment, section 5 of the bill generally
subjects foreign banks to the same multi-State restrictions that
apply to domestic banks. The Board believes, however, that direct
imposition of the branching restrictions of the McFadden Act
should be limited to Federal branches and agencies. State branches
should be put on the same competitive footing as State banks in
their home State. In this way, foreign banks may benefit from
future reciprocal interstate branching legislation that may be
agreed upon among the States.
In our previous comments on the bill, we suggested that multiState restrictions apply to both branches and agencies of foreign
banks. I expect you will hear strong testimony from State authorities urging that agencies remain exempted from multi-State branching restrictions as the bill now provides. The Board has carefully
considered these arguments which arise quite naturally from those
States interested in attracting offices of foreign banks to assist in
expanding their local industries' participation in foreign trade.
I would like now to propose what appears to be a reasonable
alternative. That alternative would be to limit agencies of foreign
banks that are licensed by the States in the future to powers that
are no greater than federally chartered Edge Act corporations.
These future State-licensed agencies would thus be able to conduct
a full service international banking business and thus promote the
further development of international trade and investment
throughout the country. At the same time, the multi-State restrictions on banking offices conducting a full service domestic banking
business would not be compromised. To exempt agencies entirely
would, in our judgment, exacerbate the present multi-State advantages enjoyed by foreign banks, as, traditionally, agencies have been
the most important form of foreign bank activity. This alternative
would equitably meet the interests of the States that wish to have
international banking agencies, the interests of foreign banks that
wish to establish international banking facilities in more than one
trade center and the public interest of competitive equality with
our domestic banks.
·
The issue of deposit insurance on foreign bank operations in order
to protect U.S. consumers and businesses has been debated since
1974. Following the action of this committee and the House vote on
H.R. 13876 last year, the Federal Deposit Insurance Corporation
suggested in comments to the Senate a method of applying deposit
insurance to the domestic deposits of U.S. branches of foreign
banks. In the judgment of the Board, that alternative is far more
desirable than the present section 6 of the bill. The Board favors
compulsory FDIC insurance on deposits in branches of foreign
banks. The arguments for extending FDIC insurance to these deposits are very direct and simple. The United States has enjoyed an
extraordinarily successful system of deposit insurance protecting in
its end effect jobs, businesses and our economies locally, regionally
and nationally since the 1930's. It is a model act covering virtually
all full-service commercial banks in this country. It is being studied
and copied by foreign governments. It would be a curious turn of
events to abandon our world leadership in this area by substituting
an imperfect form of protection. Surety bonds or pledges of assets
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Federal Reserve Bank of St. Louis
40
cannot be considered comparable to the certainty of FDIC insurance
and the Federal Deposit Insurance Corporation's ability to protect
our citizens from bank failures.
Because of the continuing rapid growth of foreign bank operations
in this country, it will become progressively more difficult to adopt
grandfathering proposals for their existing activities that are equitable and consistent with prior legislative precedent. Your bill
grandfathers multi-State banking operations as of May 1, 1976.
Nonbanking activities, other than securities affiliates, are permanently grandfathered as of December 3, 1974. The Board concurs
strongly in the permanent grandfathering of these activities and
believes it appropriate for the Congress to review the existing
grandfathering dates. A majority of the Board believes these dates
should be brought forward to afford equitable treatment to all
existing facilities.
As for securities affiliates, it will be recalled that the Senate
hearings on the International Banking Act of 1976 produced extensive controversy concerning the securities affiliate provisions in the
present bill. The Board urges that the securities affiliations that are
in place today be permanently grandfathered to quiet the controversy, and that, as a safeguard, the Board be given the discretion to
review these activities under the nonbanking standards of the Bank
Holding Company Act for any abuses that might arise over time.
This would meet the concerns expressed by the regional stock
exhanges. It would also provide some certainty to foreign banks
that their securities affiliates, which are still a very small part of
the securities industry, could continue to operate in essentially the
same form and relative size as at present.
As we have indicated to the subcommittee, the Board does not see
the necessity for the detailed guideline provisions of foreign bank
entry in section 9 of the bill. The State and Federal regulatory
agencies already have appropriate statutory requirements that
must be fulfilled by those who apply for permission to conduct a
banking business in this country. The provisions of the bill, which
provide for consultation between bank regulatory authorities and
the Secretaries of State and Treasury on new foreign bank applications, would seem entirely adequate to· insure that any important
foreign policy issues are considered when appropriate. I would
expect that in almost all cases this consultative procedure would be
entirely routine.
Legitimate issues that have been raised by foreign banks concerning fair national treatment include a key issue related to the
nonbanking prohibitions of the Bank Holding Company Act. Last
year there apparently was a misconception on the part of some
foreign bankers, who thought that the nonbanking prohibitions that
we apply to banks in our domestic market would seriously interfere
with their nonbanking interests abroad. For that reason we have
proposed a clarifying amendment to this bill whereby foreign banks
that are principally engaged in banking abroad would not be prohibited from retaining or acquiring interests in foreign-chartered,
nonbanking companies that have U.S. activities, but which are
principally engaged in business outside the United States. While
the Board believes it has sufficient regulatory authority under
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Federal Reserve Bank of St. Louis
41
present law to deal with such problems, we also believe it would be
desirable for the Congress to embody this principle in the statute.
In this proposal, we have included a requirement that any banking
transactions with U.S. offices of such foreign affiliates be conducted
at competitive rates and terms. In this way the firm or bank
involved would not have an unfair advantage over their respective
U.S. competitors.
The Board's carefully considered and strong support of the International Banking Act of 1977 is based on the conviction that the
proposed bill with the amendments that we have recommended
would fairly implement the principle of national treatment of
foreign banking organizations operating in the United States. In the
opinion of the Board, as we have repeatedly emphasized, that
principle is the only workable and equitable method of dealing with
these organizations.
As I have suggested in this testimony, most responsible objections
to the legislation have been or can be met. The question then is
simply: Should we not put foreign and domestic banks on a relatively equal footing now, for surely they should be in time? This
legislation is an essential ingredient in the larger process of
rationalizing and modernizing our own banking laws. That work
will be fairer and easier if it is evenly applicable to all banks as it
would be under this legislation.
The conscientious and excellent work of Congress and the committee should continue until this bill is passed. The Federal Reserve
is ready to assist in any way necessary.
Thank you.
[The statistical appendix to Governor Gardner's statement, along
with a compendium of supporting materials, both referred to in his
statement, follow:]
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Federal Reserve Bank of St. Louis
42
Statistical Appendix to Statement by
Stephen S. Gardner
Vice Chairman, Board of Governors of the Federal Reserve System
before the
Subcommittee on Financial Institutions Supervision,
Regulation and Insurance
of the
Committee on Banking, Finance and Urban Affairs
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Federal Reserve Bank of St. Louis
United States Bouse of Representatives
on R.R. 7325
Table la
~
U.S. BANKING lNSTJTUTJONI OWNED BY ,oA!JGN llNKI
,oR "ONTHLY REPORT DATE JN •NOVENIER
llN MJLLtONI o, DOLLARS)
'
@
,,,a
0
:l
.
ALL REPORTEIII
'
TOTAL ASSETS
14,Jl7
ASSETS OF "STANDARD• BANKING
BUSINESS
18,073
LOANS AND CREDITS
COMMERCIAL A.ND INDUSTRIAL ..
CU,S,l
(FORE!GNi
~!SC, U,S, LOA"IS INCLUDING RETAIL
MISCELLANEOUS ASSETS
ASSETS ARISING FROH TRANSACTIO"IS
INVOLVING PARENT AND AFFILIATES
CLEARING BALANCES OU! FROM DT~ERS
DUE FROM U,S, BANKING AFFILIATES
DUE FROM FOREIGN PARE~T I AFFILIATES
IIOTEI
2,714
2,U9
2,383)
5117)
1,IU
1,'20
1,968
1,762
Z,515
DETAILS HAY NOT ADD TO TOTALI DYE TO ROUNDING,
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Federal Reserve Bank of St. Louis
1,2n
H9
II
0)
34)
95
SJ
SZ)
l05
9TB
IJI
JH
Jll
ao,
JH
an
"'
170
1181
241
2,019
702
l,3U
1,612
69'
501)
'81)
iii
1,n•l
!U
1,219
945)
271)
194
1116
267
J,·u•
6,244
TU
1,495
1,551
1,480
1,2541
U71
789
40
I, 034
l,014
2,10•
1,174
HI)
47')
111
16
5,7'53
INTERBAN~ LOANS AND DEPOSITS
CU,S,l
(FOREIGNi ·
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
J,741
l,4H
6,942.
5,533!
1,410
INVUTMINT COi,
l,SS.
4,0'4
J,ZU
'·"'
I0,'507
1,275)
2,132)
779
MONEY•MARKET ASSETS
s,102
...,,
11,ZU
COMMERCIAL IANKI
BIUNCMU
AGENCIU
lJ,US
2J2
.213
7
21
175
5
SJ
"'"
~
'fable lb
U,I, BANKING INITITUTJONI OwN!D IV ,oR!lGN IANKS
,011 NONTHLY REPORT DATE IN •NOV!NIER l97Z
(IN MlLLlONI OF·DOLLARII
ALL Rf POIITEIII
AG!NCIU
TOTAL LIABILITIES AND EQUITY
21,Jl?
IJ,US
LIABILITIES OF •STANDARD" BANKING
IUllNESS
t0,I06
J,17'5
LIABILITIES rn CORPORATIONS AND
OT.HlR NON•BANKS
.,0'4
INVUTMINT COi,
""'
J,171
Z,HII
2,024
794
6,l!II
..,..,
DEMAND-DEPOSITS &ND CRFDIT IALANC!S
TIME ANO SAVINGS DEPOSITS ANO OTHER
80RROWINGI
(DEPOSITS OF u,a, R[SIOfNTll
IOEPOSITS OF FOREIGNERS)
COMMERCIAL BANKI
IIIANCH!I
.s,:102
1,135
I, 186)
UBI
t,9Hl
IOI
1,n,
1,su
11,Ji!\
1194
•••
..0
311'5
Z,1199)
JIIO
92)
SHI
NONEY•M~RKET LIA~ILITJEI
JN1ER•8AN~ BORROMINGI ANO DEPOIJT
LIASILITIFS
11,S, BANKI
FOREIGN BANKS
l,6J5
MJSCELLANEOUS LIABtLJTIES
LIABILITIES ARISING FRO~ TRANSACTIONI
INVOLVING PARENT AND AFFILIATES
,
t,1'51
.....
U,O'SJ
..
1,IOJ
tl!I
l ,8111
CLEARING BALANCES DUE TO OTHER&
DUE TO u.a. RANKING AFFILIATES
DUE TO FOREIGN PARF.NT AND AFFILJATEI
n•
1,924
1,241
3911
1,SU
l,97l
9,537
1,SZI
92
H
26
I ..
471
,....
786
1,'ilt
7,2611
HI
90
11!1
116
NUNBER o, REPORTING INSTITUTIONS
IOI
so
2'
29
DETAILS MAY NOT ADD TO TOTALS DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
12'
$80
176
112
87
Uil
138
CAPfTAL ACCOUNTS AND RESERYEI
NOT[I
241
1n
311
..
,
I
1'0
I
2111
H
Zll
~
~
:!:able 2a
U.S. BANKING INSTITUTIONS OWNl:O BY FOREIGN BAiia$
FOR NIIIITHLY RE:PORT DATE IN -DECEMBER 1914
IJN MILLIONS OF IIDI.LARSI
ALL REPORlERS
AGENCIES
BRANCHES
COMME:Rc:IAL BANKS
111TAL ASSETS
55,166
H,190
12,801
11,955
ASSETS Df •STANDARD• BANKING·
BUSINESS
H,IS5
lB,149
81511
9,5Sl
LOANS AND CREDITS
241264
COMMERCIAL AND. INDUSTRIAL ..
21,789
,u.s.)
MONEY-MARKET ASSETS
5,2081
Z..475
7,022
4,607)
2,415)
1u.s. 1
I FOREIGN I
LOANS TO SECURITY DEALERS
U.S. GOVT. AND AGENCY SECURITIES
MISaLLANEOUS ASSETS
Z,985
1,9461
110191
59'1
456
5J,
541
407
4,224
61506
4,'21
6,198
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.lllClftAIICl8 llll'l:IITalD:tm MD OB DDIIIIII l'Alllllr LBrrlll
l1U8
11101
BUI
2941
Jl
4U
,I:,,.
505
445)
601
19
2,08S
572.
846
10,641
l1HO
S,0501
2791
2,204
2,667
11445
2.58
1191
U9)
10
225
1,JJO
246
Z,·M9
117
Z,424
2,008
291
11925
DETAILS MAY N01 ADD 10 TOTALS DUI TO ROUNDlNGo
. . IIICLIIDIS cunclllllllS' LIAIIILlUIS OIi
4,S84
Z,6481
1,736)
171
1,l.58
11,711
CUARING BALANCES DUE FRON OTHERS
DUE FRON U.S. BANKING AFFILIATES
DUE FRON F~REIGN PARENT l AFFILlATES
51~
S,214
2,097)
1,1171
~1994
ASS~TS ARISING FROM TRANSACTIONS
lNVDLVING PARENT AND AFFILIATES
'
..z
4,271
10,878
lNTfRBANK LOANS AND DEPOSITS
I
uas.
z,uo
11178
41561
12,968
10,0101
2,899)
11>,5811
IFURHGNl
MISC. u.s. LOANS INCLUOIIIIG RETAIL
ll>TEI
U,030
INVHTMENT
OI CIIDU,
40
H
11
114
VI
Table
~
UoSo BANKIN; INSTITUTIONS OWNED BY FOREII.N BANKS
FDR MONTHLY REPORT DATE IN -DECEMBER 1974
IIN MILLIONS OF DOLLARS)
ALL UPDRTlRS
BRANCHH
A;ENCIES
COMMERCIAL BANKS
INVESTMENT CDS.
TOTAL LIABILITIES AND EQUITY
,,,866
28,790
12,BOl
11,9!15
.2,szo
LIABILITIES OF •STANDARD• BANKIN&
BUSINESS
I0,157
n,11t1
6,ZH
1,591
1,573
LIABJLITIES TO CORPORAllDNS ANO
OTHER NUN-BANKS
13,998
OEMAND DEPOSITS ANO CREDIT BALANCES
TIME AND SAVINGS DEPOSITS AND Ul'HER
bDRROWINGS
IOEPO~ITS OF U.S. RESI:DENTSI
IDlPDSITS. DF FOREIGNERS)
Z,D04
7,515
S,811
667
4,7i>S
683
91S
Z,992
17'
9,234
9,3B41
4,t,141
t,S21
1,1351
870)
Z,19B
1,2091
Z,61131
4,52.3
t,,8991
6171
491
14'1
5251
MONEY-MARKET LIABILITIE$
INTE~-BA~K BORROWINGS AND DEPOSIT
LiABlllTIES
U.S. BANKS
FDRHGN BANKS
12,198
11,187
1,212
CLEARING &ALANCES DUE TO OTHERS
DUE TO U.S. BANKING AFFILIATES
DUE TO FOREIGN PARENT AND AFFILIATES
CAPITAL ACCOUNTS AND RESERVES
II.IMBER OF REPIJRTIN& INSTITUTIONS
NOTEt
24,144
14,795
1,HO
3,310
9,605
481
446
5Jl
l,l98
4,97t,
4,9!>0
14,218
6,421
573
2.37
244
99
474
594
Z,323
1,114
1,260
3,9ll
333
605
zn
1,63B
364
311
1"
315
1,5"5
254
128
1,041
143
1"5
l5
5l
30
3
DETAILS MAY NOT ADD TD TOTALS DUE TO ROUNDING.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,905
1,460
9,391
47
3,ll>l
MISCELLANEOUS LIABILITIES
Ll"ABJLJTHS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFJLIATES
9,439
~
°'
Table 3a
u,s, BANKING INSTITUTIONS OWNED av ,oREIGN BANKS
,oR MONTHLY REPORT DATE ·IN ••••APRIL l'77
(IN MILLIONS o, DOLLAR&)
ALL REPORTERS
AGENCIES..,.,.
00,10
25,198
U,80
ASSETS OF "STANDARD" BANKING
BUSINESS
411,142
17,052
17,U9
LOANS AND CREDITS
u,no
COMMERCIAi. AND INDUSTRIAL*
CU,S,)
CFOREIGNI
MISC, U,S, LOANS INCLUDING RETAIL
HONEY•MARKET ASS! TS
3,188
13,851
8,858)
4,993)
70!
J,531
4;1,5
MISCELLANEOUS ASSETS
CLEARING BALANCES DU! FROM OTHERS
DUE FROM u:s~ BANKING AFFILIATES
DUE 'ROM ,oREIGN PARENT & AFFILIATES
NOTEI
,.,.
17,054
1,401,
J,138
3,002
DETAILS HAY NOT ADD TO TOTALS DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a
3,51,5
~90
1,011
eooj
158)
111'1
2,379
.J9o
244)
151)
ll
Ill
2,08'1
Z,222
2,504
820
2,887
INCLUDES CUSTOMERS' LIABILITIES ON ACCEl'TANCES OUTSTANDING A11D OR DEFERRED PAYMENT LETTl!BS C1Y CREDIT,
.,.. INCLUDES FOREIGN BANK-<JWIIED AGREEMENT CORPORATIONS,
780i
2,881
969
.,21,
8,145
5,883
4, lbJ
7,007
497)
124)
l,1>211l
e,10•
4,772)
J,931)
]011
442
859
uo
4,409
9,455
3,735,
2,981!
753
214
528
ua
7,290
7,013
4,337)
2,o?o>
20
4,477
18,087
coa,
1,05
12,945
7,250
2,591
51,
INVESTMENT
1,lllo
IS,IU
11,1,511_
11,oul
1>,170)
INTERBANK LOANS AND DEPOSITS
cu,s.>
(FOREIGN I
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
11,110
23,702
17,531)
COMMERCIAL BANKS
BRANCHES
TOTAL ASSETS
245
470
1,097
147
378
277
53
141
.i:,..
--...J
Table 3b
U,1, BANKING INSTITUTIONS O•NED BY FOREIGN BANKI
FDA MONTHLY REPORT DATE "IN ••••APRIL 107
!IN MILLIONS OF D0LLAAll
ALL REP0ATEAI
TOTAL LUSILITIU ANO EQUITY
•• ,1 . .
LIABILITIES OF 'IUN0ARD' BANKINQ
BuSINEU
40,0IO
LIABILITIES TO CORPORATIONS AND
OTHER N0N•BANKS
AG!NCIU .....
15,IU
1,n•
ll,ZST
IJ,Ult
IZ,JJI
1,021
Z,ltOZ
5,242
11,118
15,135)
1,225)
Z,Zllt
1,20•1
I, 397
CLEARING .B~LANCES DUE TO OTHERS
DUE TO U,S, BANKING AFFILIATES
DUE TO FOREIGN PARENT AND AFFILIATEI
CAPITAL ACCOUNTS AND RESERVES
NUMBER OF REPORTING INSTITUTIONS
-
NOTE I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2J,91tl
J,SH
7,177
92
z, ...
4,Ult
MISCELLANEOUS LUB!LITIES
LIABILITIES ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
7,9o9
IZ, Z94
11,534
759
II ,U9
1, JOZ
l,JJ9
Zllt
7,9H
4, l5Zl
s, IJ4l
7,581
9,7151
1,ZOS)
UT
Ul
489)
I0,Z41
JOZ
IU
210
95
a
D£TAILS MAY NOT ADD TO TOTALS DUE TO ROUNDIN0,
...
ZltT
533
ZH
402
130
531
•
10
I, 350
1,545
1,910
1,1a
2,154
INCLUDES FOREIGN BANK-OWNED AGREEMENT CORPORATl<IIS,
,,
lt45
1,ltSO
2,hl
7,0'8
4,591
4,765
14,599
cos,
ssz
10,uo
9,28.
JIit
MONEY•MARKET LIABILITIES
INTER•BANK BORROWINGS AND DEPOSIT
LIABILITIES
U,I, SANKS
FOREIGN BANKS
INYUTMENT
H,l'8
23,JltO
DEMAND DEPOSITS AND CREDIT BALANCE I
TIME AND SAYINGS DEPOSITS AND OTHER
BORRO•INGS
(DEPOSITS OF U,S, RESIDENTS!
(DEPOSITS OF FOR[IGNERSI
COMMERCIAL UNKI
8AANeHU
u, ...
zo9
7J2
824
549
227
25
158
zo
I ,471
175
34
5
~
00
'fable 4a
------Ell
U.So BANKING INSTITUTIONS OIINl:O 1Y FOREIGN INIKS
LOCATS> IN
YORK
FOR IIONTHLY REPORT DATE IN -NOVEMBER 1972
IIN MILLIONS OF DOLLARS)
ALL REPOR1ERS
TOTAL ASSETS
n.11z
ASSETS OF •STANDARD• BANKING
ftUSINf:5$
14.067
CllKMERCIAL ANO INDUSlRIALff
1u.s.1
I fORtlGNI
Mat,. U.S. LOANS INCLUDIN& RETAIL
MONEY-MARKET ASSETS
1,002
6,052)
1,9491
199
INTERBAN~ LOANS ANO DEP0$11S
1u.s.1
I FORl:IGNI
LOANS 10 SECURITY DEALERS
U.S. GOVT. AND AGENCY SECURITIES
J.l
39
1.959
30115
1,422
85
1,195
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
OIi .ACCll"IAl£IIS Olffll'fAIIDUIC
ARD OB Dll'IIIIID PAYlllllr Llffll8
9a
95
D
UI
232.
23
2
615
lT
0, CUDl'f0
...,
461
11
296
11">
~
100
101
517
202
TH
DE1AILS MAY NOl ADD 10 TOTALS DUE TD ROUNDING.
ff IIICLUDBS CUS'fOIIBIIS I LIAlllLl'flBS
.u
229
Jll
226
671
1.12.z
114
1.n9
69•
5081
1881
715
1,195
9451
2501
192
143
230
TlT
114
7621
521
107
1,531
1.212
1.1&11
1011
'189
4ll
891
loOl4
922:
1,195
7191
4761
2.5oz
INVESTIIElff COS.
1.116
1.9u
1,214
5,296
4.0631
1.2111
2,658
ihl."21
4161
1,175
1.142
MISCELLANEOUS ASSETS
CLl:ARING bALANCES DUE FROM OTHERS
DUE FROM u. 5. BANKING AFflLIAlES
DUE FROM fDREIGN PARENT C AFFILIA1ES
2.990
5,32&
4•976
ASSETS ARISING FROM 1RANSACTIDNS
INVOLVlNG PARENT ANO AFFILIATES
COIIMER~IAL BANKS
2.1M.
•• 060
,.zoo
LOANS ANO CREDllS
NDTEI
BRANCHES
10,019
175
5
53
SC
Table 4b
UoSo BAIIIKIN' INSTITUTIONS OIINED BY FOREIGN BANKS
LlitATl:D IN ------NEIi YORK
FOR MONTHLY REPORT DATE IN -NOVEMBER 1912
(IN MILLIONS OF DOLLARS!
ALL REPOR1ERS
TOTAL LIAB1Ll11ES AND EQUITY
171882
101019
61390
1,908
LIABILITIES OF •STANDARD• BANKING
BUSINE~S
LIAdlLlllES TO CORPORATIONS AND
DTri!:R MlN-SANKS
Z,053
522
l1404
11nc.
301
21'>7T
211021
111>921
221
35.ll
1101
11221>
MIS,ELLANEOUS LIABILITIES
LIABILITIES AklSING FROM TRANSACTIONS
INVOLVIN~ PARENT ANO AFFILIATES
''
CAP 11 AL ACCOUNTS ANO RESERVES
NUNo~R OF R~PDRTING INSTITUTIONS
NlTE•
91>8
258
11047
ll10ltlt
l11t79
810
81155
287
0
26
c,90
13
11905
61581
.21t8
VI
0
u
;tU
93
Ult
lt05
9U
3621
77
ll
337
Z1323
345
91t
511
776
108
887
l10~al
3561
11024
6001
8031
126
380
160
5
Zllt
131
101
51>
41t8
63
Jl
21t0
108
63
Z6
20
lit
3
DETAILS MAY NOT ADO TO TOTALS DUE TO ROUNDING•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
~7
313
Ult
454
11414
379
572
11370
CLEARING BALANCES OUE 10 OTHERS
OUc 10 U.S. dANKlNG AFFILIATES
DUi TO FOREIGN PARENT AND AFFILIATES
INVE:STMENT COS.
ua
11601
NCNEY-MARKET LIABILITIES
INTER-BANK BORROWINGS ANO DEPOSIT
LlABILlTIES
U.S. bANKS
FOREIGN bANKS
COMMttlCIAL BANKS
l1Jl6
11793
DEMAND DEPOSITS AND CREDIT BALANCES
TIME AND SAVINGS DEPOSITS AND OTHER
BORRIMINGS
COlPCISITS OF u.s.• Rt.SIDENTSI
CDEPDSITS OF FOREIGNERSI
BRANCHES
AGENCUS
Table 5e
UoS• BANKING lNSTITUTIONS OWNED BY FOREIGN BANKS
LOCATED IN ------Ell YORK.
FOR MON1HLY REPORT DATt I• -DECEMBER 1974
llH MILLIONS OF DOLLA&SI
ALL REPORTERS
AGENCIES
.
COMMERCIAL BANKS
BRANCHES
10TAL ASSElS
111,507
1B,il9
10,454
, .,,.
ASSETS OF •STANDARD• BANKING
BUSINESS
I.T, ♦H
U,229
6,951
5,195
LOANS AND CREDITS
COIIMERCIAL AND INDUSTRIAL M
MONEY-MARKET ASSETS
....,
CLEARING BALANCES 01£ FROM OTHERS
DUE FROM u.s. BANKING AFFILIATES
DUE FROM FOREIGN PARENT I AFFILIATES
NOTE•
M
3,541
sea
4,791
493
304
515
1,•n
31H9
lo♦.B
251 1
2571
461
1191
13111
10
225
n
50
545
1,101
1131
2941
ii
778
1,651
192
1,275
974
246
l,952
·l,9Zl
"
HT
1•
lO
114
1 ■ 941
2a4
DETAILS MAY NOT ADD Tll TOTALS DUE TO ROUNDING.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
99ZI
SU.
lllCLlJDl!S CUUOIIERS I LIAlllLJnBS OR ACClll'rAIICIII ourBTAIIDIIIII MD OR DBFIUBD
1,J.38
1,992
1,TBZI
2091
2,14B
1,1561
5,160
51868
396
hilt
'
.,
456
2,280
U,054
3,105
l,1211
1,21141
2,570
1,6121
9591
2,320
2,110
3,290
Z,414
MISCELLANEOUS ASSETS
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARE:NT AND AFFILIATES
908
5,980
i,11441
2,U61
INTERBANK LOANS ANO DEPOSITS
cu.s. I
(FORE:IGNI
LOANS TD SECURITY DEALERS
U.S. GOVT. ANO AGENCY SECURITIES
3,146
9,0TI
.,7041
2,3741
5T
15,lBi
11,1211
4,li>al
cu.s. I
I FDKl:JGNI
MISC. U.S. LOANS INCLUDING RETAIL
9,135
16,190
INVHTMENt COS.
•AYllllllr
Lll'rrlllS 0. CUDD:,
11
Vt
Table 5b
U.So BANKING IIIITITUTIDNS OWNED BY FOREIUI BANKS
L.lltAll:D IN
Nli:W YDRK
FDA IIDNTHLY RENRT DATE lN -DECEMIIEk 1914
llN MILLIONS DF DDLLAASI
ALL REPORTERS
AC.l:NCIH
BRANCltliS
CIIIIMERCIAL BANKS
INVISlMNT COS.
TOTAL LIAIIILITIES AND EQUITY
H,5D7
18,319
10,454
1,343
ZoJIO
LIABILITIES OF •STANDARD• BANKING
IIUSlNESS
17,439
5,8"4
5,200
4,UZ
i.1n
LIABILlllE.5 TO CORPORATIOIIS AND
OTHLR NUN-BANKS
9,ZU
D~HANO DEPOSITS AND CREDIT BALANCU
TINE AND SAVINGS DEPOSITS AND OTHER
BOlliUlW lNC.S
CDEPOSllS OF U.S. RESIDENlSI
IDlPOSllS OF FOREIGNERSI
1,ZU
4,051
I.Zit
"61
J,311
613
76"
1,159
175
5,1199
635
1961
Zo41J
7441
2,4961
Z,;t99
1,4911
493
1421
SUI
5,1171
4,0Jc,I
♦HI
I
C
'
S6oll
I
NONEY-HARKET LIABILITIES
INTER-BANK BORROKIN&S MID DEPOSIT
LIAIIILJllU
u.s. 114111KS
FORUGN IIANltS
2,112
ZoHl
Z,195
NJSCELLANEO~ ~JABILITIES
LIABILITIES ARISING FRON lRANSACTIONS
INVOLVING PA~ENT AND AfFJLJATES
CLEARING BAUNCl:S DUE TO OTHERS
DUE TO U.S. BAN~lNG AFFILIATES
DUI: TO FOREIGN PAAENJ ANO AFFILIA1E$
CAPITAL ACtOUNlS AND RESERVES
NUIIM:11 OF RE:PDRTING INST1TU1JONS
IIIDTIEI
zo,ou
.. ,734
Zo973
IZ,JlZ
1,114
U,365
Ill
1o224
161
191
155
5,151
1,116
1,191
1,162
261
lolZI
Z,HZ
1,D47
Ill
133
ua
JU
60I
1,514
151
Zll
16
UI
.115
1,047
llO
97
621
14a
11
35
Z9
14
I
DElAILS MAY NOT ADO 10 TOTALS DUI TO IUIUNUIN&o
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
i,605
0
.: ·•
VI
N
Tabla 6a
U0 1 0 IANKING INSTITUTIDNI OWNED IY ,ollEIGN IANKI
LOCATED IN ••••••••"-•••NEW YDII.K
,011 MONTHLY REPORT DATE IN ••••APRIL 1977
(IN MILLIONS o, DOLLARI)
AGENCIU
ALL ll!POIITEIII
4!1,H•
l4,8'S.
10,JU
ASSETS o, "STANDARD• BANKING
BUIINUI
LOANS ANO CREDITI
J•,u•
ll,JH
14,'91
COMMERCIAL AND INDUITRJAL"""
!U,1,l
t,DREIGN!
HlSC, U0 S, LOANS INCLUDING RETAIL
MONEY•MARKET .ASIETI
11,10!
"'
1,JOI
J,0117
NOTE!
....
11,779
, au
2,JU
••
JOT
"'
DETAILS MAY NOT ADD TO TOTALS DUE TO ROUNDING,
...
1,SOI
1,no
,u
Ill)
1,au
715
2,SH
19'
21141
U4
'"'l
470
1,1n
11'
HI
an
5J
1111
V,
~
HO
2,041
sa,
""" IIICUJDIIS CUST<IIIBII I LIAIID.UIBS' OIi ACCll'TAlall OU!:IIT.IIIDlllC MD Ill DBrBUID PA'llllll'r l.lffll8 a, CIIDI'r,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1175
s,aas;
1,200
uo
1197)
114)
I
...
1,251
4,443)
1,JJS
1,101
JS
,,.,.l
a,,sa
SU
J,'505
10,aoo
....
HI
1,J..
us
2,S17l
lt,tU
J49
IH
47'
7, J'7f
4,401
"'"
1,091
,.u,,,
INY!ITM!NT COio
i,n,
1, 11141
12
.J,202
111,78'
MISCELLANEOUS ASSETS
CLEARING B~L~NCEI DUE fRDM DTHEAI
DUE FROM u.s. BANKING AF,1LIATEI
DUE fRDM FOREIGN PARENT I AfflLIATEI
'·'"l
2,011
847
COMMERCIAL IANKI
,,u1
S,H4
7,'1a
11,oU)
4,n,,
INTERBANK LOANS AND DEPOIITI
IU,S,l ,
!FOREIGN)
LOANS TD SECURITY DEALERS
U,So GOVT. AND AGENCY SECUIIJTIEI
ASSETS ARISING ,ROM TRANSACTIONS
INVOLVING PARENT AND A,,tLIATES
7, ...
"·"'as,na
..,.
BIIANCHU
TOTAL AISETS
u
111
Table 6b
U,1, BANKING INSTITUTIONS OWNED BY ,oREIGN BANKS
LOCATED tN •••••••••••••NEW YORK
FOR MONTHLY REPORT DATE IN ••••APRIL 1977
IIN MILLIONS OF DOLLARS)
ALL R!PDRTERI
AGENCIES
COMMUCUL UNKI
BRANCMU
INVESTMENT CDS,
TOTAL LIABILITIES AND EQUITY
45,294
14,05
Z0,JU
s,1 ..
1,93'
LIABILITIES OF •STANDARD" BANKING
BUSINESS
2J,U0
4,911,
11,ZH
.,JU
1,021
LiABILlflES TO CORPORATIONS AND
OTHER NON•BANKS
I, JJ4
U,JU
DEMAND DEPOSITS AND CREDIT BALANCES
TIME ANO SAVINGS DEPOSITS AND DTH!R
BORROWINGS
(DEPOSITS OF u,a. RESID~NT8)
(DEPOSITS OF FOREIGNERS
s,su
7,910
552
J,2112
JO
1,118
1,582
12,106
e, 1811
7,1811
919
,,aoa
3,979
ml
11,sul
2,949)
4,'711
690
2a
337
Ul
I ,0J8
/189)
140NEV•MARKET LUBILITIES
INTER•BANK BORROWINGS AND DEPOUT
LIABILITIES
U, S, 84NKS
FOREIGN BANKS
CLEARING B~LANCES DUE TO OTHERS
DUE TO U,S, BANKING AFFILIATES
DUE TO FOREIGN PARENT AND AFFILIATES
CAPITAL ACCOUNTS AND RESERVES
NUMBER OF REPORTING INSTITUTIONS
NOTEI
9,772
4,2'1
J,000
13,018
JJJ
2,402
1100
1,91 I
209
n2
894
549
25
158
648
1114
102
1,514
132
6,SU
V,
260
6
49J
SJ•
I, 581
2,000
6,191
2U
2211
109
I, 395
178
157
114
175
105
113
Iii
t•
5
DETAILS MAY NOT ADD TO TOTALS DUE TD ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,75J
2,991
20,J09
2,802
I, 819
10
4,705
525
MISCELLANEOUS LIABILITIES
LIABILITIES ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
1,ea,
5,2JO
.I::,.
Table 7a
u,a.·
BANKING INSTITUTIONS OWNED BY FOREIGN BANKS
LOCATED 1N •••••••••••CALIFORNIA
FOR MONTHLY REPORT DATE IN •NOVEMBER 1972
(IN MILLIONS OF DOLLARS)
AGENCIES
ALL REPORTERS
TOTAL ASSETS
S,511
ASSETS OF "STANDARD" BANKING
BUSINESS
3,1179
LOANS AND CREDITS
I'
(
MISCELLANEOUS ASSETS
..
NOTE1
s
198
IZ&l
7
473
12111
128
1,717
1,832
121
1,282
428
0
14
0
DETAILS MAY NOT ADD TO TOTALS OU[ TO ROUNDING,
0
0
u
0
7
459
0
0
u;
2i
0)
0)
,1
115
0
0
0
INCLUDES CIJSTOMUS I LIABILITil!S ON ACCE1'UIICBS OllTSTABDING Alli> ON Dli'EJIRED PAYMl!lrl Lll'l"XIIIIS OF CUDIT,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SOJ
0
0
2J
1,277
417
0)
0)
1011
S29
0
01
0)
0
3b
0
ml
0
721
0
65•
0
2b2
134i
0
1,15'
0
0)
0)
212
coa.
INV!ITlll!NT
0
1,110
0
1,60
1, 469!
177
742
INTERBANK LOANS AND DEPOSITS
IU.S.l
IFOREIGNi
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
CLEARING BALANCES DUE FROM OTHERS
DUE FROM U.S. BANKING AFFILIATES
DUE FROM FOREIGN PARENT & AFFILIATES
1, 1151
2,303
2,020)
282)
507
MONEV•~ARKET ASSETS
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES.
0
1,89'
COMMERCIAL ANO INCUSTRUL ..
!U.S.)
IFOREIGNi
MISC. U,S, LOANS INCLUDING RETUL
1,ns
0
J,UII
2,810
COMM!Ri:UL U'NKI
BRANCHU
0
0
'18
II
11
0
o.
0
VI
VI
'Zallle 7lt
U0 l 0 IANKINS INSTITUTIONS OWNED BY ,cREIGN IANKI
LOCATED IN -----------CALl,ORNIA
,cR MONTHLY REPORT DATE lN •NDV!Ml£R 1971
CIN MILLJDNI a, DDLLARI)
AG[NCIU
ALL Rt:PDliTlRI
TOTAL LllBILITl!S IND EQUITY
s_,su
Ll&BlLITJll c, •ST•NDARb• IANKIN&,
BUSIN!SS
!,SH
LJ&BlLtTJES TD CDRPOR&TlONS ANO
OTHER NON-BINKS
1,111
0
211.
1,n,
CCIIINIIICl4~
0
,....
DEMAND DEPOSITS AND CREDIT llLANC!S
TJHE ANn SAVINGS DEPOSITS ANO OTHER
BORROWINGS
(DEPOSITS O' UoSo RESID~NTS;
(DEPOSITS OF ,oREIGNERSl
,...,
IIIIANCHII
J,•1•
4JII
,.
IANKI
•
•
....
,
0
2'52
0
0)
233)
2011
Ol
.. t
•
411
0
1,102
1,'503)
INVIITNINT COio
s,oso
1,Uf)
JOI
•
•DI
01
MONEV-MIRKET LIA81LITIEI
INTEA•BIN~ BORRO~INGS &ND DEl'DSIT
LIABILITIES
U.S. BINKS
FOREIGN BINKS
1,JII
...
MISCELLANEOUS LIAIILITl£S
LIABILITIES IRISING ,ROM TA&NSACTIDNI
INVOLVING PARENT &ND &FFILl&T[I
CLEARING BALANCES DUt: TO OTHERS
DUE TO u.s~ a-NKING ,,,1L11T[I
OUE TO FOREIGN PIAF.NT ANO AF~ILIAT!I
CAPITAL ACCOUNTS ANO RESERVES
NUMBER OF REPORTING INSTITUTIUNI
NDTEI
1,711
.
.,
..
,
s•
0
•
••
0
0
.
0
•
u
0
JI
0
,.
0
0
0
'"
,.
IS
,
0
•zs
707
,
0
1,U2
121
l,H2
1,0JII
DETAILS MAY NOT ADD TO TOTALI DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,JS2
1,2u
IU
••
IOI
27
0
111
0
24
0
10
0
VI
0
0
01
Table 8&
u.s.
IAlll<INC. INSTITUTIONS OIINf:D BY FllllElGN IANKS
LOCATl:D lN -----C.U.IFORNIA
FOR -THLY REPORT DATE IN -O£CEIIHR 1974
UN MILLlllNS OF DOLLARSI
ASSElS OF •STANDARD• BANKINC.
BUSINESS
LOAll;S AND CREDilS
IRANUIES
AGiNClES
ALL REPORTERS
TOJAL ASSETS
14,860
10,397
0
1,933
4,919
0
COMMl:RtlAL AND INDUSTRIAL ..
!1,114
4,5BZI
!1921
1,426
11,.s.1
CfDRUGNI
MISC. U.S. LOANS INCLUDING RETAIL
INVl:S1MNT COS.
";t4U
0
4,011
3,89S
6,600
COIVIERCIAL IANKS
3,190
3,366)
SUI
0
01
01
0
5
0
2,lOS
0
0
1,214
1,2171
0
01
611
01
0
1,421
VI
MDNl:Y-HARKET ASSETS
1,683
INll:RIIANK LOANS AND· DEPOSITS
cu.s.1
MISCELLANl:OUS ASSETS
CLl:AKING BALANCES DUE FROM OTHERS
DUE FMOII U.S. BANKING AFFILlAlES
DUE FRON FOREIGN PARENT~ AFFILIATES
..
NDTl:1
TH
4"1
2191
117
21
5,927
51>1
4,l24
1,143
0
01
01
0
0
'
•C
0
0
5,4TB
Dl:TAILS MAY NOT ADO TO TOTALS DUE TO ROUNDING.
IHCLUDES CllSTlllll!IIS I LlAB111TllS Olf ACCIPtAICIS OOTSTAIIIDll AID OIi DIFIIIIIIIID l'A!IIBIIT LlftllS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
or
CUDU.
0
01
01
0
0
.,
796
0
3"
450
0
0
0
HS
4,200
1,122
0
40"'
2•
20
--.J
0
156
1411
ll
D
301
650
959
0
859
6331
2261
.,
I FORlilGNI
LOANS TO SECURITY DEALERS
u.s. GOVT. AND AGENCY SECURITIES
ASSETS ARISING FROII lRANSAClIONS
INVOLVING PARENT AIID AFFILIATES
'1Z4
0
0
0
Table Sb
U.S. BANKING INSTITUTIONS OWNED BY FOREIGN BANKS
LDc.Ano IN -----<;,ALIFORNU
FOR MONTHLY REPORl DATE IN -OECEM8ER 1914
llN MILLlONS OF OOLLAKSI
ALL REPORTERS
AGENCIES
BRANCHES
C.OMM&:RClAL BANKS
INVESTMENT t0$.
TOTAL LI ABILITIES ANO EQUlTY
14,860
10,S97
0
4,463
0
LIA~ILIT16S OF "STANDARO• BAN~ING
IIUSlNESS
11,558
1,89 ♦
0
3,1>6♦
0
LlA81LlllES TO tDRPORATlDNS ANO
OTHEk NON-&AN KS
4,147
DEMAND DEPJSlTS AND CREDIT BALANCES
TIME AN~ SAVINGS DEPOSITS AND UTHER
BORROWINGS
(DEPOSITS Of U.S. RESIDENTSI
IDEPO~ITS Of FOREIGNERS!
7!>6
3,391
0
0
1,278
70
0
1,2.08
0
2,81>9
3,678 I
4b91
686
3S91
0
01
01
2,1113
3,3391
52)
0
01
01
♦ 171
HONEY-MARKET LIABILITIES
V,
INltk-BANK BORROWINGS AND DEPOSIT
LIABILITIES
U.~ • IIANKS
FORl:IGN BANKS
Z,831
CLEAAING BALANCES DUE TD OTHERS
DUl TD u.s. BANKING AFFILIATES
DUE TO FOREIGN PARENT AND AFFILIATES
CAPITAL ACCOWITS ANO RESERVES'
NUMBER Of REPORTING INSTITUTIONS
IIIOTE:
'15
3
0
0
9♦
778
1,557
0
0
195
0
0
402
0
0
0
00
0
o·
11"
205
82
0
0
471
l♦
0
3'il7
0
53
39
0
l♦
0
DETAILS HAY NOT ADO TO TOTALS DUE TO ROUNDING.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
583
2.,42.9
2.08
983
1,639
0
0
♦l
778
'18
0
boSOl
6,582
51
MISCELLANEOUS LlABILJTJES
LlABIUTlES ARISING FROM TRANSACTIONS
l!IIVOLVING PARENT ANO AFFILIATES
6,555
6,633
Table 9a
U0 8 0 BANKING INSTITUTIONS OWNED IV ,oRElGN BANKS
LOCATED IN --------·•••CALZ,ORNU
FOIi MONTHLY REPORT DATE IN •---APRIL 1977
(IN MILLIONS OF DOLLARS)
"'"'
'
~
0
..,..,'
AGENClEI
ALL A!POATERI
TOTAL USETS
ASSETS o, "STANDARD• IIANKlN0
BUSINEH
"·'··
!l,'74
11, ...
LOANS AND CREDITS
COMMERCIAL AND INDUSTRIAL..,
!l,8'15
!FOREIGN\
MISC. u,s. LOANS INCLI/DING RETAIL
2,197
INTERBANK LOANS AND DEPDSlTI
cu.a.)
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILI&Tfl
CLEARING BALANCES DUE FROM OTHERS
DUE FROM u:a •. BANKING AF'1LIATEI
DUE FROM FOREIGN PARENT~ AFFILIAT!S
NOTE!
...
n•
2..
J, IOJ
1,240
J,lJII
l,J91
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(II
31
0l
0
0
!ITO
u,
-Jl
158
V,
\CJ"
0
01
20
l,011
HI
Dl!FIIUBD PAYlll!IIT UITTIIIS I:. CUDIT•
0
:sz•
ml
0
DETA,ILS MAY NOT ADD TO TOTALS DUI TO ROUNDING;
IIICLUDBS CUSTIIIIIBS' LIABILITIBS OH ACCBPTAllCIS ovrBTAllDIIIG .AIID
2,1n
t,417
0
0
0
0
0l
Ol
0
2Ul
0
0
11,UO
!l,ZH
0
,,.oo;
0
0)
0)
JU
0
t,eu
0
so•
911
0
0)
0
eo•!
4011
I, 121
0
0
0)
1,213
lNYEITMENT COi,
4,03.
0
24
21
MISCELLANEOUS USE°TS
,,ou
l ,271
l,!139
1,0'8)
44li
(FOREIGN\
LOAN8 TO SECURITY DEALERS
u.a. GOVT. AND OE_NCY S!CURITI!a
0
sn
z,.ae
MONEY-MARKET ASSETS
••HZ
4,0JZ.
3,45'!
s,os,!
837
cu.a.,
0
4,057
8,0'3
C0MMEIIClAL BANKS
BIIANCHU
10,314
0
0
0
0
0
Table 9b
U,1, BANKING INITITUTJONI OWNED BY ,oRElGN IANKI
LOCATED IN •••••••••••CALJ,ORNlA
,oR MONTHLY REPORT DATE IN ••••APRIL 1977
ClN MILLIONS o, DOLLARII
ALL RE,.DRT!RI
ADENClt:a
COM"IRClAL· IANKI
IRANCH!I
lNYt:IT"ENT COi,
TOTAL LlAIILJTlEI AND EQUITY
1,,,..
10,JU
0
6,HI
0
LIABlLJTlES o, •STANDARD• BANKING
BUSINESS
u,,111
1,JJZ
0
s,.sz
0
LlABJLJTIEI TO CORPORATIONS AND
OTHER NON•BANKS
.,IH
DEMAND DEPOSITS AND CREDIT BALANC!I
TIME AND SAVINGS DEPOSITS AND OTHER
BORROWINGS
(DEPOSITS OF U,9, RESIDENTS;
(DEPOSITS OF FOREIGNERS!
1,266
1,7 ..
1,6h
1,2271
551
707
s,s"!
110
s,1ao
0
S9
0
0
1,n1
0
0
J,109
5,0H)
IOJ)
:i
o;
01
0
INTER•BANK BORROWJNDS AND DEPOSIT
LIABlLJTJES
U,8, BANKS
FOREIGN BANKS
6,277
1,JOO
NUMBER OF REPORTING IN8TITUT10NS
NOTEI
926
1,160
U7
0
0
IO
0
,n
0
0
0
•oo
0
J75
HO
0
0
127
0
100
1110
liOlS
1,012
0
0
0
155
IU
612
122
0
960
0
u
48
0
IS
0
DETAILS MAY NOT ADD TD TOTALS DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0
6)051
12
zn
CLEARING BALANCES DUE TO OTHERS
DUE TO U,S, BANKING AFFILIATES
DUE TO FOREIGN PARENT AND AfFlLlAT!I
CAPITAL ACCOUNTS AND RESERYEI
,,uo
,,111
92
l,JOI
MJSCELLANEOUS LlABJLlTJES
LJABILJTIES ARJSJNG FROM TRANSACTIONS
lNVOLVJNG PARENT AND AFFILIATES
O'I
0
MONEY•MARK!T' LlABILITlES
0
0
Table 10a
U,1, IANKINI INSTITUTIONS OWNED BY _IANKS IN •••••••••••••••JA,AN
,oR MONTHLY REPORT DATE IN •NOVE"IER l•'II
CIN MILLION& o, DOLLARS!
AGENCIES
ALL IIIPORTERI
TOTAL AUETI
AISETS a, 1 1TANDARD 1 BANKING
BUIINEU
LOANS AND CREDITS
COMMERCIAL AND INDUSTRIAL
cu.a.,
,o, ..,
1,7 ..
1,llll
,,197
,,Ul
l;so•
MONEY•MARKET ASIETI
INTERBANK LOANi AND DEPOIITI
C,OREJGNI
LOANS TO SECURITY DEALERS
U,1, GOVT, AND AGENCY IECURITIEI
AISETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATEI
CLEARING B~L~NCES DUE FROM OTHERS
DUE FROM U,S, BANKING AFFILIATES
DUE FROM FOIIEIGN ,,RENT I AFFILIATES
NOTEI
ff
l,9U
l•
Ul
20
7111
11110
l,Hl
2'11
0
l
lSO
l,909
1,lSII
2J
na
HI
0
1117
J4J
1,J25
20
a
UII
2l
DETAILS MAY NOT ADD TO TOTALI DUE TD ROUNDING,
lllCWl)BS CUSTlllllllS I LIAIIILl'lIIS OB ACCBIDIICll8 OUfSTAll>Illl AIID OB DUIIIIIIID 1'AYllllll't Ll'ffllS OIi CUDl'II,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'°'
a:s,0)
52
0
0
OJ
Ill
.n,
Ill
'°'I
20
...
0
7'7i
o
an
...,
l,117
,.,,,
INVUT"INT ca,,
0
01
o
7')
MISCELLANEOUS ASSEJS
IIJ
11,,u!
1,222
71111
cu.a.>
''°
S,IJII
S,:S97)
l,:SIIJI
JH
CFOll~IGNI
MISC, U,S, LOANS INCLUDING RETAIL
CDMMIIICIAL IANKI
a,ou
S,IJII
7,0IO
ff
BRANCH!I
0)
0
o
'°
·~1
0
0)
01
0
0
0
SIii
.
71
...l
.J
0
0
o
0
o
°'
Table 10b
U,1, BANKING INITITUTIONI OWNED BY BANKI IN •••••••••••••••JAPAN
,oR MONTHLY REPORT DATE IN •NOVEMBER 1971
CIN MILLIDNI o, DOLLARI)
ALL RIPOIITERI
TOTAL LIABILITIEI AND IQUITV
LIABILITIES o,
BUSINUI
1
AGENCIU
COMMERCIAL IANKI
IRANCHU
lNVIITMINT coa,
I0,9'1
8,7 ..
1,0
a,ou
0
4,HI
J,0411
SI
1,,..
0
1TANDARD• BANKING
LIABILITIES TD CORPORATIONI AND
OTHER NDN•UNKI
1,,011
DEMAND DEPDIITS AND CREDIT IALANCII
TIME AND SAYINGS DEPOSITS AND OTHER
80RRDWINQS
CDEPDllTS o, u,a, REIIDfNTli
(DEPDllTS a, ,oA!IGNERB
U7
110
ISO
7
1,JIII
1,7621
117
JJ
H)
· 21
I)
1,.s,
0
• •
usi
UI
0
11477
SU
as•
0
,,:ss,l
u,
0)
0
1,058
0)
MONEV•MARKET LIABILITIEI
lNTEM•BANK BORROWINGS AND DEPDIIT
LUBlLlTlEI
u.a~ BANKS
FOREIGN UNKI
1,700
MISCELLANEOUS LIABILITIES
LIABILITIES ARISING FROM TRANIACTIONI
INVOLVING PARENT AND AFFILIATEI
1,0H
1,042
CLEARING B&LANCEI DUI TO OTHERI
DUE TO u~a~ BANKING ,,,1L1ATES
DUE TD FOREIGN PARENT AND A,,1L\tTII
CAPITAL ACCOUNTS AND RE8UVEI
NUHIIR o, REPORTING INITITUTIONI
NDTEI
., •• 7
4,00
.,....
ST
II
it
HO
117
0
0
0
0
0
0
aos
SIS
a
s
0
27
0
19
sn
•
°'
N
0
II
IS
10
10
J62
1,Jtl
ns
:n
0
'9S
S,HS
,SH
DETAILS HAY NOT ADD TD TOTALI DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,H,
1, ..,
IS
0
0
!able lla
UoSo BANKING INSTITUTIONS DWNED BY BANKS IN -------JAPAN
FOR MDNTHLV REPORT DATE IN -OECEMBER 1974
IIN MILLIONS Of DDLLARSI
ALL REPORTUS
AGlaNC:IES
10TAL ASSETS
H,707
18,872
ASSETS DF •STANDARD" BANKING
BUSINUS
16,599
12,657
LDANS ANO tREDITS
U,697
9,7931
Z,9041
551
COHMERC:IAL ANO IIIDUSTRIAL""
1u.s.1
IFORElliolll
MlSC. u.i. LOANS INCLUDING RETAIL
MONEY-MARKET ASSETS
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT ANO AFFILIAlES
CLEARING BALANCES DUE FROII OTHERS
DUE FROM u.s. 8AIIKING AFFILIATiS
DUE FROM FOREIGN PARENT C AFFILIATES
NOTES
11370
1,3001
70J
''
0
67
0
0
3311
3291
11
"°
D
·2.0
4
715
691
7,108
1,166
41161
1,579
6,216
983
41059
l • 1'14
189
l88J
61
6U
197
119
SU
19
92
♦OZ
0
cu
OJ
0
0
lJ
11
481
0
52.4
11314
985J
290
0
OJ
OJ
924
1,566
l,Z35J
DETAILS MAV NOT ADO m TOTALS DIIE to· RIIUIIIDlNGo
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
29
80
1,010
MISCELLANEOUS ASSETS
847
..121
4151
800811
2,4001
0
1,894
847
10,481
lNnSTMENT C:OSo
0
3,015
927
1,665
21656
INTERbAIIK LOANS AND OEPOSllS
cu.s.J
lfORElGHI
LOANS TO SECURITY DEALERS
U.S. GOVT. AND AGENC:V SEC:URITIIS
1,194
10,509
13,250
"1MMERC:IAL BANKS
BRANCHES
0
0
364
12
I
0
0
0
01
~
Table llb
UoSo BANKING lNSTllUllilNS OWNED BY BANKS IN -------JAPAN
Fill< MONTHLY REPORT OATE JN -DECEMBER 1974
llN HlLLlONS OF DOLLARSI
BRANCHU
AGENCIES
ALL REPORTERS
TOTAL LlABlLlTIES AND EQUITY
LIABILlllES OF •STANDARD" BANKING
uUSINESS
COHHERCIAL BANKS
0
10,421
LIABILITIES TO CORPORATIONS AND
OTHl:R NON-BANKS
INVESTMENT COS.
1,,.,.0
18,872
23,707
2,671
0
3,811,
OEHAND DEPOSITS AND CREDIT BALANCES
TIHc ANO SAVINGS.DEPOSITS AND OTHER
BCJRRUWINGS
!DEPOSITS Of U.S. RESJDENTSI
!DEPOSITS OF fOREJGNE.kU
0
1,331
321
49
2,485
3,262)
554)
874
811>1
75
3761
0
91,2
1()1,)
1,536
2,340)
01
181
1581
01
0
HONEY-HARKET LIABILITIES
INTER-BANK BORRDWINC.S AND DEPOSIT
LIA&ILJTifS
U.S. 8Ar,KS
fOREir.N SANKS
HISCELLANEOUS LlABlLITIES
7,307
7,510
l,485
26
LIABILITIES ARISING FROM TRANSACTIONS
JNVCJLYING PolRENT AND AFFILUUS
981
4,2.03
4,481
SU
NUHBER Of REPORTING INSTITUTIONS
NOTE•
DETAILS MAY NOT ADD 10 TOTALS DUE 10 ROUNDING.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,.,.
25
1
45
144
994
8,265
CLEARING bALANCES OUE TO OTHERS
DUE lO U.S. SANKING AFFILIATES
DUE TO FOREIGN PARENT AND AFFILIATES
CAPITAL ACCOUNTS AND RESERVES
1,920
2,193
133
158.
7,307
0
0-,
0
0
0
128
0
406
3,6'tl
2
158
304
0
0
4,298
134
48
0
Y2b
~
0
54
186
19
318
0
30
0
B
0
u,a,
Table
AGENCIES-
ALL REPORTERS
TOTAL ASSETS
is,01
15,lJG
ASSETS OF
BU&lNEU
il,211
ti, I 70
1
STANDARD 1 BANKING
LOANS AND CREDITS
C,ORElGN!
MISC. u.s, LOANS INCLUDING RETAIL
INTERBANK LOANS AND DEPOSITS
u:s:
NOTEI
7,ls•i
t,4U
'42
,.an
2,890
1,2'2
I 1'
12'
no
DETAILS MAV NOT ADD TD TOTALS DU! TD ROUNDING,
...
IIICLUDES CUSTQIIIJS I LIABILITIES OH ACCBPWICBS OUTSTAIIDIIIG AIID OIi Dl!FBUBD PA'lllllillT LITTIIIII
-
INCLUDES FORBIGH BA!Gt-011RBD AGRBl!IIBIIT COIIPOUTIOH,,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
5'1
sn
472
or
CRBDIT.
0
0)
0)
0
0
1,090
5.
517
2,740
904
0
15)
12
I
10
l2J
a,1,0
!1,lto
241
to
0)
0
40.
s,o,
294)
391
0
OI
1,5111
SIi
ml
0
1,071
JU
205
,....
1,Hli
29')
•tt>
a
•
1,a.o
'2
. .,
c·o,.
0
J,021
1,595
2,015
1,491
MISCELLANEOUS ASSETS
t,5'5
INVUTMENT
0
s,ua
1,911
1,784
t,540)
244)
:~o=E~GNi
LOANS TO SECURITY DEALERI
U,S, GOVT, AND AGENCY SECURITIES
5,TOI
9,JTI
J,J44
MONEV•HARKET ASSETS,
CLEARlNG BALANCES DUE ,ROM OTHERS
DUE FRO~
BANKING A,,1LIAT!I
DUE FRO FOREIGN PARENT I AFFILIATES
2,4SJ
12,915
9,9'12)
2,UJl
t,aaa
cu.s:,
COMMERCIAL IANKI
IRANCHU
,,sn
IJ,'95
COMMERCIAL AND INDUSTRIAL .,.
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PA~ENT AND AFFILIATEI
12 ■
BANKING INITITUTIDNI OWNED av BANKS IN ··············•JAPAN
,oR MONTHLY REPORT DATE IN ••••APRIL 1977
CIN MILLlDNI OF DOLLARS)
0
0
J..
IQ
151
0
0
0
°'
V,
Table l2b
u,a. BANKING INSTITUTIONS OWNED BY BANMS IN ·············••JAPAN
FOR MONTHLY REPORT DATE IN ••••APRIL 1977
(!N MILLIONS OF DOLLARS)
AGENCIES,,....
ALL REPORTERS
TOTAL LIABILITIES AND EQUITY
ZJ,4'1
LIABILITIES OF •STANDARD" BANKING
BUSINESS
LIABILITIES TO CORPORATIONS ANO
OTHER NON•BANKS
2,453
9,.05
I, 095
.,187
DEMAND DEPOSITS AND CREDIT BALANCES
TIME ANO SAVINGS DEPOSITS ANO OTHER
BORROWINGS
(DEPOSITS OF U,S, RESIOENTSi
(DEPOSITS OF FOREIGNERsi
5,7D8
599
1,374
1,305
4,882
0
4,214
3,099
3,784)
545
520)
79)
1,238.
939)
4J5i
944i
430)
MONEY•MARKET LIABILITIES
!NTER•BANK BORROWINGS AND DEPOSIT
LIABILITIES
U,S, BANKS
FOREIGN BANKS
., 422
20
MISCELLANEOUS LIABILITIES
LIABILITIES ARISING FROM TRANSAC'TIONS
INVOLVING PARENT AND AFFILIATES
NUMBER OF REPORTING INSTITUTIONS
NOTEI
3,10
114
1•
4
292
1es.
1,324
559
2,330
2,UB
842
3,351
497
179
274
104
74•
44
474
au
208
34
574
51
31
II
10
DETAILS MAY NOT ADD TO TOTALS DUE TO ROUNDING;
,,.... INCUJDES FOREIGN BANK-OWNED AGREEMENT CORl'ORATION,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
J08
2,231
5,518
7,340
130
312
•• 000
0
2,708
CLEARING BALANCES DUE TO OTHERS
DUE TO U,S. BANKING AFFILIATES
DUE TO FOREIGN PARENT ANO AFFILIATES
CAPITAL ACCOUNTS ANO RESERVES
•• 000
.,442
INVESTMENT CDS,
54
11•
5,20)
COMMERCIAL BANKS
BRANCHEI
15,330
0
0)
0)
'Zable 13e
UoSo IANKING INSTITUTIONS OW'IED BY .BANKS JN ------,..,c;ANADA
FOR 140NTHLY REPORT DATE IN -NDVEIBER 1972
IIN HILUONS OF D01,LARSI
ALL REPORTERS
TOTAL ASSETS
5,0»
ASSETS DF •STANDARD• IANCING
BUSINESS
3,290
LOANS AND CREDITS
2061 T
1,317
I FOREIGN)
MISC. U.S. LOANS INCLUDING RETAIL
1,120
INTERBANK LOANS AND DEPOSITS
(U.S. I
I FORE IGNI
LOANS TO SECURITY DEALERS
U.S. GOVT. AND AGENCY SECURITIES
NOTE•
1,516
1,833
1,"6T
314
280
1,185
36
1,111
Ul
62
0
19
0
111
01
01
l
2
14
98
11
0
0
0
5T
0
43
21
240
D
01
01
0
0
01
01
14
323
368
DETAILS MAY NOT ADD TO TOULS DUE TO RIIUNOING.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
211
91
0
TO
681
21
81
3
60T
5441
631
168
163
0
-150
156
15al
01
Tl
1341
34
INVESTMENT COS.
0
339
lll
906
1121
6Z6
5o31
641
183
311
MISCELLANEOUS ASSETS
CLEARING BALANCES DUE FROM OTHERS
DUE FRON U.S. BANKING AFFILIATES
DUE FRON FOREIGN PARENT C AFFILIATES
382
244
940
1,131
9961
1351
1116
1u.s.1
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
CDIIIERtlAL IMU
BRAICHES
567
CDIMERCIAL AND INDUSTRIAL . .
MONEY-fl All KET ASSETS
.aGENCJ ES-
"
4
0
0
6
0
°'
-..J
table 13)1
U.S. BANKING INSTITUTIONS OW.ED BY BANKS lN FOR l'ONTHLY REPORT DATE lN -NOYEMIER 1972
(IN MILUONS OF DOLLARSI
ALL REPORTERS
TOTAL LIABILITIES AND EQUITY
L UBI UTI
BUSINESS
es
ANADA
BRANCHES
AGENCIES·
COlflERCUL UNKS
INVESTMENT C:OS •
5,0JJ
4, 1)83
567
382
0
1,140
3114
486
301
0
OF "STANDARD" BANKING
LIABILITIES TO C:ORPORATlONS ANO
OTHER NON-BANKS
zoo
931
DEMAND DEPDS ITS ANO CREOlT BALANCES
TIME 4Nl SAVINGS DEPOSITS AND OTHER
BORROWINGS
IOEPUSITS OF U.S. RESIDENTS!
(DEPOSITS OF FOREIGNERS!
0
Z83
449
338
129
u
137
0
!>93
6671
2"41
70
491
1511
3n
41ol
l4o
2021
801
0)
331
0
01
MONt:Y-11 AR KET LIABILITIES
108
88
107
l
3,120
0
3,720
39i
CLEARING BALANCES DUE TO OTHEltS
DUE TO u.s. BANKING AFFILIATES
DUE TO FOREIGN PARENT ANO AFFILIATES
ZB't
3,l't3
l
1
19
0
1,6
17
11
79
367
2114
3,069
"
1
19
8B
101
MJSCELL4Nf0US LIABILITIES
LI48JLJTIE:S ARISING FROM 1RANSACTIONS
INVOLVIN. PARENT ANO AFFILIATES
21
17
0
62
0
0
8
0
1
12
0
0
CAPITAL 4CCWNTS AND RESERVES
.,,
10
3
60
0
NUMBER IF REPORTING INSTITUTIONS
21
11
4
8
0
NOTE:
OElAILS MAY NOT ADD TO TOTALS DUE TO RCIJNDINGo
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
°'
00
INTER-BANK BORROWINGS AND DEPOSIT
LU81L ITIES
U.S. BANKS
FOREIGN BANKS
0
0
Tabla 14a
UoSo IANKING INSTITUTIONS OWNED BY BANKS IN
FOR MONTHLY Rl:PDRT DATE IN -OECEMBER 1914
ClN MILLIONS Of. OOLLARSI
A~CIH
ALL RE.PORURS
.,192
1,821
501
ASSETS OF •STANDARD• BANKING
BUSINESS
!>,OIZ
4,191
196
COMMERCIAL AND INDUSTRIAL
ru.s. I
2,TH
NOTE•
...
Ul
1,211
6211
6441
313
191
321
1,110
3,629
666
26C.
2,884
601
191
2,a:n
111
3
11
'11
116
55
29
l
11
DETAILS MAY NOT ADD TO TOTALS DIE TQ·RDUNDINGo
0
0
0
0
10
••
0
01
01
53
14
lRCLIIDIS CUSTOMll:IIS I LIAlllLl'llBS OIi .ACCB1'rAIICIIII OUDTARDDlG AIID OIi DIPIIIIIBD PAYIIBll'r LB'rlllS or CUD1T0
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
11
61
23
101
0
0
6
6
251
0
OJ
01
146
01
395
0
162
U.61
51
121
14
1,158
409
MISCELLANEOUS ASSETS
CLEARING BALANCES DUE FROM OTHERS
DUE FROM U.S. BANKING AFFILIATES
DUE FROM FOREIGN PARENT I AFFILIATES
3291
30
1,295
b~OI
6451
0
289
Ul
2251
61
1,1311
INVESTMENT COS.
0
488
2,0bO
2,011
INTERllAN~ LOANS AND DEPOSITS
ru.s. I
lfOREJGNI
LOAhS TO ~CURlTY DEALERS
U.S. GOYTo AND AGENCY SECURITIES
51>1
159
21!>
MONEY-MARKET ASSETS
A$S~TS ARISING FROM TRANSACTIONS
INYULYJNG PARENT ANO AFFILIATfS
2,090
2,451
2,1131
3401
ti
lfOREJGNI
Ml~~. U.S. LOANS INCLUDING RETAIL
CDMMEII.CIAL IANKS
BRANCHES
TOTAL ASSETS
LOANS ANO CREDITS
ANADA
0
0
0
°'
\0
"rable 1411
UoSo IANIUN5 INSTITUTIONS DllliltO BY BANKS IN
FOIi IIONTHLY kEPDlll DATE IN -OECEMIEA J.974
IIN HILLJDNI. OF DDLLARSl
ALL RIPORT l:AS
ANADA
BRANCHES
AGiNCIES
INViSTIIENT COS.
CDMMUCIAL BANK$
TOTAL LJABILITJES AND EQUITY
1,192
7,8.17
,OS
561
0
LJA81LITIES OF •STANDARD• BANKING
BUSINESS
3,014
2,185
421
401
0
LJABILITJES TO CORPORATIONS AND
OTHlck Nt;N-IIANKS
1,066
DEMAND DEPOSITS AND CREDIT BALANCES
TIME AND SAVINGS DEPOSllS AND DTHiR
bORROWINGS
(Ol;PDSITS Of u.s. RESIDENTSl
(DEPOSITS Cf fOREJGNERSI
391,
311
~··
497
llt
1391
Z57l
379l
n1
0
no
no
1'8
1071
.
0
201
Ztll
2lll
0
01
Ol
Mil
4ll
HONEY-MARKl;T LIABILITIES
-..J
INTER-8ANK 80KR0111NGS AND DEPOSIT
LhBILlllES
U.S. SANKS
~OREIGh 8ANKS
1,624
1,576
CLEARING BALANCES DUE TO OTHERS
DUE TO U.S. BANKING AFFILIATES
DUE TD FOREIGN PARl:NT AND AFflLIATH
UPJTAL AtCOUNTS AND RESERVES
NJMBER OF REPORTING INSTITUTIONS
NDTU
5,420
67
716
H
2
106
22
10
zi
11
6
0
0
0
9
ll
36
0
H
.J8
0
u
243
4,662
0
0
15
86
0
0
15
35
45
29
lie
7a6
302
4,734
DUAILS MAY NOl ADD TD TOTALS DUE TO RDUNDllllGo
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
J
302
5,7n
IC!
1,521
50
MJSCcLLANEDUS LIABILITIES
LJABILlTIES ARISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
1,5Jl
75
0
•
0
Table lSa
u,s, BANNING INSTITUTIONS O~NED BY BANNS IN ••••••••••••••CANADA
FOR MONTHLY REPORT DATE IN ••••APRIL 1977
CIN MILLIONS OF DOLLARS)
AGENCIES
ALL REPORTERS
TOTAL ASSETS
11,an
ASSETS OF •STANDARD" BANKING
BUSINESS
4,JU
LOANS AND CREDITS
J,01,8
COMMERCIAL AND INDUSTRIAL,.,.
2,104
1,8531
251 l
l~□~E~GN!
MISC, U,8, LOANS INCLUDING RETAIL
MONEY•MARKET
328
INTERBANK LOANS AND DEPOSITS
:~□:E~GNI
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
CLEARING BALANCES DUE FROM OTHERS
OLJE FROM u;s~ BANKING AFFILIATES
DUE FROM FONEION PARENT I AFFILlATES
NOTE1
...
408
2,294
2,SJ0
533
J4
1,UZ
z•
1,795
Ill I
DETAlL8 MAY NOT ADD TO TOTALS DUE TO ROUNOlNO,
INCLUDES CUSTm!ERS' LIAIIILITIES ON ACCBPrABCBS OUTSTABDING ARD ON DEFERRED PAYlll!BT LITTERS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
IJ
or CREDIT•
0
Ol
Ol
Ji
9
IU
0
0
57
411
5
0
79i
9J
21»
0
1'0
1111
IJl
0)
I
4
191
473
0
Ol
Ol
I'll!
14
u
257
a
Z07-
ta
1,077
'IS'II
118)
173
40
U,8
MISCELLANEOUS ASSETS
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT ANO AFFILIATES
28
1, I 73
1,os1)
121)
183
0
J91o
405
40Zl
Jl
111
1,291
co,.
0
...
SIio
1, 4'12.
l,2S8l
Ul
1,523
ASSETS
INVUTMENT
71J
U7
1,520
2;432
COMMERCIAL BANKS
IIRANCHU
818
5,JU
0
0
.34
4
•
0
0
0
-.I
u.a.
Table lSb
BANKING INSTITUTIONS OWNED BY BANKS IN ••••••••••••••CANADA
FOR MONTHLY REPORT DATE IN ••••APRIL 1971
(IN MILLIONS o, DOLLARS)
AGENCIES
ALL REPORTERS
BRANCHES
INVEITMENT
COMMERCIAL BANKI
TOTAL LIABILITIES.AND EQUITY
•. ,o
5,JU
818
71J
0
LIABILITIES OF •STANDARD" BANKING
BUSINESS
2,250
1,011
704
535
0
LIABILITIES TO CORPORATIONS AND
OTHER NON•BANKS
J2J
1,420
DEMAND DEPOSITS AND CREDIT BALANCES
TIME AND SAVINGS DEPOSITS ANO OTHER
BORRO~!NGS
(DEPOSITS OF~.~. RESIDENTSj
(DEPOSITS OF FOREIGNERSi
0
510
587
cos,
457
151
10,
1,,
0
9b3
I 71.
i1al
47'
JU
357)
!SJ)
0
0)
98'1)
4JI)
514)
74)
204
0)
MONEY•MARKET LIABILITIES
-.J
INTER•BANK BORROWINGS ANO DEPOUT
LIABll.!TIES
U,S, BANKS
FOREIGN BANKS
575
LIABILITIES ARISING FROM TRANSACTIONS
INVOI.VING PARENT ANO AFFILIATES
NUMBER OF REPORTING INSTITUTIONS
NOTEI
0
175
75]
ts•
J,44•
UJ
u
2•
u
10
50
10
•
0
2
0
0
23
0
&7
II
15
54
JI,
72•
219
J,548
N
2
57
I 04
4,328
4,51'
DETAILS MAY NOT ADD TO TOTALS DUE TO ROUNDING,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sil
255
Ct.EARING B~LANCES DUE TO OTHERS
DUE TO U,S, BANKING AFFILIATES
DUE TO FOREIGN PARENT ANO AFFILIATES
CAPITAL ACCOUNTS ANO RESERVES
525
so
MISCELLANEOUS LIABILITIES
•o
513
0
0
0
••'
91
0
I
0
0
0
u,a,
Table 16a
BANKING INSTITUTIONS OWNED BY BANKS IN •••4!RD111"
,cA MONTHLY REPORT DATE IN •NOVEMBER 1972
(IN MILLIONS o, DOLLARS)
AGENCIES
ALL AEPCAT!RS
TOTAL ASSETS
,,on
ASSETS OF "STANDARD" BANKING
BUSI NEU
s, 11,
LOANS AND CREDITS
COMMERCIAL AND INDUSTRIAL,..
CFOREIGNI
MISC. u,a, LOANS INCLUDING RETAIL
MONEY•MARKET ASSETS
384
]39
4911
CLEARING BALANCES DUE FRCH OTHERS
DUE FROM u:s, BANKING AFFILIATES
DUE FROM ,oREl~N PARENT & AFFILIATES
'23
JI
u•
Ill
0
200
180
.
IU
,
-J
11
"!
•o
1111)
JO
95
5l
JI .
JU
131
U2
155
24
u,
17
151
u,
2
u
175
5
n
DETAILS NAY NOT ADD TD TOTALS DUE TO ROUNDING,
• FRANCE, GERMANY, GREECE, ITALY, THE N[THERLANDS, SPAIN, SWEDEN, SWITZERLAND, THE UNITED KINGDOM, AND TH! !URD•AMERICAN GROUP,
NOTEI
..
INCLUDES aJST<HIIIS' LWILlTIBS 01I ACCBPUIICBS OIJTSTARDilll ARD OIi D!Pl!llllBD PAYIIIIIIT LBTTlll8 OI CUD IT,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
...
SOil
188)
ill
OS
HJ)
i!Ul
183
702
717
117jl
JI
1,010
s•11
1,014
504
1,JU
l,J22
2111
l,92J
...
J7'
JI
•
5011
INVUTMENT CDS,
1,JS.
5111!
1!5
,2l
IOJ
0
11
1,001!
MISCELLANEOUS ASSETS
n,
IU
1,391.
l~a:E~GNI
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
1,Joa
910
1'
5111
20
I
2,214
INTERBANK LOANS AND DEPOSITI
ASSETS ARISING FROM TRANSACTIONS
INVOLVING PARENT AND A,FILIATES'
77
2,2a
1,598)
U8l
232
cu;s;)
I ,SOJ
2,0U
252
2,441
COMMERCIAL UNKS
IIRANCHU
J,115
4U
I.,.)
u,a.
Table 16b
BANKING INSTITUTIONS OWNED BY BANKS IN ••••tullQl>B*'
FOR MONTHLY REPORT DATE IN •NOV!MBER 1972
!IN MILLIONS OF DOLLARS)
COMMERCIAL BANKI
BRANCHEI
AGENCIES
ALL REPORTERS
lNVEITMENT
TOTAL L!ABILITIEI AND EQUITY
7,09'
40
J,115
1,503
l,Ja
LIABILITIU OF 'STANDARD' BANKING
BUSINESS
1,,14
u,
1,sn
1,10
128
L!ASILITlES TO CORPORATIONS ANO
OTHER NON•BANKS
2,837
IH
732
DEMAND DEPOSITS ANO CREDIT BALANCES
TIME AND SAVINGS DEPOSITS ANO OTHER
BORROWINGS
(DEPOSITS OF U,S. RESIDfNTSi
(DEPOSITS OF FOREIGNERS
1,0IZ
1,232
8
2,t OS
1,bll)
130
1,20b)
i1!l
coa,
454
lbl
353
108
,10
bl,81
5U
n,
JO
8b81
144
JUI
•21
MONEY•MARKET LIABILITIES
!NTER•BANK BORROWINGS ANO DEPOSIT
LIABILITIES
U,S, BANKS
FOREIGN BANKS
734
2,684
CLEARING BA.LANCES DUE TO OTHERS
DUE TO U,S, BANKING AFFILIATES
DUE TO FOREIGN PARENT ANO AFFILIATES
CAPITAL ACCOUNTS ANO RESERVES
NUMSER OF REPORTING INSTITUTIONS
NOTE I
248
u
121
J44
54
44
11
73
34
2.i ,2
JOI
8
1•
J6
11
IJ
JJ
215
llb
b8
174
310
120
JJJ
II
1,858
ao
5
214
7
47
I ..
•
108
J
DETAILS HAY NOT A00 TO TOTALS PUE TO ROUNDING,
• FRANCE, GERMANY, GREECE, ITALY, THE NETHERLANDS, SPAIN, SWEDEN, SWITHRLANO, THE UNITED KINGDOM, ANO THE EURO•AMERICAN GROUP,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-..I
248
u
lb
'5
2,202
128
b58
80
2H
lb
374
MISCELLANEOUS LIABILITIES
LIABILITIES ARISING FROM TRANSACTIONS
IN\'OLVING PARENT ANO AFFILIATES
137
JbO
~
Table 17•
Uolo IANKJNG JNITITUTIDNS DNNED IY BANKS IN••••~,oR MONTHLY REPORT DATE lN •DECEMBER 1,,.
CJN MJLLJDNS a, DDLLARI)
~
t
0
......'
.'
ALL REl'DRTER.1
TOTAL UIETI
20,uo
ASSETS a, 1 STANDARD 1 BANKING
BUSlNEU
LDANI AND CREDITS
14,497
COMMERCIAL AND INDUSTRIAL ..
.,,,,.
cu.a.!
MDNEY•MARK!T ASSETS
.,,o,
ml
us
MISCELLANEOUI ASSETS
1,75'1'
s.,u
!10
Q!IJ
J,9JJ
379
1,'22
1'57
U9)
10
225
1,oa.
1,,11
1, .. 0
.IH
1,n,
IIU
51
·111
1,, ..
115'
J,116
?O
22!1
ml
n,
!!I
151.
190
1,s4?1
1,003
11,
0
1,'l'H
II
•.n
1,!ll?
1,Ho
1191
..,
C,OR!lGN!
LOANS .TO SECURITY DEALERS
Uala GOVT. AND AGENCY IECURZTZEI
2H
1142
1,115
IJ
Ill
JI?
II
114
NDTEI DETAILS MAY NOT ADD TCP TDTALI DUE TD ROUNDING.
t F'RANCE, GERMANY, GREECE, IT~LY, THE NETHERLANDS, SPAIN, INEDEN, INZT2!RLAND, THE UNITED KlNGDDM, AND THE EURD•AIIERICAN QRDUI',
..
IRCLUDIIS CUS'lOIUS' LIAIIILlTIIIS la &CCBffAIICIIS IJJTffAIIDJJm AIID OIi .DIPIIIIID J'Atllll'r Ll'nlll C. CUD:t'r,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
...,
l,lO?
Ill)
,....
1,fH
SU
l,UI
1,,.,.
1,4111
202
1111)
JS
0
ca,.
l,171
1,141
a,,.,.,
1,114)
.
lNVUTIIEII-T
l,HO
!l,U!I
1,?11
2001
3,99?
2,212!
1,385!
cu.a.>
7,sn
H!I
!l,IIU
INTERBANK LDANI AND DEPDSITI
CLEARING BALANCES DUE 'ROM OTHERI
DUE F'ROM U.S. IANKZNG AFFILIATES
DUE FROM FOREIGN PARENT I AFFILIATIS
1119
...
CDMMERCJAL IANKI
IRANCHII
,,u,
5, ?IIJ
11,J19)
1,0211>
1,SJ!I
(F'ORUGN!
Mrsc~ u.,. LOANS INCLUDING RETAIL
AIIETI ARISING FRDM TRANIACTlONI
INVOLVING PARENT AND AF',ILIAT!S
AGENCJU
l,J02
..J
UI
u.s.
Table 17b
BANKING INSTITUTIONS OWNED BY BANKS IN ••••:£uROPB•~
FOR MONTHLY REPORT DATE IN •DECEMBER 1974
(IN MILLIONS OF DOLLARS)
ALL REPORTERS
COMMERCIAL BANKS
BRANCHES
AGENCIES
INVESTMENT
TOTAL LIABILITIES AND EQUITY
20,uo
1, JOZ
,,au
7,577
2,JZO
LIABILITIES OF "STANDARD" BANKING
BUSINESS
12,11)
702
4,U7
s,uo
1,57J
LIABILITIES TO CORPORATIONS ANO
OTHER NON•BANKS
a, 02•
DEMAND DEPOSITS AND CREDIT BALANCES
TIME AND SAVINGS DEPOSITS ANO OTHER
BORRO•INGS
(DEPOSITS OF U,S, RESIOENTSi
(DEPOSITS OF FOREIGNERSI
4,339
2,842
181
2,50b
21
5,523
4,,u,
3,0bb)
lbO
32)
i481
bb1
1,728
175
2,blO
4,045!
2'4
493
142)
525)
582
2,2b0
743)
2,0,,1
cos,
MONE V•MARKE T LIABILITIES
INTER•BANK BORROWINGS ANO DEPOSIT
LIABILITIES
2,9b7
FOREIGN BANKS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
7,503
CLEARING BALANCES DUE TO OTHERS
DUE TO U,S. BANqNG AFFILIATES
CUE TO FOREIGN 'ARENT AND AFFILIATES
CAP! TAL ACCOUNT& AND RESERVES
NUMBER OF REPORTING INSTITUTIONS
NOTE!
1,553
405
34
n
I, I lb
MISCELLANEOUS LUB!LITIES
LIABILITIES ARISING FROM TRANSACTIONS
INVOLVING PARENT ANO AFFILIATES
439
1,852
I, 114
U.S. 8,f.NKS
IU
09
1,1,4
n•
153
12
417
333
005
I ,537
24
Jb7
3,375
-.J
"
474
242
2U
4,521
583
2,742
420
4,340
57J
402
1,18'
3o4
273
lb
Jl5
23J
816
17
54
002
143
u
lb
JZ
II
3
DETAILS MAY NOT ADO TO TOTALS CUE TO ROUNDING,
• FRANCE, GERMANY, GREECE, !TALY, TM! N[TM[RLANDS, SPAIN, SWEDEN, SWITZERLAND, TM[ UNITED KINGDOM, ANO TM! EURO•&MERICAN .GROUP,
a-.
u.,.
Table
ALL REPORTERI
TOTAL ASSETS
J0,051
ASSETS o, "STANDARD" BANKING
BUllNESS
n,u,
LOANS AND CREDITS
CLEARING BALANCES DUE 'ROM OTHERS
DUE FROM U,1, BANKING AFFILIATES
DUE FROM FOREIGN PARENT I AF,lLIATEI
NOTEt
...
U,515
9,535
S,315i
4,Uoi
JSS
!,US
1,0.
u,s,s
.,sso
lteH
J,672
1,118
2,402
.
.
527
.,.06,
222
0
1,UJI
3051
1,410
,....
'70
1,410
39'
u
JI
,,on
Ill
241
470
1t2S•
110
116
277
SJ
1111
DETAIL& MAY NOT ADD TD TOTALI DUE TO ROUNDING,
• FRANCE, GERMANY, GREECE, ITALY, THE NETHERLANDS, SPAIN, SWEDEN, SWITZERLAND, THE UNITED KINGDOM, AND THE EURD•AMERICAN GROUP,
,...
-
IRCI.llDBS CUST<llllllS' LIAIIILlTIBS ON ACCBPTARCES IM:STAIIDIRG ARD Cll!I Dl1Bllllll PA11111111r LITTDS 0, CUDIT,
IRCLIJDES FIIIBIGR IWIC-CJIRED AGBBBIIE!lr CCIIPIIIATICII,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
2441
1511
Ill
271
611
590
n•t
-JBO
1,910
uo
••n
'241
465
410901
J,6711
1,,n
HI
1,540
;,,,
o,sn
coa,
z,on
1,195)
472
1,Sll
2,68J)
10
215
UI
165
.J,915
4,901
26
717
7,262
JNYEITMINT
1,0J4
907
65JI
2541
JI
2,430
COMMERCIAL IANKI
11,10
527
7,UI.
s,0101
2,540)
1,623
MISCELLANEOUS ASSETS
BRANCHU
1,S7l
9,244
INlERBANK LOANS AND DEPOSITS
(U,S,I
(FOREIGN\
LOANS TO SECURITY DEALERS
U,S, GOVT, AND AGENCY SECURITIES
AISEtS ARISING FROM TRANIACTIONI
INVOLVING PARENT AND A,,zLJATES
AGENCIU2,211
COMMERCUL AND INDUSTRIAL ..
IU,1,1
<FOREIGN!
MISC, u,a, LOANS INCLUDING RETAIL
MONEY•NARKET ASl!TI
18■
BANKING INSTITUTIONS OWNED av BANKI I N · · · · ~
,oR MONTHLY REPORT DATE IN ••••APRIL 1977
(IN MILLIONS o, DDLLARI)
-..J
-..J
table 18b
u.s. BANKING INSTITUTIONS o•NED BY BANKS IN ··••llUllOn,oR MONTHLY REPORT DATE IN ••••APRIL 1'77
IIN MILLIONS OF DDLLARII
ALL REPORTERS
AGENCIES
BRANCHES
COMMlRCUL IANKI
INYUTMENT
TOTAL LIABILITIES AND EQUITY
J0,491
2,211
u,,n
1,os•
1,n•
LIABILITIES OF •STANDARD" BANKING
BUSINESS
,,,s11
1,277
10, • . ,
.,571
1,021
LIABILITIES TO CORPORATIONS AND
OTHER NON•SANKS
13,170
DEMAND DEPOSITS &ND CREDIT BALANCES
TIME AND SAVINGS DEPOSITS AND OTHER
eo••o•INGS
(DEPOSITS O' U,S, AESlD~NTSi
(DEPOSITS OF FOREIGNERS!
JU
T,2U
2,811
12
756
10,0,
8,1171
5,5531
330
.,5Z7
Jl2
4, JOI)
2'l
.....
cos,
552
1,8'7
216
...,
1,7'1
5,2411
U4
2,,1,1
JJ7
UJ
HONE Y•MARKET LIABILITIES
INTEA•BA~K BORROWINGS AND DEPOSIT
LIABl~ITIES
U,8, BANKS
FOREIGN BANKS
••u• J,IJ.
77J
1,271
IU
sn
MISCELLANEOUS LUBiLITIES
LIABILITIES &RISING FROM TRANSACTIONS
INVOLVING PARENT AND AFFILIATES
,,124
nEARING BALANCES DUE TO OTHEAI
DUE TO U,S, BANKING AFFILUTEI
DUE TO FOREIGN PARENT AND AFFILIATES
CAPITAL ACCOUNTS AND RESERVES
NUMBER OF REPORTING INSTITUTlpNI
NDTEI
.. ,.
JU
2,SH
451
zo•
SU
n•
1,116
TU
242
Ill
430
1•7
us
"IOI
JU
T,JU
•12
2,523
I, Ill
1,0AT
752
21
TII
•••
•IT
14
s,s,.
25
s•
ISi
1,057
2'
105
UT
ITS
eo
21
42
II
5
DETAILS MAY NOT ADD TD TOTALS DUE TD ROUNDING,
• FRANCE, GERMANY, GREECE, ITALY, THE NETHER_LANDS, SPAIN, IWEDEN, IWITZEALAND, THE UNITED KINGDOM, AND THE EURO•AMEAJCAN GROUP,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
...
DICLUDES FlllEIGH IIAIIIMJlffiED AllllEBIIBirr Cllll'QlATICII.
IH
•
-...I
00
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'1'able 19
LACAUON Of FORUGN BJNKING JNITITUUONI IN THE U l __ A_.._1_,o.,r_..&c,PR,.,lu.L.__..t,Liuic__ _ _ _ _ _ _ _ _ _ _ _ __
CATEGORY OF JN.!ITJTUTJQN
IAJ.NCHl!:I
sue.
COMM, INVEITMENT AGREEMENT
RANKS
en,
CDAPI,
ClNADA
V
CALIFORNIA
'
b
0
ALL OTHERS
b
z•
\Z
TOTAL
'
b
4
4
CONTINENTAL EUROPE
w
••
CALIFORNIA
NO
ALL OTHERS
10
TOTAL
15
II
]
I
,4
JO
II
2
2'
•
5
5
7
57
z
4
52
ALL REPORTERS
05
CALIFORNIA
b]
ALL OT,<ERS
17
5
TOTAL
9J
7b
34
5
210
......i
\0
80
Table 20a
Foreign Banking Institutions in the United States
Listed by Type of Institution, as of April 1977
INSTITUTE CODE
01
AGENCIES
··············
·············· ·····-········
·························
BANK
C?TY
PARENT BANKING
NAME
ORGANIZATION
··-·······-··· ···········-··· ·-·······--··· ···-----·-··· ·-··········
BANCO DI NAPOLI AGENCY
BANCO NACL DE MEXICO AGENCY
BANGKOK BANK LTD AGENCY
TAIYO KOBE LTD AGENCY
BANK LEUMI LE•ISRAEL
BANK MELLI IRAN AGENCY
BANK OF MONTREAL AGENCY
BANK OF NOVA SCOTIA AGENCY
BANK SADERAT IRAN AGENCY
BANK OF TOKYO LTD AGENCY
CANAD IMPL BIC OF COMM AGENCY
THOS COOK AND SON AGENCY
DAI•ICHI KANGVO BANK AGENCY
DAIWA BANK LTD AGENCY
FUJI BANK LTD AGENCY
INTL COMM BK OF CHINA AGENCY
KOREA EXCHANGE BANK AGENCY
MITSUBISHI BANK LTD AGENCY
MITSUI BANK LTD AGENCY
RQVAL BANK OF CANADA AGENCY
SUMITOMO BANK LTD AGENCY
T0ICAI BANK LTD AGENCY
TORONTO DOMINION B ANO T CO
THE SAITAMA BANK, LTD.
INDUSTRIAL BANK OF JAPAN LTD
HOKKAIDO TAKUSHOKU BANK LTD.
OVERSEAS UNION BANK, LTD
KYOWA BANK AGENCY
BANCO DO ESTADO DE SAO PAULO
THE MITSUI TR & BKG CO LTD
MITSUBISHI TR & BKG CORP
BANCO MERCANTIL DE SAO PAULO
BANCO URQUIJO
BANCO DE BILB40
BANCO UNION C0 A0
BANCO IND DE VENEZUELA c;A.
BANK OF NEIii SOUTH WALES
CUMMERCIAL BANK OF K~REA
AUSTRALIA & N ZEALAND BKG GR
BANCO DE VtlCAVA
BANCO HISPAN0•AMERICAN0
COMM BK OF AUSTRALIA
BANQUE CANA0IENNE NATIONALE
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
NEW
NO
NEW
NEW
1',iEW
NFW
NEIii
NEW
NEW
NEW
NEW
NEW
NE'W
NE:-,,
YORK
YORI(
YORIC
YORK
YORK
YORK
YORK
YORK
YORK
V0RK
YORK
YORK
YORK
YORK
l',ifw V0RK
NEW YORK
NEW YORK
NEW YORK
NEIii YORK
NEW YORK
NEW YOR~.
NEW YORK
NEIii YORK
NEW YORK
NEW YORK
NEIii YORK
NElol YORK
NF.Ill YORK
NElli YORI<
NEIii YORK
NfW YORI<
NEW YORK
NEW YORK
NEW YORK
NEW VORK
NEW YORK
fllEili YORK
NEw-YORK
NEW YORK
NEW VORK
NEIii Y0RIC
NEW YORK
NEW YORK
BANCO DI NAPOLI
BANCO NACL DE MEXICO
BANGKOK BANK
HIVO KOBE BANK
BANK LEUMI LE•ISRAEL
BANK MELLI IRAN
BANI< OF MONTREAL
BAi',iK OF NOVA SCOTIA
8Ai',iK SADERAT IRAN
BANI< OF T0IIYO
CANAD IMPL BK OF COMM
THOS COOIC AND SON
DAI•ICHI KANGV0 BANI(
DAhlA BANK
FUJI BANK
INTL COMM BK OF CHINA
KOREA EXCHANGE BANK
MITSUBISHI BANK
MITSUI UNIC
ROYAL BANK OF CANADA
SUMITOMO BANK
TOICAl BANK
TORONTO DOMINION BANK
SUTAMA BANK
-INDUST BANK OP JAPAN
HOKKAIDO IAKUSHOKU
OVERSEAS UNION BANI(
ICVOiliA BANK
ESTADO DE SAO PAULO
MITSUI TR & BKG CO
MITSUBISHI TR I BKG
MERCANTL DE SAO PAULO
BANCO URQUIJO
BANCO DE BILBAO
BANCO UNION
BANCO INDUSTL DE VEN
BK OF NEw S0UTM WALES
COMM BANI( OF KOREA
AUST & NEW ZEALAND GR
BANCO DE VIZCAYA
Bea HISPANO•AMERICANO
COMM BK 0~ AUSTRALIA
BANQUE CANAD NATLE
81
INST ITU TE CODE
Ot
AGENCI!S
Table 2Oa, page 2
---------··-------················
······-·············
·············
BANK
CITY
PARENT BANKING
NAME
ORGANIZATION
················--· ··················· ·-········--······· ·-····--···
TAIYO KOBE AGENCY
BANK OF TOKYO AGENCY
DAI•ICHI KANGYO BANK AGENCY
DAI-A BANK AGENCY
EUROPEAN•AMERICAN BKG CORP
FUJI BANK AGENCY
KOREA EXCHANGE BANK AGENCY
MITSUBISHI BANK LTD AGENrY
MITSUI BANK LTD AGENCY
SwISS CREDIT BANK AGENCY
TOKAY BANK AGENCY
BANCO DI ROMA AGENCY
BANK OF MONTREAL AGENCY
BANK OF NOVA SCOTIA AGENCY
BANK QF TOKYO AGENCY
BANQUE NATLE DE PARIS AGENCY
BARCLAYS BANK INTL AGENCV
CANAD IMPL BK OF COMM AGENCY
CHARTD BANK OF LONDON AGENCY
HONGKONG & SHANGHAI BK AGENC
NATL WESTMINSTER BANK AGENCY
PHILIPPINE NATL BANK AGENCY
ROYAL BANK OF CANADA AGENCY
SANIJjA BANK LTD AGENCV
SUMITOMO BANK LTD AGENCY
Sw?SS BANK CORP AGENCY
TORONTO DOMINION BANK AGENCV
SHANGHAI COMMERCIAL BANK LTD
BANK OF BRITISH COLUMBIA
BANCO 00 BRAZIL
INDUSTRIAL BANK OF JAPAN LTD
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ATLANTA
BARCLAYS GROUP
LOS
LOS
LOS
LOS
LOS
LOS
LOS
LOS
LOS
LOS
LOS
SAN
SAN
SAN
SAt.
SAN
SAN
SAN
SAN
SAN
SAN
SAN
SAN
SAN
SAN
SAN
SAiii
SAiii
SAN
SAiii
LOS
TA I YO KOBE BANK
BANK OF TOKYO
DAI•ICHI KANGYO BANK
DAIWA BANK
EUROPEAN•AMER 1 GROUP 1
FUJI BANK
KOREA EXCHANGE BANK
MITSUBISHI BANK
MITSUI BANK
SWISS CREDIT BANK
TOKAY BANK
BANCO DI ROMA
BANK OF MONTREAL
BANK OF NOVA SCOTIA
BANK OF TOKYO
BANQUE NATLE DE PARIS
BARCLAYS GROUP
CANAD JMPI.. BK OF COMM
STAND•CHARTERED GROUP
HONGKONG AND SHANGHAI
NATL WESTMINSTER BANK
PHILIPPINE NATL BANK
ROYAL BANK OF CANADA
SANIJIA BANK
SUMITOMO BANK
5,.rss BANI( CORP
TORONTO DOMINION BANK
SHANGHAI COMM BANK
BANK OF BRIT COLUMBIA
BANCO DO BRASIL
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
ANGELES
INDUST BANK OF JAPAN
82
INITITUTE CODE
Ot
AGENCIES
Table 20a, page 3
···············--············-·----·-··-··-··········-··
············
BANK
PARENT BANKING
CITY
NAME
ORGANIZATION
.•....•.............•.................................... .....••..•.
BANCO DE COMERCIO
EUAOPEAN•AMEAICAN BKG CORP
CREDIT LYONNAIS PARIS
BANCA COMMERCIALE ITALIAN&
DRESDNER BK AG FRANKFORT
HOKKAIDO TAKU8MOKU
SAITAMA BANK
BANCO DO BlhSIL.
AL.GEMENE BK NEDERLAND
BANCO NATL DE MEXICO AGENCY
KYOWA BANK AGENCY
BANCO REAL AGENCY
BANCO DO ESTADO DE SAO PAULO
BANK LEUMI LE•ISRAEL,B.M.
BANGKOK BANK LTD AGENCV
BANK SADERAT IRAN AGENCV
BANK HAPOALIM, B.M.
PHILIPPINE NATL BANK AGENCY
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOS ANG!LES
SAN FRANCISCO
LOS ANG!LES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
LOS ANGELES
UN FIUNCISCQ
BE:VERLV MILLS
SAN FRANCISCO
LOS ANGELES
BEVERLY MILLS
HONOLULU
BANCO DE COM!RCIO
EUROPEAN•AMER 1 GROUP 1
CRED!T LYONNAIS
BANCA COMM ITALIANA
DRESONER BANK
MO~KAIDO T&KUSHOKU
SAITAMA BANK
BANCO 00 BRASIL
ALGEMENE BK NEDERLAND
BANCO NACL OE MEXICO
KYQ,IA BANK
UNCO REAL
ESTADO DE SAO PAULO
BANK LEUMI LE•ISRAEL
BANGKOK BANK
BANK SAOERAT IRAN
BANK HAPOALIM
PHILIPPINE NATL BANK
83
INSTITUTE CODE
Di!
BRANCHU
Table 20a. oa2e 4
BANIC
CITY
PARENT BANKING
---------···---------·-··-----------------··························
NAME
ORGANIZATION
······-·····-···-········-····-·····----······----··················
BARCLAYS BANK INT
BOSTON
B&IICLAYS GROUP
BANCO DE BOGOTA
BANCO DI ROMA
BANCO 00 BRASIL BRANCH
BA"ICA COMM ITALIANA BRANCH
BANCA DEL LAVORO BRANCH
BANCO DE LA NACION
BANCO REAL BRANCH
BANK FUR GEMEINWIPTSCHAFT
BA"II< HAPOALIM B.M.
BNQ FRAN DE COM EXTERIEUR
BARCLAYS BANK INTL BRANCH
BANQUE NATIONALE DE PAIIIS
BERLIN HANDELS & FRNl<FIIT BK
CHARTD BANK OF LONDON BRANCH
COMMERZBANK AKT BRANCH
CREDIT INDUSTRIEL ET COMML
CREDIT LYONNAlS BRANCH
CREDTTO ITALIANO
DEUTSCHE GENOSSENSCHAFTSBI<
DRESONER BANK BRANCH
HABIA BANI< BRANCH
HUNGl<ONG & SHANGHAI 811' BRANC
ISRAEL DISCOUNT BANI<
LL~YDS BK INTL LTD
LONG•TERH CREDIT BK OF JAPAN
NATL BA"IK OF PAKISTAN BRANCH
NATL WESTMINSTER BANK BRANCH
ALGEMENF. BK NEDERLAND BRANCH
NIPPnN FUDOSAN BANK LTD
PMILTPPINE NATL BANK BPANCH
SANwA BANK LTD BRANCM
STANDARD CHARTERED BANK LTD
STATE BANK OF INDIA 8RANCM
SUMITOMU TR & BKG CO LTO
S\IIIISS 8ANk CORP BRANCH
SIIIISS CREDIT BANK ARANCM
TOVO TRUST & BANKING en LTD
UNION BANk OF BAVARIA
U"IION BANK OF SwIT2ERLAND
NEW
NFIII
NEW
fljE\ol
NEW
NEW
NE\ol
NEW
NEili
NEW
NFlol
NEW
NEW
NEW
NEW
N11;1;
NEW
NE Ill
NEW
NFW
NEI;
NF.w
NP::1;
NP::W
BANCO DE BOGOTA
BANCO DI ROMA
BANCO 00 BRASIL
BANCA COMM lTALUNA
BANCA NAZL DEL LAVORO
BANCO DE LA NACION
BANCO REAL
Bk GEMEINWIRTSCHAFT
BA"IK HAPOALIM
BNQ FRAN DE COM EXT
BARCLAYS GROUP
BANQUE NATLE DE PARIS
BERLI"I HANDLS & FRICFT
STAND•CHARTERED GROUP
CUMMERZBANK
COMP FIN DE SUEZ
CREDIT LYONNAIS
CREDITO ITALIANO
DEUT GENOSSENSCHAFTBI<
DRESDNEII BANK
HA!II8 BANI<
HONGKONG AND SHANGHAI
ISRAEL DISCOUNT BANK
LLOYDS GRUUP
LONG TERM CREDIT
NATL BANK OF PAKISTAN
~ATL ~ESTMINSTER BANK
ALGEMENE BK NEDERLAND
NIPPON FUDOSAN BANk
PMILIPPINE NATL RANI<
SANoiA BANK
STANO•CHARTERED GROUP
STATE BANK OF INDIA
SU~ITU~U TR & BKG CO
SioISS RANK CORP
S~ISS CREDIT BANI(
TOVU TR & 8KG CO
U~ION BANK OF BAVARIA
U~ION BAN~ OF SwITZ
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
NE\ol
NEI;
NEW
NEI;
Nfl;
NEIii
NE!oi
NEIii
NF!ol
NEW
NEW
NEW
NE"
NE\111
NF.W
YORK
YORK
YORK
YORI<
YORI<
YORIC
YORK
YORK
YORK
YORK
YORI(
YORK
YORI<
YORI<
YORK
YORK
YOFlk
YORK
YORK
YORI<
YORI<
YORII'
YORK
YORK
YORK
YORK
YORK
VnRK
YORK
YORK
YORK
YORK
YORI<
vnRK
YORK
YORK
YnRK
YORK
YORK
84
INSTITUT! CODE
02
BRANCHES
,able 20a, page 5
·························--··-···········-····-···-·····
············
PARENT BANKING
UNI<
CITY
NAME
ORGANIZATION
···············----·--·--····-·-·················-···-·· ·······-····
WESTDEUTSCHE LANDESBANK
YASU~A TRUST & BKG CO LTD
BANK OF NOVA SCOTIA BRANCH
ROYAL BANK OF CANADA BRANCH
BANK OF NOVA SCOTIA BRANCH
BARCLAYS BANK INTL BRANCH
ROYAL BANK OF CANADA BRANCH
NEW YORK
N!:io, YORI<
SAN JUAN
SAN JUAN
CHFIISTENSTED
CHARLOTTE AMAL
CHRISTENSTEO
WESTDEUTSCHE LANDESBK
YASUDA TR & BKG CO
BANK OF NOVA SCOTIA
ROYAL BANK OF CANADA
BANK OF NOVA SCOTIA
BARCLAYS GROUP
ROYAL BANK OF CANADA
ALGEMENE BANK NEDERLAND N~V,
BANCA COMMERCIALE ITALIANA
BANK LEUMI LE•ISRAEL
BARCLAYS BANK INTL BRANCH
BANQUE NATIONALE DE PARIS
BNQ OE LINOOCHINE ET OE SUEZ
TME CHARTERED BANK
COMMERZBANK AKT BAANCM
CREDIT LYONNAIB BRANCH
OAESONER BANK BRANCH
HONGKONG & SHANGHAI AK BRANC
KOREA EXCHANGE BANK BRANCH
INTL COMM BK OF CHINA BRANCH
LLOYDS BK INTL LTD
NATIONAL BK OF GREECE S,A,
NATL ~ESTMINSTER BANK BRANCH
SANwA BANK BRANCH
STATE BANK OF INDIA AAANCH
THE SUMITOMO BK LTD
SwISS BANK CORP BRANCH
UNION BANK OF BAVARIA
UNION BANK OF SWITZERLAND
CHICAGO
CI-IICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CI-IICAGO
CI-IICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
CHICAGO
Ct-<ICAGU
CI-IICAGO
CHICAGO
ALGEMENE BK NEDERLAND
BANCA COMM ITALIANA
BANK LEUMI LE•ISRAEL
BARCLAYS GROUP
BANQUE NATLE DE PARIS
COMP F?N DE SUEZ
STANO•CHARTEREO GROUP
COMMERZBANK
CREDIT LYON NA IS
ORESDNER BANK
HONGKONG AND SHANGI-IAI
KOREA EXCHANGE BANK
INTL COMM BK OF CHINA
LUlVDS GROUP
NATL BANK OF GREECE
NATL WESTMINSTER BANI<
BANK OF TOKYO LTD BRANCH
CANAD IMPL BK OF cnMM BRANCH
BANK OF TOKYO LTD BRANCH
CANAD IMPL BK OF COMM RAANCH
THE CMARTeREO BANK
HONGKONG & SHANGHAI RKG CORP
TAIYO KOBE RANK LTD
PORTLAND
PORTLAND
SFATTLE
BANI< UF TOKYO
CANAD IMPL BK OF COMM
BAN!( DF TOK YO
CANAD !MPL BK OF COMM
STANO•CHA~TEREO GROUP
HONGKONG ANO SHANGHAI
TA IYO KOBE BANIC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
S~ ATTL.E
SF A TTL.E
SEATTU:
SEATTLE
SANwA BANI<
STATE BANI< OF INOIA
SUMITOMO BANI<
hISS BANI< CORP
UNION RANI< OF BAVARIA
UNION BANI< OF SWITZ
85
INST IT UTE CODE
03
BANKING SUBSIDIARIES
Table 20a, page 6
···············-···--····················--············
·············
BANK
CIT V
PARENT BANKING
NAME
ORGANIZATION
···········--·--·-·················---------·····--····- ·--····--···
ATLANTIC BANK OF NEW YORK
BANK LEUMI TRUST CO
BANK OF MONTREAL TRUST CO
BANKO' NOVA SCOTIA TRUST CO
BANK OF TOKVO TRUST CO
BARCLAVS BANK OF NEW YORK
CANAD IMPL BK COMM TRUST en
EUROPEAN•AMERICAN B ANO T CO
FUJI BANK & TRUST CO
~~~~STRIAL BANK OF JAPAN
ISRAEL DISCOUNT BANK
REPUBLIC NATL BANK OF NY
ROVAL BK OF CANADA TRUST CO
SCMROOER TRUST CO
TORONTO DOMINION BANK AGENCV
U,B,A,F, ARAB•AMERICAN BANK
FIRST NATIONAL BK PUERTO RIC
NEW YORK
NEW VORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW YORK
NEW VQRK
NE\rj YORI<
NE:w YORK
NEW YORK
NE\rj YORK
HA TO REY
NATL BANK OF GREECE
BANK LEUMI LE•ISRAEL
BANK OF MONTREAL
BANK OF NOVA scoitA
BANI( OF TOKYO
BARCLAYS GROUP
CANAD IMPL BK OF COMM
EUROPEAN•AMER 1 GROUP 1
FUJI BANK
BANCO DI ROMA
FIRST PACIFIC BK OF CHICAGO
C~ICAGO
CMICAGO
BANCO DI ROMA
OAI•ICMI KANGYO BANK
KOREA EtCHANGE BK OF CALIF
LLnYDS BK OF CALIF
MITSUBISHI BANK OF CALIF
MITSUI BK OF CALIFORNIA
TOKAJ BK OF CALIFORNIA
BANK QF MONTREAL•CALJFORNIA
BARCLAYS BANK OF CALTFORNIA
CALIFORNIA CANADIAN BANK
CALIFORNIA FI~ST BANK
CHARTERED 81< OF LONOON•CALIF
FRENCH BANK OF CALIFORNIA
MONGKONG BK OF CALIFORNIA
SANWA BANK OF CALIFORNIA
SUMITOMO BANK OF CALIFORNIA
TORONTO DOMINION BK OF CALIF
LOS
LOS
LOS
LOS
LOS
SAiii
SAN
SH,
SAN
SAN
SAN
SAN
SAiii
SAN
SAN
KOREA EXCMANGE BANI(
LLOYDS GROUP
MITSUBISMl BANK
MITSUI BAIIIK
TOl<AI BANI<
BANK OF MONTREAL
BARCLAYS GROUP
CANAD JMPL BK OF COMM
BANK UF TOKYO
STAND•CMARTERED GROUP
BANOUE NATLE DE PARIS
MONGKONG ANO SMANGMAI
SA'-WA BANI<
SUMITOMU BANK
TORONTO DOMINION BANK
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ANGELES
ANGELES
ANGELES
ANGELES
ANGELES
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
FRANCISCO
INDUST BANK OF JAPAN
lSRnL orsctllJNl liANK
TRADE DEVELOPMENT BK
ROVAL BANK OF CANADA
SCHRODER GROUP
TORONTO DOMINION BANK
BOS ARABES & FRAN
BANCO DE SANTANDER
86
INSTITUTE CODE
OS
INVESTMENT COMP.
Table 20a, page 7
·········································-······-··-·····-···········
BANI<
CITY
PARENT BANKING
NAME
ORGANIZATICfi
····································································
EUROPEAN•A~ERlCAN BKG CORP
'RENCH•AMERICAN BKG CORP
J HENRY SCHRODER BKG CORP
NORDIC AMERICAN BANKING CORP
BAEii AMERICAN Bl<G CORP
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
NEW
NEW
NEW
NEW
NEW
YORK
YORK
VORK
YORK
YORK
EUROPEAN•AMER 1 GAOUP 1
BANQUE NATLE DE PARIS
SCl'IRODER GIIOUP
SVENSKA HANDELSBANKEN
BAER AMER BKG CORP
87
INSTITUTE CODE
06
AGREmfi!NT CORPORATIONS
Table 20a, page 8
···············--·-·------------······-·····-····--···-·-······-···
BANI(
CI TY
PARENT BANKING
NAHE
ORGANIZATION
············-·-----·-····-···--------···········----·-·-·······--···
TOKYn BANCORP INTERNATIONAL
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
HOUSTON
BANI< OF TOKYO
88
Table 20b
Foreign Bank{ng Institutions in the United States
Listed by Country of Parent Bank, as of April 1977
PARENT
PARENT BANKING
---------------------------UNK
CITY
INST
----------·······------------·
--·--------·-·-COUNTRY
ORGANIZATION
NAME
CODE
------------------------····---------········--····------·-··-·--·--··-·-FRANCE
BANQUE NATLE DE PARIS
CREDIT LYONNAtS
COMP l"IN DE SUEZ
BQS ARABES & l"RAN
BNQ FRAN DE COM EXT
05
02
02
01
03
02
02
01
02
02
03
02
FRENCH•AMERICAN BKG CORP
BANQUE NATIONALE DE PARIS
RANQUE NATIONALE DE PARIS
RANQUE NATLE DE PARIS AGENCY
FRENCH BANI< OF CALIFORNIA
CREDIT LYONNAtS BRANCH
CREDIT LVONNAIS BRANCH
CREnIT LYONNAIS PARIS
CREDIT INDUSTRIEL ET COMML
RNQ DE LINDOCHINE ET DE SUEZ
U~B.A.F. ARAB•AMERICAN BANK
RNQ FRAN DE COM EXTERIEUR
NEW YORK
NEW YORI<
CHICAGO
SAN FRANCISCO
SAN FRANCISCO
NEW YORI<
Cl-UC AGO
LOS ANGELES
NEW YORK
CHICAGO
N!W YORI<
"E1" VORK
O?
02
02
02
01
02
02
02
02
02
02
COMMERZBANK AKT BRANCH
COMMERZBANK Al(T BRANCH
DRESDNER BANK BRANCH
ORESDNER BANK BRANCH
ORESD"ER BK AG FRANKFORT
UNION BANK OF BAI/ARIA
UNION BANK or BAVARIA
WESTOEUTSCHE LANDESBANK
BANI< FUR GEMEIN~IRTSCHAFT
BERLIN HANOELS & FR,.KFRT BK
DEUTSCME GENOSSENSCHAFT,SBK
NEl!I YORK
CHICAGO
NEW YORI<
CHICAGO
LOS ANGELES
NE~ YORI<
CHICAGO
NEW YORK
NEW YORI(
NEW YORK
NEW YORI<
GERMANY, FEDERAL REPUBLIC OF
COMMERZBANK
DRESDNER BANK
UI\IION BANI( or BAVARIA
WESTOEUTSCHE LANOESBK
BK GEMEINWIRTSCHAFT
BERLIN HANOLS & FRKFT
DEUT GENOSSEI\ISCHAFTBI<
GREECE
NATL BANI< OF GREECE
03 ATLANTIC BANI< OF NEW YORI<
02 NATIONAL BK OF GREECE S,A,
NEW YORK
CHICAGO
ITALY
BANCA COMM ITALIANA
BANCA
NAZL DEL LAVORQ
8A"CU 01 NAPOLI
BANCO DI ROMA
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
02
02
01
O?
01
02
03
01
BANCA
BANCA
BANCA
BANCA
BANCO
BANCO
RANCO
l!HJCO
COMM ITALIANA BRANCH
COMMERCIALE ITALIANA
COMMERCIALE ITALIANA
OEL LAVORO BRANCH
DI NAPOLI AGENCY
OI ROMA
OI ROMA
OI ROMA AGENCY
NEW YORK
CHICAGO
LOS ANGF.LES
NEiol YORK
NEW YORI<
NEW YORK
CMICAGO
SAN FRANC I sea
89
Table 20b, page 2
·;ARENT···p;RENT-&Ull<mc·······i~;T············e;~;-··················cit;····
COUNTRY
ORGANIZATION
CODE
NAME
······-·············--···-··--·-·-··········--·······----·······-·-------I ULY
CREDITO ITALIANO
NE.W YORK
02 CREDITO ITALIANO
NETHERLANDS
ALGEMENE AK NEDERLAND
02 ALGEMENE BK NEDERLAND BRANCH NEW YORK
02 ALGEMENE BANK NEDERLAND N V. CHICAGO
01 ALGEMENE BK NEDERLAND
LOS ANGELES
0
SPAIN
BANCO Ul!QUIJO
BANCO DE AILBAO
BANCO DE VIZCAYA
BCD HISPANO•AMERICANO
BANCO DE SANTANDER
FIANCO
RANCO
FIANCO
BANCO
03 F!RST
01
01
01
01
URQUIJO
DE BILBAO
DE VIZCAYA
HISPANO•AMERICANO
NATIONAL BK PUERTO RIC
NEW YORK
NEW YORK
Nl!:W VONK
NEW YORK
HATQ REY
SWEDEN
SVENSKA MANDELSBANKEN
OS NORDIC AMERICAN BANKING CORP NEW YORK
SWITZERLAND
TRADE DEVELOPMENT BK
SWISS BANK Cr.lRP
SWISS CREDIT BANK
UNION BANK OF SWITZ
BAER AMER BKr, CORP
03 REPUBLIC NATL BANK OF Ny
02 SWISS BANK CORP BRANCM
02 SWTSS BANK CORP BRANCH
01 SWISS BANK CORP AGE~CY
02 SwISS CREDIT BANK BRANCM
01 SWISS CREDIT BANK AGENCY
02 Ur,,?uN BANK OF s~ITZERLAN~
02 UNION BANK OF SWITZERLAND
OS BAER AMERICAN 8KG CORP
NEW YORK
Nl!:1-1 YORK
CHICAGO
SAIi; FRANCISCO
NEj, YORK
LOS ANGELES
NE.~ YORK
CHICAGO
NEW yQRK
02 RARCLAVS BANK INT
02 FURCLAVS BA"'K IlliTL BRANCH
03 RAACLAYS BU<K OF r~E IN YORK
02 BARCLAYS BANI< INTL BRANCI-I
01 IIAACLAYS BAt,,K INTL AGENCY
02 FIARCLH~ BA'.'K y-.~:,. 8RAfJCM
BOST('1N
NEIii YORK
NE~ YORK
CI-IARLOTTE. AMALIE
ATL ANT.A
UNITED KINGDOM
BARCLAYS GROUP
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CMlCA~U
90
Table 20b, page 3
·····-----·--·-··········-·-·------·-······-········-----PARENT
-···---···--·--PARENT BANKING
INST
CITY
BANI<
COUNTRY
ORGANIZATION
CODE
NAME
----------·····--·--·---··· ·················-········----- ·······--·-·-·--··
UNITED KINGDOM
BARCLA Yt1 GROUP
STAND•CMARTEFIED GROUP
SCHRODER GROUP
LLOYDS GROUP
NATL WESTMINSTER BANK
THOS COOK AND SON
01
03
02
02
02
01
03
02
05
03
02
02
03
02
02
01
01
BARCLAYS BANK INTL AGENCY
BARCLAYS BANK OF CALIFORNIA
CHARTD BANK OF LONDON BRANCH
STANDARD CHARTERED BANI< LTD
THE CHARTERED BANK
CMARTD BANK OF LONDON AGENCY
CHARTERED BK OF LONDON•CALIF
TME CHARTERED BANK
J HENRY SCHRODER BKG CORP
SCHRODER TRUST CO
LLOYDS BK INTL LTD
LLOYDS BK INTL LTD
LLOYDS BK OF CALIF
NATL WESTMINSTER BANK BRANCH
NATL WESTMINSTER BANK BRANCH
NATL WESTMINSTER BANK AGENCY
THOS COOK AND SON AGENCY
SAN FRANCISCO
SAN FRANC! SCO
NEW YORK
NEW YORK
CHICAGO
SAN FRANCISCO
UN FRANCISCO
SEATTLE
NEIN YORK
NEW YORK
NEW YORK
CHICAGO
LOS ANGELES
NEW YORI<
CHICAGO
UN FRANCISCO
NEW YORK
05
03
06
01
01
~UROPEAN•AMERICAN
EUROPEAN•AMERICAN
EUROPEAN•AMERICAN
EUROPEAN.AMERICAN
EUROPEAN•AMERICAN
Bl(G CORP
B AND T CO
Bl(G CORP
Bl<G CORP
BKG CORP
NEW YORI<
NEW YORI<
CHICAGO
LOS ANGELES
SAN FRANCISCO
01 BANK OF "'0NTREAL AGENCY
03 !IANK OF MONTREAL TRUST CO
01 BANK OF MONTREAL AGENCY
03 BANK OF MONTREAL•CALIFORNIA
01 BANK OF NOVA SCOTIA AGENCY
03 IHNI< OF NOVA SCOTIA TRUST CO
Oi! BANK OF NOVA SCOTIA BRANCH
02 BANI( OF NOVA SCOTIA BRANCH
01 !IANI( OF NOVA SCOTIA AGENCY
0 I CANAD IMPL BK OF COMM AGENCV
03 CANAD IMPL 81( COMM TRUST CO
01 CANAD IMPL 81< OF CO~M AGENCY
01 CALIFORNIA CANADIA~ BANK
02 CANAD IMP~ BK OF COMM BRANCH
02 CANAD IMPL Bl< OF COMM BRANCH
NEW YORK
NEW YORK
SAN FRANCISCO
SAN FRANCISCO
NEW VOl'IK
NO, VOl'IK
SAN JUAN
CHIHSTENSTED
SAN FRANCISCO
N!W YORI<
Nfw YORI<
SAN FRANCISCO
SAN FRANCISCO
PORTLAND
S!ATTLE
OTHER WESTERN EUROPE
EUROPEAN•AMER •GROUP•
CANADA
BANK OF MONTREAL
BANI< OF NOVA SCOTIA
CANAD IMPL 81( OF COMM
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
91
Table 20b, page 4
----·······-------·-········-----------·-···············-······-······-·--··
PARENT
PARENT BANKING
BANI<
INST
CITY
COUNTRY
ORGANIZATI<!i
NAME
CODE
······---···-··-···········--·------·-··--·----·······-·-·······-···---·---·
CANADA
ROYAL BANK OF CANADA
Nh YORI<
NEW YORK
ROYAL BANK OF CANADA BRANCH SAN JUAN
ROYAL BANK OF CANADA BRANCH CHRISTENSTED
ROYAL BANK OF CANADA AGENCY SAN FRANCISCO
TORONTO DOMINION 8 AND T CO NEW YORK
TORONTO DOMINION BANK AGENCY Nh YORI<
TORONTO DOMINION BANK AGENCY SAN FRANCISCO
TORONTO DOMINION BK OF CALIF SAN FRANCISCO
ur,, FRANCISCO
BANK OF BRITISH COLUMBIA
BANQUE CANADIENNE NATIONAL! NEW YORI<
01 ROYAL BANK OF CANADA AGENCY
03 ROYAL Bl< OF CANADA TRUST CO
TORONTO DOMINION BANK
BANK OF BRIT COLUMBIA
SANQUE CANAD NATLE
OZ
02
01
01
03
01
03
01
01
ARGENTINA
BANCO DE LA NACION
OZ RANCO DE LA NACION
BRAZIL
BANCO 00 BRASIL
BU.ICC REAL
ESTAOO DE SAO PAULO
MERCANTL DE SAO PAULO
OZ
01
01
OZ
01
01
01
01
BANCO
BANCO
BANCO
BANCO
BANCO
BANCO
BANCO
BANCO
00 BRASIL BRANCH
NEW YORI<
DO BRAZIL
UN FRANCISCO
DO BRASIL
LOS ANGE'LES
REAL BRANCH
Nh YORK
REAL AGENCY
LOS ANGELES
DO ESTAOO DE SAO PAULO NEw YORK
DO ESTADO DE SAO PAULO SAN ,RANCISCO
MERCANTIL DE SAO PAULO NEW YORI<
COLOMBIA
BANCO DE BOGOTA
02 BANCO DE BOGOTA
NEW YORI<
01 BANCO NACL OE MEXICO AGENCY
01 BANCO NATL OE MEXICO AGENCY
01 BANCO OE COMERCIO
Nh YORK
LOS ANGELES
LOS ANGELES
01 BANCO UN?ON C,A,
NEW YORI<
MEX ICU
BANCO NACL OE MEXICO
BANCO DE COMERCIO
VENEZUELA
BANCO UNION
https://fraser.stlouisfed.org
- 77 - 7
Federal Reserve Bank93-031
of St.0 Louis
92
Table 20b, page 5
•...........•......•...............•.•..•.....•...........................••
PARENT
PARENT BANKING
COUNTRY
ORGANIZATION
INST
CODE
CITY
---········-····························-····-······--·--············--·-·-VEN!ZUELA
BANCO INDUSTL DE VEN
01 BANCO IND DE VENEZUELA c;A.
N!W YOAK
HONG KONG
HONGKONG •ND SHANGHAI
SHANGHAI COMM BANK
02
02
01
03
02
0I
HONGKONG
HONGKONG
HONGKONG
HONGKONG
HONGICONG
SHANGHAI
& SHANGHAI BK BRANC NEW YORK
CHICAGO
UN FIUNCIICO
UN FRANCISCO
SEATTLE
COMMERtIAL BANK LTD UN ,RANc1sco
& SHANGHAI BK BRANC
& SHANGHAI BK AGENC
BK OF CALIFORNIA
& SHANGHAI BKG CORP
INDIA
STATE SANK OF INDIA
02 STAT[ BANK OF INDIA BRANCH
02 STATE BANK OF INDIA BRANCH
NEW YORK
CHICAGO
UNK MELLI !RAN
BANK SADERAT !RAN
01 IIANK MELLI IRAN AGENCY
01. BANK SADERAT IRAN AGENCY
01 IIANK SADERAT IRAN AGENCY
NEW YORK
NEW YORK
LOS ANGELES
01 BANK LEUMI LE•URA!L
0] BANI< LEUMI TRUST CO
02 BANI( LEUMI LE•URAEL
01 BANK LEUMI LE•ISRAEL,B.M.
02 ISRAEL DISCOUNT BANK
03 ?SRA[L DISCOUNT BANK
02 BANK HAPQALIM B.M.
0 I BANIC HAPOALIM, B0 M0
NEW YORIC
NEW YORK
CHICAGO
BEVERLY MILLS
NEIii YORIC
NEW YORK
NEW YORI<
BEVERLY HILLS
01 TAIYO KOBE LTD AGENCY
01 TAIYO KOBE AGENCY
NEW YORK
LOS ANGELES
SEATTLE
NEW YORK
,-.EW YORIC
IRAN
ISRAEL
BANK LEUMI LE•ISRAEL
ISRAEL DISCOUNT BANK
BANK HAPOALIM
JAPAN
TAIYO KOBE BANK
BANK OF TOK Yr)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
01 TAIYO KOIIE BANK LTD
01 BANK OF TOKYO LTD AGENCY
03 RANK OF TOKYO TRUST CO
93
Table 20b, page 6
······························
·······················-······
·-·-····-·---···
PARENT
BANI<
PARENT BANKING
INST
CITY
COUNTRY
ORGANIZATION
CODE
NAME
······-··········-············ --··--·-······--·······----- ···············-··
JAPAN
BANK OF TOK YO
DAl•lCHI KANGYO BANK
DAIWA BANK
FUJI BANK
MOKl<AIDO TAKUSMOKU
INDUST BANK OF JAPAN
MITSUBISHI BANK
MITSUI BANK
SANIIIA BANK
SUMI TOl-111 BANK
SUTAMA BANK
TOKA I BANK
KYOWA BANK
LONG TERM CREDIT
MITSUBISHI TR & 8KG
MITSUI TR & BKG CO
TOYO TR & 8KG CO
YASUDA TR & BKG CO
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
06 TOK YO BANCORP INT!:RNA TIONAL
01 BANK OF TOKYO AGENCY
01 BANK OF TOKYO AGENCY
03 CALI~ORNIA FIRST BANK
02 BANK OF TOKYO LTD BRANCH
02 BANK OF TOKYO LTD BRANCH
01 DAI•tCHI KANGYO BANK AGENCY
03 'IRST PACIFIC BK OF CHICAGO
01 DAt•ICMI KANGYO BANK AGENCY
01 DAIWA BANK LTD AGENCY
01 DAIWA BANK AGENCY
01 FUJI BANK LTD AGENCY
03 ,uJI BANK & TRUST CO
01 FUJI BANK AGENCY
01 HOKKAIDO TAKUSHOKU BANK LTD,
01 HOKKAIDO TAKUSMOKU
01 INDUSTRIAL BANK OF JAPAN LTD
03 INDUSTRIAL BAN( OF JAPAN
01 INDUSTRIAL BANK OF JAPAN ~TD
01 MITSUBISHI BANK LTD AGENCY
01 MITSUBISMI BANK LTD AGENCY
03 MITSUBISHI BANK OF CALIF
01 MITSUI BANK LTD AGENCY
01 MITSUI BANK LTO AGENCY
03 MITSUI BK OF CALIFORNIA
02 SANWA BANK LTD BRANCH
02 SANWA ~ANK BRANCH
01 SANWA BANK LTD AGENCY
03 SANWA BANK OF CALIFORNIA
01 SUMITOMO BANK LTD AGENCY
02 THE SUMITOMO BK LTD
01 SUMITOMO B•NK LTD AGENCY
03 SUMITOMO BANK Or CALIFORNIA
01 TME SAITAMA BANK, LTD,
0 I SA IT AMA BANK
01 TOKAI BANK LTD AGENCY
01 TOKAI RANK AGENCY
03 TOKAI BK Or CALIFORNIA
01 KYOWA BANK AGENCY
01 KYOWA BANK AGENCY
02 LONG•TERM CREDIT 8K UF JAPAN
01 MITSUBISHI TR & 8KG CORP
01 THE MITSUI TR & BKG CO LTO
02 TOYO TRUST & BANKING CO LTO
02 YASUDA TRUST & 8KG CO LTD
HOUSTON
LOS ANGELES
SAN FltANCt sea
SAN FFl4NCISCO
PORTLAND
SE.A TTLE
NEW YORK
CHICAGO
LOS ANGELES
NEW YORK
LOS ANGELES
NEw YORK
NEl'I YORI<
LOS ANGELES
NEW YORK
LOS ANGELES
NEw YORK
NEw YORK
LOS ANGELES
NEw YORK
LOS ANGELES
LOS ANGELES
NEw YOFIK
LOS ANGELES
LOS ANGELF.S
NEw YORK
CHICAGO
SlN FRANCISCO
SAN FRANCISCO
NEW YORK
CHICAGO
SAN FRANCISCO
SAN FRANCISCO
NEW VQRK
LOS ANGELES
t,Ew YORK
LOS ANGELES
LOS ANGELES
NE,i YORK
LOS ANGELES
NEW YORK
NE,1 YORK
NE,i YORK
NEw YORK
NE\,; YORK
94
Table 20b, page 7
························································-····················
PARENT
PARENT BANKING
?NIT·
UNI(
cnv
COUNTRY
ORGANIZATION
!=-OD!
NAM!
a••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
JAPAN
NIPPON FUDOSAN B•NK
IUM?TOMO·TA I BKG CO
02 NIPPON FUDOSAN BANK LTD
02 SUMITOMO TA I BKG CO LTD
NEW YORK
NEW YORK
Ol
02
01
OJ
01
NEW YORK
CHICAGO
LOI ANGELES
LOS ANGELES
NEW YORK
ICOAU, SOUTH
kOAEA EXCHANGE BANK
KOREA EXCHANGE BANK AGENCY
KOREA EXCHANGE BANK BRANCH
KOREA EXCHANGE BANK AGENCY
KOREA EXCHANGE BK OF CALIF
COMMERCIAL BANK OF KOREA
PAK UTAN
HAlllB BANK
NATL BANK OF PAKISTAN
02 HAUB BANK BRANCH
NEW YORK
02 NATL BANK OF PAKISTAN BRANCH NEW YORK
PHILIPPINU
PHILIPPINE NATL BANK
02 PHILIPPINE NATL BANK BRANCH
Ol PHILIPPINE NATL BANK •GENCY
01 PHILIPPINE NATL BANK AGENCY
NEW YORK
SAN FRANCISCO
HONOLULU
Ol OVERSEAS UNION BANK, LTD
NEW YORK
llNGAPOAE
OVERSEAS UNION BANK
CHlNA, REPUBLIC OF TAIWAN
INTL COMM BK OF CHINA
01 lNTL COMM BK OF CHINA AGENCY NEW YORK
02 INTL COMM BK OF CHINA BRANCH CHICAGO
THAILAND
UNGKOK BANK
Ol BANGKOK BANK LTD AGENCY
01 BANGKOK BANK LTD AGENCY
NEW YORK
UN FRANC rsco
AUITULU
BK OF NEW SOUTH WALES
AUST I NEW ZEALAND GA
COMM BK OF AUSTRALIA
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
01 BANK OF NEW SOUTH WALES
N!W YORK
01 AUSTA•LIA & N ZEALAND BKG GA NEW YORK
01 COMM BK OF AUSTAALlA
NEW YORK
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
------------~------------__,T,.ab,.l=•~. \ ________________________
PAGE I OF 3
VI
OR
I GA I IL I TX I CA
WA
I TOUL.
••••I•••• I•••• I•••• I•••••
IB
1B
IA
IB
IA
I
5
I·
IB
I
I
,a
I
I
IS
·2
IB
I8
IB
IS
IA
IB
IB
IS
I
ANCA.NUL DEL_L.AllOROL__I
IA
BANCO DI N.lPOLI
I
.~C(U).LBLIB
IB
CREDITO ITAL!ANO
EJHERLAND8 . __ ····-- __
IS
ALGEHENE SK NEDERLAND!
BANCA COMM ITAL UNA
l
IA
IS
'°
V\
IB
.IA
IB
IA
P.AllL
e-••c,ioE ·aiLa•o
u,,cg of
SANTANPEA
BANCO CE VUCAVA
_A_Ni;_O_.JJRJlJJ.LJ(L_
sco HISP•NO•AHERICANOI
IA
I
IA
A
IA
I
81
I
IB
IA
I
CI
I
I Ai
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Table 21
PAGE Z
o,
J
lOC.&UQN Of fOAEtGN BANKING !NSTITUTtONS IN THE U,S,
BY COUNTRY AND •FAMILY" A8 OF APRIL 1977
COUNTRY
FAMILY
WA
••••I•••• I•••• I•••• I•••••
CANADA
ANK OL.e_l!ll...tOJ.J!!!.
BANK OF MONTREAL
BANK OF NOYA SCOTJA
IA
I
IA
I
IA
CANAD IMPL BK OF COMM!
ROYA_L_l!.!Ji'L.OL'-!!!ADA
TORONTO DOMINION BANK I
BANGUE CANAD NHL£
IA
•
IA
s
s
s
8
I
I
8
4
IA
Il
I
s
I TOTAL
-•--1 ••···
!i
6
IA
5
I
I
·,,
IA
4
I
I
(LATIN AMERICA)
AliGENTI~~
I
I
I8
I
I8
IB
IA
BANCO DE LA NACION
BRAZIL
I
I
BANCO DO BRASIL
_ANt_O~L
ESTADO DE SAO PAULO
I
MER CAN TL DL_l!Q_f~_\/1,.Q.L___j A
COLUMBIA
I
I
ANCO
I
I8
MEXICO
I
I
BANCO DE C0tol£ACIO
I
I
BANCO NACL DE MEXICO I
IA
I
VENEZUELA
BANCO IND DE VENEZUEL I
IA
BANCO UNION
I
IA
CAS!Al
HONGKONG
I
HONGKONG AND SHANGHAI I
SHANGHAI COMM BANIC
I
!ND!A
I
IB
I
I
I
I8
I
I
I
I
I
I
BANK HAPOALIM
I
AANK LEUM? LE•ISRAEL I
!SRAEL DISCOUNT BANK I
JAPAN
I
BANK OF TOK VO
I
QAJ•ICNI IUiN';VQ BANK I
DAll'IIA BANK
I
IJ I B NK
HOKKAIDO T AKUSHOKU
JNDUST BANK PF JAPAN
ICYOWA BANK
I
l ONG•TfRM CREDU BANK I
IA
IA
I
IB
IA
IB
I
IA
IA
IA
A
IA
IA
IA
18
IU
J
z
z
IA
IA
I
I
I
I
IA
l
l,C)
°'
IA
I
18
I
I
IB
I
I
I
I
I
I8
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
IA
I
I
I
I
I
I
sI
I
IA
IA
I
I
8
5
I
I
I
I
IA
IA
I
I
CIU
IA
IA
IA
IA
IA
z
4
z
8
8
8
J
IA
z
z
]
z
I
I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Table 21
PAGE l OF l
COUNTRY
I HA I NY
FAMILY
HA
VI
_ _ _ _ _ _ _ _ _...
, ,,
....
o._,.__cONJlNUf.D_ _ _ __,_
f,IITSUBI!Ht 84NIC
I
OR
WA
I TOTAL
•••• •••• ••••I•••••
---------,-A~s~1-.,~·~~NliNU£;~········••l ••••I••···
__,~------'---'---'--'--,-----,,------~---,------------IA
----------~.m~~1::~KlLLB~,.,A~------'-------'---'-----'-----------'---!,------------
----------- ~li~~~ i~o~s~~'•-a-,N-K-~-~,: ' - - - - - - ~ - ~ - ~ - ~ - - - - - - - - . . . , . . _ - ~ - - - - - - - - - - -
_________. ., s~~:~:.~!"':'----~,--',~a------~--'-:--~-~-=-------~~.~-------------------:~:gg:g ~:N:-eKicoH-~:-------'------~-+---'-''-.._________+--'~c------------------------aT6~-I~-:~~:_a_ANI(
TOYO TRUST & 8KG CO
YASuOA T• & a•G co
- - - - - - - " · ~0~•E~•=~2¥~e.NK OF
KOAE4
,
I
::
18
:~
:A
:
:A
ANIC
I
NATL BANK OF PAK!SUNI
IB
------~,7,.71~s7r:~f!E_A_E_l(_~HANQE 8 NK
HAB 8
~
s
IB
I
I
I
18
---------•~H~I~L~I~•:~~~~'.-pccp.-1""NE=----cNccA.-T,--L-cBccAccNccK----;------;-I""B-----~L-,---~I-----;------;-17A - - - - . - - - - - - + - - . - - - - - - - - - - - -
Sl NGAPQAE_
OVER.SEAS UNION B.ANK
CHlNAfRQLJ!!L
O
A WN
INTL :OHM lilC OF CHINA!
yHULjND
I
14
IA
I
I
I
I
I
I
18
I
I
I
A A
BK Of NEjlj SOUTH WALES I
IA
I
!5~i~~~1/:
1:
:
-----------=co"'~~"'~-~-f-a~
TOTALS
,
A (AGENCIES)
8 (BAANCafS)
9 csua,__~_a~_._81(S:)
I
I
l••••I•••••
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I
I I 41
I
O I
lb
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••••l••••l••••l••••I•••••
O I I I • I • i 48
2 I O I 22 I • I
1 I O I 2 I O I
,s
I
••••l•---0 I 9)
5 I 7b
0 I
14
---------~C,;--,C,=--,AGREEMENT CORPS,-,~,--,-,,-0,,...,,--0-~--,o~,__,o~,__,s-1---s,--s-1~,-'~o_ _,_----;;--os---,1-~2=-----------I
( NY INVESTMENT CCS, ~
UL REPORTER$
I
•IS
•I
•I
•I
•I
l••••l•••••••••••••••l••••l••••l••••I•••••
I t I 105
J I t I z5 I 1 I 113
•I
5
••••I•••••
S I 210
98
COMPENDIUM OF SUPPORTING MATERIALS
FOR B.R. 7325
THE INTERNATIONAL BANKING ACT OF 1977
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Federal Reserve Bank of St. Louis
99
LIST OF BXBIBITS
Pederal Reserve Presa Release of May 26, 1977, including
letter from Chairman Burns dated May 25, 1977 to
Chairman St Germain and Accompanying Stat:eu.nt of
Proposed Amendments
EXHIBIT •9•
EXHIBIT
•c•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Proposed Amendments to. R.R. ~325, 'l'he International
Banking Act of 1977, prepared by staff of the Federal
Reserve
Letter from Vice Chairman Gardner dated June 2, 1977
to Dr. WOlfgang Jahn of Commerzbank
Proposed Alternative to Section S(a) of R.R. 7325-Imposing Bdge Act Limitations on Future Out-of-State
Agencies
100
F ED ER A L
-~ ,2 •
•
press
·.t
·-~
R ES ERV E
release
May 26, 1977
EXHIBIT "A"
For immediate release
The Board of Governors of the Federal Reserve System has
informed Congressional leaders concerned with bank regulation that it
strongly supports the International Banking Act of 1977 that was
introduced in the House this week.
The Board said such legislation is needed because of recent
rapid growth of foreign bank operations here, the increasingly imp~r~ant
share of the domestic market that is controlled by foreign banks and the lack
of any national regulation and supervision of these operations.
''We are primarily concerned about the absence of a national
policy and regulatory framework in this increasingly important area and its
attendant ramifications for the formulation of monetary policy, the
development of a sound and competitive banking system, and the coordination
of policies with national monetary and regulatory authorities abroad," the
Board said in a letter to the Congressional leaders.
The Board's recommendation was accompanied by proposals for a
number of amendments.
Since 1974 the Board has backed foreign bank legislation aimed
at national treatment of foreign banks operating here, that is, to place
foreign banks under the same type of Federal banking and monetary regulation.
that affects comparable domestic banks.
A copy of the Board's letter, and its accompanying proposals
for changes in the bill, are attached.
The letter went to the chairmen and
minority leaders of the House and Senate banking committees and to chairmen
of related subcommittees.
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Federal Reserve Bank of St. Louis
-o-
101
CHAIRMAN OF THE BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
May 25, 1977
The Honorable Fernand J. St Germain
Chairman
Subcommittee on Financial Institutions
Supervision, Regulation and Insurance
Committee on Banking, Currency and Housing
U.S. House of Representatives
20515
Washington, D.c.
Dear Mr. Chairman:
The Board has for the past several years strongly recommended
to Congress that it enact legislation providing for the regulation and
supervision of foreign banks operating in the United States. In particular,
the Board has recommended that any such legislation embody the principle
of national treatment and thus place foreign banks under the same type
of federal banking and monetary regulation that structures the operations
of comparable domestic banking institutions. In 1974 and 1975, the
Board submitted its own draft legislative proposals to accomplish these
purposes. Last year, we strongly supported enactment of H.R. 13876-The International Banking Act of 1976 ("IBA")--which was passed by
the House of Representatives and which, of course, was the product
of substantial efforts by the members of your Com.~ittee.
In recommending enactment of foreign bank legislation, we
have been influenced by the rapid growth of these operations in recent
years, their increasing importance in our domestic banking and monetary
system, and the need to establish a comprehensive and coherent national
regulatory policy concerning such operations.
Our experience since introduction of our first legislative
proposal in 1974 has served to reaffirm these conclusions. First,
foreign bank operations in this country have continued to expand at
a rapid rate. Since introduction of the Board's legislative proposal
in 1974, total assets of U.S. offices of foreign banks have increased
30 per cent to $73 billion, and 21 additional foreign banks have entered
our markets and 14 foreign banks already here have expanded their banking
operations into additional States. As of March, 1977, 92 foreign banks
were operating some 207 banking facilities in this country and more
offices have been opened or announced since then. Second, foreign banks
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Federal Reserve Bank of St. Louis
102
The Honorable Fernand J. St Germain
-2-
have been assuming an increasingly important share of the market for
commercial and industrial loans, have been increasing their penetration
into regional markets and retail banking services, and have been active
participants in domestic money markets. As of March 31, 1977, commercial
and industrial loans extended to domestic borrowers by o.s. offices
of foreign banks amounted to approximately $16 billion, a figure equal
to approximately 14 per cent of domestic commercial and industrial loans
extended by large domestic banks that report weekly to the Federal
Reserve. And third, the lack of any significant national regulation
and supervision of such operations, which may have been justified when
such operations were a relatively insignificant part of our banking
system, has resulted in an ever-widening gap in our regulatory structure
through which a growing number of foreign banks can conduct multi-State
operations and securities activities and escape Federal Reserve monetary
policy controls.
From the Board's standpoint, we are primarily concerned about
the absence of a national policy and regulatory framework in this increasingly
important area and its attendant ramifications for the formulation of
monetary policy, the development of a sound and competitive banking
system, and the coordination of policies with national monetary and
regulatory authorities abroad. While we have no reason to doubt that
State banking authorities are doing a competent job of local banking
regulation in this area, there is a need for a federal presence to ta~e
into account the broader national and international implications of
foreign bank operations in this country. In this regard, we believe
that foreign banks should be encouraged to enter and expand within this
country and to participate fully in our banking and financial markets.
We further believe,·however, that such entry and expansion should not
occur under fifty different sets of rules but rather should occur under
a set of national standards uniformly applied to all foreign banks.
Continued deferral of action on foreign bank legislation while
the Congress studies areas of domestic banking reform is, in our judgment,
-a course of action that will over time create many more problems than
it will solve. For example, reasonable grandfathering of existing multiState and securities operations of foreign banks, which in our judgment
is an essential element of any acceptable foreign bank proposal, becomes
more difficult and·uncertain as such operations expand in the interval.
By establishing national ground rules for foreign banking institutions
at this time, we can ensure that no matter what directions may be taken
in future domestic banking reform, domestic and foreign banks will be
equally affected._
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Federal Reserve Bank of St. Louis
]03
The Honorable l!'ernand J. St Germain
-3-
Given the similarity between the IBA and the Board's earlier
legislative proposals and the substantial progress made by the IBA in
the last Congress, we strongly support the introduction of the IBA in
the 95th Congress as the International Banking Act of 1977 and recommend
that it be given early consideration. we believe, however, that certain
changes in the IBA would be desirable and we urge the Congress to give
careful consideration to the amendments proposed in the statement that
accompanies this letter. Legislative language accomplishing these and
other more technical amendments to the IBA, as recently introduced in
the House of Representatives, is currently being prepared by the Board's
staff and will be furnished shortly. We would note that many of these
proposals reflect Board suggestions presented by Vice Chairman Gardner
in his Senate testimony of last year on the IBA.
and
In conclusion, the Board hopes that Congress will act favorably
expeditiously on these recommendations.
Sincerely yours,
Arthur
Enclosure
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Federal Reserve Bank of St. Louis
I!'.
Burns
104
PROPOSED
AMBlmlBNTS
TO
'l'BB
IHTBRNATIONAL BANKING ACT OP 1976
SU111111ary of Principal substantive Amendments
The Board strongly supports enactment of the International
Banking Act of 1977 <•IBA•) because it would accomplish the two basic
public policy goals that have guided the Board in recamnending legislation
to regulate foreign banks.
First, the IBA implements the principle
of nati~nal treatment by affording foreign banks the same opportunities
and by subjecting them to the same rules and regulations that structure
the operations of comparable domestic banking institutions.
Second,
the IBA provides for a comprehensive Federal presence in the regulation
and supervision of foreign bank operations in order to insure appropriate
national regulation of those activities of foreign banks in this country
that have broader national and international implications.
The Board
believes, however, that revisions of certain provisions of the IBA would
be desirable because, in our judgment, they would further the goals
stated above.
areas:
Our suggestions in this regard concern the following
(1) Monetary Policy controls; (2) Interstate Banking, (3) Federal
Deposit Insurance; (4) Grandfathering of Securities Ac_tivities; (5)
Federal Review of Entry, and (6) Nonbanking Prohibitions.
Monetary Policy controls
A major objective of the Board in recanmending the enactaent
of foreign bank legislation has been to place this increasingly· important
segment of domestic banking u_ndei: the sue 1110netary and superv-isory
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Federal Reserve Bank of St. Louis
105
controls that apply to comparable
u.s.
banks.
The IBA largely accomplishes
this objective without requiring formal membership in the Federal Reserve
System-a solution that is acceptable to the Board.
We are concerned,
however, that the IBA would not subject State-chartered subsidiaries
of large foreign banks to these same controls.
The situation of a State
bank owned by a 1111lti-billion-dollar foreign bank must realistically
be distinguished from that of a small State non-member bank that primarily
serves local comnunities.
A bank own_ed by a large foreign bank is from
both a market and monetary policy viewpoint an integral part of a larger
foreign institution and, as such, competes primarily with major domestic
banks, virtually all of whom are members of the System.
The Board thus
believes that the appropriate test for determining imposition of monetar1
controls is the capability of the foreign institution to compete and
participate through its U.S. affiliate in our major money and credit
markets and not the organizational form in which it chooses to operate.
Accordingly, the Board recommends that section 7 of the IBA be amended
to permit the imposition of Federal Reserve monetary controls on all
U.S. operations of a foreign bank that has $1 billion or more in worldwide
assets, irrespective of whether its
u.s.
operations are conducted in
the form of agencies, branches, bank or New York Investment COmpany
subsidiaries.
Interstate Banking
The Board strongly supports the principles adopted in section
5 of the IBA subjecting foreign banks to the same interstate restrictions
that apply to domestic banks and grandfathering existing operations
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Federal Reserve Bank of St. Louis
106
from the reach of such restrictions.
The Board does, however, believe
tna~ section 5 may be improved in two ways.
First, we would recommend
that the restrictions be applied as well to agencies of foreign banks
the activities of which, in terlllS of both total assets and loans, are
greater than the activities of branches.
In this regard, it should
be stressed that agencies are not mere loan production offices, but,
except for their inability to accept deposits from the public, are fullfledged commercial banking offices.
Based on their activities, agencies
would clearly be considered "branches• of national banks under the
McFadden Act definition and their credit balance accounts overlap many
of the same services provided large commercial cust0111ers by domestic
banks.
Essentially, we believe that many of the international ban~ing
services now provided by agencies can be appropriately conducted through
Edge Act Corporations, foreign bank ownership of which is provided in
the IBA1 in this connection to make such facilities more comparable
to other banking facilities, we recommend that the leveraging limits
and mini1111m 10 per cent reserve requirements of that Act be amended.
Secondly, we would recommend that direct imposition of the branching
restrictions of the McFadden Act be limited only to Federal branches
and agenciesi State branches and agencies should be put on the same
competitive footing as State banks in their h0111e State.
In this way,
foreign banks may benefit from future reciprocal interstate branching
compacts that may be agreed upon between the States.
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In a related context, we do not believe that the States should
have the authority in section 4 of the IBA to veto the entry of a Pederal
branch or agency.
such a State veto is not permitted in the case of
the establishment of national banks or Edge Corporations, or even under
the Bank Bolding Company Act, and would thus represent a clear departure
from the traditional operation of our dual-banking system.
It may also
serve to restrict both the development of and-competition inn- international banking markets in this country.
We recommend therefore that
State bank authorities instead be given a consultative role on Federal
branch or agency entrance into their State.
Federal Deposit Insurance
While section 6 of the IBA does afford some protection to
depositors of U.S. branches of foreign banks, the Board believes that
it would be unwise not to make use of our deposit insurance system which
has effectively protected U.S. depositors over some 40 years.
'l'herefore,
we were encouraged last year to see the Federal Deposit Insurance Corporation
suggest that, in lieu of the surety bond and pledge of assets requirements
of section 6 of the IBA, it would be possible to extend deposit insurance
to domestic deposits at U.S. branches of foreign banks if adequate
provisions were made to protect the FDIC fund.
We would, however,
modify the FDIC's suggestions by making insurance mandatory for
deposits at these offices.
All national banks, State --.bar banks,
and bank subsidiaries of bank holding companies are required to beOOIIII!
insured and we can see no reason to exempt branches of foreign banks
from.this generai requirement that structures the operations of their
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108
doastic competitors.
A key element of public confidence in this nation's
banking system is our system of deposit insurance and we do not feel
that this confidence should in any way be lessened by failing to insure
deposits at foreign bank branches, many of which actively solicit retail
customers.
Grandfathering of Securities Activities
While the Board has recommended that foreign banks should
be subject tc the same securities activity restrictions that apply to
domestic banks, we have also reconmended that existing securities affiliates
of foreign banks be grandfathered from those restrictions for reasons
of equity and of mitigating any retaliatory sentiments abroad.
Statements
made and submitted at the Senate's hearings on the IBA last year made
clear that the existing provisions of the IBA do not effectively grandfather existing activities and are a source of considerable controversy
with the regional stock exchanges.
It is possible that there are compromises
on this issue that can satisfy the legitimate concerns of all involved,
based on proposals put forward last year, however, it is likely that
any such compromises will be so involved and technical as to defy efficient
administration.
The Board thus continues to favor permanent grandfathering
of such activities with discretionary review under the nonbanking standards
of the Bank Bolding COmpany Act to prevent any abuses that might arise.
Federal Review of Bntry
The Board does not advocate or see the necessity for the
detailed guideline provisions on for;eign bank entry in section 9 of
the IBA.
We believe in thia r~ar!} that the prOV'_isions of the IM
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109
providing for consultation between the bank regulatory authorities and
the Secretaries of State and Treasury on new foreign bank operations
should be adequate to ensure that foreign policy issues are considered
when appropriate.
Nonbanking Prohibitions
In his testiDK>ny of last year on the IBA, Vice Chairman Gardner,
on behalf of the Board, presented for Congress' consideration a proposed
amendment to the IBA that would have prevented the Bank aolding Company
Act provisions of the IBA from interfering unnecessarily with the essentially
foreign shareholdings and activities of foreign banks.
The Board again
would like to endorse strongly this proposal, which we believe relieves
the concerns of many foreign banks about the scope of the IBA, and,
in this regard, would like to reiterate the following explanation provided
in Vice Chairman Gardner's earlier statement:
"I would like to discuss what I believe is
a misconception on the part of some foreign banks
about the reach oi the nonbanking prohibitions of
the Bank Holdin3 Company Act. Apparently, some
foreign banks believe that the nonbanking prohibitions
of the Bank Holding Company Act would seriously
interfere with their foreign nonbanking interests.
I would note first that set:tion 2 (h) ".>f the Bank
Holding Company Act specificall~• exempts the whollr
foreigu activities and shareholdings of foreign
banks from the nonbanking prohibitions of the Act.
Next, I would emphasize that even when a foreign
company in which a foreign bank has an equity interest
does conduct a part of its business in the United
States, the Board has used its discretionary authority
under section 4(c) (91 of the Act to prevent the
nonbanking prohibitions of the Act from unnecessarily
interfering with essentially foreign shareholdings.
In this regard, I think it is important to quote
a provision of Chairman Burns' previous testimony
on this issue before the Senate Banking Committee
in 1970:
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110
. . (W]e believe that bank holding
companies that are principally engaged
in banking abroad should be allowed to
retain interests in foreign-chartered
nonbanking companies that are also principally
engaged in business outside the United
States. We do not believe Congress
intended the Act to be applied in such
a way as to impose out ideas of banking
upon other countries. To do so might
invite foreign retaliation against our
banks operating abroad, to the detriment
of the United States. The provisions
of the House-passed bill authorizing
the Board to grant exemptions in this
area would be most useful in dealing
with these problems.'
The Board would continue to be guided by these principles
in its administration of the Bank Holding Company
Act vis-a-vis the foreign banks that would be covered
by this proposed legislation.
While the Board believes that it has sufficient
regulatory authority under section 4(c) (9) to deal
with problems that may occur in this area, we also
believe that it would be desirable at this time
for the Congress to adopt a more well-defined legislative policy. A great number of foreign banks emanating
from a great variety of banking environments would
become subject to the nonbanking prohibitions of
the Bank Holding Company Act as a result of this
proposed legislation. The lack of a statutory policy
could initially cause some misunderstanding by
foreign banks of the Act's effects on foreign companies
with U.S. operations and would make more difficult
the task of for111Ulating appropriate general regulations.
Therefore, the Board recommends that H.R. 13876
be amended to make clear that the nonbanking prohibitions of the Bank Holding Company Act are not
meant to prevent foreign banks principally engaged
in banking abroad from retaining or acquiring interests
in foreign-chartered nonbanking companies that are
also principally engaged in business outside the
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111
united States. we do feel, however, that as a
corollary to any such amendment, a domestic office
of a foreign bank should be required to deal with
the doaatic operations of a foreign company in
which it -Y have an equity interest on a strictly
araa-lengh basis so as not to give the fir■ or bank
involved an advantage over their respective o.s.
caapetitors. •
COIICLOSIOR
'l'be Board believes that the proposed substantive amendments
will prove useful in developing a bill that will gain expeditious and
widespread acceptance in both the House and Senate.
We, of course,
stand ready to be of further assistance and, in this connection, will
shortly provide the Congress with legislative language to accomplish
the above and other more technical amendments that may be desirable.
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EXHIBIT "B"
PROPOSED AMENDMENTS TO R.R. 7325
THE INTERNATIONAL BANKING ACT OF 1977
Prepared by the staff of the
Board of Governors of the Federal Reserve System
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113
~-
Page 1, line 10 insert •checks are paid, or money is lent•
after the word •powers,•.
Explanation:
The words •checks are paid, or money is lent•
were deleted from the definition of •agency• as a result of certain
technical amendments adopted during House passage of the International
Banking Act of 1976 (H.R. 13876) (see daily ed. Cong.~- July 29,
1976 at 7945).
It appears from the precise language of the technical
amendment adopted by the House of Representatives, that is, deletion
of the phrase, •and checks are paid or lllOney is lent,• that the amendment
was intended to apply to the definition of •branch" not •agency• (see
discussion infra).
Accordingly, it is recommended that the deleted
phrase be reinserted.
2.
Page 2, lines 7-8, strike the words "and checks are paid or
money is lent•.
Explanation:
In its passage of H.R. 13876, the House of
Representatives adopted the following technical amendment without explanation-page 2, line 6 strike the words •and checks are paid or money is lent.•
The page and line references were to the definition of •agency•, however,
the precise phrase is contained in the definition of "branch".
It is
believed that the amendment was intended to apply to the definition
of •branch• in order to close a potential loophole.
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Federal Reserve Bank of St. Louis
Technically, under
114
the existing definition of •branch•, if a U.S. office of a foreign bank
accepted deposits but did not also lend money or pay checks, it would
not be defined as either a •branch• or •agency•. ·ay striking •and
checks are paid or money is lent• in the •branch• definition, this
potential loophole would be closed and it would be made clear that any
office receiving deposits would be defined as a branch.
If a foreign
bank office did not accept deposits but dtd lend money or pay checks
or maintain credit balances, it would be defined as an •agency• and
would not otherwise escape the Act's coverage.
3.
Page 2, strike lines 17 through 25, and page 3 strike lines
1 through 7 and insert in lieu thereof the following:
"(7) 'foreign bank' means any company organized
under the laws of a foreign country, a territory
of the United States, Puerto Rico, Guam, American
Samoa, or the Virgin Islands, that has the power
to engage in the business of banking, or any subsidiary
or affiliate organized under such laws of any such
company, except that in administering their respective
responsibilities under this Act the Board and Comptroller
are authorized to adopt, by regulation or order,
such other definitions as may be necessary and
appropriate to enable them to effectuate the various
provisions of this Act and prevent evasions thereof.•
Bxplanation1
The present definition of "foreign bank" in
section l(b) (7) of H.R. 7325 covers only foreign-chartered institutions
that principally conduct their banking business outside the United
States.
'l'here are two major problems with this definition.
First,
it would exclude a foreign bank that principally conducts its banking
business in this country, since this definition generally applies to
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115
all provisions of the Act, it would illogically exclude from the interstate and other restrictions foreign banks whose primary business is
in this country.
For example, if a group of individuals chartered a
bank in the cayman Islands and that bank in turn established U.S. branches
and agencies, it would not be covered by the Act.
Second, it is not
clear whether the •principally conduct• test is a continuing one, for
example, a foreign institution may come within the definition at the
time the Act is made effective, but may.later no longer qualify e.g.,
it expands to the point where its business is now being principally
conducted in the
o.s.
The inherent problem with a general definition in the Act
is that it may be desirable to have broad definitions for some provisions
e.g., section 8 which restricts the combination of banking and nonbanking
activities in the United States, and to have more .limited definitions
for other provisions, e.g., sections 2-4 where a defined foreign bank
is given the ability to apply for.certain direct or indirect banking
powers in the
o.s.
Accordingly, the proposed definition attempts to
distill two very general criteria:
(a) incorporation or organization
abroad, and (b) the power to engage in the business of banking.Y With
respect to particular provisions of the Act, it i's left to the agencies
to adopt, if needed, other definitions of the term as may be necessary
y
If an organization is required to'be actually engaged in a banking
business outside the o.s. to qualify as a foreign bank, a s~ell banking
corporation organized abroad to do business solely in the U.S. would
still not
covered.
be
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116
or appropriate to carry out the provisions of the Act or prevent evasions
thereof.
This gives flexibility to consider the purposes of each provision
and to tailor.the definition as needed.
4.
Page 4, line 3, insert the following -new definition:
'
•(12J 'consolidated' means consolidated in accordance
with generally accepted accounting principles in
the United States consistently applied.•
BxPlanation:
The amount threshold for imposition of monetary
controls on foreign banks in Sections 7(a) (2) and (3) of H.R. 7325 both
rely on a •consolidated• test applied to foreign banks.
The recommended
amendment would make clear that U.S. accounting principles are to be
applied in determining what must be consolidated for purposes of computing
the threshold.
5.
Page 4, line 4, strike the title •Establishments of National
Banks• and insert in lieu thereof •Directors of National Banks•.
BxPlanation:
Section 2 of H.R. 7325 refers only to directors
of national banks owned by foreign bankqi the present title is a holdover
from earlier provisions of the legislation and may be misleading.
6.
Page 4, line 23, strike the period and insert in lieu thereof
•, and the last sentence of said paragraph is amended by inserting a
period after 'prescribe' and striking 'but in no event less than 10
per centum of its deposits••.
BxPlanation:
The Edge Act presently requires that Edge Corpora-
tions carry reserves on deposits received in the United States in such
amounts as the Board may prescribe, but in no event less than 10 per
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Federal Reserve Bank of St. Louis
117
centum of its deposits.
The Board presently requires F.dge Corporations
to carry the same reserves as member banks, subject to this statutory
minimum.
'l'o assure competitive equality between branches and agencies
of foreign banks and F.dge Corporations, it is recommended that the
minimum requirement be eliminated so that all of these organizations
will be subject to the same requirements.
7.
Page 6, line 12, insert "which engages directly in a banking
business outside the United States• after the word "bank".
Explanation:
It is suggested that only foreign banks engaged
directly in a banking business outside the United States be allowed
to open direct branches or agencies in the u.s. (see discussion supra
on the definition of foreign bank).
8.
Page 6, line 13, strike "(1)" and line 14 insert a period aftet
"law• and strike lines 15-17.
Explanation:
Under the present section 4(a) (2) of H.R. 7325,
a foreign bank cannot establish a Federal branch or agency in any State
where a foreign bank is •prohibited by State law• from establishing
a branch or agency.
(the •statement")
As
discussed on pages 3 and 4 of the Statement
accompanying the Board's letter of May 25, 1977 to
the Congress, the Board has recommended that the States not be given
a right to veto foreign bank entry through a federal branch or agency.
Rather, the Board has recommended that the State authorities be afforded
a consultative role only.
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(See existing section 9(d) of H.R. 7325).
118
9.
Page 8, lines 7-8, strike •engage in the business of receiving
deposits or exercising• and insert in lieu thereof "receive ·deposits
or exercise•.
Explanation:
The suggested language change avoids the problem
of defining what it means to be engaged "in the business• of receiving
deposits, the prohibition should be simply against the receipt of deposits
by an agency.
10.
Page 8, line 25, strike the word •or•.
11.
Page 9, line 1, strike the word •agency•.
12.
Page 9, line 18, and page 10, line 8 strike the words •or
agency•.
Explanation:
Amendments 10-12 would remove the requirement
of a capital equivalency deposit for •Federal agencies•.
Foreign bank
agencies are generally not required to maintain capital equivalency
deposits under State laws because of their inability to accept deposits
from the general public, imposition of such a requirement on Federal
agencies could put them at a competitive disadvantage.
13.
Page 10, line 16, insert the following new paragraph (4).
"(4) Subject to such conditions and requirements
as may be prescribed by the Comptroller, each foreign
bank shall hold in each State in which it has a
Federal branch or agency, assets of such types and
in such amount as the Comptroller may prescribe
by general or specific regulation or ruling as
necessary or desirable for the maintenance of a
sound financial condition, the protection of depositors,
creditors and the public interest. In determining
compliance with any such prescribed asset requirements,
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119
the Comptroller shall give credit to (i) assets
required to be maintained pursuant to paragraphs
(1) and (2) of thi& subsection, (ii) reserves required
to be maintained pursuant to section 7(a) of the
International Banking Act of 1977, (iii) assets
pledged to the Federal Deposit Insurance Corporation
pursuant to section 6(a) of the International
Banking Act of 1977, and (iv) the amount of any
surety bond obtained pursuant to sect~on 6(a) of
the International Banking Act of 1977. The Comptroller may prescribe different asset requirements
for branches or agencies in different States, in
order to ensure competitive equality of Federal
branches and agencies with State branches and agencies
and domestic banks in those States.•
Explanation:
State laws generally require foreign banks main-
taining branches or agencies to maintain assets in the State equal to
108 per centum of the liabilities payable at or through such offices
in the State.
The general purpose of such requirement is to ensure
that, in the event of insolvency, there will be sufficient assets in
the State to satisfy the claims of u.s. creditors and depositors of
that office.
Federal branches and agencies should have similar asset
requirements in order to insure •adequate protection to U.S. customers
and·competitive equality with State branches and agencies.
Under this
provision, each foreign bank would be required to hold assets in each
State in which it has a, Federal bank or agency under rules and regulations
to be prescribed by the Comptroller.
The Comptroller would be given
the authority to set different requirements for different States, in
order to equalize competition in the States between Federal and State
branches and agencies, and between Federal branches and agencies of
domestic banks.
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14.
Page 12, line 4, insert •(1)• before "Whenever tbe-CCll,ptroller•
and line 20 insert a new paragraph (2) as foll.on:
•(2) In any receivership proceeding ordered pursuant
to this subsection (j), whenever there bas been
paid to each and every depositor and creditor of
such foreign bank whose claia or claias shall have
been proved or allowed, tbe full aiiount of such
clai- arising out of transactions had by th- with
any branch or agency of such foreign bank located
in any State of the United States, e:acept (1) clailllB
that would not represent an enforceable legal obligation
against such branch or agency if such branch or
agency were a separate legal entity, and (2) amounts
due and other liabilities to other offices or branches
or agencies of, and wholly-owned (except for a
nominal number of directors' shares) subsidiaries
of, such foreign bank, and all expenses of the
receivership, ·the <lollptroller or the Federal Deposit
Insurance Corporation, where that Corporation has
been appointed receiver of the foreign bank, shall
turn over the re-inder, if any, of the assets and
proceeds of such foreign bank to the head office
of such foreign bank, or to the duly appointed
domiciliary liquidator or receiver of such foreign
bank.•
Explanation:
Section 4(j) provides, generally, that the
Camp-
troller uy appoint a receiver of a federal branch or agency in certain
extreme situations.
'l'he receiver is given the -
rights, privileges,
powers and authority as the receiver of a national bank.
It is probable
that if a foreign bank failed, creditors from all over the world would
seek to present their claims in any forum where substantial assets were
iocatedr a federal receiver of a federal branch or agency could be put
in the difficult position of having to consider claills from creditors
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Federal Reserve Bank of St. Louis
121
of the foreign bank having no direct relation to the basin••• of the
foreign bank at it• offlcu in thi• country.
'!be proposed
amendllent•
1110Uld have the federal. reoeiver pay out clai• arising directly out
of transaction• bad by depo•itor• or creditors with
agencies of the foreign bank.
u.s.
branche• and
Once such clai• and coat• of the r-iver•hip
have been paid in full out of available assets, the receiver would turn
over any surplus to the foreign bank, or ac>re likely its domiciliary
liquidator.
'i'hus, clai- not related to
u.s.
branch or agency transactions
lfOIJld be considered in the general liquidation.
15.
Page 12, strike lines 22 through 25 and page 13 strike lines
1 thro119h 13 and insert in lieu thereof the following:
•SBC. 5. (a) Bxcept as provided by subaec:tion
(b), (1) no foreign bank may directly or indirectly
operate a Pederal branch or agency outside its h0111e
State unless the State is one in whic:h it could
operate a branch or agency if it wre a national
bank located in its hcae Stater (2) no foreign bank
may directly or indirectly operate a State branch
or agency outside its hcae State unless (A) the
statute laws of the State in whic:h such branch or
agency is to be located specifically authorize a
State bank organized under the laws of such foreign
bank's home State to establish or cperate suc:h
branch or agency, by language to that effect and
not merely by implication, and (B) the State branch
or agency is approved by the bank regulatory authority
of the State in which such branch or agency is to
be located, (3) no foreign bank or company of which
it is a subsidiary uy directly or indirectly acquire
any voting shares of, interest in or substantially
all of the aasets of a - r c i a l lending COlll?8DY
located outside of its hcae state unless (Al the
statute laws of the State in which such company
19 to be located apec:ifically authorize a State
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122
bank organized under the laws of such foreign bank's
home State to acquire any such company, by language
to that effect and not merely by implication, and
{ii) the acquisition is approved by the bank regulatory
authority of the State in which such commercial
lending company is to be located1 and (4)
no foreign bank may directly or indirectly
acquire any voting shares of, interest in or substantially
all of the assets of a bank located outside of its
home State unless such acquisition would be permissible
under section 3 of the Bank Holding Company Act
of 1956 if the foreign bank were a bank holding
company the operations of whose banking subsidiaries
were principally conducted in the foreign bank's
home State.•
Explanations
This recanmended amendment to section S{a) of
H.R. 7325 makes three substantive changes discussed on pages 2 and 3
of the Statement, as well as certain technical changes.
First, it would
subject agencies of foreign banks to the same interstate restrictions
that apply to branches.
As stated in Vice Chairman Gardner's testimony
on H.R. 13876, though agencies do not accept deposits, their credit
balance accounts serve many of the same functions as deposits and agencies
may perform many other commercial banking activities that are carried
on by branches of U.S. ban~s, such as the making of commercial loans,
that cannot be engaged in by
u.s.
banks at out-of-State offices.
Second,
while the McFadden Act test has been retained for federal branches and
agencies, it has been deleted for State branches and agencies.
Under
the aaendment, a foreign bank would be able to establish a State branch
or agency outside of its home State if a State bank in its home State
could establish such an office.
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Thus, if reciprocal branching legislation
123
were passed between two States, foreign banks could benefit from such
changes in State law.
Third, foreign banks would not be allowed to
acquire interests in commercial lending subsidiaries outside of their
home State unless the statute laws of the receiving State specifically
allowed a State bank in their home State to make such acquisition.
This parallels the interstate tests for agencies and commercial lending
companies in view of their similar powers.
16.
Page 13, line 20.
The Congress may wish to move the grandfathering
date for interstate operations up to the date of introduction in the
95th Congress, and may wish to make clear that if a foreign bank converts
a grandfathered office to another form of organization e.g., converts
a grandfathered branch to an agency, it would not lose its grandfather
rights.
17.
Page 13, strike lines 21 through 25, and page 14 strike lines
1 through 10 and insert in lieu thereof the following:
"(C) For the purposes of this section, the home
State of a foreign bank that has branches, agencies,
subsidiary commercial lending companies, or subsidiary banks, or any combination thereof, in more
than one State, is whichever of such States is
determined by election of the foreign bank, or,
in default of such election, by the Board."
Explanation:
If, as suggested supra, agencies and commercial
lending companies are treated the same as branches and subsidiary banks,
respectively, then a foreign bank should simply be allowed to choose
which State is to be its home State, regardless of the form of organization
that is maintained in any State.
93-031 0 - 77 - 9
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18.
i through
Page 15, strike lines 5 through 24, and page 16 strike lines
3 and insert in lieu thereof the following:
IRSU1WICB OP
•es:.
6.
(a)
DBPOSI'l'S
.Any branch of a foreign bank 111111t
becoae an insured bank under the Pederal Deposit
Insurance Act ·112 u.s.c. 1Bll-3lb) with respect
to its ac-atic deposits, aa defined by regulation
by the Board of Directors of the Federal Deposit
Insurance Corporation. upon ao beCC1111ing an insured
bank, a Pederal branch shall thereafter be treated
!l• if it were a national member bank, and any other
branch shall thereafter be treated aa if it were
a State member bank, for purposes of applying the
Federal Deposit Insurance Act to such branch's
daneatic activities • .Any branch which becomes an
insured bank shall Mintain with the Pederal Deposit
Insurance Corporation, or aa the Corporation•may
otherwise direct, a surety bond or a pledge of
assets in such amount and subject to such conditions
and rules as the Corporation may prescribe for the
purpose of providing sane additional protection
to the deposit insurance fund against the additional
riaka entailed in insuring the domestic deposits
of a foreign bank whose activities, assets, and
peraoMel are in large part outside the jurisdiction
of the united States. In prescribing such rules,
however, the Corporation shall, to the maximum
extent it considers appropriate, endeavor to avoid
imposing requirements on such branches that would
place them at an undue coapetitive disadvantage
via-a-via ac-atically incorporated banks with which
they coapet:a.
(b) Subsection (a) of this section shall take
effect 180 days after enactment hereof. Within
90 days after enactment and aa may be appropriate
thereafter, the Corporation shall submit to the
Congress its r-ndationa for -nding the Federal
Deposit Insurance Act ao aa to enable the Corporation
to implement the provisions of this section in a
manner fully consistent with the purposes of that
Act.•
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125
Explanations
'l'his aMndment would strike the existing section
6 of B.R. 7325 and replace it with the alternative suggested by ChairMn
Barnett of the PDIC in his letter of August 26, 1976, to Senator McIntyre
on B.R. 13876, except that this proposed amendllent would Mke insurance
mandatory for branches, whereas Chairman Barnett's prcposal would have
insurance be optional.
'l'he Board, as explained more fully on page 4
of the Statement, has consistently recommended that insurance be made
mandatory for reasons of both national treatment and protection of
u.s.
depositors.
19.
Page 16, line 10, insert the words •bank and• before •commercial
lending company•, and line 13 insert the word •bank• before •or•.
Explanation:
20.
See explanation for amendments numbered 22-30.
Page 16, line 10 insert the words •directly or indirectly•
after •controlled•.
Explanation:
The insertion of directly or indirectly would
make clear that a bank or commercial lending subsidiary would be subject
to monetary policy controls even if it was held indirectly by a group
of foreign banks through a dcnestic or foreign bank holding company.
See
similar changes in amendments numbered 23, 27 and 29.
21.
Page 16, line 15 change the semi-colon after •Act• to a period
and strike the remainder of the line and lines 16 through 25, except
for •The• on line 25.
Explanation:
The language struck permitted the Board to set
different reserve and interest rate requir-nts for bra~hes, agencies
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126
and New York Invest.nt Company subsidiaries of foreign banks.
While
such provision was apparently intended to allow the Board flexibility
in setting 1110netary policy requirements, its inclusion is inconsistent
with the principle of national treatment and should be omitted.
'l'hrough
its ability to graduate in the imposition of reserve requirements over
a period of time and to define and classify deposits and prescribe
rates, the Board would seem to have sufficient legal authority to deal
with any problems that might arise in imposing reserve requirements
on U.S. operations of foreign banks.
22.
Page 17, line 2, insert the word •banks" before •and commercial
lending companies•.
23.
Page 17, line 14, insert the words "bank or• before •commercial
lending company•, and line 15 insert the words •directly or indirectly"
before •controlled".
24.
Page 18, lines 7-8, strike •any commercial lending company•
and insert in lieu thereof •any bank or commercial lending company
subject to section 7(a) of the International Banking Act of 1977".
25.
Page 18, line 10, insert a period after "bank" and strike
the phrase beginning with "if such branch" and ending with •.11ct of 1977•
on line 13.
26.
Page 18, lines 14, 16 and 18, insert the word "bank• before
the word •or• in each line, and insert a comma after "branch• in line
14.
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127
27.
Page 19, line 1, insert •bank o~• before •~rcial lending
coapany•, and line 2 insert •directly or indirectly• before •controlled•.
28.
Page 19, line 11, insert the word •bank• at the beginning
of the line.
29.
Page 19, line 19, insert the words •bank or• before •commercial•,
and line 20 insert •directly or indirectly• before •controlled•.
30.
Page 20, line 9, insert. the word•, banks• before •or•.
Explanation:
Proposed amendments 22 through 30 would amend
section 7 of H.R. 7325 to subject U.S. bank subsidiaries of foreign
banks to the same monetary and regulatory controls to be applied to
branches, agencies and commercial lending company subsidiaries of foreign
banks.
As
pointed out by Vice Chairman Gardner in his testi1110ny on
H.R. 13876, and as discussed 1110re fully on pages 1 and 2 of the Statement,
exemption of foreign bank subsidiaries from 1110netary controls could
result in an anomalous situation whereby part of a foreign bank's operations
would be subject to 1110netary controls and another part would not--for
example, a foreign bank that maintains both a non-member subsidiary
bank and branches or agencies.
The amended section would only apply
to subsidiaries of those foreign banks that have worldwide consolidated
assets in excess of $1 billion.
31.
Page 21, line 16, insert the following new sections 7(f) and
7(g):
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128
•(f) Unless the Board determines that adequate
provision exists under the laws of the State in
which each agency or branch of a foreign bank is
established or operating pursuant to State law,
each· foreign bank shall hold in each State in which
it has a State branch or agency the same amount
and types of assets that would be required of a
federal branch or agency in that State pursuant
to section 4(g) (4) of the Internation Banking Act
of 1977.
(g) Bach bank organized under the laws of a foreign
country and with an office or doing business directly
or indirectly through a subsidiary in the United
States shall make to the Board such reports which
shall be in such form and shall contain such information as the Board may require to enable it
to carry out its responsibilities under this Act
and the Federal Reserve Act.•
Explanation:
It is recamoended in new section 7(f) that the
domestic asset requirements recamoended for federal branches and agencies
in proposed amendment number 13 (new section 4(g) (4)), and which has
already been adopted bY most States that license agencies or branches
of foreign banks (New York, California and Illinois) also be applied
equally to all State branches and agencies.
If State law contained
an adequate provision to protect domestic depositors and creditors,
section 7(f) would not apply.
'l'he new section 7(g) would expand the authority of the Board
to require reports of foreign banks without banking offices _but nevertheless doing business in the United States--such as through representative offices at which
made.
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u.s.
deposits and loans may be solicited but not
129
32.
Page 23, line 22, strike the words •Notwithstanding any exercise
of the authority•, and strike lines 23 through 25.
33.
Page 24, strike lines 1 through 16.
Explanation:
Amendments 32 and 33 would, as recommended by
the Board on pages 4-5 of the Stat-nt, amend Section 8 of R.R. 7325
by removing the limitations and restrictions imposed on the grandfathering
of securities affiliates of foreign banks.
Under the amended proposal,
securities affiliates would be permanently grandfa-thered if established
before December 3, 1974--the original date of introduction of the Board's
bill.
34.
Page 25, line 25 is amended by adding the following new section
(e):
"(e) Section 2(h) of the Bank Holding Company Act
of 1956 is amended by striking the proviso to that
section and inserting in lieu thereof the following:
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Federal Reserve Bank of St. Louis
'Provided, however, That the prohibitions
of Section 4 of this Act shall not apply
to shares of any company organized under
the laws of a foreign country (or to
shares of any subsidiary of such company
principally engaged in activities incidental
to the business of the parent) that is
principally engaged in business outside
the United States if such shares are held
or acquired by a bank holding company
organized under the laws of a foreign
country that is principally engaged in
the banking business outside the United
States, except that (1) such a company
(A) may engage in the business of underwriting,
selling or distributing securities in
130
the United States only to the extent that
a bank holding company may do so under
this Act and under regulations or orders
issued by the Board under this Act, and
(B) may engage in the United States in
any banking or financial operations or
types of activities permitted under section
4 (c) (8) or in any order or ·regulation
issued by the Board under such section
only with the Board's prior approval under
that section, and (2) no domestic office
or subsidiary of a bank holding company
or subsidiary thereof holding shares of
such .company may extend credit to a domestic
office or subsidiary of such company on
terms 1110re favorable than those afforded
similar borrowers in the United States.
For purposes of this subsection--(i) a
bank holding company may not in any case
be considered to be 'principally engaged
in the banking business outside the Uni.ted
States' if its principal banking subsidiary
is located in the United Statesi and (ii)
'domestic' means located in the United
States or organized under the laws of
the United States or any State thereof.••
Explanation:
The present section 2(h) of the Bank Holding
Company Act provides that the nonbanking prohibitions of the Act •shall
not apply to shares of any company organized under the laws of a foreign
country that does not do any business in the United States, if such
shares are held or acquired by a bank holding company that is principally
engaged in the banking business outside the United.States.•
Thus, under
the current section, a foreign nonbanking company held or acquired by
a foreign bank is only eligible for a statutory exemption fr0111 the Act's
nonbanking prohibitions if it does no business in the United States.
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131
'l'his amendment, first proposed by Vice Chairman Gardner in
his testimony on R.R. 13876 and endorsed again by the Board on pp. 57 of the Statement, would. amend section 2(h) of the Act to g.ive foreign
bank holding ccmpanies principally engaged in ba~king abroad a statutory
exemption under which they could retain and acquire interests in foreignchartered nonbanking companies that are principally engaged in business
outside the United States, even if they have
u.s.
operations.
This
would exempt both controlling and minority interests in such companies.
'l'hree important exceptions, however, are made to the exemption.
First, no company may qualify for the exemption if it conducts a
u.s.
securities business that would not be permissible for a domestic bank
holding company, this serves to prevent this exemption from being used
as a way to avoid Glass-Steagall prohibitions.
Secondly, no foreign
bank holding company may use this exemption as a means of evading the
requirements of S 4 (cl (8) of the Act..
For example, if a foreign bank
owns a foreign leasing company that company may only establish or retain
offices in the United States to conduct leasing operations in accordance
with the same limitations and procedures that apply to domestic bank
holding companies under S 4(c) (8) of the Act and the Board's Regulation
Y.
Thirdly, it is provided that no domestic office or subsidiary of
a foreign bank or subsidiary thereof may extend credit to a domestic
office or subsidiary of a foreign nonbanking company qualifying for
the exemption on terms more favorable than those afforded similar borrowers
in the United States.
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Federal Reserve Bank of St. Louis
'l'hi• condition is imposed so as not to give the
132
foreign bank or nonbank firms involved in advantage over their respective
u.s.
competitors.
In addition, appropriate governing definitions have been
proposed in the amendment.
Por example, in order for a foreign bank
holding company to be •principally engaged ·in the banking business
outside the United States• and thus eligible to use the exemption, it
is provided that its principal banking subsidiary cannot be located
in the United States.
This latter definition prevents large U.S. banking
organizations from ever being able to use the exemption.
'l'he general purpose of the proposed amendment is to make clear
that the Bank Holding Company Act and H.R. 7325 are not meant to apply
our ideas of banking to foreign bank operations that derive from and
have their primary effects in countries outside the U.S.
Since the
companies exempted must be principally engaged in business outside the
United States and since the foreign bank must be principally engaged
in the business outside the United States, it is not anticipated that
the amendment would have significant effects on the concentration of
domestic resources or give foreign banks or their nonbank affiliates
signifi~ant competitive advantages.
be consistent with the
u.s.
The proposed amendment would also
approach of encouraging foreign investment
in this country, lack of a statutory exemption may discourage major
foreign nonbanking companies from establishing facilities in the
because of a foreign bank shareholder.
u.s.
Finally, the proposed amendment
should lessen the possibility of any retaliatory measures being taken
abroad
against
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Federal Reserve Bank of St. Louis
u.s.
banks.
133
35.
Page 26, line 1 strike •GUIDELINES
roa•
and insert in lieu
thereof •sTA'l'EMBNT OF POLICY AND IN'l'ERAGENCY CONSULTATION ON•.
36.
Page 26, lines 2 and 3 strike •'!'he Secretary of the Treasury
in issuing guidelines under this section, and•, and capitalize •the•
on line 3, and strike the comma after •Act• on line 4.
37.
Page 26, strike lines 17 through 25.
38.
Page 27, strike lines 1 through 11, and redesignate subsections
•(d)• and •(e)•, lines 12 and 20, as subsections •(b)• and •(c)•.
39.
Page 28, lines 6 and 20, redesignate subsections •(fl" and
•191• as subsections •(di and "(e)".
Explanation:
Amendments 35-39 and 41 would, as reconnnended
by the Board on page 5 of the Statement, eliminate the detailed guidelines
provisions in section 9 of H.R. 7325.
40.
Page 31, line 16 insert the following new section:
•AMENDMENT TO THE BANKING ACT OF 1933
SEC. 12. Section 21 of the Banking Act of 1933
(12 u.s.c. 378) is amended by striking clause (B)
of paragraph (2) of subsection (a) thereof and inserting
in lieu thereof the following:
·
'(Bl shall be permitted by the United
States, any State, Territory, or District
to engage in such business and shall be
subjected by the laws of the United States,
or such State, Territory or District to
examination and regulation.••
Explanation:
'!'his amendment recognizes that a foreign bank
may·lawfully engage in a deposit-taking business in the United States
through the establishment of a federal branch under section 4 of B.R. 7325,
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Federal Reserve Bank of St. Louis
134
'l'he current provisions of the Banking Act of 1933 do not cover such
a possibility and accordingly an amendment is needed in order to avoid
any possible conflict between the federal branch provisions of H.R.
7325 and Section 21 of the Banking Act of· 1933 which provides criminal
penalties for any violation of its provision••
41.
Page_ 31, line 18 ·redesignate "SEC. 12.• as "SEC. 13.•, and
strike the canma after "Comptroller• and inse.rt in lieu thereof the
word •and" and strike•, and the Secretary of the Treasury• continuing
on line 19.
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Federal Reserve Bank of St. Louis
135
BXHIBI'l'
•c•
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, 0. C. 205!11
STEPHEN S. GARDNER
VICE CHAIRMAN
June 2, 1977
Dr. Wolfgang Jahn
Managing Director
CollDilerzbank A.G.
25 Breite Strasse
4000 Dusseldorf 1, Germany
Dear Dr. Jahn:
During my talk at the recent convention of the
Bankers' Association for Foreign Trade, time did not
permit an answer to one of the questions you put to me.
I have been anxious to correct that omission as the
question you raised is an important one and deserves a
serious response.
To generally restate your question: Is there
truly a need for the Federal Reserve to control foreign
banks for domestic monetary policy purposes and because
of their role as conduits for flows of funds to and from
the United States?
It is important in approaching this question to
keep two things in mind: first, the character of the
foreign banks operating in this country and the nature of
their business; second, the tools employed by the Federal
Reserve in the conduct of monetary policy. On the first
of these points, there must surely be agreement that the
foreign banks coming to this country are, for the most
part, very large institutions of multinational repute and
clearly key institutions in their home countries; that
their business in this country is intended to be largely
of a wholesale nature including loans to multinational
corporations; that their location here is also motivated
by a desire to obtain a U.S. dollar base for their multinational operations as well as to assist in clearing and
foreign exchange operations; and that the inevitable
effect is for them to have a significant role in U.S.
money and credit markets in competition with the large
money center banks.
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Federal Reserve Bank of St. Louis
136
Dr. WolfgqJahn
Page Two
With regard to the second of these points,
reserve requirements have been employed as one of the
principal tools of monetary policy in the United States
in conjunction with open market operations. The utility
of reserve requirements rests in their function as a
fulcrum on which the lever of open market operations can
work to affect the cash position of member banks and,
hence, their ability to extend credit and create monetary
liabilities. The ability to alter the level of reserve
requirements provides a means for changing the leverage
of those operations.
Currently, about two-fifths of the commercial
banks in the United States are member banks and these
banks account for about three-fourths of the deposits in
all insured banks. A substantial proportion of commercial
bank liabilities is thus directly subject to reserve requirements. However, the proportion of banks that are
member banks and the proportion of deposits that is lodged
in member banks have been declining in recent years. The
Federal Reserve has consequently become seriously concerned
about the impact of this membership erosion on its ability
to conduct monetary policy efficiently. One expression of
this concern has been to seek legislative authority for
the extension of reserve requirements to all commercial
banks.
Viewed against this background, the foreign banks
form another set of banking institutions in the United
States that is growing very rapidly and whose liabilities
are not subject to reserve requirements. Moreover, this
set of institutions is conducting a banking business in
essentially the same ways as the large domestic banks
that are members of the Federal Reserve System. The
following comparisons of selective activities of the
foreign banks here with those of the 175 large member
banks that report weekly to the Federal Reserve are
revealing.
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137
Dr. Wolfgang Jahn
Page Three
Large
member
banks
Foreign
banks
Share of
foreign banks
(per cent)
Total assets
469
76
16
Commercial and industrial loans
104
20
19
Domestic inter-bank
loans (mainly
Federal funds)
20
8
40
Total deposits and
credit balances
352
36
10
Note:
Data are as of the end of 1976 and are in billions
of dollars. These comparisons are approximate
since the data are not exactly comparable
--e.g., figures for total assets and deposits
of foreign banks include $ 7 bill ion of intracompany business, where these are largely but
not entirely netted out in the case of large
member banks.
The importance of foreign banks' operations in U.S.
money and credit markets is clearly indicated in these comparisons. They also illustrate, though in a somewhat rough
fashion, the competitive niches that the foreign banks have
carved out in a fairly short period of time. It is therefore not surprising that the foreign banks can no longer be
ignored by the central bank and that their operations, too,
are a matter of concern to the central bank because of
their implications for the conduct of monetary and credit
policy.
The point is not that the Federal Reserve is incapable
of conducting monetary policy because of the operations of
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Federal Reserve Bank of St. Louis
138
Dr. Wolfgang Jahn
Page Four
these institutions outside the pale of reserve requirements.
Nor is the point that reserve requirements per se are
essential to the conduct of monetary policy. The point is
rather that reserve requirements are highly useful because
they enhance the predictability of how central bank operations on the banks' reserve base will affect changes in
money and credit aggregates. Thus, it is highly desirable
that the base of required reserves be large enough to
minimize slippages in that translation process. Hence,
it is very important to include in the reserve base the
major money-center banks and a group of institutions
having comparable characteristics and behavior patterns
such as the major foreign banks operating in the U. S.
The importance of the foreign banks here as conduits of international flows of funds has already been
recognized by the Federal Reserve and accepted by the
foreign banks. As you will recall, in 1973 Chairman Burns
called upon the foreign banks here to conform voluntarily
to the system of marginal reserve requirements then imposed on net inflows of foreign funds to member banks.
The Federal Reserve has been greatly heartened by the full
cooperation of the foreign bank community with Chairman
Burns' request. That cooperation· has connoted recognition
of the potential of foreign banks for significant international flows of funds and the potential disruptiveness
of the kind of two-tiered market that would result from
different institutions being subject to substantially
different rules.
In my view, it cannot be stressed too often that
the United States is unique among the major countries in
that it is the only one in which the foreign banks are not
subject to the monetary policy rules of the central bank.
In your own country, for example, it is my understanding
that the reserve requirements imposed by the Bundesbank
apply equally to German banks and to foreign banks. I
find it difficult to imagine that the major German banks,
such as yours, would not object to such reserve requirements if a large and growing foreign banking sector were
exempted.
The essence of the argunent for subjecting foreign
banking operations to the rules of the central bank may be
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Federal Reserve Bank of St. Louis
139
Dr. Wolfgang Jahn
Page Five
summarized as follows: The foreign banks in the United
States have the same characteristics as the large domestic
money-center banks and are in direct competition with
them. The large domestic money-center banks are key
elements in the functioning of money and credit markets
in the United States and, consequently, are key institutions for the effective workings of monetary policy. The
large domestic money-center banks are all members of the
Federal Reserve System and subject to reserve requirements
and other monetary policy rules. For reasons of equity
among comparable institutions and for reasons of minimizing
slippages in the effectiveness of monetary policy, foreign
banks should be subject to the same requirements as the
large domestic banks.
I hope that you find this responsive to your
question. As I told you, I am sending a copy of this
letter to the Bankers' Association for Foreign Trade for
inclusion in the record of the meeting so that it will
be available to all.
You will have noted that the International Banking
Act has been reintroduced into Congress and that the
Federal Reserve has commented on the bill, including suggestions for a number of changes. The debate on the merits
of the various proposals in the bill may now take place at
the legislative level. The Federal Reserve supports the
proposal with amendments and has urged the Congress to
enact it this year.
93-031 0 - 77 • 10
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Federal Reserve Bank of St. Louis
Sincerely,
140
BXBIBIT
•o•
PROPOSBD ALTBRNATIVB 'l'0 SBCTION 5(a) OP
B.R. 7325--IMPOSING BDGB ACT
LIMITATIONS ON
PIJ'l'URB
OOT-OP-STATB AGENCIES*
July 12, 1977
*Note: '!'his proposed alternative is submitted in lieu of amendment
nwaber 15 in the staff docU11ent entitled ■proposed Amendments to
B.R. 7325, 'l'he International Banking Act of 1977,• that is Exhibit •a•
in this CcmpendiU11.
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141
1,
Page 12, strike lines 22 through 25 and page 13 strike
lines 1 through 13 and insert in lieu thereof the following:
•SEC, 5. (a) Except as provided by subsection
(b), (1) no foreign bank may directly or indirectly
operate a Federal branch or agency outside its home
State unless the State is one in which it could
operate a branch or agency if it were a national
bank located in its home State, (2) no foreign bank
may directly or indirectly operate a State branch
outside its home State unless (A) the statute laws
of· the State in which such branch is to be located
specifically authorize a State bank organized under
the laws of such foreign bank's home State to establish
or operate such branch, by language to that effect
and not merely by implication, and (Bl the State
branch is approved by the bank regulatory authority
of the State in which such branch is to be located1
(3) no foreign bank may operate a State agency
outside its home State unless (A) the State agency
is approved by the bank regulatory authority of
the State in which such agency is to be located,
and (Bl the State agency limits its activities to
those permissible for a Corporation organized under
section 25(a) of the Federal Reserve Act1 (4) no
foreign bank or company of which it is a subsidiary
may directly or indirectly acquire any voting shares
of, interest in or substantially all of the assets
of a conmercial lending company located outside
of its home State unless (A) the acquisition is
approved by the bank regulatory authority of the
State in which such commercial lending company is
to be located and (B) the commercial lending company
limits its activities to those permissible for a
Corporation organized under section 25(a) of the
Federal Reserve Act1 and (51 no foreign bank may
directly or indirectly acquire any voting shares
of, interest in or substantially all of the assets
of a bank located outside of its home State unless
such acquisition would be permissible under section
3 of the Bank Bolding Company Act of 1956 if the
foreign bank were a bank holding company the operations
of whose banking subsidiaries were principally conducted
in the foreign bank's home State.•
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142
Explanation:
This recommended amendment to section S(a) of
B.R. 7325 makes two substantive changes, as well as certain technical
changes.
Pirst, it would permit agencies and commercial lending company
subsidiaries of foreign banks to be established in.the future outside
of a foreign bank's home State, so long as these offices restricted
their operations to those international banking activities permissible
for Bdge Act Corporations.
A chart comparing the powers of Edge Act
Corporations to those of agencies and branches of foreign banks is attached.
Second, while the McFadden Act test has been retained for federal branches
and agencies, it has been deleted for State branches.
Under the amendment,
a foreign bank would be able to establish a State branch outside of
its home State if a State bank in its home State could establish such
an office.
Thus, if reciprocal branching legislation were passed between
two States, foreign banks could benefit from such change in State laws.
2.
Page 13, strike the period in line 20 and add the following
new phrase:
"and may continue to engage in all activities permissible to any such offices or subsidiaries under
State law.•
Explanation:
This amendment would make clear that grandfathered
agencies and co,mercial lending company subsidiaries of foreign banks
would be permitted to engage in all activities permissible under State
law and would thus not be affected by the Edge Act limitations to be
applied on future agencies and commercial lending companies under the
first amendment.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Powers and Restrictions
on U.S. Activities
Engage in international banking
transactions--acceptance and
other credit facilities, commercial letters of credit,
foreign collections, foreign
exchange dealing, remittance of
funds, etc.
•Agencies of Foreign
Banks
Yes
Stanches of Foreign
Yes
Engage in domestic lending
transactions--C&I loans,
federal funds market, consumer
lending.
Deposit-taking ability.
Yes, except for consumer lending. Generally able to make
domestic C&I loans and participate in federal funds market:
generally unable to engage in
consumer lending.
No, but can accept credit
bala~s incidental to
either international or
domestic business. carinot
issue certificates o-f-deposits in _!& event.
No FDIC insurance.
Yes, restrictions may apply to
consumer lending.
Yes, not limited to internationally related, can
issue domestic certificates
of deposit. No Fnrr.
insurance.
No. Prohibited from engaging
in any domestic lending transaction; can engage in federal
funds transactions only as
necessary to adjust reserve
balance, and not as medium
of investment.
Yes,~ only those incidental to international
transactions. Can accept
time deposits for foreign
accounts,~ if proceeds
not to be used to pay
expenses in the u.s. No
FDIC insurance ..
Banks•
Bdge Act Corporations
Yes
'"The precise powers of agencies of foreign banks vary somewhat by state
law. This chart uses the powers extended agencies of foreign banks
in New York as a model.
144
Mr. ST GERMAIN. Thank you, Governor Gardner, for a very
excellent statement. We will certainly give serious consideration to
the amendments that you have proposed.
Governor Gardner, in the last go-around there were many members who were apprehensive about, and I put this in quotes, "retaliation." Now this subcommittee did, in fact, visit the central banks
of Europe 2 years ago, and at the time we were told it was the first
time that a committee of Congress had taken this step. The primary
reason was to discuss the legislation that is before us today.
We did, in fact, find at no point, any indication that there would
be any retaliation. It was a good exchange between the members of
the subcommittee and the major central banks of Europe.
Now the Fed is in constant contact with these same central banks
that are also in contact with many of the foreign banks. I might say
in concluding that all of this red herring about retaliation comes
not from the regulatory agencies in those foreign nations but rather
from individual banks who have made these statements and given
this impression to some of the members.
Governor GARDNER. I think you are safe, Mr. Chairman, and I
agree with your view. The currents that are runnning, it seems to
me, among American banks, are the concerns of those who have
very substantial investment abroad, that is certainly proper. They
don't want to see retaliation and they are fearful of it. I think the
largest number of banks engaged in foreign trade think the bill is
desirable and don't believe that the possibility of retaliation
outweighs that desirability.
As for the regulatory and central banking agencies abroad, they
are ve~ reasonable people. In our judgment they understand that
we don t have a banking law governing foreign banks in the United
States, and that seems curious to them. It has always seemed
curious to foreign banks coming to this country that they had no
place in the Federal Government to even consult, because as you
know, they are chartered solely by States.
I think foreign bankers, those who have not come here in full
force, are probably a little apprehensive about a law being passed,
but I also believe that among the foreign bankers you will findand this subcommittee can check as the hearings proceed-you will
find some sentiment for a bill which provides certainty, which is
finally enacted by the Congress. Because every year we delay, I
believe we are likely to have more issues presented to this subcommittee and to the Congress, and there is a great possibility that a
future bill could be more restrictive, less outgoing, less based on
national treatment.
Mr. ST GERMAIN. Governor Gardner, in your proposed amendment with respect to the securities activities of these foreign banks,
you suggest the Board be given the discretionary review of these
activities under nonbanking standards of the Bank Holding Company Act to assure no abuses arise.
Two questions: First, is this a proposal for explicit review powers
or is it related to the general review of nonbanking activities which
is currently required under the Bank Holding Company Act?
Governor GARDNER. I think it's the latter, Mr. Chairman.
Mr. ST GERMAIN. Second, as you know, the Board admitted, I
believe during the FINE Study hearings or at some point, Chairman
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Burns admitted that the Board's review and oversight of
nonbanking activities and the Bank Holding Company Act left a
little bit to be desired. This was about a year or year and a half ago.
Keeping that in mind don't you feel that perhaps these examinations of the securities activities of foreign banks, if they are, in fact,
grandfathered, should be conducted in conjunction with the agency
of Government specifically designated to do this, to wit, the SEC?
Governor GARDNER. That is a new thought. I don't see anything
wrong with it on first appraisal, because certainly the Securities
and Exchange Commission does regulate directly the activities of
these affiliates. I think it's a partnership form of regulation when it
affects banks, and I see no problem with that.
Mr. 8'r GERMAIN. Would you, therefore, speak to your colleagues
at the Board about incorporating that in the amendment?
Governor GARDNER. I will, indeed.
Mr. Chairman, when the Bank Holding Company Act was passed
in 1956 and amended in 1970 there was a good deal of
grandfathering of prohibited activities, and the Board has in that
act the power, should some abberation occur, some economic problem arise, the Board has the power to review those permanently
grandfathered activities.
I inquired yesterday and in a fragmentary answer, without complete research, we have never had to initiate any action under that
act to require termination of grandfathered activities. There may be
such cases. I will research it further.
What I am getting at is that we adopted .a permanent
grandfathering system in our own country when we specifically
grandfathered otherwise prohibited activities in the Bank Holding
Company Act.
Mr. ST GERMAIN. Thank you, Governor Gardner.
Mr. Annunzio?
Mr. ANNUNZIO. Thank you, Mr. Chairman. I join you in welcoming Governor Gardner to the subcommittee this morning, and for
your very excellent statement.
Governor, you stated that H.R. 7325 is necessary to provide
equitable treatment between foreign owned and domestic banks. Is
it not true that our domestic bank holding companies, through their
many bank and nonbank subsidiaries and other facilities, conduct
far more extensive interstate banking activities than do the foreignowned banks which have established branches?
Governor GARDNER. That is a judgmental question, Congressman
Annunzio. I think the interstate foreign bank activities are more
directly banking activities.
We permit loan production offices, and we permit representative
offices that can't create actual transactions, but foreign banks, as I
indicated in my statement, can have full service commercial banks
in any of the 50 States that will permit entry. So I would have to
say they have the power to do more. Our banks do operate nationally, they can have Edge Act corporations on either coast, but those
corporations are restricted to international banking, and cannot
engage in domestic banking.
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Our banks do conduct various kinds of businesses throughout the
United States, but not from full service banking offices, which the
foreign banks can do.
[See also Governor Gardner's supplemental reply on page 204 to the
question raised above by Congressman Annunzio.]
Mr. ANNUNZIO. Governor, of the 25 foreign bank branches located
in Chicago's Loop, only 3 branches have ground floor locations and
compete for local retail deposits. Of the three foreign banks with
branches in New York, only three Puerto Rican banks are actively
competing for retail deposits. With such distinction, why do you feel
foreign banks abuse their branching privileges?
Governor GARDNER. I am not sure I would say they are abusing or
taking advantage of their branching privileges. It is true, Congressman Annunzio, that on the east coast you find far less participation
in domestic consumer business than you do on the west coast, but
on the west coast the foreign banks, a number of them, are doing a
regular consumer business. Recently, as you know, it was announced that the Sumitomo Bank had acquired 19 branches of the
Bank of California out of the 27 they offered for sale, and you will
find an incipient growing consumer banking activity on the west
coast among foreign banks with American consumers, not necessarily related to international trade. Those powers exist and they could
be further developed.
Mr. ANNUNZIO. You talk about the west coast and their consumer
activities; what do you find in the Midwest, Chicago, for the record?
Governor GARDNER. I find Chicago is a gateway city. The last time
I was there they told me they were 17th in GNP in the world and I
find all kinds of international banking activities going on there. But
Chicago is a unit banking State. The pressures are less and the
foreign banks are there for their international banking activities.
Mr. ANNUNZIO. But in Chicago, my information, if it's correct, is
these foreign banks, the great bulk of their business is commercial
and they are not doing the domestic business.
Is that true?
Governor GARDNER. That is true. You say the great bulk of their
business is commercial?
Mr. Annunzio, that is indeed my belief as well. It's also true, I
think, that the securities affiliates of some of the foreign banks are
active participants in the Midwest Stock Exchange.
Mr. ANNUNZIO. Can you explain if any of our national objections
have been impeded by State or city of foreign banking activity?
Governor GARDNER. You ask me a very sensitive question. New
York has a reciprocity law and in that reciprocity law the State
Legislature of New York decided a long time ago that if New York
banks can't accept deeosits in a country abroad, the foreign banks
from that country can t continue branch banking operations in New
York. That is part of the law of New York State.
Let me just say this: I don't think the United States should have
international reciprocity banking policies in 50 different State capitals. It doesn't really make much sense. I don't object to New
York's law, but I point it out as something unusual.
Mr. ANNUNZIO. I have one more question, Governor.
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A central State like Illinois will never be able to maintain its
foreign bank branches if the multi-State prohibitions on branching
contained in this bill become law. Is it not in our national interest
to continue to promote other areas, New Vork and California, as
international banking centers?
Governor GARDNER. It is, indeed, and that is the reason I proposed this morning that agencies of foreign banks be allowed to
conduct a banking business in any city that they so choose, provided
their powers are similar to those of our Edge Act corporations
which are limited to international business and domestic business
that is directly related to that international business.
If we conform the powers of new agencies to those of Edge Act
corporations, and if we grandfather the present agencies, then an
infinite number of foreign banks could open agencies in Chicago and
conduct international banking there, and such domestic business as
is strictly related to that international banking.
Mr. ANNUNZIO. As a follow-up, then how would the dual banking
system be protected by the passage of the provision of section 7 of
the bill which would give the Federal Reserve a veto power over
States in determining whether foreign banking institutions could be
organized under State law?
Governor GARDNER. I must confess that that was placed in your
bill last year when we responded to a simple question, and the
question that was addressed to the Federal Reserve was-what are
the regulatory powers that are related directly to Federal Reserve
controls over State banks and, how do we conform our banking law
directly with our domestic law? I think that provision, which is
specifically paragraph 7(e), is unnecessary. If the foreign banks are
not to be members of the Federal Reserve System, I see no reason
that the Federal Reserve should have to pass on a State chartering
of a foreign institution, and I would have no difficulty if that
provision were eliminated-I don't know why you are smiling-but
I just caught up with that provision yesterday.
Mr. ANNUNZIO. My time has expired.
Thank you.
Mr. ST GERMAIN. Thank you, Mr. Annunzio.
I would like to state to the best of my knowledge, there are no
foreign banks functioning in Rhode Island, and yet I still feel that
there is a need for this legislation.
Mr. Rousselot?
Mr. RoussELOT. Thank you, Mr. Chairman.
Mr. Gardner, it is nice to see you again.
Mr. Gardner, on page 7 of your statement that we have before us
you have stated that the Federal Reserve supports the extension of
compulsory FDIC insurance on deposits in branches of foreign
banks. My question is: Are you satisfied that a system has been or
can be devised to ensure that it will be only the domestic deposits of
the foreign branch that will be insured, and not the foreign bank
itself!
Governor GARDNER. My answer, Congressman Rousselot, is that I
think the recent proposal of the FDIC, the one they submitted to
the Senate after this bill had passed the House, is adequate. I am
glad you asked me that question too, because I want to clear up a
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matter about the FDIC insurance that really hasn't come to everyone's attention.
We are talking about FDIC insurance for branches of foreign
banks that have full service, U.S. facilities.
Now, subsidiaries of foreign banks are largely already insured in
the United States, and agencies of foreign banks not holding deposits would not be insured. Agencies have credit balances and all we
are really saying is that branches of foreign banks that operate just
as our banks operate in the United States would be required to
have Federal deposit insurance, something the United States is a
world leader in. You may remember the difficulty several years ago
when a German private bank, uninsured, failed, and now Germany
has a deposit insurance scheme.
Almost all U.S. full-service commercial banks are insured. You
will hear that the insurance is optional, but that statement should
be inspected very carefully by the subcommittee. According to my
figures, there are only about 295 banks in the United States that
are not insured, and I am persuaded that almost half of those are
not really commercial banks at all, but industrial loan companies in
the Far West.
Mr. RoussELOT. Do I understand your answer then to mean that
the FDIC will not be insuring the entire foreign bank but will only
be insuring the deposits of the branch?
Governor GARDNER. That is what I think the FDIC proposal
covers. If I am wrong-Mr. RoussELOT. That is your understanding of it?
Governor GARDNER. Yes, sir. I will come back to the subcommittee if I am wrong.
Mr. RoussELOT. I yield to the chairman of the subcommittee.
Mr. ST GERMAIN. I thank the gentleman for yielding, but the real
problem here is that you have a subsidiary of a foreign bank here in
the United States.
Governor GARDNER Yes, sir.
Mr. ST GERMAIN. There is no control, the FDIC cannot look at the
operations of that foreign bank in its parent country. If the parent
fails and the FDIC has no control whatsoever over what is happening at the parent bank, and the subsidiary fails as a result not
because of what happened in the subsidiary but what happened in a
foreign bank in a foreign land, nevertheless the fund is going to be
charged for this loss. That is the phase of it that many of us find
very difficult to accept.
Governor GARDNER. We need to clarify this so my statement has
some integrity. I think you will find the subsidiaries of foreign
banks chartered in this country are now generally insured by the
FDIC because they are units, they are banks. They are insured, and
the FDIC, and also the Federal Reserve, in the case of member
banks, require that adequate capital be maintained here to support
such subsidiary banks. So I think we have that protection already
for subsidiaries of foreign banks.
What I am proposing and what the Federal Reserve Board thinks
is the appropriate position is that branches also be insured, and the
FDIC would have some backup to its protection through the deposit
of funds or securities in some form to act as local capital in support
of the branch's operations.
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The issue last year was how do you protect the Federal deposit
insurance fund if they are going to insure branches of foreign
banks, and I think the answer has been worked out by the FDIC.
Again, I will say that agencies, which are the most numerous of the
foreign banking offices, don't take deposits, since they would not be
covered. They have credit balances, but they are commercial balances related to international trade and they would not be covered
by FDIC insurance.
Mr. RoussELOT. So your understanding is the FDIC exposure
would only be in this country, period.
Governor GARDNER. That is my understanding.
Mr. RoussELOT. You keep mentioning what the FDIC worked out
with the Senate. What do you mean by that?
Governor GARDNER. They submitted a statement which was characterized as a plan that could be used to insure deposits in foreign
branches, and they recommended at that time that the plan could
be optional. But if required or if foreign banks applied, they could
have Federal deposit insurance for branches. That was a new
development after your hearings last year.
Mr. RoussELOT. Did the FDIC submit legislative language or just
a working agreement?
Governor GARDNER. I think they submitted the language. I will
ask my associates.
They submitted the language last year. I am told we expect them
also to make a similar recommendation this year. However, mandatory insurance would be limited to subsidiaries. I would extend it to
branches as well as subsidiaries.
Mr. RoussELOT. Then you would go further than what the FDIC
recommended to the Senate?
Governor GARDNER. Yes, I would, without exception, because
Federal deposit insurance in this country has a great advantage. It
is really a way that our Federal regulatory authorities can prevent
bank failures, can continue a bank through merger rather than face
liquidation, and can assure that there is no economic upheaval in a
city or town or region. That is the great virtue of Federal deposit
insurance, the ability of the Federal Deposit Insurance Corporation
to go in, to buy and liquidate bad assets and sell the good assets to a
continuing bank.
Mr. RoussELOT. Then we can assume the FDIC will submit
similar recommendations here, I guess.
On page 2, Governor Gardner, you note and I now quote from
your statement:
More than half of these foreign banks operate across State lines, an advantage
denied to the domestic banks.
AB you know, in the last Congress the FINE Study considered a
proposal to liberalize restrictions on interstate branching of domestic banks, but it was not embodied in the legislation which the
committee later considered.
Would you prefer to liberalize interstate branching restrictions on
domestic banks rather than to tighten restrictions on foreign banks?
Governor GARDNER. My position, Congressman Rousselot, is very
simple. I think we should at the moment apply our domestic laws to
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foreign banks in the hope that, in the wisdom of Congress, the
eventual resolution of interstate banking will be done in this
committee room, in this Congress, and any such activity would then
be appropriately applied to both foreign and domestic banks. So I
have to say I want to conform foreign banks to our present law and
I would look forward to the day when the Congress would review
the interstate banking restrictions that exist in this country.
Mr. RoussELOT. But not at this time.
Governor GARDNER. I would not hold up foreign banks until then,
because I think that is a trap. That will create-Mr. RoussELOT. A trap?
Governor GARDNER [continuing]. A trap in the sense that the
foreign banks have grown from 100 offices to 200 offices in 5 years,
and that 5 years from now they may have 1,000 offices. I think it
will just enormously complicate your work.
Mr. RoussELOT. Thank you, Mr. Chairman.
Mr. ST GERMAIN. Governor Gardner, one point: As far as FDIC is
concerned, does the Fed have any information as to the burden
placed on the liabilities of the fund as a result of the activities of
our domestic multinational banks abroad?
The big question is: Are deposits in our multinational banks,
foreign deposits in foreign branches, are they covered by FDIC, and
what is the exposure there? Is that exposure a problem to our fund,
because, as you know, in many countries your regulatory authorities cannot examine the branches of our multinational banks in
those countries, but must restrict themselves to going to the home
office here, and hopefully finding the information they· need.
Governor GARDNER. Mr. Chairman, I believe that our overseas
branches of American banks are not covered by Federal deposit
insurance. I believe that issue has been considered and studied at
the Corporation. I would be remiss if I tried to comment on their
attitude, but I think it also makes pretty good sense, because the
central banking authorities in various countries are looking at their
form of internal deposit insurance, and it's my belief that in the
United Kingdom they are considering deposit insurance that would
apply to the domestic offices in the United Kingdom of U.S. banks.
The impact of bank failure is, of course, twofold: One, it always
has the possibility of affecting international economies, if the bank
involved is international in scope, and second, it also has its first
and primary effect on the economy where the bank is domiciled.
Mr. ST GERMAIN. An example was -Franklin National, a good
example.
Governor GARDNER. I think we should insure the deposits of
Americans in foreign banks here, and I think similar protection
systems will grow in the rest of the world.
Mr. ST GERMAIN. Thank you.
Mr. Derrick?
Mr. DERRICK. Thank you, Mr. Chairman.
Governor, the question that I have to you was kind of pre-empted
by Mr. Rousselot and the chairman, but let me follow along.
I may be just a little repetitious.
In your statement, when I was first listening, on the insurance by
FDIC, it sounded like something that was very worthwhile. How
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ever, I don't understand. It would seem to me that if we offer this
protection here in this country and there are failures that have
nothing to do with this country but rather with the mother country
of the bank, I don't see what recourse the FDIC could possibly have
in a situation like this against the assets of the bank.
Governor GARDNER. You don't see what recourse?
Mr. DERRICK. That's right; I don't see what recourse.
Governor GARDNER. I am on unsteady ground here because I
haven't studied their plan in great detail, but they propol!le a pledge
of assets in the United States.
Mr. DERRICK. My next question is going to be: Why do we want to
do it anyway?
Governor GARDNER. I think there are ways, Congressman Derrick, to protect the FDIC fund, and I would not be proposing it if I
didn't believe that.
Mr. DERRICK. I understand. The banking operations are increasing, multiplying substantially every year, and although it's a minor
part of our banking now, in the next few years it could become a
substantial part, and I think if there is no recourse and we start
insuring, it could possibly affect the very stability of our banking
system through the FDIC.
Governor GARDNER. I would not have one bit of doubt, without
some protection.
Mr. DERRICK. If there is no recourse, you know. That is what it is
all built around.
Governor GARDNER. I think there not only would be recourse in
the sense that I think you are using it, but I think the FDIC would
require the insured banks to-Mr. DERRICK. How would they do that?
Governor GARDNER [continuing]. To maintain assets in this
country.
Mr. DERRICK. Sufficient to deposits?
Governor GARDNER. Sufficient to give them the normal capital
protection they would have in a domestic bank.
Mr. DERRICK. My next question is: Why do we want to encourage
domestic deposits in foreign banks to begin with?
Governor GARDNER. We have a national treatment policy. We
have foreign banking subsidiaries that have operated here for many
years, and some that have come recently. We have branches of
foreign banks and, insofar as they deal with American businesses
and American consumers, which they do, I think deposit insurance
is entirely appropriate.
Mr. DERRICK. I think maybe you misunderstood my question.
Maybe I didn't articulate it properly. Why do we want to encourage
the domestic deposits to begin with? I mean the insurance by the
FDIC would seem to me to be a move in that direction of encouraging domestic deposits in foreign banks. Why do we want to do that
to begin with, or what do we possibly have to gain from it?
Governor GARDNER. I can only say that-Mr. DERRICK. We certainly have adequate banking facifities here
in this country.
Governor GARDNER. We have a lot of domestic banks that are
owned in part by foreigners. The only thing-
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Mr. DERRICK. Let them clip their coupons. That is fine.
Governor GARDNER. The only thing we are talking about here are
offices established, primarily owned by major foreign banks.
Mr. DERRICK. I don't have any foreign banks in my home State,
but if I did why should I put one there next to one of my domestic
banks and give them the same advantage? What could we possibly
gain from it?
Governor GARDNER. It seems to me we gain something because we
do not have a big population of foreign banks in this country. You
have heard Congressman Annunzio, the Governor of Oregon has
also just written to your chairman, and I have a copy of that letter,
and I think you will hear testimony from other States who want to
encourage the foreign trade that comes out of their States and their
industries, and one way they believe that they can do that is to
attract foreign banks to their cities, and I think our amendment to
permit international agencies would take care of their concerns.
That will inevitably bring up the question of deposits in those
foreign banks, because that is what a bank is, a depository.
Mr. DERRICK. Governor, if I may, what is your opinion of the
advantage?
Governor GARDNER. I think it's all procompetitive. I think it's
procompetitive to have foreign banks operating in this country, and
to have our banks operating abroad.
Mr. DERRICK. So you think it's desirable to nave the competitive
situation for domestic deposits?
Governor GARDNER. Yes, in this interdependent world, I think it
is desirable.
Mr. DERRICK. What will we gain from that situation?
Governor GARDNER. The world has become smaller in trade and
commerce, and finance is a very key part of trade and commerce in
our economies, and the large presence of the United States in the
international payments mechanism and international trade is supported by the multinational financial system that has grown up in
the last few years in the world.
Mr. DERRICK. I thank you, Governor.
Governor GARDNER. Yes, sir.
Mr. 8'r GERMAIN. Thank you, Mr. Derrick.
Mr. Cavanaugh?
Mr. CAVANAUGH. Thank you, Mr. Chairman.
I would like to welcome the Governor and commend him for his
quite enlightening statement.
Governor, I would have a question on page 8, the last paragraph.
There you indicate, I would guess, desire to remove section 9 from
the bill. Is that recommendation based upon objections to the
substance of section 9 or simply, as your statement would indicate,
that you feel section 9 superfluous to powers already existent?
That is, does section 9 create powers that otherwise would not
exist or be enforced by the Fed, the Comptroller or the State
regulatory agencies?
Governor GARDNER. I think it's superfluous if we are talking
about the entry provisions. I think it's superfluous because we
charter banks very carefully in this country, and have since the
early 1930's or the late 1920's, and we have very careful procedures
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to appraise, to evaluate charters, and branching and other matters,
and they are all being administered very strictly for our own
domestic banks. So I think we do not need detailed guidelines, as I
have indicated.
I happen to think it would be a good idea if the Federal chartering authorities simply informed State and Treasury. There could be
a foreign policy issue that might occur.
For example, we have some unfriendly countries in the world. We
have other countries that have from time to time required that all
our banks in their jurisdictions be nationalized. But really, the U.S.
posture in reciprocal trade agreements and similar matters has
been most outgoing. Perhaps as outgoing as it properly should be, so
I don't see a need for a special set of guidelines.
I think the guidelines inherent in the chartering authority of the
Comptroller of the Currency and in the State regulatory agencies
are sufficient. So I would say it's superfluous in my judgment.
Mr. CAVANAUGH. Superfluous as opposed to objectionable? That
is, the Fed does not object to any proposals or content?
Governor GARDNER. It's possibly objectionable, and it may raise
questions-Mr. CAVANAUGH. Excuse me, that was my question. My reading
of your statement would have left me with the feeling that it was
superfluous. If it is objectionable, then I would solicit you to address
yourself to those objectionable portions of section 9.
Governor GARDNER. I had an opportunity this morning as I came
up here to read the State Department's testimony, and I gather
they will raise questions on our treaties of friendship, commerce
and navigation, and the fact this appears to be a special provision
applied solely to foreign banks, which isn't really national treatment under those treaties. Their testimony will express some concerns about section 9. The objectionable feature that I find is that I
think the International Banking Act is long overdue. If this is
superfluous and possibly divisive in the process, I would remove
section 9.
Mr. CAVANAUGH. I yield to my chairman.
Mr. ST GERMAIN. I am bothered by that statement, Governor
Gardner. I mean either you stand for something or you don't. What
you are essentially saying is if section 9 is going to impede the
progress of this legislation then it is objectionable rather than
superfluous. I don't like that statement.
Either you stand for it or you stand against it, but you don't give
as a reason for an objection the fact that it might be divisive as far
as members of the committee of the House or Senate are concerned.
That bothers me.
Governor GARDNER. Mr. Chairman, I appreciate your comment. I
would only make that comment since I believe it is unnecessary to
have a special set of guidelines. Since I think it's unnecessary to
have those guidelines, I would, therefore, not want the legislation to
suffer any difficulty because those guidelines were in there.
I think I know what I stand for, but I appreciate your comment.
We do have a very careful system for chartering and licensing
banks in this country. I think it's a good system.
Mr. CAVANAUGH. Do I have time remaining?
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Mr. ST GERMAIN. Yes.
Mr. CAVANAUGH. I am not sure if I want to pursue this now. I am
getting more confused as I go along. My understanding then would
be that in terms of the consultive requirements between the various
branches of Government, Treasury, State, Board of Governors,
Comptroller, State regulators, that you are saying to us that these
things would be done in the normal course, which, in that case, I
find no problem with setting them out in legislation.
My question was: Is there anything we put in section 9 in terms
of those requirements that would not be beneficial to the regulation
of foreign banking from a public policy point of view?
Governor GARDNER. One of the reasons I made this statement is
that I think the development of guidelines is a very difficult process
and I don't think the development of such guidelines, which will
require a great deal of study and then full publication of the
guidelines for comments and what have you from all parties in
interest, is going to do any more than our present laws do in
requiring that adequate capital be in a new institution or that the
institution meet all applicable State and Federal laws.
There is a portion of section 9 that talks about discrimination.
Banks operating in our country, I believe, are now subject to our
antidiscrimination laws.
Mr. CAVANAUGH. In that particular case, in the discrimination
clauses of section 9, you would feel those would apply regardless of
section 9?
Governor GARDNER I would.
Mr. CAVANAUGH. I do have another area, if I could just quickly. I
am referring to the bottom of page 9 in your statement, and I
believe you also address it on page 18 of your suggested amendments, your last sentence. In the proposal we included a requirement that any banking transactions of U.S. offices of such foreign
affiliates be conducted at competitive rates and terms. Your suggested amendment provides some exemptions for the relationships
between the domestic offices and their foreign affiliates.
In light of your remarks to Mr. Derrick, one of the advantages of
encouraging foreign banking or providing these, or at least the
protections of FDIC or encouraging foreign banking at any rate, is
to promote competition. Then how does this restriction upon their
relationships with their subsidiaries enhance competition or pass on
a benefit to the consumer? It seems it would restrain their competitive ability.
Governor GARDNER. First, what I am talking about here is a
foreign bank office in the United States dealing with a subsidiary
commercial concern that is owned by the same parent as the
foreign bank. I would not want to see a special kind of relationship
in terms of rates and terms for lending carried on to the detriment
of our own commercial banking industry. I think-.,when I say
procompetitive I think they should be at market rates and at
market terms. It's the same kind of test we apply in this country to
insider transactions under section 23(a), and we have for a long time
set up restrictions on transactions between affiliates that appear to
be noncompetitive, that could possibly damage the banking institution involved. You are quite right in the thought this might require
the foreign bank to work harder for its competitive position.
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Mr. CAVANAUGH. Let me put the question this way: Is this
recommended provision more restrictive than that imposed on
insider transactions or your section 23(a) on domestic banks, or is it
the same?
Governor GARDNER. It's the same.
Mr. CAVANAUGH. Thank you.
I have no further questions, Mr. Chairman.
Mr. ST GERMAIN. Thank you, Mr. Cavanaugh.
Mr. Hyde?
Mr. HYDE. Thank you, Mr. Chairman.
Governor Gardner, one of the statements in the press release
announcing these hearings from the distinguished chairman of this
subcommittee says:
The continued rapid growth of foreign bank operations in the United States with
aggregate assets now totaling $65 billion, a 30 percent increase in the last four years,
makes it imperative that the Congress respond favorably to the request of the
Federal Reserve Board for appropriate legislation.
Have assets of foreign banks in the United States increased
disproportionately when compared with increases for all banks?
Governor GARDNER. I think they have, Congressman Hyde. I don't
have the figures here. I can submit a further analysis for the
subcommittee. I think they have grown more rapidly than our own
banks have grown.
Mr. HYDE What about U.S. banks overseas?
Governor GARDNER. I can't express an opinion on that, but I
would be glad to try to make a similar comparison. This comparison
will have to be carefully instructed for banks of similar capabilities
and size.
Mr. HYDE. All right. I believe you touched on this earlier, but I
am uncertain of your response.
Would this bill raise any questions of violations of commercial
treaties, treaties of friendship, commerce and navigation that we
have with our major trading partners, France, Germany, England,
Italy, Switzerland, Japan? Has any study been made of that?
Governor GARDNER. I have to hark back to a former position I
held in the Treasury. We attempted to study that then. We believed
that they did not, but you will hear testimony from the State
Department, I am told, that will indicate that perhaps some features of the bill may violate friendship, commerce and navigation
treaties.
I want to make one poinf as strongly as I can. No other sovereign
nation lacks the kinds of controls over foreign banks in their
jurisdiction that we lack over foreign banks in ours. So I don't
believe the issue would rise to the point of a true violation of
friendship, commerce and navigation treaties.
Mr. HYDE. Governor, when you say we lack control over foreign
banks, are you speaking from the perspective of the Federal
Government?
Governor GARDNER. Yes.
Mr. HYDE. As distinguished from the prospective of the State
governments?
93-031 0 - 77 - 11
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Governor GARDNER. Yes, from the perspective of the Federal
Government and central banking authorities.
Mr. HYDE. Have there been any problems with the voluntary
system of Federal Reserve Board monetary controls of foreign
banks?
Governor GARDNER. No. I don't know of any problem. I think
foreign banks have been good citizens generally.
Mr. HYDE. On the matter of the Federal Reserve Board control
over reserves, why isn't it enough to have effective reportin~ plus
the existing pattern of State reserve requirements? Wouldn t the
State-set reserves be an adequate fulcrum for the Fed's open market activities to operate upon?
Governor GARDNER. No, sir, it wouldn't, Congressman Hyde. The
difficulty is, of course, that with only one or two exceptions, in our
entire universe of major banks dealing in international banking and
international flows of funds, those domestic banks are members and
subject to the central bank's monetary controls, including reserves.
State reserves are liquidity reserves arid they are usually held in
some form of earning assets, perhaps State securities of one kind or
another. No other entity in the United States requires the maintenance of uninvested cash reserves except the central bank. So the
banks I am talking about, those of a billion dollars and over, are
entirely related, and can be compared to our major U.S. banks,
which are, with possibly one or two exceptions, all members of the
Federal Reserve.
Mr. HYDE. I notice on page 5 of your statement that the Board
recommends that section 7 of the bill be amended to require that
Federal Reserve monetary controls be applied to all of the U.S.
operations of a foreign bank that have $1 billion or more in
worldwide bank assets.
Governor GARDNER. Yes, sir.
Mr. HYDE. Are there any domestic banks that have over $1 billion
in assets that are not Federal Reserve members?
Governor GARDNER. Yes, sir.
Mr. HYDE. About how many?
Governor GARDNER. I know of a few, not very many. I can submit
that later.
Mr. HYDE. All right. I have no further questions.
Mr. ST GERMAIN. Thank you.
Mr. Allen?
Mr. ALLEN. Thank you, Mr. Chairman.
Governor Gardner, I must confess a degree of lack of knowledge
on the subject of international banking, so I want to ask you first
this question: In the past 25 years, how many foreign banks doing
business in the United States have gone bankrupt?
Governor GARDNER. I can't recall any, Congressman.
Mr. ALLEN. In the past 25 years, how many depositors or investors in foreign banks doing business in the United States have lost
money?
Governor GARDNER. Congressman, I can't give you any examples.
I will try, but I don't have any now.
Mr. ALLEN. You know of none?
Governor GARDNER. I know of none.
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Mr. ALLEN. Of course, you will recognize immediately that I am
trying to get at the urgency and need for such legislation as this. If
it is not then for the purpose of assuring the safety of investments
by citizens of the United States in foreign banks, what then is the
major purpose of such legislation as this and the need for it?
Governor GARDNER. First, quickly, monetary controls. Two, the
international activities of banks have expanded enormously in
recent years, both our banks going abroad, foreign banks coming
here. I would not have any confidence that the history that you
drew from me of no bank failures for 50 years would be the pattern
for the next decade or two. There is a strong possibility, there is
always a possibility, that as the system grows, more banks will
participate, as international banking becomes a more normal part
of our total banking picture here and abroad. Clearly we will have a
risk that hasn't occurred or didn't occur in the 50-year period.
I answered you truthfully. I don't know what banks may have
failed, but I would like to research this question because I think it is
an appropriate question.
Mr. ALLEN. I would appreciate such information that you can
give, and verification of your original statement or modification, if
you find the facts are different from what you have indicated.
[In response,to the request of Congressman Allen, the following
information was submitted for the record by Governor Gardner:]
REPLY RECEIVED FROM GoVERNOR GARDNER
Question from Congressman Allen-How many foreign banks doing business in the
United States have gone bankrupt?
Aside from situations arising during wartime and possibly during the Depression,
the only recent failure we have been able to uncover involving a foreign bank in the
U.S. was that of Intra Bank, S.A., Beirut, Lebanon, a Lebanese bank that maintained
a branch in New York City. On October 15, 1966, the Superintendent of Banks for
the State of New York took possession of the business and property of Intra's New
York branch and liquidated its affairs under the New York Banking Law. It is our
understanding that local creditors of the New York branch were paid in full in the
proceeding, because of provisions in New York law which required Intra Bank to
pledge U.S. assets to back up its U.S. indebtedness to depositors and U.S. creditors.
The FDIC has recommended a similar asset requirement provision in its alternative
insurance proposal.
The advantage of FDIC insurance in such situations is that the FDIC has the
authority to arrange alternative solutions to liquidation when such actions appear to
be less costly than paying off depositors. This provides a greater range of remedies to
protect the interests of U.S. depositors and creditors. For example, assets and
liabilities of a failing branch or agency could be purchased and assumed by another
banking institution, thus maintaining the continuity of banking services. While it is
true that U.S. authorities cannot prevent the failure of a foreign bank abroad, FDIC
insurance and federal superviso9-: controls should help to ensure that local creditors
and depositors of a foreign banks U.S. offices are protected to the maximum extent
possible.
Mr. ALLEN. You speak about this bill would give some monetary
control. I suppose you mean to the Federal Reserve System over the
operation of national banks operating here, and if so, how?
Governor GARDNER. We would, under the bill, be given authority
to impose reserve requirements on deposits of money center banks,
and those are the banks where large funds flow around our economy and throughout the world, and affect our own money supply.
That is what I am talking about when I am talking about monetary
controls.
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Mr. ALLEN. In other words, your fear, if I understand it, is they
will siphon off a lot of money from U.S. depositories that would
otherwise be deposited with American banks, and thereby leave us
depleted of funds necessary to operate in this country.
Governor GARDNER. I am sorry, I didn't quite hear the end of
your question, Congressman Allen. I started to answer by saying
that as a larger and larger portion of our basic money and credit
supply becomes subject to international and large domestic flows,
and is placed outside of the control of the monetary authorities, you
have less perfect arrangements to assure that an appropriate monetary policy is being implemented in the United States. And I see
growth as one of the dangers, because I think these trends that
have been so evident in the last 5 years will continue, and I know of
no country that does not have that type of control for foreign banks
as well as domestic banks in the major trading nations of the world.
So I would consider it a very normal procedure, and I would think
it terribly important for the appropriate conduct of monetary policy
in this economy.
Mr. ALLEN. Now we are speaking about the growth of international banks in this country. I believe the question has previously
been asked you how their growth has compared with domestic
banks, and I think you said you would undertake to furnish that
information later.
Governor GARDNER. Yes, sir, and I did say, Congressman Allen,
it's my impression that in the last few years the growth of foreign
banks has been significantly higher in the United States than the
growth of the U.S. bank assets.
Mr. ALLEN. Tell me, do the foreign banks offer higher rates of
interest to their deposits than the domestic banks, Federal Reserve
member banks are permitted to offer?
Governor GARDNER. No, sir, but they have significant additional
opportunities to compete, because they are dealing in international
trade, they are dealing with their parents abroad, which are very
large banks, and so their growth has been, as I suggested earlier,
procompetitive in the sense we have more competition in our
markets, and in international transactions they would have some
certain advantages which would encourage their growth.
Mr. ALLEN. You speak of advantages without defining them, and I
will take you at your word, that you know of certain acJ.vantages
that have not been listed.
I,
One other point: If indeed we blanket foreign banks under the
Federal Deposit Insurance Corporation and local depositors who
know their money is just as safe with a foreign bank as it is with a
domestic bank, we are talking about the growth of foreign banks,
would this not accelerate the attractiveness and the growth of
foreign banks if your money was just as safe with them, or the
public was made to feel so, as it would be with any of the largest
local banks?
Governor GARDNER. I cannot deny that this would give an additional competitive point to foreign banks.
Mr. ALLEN. Thank you, sir.
Mr. ST GERMAIN. Mr. Leach?
Mr. LEACH. Yes, sir; I have just one question.
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On page 8 you note that the Board urges that the securities
affiliations in place today be permanently grandfathered to quiet
the controversy surrounding the issue.
Could you describe exactly what the controversy surrounding the
issue is, and specifically do U.S. banks have securities branches in
their overseas operations, and if so, is the major fear retaliation in
that regard?
Governor GARDNER. There is a major fear of retaliation. I think if
we force divestiture, the controversy surrounding the issue, to go to
the first part of your question, is that it seems eminently unfair to
require divestiture retroactively of something that has been
permitted to continue in this country for many years.
There is ample legislative precedent for grandfathering. We have
grandfathered for the banking business what we now consider to be
impermissible activities of banks under the Bank Holding Company
Act. So I suggest that the first appropriate posture, the one that is
supported by legislative history, is that when you impose new law
and regulation, Congress frequently does grandfather nonstandard
activities that have occurred in the past.
Divestiture is a very significant difficulty for any company that
has operated here within our laws as they existed at that time.
Usually it has an economic cost associated with it. Our banks
abroad are frequently engaged in some form of securities transactions, but because the laws of those countries permit their banks to
engage in securities transactions.
In other words, national treatment means specifically that when
our banks go to the United Kingdom or to the European community, they are generally permitted to do what banks in that host
country are permitted to do.
Now, in the United States there is an abnormal situation. U.S.
banks, since the imposition of the Glass-Steag~ll Act, have been
divorced from direct security activities. But all during that period
since enactment of the Glass-Steagall Act, we have had relatively
few affiliates of foreign banks operating here in the securities
market just as our broker dealers and investment bankers operate.
It seems wrong to require divestiture, because they are at this time
not a major part of our securities industry.
I suggest that, if we don't prevent the development of this in the
future we have the possibility of the growth of securities affiliates
among banks in direct opposition to what the Glass-Steagall Act
prevents U.S. banks from doing.
I think the controversy is very severe. Foreign governments,
foreign banks, would consider it an unfriendly act to require them
to divest themselves of their business here.
The present bill requires divestiture at some future date, but that
leaves no option to the owner. Therefore, the owner's opportunity to
sell is compromised by' the provisions of the bill.
Mr. LEACH. May I interrupt just a second? Specifically, do U.S.
banks have securities branches abroad? I mean, do we operate in
this fashion? Is that the fear of retaliation?
Governor GARDNER. That is certainly one of the fears.
Mr. LEACH. May I ask what banks have securities operations? For
example, are we protecting the interests of one, two, three, four or
dozens of banks?
·
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Governor GARDNER. I don't have the figures or a comprehensive
list with me today. I can supply it for the subcommittee. We have
the possibility of retaliation. I don't really think retaliation abroad
is the most significant issue here, but it's certainly present. We may
be, in a sense, in a very indirect sense, protecting our American
banks overseas that now do a securities business.
Mr. LEACH. Might we also, though-Governor GARDNER. It's quite an indirect result of this legislation.
Mr. LEACH. To play the devil's advocate, as equally precedented
as grandfathering is divestiture in all realms of American enterprise, and it's always a difficult thing. But when you are dealing
with equality I think you can make a fairly good case it's not
unequal treatment. We are talking about equal treatment.
Second, when you are dealing with competitiveness, there are
increasing possibilities that more and more foreign funds are going
to be attracted to the U.S. securities markets, and we will directly
be placing our own banks at a competitive disadvantage with
foreign banks, and we will also be giving up a given type of business
that might otherwise follow through to the securities industry of
the United States.
I am just wondering if those aren't balancing features to a point
of view that is more status quo oriented.
Governor GARDNER. When you say status quo, Congressman, do
you mean the present legislation should not require divestiture?
Mr. LEACH. No, I mean that grandfathering implies status quo,
and current legislation, which implies divestiture would be nonstatus quo.
Governor GARDNER. As my testimony has indicated, I think the
best way to treat this issue in its present form is one of permanent
grandfathering.
Mr. LEACH. Thank you very much.
Mr. &r GERMAIN. Thank you, Mr. Leach.
Mr. Hanley?
Mr. HANLEY. Thank you, Mr. Chairman.
Governor, I regret I had to miss your presentation this morning,
and as of this point have not completed reading it. I do have a fair
handle on the subject matter, in recognition of our past efforts in
this regard.
Just one quick question. What, in your judgment, would be the
single most important factor which has made the American market
this attractive to the foreign industry when we look upon a ten-fold
increase in a 10-year period?
That is rather interesting, and what would be your analysis of the
most attractive reason for this?
Governor GARDNER. Very directly, our dollar is the world trading
currency. This is the largest economy in the world. The U.S.
financial markets, the enormous consumer and commercial and
industrial activites in the United States, in my opinion, make the
United States the most desired location for any major foreign bank
wishing to expand abroad.
Our currency is so important in the Western world trading
structure that it seems to me, Congressman Hanley, that I could
look for a twenty-fold increase of foreign banks coming here.
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Mr. HANLEY. The atmosphere here existed similarly prior to the
past decade, and apparently it's only within the last decade that the
foreign banks became enlightened with regard to the opportunity,
because certainly the opportunity has been traditional.
Governor GARDNER. You will forgive a little bit of patriotism, but
I think the very aggressive competitive activities of U.S. banks in
the last two decades abroad, when we have seen an enormous rise
in international finance, has really been the vanguard reason why
international banking has grown so significantly. I think specifically, and I can cite an instance, foreign bankers have become more
competitive, have become more outgoing in the last two decades
abroad, indeed some of this must be credited to the action of our
own banks in going abroad.
I can remember American banks pioneered the term loan or the
medium term loan. Foreign banks just didn't make medium term
loans 20 or 25 years ago, if my friends from abroad will forgive me.
Some of them still do it in a subsidiary, because it's quite
different from the kind of lending that they traditionally did. But as
the world's interdependency, financially and economically, has
grown in the post-war period, the opportunities for the growth of
multinational financial organizations have been quite attractive.
I think a reluctance to come to the United States is explainable.
A bill of this kind providing some certainty for foreign banks will
probably encourage the development of international financial
structures.
Mr. HANLEY. Perhaps you have mentioned this in your statement
but how does the American industry involvement in the foreign
market compare with the other over the past decade?
Governor GARDNER. Of course, you know our American industry
went abroad, which is one of the reasons why American banks went
abroad. I think you will find that foreign investment in the United
States is certainly not diminishing but iµcreasing, and as foreign
investment in the United States increases and the ownership of
various facilities in the United States by foreign shareholders and
the like increases, you would expect banks from those countries,
having dealt with the business concern abroad, to follow their
customers, as our banks followed their customers.
Mr. HANLEY. In recognition of the ten-fold increase over the last
decade, how does American involvement over there compare?
Governor GARDNER. The ten-fold increase in my statistics I think
runs from 1972 to 1977. That may not be correct. I would say that
American bank activities abroad may have slowed a little most
recently, but as you have pointed out in the first part of the last
decade, American bank activities abroad grew very rapidly.
Mr. HANLEY. Thank you very much, Governor, and thank you,
Mr. Chairman.
Mr. ST GERMAIN. Thank you, Mr. Hanley.
Ms. 0AKAR. Thank you, Mr. Chairman.
Governor, I have a question somewhat related to Mr. Hanley's
inquiry. As we observe an increase in foreign banking operations
here in the United States, it would appear we are witnessing a
decrease in the U.S. banks involved in their own communities
financing.
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Governor GARDNER. Involved in our country?
Ms. OAKAR. Yes.
Governor GARDNER. I don't think so, but I may not understand
your question.
Ms. OAKAR. Perhaps this will clarify my point. Our own chairman, Mr. St Germain, reported we had a number of cattle farmers
who simply couldn't get credit from U.S. commercial banks during a
period of great capital need and yet I noticed that U.S. commercial
banks are lending huge sums to South Africa, Bahamas, and Brazil.
Some of the people in our cities-real estate developers, as well as
the individual consumer-have had a very difficult time borrowing
from the commercial banks in their localities. I merely ask this: Is
increased foreign bank activity in the United States related to
increased U.S. lending to overseas concerns? In short, is there a
correlation?
Governor GARDNER. I don't really see any correlation. The banks
that are overseas that are American banks, are largely confined to
our giants and near giants.
Ms. OAKAR. Excuse me, I didn't hear your response.
Governor GARDNER. The giant or near giant banks, and, of course,
the United States has a very unique banking industry. We have
14,000 or more commercial banks, and we have 20,000 credit unions,
9,000 or 10,000 savings and loans institutions.
Ms. 0AKAR. It doesn't mean they always lend to community-based
people.
Governor GARDNER. The vast majority of our financial institutions are entirely domestic, and have no overseas business. Only a
small fraction are overseas.
Ms. 0AKAR. Are you saying only a small fraction of the giants?
Governor GARDNER. No, our giants are overseas, but they are only
a small fraction of our banking industry.
Ms. 0AKAR. The giants, then, represent a small portion of the
entire U.S. banking industry?
Governor GARDNER. Right.
Ms. OAKAR. If I may pursue another point. In his testimony
before our subcommittee, Governor Wallich addressed the problem
of redlining at the international level. He stated that Government
subdivisions and private firms were evaluated as creditworthy; but
their countries per se were not evaluated. One of my distinguished
colleagues, Mr. Annunzio, for example, expressed concern that Italy
might be suffering from some sort of redlining by U.S. lenders.
I wondered if the U.S. banks at times do engage in their own sort
of foreign policy making and if this is so are you or the State
Department advised on some of these practices? Have you ever
noted any of these problems with international redlining?
Governor GARDNER. It's hard for me to answer that, but I will try.
The disposition of any financial institution to extend credit to
industries and governments abroad has to be related to the ability
of those institutions or governments to repay their indebtedness,
and our banks have extended a good deal of credit abroad, and I
think each bank has to carefully spread its risks among commercial
concerns and businesses in various countries, because of a variety of
different economies and exchange conditions and security or safety
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of foreign exchange flows, country indebtness and balance of payments. So I don't call it redlining. I think a bank could easily take
the position that they had a sufficient percentage of their portfolio
in loans to one country, and that was all that they wanted to put at
risk in that one country.
Ms. 0AKAR. You would not describe that as redlining?
Governor GARDNER. No, I don't think so.
Ms. 0AKAR. Thank you, Governor Gardner. Thank you, Mr.
Chairman.
Mr. ST GERMAIN. There will be additional questions that will be
submitted in writing. We hope you can get the answers back to us
expeditiously, so we will have the benefit of those answers when we
come to a markup session.
Governor GARDNER. Thank you, Mr. Chairman. I want to still be
optimistic and I very much appreciate the opportunity to appear
before this subcommittee today.
Thank you.
Mr. ST GERMAIN. Thank you.
[Letters follow containing: Chairman St Germain's written questions to Governor Gardner regarding H.R. 7325; Chairman Arthur
F. Burns, support of the "International Banking Act of 1977";
Governor Gardner's reply to Chairman St Germain's questions; and
answers to questions raised by Congressmen Frank Annunzio and
Clifford Allen:]
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. . . N.i:ND ~.-.T GCR ..AIN, •• I., CHAl,.MAN
JOHN H, ROUS.SD.OT, CALIP',
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GAIUIT ■ 110-, lr,IIICN,
JAM&S M, HANLCY, N,Y.
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.evn.clt DS.RlttCIC, S.C.
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NOIIMAN E. D'A""o,.n,s, N,N,
JOHN J, L,rJ'ALCC. N.Y,
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HCN"T J. H'W~ 1U,..
U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION. REGULATION AND INSURANCE
cuno•a
.IOMN J, CAVA1"1.-.VGH, Nl!: ■11.
MAaT JtOSC OAKAII, OHIO
.IIM M4ff0X,. TCX.
GllOIIIGE HANS.CH, IDAMO
JAMES A, S, I.CACM, IOW.
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
WASHINGTON, D.C. 20515
July 13, 1977
The Honorable Stephen S. Gardner, Vice Chairman
Board of Governors
Fe~eral Reserve System
Washington, D. C. 20551
Dear Vice Chairman Gardner:
On behalf of the Subcommittee, I wish to ekpress our appreciation
for your testimony yesterday on the provisions of the International
Banking Act of 1977, H.R. 7325. As I stated in my opening statement, we
are most anxious to complete action as quickly as possible in order for
the Senate to complete their deliberations in the 95th Congress.
It is the intention of the Subcomnittee to mark up the bill during
the week of July 25 through July 29 and, accordingly, I would request
that I receive your response to the following questions no later than
noon on Thursday, July 21. It is my intention to distribute copies of
this letter and your response thereto to each of the Subcommittee Members
prior to Subcommittee markup.
The questions follow:
1. Could you elaborate for the benefit of the Subcommittee on the
distinction to be made between agencies of foreign banks and powers now
granted to federally chartered Edge Act corporations? This follows your
auggestion on page 6 which, in my judgment, appears to be a constructive
one.
2. Your comment on page 8 concerning the securities affiliate provisions
of Section 8 of the bill, I find disappointing. I am, of course, aware of
the controversy and the House spoke to this controversy, as you know, last
year by its defeat of the Rees-Murphy-Moss amendment. From a practical
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point of view, I ,can understand your reasoning, but should we consider
your suggestion, then I feel we will need more testimony concerning how
the Board would propose to use its discretion to control the type of
abuses that the Board contemplates "might arise over time." During the
hearings, you will recall we discussed the possibility of sharing the
responsibility for the review of securities affiliate grandfathered activities with the Securities Exchange CoIImlission. L request, as I stated
during the hearings, a written response stating the position of the Board
of Governors.
3. On page 3, you indicated that many believed foreign bank highly
specialized institutions operated only in port and gateway cities and
then asserted that the position was erroneous "in view of extraordinary
expansion of these banks in the context of the development of multi-national
banking." Could you elaborate on your rebuttal argument?
4. Given the statistical evidence at hand which has seen an increase from
approximately $7 billion in foreign assets in 1965 to more than $76 billion
currently, could you venture an opinion as to whether you feel this trend
will continue; and if so, what is your best estimate of the total amount of
foreign assets in the United States at the end of the next ten-year period?
The enactment of this bill does not have as its purpose the discouragement of foreign investment which I feel needs to be empha.sized in view
of the misunderstandings clearly existing today. Would you agree with this
comment; and if so, could you discuss briefly how the Fed would propose to
exercise the considerable discretion granted to it should the bill with proposed amendments be adopted?
5. Of the 94 foreign banks to which you·make reference on page 2 of your
statement, how many of those banks have assets in excess of $1 billion?
6. The insurance provisions of this bill appear to be the most difficult
to adjust in terms of the various suggestions which have been made. They
are also, I think, perhaps the most significant in terms of public policy.
I would like to ask you to discuss the possibility that the insurance of
foreign banks might expose the fund to undue risk. Even if the risk is
not, in your view, unnecessarily great, it does appear that there are
risks in addition to those which relate to domestic banks. I would also
like you to discuss the larger issue which relates to the question of
deposit insurance for overseas branches of U.S. banks. To what extent
have the international banking operations of U.S. banks undermined the
safeguards of deposit insurance? Could you supply for the record some in:dication of the proportion of liabilities of the largest U.S. multi-national
banks which are insured!
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7. Governor Gardner, on page 3 of your statement, you note that "The
growth of this international financial community is testing the regulatory
framework and monetary system in many other countries," and that ~ahkiHg
laws in four other countries are being revised to meet some of the problems resulting from the rapid expansion of multinational banking.
Could you describe some of those revisions and indicate whether or
not the concerns of those countries are similar to the concerns embodied
in this bill?
8. On page 5 of your statement, you discuss a proposed Federal Reserve
amendment imposing reserve requirements on subsidiaries of foreign banks.
You are no doubt aware that this will be a very controversial amendment
and that it will be criticized as a violation of the dual banking system.
I would like to give you an opportunity to explain the Federal Reserve's
position more fully. As I understand your concern it related to the fact
that foreign banks in the U.S. operate their offices -- whether they be
subsidiaries>· agencies or branches -- to some extent as a unit.
It ia
possible for them to shift funds between these units regardless of their
form of operation and to use the network as a way of minimizing the cost
of reserves and to escape regulation and examination.
To some ~xtant 9
this is occurring with respect to U.S. banks as well and holding companies
in which only one of several banks is a Federal Reserve member. Have 1
understood your concern correctly? Would you comment further on it?
9. On page 6 of your statement, you suggest a modification of the interstate prohibitions which would have the effect of restricting the powers
of agencies in otder to minimiae the competitive advantage which they have
with regard to U.S. banks not being able to operate in more than one state.
Could you describe the present powers of agencies and how you propose to
restrict them under this turrent suggestion?
to
10. The date at which the Board regularly provides
the C0111mittee on
assets and liabilities of foreign Danks indicate§ that th@re was a drop of
$6 billion in the total assets and liabilities of these offices between
March and April of this year. At other times, there have been.increases
in their assets of about the same size. The fiow of funds into and out of
the U.S. through offices of foreign banka appears tij Be·vi!ty substantial.
Does the volatility of their operations complicate the conduct of monetary
policy? If so, could you explain why?
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167
In addition, the.following question is posed on behalf of Congressman Annunzio, and I would appreciate a copy of your response to this
question being sent directly to Mr. Annunzio.
The question is as follo~s:
You have stated that H.R. 7325 is necessary to provide equitable
treatment between foreign owned and domestic banks.
Is it not true that
our domestic bank holding companies, through their many bank and nonbank
subsidiaries and other facilities, conduct far more extensive interstate
banking activities than do the foreign-owned banks which have established
branches?
Again, I do appreciate your assistance and look forward to your responses to the foregoing questions.
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Federal Reserve Bank of St. Louis
Sincerely,
Fernand J. St Germain
Chairman
168
CHAIRMAN OF" THE eoARO OF" GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
July 22, 1977
The Honorable Fernand J. St Germain
Chairman
Subcomnittee on Financial Institutions
Supervision, Regulation and Insurance
Committee on Banking, Finance and
Urban Affairs
House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
I would like to join in Governor Gardner's response to
you and to the Committee and assure you of my own support of the
International Banking Act of 1977. I hope your efforts to obtain
a balanced and appropriate bill will be successful, and we at the
Federal Reserve will lend all possible assistance in that endeavor.
In reviewing your questions and Governor Gardner's response,
I
am persuaded that the difficulties raised by foreign banks and
State authorities can be resolved through appropriate amendments.
I have no doubt that it is essential to do this to aid passage of
the bill. The close links among the world's financial markets,
the ease of international fund transfers,_ and the important role
of our currency in this system have created a serious need for a
aational regulatory structure that inc_ludes the foreign banking
1nst1tu~ions operating in the United States. The proposals in
your bill are essential to assure the safety and soundness of
banking in our country. Among other things, they give additional
power to our central bank, but I am unaware of any other monetary
authorities among our major trading partners who lack such powers.
I hope your efforts will be successful and, again, we
at the Board are prepared to assist.
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Federal Reserve Bank of St. Louis
Best wishes.
Sincerely yours,
(
) Arthur F. Bums
Arthur
:r.
Burns
169
BOARO Or GOVERNORS
Dl"THE
FEDERAL RESERVE SYSTEM
WASHINCiTON, D.C. 20551
11TCPHEN 5, GARDNER
VICE CHAIRMAN
July 22, 1977
The Honorable Fernand J. St Germain
Chairman
Subcommittee on Financial Institutions
Supervision, Regulation and Insurance
Committee on Banking, Finance and
Urban Affairs
House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
I want to thank you for and respond to
your letter of July 13 requesting that I elaborate
on and supplement my testimony of July 12 before
the Subcommittee on Financial Institutions, Supervision, Regulation and Insurance. For your convenience and that of the Committee I have provided answers
to each question in the enclosed attachments and
appendices. I have included answers to questions
raised by Congressman Annunzio and Congressman Allen;
and, as you suggested, I am sending separate direct
responses to Mr. Annunzio as well as to Mr. Allen.
In this covering letter I w9uld also like
to provide clarifying comments for you and the Committee
on the key issues which you have approp~iately identified. Since the original introduction of prospective
foreign bank legislation, it has becOIJ\e clear to the
Board of Governors that some State governments were
and continue to be interested in attracting and chartering agencies of foreign banks to support their local
economy's participation in international finance and
trade. That development was the guiding force for our
proposed amendment to exempt future agencies from the
multistate limitations of current national and State
law. Since the inception of the Edge Act in 1919,
U.S. banks have been given a multistate exemption for
similar international banking offices. As you know,
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170
if our proposed amendment is adopted, State-chartered
agencies ·can continue to be exempted from multistate
restrictions provided they are limited to the powers
which similar U.S. concerns can have under the longstanding Edge Act provisions of Federal law. It follows,
then, that we would provide national treatment to foreign
banks by not restricting States from licensing agencies
of foreign banks since there are similar opportunities
for U.S. banks under present Federal law.
I hope you will find my answer to the questions you asked concerning the oversight of securities
affiliates arid the role of the Board and the SEC forthcoming. In short, there will be a shared responsibility
if the amendment provisions we suggested for Section 8
are incorporated in the bill. The SEC already has full
regulatory and supervisory powers over the securities
affiliates of foreign banks. 'What is lacking at present
is the regulatory oversight necessary for the Federal
Reserve to deal with any future problems that might
occur in the banking affiliate of the securities entity.
Cooperation and coordination between the SEC and the
Board would be certain if the amended language is incorporated in the bill. ·
I hope the attachments will also point out
clearly that insuring domestic deposits in foreign banks
will not expose the FDIC insurance fund to unusual risks.
Under the FDIC proposals, foreign bank assets in the U.S.
could be segregated and pledged to protect the fund
against any undue risk of potential liquidation demands.
In a related matter, I am not certain that all members·
of the Committee understood that, at present, the FDIC
does not insure the overseas deposits of American banks.
Further, as the attachment to this letter indicates, the
international banking operations of U.S. banks do not
appear to have undermined the safeguards of our domestic
deposit insurance system.
As you point out in Question 8, establishing
reserve· requirements for·large·foreign banks has been
criticized from the standpoint of the dual banking system.
This criticism is directed at our proposal generally and
not solely to the question of whether subsidiaries of
large foreign banks should be covered. Our present
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171
recommendation will not usurp other State powers
covering the approval or oversight of branches, agencies, and subsidiaries of foreign banks. However, the
need for reserve requirements on large foreign banks
is dramatically shown in Appendix II of the attachments.
The two largest nonmember banks operating in the United
States, the Bank of Tokyo Trust Company and the California First Bank, are subsidiaries of the same foreign
bank. Their total assets in the U.S. as of December 31,
1976, were almost $4-1/2 billion. If subsidiaries are
not made subject to the reserve requirement provisions
in the Act, they will, of course, become the preferred
form of entry, and U.S. domestic monetary policy controls will continue to be weakened.
Finally, I would like to observe that your
Committee, and this Congress and the last, has been
engaged in a courageous, farsighted and appropriate
effort. Clearly, each new development in the unregulated structure of foreign banking in the U.S. will
complicate the future passage of a fair domestic
regulatory measure, such as the International Banking
Act of 1977. In the present case, the Committee is
debating a bill and various amendments which can
provide fair national-treatment for foreign banks,
encourage competitive entry into the U.S., and establish in the U.S. normal protections for our monetary
system and those citizens who transact business with
foreign banks. These measures are comparable to those
imposed on U.S. banks abroad by sovereign governments
and on U.S. banks here by our own government.
I am very anxious to provide any assistance
that the Board of Governors can offer to'the Committee
to assist in your further deliberations on this vital
legislation.
All best wishes.
Sincerely,
Stephen S. Gardner
Enclosures
93-031 0 - 77 - 12
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172
Questions land 9
l. Could you elaborate for the benefit of the Subcommittee
on the distinction to be made between agencies of foreign
banks and powers now granted to federally chartered Edge Act
corporations? '!.'his follows your suggestion on page 6 which,
in my judgment~ appears to be a constructive one.
9. On page 6 of your statement, you suggest a modification
of the interstate prohibitions which would have the effect
of restricting the powers of agencies in order to minimize
the competitive advantage which they have with regard to o.s.
banks not being able to eperate· in more than one state. C.ouid
you describe the present powers of agencies and how you propose
to restrict them under this current suggestion?
!!!!!!!£_a
Both of these questions relate to the respective
powers of Edge Act Corporations and agencies of foreign banks and how
the latter would be restricted under the Board's proposed amendment
regarding multistate agencies.
'l'he Board has proposed that section
5 of B.R. 7325 be amended to subject agencies established outside of
a foreign bank's home State to the same .limitations of powers that apply
to Edge Act Corporations (Section 25(a) of the Federal Reserve Jlct)1
the amendment would only affect agencies not qualifying for grandfather
privileges.
Concurrent with its proposal, the Board furnished the Subcommittee
with appropriate legislative language and a chart briefly comparing
the powers of foreign bank agencies and branches to those of Edge Act
-Corporations.
A copy of these materials is appended for the Subcamnittee's
convenience.
llasentially, agencies are now permitted to engage in any banking
and lending activities granted them by. th~ several States that permit
these offices. ·'l.'he most common denominator defining agencies under
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173
the various State laws is that they are unable to accept deposits from
the general public and are unable to engage in trust powers; agencies
can, however, maintain credit balances for their loan and other customers.
customers may generally draw against these balances by mail, telephone
or cable instruction, and in some cases by draft, which is the functional
equivalent of a check, for the purpose of transferring funds to third
parties.in settlement of a wide variety of financial and commercial
transactions.
'l'bus, the only thing that actually distinguishes these
balances from normal deposits in a wholesale/commercial banking context
is that the deposit relationship must derive from and be incident to
a loan or other banking relationship.
Aside from the above-noted restrictions, agencies can generally
engage in the types of wholesale banking activities permitted domestic
banks; principal among these have been commercial and industrial loans,
interbank loans and deposits, and lending and deposit.transactions involving
the parent bank and affiliated institutions.
under the Edge Act and the Board's Regulation K, Edge Act
Corporations can engage in the fuil range of international banking and
lending transactions usual in financing international commerce in the
united States including deposit facilities; loan, overdraft, advance
.acceptance and other credit facilities, commercial letters of credit;
foreign collectionsi purchase and sale of foreign exchangei remittance
of funds abroad7 and custody of securities and acceptances for account
of customers abroad.
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Federal Reserve Bank of St. Louis
'l'be principal difference between an agency and
174
Edge Act Corporation is that the latter my not engage in any domeatic
comnercial banking activities that are not directly related to financing
international trade and c~rce.
For example, an F.dge Act corporation
caMot make a working capital loan to a domestic importer or accept
domestic deposits in competition with local banking organizations.
Essentially, then, under the proposed IIIM!ndment, agencies
established in the future outside of a foreign ~n~•e
bQllle
State would
have to confine their activities permitted under State law to those
related to financing international trade or eommerce--tt,e vast lllil1ority
of their existing transactions.
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175
PROPOSED A.!11.'DliATiln: TO SECTION 5 (a) OF
H.R. 7325--DIPOSING mxlE ACT
LIMITATIONS ON FUTURE OUT-OF-STATE AGmlCIES*
* ~ ; Tflis pr!)posee alternative is submitted in lieu of amendment
number 15 in th~ staff dsolirnent entitled "Proposed Amendments to
B.R. 7325, ·The Intetnati.otia1 Aanking Act of 1977," that is Exhibit "B"
in ti!i.s compendium,
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176
1.
Page 12, strike lines 22 through 25 and page 13 strike
lines 1 through 13 and insert in lieu thereof the following:
•sEc.
5. (al Except as provided by subsection
(bl, (1) no foreign bank may directly or indirectly
operate a Federal branch or agency outside its home
State unless the State is one in which it could
operate a branch or agency if it were a national
bank located in its home State; (2) no foreign bank
may directly or indirectly operate a State branch
outside its home State unless (A) the statute laws
of the· State in which such branch is to be located
specifically authorize-a State bank organized under
the laws of such foreign bank's home State to establish
or operate such branch, by language to that effect
and not 1nerely by implication, and (B) the State
branch is approved by the bank regulatory authority
of the State in which such branch is to be located;
(3) no foreign bank may operate a State agency
outside its home State unless (A) the State agency
is approved by the bank regulatory authority of
the State in which such agency is to be located,
and (B) the State agency limits its activities to
those permissible for a Corporation organized under
section 25(a) of the Federal Reserve Act; (4) no
foreign bank or company of which it is a subsidiary
may directly or indirectly acquire any voting shares
of, interest in or substantially all of the assets
of a commercial lending company located outside
of its home State unless (A) the acquisition is
approved by the bank regulatory authority of the
State in which such commercial lending company is
to be located and (B) the commercial lending company
limits its activities to those permissible for a
Corporation organized under section 25(a) of the
Federal Reserve Act: and (5) no foreign bank may
directly or indirectly acquire any voting shares
of·, interest in or substantialiy all of the assets
of a bank loca_ted outside of its home State unless
such acquisition would be permissible uncer section
3 o: t.h~ E?:-:.~ =~:.:::-:; Cc:-:;::a!"l:t ;...:;:t c! 1;55 i! t.,._.!!
fore!;~
=~=-:~ \:::::
a ::::~):
:".=:-:.:.::; ::~:..:-.~· _:...~~ 0:=•::a:!.cns
o~ w~cze banking s~~sidiaries were principally conducted
in the foreign bank's home State.fl
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177
Explanation:
This recommended amendment to section S(a) of
B.R. 7325 makes two substantive changes, as well as certain technical
changes.
First, it would permit agencies and commercial lending company
subsidiaries of foreign banks to be established in the future outside
of a foreign bank's home State, so long as these offices restricted
their operations to 'those international banking activities permissible
for· Edge Act Corporations.
A chart comparing the powers of Edge Act
Corporations to those of agencies and branches of foreign banks is attached.
Second, while the McFadden Act test has been retained for federal branches
and agencies, it has been deleted for State branches.
Under the amendment,
a foreign bank would be able to establish a State branch outside of
its home State if a State bank in its home State could establish such
an office.
Thus, if reciprocal branching legislation were passed between
two States, foreign banks could benefit from such change in State laws.
2.
Page 13, strike the period in line 20 and add the following
new phrase:
"arid may continue to engage .in all activities permissible to any such offices or subsidiaries under
State law.•
Explanation:
This amendment would make clear that grandfathered
agencies and commercial lending company subsidiaries of foreign banks
would be permitted to engage in all activities permissible under State
applied on future agencies and commercial lending companies under the
first amendment.
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Federal Reserve Bank of St. Louis
Powers and Restrictions
on U.S. Activiti~s
Engage in international banking
Engage in domestic lending
transactions--acceptancc and
ot:hcr credit faciliti~s, commercial letters of credit,
foreign collections, foreign
~xchangc dealiny, remittance of
Cunds, etc.
transactions--C&I loans,
fed~ral funds market, consumer
Deposit-taking ability.
lending.
--------------j---------------+----------------+------------
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Federal Reserve Bank of St. Louis
Yeo, except for consumer lend-
,,,gencies of Foreign
Banks
Yes
ing. Generally able to make
domestic C&l loans and participate in feder,'1.l funds market;
generally unuble to engage in
consumer lending.
No, but ·can accept credit
bala~s incidental to
eithP.r, international or
dornentic business. cari"nol
iszue ccrtificat':?s o-f-dcposits i n ~ event.
f,/o FDIC insurance •.
Yes, restrictions may apply to
Branches of Foreign
Banks
Yes
consumer lending.
Yes, not limited to internationally related, can
issue domestic certificatof deposit. No F~!~
insurance.
No.
Ed•Je Act Corporations
Yes
Prohibited from engaging
in any domestic lendihg transaction; can engage in federal
funds transactions on°ly as
nec~ssary to adjust reserve
balance, and not as medium
of investment.
•The precise powers of agencies of foreign banks vary somewhat by State
law. This chart unc9 the powecs extended agencies of foreign banks
in New York as a model.
Yes, but only those incidental to international
transactions.
Can accept
time der,osits for foreign
accounts, only if proceed,
not to be used to pay
expenses in the U.S. No
FDIC insurance.
-...J
00
179
Question 2
Your comment on page 8 concerning the securities affiliate
provisions of Section 8 of the bill, I find disappointing,
I am, of course, aware of the controversy and the Bouse spoke
to this controversy, as you know, last year by its defeat
of the Rees-Murphy-Moss amendment. From a practical point
of view, I can understand your reasoning, but should we consider
your suggestion, then I feel we will need more testimony concerning
how the Board would propose to use its discretion to control
the type of abuses that the Board contemplates "might arise
over time.• During the hearings, you will recall we discussed
the possibility of sharing the responsibility for the review
of securities affiliate grandfathered activities with the
Securities Exchange Commission, I request, as I stated during
the hearings, a written response stati"ng the position of the
Board of Governors.
~:
When the Bank Bolding Company Act was amended in
1970 to cover one bank holding companies, Congress permanently grandfathered all nonbanking operations commenced on or before June 30, 1968.
The Congress, however, also provided that the Board could terminate
such authority to engage in grandfathered activities if it determined,
having due regard to the purposes of the Act, that such action was
necessary to prevent undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices,.!/
It has been recommended by the Board that all permanently grandfathered
nol)banking operations of foreign banks under B,R. 7325, including securities
affiliates, be subject to such discretionary review.
In the case of
securities affiliates, ·the Board has recommended this procedure in lieu
of the existing provisions of B,R. 7325 which effectively limit grandfathering
till 1985 •
.!/ In the case of bank holding companies controlling banks with assets
in excess of $60 million, the Board was further required to conduct
such a grandfather review within two years from the date of enactment
of the amendments or from the date on which bank assets exceeded $60
million, whichever was later.
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180
In
my
testimony,
I stated that this authority could
be used to correct any abuses that might arise over timei I
further stated such grandfathering would permit these affiliates to
operate "in essentially the same form and relative size as at present•.
I chose these words carefully to indicate that the Board saw
no imediate problems with grandfathering due to the relative size
and importance of these affiliates in our domestic economy.
If the
grandfathered affiliates-through, for example, significant capital
contributions from their foreign bank parents--became among our largest
securities concerns, such a development could have very serious repercussions for fair competition in both the investment and commercial
banking comuunities and for the concentration of resources in our financial
markets.
'l'hus, one situation that might arise and that would call for
review would be a significant expansion of the size and importance of
these affiliates.
as amended
It should be noted, however, that H.R.
7325, even
bY the Board, would not give foreign banks with grandfathered
securities affiliates the authority to expand further by the acquisition
of a going concern--i.e., Merrill Lynch--rather they would be limited
only to expanding de!!.!!!!!.·
Aside from problems that might be caused
bY a significant
expansion in the size and business of such affiliates, there are several
abuses to which the Glass-Steagall Act and Bank Holding COmpany Act
are addressed that could possibly arise here between u.s. offices of
foreign banks and their
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Federal Reserve Bank of St. Louis
o.s.
securities affiliates.
Following are some
181
examples,
unsound loans to such affiliates or to companies whose shares
were being underwritten, sold or_distributed by such affiliates1 loss
of public confidence in the
u.s.
banking operations of a foreign bank
due to the failure of its U.S. securities affiliate; and anticompetitive
tying of commercial banking and investment banking services.
These
types of abuses or practices, which we must stress we have no reason
to believe are now occurring, couid be uncovered through the bank examination
and supervisory process and, under R.R. 7325, the Board could use its
authority to terminate grandfather authority if major abuses should
occur or to take cease and desist action to prevent other abuses from
escalating.
It should be noted that the Board and other banking agencies
have increasingly made use of cease and desist authority to deal with
violations of law and unsound banking practices.
Your suggestion concerning a sharing of responsibility between
the Board and SEC for discretionary review of the grandfathered operations
of securities affiliates of foreign banks
would be achieved if the
Board's recommendations for amendment of Section 8 of the bill are
adopted.
The SEC already has supervisory and regulatory authority over
the operations of these domestically-chartered securities affiliates
and thus would be equipped to deal both now and in the future with any
securities law problems that might arise with these affiliates.
The
gap in our present regulatory structure is on the bank regulatory side
and it is that gap that would be filled by Section 8 o~ the bill, since
it would give the Board the authority to terminate a foreign bank's
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Federal Reserve Bank of St. Louis
182
affiliation with a d0111estic securities concern if it led to abuses
prohibited by the Congress in the Bank Holding Company Act--an .!\ct which
Congress has directed the Board to enforce.
In this regard, in exercising
its proposed review authority over foreign banks and their securities
affiliates, the.Board would consult with the SEC in order to benefit
from any informatign or views the SEC might have that would be relevant
to the issues tllat •ust be considered by the Board under the grandfather
review standards of the Bank Holding Company .!\ct.
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183
Question 3
page 3, you indicated that many believed foreign banks
to be highly specialized institutions operating only in port
and gateway cities and then asserted that the position was
erroneous "in view of extraordinary expansion of these banks
in the context of the development of multi-national banking.•
Could you elaborate on your rebuttal argument?
On
~•
My comment about the disparity between the
traditional view of foreign banks' activities in port and gateway
cities and the realities of multinational banking activities today was
based upon the changed character of multinational banking over the past
few years.
Initially, foreign banks specialized in providing trade
financing, largely for customers of their parent bank organization.
But gradually over time, as the foreign baqks' contacts improved, their
knowledge of u.s. financial markets expanded, the opportunities presented
by u.s. domestic credit markets became apparent, and the foreign banks
broadened their range of services offered.
The foreign banks began
to compete for domestic commercial and industrial loans and to offer
corporate banking services.
In some instances, foreign banks have even been able to compete
with domestic banks in retail banking markets, traditionally the most
difficult credit market for a newcomer, particularly a foreign bank,
to compete with established local banks.
Barclays in New York and california,
European-American in New York and Lloyds and Bank of Tokyo are the most
notable examples of foreign banks which have established or acquired
very competitive retail banking networks in this country.
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184
Foreign banks are still heavily engaged in trade financing,
both for trade originating in their ~wn country and the increasingly
important market for third-country financing.
Many smaller and newer
foreign banks continue to rely heavily on trade financing for a major
part
of their business.
But increasingly multinational banking has
become a highly competitive busine~s in which banks from all countries
offer the full spectrum of their banking services to customers in all
major cities throughout the world.
These business opportunities have
been enhanced by the development of multinational firms with manufacturing
and sales facilities throughout the world.
Such major firms rely on
groups of banks, foreign and domestic, to provide working capital loans,
term loans, plant financing and many banking services that are not specifically
trade-related.
Foreign bank offices in the U.S. are increasingly. engaged
in all types of banking business for domestic and multinational firms.
While the new aggressive conduct of multinational banking
today has promoted a healthy environment of international banking competition,
it has conconnnitantly spurred banking authorities everywhere to be more
watchful of the consequences fo~ their domestic financial institutions
and markets.
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185
Question 4
Given the statistical evidence at hand which has seen an increase
from approximately $7 billion in foreign assets in 1965 to more
than $76 billion currently, could you venture an opinion as to
whether you feel this trend will continue; and if so, what is
your best estimate of the total amount of foreign assets in the
United States at the end of the next ten-year period?
The enactment of this bill does not have as its purpose the
discouragement of foreign investment which I feel needs to be
emphasized in view of the misunderstandings clearly existing
today. Would you agree with this comment; and if so, could
you discuss briefly how the Fed would propose to exercise the
considerable discretion granted to it should the bill with
proposed amendments be adopted?
~:
I wholeheartedly support your statement that the
proposed bill is not intended to discourage foreign investment.
On
the
contrary, we believe that the provisions of the International Banking Act
are consistent with the longstanding U.S. government policy of encouraging
foreign investment in this country. ·The Act would encourage foreign banks
to continue entering the United States by ensuring them of a welcome, by
guaranteeing certainty of regulatory treatment in planning their activities,
and by establishing a fair and reasonable framework within which they may
conduct their operations.
The Act's Guidelines clearly spellout these
object.ives by stating that the purpose of the Act is to "achieve a parity
of treatment" between foreign and domestic banks.
The purpose of the discretionary powers given to the Federal
Reserve in the proposed amendments is to ensure that fair and equal
treatment is afforded foreign banks in the U.S. banking structure.
The
two most sensitive areas which we feel require discretionary authority
are the treatment
of foreign-owned security affiliates and relationships
between U.S. offices of foreign banks and nonbanking affiliates of the
same ·foreign bank.
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186
The Federal Reserve has no evidence that the present activities
of foreign banks' U.S. securities affiliates are harmful to our financial
industry.
If this were not the case, we would not have vigorously supported
provisions to permanently grandfather these institutions.
We are not aware
of any inappropriate transactions between U.S. foreign banking affiliates
and U.S. offices of nonbanking subsidiaries of the same parent organization.
In both areas, there is always a potential for future infringement
of U.S. banking regulations, and we therefore feel it is wise and appropriate
to monitor such activities.
To attempt to forecast the exact nature of the activities of
foreign institutions which might pose a threat to the stability, competitiveness or viability of U.S. financial markets in the context of the
rapidly changing financial environment of recent years is a practical
impossibility.
And, consistent with this uncertainty about events, it
is also impossible to outline now all the types of measures which may be
needed to implement the Board's discretionary powers.
However, in
Section 8(c) of the IBA, the Congress has ennumerated the conditions which
the Board is to prevent through exercise of its discretionary powers,
Furt.her the proposed amendments provide the authority to deal with future
situations and ensures that the Board will have the flexibility to implement
the Congresses mandate.
As
you noted, the growth of foreign banks' assets in the U.S.
over the past decade has been extraordinary.
As
indicated in Appendix II,
in recent years, they have increased at a rate more than four times faster
than comparable domestic bank assets.
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While I hesitate to extrapolate
187
·this trend, it seems likely that they will continue to increase their
share of a growing U.S. financial market as other foreign investments
rise in the U.S. and as more foreign banks come here.
The underlying
reasons for this growth, the stability and size of our economy, and the
use of the dollar as the world's premier trading currency are unlikely
to change.
I would not be surprised if foreign bank assets here were to
double in the next decade.
I would be very surprised if they did not
increase at this or a faster pace.
93-031 0 - 77 - 13
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188
Question 5
Of th.e 94 foreign banks to which you make reference on page
2 of your statement, how many of those banks have assets in
excess of $1 billion?
Answer:
Available statistics indicate that 88 of the 94 or
93 per cent of the foreign banks operating U.S. banking facilities have
worldwide assets in excess of $1 billion.
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Question 6
'ftle insurance provisions of this bill appear to be the most
difficult to adjust in terms of the various suggestions which
have been made. They are also, I think, perhaps the most
significant in terms of public policy.· I would like to ask
you to discuss the possibility that the insurance of foreign
banks might expose the fund to undue risk. Even if the risk
is not, in your view, uMecessarily great, it does appear
that there are risks in addition to those which relate to
domestic banks. I would also like you to discuss the larger
issue which relates to the question of deposit insurance for
overseas branches of u.s. banks. To what extent have the
international banking operations of u.s. banks undermined
the safeguards of deposit insurance? Could you supply for
the record some indication of the proportion of liabilities
of the largest U.S. multi-national banks which are insured?
~•
There are really two parts to this question.
First,
what are the risks involved to the FDIC fund in insuring deposits at
U.S. branches of foreign banks.
And, second, does the expansion of
the international banking activities_of U.S. banks pose significant
new problems for the FDIC fund.
In answ.er to the first part of the question, we believe that
the FDIC in submissions to the Subconunittee and in Chairman LeMaistre's
testimony has fully identified the range of risks that are peculiar
to insuring deposits at u.s. branches of foreign banks.
The FDIC, as
set forth in their alternative proposal, can limit this risk through
two important powers included in that proposal.
First, the FDIC is
given the authority to define what domestic deposits at branches are
to be insured.
This makes clear that the FDIC is not insuring overseas
operations-a question raised by Congressman Rousselot at the hearings.
Moreover, the FDIC can limit their exposure as necessary by insuring
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190
only those domestic deposits which they define as such.
Second, and
most important, the FDIC is given the authority to require a pledge
of assets or surety bond to further protect the l!'DIC fund against the
unique risks attaching to insuring deposits at a
o.s.
office of a foreign
institution whose primary assets and management are located abroad·.
Thus, the FDIC would have an effective means of assuring that, if any
payments to depositors are required, there would be sufficient assets
in the
o.s.
to protect its fund.
In answer to the second part of your question, I want to
emphasize that deposit insurance was enacted in this country to protect
the small depositor and small saver from the consequences of bank failure
and in this way to lessen the hardships of bank failures on our local
=-unities and economies.
Congress did not decide to fully protect
all depositors in insured banks and, in particular, did not, in our
opinion, provide insurance on deposits payable only outside the
at foreign branches.
o.s.
The protection of overseas depositors is the responsibility
of the authorities in the countries in which those branches are located,
For those depositors in the United States whose bank accounts
are fully insured, the development of international banking operations
by U.S. banks has not affected the safeguards provided them by FDIC
insurance.
For the FDIC, on the other hand, the development of international
banking operations in insured banks has added another dimension to its
responsibilities.
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While those operations add some different kinds of
191
risk to those already present in domestic operations,.at the same time,
foreign operations add to the diversification of bank assets.
The
evidence to date supports the conclusion that international operations
of U.S. banks have not weakened the system of deposit insurance we have
in this country nor its ability to achieve the public objectives for
which it was established.
The table below provides data on the percentage of total
deposits which were made at domestic offices for a number of the largest
u.s.
multinational banks.
1976
Per cent of total deposits at
· u.s. offices
BankAmerica Corporation
57
Citicorp
36
Chase Manhattan Corporation
53
Manufacturers Hanover Corporation
65
J.P. Morgan Company, Incorporated
46
Chemical New York Corporation
60
Continental Illinois Corporation
55
'1'hese figures provide an indication of the proportion of deposits
in these banks on which deposit insurance premiums are paid.
They do
not represent the percentage of total deposits which are insured in
these banks, since individual deposits are insured only up to the first
$40,000 and most public funds are insured up to $100,000.
actual insured deposits would be leas:
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Thus the
Data sh01ring the amount of
192
insured domestic deposits by bank are not available to us.
However,
the FDIC reported that for 1975, 64 per cent of all domestic deposits
were insured.
This percentage of insured deposits is probably even
lower in the banks listed since wholesale banking and large account
holders account for a relatively greater share of business at large
banks than at small banks.
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Question 7
Governor Gardner, on page 3 of your statement, you note that
"The growth of this international financial comnunity is testing
the regulatory framework and monetary system in many other
countries," and that banking laws in four other countries are
being revised to meet some of the problems resulting from the
rapid expansion of nrultinational banking.
Could you describe some of those revisions and indicate whether
or not the concerns of those countries are similar to the concerns embodied in this bill?
Answer:
In August 1976 a White Paper was published in Canada
containing proposals for the decennial revision of the Bank Act.
Among
those proposals was one which would allow foreign banks to conduct depositbanking activities in Canada, something which foreign banks cannot presently
do.
Such activities would be subject to certain limitations.
One of the
factors underlying this proposal was the growth in near-banking activities
by U.S. and other foreign banks in recent years through Canadian subsidiaries.
These subsidiaries have engaged in a broad variety of financing
activities, funded through the Canadian money market, but have not been
subject to banking regulations.
Under the proposals, these subsidiaries
would be converted to licensed banks that would be subject to the same
banking regulations as domestic Canadian banks.
A White Paper was also published in. the United Kingdom in
August 1976, which would provide a statutory basis for bank regulation
in that country.
The United Kingdom has not had a specific banking law
governing the entry and operations of banking institutions.
In recent
years, problems have been encountered .wit~ the establiphment of companies
which called themselves banks, or bankers, and accepted funds from the
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194
public without being regulated in any meaningful way.
Many of these
companies have gotten into serious financial difficulties.
Under the
proposals contained in the White Paper, all institutions accepting deposits
would have to be licensed and only selected institutions would be allowed
to call themselves banks.
Another of the proposals contained in the
White Paper was a recommendation for a deposit protection fund on
sterling deposits; the deposit insurance scheme would apply to sterling
deposits in branches of foreign banks as well.
In both Canada and the United Kingdom, comments on the White
Paper proposals have been received and legislation is now expected to be
introduced into the respective Parliaments before the end of the year.
In the banking law enacted by Belgium and the one in the final
stages of enactment in the Netherlands, it is of interest to note that
provision was made to allow the banking authority to exchange appropriate
information with foreign banking supervisors.
These provisions are, of
course, a direct outgrowth of the development of multinational banking
operations and the consequent sharing among nations of responsibility
for their supervision.
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195
Question 8
On page 5 of your statement, you discuss a proposed Federal
Reserve anendment imposing reserve requirements on subsidiaries
of foreign banks. You are no doubt aware that this will be a
very controversial amendment and that it will be criticized as
a violation of the dual banking system. I would like to give
you an opportunity to explain the Federal Reserve's position
more fully. As I understand your concern it related to the
fact that foreign banks in the U.S. operate their offices -whether they be subsidiaries, agencies or branches -- to some
extent as a unit. It is possible for them to shift funds
between these units regardless of their form of operation and
to use the network as a way of minimizing the cost of reserves
and to escape regulation and examination. To some extent, this
is occurring with respect to U.S. banks as well and holding
companies in which only one of several banks is a Federal Reserve
member. Have I understood your concern correctly? Would you
comment further on it?
~:
As
a central bank, the Federal Reserve is concerned
about the operations of foreign banks in the United States because they
are large banks conducting large operations comparable in every way to
our large banks, but their monetary liabilities are not subject to
reserve requirements.
These foreign banks happen to conduct their
business through several organizational forms: branches, agencies, and
subsidiaries, largely to conform to or take advantage of different
provisions of various State laws.
Almost all of the subsidiary banks
belong to an organization that also has a branch or agency (31 out of
34 to be precise).
These subsidiaries operate in conjunction with the branches
or agencies with assets and funds readily shifted among them.
Some
foreign banks have already developed networks of operations in this
country using all three organizational forms.
the most notable example.
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The Bank of Tokyo is
The Bank of Tokyo operates a subsidiary bank
196
and an agency in New York; another subsidiary bank and an agency in
California; a branch each in Washington and Oregon; an Agreement
Corporation in Texas; and an af_filiate in Chicago.
At the end of
last year, the assets of this U.S. ·organization totaled $12.5 billion.
Of this amount, $4.5 billion were accounted for by its two nonmember
subsidiary banks.
To subject branches and agencies to monetary controls
but to leave out subsidiary banks would be a large omission, as this
example illustrates.
The size and sophistication of the foreign
banking institutions here and the coordination among their various
U.S. offices and with their related institutions in foreign countries
clearly affords them an ability to shift business among their U.S.
offices so as to avoid reserve requirements where such an opportunity
exists.
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Question 10
The date which the Board regularly provides to the Com:nittee
on assets and liabilities of foreign banks indicates that there
was a drop of $6 billion in the total assets and liabilities
of these offices between March and April of this year. At
other times, there have been increases in their assets of about
the same size. The flow of funds into and out of the U.S.
through offices of foreign banks appears to be very substantial.
Does the volatility of their operations complicate the conduct
of monetary policy? If so, could you explain why?
Answer:
The size and character of the credit and deposit
business of foreign banking offices in the United States make it
important for the efficient conduct of U.S. monetary policy that
their activities be subject to Federal Reserve regulations.
Access
of these foreign-owned banking offices to funds from domestic and
international financial markets gives them the capability of expanding
their balance sheets rapidly when demands for credit rise.
Foreign-
owned banking offices, like the largest U.S. banks, have a substantial
share of their assets in U.S. conunercial and industrial loans, and
they have increased these loans rapidly in periods of sharply rising
business activity in this country.
In such periods when monetary
policy is directed toward moderating the pace of business expansion,
it can be more efficient in this effort if the monetary policy
restraints are applied evenly to all banking institutions.
The attached chart presenting monthly data on total assets
of foreign banking facilities reveals some sharp month-to-month changes.
Too much importance should not be attached to any one of these as a
wide variety of factors can lie behind them.
Among these factors are
seascnalinfluences, shifts in relative interest rates leading to
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198
arbitrage transactions, and fluctuations in clearing transactions.
To
the extent that abrupt shifts in these balance sheets reflect international flows of funds or the arbitraging of interest rates between
U.S. and foreign financial markets, they are another element to be
taken into account in the day-to-day conduct of monetary policy, and
when they are large they can be a complicating factor.
More important to the longer-run conduct of monetary policy
are the basic credit and deposit flows in this growing and increasingly
significant segment of the banking system.
It is nevertheless clear
that these facilities, through their links to the other major financial
markets through their parents, have the potential to effect large
international shifts of funds in the short run, with consequent effects
on money markets and credit conditions.
Attachment
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TOTAL ASSETS OF FOREIGN BANKING INSTITUTIONS
Source : 886a
Billions of dollars
80
80
70
70
60
60
50
50
40
40
-'°
'°
30
20
20
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'72
1973
1974
1975
1976
1977
200
Appendix I
Non-Member U.S. Banks with Total Assets
Exceeding $-1 billion as of December 31, 1976
Bank Name
Total Assets
(millions)
Bank of Tokyo Trust Company'f<
2,245
California First Bank*
2,214
Lloyds Bank of California*
1,475
Bank of Hawaii
1.279
Banco Popular de Puerto Rico
] '2)(}
Equitable Trust Company
(Baltimore, Haryland)
l,lH
Industrial 11all.-,y Bank and Trust Co.
(Jenkintown, Pennsylvani~)
I .230
Northwestern Bank
(North Wilkesboro, North Carolina)
1,206
American Bank and Trust Company of P.ennsylvania
1,184
Contjnental Bank
(Norristown, Pennsylvania)
1,178
.First-Citizens Bank and Trust Co.
(Raleigh, North Carolina)
1,169
Arizona Bank
l, 164
Bank Leumi Trust Company of New York*
1,133
WilmingtoQ Trust Company
1,129
First Hawaiian Bank
1,096
Old Stone Bank
(Providence, Rhode Island)
1,019
* Affiliates of large foreign banks,
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201
Appendix 11
The attached table compares the growth of the U.S. activity
of foreign banks, the growth of. the U.S. offices of the large banks
which report weekly to the Federal Reserve, which are the primary
competitors of the U.S. offices of foreign banks, and the growth of
the assets of the foreign branches of U.S. banks.
The data indicate
clearly that the assets of the U.S. offices of foreign banks and
foreign branches of
u.s.
banks have in recent years been growing
substantially more rapidly than the assets at domestic offices of
the weekly reporting banks.
Attachment
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202
Comparative growth of foreign banks in United States and of U.S. banks
(in billions of dollars)
December
1972
1976
Foreign banks in U.S.:
Total Assets
Less due from directly
related institutions
in U.S.
Large member banks:
Total Assets
Foreign branches of
member banks:
Total Assets
Less intra-branch
claims
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Per cent
change
April
1976
1977
Per cent
change
26.8
75.8
59.0
66.2
...l.d
....§...:i
5.4
4.2
25.6
69.4
171
53.6
62.0
16
350.8 469.4
34
501.6 545.2
9
78.2
219.9
lLi.
46.6
66. 7 173.3
189.4 223.0
39.6
160
47.8
149.8 175.2
17
203
BOARD OF' GOVERNORS
0FTH£
FEDERAL RESERVE SYSTEM
WA!iHINGTDN, 0. C. aa S!I I
STC~HIEN S.GAfllONll.111
VICE CHAUIMAN
July 22, 1977
The Honorable Frank Anni.mzio
House of Representatives
Washington, D.C. 20515
Dear Frank:
I am enclosing an answer to your question about
the activities of domestic and inter-State foreign banks.
I hope you will find the answers useful.
During.your questioning of me, I tried to explain
that the Board's amendment to the bill covering agencies
would not diminish the opportunity fo-r major industrial
centers to attract State-licensed agencies of foreign banks.
I think this amendment would be considered fair and appropriate by competing domestic banks. The essence of the
proposal, as you know, is that State-licensed agencies
could be established in many State locations if they
engaged in international banking business. That means
they could finance_ trade and engage in loan transactions
and accept balances from U.S. and foreign customers provided those balances, called credit balances, were directly
related to the international transactions they handle for
foreign and domestic customers, These powers are entirely
similar to the powers now_ granted American:banks imder the
Edge Act.
The amendment strikes a fair balance and conforms
the treatment of American banks in the U.S. with the treatment of foreign banks here. It also respects the right of
the States to p~rmit entry of foreign bank agencies.
If there is any further explanation I can give
you on this important matter, I would be most pleased, as
you know, to see you at your convenience.
All best wishes,
Sincerely,
Enclosure
93-031 0 - 77 - 14
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S t a p ~ r..
204
Question from Congrt!ssman Annunzio
You have stated that H.R. 7325 is necessary to provide equitable
treatment between foreign owned and domestic banks. Is it
not true that our domestic bank holding companies, through
their many bank and nonbank subsidiaries and other facilities,
conduct far more extensive interstate banking activities than
do the foreign-owned banks which have established branches?
~•
The proper answer is no.
Domestic bank holding
companies are only permitted to conduct nonbanking activities across
State lines1 principal among these have been consumer finance, mortgage
lending, factoring, and leasing.
Edge Act Corporations are only permitted
to engage in international banking activities.
Thus, while it is true
that domestic banks through affiliated bank holding companies and Edge
Act Corporations conduct a greater range and volume of activities throughout
the U.S. than foreign banks, it is currently only foreign banks and
the small group of domestic banking organizations which were grandfathered
in 1956 and 1966 that are able to conduct a multistate banking business.
It should be further noted that, except for certain Edge Act provisions
that would be 1110dified by section 3 of H.R. 7325, there is currently
no provision of federal law preventing foreign banks from buying nonbanking
companies or for that matter, from buying any companies which domestic
bank holding companies are excluded from acquiring.
Thus, except for
the Edge Act,.foreign banks have essentially complete freedom to conduct
any form of activity--banking or nonbanking--on a multi-State basis.
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205
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v..klllgt.oa, D.C.
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Federal Reserve Bank of St. Louis
s/ St ::r~~~- :3.-;-ca:;,•;.:i:~
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II•••· car
206
9.uestion from Congressman Allen
How many foreign banks doing business in the United States
have gone bankrupt?
Aside from situations arising during wartime and possibly
during the Depression, the only recent failure we have been able to
uncover involving a foreign bank in the U.S.
was that of Intra Bank,
S.A., Beirut, Lebanon, a Lebanese bank that maintained a branch in New
York City.
On October 15, 1966, the Superintendent of Banks for the
State of New York took possession of the business and property of Intra'
New York branch and liquidated its affairs under the New York Banking
Law.
It is our understanding that local creditors of the New York
branch were paid in full in the proceeding, because of provisions in
New York law which required Intra Bank to pledge U.S. assets to back
up its U.S. indebtedness to depositor_s and U.S. creditors.
The FDIC
has recommended a similar asset requireme.nt provision in its alternative
insurance proposal.
The advantage of FDIC insurance in such situations .is that the
FDIC has the authority to arrange alternative solutions to liquidation
when such actions appear to be less costly than paying off depositors.
This provides a greater range of remedies to protect the interests of
u.s.
depositors and creditors.
For example, assets and liabilities
of a failing branch or agency could be purchased and assumed by another
banking institution, thus maintaining the continuity of banking services.
While it is true that
u.s.
authorities cannot prevent the failure of
a foreign bank abroad, FDIC insurance and federal supervisory controls
should help to ensure that local creditors and depositors of a foreign
bank's U.S. offices are protected to the maximum extent possible.
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Mr. ST GERMAIN. We are running a little short on time because of
the popularity of Governor Gardner with the members. As a result
thereof we were going to have a panel, and one of the witnesses has
graciously consented to be rescheduled to Tuesday, July 19. That is
the Bankers Association for Foreign Trade, and we want to express
our deep appreciation to them for their cooperation.
Under the circumstances, we will now ask Mr. Edward O'Brien,
president of the Securities Industry Association, if he would come
forward.
Mr. O'Brien, welcome.
We will place your entire statement in the record and you may
proceed to comment as you would like.
STATEMENT OF EDWARD I. O'BRIEN, PRESIDENT, SECURITIES
INDUSTRY ASSOCIATION (SIA); ACCOMPANIED BY JAMES W.
WALKER, JR., EXECUTIVE VICE PRESIDENT
Mr. O'BRIEN. Thank you very much, Mr. Chairman.
I am Edward I. O'Brien, president of the Securities Industry
Association. Accompanying me today is James W. Walker, Jr.,
executive vice president of the association.
As you know, the SIA membership includes more than 500
investment banking and brokerage firms located throughout the
Nation performing a broad range of services for investors of every
size and type.
At the outset, I want to congratulate the subcommittee chairman
for his persistent leadership last year in moving this important
legislation through the committee and through the House. On
behalf of our board of directors, I want to thank you again, and I
also want to extend our appreciation to Chairman Reuss and your
other colleagues on the Banking Committee who cosponsored H.R.
7325.
We are pleased to appear again before the subcommittee in
support of the basic purpose of H.R. 7325, that is to provide for
Federal regulation of foreign banks in the United States. The everincreasing participation of foreign banks in our domestic financial
markets certainly justifies the establishment of a national policy
with respect to those activities.
We also believe that two interrelated principles reflected in the
bill are fair and justified. First, SIA is in complete agreement with
the view that organizations offering similar or identical services
should be subject to comparable regulation. Second, foreign firms
operating in the United States should not receive a competitive
edge over domestic firms because they are permitted to engage in
certain endeavors which the Congress has determined as a matter
of public policy to be inappropriate for American businesses.
As we stated in our testimony before this panel last year, we
favor the enactment of H.R. 7325 because it reaffirms a basic tenet
of U.S. banking law-that there are limits as to the range of
activities in which banks or bank-related companies are permitted
to operate.
A review of the legislative history of the Banking Act of 1933the Glass-Steagall Act-the Banking Holding Company Act of 1956,
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Federal Reserve Bank of St. Louis
208
and the Bank Holding Company Act Amendments of 1970 evidences
both congressional recognition that the combination of banking and
nonbanking enterprises poses serious economic problems and a
consistent congressional intent to separate banking from other
areas of commerce.
SIA shares these views and believes they are as valid today as
they were in the past. For a more detailed commentary of SIA
views on these subjects, we would like to submit for the record a
copy of the Securities Industry Association's "Memorandum for
Study and Discussion on Bank Securities Activities."
Mr. 8'r GERMAIN. Without objection, it will be made a part of the
record.
[The above referred to publication follows the appendix to Mr.
O'Brien's statement.]
Mr. O'BRIEN. Turning to the specific provisions of the bill, section
8 deals with the extent to which foreign banks may conduct
nonbanking activities. This section applies the restrictions of the
Bank Holding Company Act of 1956 as amended to the nonbanking
operations of foreign banks which control branches, agencies or
commercial lending companies in the United States.
The primary purpose of that act, reaffirmed again when Congress
passed the Bank Holding Company Act Amendments of 1970, was to
close the 1956 Act's one bank holding company loophole in order to
preserve the basic separation of bank and bank-related activities
from other areas of commerce. SIA strongly supports that principle
and believes it should apply to foreign banks as well as domestic
banks.
The bill also requires that they terminate all nonbanking activities as of December 31, 1985, except that foreign banks which have
subsidiaries or affiliates engaged in the underwriting of securities
may continue to underwrite after that date if they do not sell
securities in the United States. To qualify to continue to underwrite, such aftUiates must have been established prior to December
3, 1974, or acquired pursuant to a contract entered into before or on
that date.
In addition, foreign banks or companies could continue to engage
in such other securities activities "to the extent not prohibited by
paragraph 7 of the Revised Statutes of the United States (12 U.S.C.
24), commonly referred to as the Glass-Steagall Act. A relevant
passage from that paragraph states:
... The business of dealing in securities and stock shall be limited to purchasing
and selling such securities and stocks without recourse, solely upon the order, and
for the account of customers, and in no case for its own account, and the association
shall not underwrite any issue of securities or stock.
For an uninterrupted period of nearly 40 years, this provision was
strictly construed by bank regulators. However, in recent years,
they have taken a much more permissive attitude in construing
what was intended to be a purposeful restraint on bank dealings in
securities. Today the only construction on which there is universal
agreement is that the quoted language prevents commercial banks
from engaging in the classic "underwriting" function of buying
securities and from a corporate issuer for the purpose of public
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Federal Reserve Bank of St. Louis
209
distribution and from buying and selling as a dealer for the banks'
own account securities not exempt from the act.
We have cited in the appendix a number of specific examples of
bank regulatory actions which highlight our concerns. Based on
these developments we are led to conclude that what appears to be
a plain and clear mandate that banks should not be in the business
of soliciting the purchase and sale of securities is not being followed
by bank regulators.
We believe it is also fair to conclude that if the Congress wants to
reaffirm the principle that banking activities should be separated
from other areas of commerce in general and the securities business
in particular, it cannot confidently rely on bank regulators, based
on recent experiences, to construe the language contained in paragraph 7 in a manner which will carry out that congressional intent.
Therefore, rather than merely incorporate by reference the statutory language which has increasingly been the subject of intense
legal debate, this subcommittee should take this opportunity to
state with precision what, if any, securities activities should be
offered by commercial banks, be they foreign or domestic.
In our view, banks should be prohibited from soliciting orders to
purchase or sell securities other than those securities now explicitly
exempt from the restrictions of the Glass-Steagall Act. Bank
brokerage services would thus be limited to those where the bank
provides the service solely at an existing customer's request as an
accommodation, the result intended by the act. Banks should also
be prohibited from engaging in private placement activities. We
believe regulators, bankers, and brokers all would definitely benefit
from the greater certainty such a congressional act of clarification
would provide. Positive action, indeed, would be timely and in the
public interest.
Another issue which sparked controversy last year was the extent
to which existing U.S. securities firms with foreign capital invested
in them would be affected by the legislation. Certain Members of
the House, joined by spokesmen from regional stock exchanges and
foreign affiliated securities firms, some of which are SIA members,
voiced concern that the bill failed to adequately take into account
the impact on the securities marketplaces and on the capital needs
of the Nation. Other House Members argued that the legislation
was protectionist and could invite foreign governments to retaliate
against U.S. commercial and investment bankers abroad.
As a matter of principle, SIA has no difficulty with putting
foreign banks to the same choice as U.S. banks, let them choose to
be either in the commercial banking business or in the investment
banking/securities business, but not both. Preoccupation with ancillary factors mentioned above tend to obscure the basic purpose of
the bill.
On the other hand, however, there may be practical considerations which will lead the Congress to temper the potentially
disruptive impact of a sound but hard principle with certain modifications. Last year, several proposals were debated and rejected.
Whether a more compelling case ca~ be made this year remains to
be seen. Certainly, our members, who either have already received
foreign bank capital or who may look to foreign banks as a source of
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210
capital in the future, would urge that some allowance or accommodation be made.
While these concerns may be valid, let me reiterate that as a
matter of principle that SIA supports the position that commercial
banks should not be in the business of soliciting the purchase and
sale of securities and that foreign institutions conducting a commercial banking business in the United States should be treated no
differently than their domestic counterparts.
We appreciate the opportunity to share with you our views on
this important legislation.
[The appendix to Mr. O'Brien's statement, along with a publication entitled "Securities Industry Association Memorandum for
Study and Discussion on Bank Securities Activities," follow:]
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211
APPENDIX
ILLUSTRATIONS OF REGULATORY TREND
RELATING TO BANKS OFFERING SECURITIES SERVICES
Securities organizations have had to seek legal redress to correct
the permissive interpretations of the Glass-Steagall Act by bank regulators.
The following events swmnarize the two important cases.
The Comptroller of the Currency, in 1965, ruled it was permissible
·undeT Glass-Steagall for banks, in effect, to sell mutual fund shares.
The Investment Company_Institute (ICI) challenged the ruling but had
to go ~11 the way to the U.S. Supreme Court to resolve the dispute.
The highest court held in the lnvestment Company Institute y, Camp
401 U.S. 617 (1971), the leading case interpreting the scope of permissible
activities under the Act, that the Comptroller was in error and that
such activities were in violation of the law.
The Comptroller of the Currency, this time in 1974, said that
the Glass-Steagall Act did not bar banks from offering automatic investment service (AIS) plans to its customers.
The ICI, joined by the New
York Stock Exchange (NYSE), have sued to overturn this opinion.
The
Comptroller's decision was upheld by a Federal District Court in 1975,
but th~ ICI and the NYSE currently have an appeal pending before the
U.S. Court of Appeals.
Disputes 'also occur when bank regulators make a more limited construction of the Glass-Steagall Act.
The following events relating to banks'
private placement activities, which amounted to an estimated $1.3 billion
in 1976 -- a more than 10 fold increase since 1972 -- provide an interesting
illustration:
The Deputy Comptroller of the Currency, in letter rulings dated
in late 1974 and early 1975, ruled that national banks and their subsidiaries
should not participate in any substantial degree in negotiations between
their clients and prospective purchasers of securities, nor should they
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212
charge a fee contingent upon a successful placement of securities since
such role "lies at the heart of the invesbnent banking businesa and undoubtedly constitutes a proscribed underwriting, selling, or distribution of
securities".
The content of these letters did not become public knowledge
until early 1976.
When asked last year by securities industry spokesmen
what plans the office of the Comptroller had either to publicize these
rulings or to enforce them, the response was the substance of the rulings
was under review for the purpose of liberalizing the ruling.
The Federal Reserve Board, on December 17, 1976, rejected an application by the First Arabian Corporation to retain an investment in Edward
Bates & Sons (Holding) Ltd., which owned 52% of Bates North American, a
United States broker-dealer subsidiary engaged in the private placement
business.
The Board ruled:
It is the public policy of this nation's banking laws, as expressed in the Glass-Steagall •••
to separate commercial banking from invesbnent
banking; and in the Board's judgment Bates
North American's participation in negotiations
and its contingent fee arrangements infringe
upon the area of investment banking to such
an extent that it must be considered engaged
in the business of underwriting, selling, or
distributing securities •••
within the meaning of Regulation Y promulgated under the Bank Holding Company Act.
On January 7, 1977, senior officers for three of the largest New
York City banks wrote the Board expressing concern over the possible implications of the Board's Order with respect to the First Arabian case and
specifically requested that the Board issue a statement to the effect that
the First Arabian Order is not intended to determine the legality under
the Glass-Steagall Act of the private placement activities of commercial
banks".
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213
On January 19, 1977, a joint letter on behalf of the Board was
sent to those banks reassuring them that "the Board has not, as a general
matter, attempted to limit, by application of the Bank Holding Company
Act, the activities that may be engaged in directly by banks that are subsidiaries of bank holding companies."
Furthermore, "(i)n the First Arabian
case, the Board was not called upon to consider the extent to which the
Glass-Steagall Act might prohibit banks from participating in the private
placement of securities".
On
June 15 the staff of the Board, in response to a request from
Chairman Reuss, reached an opposite conclusion.
The staff report claimed
while it "is not free from doubt" whether the Glass-Steagall Act prohibits
commercial banks from assisting private placements, the "stronger case" was
that such activities were not prohibited by the Act.
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214
SECURITIES INDUSTRY ASSOCIATION
MEMORANDUM FOR STUDY AND DISCUSSION
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Federal Reserve Bank of St. Louis
ON
BANK SECURITIES ACTIVITIES
August 1976
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215
INTRODUCTION
A strong and vital American banking system is essential
to the economic well being of this nation and, indeed, the
economic stability of the world. Banks play a central role in
international trade and finance and domestically provide
the credit essential to the smooth flow of commerce. The
importance of the role of banks in this country is underscored by the unique legal and regulatory framework in
which they function. Because of this unique position, it is
no small wonder that "the American people have repeatedly demonstrated their determination to have a sound
system of banking." 1
Background
The banking system currently is undergoing its most
extensive governmental review in over forty years. For
example, the Subcommittee on Financial Institutions
Supervision, Regulation and Insurance of the House Banking, Currency and Housing Committee recently has comple'ted a broad study of the nation's depository institutions2 and has proposed legislation to reform the regulatory structure of the banking industry. 3
The Securities Subcommittee of the Senate Committee
on Banking, Housing and Urban Affairs also is conducting
an extensive study of bank securities services, including
brokerage-related services and investment advisory services.4 The Subcommittee's study will attempt to determine, among other things, whether allowing banks to provide securities services may cause an undue concentration
of economic power and whether it may endanger the safety
and solvency of banks or investor confidence in capital
markets. 5
In addition to legislative review, the Capital Markets
Task Force, an interagency working group which the
Department of the Treasury chairs, is conducting a far-ranging study of bank securities services, including brokeragerelated, investment advisory and investment banking serBurns, Arthur F., "Maintaining the Soundness of Our Banking
System," speech delivered at the 1974 American Bankers Association Convention, Honolulu, Hawaii (Oct. 21, 1974) p. 1.
Hearings on Financial Institutions and the Nations Economy
(FINE) Study Discussion Princip/111 before the Subcomm. on
Financial Institutions Supervision, Regulation and Insurance of
the House Comm. on Banking, Currency aud Housing, 94th
Cong., 1st & 2nd Sass. (1975-76).
"Federal Reserve Act of 1976" IH.R. 12934), "Financial Reform Act of 1976" (H.R. 13077), and "International Banking
Act of 1976" (H.R. 13211). (The House has passed, in place of
H.R. 13211, H.R. 13876; further action on the other two bills is
not anticipated.I
Subcomm. on Securities of the Senate Committee on Banking,
Housing and Urban Affairs, The S11curati11S Activities of Commercial Banks, Study Outline (Comm. Print) 94th Cong., 1st Sess.
11975).
Unfortunately, the study does not intend to examine the serious
problems raised by investment banking services provided by
banks.
216
vices, to determine if the availability of securities services
from banks might have an adverse effect on the nation's
capital markets. 6 In 1974, the Securities and Exchange
Commission (SEC) conducted an extensive inquiry into
bank securities services to determine if adequate protection
is being afforded investors patronizing those services. 7 The
SEC is now undertaking a Congressionally-mandated study
to determine whether it is appropriate to continue to
exempt banks from many of the provisions of the securities
laws. 8 In addition to the adequacy of investor protection,
the SEC has also expressed concern about the disparity of
regulatory burdens among participants in the securities
industry as a matter of competitive fairness. 9
This extensive governmental consideration of the appropriateness of bank-sponsored securities services has initiated
a widespread public debate. We believe it is essential that
those who will play a role in resolving this issue be aware of
the securities industry's point of view. This paper is intended to present the industry's perspective in a manner that
will contribute to intelligent and informed debate.
Summary
It has long been the public policy of the United States to
separate the business of commercial banking from other
areas of commerce. 10 This theme has predominated bank
reform legislation from the Banking Act of 1933 (the
Glass-Steagall Act) through the 1970 amendments to the
Bank Holding Company Act and is visible in legislation currently pending in Congress.
Their dominant position as the principal suppliers of
credit to the private sector of the economy makes bankers a
force to be reckoned with, with substantial influence not
only on the economic and financial community but on our
social and political institutions as well. Indeed, concern
over excessive concentrations of power in the banking
industry is manifest in manY features of the present structure of our banking system, which includes a dual system of
6
Department of the Treasury, Public Policy Aspects of Bank Se·
curities Activities - An Issues Paper, November 1975 (hereinafter "Treasury Issues Paper").
Securities and Exchange Commission inquiry concerning bank•
sponsored investment services, Securities Act of 1933 Release
No. 5491, Securities Exchange Act of 1934 Release No.10761,
Investment Company Act of 1940 Release No. 8336 and Invest·
ment Adviser-5 Act of 1940 Release No. 409 (April 30, 1974).
Securities and Exchange Commission study of persons excluded
from definition of "broker" and "deater" pursuant to the directive of Section 11A(e) of Securities Exchange Act of 1934, as
amended.
See, Testimony of Securities and Exchange Commission Chairman Roderick M. Hills, Securities Activities of Commercial
Banks, Hearin111 before the Securities Subcomm. of the Senate
Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st
Seu. (1975) pp. 140-141.
10 As early as 1864 the National Bank Act limited the power of
banks chartered by the federal government to engage in activities
other than traditional banking functions. National Bank Act, Act
June 3, 1864, c. 106.
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Federal Reserve Bank of St. Louis
state and federal regulation, restrictions on interstate bank·
ing and a separate industry-apart from commercial
banking-comprised of savings and loan and other thrift
institutions.
In addition to their efforts to limit concentration, our
legislators consistently have attempted to circumscribe the
tendency of banks to become entrepreneurs rather than
intermediaries-that is, investing depositors' funds on their
own rather than providing credit to others. During the
1920's and early 1930's, bank participation in the securities
industry threatened to bring the underwriting of equity
securities and medium to long term debt instruments under
the domination of the major commercial banks. 11 Congress
enacted legislation explicitly separating banking from most
aspects of the securities business. More recently in 1970,
Congress, in amending the Bank Holding Company Act,
codified the principle that banking organizations should
confine their activities to fields closely related to
banking. 12
In recent years, commercial banks again have begun to
expand their operations into numerous nonbanking businesses. Some businesses in which they have engaged, or
attempted to engage, include operating an insurance
agency, providing financial and management consulting services, operating travel agencies, providing armored car service, leasing automobiles and providing data processing
services. 13
It has been widely assumed that existing banking law
prohibits bank expansion into securities activities, other
than those specifically permitted by the Glass-Steagall Act.
In the area of underwriting and dealer activity this assumption generally has not been questioned, although there remains some uncertainty as to the kinds of government obligations which qualify for the exemption afforded by the
Glass-Steagall Act. The legal status of other investment
banking activities, however, is less clear. The Office of the
Deputy Comptroller of the Currency has ruled that banks
may offer private placement services, subject to a number
of conditions: for example, a bank cannot participate in
negotiations between the issuer and the purchasers or
charge a fee for its services contingent upon the success of
the placement. The status of financial advisory services
offered by banks to corporate clients, such as advice on
mergers and long term financing, also is in doubt. The prac-
11 ''By the·end of the decade [the 1920's) commercial banks and
their affiliates had become the dominant force in the investment
banking field." Perkins, Edwin J., "The Divorce of Commercial
and lnveitment Banking: A History," 88 The Banking Law Jour•
nal 483, 495 (1971). In 1930, commercial banks and their affiliates underwrote 61% of all new bond issues. Id.
1 2 Some pertinent excerpts from the legislative history of both the
Glass-Steagall Act and the Bank Holding Company Act, includ•
ing the 1970 amendments, are set forth in Appendix I.
13 See note 135 balow.
217
tice of syndicating long term bank loans is another area
where the legal implications of Glass-Steagall have yet to be
definitively resolved.
More recently, banks have sought to offer certain types
of brokerage services, such as monthly automatic investment plans and dividend reinvestment plans. The legality of
the former has been judicially challenged and upheld by a
United States District Court, a decision which currently is
being appealed. At least one major commercial bank has
reported plans to offer a standard brokerage service to the
general public, and so far no regulatory authority has
moved to challenge this undertaking. It seems fair to conclude that the status of brokerage-related activities under
present law is highly uncertain.
The courts and, to some extent, the bank regulatory
agencies have sought to place certain restrictions on bank
expansionism. But the issues raised by bank participation in
these activities are too important to be resolved in this
manner, especially since the process would involve app1ica•
tion of legislative proscriptions over 40 years old to facts
clearly not then contemplated by Congress. It is a phenomenon which raises critical public policy issues deserving of
careful reevaluation by Congress. Such a reevaluation
requires examination of the principles and policies underlying the Glass-Steagall Act and other major banking legislation to determine the need for updating their provisions
in light of contemporary activities of banks and bank holding companies.
There are a number of important policy considerations
which should be weighed in the course of any Congressional
review. A good starting point would be a definition of what
Congress now believes are realistic and necessary goals to be
attained by national policy respecting the banking and
securities industries. We believe that an appropriate list of
such goals would be: (a) to promote maximum efficiency in
the capital markets, (b) to create an environment in which
financial institutions have both the incentive and ability to
meet the rapidly changing demands of our economy, (cl to
create a climate in which public trust in intermediating
institutions is high, (d) to encourage widespread direct
public ownership of American industry, (e) to promote fair
competition not only within markets but between markets
for substitute products, (f) to limit the economic and political power of any one sector, and (g) to protect investors
and depositors against improper practices. These objectives
may conflict at times, and careful reconciliation often is
necessary to strike a reasonable balance. The activities of
banks must be regulated with a view toward promoting
these goals.
Because of their importance as financial intermediaries,
banks have been accorded a variety of privileges designed to
reduce their costs of intermediation. The intended effect of
reducing these costs is to make credit available to the economy at low cost. Included among such privileges are favorable tax treatment, restrictions on entry into the banking
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business and the ability to obtain funds readily at low cost
from depositors, from other banks in the federal funds
market and from the Federal Aeserve's discount window.
Because of these and other advantages, banks possess an
enormous edge when they compete with other types of
enterprises in nonbanking businesses.
The critical point is that each of these advantages or
privileges is paid for by taxpayers and bank depositors and
is provided to banks for the benefit of those in need of
credit. They are not for the purpose of enhancing the ability of banks to engage in nonbanking activities; in fact, it
would constitute a clear departure from their purpose if
banks were permitted to employ them in such activities.
Equally as important, it would be highly unfair to expect
nonbanking entities to compete with banks in businesses
other than banking without the benefit of such privileges.
Another concern which cannot be overlooked in any
reevaluation of permissible bank activities is an appraisal of
the economic power which the major commercial banks
presently possess and continue to gather. Commercial banks
already are such a significant force in the economy, and so
far overshadow all other intermediary institutions, that any
serious study of the nation's present and prospective financial structure cannot ignore their growing influence. Commercial banks control in the aggregate over $1,300 billion
in assets and provide well over half of all external corporate
•
financing through bank loans.
In this regard, a good deal of public and Congressional
concern stems from the fear that banks may become so
dominant that, for practical purposes, no alternative means
of financing will remain available to provide business capital-a situation not unlike that which currently prevails in
Europe where commercial banks control virtually every
source of credit. Failure to take account of this possibility
could have serious consequences not only for our economy
but for our political system as well.
There are several other factors which should receive consideration in the review of banking law here recommended.
They include scrutiny of the conflicts of interest with
which bankers are faced when they provide securities or
other nonbanking services, the potential impact on the
stability of the banking system of bank expansion into nonbanking activities and the adequacy of investor protection
when banks offer brokerage and other securities services.
It is our belief such a review will prompt Congress to
conclude that reform of the banking laws is required to
restrict banks from continuing on their present course.
Such reform should effect a tightening of the existing provisions of the Glass-Steagall and Bank Holding Company
Acts which seek to restrict banks to banking-related activities. It also should ensure that banks are not permitted to
underwrite revenue bonds. Moreover, any amendments
should effect whatever changes are necessary to ensure that
bank regulators will not be tempted to erode such statutory
limitations.
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218
Legislative reform of this kind should be accompanied
by changes in the laws applicable to activities carried on in
the United States by banking organizations affiliated with
foreign banks. The policy objective should be to regulate
such organizations in a manner comparable to regulation of
domestic banks, particularly with respect to limitations on
nonbanking activities.
In the material which follows, we shall undertake to
e,cplore in detail the nature and implications of increasing
bank involvement in other areas and particularly in the
securities business. This task has been rendered considerably more complex by the absence of reporting requirements and the unavailability, for obvious competitive
reasons, of much data relating the specific activities engaged
in by individual banks. We also have experienced some difficulty in learning the precise nature of the positions with
respect to such activities taken by certain bank regulatory
agencies which do not make public in the normal course
replies to requests for interpretive advice or rulings.
219
SECURITIES ACTIVITIES OF BANKS
The role played by commercial·banks in various aspects
of the securities business has become extensive in recent
years, undoubtedly beyond anything dreamed of by Congress when the Glass-Steagall Act was adopted. Although
lack of comprehensive information makes cataloguing a
difficult task, the following subsections contain a brief
description of their principal activities in this area.
Investment Advisory Services
Apart from their own assets, banks are responsible for
the management of more funds than any other type of
financial institution. 14 In their capacity as fiduciaries,
banks manage the assets of pension and other employee
benefit plans and of trusts and estates of individuals. In
their capacity as agent, they manage the portfolios of a
variety of individual and corporate customers. In addition,
banks serve as investment advisers to both open•end and
ctosed·end investment companies and also act as investment
advisers to REITs (which, in many cases, they sponsor).
Brokerage Related Services
In recent years, many banks have begun to offer their
customers several brokerage related services. One of the
more common of these is the automatic investment service
{AIS). Through AIS plans, banks offer customers the
opportunitv to have a specified amount automatically
deducted each month from their checking accounts and
invested by the banks in the common stock of one or more
issuers included on a \ist supplied by the bank. The list
typically includes the twenty-five largest corporations in
the Standard and Poor's 425 Industrial Index, based on the
market value of the corporation's outstanding common
stock. The bank pools the monthly deductions from the
accounts of the participating customers and orders a broker
to execute transactions for the pooled accounts. Each Al$
customer receives a monthly statement indicating, among
other things, the number of shares purchased and the pur•
chc1se price.
Some banks also offer dividend reinvestment plans under
which investors may have the dividends they receive from a
participating corporation automatically reinvested in the
securities of that corporation. Through these plans, share•
holders of a participating corporation may request that
their dividends be paid directly to a bank, which pools the
dividends received and purchases additional shares of the
corporation's stock in the open market.
Besides pooling funds and acting as a conduit between
brokers and customers, some banks perform a more traditional type of brokerage by executing agency transactions
for their trust and other managed accounts, as well as for
banking customers, either through a registered brokerdealer, in the case of exchange transactions, or directly in
the over-the-counter market.
More recently, Chemical Bank of New York has an•
nounced that it plans to offer brokerage services to customers on an agency basis, regardless of whether a banking
relationship with the customer exists. 15 The bank will
charge a fee to participate in the service and a flat fee per
transaction. A major clearing firm reportedly will execute
these transactions for Chemical. A spokesman for the bank
indicated that its marketing plans were still being developed
but would not deny that the service might be promoted
through bank mailings to checking and savings account
customers. 16 The possibility that a bank affiliate might
apply for stock exchange membership remains open.
In the over-the•counter market, particularly the "third
market" where listed securities are traded, banks have a
long history of dealing directly with market makers as agent
for their customers. To the extent they do so, they appear
to be performing a traditional broker-dealer function.
Investment Banking Services
Banks are permitted to underwrite and distribute publicly debt instruments which constitute general obligations of
U.S. government units, although they reputedly purchase
more of their syndicate participation for their own
accounts than they distribute. 17 In recent years, the definition of a general obligation bond has been broadened by
the Comptroller of the Currency so as to include a number
of instruments more traditionally thought of as revenue
bonds. Apart from underwriting, the investment banking
activities of commercial banks generally take two forms,
the rendering of financial advice to corporations and the
finding or furnishing (or both) of funds for the tong-term
capital needs of corporations.
Financial counseling may be provided for a fee either on
a long term basis or for specific project~ {e.g., the financing
of a new plant) and generally comprehends the customer's
total need for financing, ranging from short term borrow·
ings to permanent capital. ts Where funds are to be obtained other than through the bank itseff, the bank frequently will assist its customer in preparing the necessary
documents for a private placement19 or selecting and nego15
16
17
115
19
14 The Treasury Department has estimated that commercial banks
manage approximate!y $400 bi/Hon in trust assets alone. Treas•
ury Issues Paper at 7.
93-031 0 - 77 - 15
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The Chemical Bank announced that it would offer brokerage
services and p!ace the orders through registered broker-dealers.
Securities Week, March 15, 1976.
Securities Week, March 29, 1976, p. 7.
Herman, Edward S .. Conflicts of Interest: Commercial Bank
Trust Departments, Twentieth Century Fund, 1975, p. 12.
In two private interpretative letters, the Comptroller authorized
the provision of financial counseling services by national banks.
(See Appendices IIA and 11B.)
In those same letters, the Comptroller also authorized limited
bank involvement in private placement activities. See discussion
below under "Legal Status of Bank Securities Activities-Investment Banking."
220
tiating with an underwriter in the case of a public offering.
in private placements they have arranged by purchasing for
portfolios under their management a portion of the securities to be sold, 23 and on occasion a bank will assemble for
a customer a financing package consisting of a medium
term loan from the bank itself, together with a private
placement to provide the ultimate long term financing.
Since the legal restrictions of the Glass-Steagall Act do
not apply to the foreign securities activities of United
States banks,24 those banks have been engaging in an everincreasing range of investment banking activities overseas.25 Through foreign branches, Edge Act corparations
and investments in foreign banks, United States banks participate in large syndicated bank loans to foreign borrowers26 and Eurobond underwriting syndicates, 27 as well as
offering financial counseling services.
For over thirty years, U.S. commercial banks had been
largely content with confining themselves to accepting
depasits and lending money, but beginning in the 1960's
commercial banking underwent a radical change.28 The
large money-center banks aggressively sought funds through
new deposit instruments, such as certificates of deposit, and
began to extend the term of their loans. Then, with the
advent of the one bank holding company concept as a catalyst, these banks expanded into new fields, such as consumer finance, foreign merchant banking and mortgage origination, in search of outlets for those funds.
If recent patterns of activity and development by the
major commercial banks continue, it appears likely that
these banks will attempt to extend their activities in the
securities industry during the next decade. Brokerage and
advisory services in particular-which require principally
personnel and office space-are especially attractive to
many of the large banks because they can afford the opportunity to offer a "full-line" of financial services to gain an
edge in the intense competition for both depositors and
commercial customers.
Banks also furnish financial advice in connection with corporate reorganizations, including mergers and acquisitions,
and sometimes perform appraisal services in connection
with such transactions.
Banks also serve directly as a source of long term funds,
either through their own lending facilities or by arranging
private placements of securities with other lenders. At the
time the Glass-Steagall Act was enacted, bank lending typically was short term in character, ranging from demand to
90-day loans. Since then, banks have gradually increased
the maturity of their loans, so that term loans (those exceeding one year in maturity) now constitute more than
40% of industrial and commercial loans of major commercial banks,'2° and borrowings with much longer maturities
(exceeding five years) constitute a significant Portion of
such loans. 21 Frequently, these loans are made through
syndicates of banks, which contain from a handful to a
substantial number of domestic, and sometimes foreign,
banks. Syndicated bank loans are effected for domestic and
foreign borrowers and are extended both by U.S. banks and
their overseas affiliates. {See Appendix 111.)
In addition to providing long term funds themselves,
banks have become quite active in arranging, for a fee,
private placements of securities of all types, from long term
bonds to equities, with a variety of institutional lenders.
Although some of the commercial banks most active in the
private placement of securities-e.g., Morgan Guaranty,
Crocker National and Manufacturers Hanover-do not
report the extent of those activities, during 1975, those
which did not report were involved in over $500 million of
private placements. 22 In some instances, banks participate
2
°
FIHl11ra/ Res11rve Bul/11tin, A-23, February 1976.
21 According to the Tn,asury Issues Pa/)llr, on April 30, 1975, 140
national banks having deposiu in excess of $250 million reported that 10,75 percent of their industrial and commercial loans
had maturities of greater than five years. Tn,asury lssun Paper at
10.
22 As reported by Investment Deal11rs' Di!JBst, the following banks
were engaged in private placement activities during 1975:
Advisor
Number of lauas
Amount
23 Conflicts
of Interest: Comm,rcia/ Bank Trust 0epartment1, pp.
47-48.
These restrictions are discussed more fully below under "Legal
Status of Bank Securities Activities-General."
25 See, Welles, Chris, Th11 Last Days of the Club, New York, E. P.
Dutton & Co., Inc. (1975), p. 423; and "The Lessons Banks
Learned from Overseas Misadventures," Busines1 Week April 19,
1976, p. 104.
26 See advertisements in Appendix Ill.
2 7 Eurobonds are securities publicly offered by an international
underwriting syndicate in more than one country, Of the 173
Eurobond offerings in 1975, it was reported that Manufacturers
Hanover Ltd., an affiliate of Manufacturers Henover Trust Company, participated in 159, Citibank's foreign affiliate in 128,
Bank of America's in 99, Bankers Trusts's in 48 and Firtt Chica•
go's in 36, Busine,s Week at 104.
28 SH generally, "Merchant Banking, Is the U.S. Ready For It?"
Business Week, April 19, 1976, p. 54.
10001
Citibank N.A.
First National Bank of Chicago
Northern Trust Company
Chase Manhattan Bank
Manufacturers National Bank
of Detroit
Hibernia National Bank New Orleans
Marquette National Bank Minneapolis
Total
4
19
6
3
$231,590
138,947
81,000
38,476
24
5,000
4,700
1
36
2,045
$501,758
ln1111stment Dealers• Digest, March 12, 1976.
Business Week reports that although they do not reveal their
dealings Morgan Guaranty Trust Company, Crocker National
Bank and Manufacturers Hanover Trust Company are active in
the private placement field. Morgan is characterized as "[pJrobably the leader in bank practice placements." Business M.,k,
April 19, 1976, p. 64.
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221
The combination of the competitive advantages enjoyed
by banks29 with their natural interest in the securities industry suggests that participation in the industry by the
major banks is likely to increase in the absence of legislative
or regulatory restrictions. These banks can surely be ex-
pected to employ their advantages with the same degree of
imagination they exhibited in utilizing the one bank hold-
ing company mechanism to diversify despite the restrictions
on that concept impcsed by the 1970 amendments to the
Bank Holding Company Act.
30
29 These are discussed below under "Policy Reasons for Restricting
Bank Securities Activities-Economic Advantages Possessed by
Banks."
30 "Instead of serving as a deadly barrier between banking and
other businesses, the 1970 'one-bank holding company' law 1s
coming to look more like the gateway to a promising new land
of profits and power. By setting up holding companies, many
banks now find it possible to move into lucrative new ventures
ranging from the operation of insurance agencies to computerized payroll processing." {Janssen, Richard and Foldessy, Edward, "Holding-Firm Law Designed to Limit Banks Instead
Opens New Finance-Service Vistas," WSJ, January 7, 1972.)
"Thanks to the 1970 amendments to the Bank Holdmg Company Act of 1956, commercial lending institutions gained both
incentive and authorization to widen their corporate horizons."
{Anreder, Steven S., "Beautiful Balloon? Bank Holding Companies Embark on Frantic Expansion," Barron's, April 29, 1974, p,
3.1
222
LEGAL STATUS OF
BANK SECURITIES ACTIVITIES
General
The Glass-Steagall Act was enacted in 1933 in reaction
to Congressional findings that there were many abuses by
banks in the securities industry. During the decade following World War I, banks expanded into the securities industry through the formation of securities affiliates. Not only
did these affiliates fuel the speculation of the late 1920's,
but they also diverted valuable financial and managerial resources from the parent banks. 31 Furthermore, securities
underwritten by bank affiliates frequently were purchased
by the affiliated banks themselves, often for their trust
accounts, and sometimes were "unloaded" on correspondent banks. 32 These purchases weakened the financial stability of the banks themselves.
Since the bank securities affiliates were associated with
their parent banks in the public's mind, their financial
plight in the wake of the stock market crash of 1929 seriously undermined public confidence in banks and the banking system. The failure of the Bank of the United States in
1930 was widely attributed to that bank's activities with
respect to its numerous securities affiliates. 33
The powers of national banks 34 are enumerated in Section 16 of the Glass-Steagall Act. Such banks also may
exercise all incidental powers necessary to carry on the
business of banking; 35 however, dealing in securities by
national banks is expressly limited to
purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the [bank] shall not underwrite any issue
of securities or stock. 36
Moreover, anyone "engaged in the business of issuing,
underwriting, selling, or distributing" ... securities is prohibited by Section 21 of the Act from engaging in "the
business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of
deposit, or other evidence of debt, or upon request of the
depositor
."37 In addition, by virtue of the Act, all
31
32
33
The poss1bi!1ty of spectacular profits from securities affiliates
caused the principal officers of many banks to establish such
affiliates. Burns, Helen, The American Banking Community and
New Deal Banking Reforms: 1933-1935 (1968), p, 64.
See, "Landmark Law that Boxes In the Banks," Business Week,
April 19, 1976, p, 56.
Investment Company Institute (!Cl} v. Camp, 401 U.S. 617,629
(1971).
34 Banks may be subiect
member banks 38 are prohibited from being affiliated with
securities firms, 39 and no individual who is an officer,
director, employee or partner of a securities firm may be an
officer, director or employee of a national bank. 40 To complete the statutory pattern, bank holding companies are
limited to engaging in banking and activities closely related
to banking as defined in Section 4(c)(8) of the Bank Holding Company Act; the Federal Reserve Board (the Fed) has
read into the Bank Holding Act the provisions of the GlassSteagall Act (the Act) prohibiting banks from providing
securities services.41
It is clear that one of the Act's purposes was to prohibit
commercial banks from entering the investment banking
business. 42 Congress was familiar with the practice of many
banks in establishing securities affiliates that had engaged in
the business of floating bond issues and, on occasion,
underwriting stock issues, and determined that bank involvement with the speculative securities prevalent at the
time damaged not only the financial stability of the banks,
but also of the nation. It was feared that the responsibility
of banks to make disinterested credit decisions might be
impaired by pressures resulting from bank affiliation with
securities firms. 1n addition, Congress was clearly concerned
about the conflicts of interest stemming from such affiliation. Finally, it is apparent Congress feared that loss of
depositors' confidence in the banking institutions, which
could be heightened as a result of their securities involvement, would have a serious detrimental effect on the
national economy.
In IC! v. Camp, 43 an association of open-end investment
companies and several individual companies challenged
both a regulation of the Comptroller of the Currency,
which authorized banks to operate collective investment
funds, and the Comptroller's approval of a First National
City Bank collective investment fund. Under First National's p!an, the bank customer tendered between $10,000 and
$500,000 to the bank, together with an authorization naming the bank the customer's managing agent. The customer
was then issued written evidence of his participation, which
was freely redeemable and transferable to anyone who had
executed the bank's managing agency agreement. The fund,
which was registered as an investment company under the
Investment Company Act of 1940, was managed by the
38 Every national bank is required to be a member of the Federal
Reserve System. 12 U.S.C. §222.
39 12 u.s.c. §377.
[NJ o member bank shall be affiliated 1n any manner ... with
any corporation, association, business trust, or other similar
organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail
or through syndicate participation of stocks, bonds, deben•
tu res, notes, or other securities.
to regulation by a variety of regulators,
both federal and state. Since most of the banks active in offering
securities services are either national banks or subsidiaries of
bank holding companies, this section will focus on federal banking regulation.
JS 12 U.S.C. §24, Seventh.
36 Id.
42 See Appendix I, pp. 1-3.
37
43 401 U.S. 617.
12 U.S.C. §378(a).
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40 12 u.s.c. §78.
41 See, 12 C.F.R. §225.125(b).
223
bank as investment advisor. 44
The Court found that the bank's activities were substantially equivalent to operation of a mutual fund and that, on
their face, Sections 16 and 21 of the Act prohibited this
activity by national banks.45 Nevertheless, it proceeded to
explore thoroughly the legislative intent of the Act. The
Court found that Congress wanted to keep commercial
banks out of the investment banking business
largely because it believed that the promotional in-
centives of investment banking and the investment
banker's pecuniary stake in the success of particular
investment opportunities was destructive of prudent
and disinterested commercial banking and of public
confidence in the commercial banking system. 46
In passing the Act, Congress was motivated by more than
the obvious danger that banks would invest their assets in
imprudent investments.47 Congress felt it was imperative to
eliminate the temptations banks would face upon entering
into investment banking, which could impair their ability to
function as an impartial source of credit. A bank, for example, might well fear that it would be discredited in the
public's view if its securities affiliate did poorly. Accord·
ingly, it might be tempted to shore up its affiliate's finances
in several ways: by making unsound loans or providing
other aid to the affiliate; by lending money or extending
credit to those companies in which the affiliate had invest•
ed; or by lending money to a third person to finance its
purchase of the affiliate's investments. Furthermore, the
Court perceived a strong concern on the part of Congress
over the "plain conflict between the promotional interest
of the investment banker and the obligation of the commercial banker to render disinterested investment advice." 48
And, perhaps most importantly, the loss of goodwill resulting from customers' suffering losses on investments purchased in reliance on the bank's name would result in a Joss
of the bank's reputation, which would impair national confidence in the entire banking industry and, ultimately, the
national economy.
Thus the Supreme Court recognized the serious public
policy i~sues which arise not only when banks enter the
business of investment banking but whenever banks determine to enter fields outside the business of commercial
banking. The principles enunciated by the Court in Camp
are a prerequisite to proper analysis of the legality of various bank securities services.
44
45
46
47
401 U.S. at 622-23.
401 U.S. at 625.
401 U.S. 634.
In fact, the securities aif\liates had often operated without direct
access to the bank's assets.
48 401 U.S. at 633.
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Investment Banking
Although it is clear that the Act at least forbids bank
participation in the underwriting of non-exempt securities,49 the legalitY of bank involvement in other investment banking services is uncertain. Indeed, certain investment banking services have been found by the Comptroller
of the Currency to be incidental to banking and therefore
permitted to a national bank.
For example, the Office of the Deputy Comptroller of
the Currency has issued two letters which take the view
that banks may, with certain limitations, engage in private
placement activities. (See Appendices IIA and 11B.) In the
view of the DeputY Comptroller, a bank can properly provide assistance to a customer in determining long term
financial objectives. Incidental to this function, therefore, a
bank may convey to this customer names of potential participants in a private placement and may even make preliminary inquiries of investors to ascertain interest in the issue.
The bank cannot, however, participate in the actual negotiations between the customer and the purchasers, for act•
ing as a middleman is the "heart of the investment banking
business." (See Appendix 118.) Moreover, since the Office
of the Deputy Comptroller recognizes that a bank clearly
cannot participate in a "best efforts" underwriting, it may
not charge a fee for its services contingent upon a successful
private placement, since "the levying of such a fee is a
strong incentive for the bank to locate a purchaser with
whom a deal can be made."
A persuasive argument can be made, however, that banks
may not provide their customers with private placement
services. As discussed above, 50 both Sections 16 and 21 of
the Act prohibit banks from underwriting any issue of nonexempt securities or stock. Since arranging private placements of securities appears substantially similar to "best
efforts" underwriting, and in a sense results in a "distri·
bution" of those securities, it would seem that a bank
would transgress the prohibitions of those two sections by
providing private placement services.
Moreover, the preceding analysis of the Act st.rongly suggests that Congress intended to prohibit bank participation
in private placement activities. One of the primary
functions of investment banking, after all, is the distribution of securities, whether by public offering or by private
placement; and the dangers Congress intended to prevent
by divorcing investment banking and commercial bankingincluding imprudent extensions of credit, diversion of bank
personnel from commercial banking, conflicts of interest
and undermining of public confidence in banks-are the
same d8ngers that arise when banks engage in private place49 The decision in /C/ v. Camp rested on the Court's finding that
the offering of commingled agency account services by a bank
constituted an illegal underwriting,
50 See te><t accompanving notes 35-37.
224
ment activities. For example, a bank may find itself pres•
sured by those who participated in a private placement
Finally, although extending long term loans in iteself
does not seem to exceed the banking powers of national
banks, under certain circumstances this practice could be
subject to question. As noted above, Section 21 of the Act
prohibits a bank from "underwriting, selling or distributing,
at wholesale or retail, or through syndicate participation,
stocks, bonds, debentures, notes, or other securities". 54
Presumably, an ordinary bank loan would not constitute a
"security" within the meaning of this section; however, the
distinction between a loan and a security depends on the
characteristics of the instrument creating the obligation
and, more importantly, the circumstances surrounding its
sale.
A recent Ninth Circuit case has explored this distinction
in the context of when a bank loan may be a security for
purposes of the Securities Exchange Act of 1934. 55 Under
the rationale of the case, this question turns on whether
repayment of the loan depends on the entrepreneurial or
managerial efforts of another person; if it does, a security is
likely to be involved. Among the factors considered relevant to this determination are the length of the loan,
whether the obligation is issued to a single investor or a
group of investors, the size of the debt relative to the business and the extent of the obligation's collateralization.
It would appear that some syndicated long term bank
loans (see Appendix 111) might constitute securities under
such a test. Accordingly, the syndication process itself
could be deemed an illegal distribution of securities under
Section 21.
Furthermore, although generally the provisions in long
term bank loan agreements are appropriate for protecting
the bank's investment, in some cases those provisions may
give banks such a degree of influence over the borrower
that the loan and the agreement have attributes similar to a
prohibited equity investment. s 6
arranged by the bank to make imprudent loans to the issuer
to assuage the participants' dissatisfaction with their investment. Serious conflicts of interest also may arise when a
bank attempts to place privately secruities with accounts
managed by its trust department. 51
The limitations on bank involvement contained in the
Deputy Comptroller's letters-no direct negotiation, no
contingent fee-apparently stem from his recognition that
such direct participation involves the bank in the promo-
tional aspects of securities marketing which the Act expressly banned. The promotional problems, however, may
arise even within his limits of permissible activities. Since a
bank has a clear interest in the success of a placement, it is
difficult to understand how realistically it may make even
"preliminary inquiries" of potential investors or participate
to an "insubstantial" extent in negotiations without at the
same time marketing the securities. The factors which
underlie the Deputy Comptroller's objection to a contingent fee exist whenever a bank participates in a private
placement, since the size of the bank's future placement
fees-from that client and other prospective clients-relates
directly to its reputation for successful placements. Thus,
the concerns expressed in the Deputy Comptroller's letters
provide grounds for concluding that banks should not, to
any extent, engage in private placement activities.
Other types of financial consulting by banks, apart from
private placement activities, similarly raise questions of
legality. Although providing financial advisory services in
connection with extending short term loans would appear
properly to be incidental to the business of banking, it is by
no means clear that other financial advisory services customarily provided by commercial banks, such as advice on
mergers and long term financings, are properly within a
bank's incidental powers. For example, the Federal Reserve
Board (the Fed) has ruled that bank holding companies
may not provide management consulting services-including
advice or analysis as to a firm's planning operations, such as
corporate acquisitions and mergers, and determination of
long term and short term goals-because it does not regard
such services as being "closely related to banking" under
Section 4(c)(8) of the Bank Holding Company Act. 52
Although the Fed's enumeration of non-permissible
management consulting servicess 3 does not expressly encompass all financial advisory services, the rationale of its
ruling supports the proposition that national banks may not
properly engage in such services (except those incident to
the extension of short term credit).
Brokerage Related Services
The legal status of one form of brokerage service offered
by banks is currently the subject of litigation, the New
York Stock Exchange (NYSE) and the ICI have appealed
the District Court's decision granting the Comptroller's
motion for summary judgment in their case challenging the
Comptroller's interpretative letter permitting banks to offer
A/S's. 57 That interpretations 8 reviewed the provision of
54 12 U.S.C. §378 fa)(1).
55 Great~sternBank & Trust v. Kotz, 532 F.2d 1252, {9th Cir.
1976).
S6 National banks are prohibited from purchasing for their own
account equ1tv securities. 12 U.S.C. §24, Seventh. Similarly,
bank holding companies may not purchase stock of a company
which is not a bank or engaged in a business closely related to
banking. 12 U.S.C. §1843(a).
57 Naw York Stock Exchange, Inc. v. Smith, 404 F. Supp. 1091
(D.D.C. 1975).
58 Comptroller of the Currency, letter dated June 10, 1974.
51 See note 23 above.
52 12 C.F.R. §225.t25(f).
53 12 C.F.R. §225.4(al(5) n. 3. This enumeration is not deemed to
be exclusive.
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225
AIS plan. 65
Regardless of the outcome of the case however, the critical question is not the legality of AIS or dividend reinvestment plans; it is the legality of the full-scale brokerage services that at least one major commercial bank has disclosed
plans to offer.66 Through these services, banks would seek
to reach more customers than they do with AIS plans and
such services would receive a full-scale promotional and
advertising campaign. Such services clearly would involve
many of the problems the Act sought to remove.
Section 24 of Title 12 which states that
(tJ he business of dealing in securities and stock by
the [bankJ shall be limited to purchasing and selling
such securities and stock without recourse, solely
upon the order, and for the account of, customers ... 59
and concluded that the plain meaning of the words permits
banks to purchase and sell stock as agent for customers,
precisely the activity involved in AIS's. It further deter•
mined that the creation and management of an AIS by a
bank did not involve the business of underwriting, selling or
distributing securities in contravention of Section 378 of
Investment Advisory Services
Title 12.
Investment advisory services seem to be properly incidental to the trust activities of a bank, and no legal basis for
challenging such activities appears to exist so long as they
are performed by the bank's trust department independent
of its commercial department.
The NYSE and ICI, on the other hand, maintained that
the statutory language permits agency transactio~s. but
only when done as an accommodation for the customer and
at or below the bank's costs.60 Moreover, they argued, the
Act did not intend for banks to promote, advertise and
solicit participation in such services nor to use such services
to attract new banking customers.
The District Court's decision was based largely on the
doctrine that courts should give great weight to an agency's
interpretation of a statute for which the agency has administrative responsibility. 61 This doctrine has not rescued other interpretations promulgated by the Comptroller. 62 Furthermore, the fact that the challenged interpretation marks
a reversal of the Comptroller's earlier view63 casts further
doubt on the current interpretation. While the legislative
history is ambiguous on this point, the intent of the Act, as
articulated by the Supreme Court in /C/ v. Camp,64 suggests that the very risks the Act sought to eliminate-loss of
public confidence in the banks, conflicts of interest and
biased credit judgments-arise when the bank has a salesman's stake in its investment services through offering an
59
65 The same considerations would appear to apply with equal force
to dividend reinvestment plans and the limited direct brokerage
in which banks are currently engaged.
66
12 U.S.C. §24, Seventh.
60
NYSE's and ICl's Memorandum ... in Support of Plaintiff's
Cross Motion for Summary Judgment (hereinafter "NYSE and
/Cl Memo") at 27, NYSE v. Smith.
61 NYSE v. Smith. supra, citing IC/ v. Camp, supra, and Udall v.
Tallman, 380 U.S.1, 16 (1965).
62
During the past decade numerous interpretative rulings promulgated by the Comptroller have been overturned by the courts:
Agents, Inc. v. Saxon, 268 F.
399 F.2d 497 {1968) (Insurv. Saxon, 261 F. Supp. 247
(1968) {underwritmg munict•
Bank v. Dickinson, 396 U.S.
122 (1969) (armored car services); Investment Company Institute v. camp, 401 U.S. 617 11971) (mutual fund); Arnold Tours,
Inc. v. Camp 472 F.2d 427 (1st Cir. 1972) (travel agency);
National Retailers Corp. of Arizona v. Valley National Bank and
Smith, Doc. No. 71-410 PHX-WEC (O. Am. 1976) (data process1ngl.
63 Originally, the Comptroller mterpreted this provision to prohibit
banks from purchasing or selling securities for a customer's account except as an accommodation to the customer. /Bulletin of
the Comptroller of the Currency, No. 2, Oct. 26, 1935 at 2-3.)
64 This legislative intent argument is more fully set out in the NYSE
and /Cl Memo at 12-25.
Georgia Ass'n. of Independent Ins.
Supp. 236 (N.D. Ga. 1967). aff'd
ance agency); Baker, Watts & Co.
(O.D.C. 19661, aff'd 392 F.2d 497
pal revenue bonds); First National
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See note 15 above.
226
POLICY REASONS FOR RESTRICTING
BANK SECURITIES ACTIVITIES
vital because of our national commitment to commercial
fair play and our democratic tendency to avoid massive
aggregations of power in any individual, corporation, institution or industry.
These goals frequently may be in conflict, and reconciliation often is necessary; nevertheless, a workable compromise among them should be attainable. For example, a reasonable balance between promoting economic efficiency
and limiting concentration can be struck by limiting the
areas of direct competition between different types of institutions while encouraging these institutions to offer close
substitutes for each other's products, subject to certain constraints, and providing for easier entry by other types of
competitors into each of the restricted markets. Similarly,
investor protection through full and fair disclosure need not
be inconsistent with public confidence in intermediaries.
Some would argue, in fact, that disclosure eventually
improves corporate behavior and thus enhances public confidence.
The remaining subsections discuss the desirability of separating the banking and securities industries to maximize
attainment of the above policy objectives.
This section will explore some of the fundamental policy
issues raised by bank participation in securities activities.
To develop these issues in the proper context, we shall
begin with a discussion of some of the objectives for national policy respecting the banking and securities industries.
Public Policy Objectives
As articulated in the Introduction to this paper, we believe an appropriate list of major policy objectives would
include the following: (a) to promote maximum efficiency
in the capital markets, 67 (b) to create an environment in
which financial institutions have both the incentive and
ability to meet the rapidly changing demands of our econ-
omy, (c) to create a climate in which public trust in intermediating institutions is high, 68 (d) to encourage widespread direct public ownership of American industry, 69 (e)
to promote fair competition not only within markets but
between markets for substitute products, 70 (f) to limit the
economic and political power of any one sector, 71 and (g)
to protect investors and depositors against improper practices. 72 The first four goals relate to the need to maximize
our capital-raising ability in order to satisfy the nation's
immense capital needs: 73 goals (a) and (b) are concerned
with institutional efficiency and flexibility; goal (c) relates
to the highly developed sense of public confidence in our
financial intermediaries which is a necessary precondition
to use of such intermediaries for savings and investment;
and goat (d) refers to the direct equity ownership which
gives the public a stake in the free enterprise system.
Achievement of these goals, it is urged, would produce the
conditions necessary for sustained economic growth and a
high level of employment. Goals (e), (fl and (g) also are
67
68
Role of Banks and Securities Firms
in Capital Markets
Much of the banking legislation of this century has been
a response to the perceived need to foster and maintain the
stability and soundness of the banking system. The Federal
Reserve Act of 1913 was enacted in response to the banking panic of 1907, and the Glass-Steagall Act was enacted
to deal with the role of banks in the credit excesses of the
1920's that contributed to the collapse of the nation's
economy and numerous bank failures in the 1930's. 74 The
Bank Holding Company Act of 1956, as amended in 1970,
reflected Congressional concern that banks through one
bank holding companies, would diversify into businesses
which could jeopardize their financial stability. 75
This objective is discussed more fully below under "Role of
Banks and Securities Firms m Capital Markets."
Publ,c Policy for American Capital Markets, prepared by James
H. Lone for submission to the Secretary and the Deputy Secretary of the Treasury, February 7, 1974 at 4-5.
74 The Senate committee which reported the bill that became the
Federal Reserve Act of 1913 stated that:
69 Id.
The chief purposes of the banking and currency bill is
to give stability to the commerce and industry of the
United States, prevent financial panics or financial stringencies; make available effective commercial credit for individuals engaged in manufacturing, in commerce, in finance, and in business to the extent of their just desserts;
put an end to the pyramiding of the bank reserves of the
country and the use of such reserves for gambling purposes
on the stock exchange.
70
The preamble to the Bank Holdmg Company Act of 1956 states
as its purpose the prevention "of undue concentration of resources, decreased or unfair competition, conflicts of interest, or
unsound banking practices."
71 Id.
72
The preamble to the Securities Exchange Act of 1934 states rn
part:
For the reasons hereinafter enumerated, transactions in
securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a
national public interest which makes it necessary to provide for regulation and control of such transactions and of
practices and matters related thereto, ... to insure the
maintenance of fair and honest markets in such transactions.
13 Business Week estimates that during the decade 1975-84 $4.5
trillion in capital investment will be needed by the economy,
nearly three times the $1.6 trillion consumed in the 1965-74
decade. Business Week, September 22, 1975, p. 43.
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S. Rep. No. 131, pt. 2, 63rd Cong., 1st Sess. 7 (1913).
The preamble to the conference report which accompanied the
bill that was enacted as the Banking Act of 1933 (the GlassSteagall Act) stated that the bill's purpose was:
to provide for the safer and more effective use of the assets
of banks ....
H.R. Rep. No. 254, 73rd Cong., 1st Sess. 1 (19331.
75 The report of the Conference Committee that rep0rted the Bank
Holding Company Act Amendments of 1970 noted the "mixing
(of] banking and nonbanking in complete contravention of the
12
227
TABLE 1
Effective Tax Rate is Lower for Banks Than Brokers
50%
\
5 Major Brokers
40%
Average
Percent of
Net Income
Paid In
Taxes
30%
5 Major Banks
20%
0%-'----~---~----~---~----~---~--72
74
71
73
1970
1975
Source:
Speech by Alan F. Blanchard, former Executive Director of the Securities and Exchange Commission, before the Carter Golembe
Associates Executive Seminar, October 16, 1975 (hereinafter "Blanchard Speech") p. 22A.
The role of the securities industry in our capital markets
is equally vital to the economy. 76 The underwriting net-
work makes new capital available to government and industry, and the secondary markets ape rate to provide a highly
efficient mechanism for valuing and transferring ownership
76 Public Policy for American Capital Markets, at 1 .
77 The Report of the Joint Conference Committee on the Securities
Acts Amendments stated:
The securities markets of the United States are indispensable to the growth and health of this country's and the
world's economy. In order to raise the enormous sums of
investment capital that will be needed in the years ahead
and to assure that that capital is properly allocated among
competing uses, these markets must contmue to operate
fairly and efficiently. The increHing tempo and magnitude
of the changes that are occurring in our domestic and international economy make it clear that the securities markets
are due to be tested as never before. Unless these markets
adapt and respond to the demands placed upon them, there
1s a danger that America will lose ground as an international
financial center and that the economic, financial and commercial interests of the Nation will suffer.
H.R. Rep. No. 229, 94th Cong., 1st Sess. 91 (1975).
of securities. Indeed, one of the principal purposes of the
Securities Acts Amendments of 1975 was to promote the
efficiency of the securities markets. 77
purpose of both Federal banking laws going back to the 1930's
and the Bank Holding Company Act of 1956" and quoted with
approval the following statement of the President:
Left unchecked, the trend toward the combining of
banking and business could lead to the formation of a
relatively small number of power centers dominating the
American economy. This must not be permitted to happen; it would be bad for banking, bad for business, and
bad for borrowers and consumers.
H.R. Rep. No.1747,91st Cong., 2nd Sess, 11 (1970).
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228
strictions on entry into banking and the readiness of the
Fed to provide low cost credit through the discount window to meet banks' temporary liquidity problems.
Economists would classify these special advantages and
privileges-deposit insurance, access to the discount window
and the federal funds markets, limitations on entry, interest
rate ceilings and tax breaks-as "subsidies", the purpose of
which is to lower the cost of intermediation of funds and
thus to lower the cost of funds to borrowers. These privileges are paid for directly or indirectly by the public.
For example, limited entry into the banking business
reduces the competition for deposits, thereby decreasing
the rates earned by depositors, as against those that would
prevail were there free entry. Similarly, interest rate ceilings
in respect of time deposits and interest prohibitions in
respect of demand deposits eliminate price competition for
deposits when they operate to prevent commercial banks
from having to pay what would be the market rate of interest on such deposits. These differences in interest rates con•
stitute income transfers in favor of such banks.
Other advantages are paid for by taxpayers indirectly
when banks are permitted to reduce their tax liabilities by
deducting interest paid on funds borrowed to hold taxexempt securities, a privilege not generally available to
nonbank financial institutions.
These privileges are provided to banks in the expectation
they will be passed on to borrowers of funds, thus reducing
borrowing costs, making credit more freely available in the
economy and stimulating economic growth. It would constitute a clear departure from the purpose of the privileges
for banks to employ them in non banking activities.
Moreover, it would be patently unfair if nonbanking entities were forced to compete with banks without the benefit of such privileges. To illustrate this point, one need only
compare the cost of borrowed funds to banks with the cost
to broker-dealers. Broker-dealers depend on bank loans to
provide "margin" for their customers and to carry securities
during an underwriting; as of June 30, 1975 they owed the
large banks of New York City atone nearly $4 billion. 84
Under these circumstances, it is difficult to understand how
broker-dealers could successfully compete with banks, since
their effective interest cost on borrowed funds is one to
two percentage points higher than the cost to banks (which
translates into an effective cost of funds of as much as 25%
greater than the cost to banks). 85 It would be "like a dress
shop that buys its goods wholesale competing against
another dress shop that must buy stock retail.''86
An even more telling example is provided by the exper•
ience of the mortgage banking industry, in which many
bank holding companies made acquisitions in the early
Economic Advantages Possessed by Banks
Financial intermediation by banks involves the accumulation of savings as deposits and the lending of those funds
to those with capital needs. This transfer process is a pri·
mary economic function of financial intermediaries. There
are essentially two cost elements in the intermediation of
funds: {1) the rate of return required to induce holders of
idle funds to deposit them, and (2) the costs of the inter•
mediation process. The privileges that banks enjoy are intended to lower those costs so that those who need funds
may obtain them relatively inexpensively.
For example, federal deposit insurance serves to lower
the rates of return required to attract depositors by making
bank deposits up to prescribed levels virtually "risk
free". 78 Such rates of return also may be kept artificially
low through governmental action when legal interest ceil·
ings or prohibitions on deposits are set at levels below the
rate that market forces would otherwise dictate.
Moreover, the direct costs of intermediation are reduced
through the favorable tax treatment accorded banks for
interest expenses 79 and loss reserves, 80 which increases
their after tax income. (See Table 1 for a comparison of tax
rates applicable to banks and brokers.) In 1975, five
of the ten largest bank holding companies had a negative
federal income tax liabilitY on their worldwide income, 81
and no one of the ten had a tax liability to all governments
in excess of 35% of its worldwide income, 82 although the
statutory corporate income tax rate in the United States is
48%.
In addition, banks have ready access to short term capital at low cost through access to the federal funds market
and the Fed's discount window. 83 The cost to banks of
long term capital also is lower becau~e of reduced risks
associated with investment in the banking business. Such
reductions in risk result in part from federal and state re76 The FDIC insures up to $40,000 of each account. 12 U.S.C.
§1813 (m).
79 Banks are permitted to deduct interest expenses incurred to hold
tax-exempt municipal bonds. Rev. Aul. 61-222, 1961-2 C.B. 58.
80 Although this provision is being gradually phased out, banks are
permitted to reserve against future loan losses and to deduct such
reserve from gross income. Section 585 of the Internal Revenue
Code.
81 Chase Manhattan Corp.'s negative federal income tax liability constituted 31. 7% of its worldwide income; Bankers Trust's was
4.5%; Chemical New York lnc.'s 10.5%, Citicorp's 3.3%; and
Manufacturers Hanover lnc.'s 7 .1 %. Tax Notes, Vol. IV, Issue 17,
April 26, 1976, p. 31.
82 The worldwide tax liability of each of the ten as a percentage of
worldwide income was: Bank of America, 31.3%; Bankers Trust,
15.1 %; Chase, 10.3%; Chemical, 2.6%; Citicorp, 29.8%; Continental Illinois, 28.7%; Manufacturers, 9.9%; J.P. Morgan, 31.7%; Security Pacific, 9.6%; and Wells Fargo, 15%. Id.
83 At a time when the prime rate, the rate charged a bank's best
commercial risks, was at 6-3/4%, the federal funds rate was approximately 4-5/8% and the discount rate was 5-1 /2% WSJ
April 20, 1976, p, 37; Federal Reserve Bulletin, April, 1916, p'.
AS.
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Federal Reserve Bank of St. Louis
84
85
Federal Reserve Bulletin, February 1976, p, A 16.
For example, broker call money carried an interest rate of approximately 6% at a time when banks were paying only 4.8% on
86 ~: ~:s:t;ac:;::i:~:esc~:b~;.o;~1,' _wsJ, April 20, 1976, p. 37.
14
229
1970's. That industry is similar to the investment banking
industry in that mortgage bankers "underwrite" or inventory mortgages while looking for institutional purchasers.
In performing this function, independent mortgage bankers
suffer a distinct disadvantage in competing with mortgage
banking firms affiliated with banks. A large expense is the
interest cost of holding mortgages in inventory, but bankaffiliated firms can finance their inventories with loans
from their affiliated banks. One of the anti-competitive impacts cited as having prompted the Fed to disapprove
Citicorp's retention of Advance Mortgage Corporation was
the 1100% increase over two years in its extension of credit
to Advance. 111 Securities firms are placed at a similar disadvantage in c9mpeting with banks in underwriting general
obligation bonds.
Many other nonbanking enterprises owned by bank
holding companies are financed by interest free funds from
the holding company. Often in such cases the nonbanking
activity would produce little or no profit if it were charged
for its funds at market rates. 88 For example, had Citicorp
charged its nonbanking subsidiaries at least the cost to it of
the funds it made available to those subsidiaries, they
would have shown a net loss for 1975 instead of a $17
million profit.89
Common sense suggests, and economic theory confirms,
that "competition" of this sort does not produce the social
benefits normally expected to flow from competitive
forces. 90
In the securities industry, banks have additional cost
advantages over securities firms which make direct competition particularly unfair. Banks, for example, are not subject
to the strict regulation of their securities activities which
add significantly to operating costs for members of the
securities industry. (An outline of the regulatory burdens to
which members of the securities industry are subject is set
forth in Table 2.)
Furthermore, banks have a ready and willing market of
customers for thei. securities services: every day millions of
customers stream across the threshold of the nation's banks
TABLE 2
Regulatory Burdens to Which
Members of the Securities Industry
Are Subject
Brokerag1 Related and Investment Banking Services
1. Registration and licensing.
A. Registration with SEC as broker-dealer under Section
15 of the Securities Exchange Act of 1934,
1. Filing of application,
2. Periodic financial statement filings.
3. Periodic fees.
B. Membership in National Association of Securitie1
Dealers, Inc. ("NASO").
1. Requirements for maintaining books and records.
2. Minimum capital requirements.
3, Membership fees and charges.
4. Compliance with "suitability" rules and other extensive Rules of Fair Practices.
C. Membenhip on national securities exchanges.
t. Requirements for maintaining books and records.
2, Periodic financial reporting.
3. Minimum capital requirements.
4, Membership fees and charges.
D. Licensing of securities salespersons with NASO and
exchanges.
1. Training.
2. Examination.
3, Bonding of employees.
2. Continuing regulatory obligations under Securities Exchange Act and rules of self-regulatory bodies.
A. Minimum capital requirements (usually must be calculated daily),
B. Rules regarding suitability of securities for an invest-
o,.
C. Rules governing the appropriateness of advertising
materials and requiring pre-clearance,
D. Requirement of furnishing detailed conformation of
purchases and sales and periodic statements of accounts.
E. Contribution to Securities Investor Protection Corp.
oration.
F. Rules requiring full disclosure of information regarding securities sold to customers.
G. General rules regarding the duty owed by brokers to
their customers under the so-called "shingle" theory,
which seeks to hold brokers to high professional standards.
H. Duty of broker-dealer principals to supervise employees.
87 "This financial support following the subject acquisition permit-
ted Advance, in no small part, to improve its position significantly within the mortgage banking industry." Federal Reserve Bulletin, January, 1974, p. 53.
88 WSJ, April 20, 1976, p. 1.
89 Citicorp made available to its nonbanking subsidiaries over $600
million interest free. Form 10-K filed by Citicorp with the Securities and Exchange Commission on March 30, 1976, p. 13.
96 The major benefit of competition in an industry is the efficient
allocation of scarce resources in that industry. However, such
beneficial competition only occurs in the absence of structural
defects In the organization of an induury. Among tha driect1
commonly recognized by economists is the enjoyment of absolute cost advantages by et1nain members of an industry. The
interest cost advantage enjoyed by banks suggests that efficient
competition would not occur were banks to participate in the
securities industry, See, Bain, Joe S., Industrial Organization, 2nd
Ed., New York, John Wiley & Sons, Inc. 11968) pp. 260-63,
464-66.
Investment Advisory Services
1. Registration and licensing.
A. Registration with SEC as investment adviser under
Section 203 of Investment Advisers Act of 1940.
1, Application.
2. Filing fee.
3. Books and records requirements.
2. Continuing regulatory obligations under Investment Ad·
visers Act.
A. Rule1 governing the appropriateness of advertise•
ments and requiring pre-clearance.
8. Rules governing advisory contracts with customers.
C. Rules governing methods of calculating fees,
D. Rules requiring disclosure of capacity and prior consent when acting as principal with investor.
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Federal Reserve Bank of St. Louis
15
230
to patronize banking services and regularly receive bank
mailings in the form of statements and bills. Because of
This can be illustrated by an example. A potential
ldan applicant might voluntarily place his casualty insurance business with a bank-affiliated insuror in
hopes of improving his chances for a mortgage loan
on the insured property on favorable terms. This
would have the same effect as a coercive tie-in. Competition in the tied product, insurance, would be lessened to the extent that customers no longer purchased it entirely on its own economic merit. One
such merger might well trigger others and as a pattern
of such bank-insurance affiliations developed, market
foreclosure in the tied field would become more and
more serious.
Such voluntary tying or tying effect, as we called
it in a recent case, is the product of market structure
-not misconduct.
This structural problem is intensified because present antitrust remedies appear inadequate to deal
directly with it. There simply is no illegal practice or
conduct for a court to enjoin. Hence, we must concentrate on avoiding a structure which gives rise to
such effects.92
their banking relationship with these customers, which in·
eludes intimate knowledge of their financial position, banks
are uniquely able to cull their customer lists for likely prospects. In addition, the ability of banks to extend personal
loans to corporate officers enables them to provide another
strong inducement to patronage of their services.
Without suggesting that banks would engage in illegal
tie-ins, it also seems apparent that potential borrowers may
patronize various securities services offered by their bank in
the belief that their patronage of those services enhances
their creditworthiness with the bank. Particularly when
short term credit becomes a relatively scarce and valuable
commodity, customers may feel obliged to be "good customers" of their bank in all respects. The Conference Committee that reported the Bank Holding Company Act
Amendments of 1970 specifically noted the possibility of
this occurring:
Because of "the unique advantages granted to banks to
facilitate their intermediation services and because of their
other cost advantages vis-a-vis members of the securities
industry, fair competition in providing securities services
between major commercial banks and members of the
securities industry may not be possible. Nonetheless, commercial bankers and investment bankers can continue to
compete indirectly on an equitable basis by offering users
of capital two alternative types of financing. For most
types of loans offered by commercial banks, investment
bankers will strive to remain competitive by devising a comparable security that can be sold in the private or public
capital markets. Thus, investment bankers provide the alternative of commercial paper to the banks' short term loans.
They also place medium term public debt (5-7 years) tc
compete with bank loans of comparable maturity. Competition of this type produces innovation and efficiency while
providing businessmen with a meaningful choice of capital
sources.
Such tie-ins may result from actual coercion by a
seller or from a customer's realization that he stands a
better chance of securing a scarce and important commodity (such as credit) by 'volunteering' to accept
other products or services rather than seeking them in
the competitive market place. In either case, competition is adversely affected, as customers no longer
purchase a product or service on its own economic
merit. 91
This potential for voluntary tie-ins has aroused concern
among those responsible for protecting healthy competition
in the economy because its anticompetitive impact cannot
be cured by regulation or resort to the antitrust laws. As
suggested by Richard W. McLaren, then Assistant Attorney
General in charge of the Antitrust Division, in his testimony
before the Senate Committee considering one bank holding
company legislation in 1970, the only solution to this structural defect in the marketplace is a separation of banking
from nonbanking enterprises:
Bank expansion in other areas permits the carry•
over of economic power into such endeavors. There
is, of course, the obvious danger of overt reciprocity
or tying arrangements, as well as general favoritism of
bank affiliates, particularly in times of tight money.
Also, and perhaps more important in terms of the
need for present legislation, there are dangers which
are of a more structural nature-adverse competitive
effects that would tend to develop naturally without
actual overt use of the economic power carried over
from the banking sphere.
I refer to a voluntary form of reciprocity or tie-in
effect, where a potential borrower may independently decide that, just because he might possibly be
under watch, it is in his best interest to patronize
bank-affiliated enterprises in the hope of improving
his chances of obtaining credit from the bank on
favorable terms, or indeed at all.
92 One Bank Holding Company Legislation of 1970, Hearings Be-
fore the Senate Comm. on Banking and Currency, 91st Cong.
2nd Sess. at 239-40 (1970). See also, Mr. McLaren's remarks
before the House Committee: The Bank Holding Company Act
Am8ndmttnts, Hearings Before the House Comm. on Banking
and Currency, 91st Cong. 1st Sess. at 91-92 (1969).
91 H.R. Rep. No. 1747, 91st Cong., 2nd Sess. 18 (1970).
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Federal Reserve Bank of St. Louis
16
231
TABLE 3
companies; {2) thrift institutions; (3) commercial banks; (4)
trust companies (or trust departments of commercial
banks); (5) mutual funds; and (6) broker-dealers. Various
other kinds of intermediaries exist in the economy, such as
finance companies, commercial factors and mortgage banks,
but generally these are not major sources of intermediated
funds for business.
Major banks dominate the nation's trust business. The
trust departments of commercial banks manage over $400
billion in assets, composed of personal trusts and estates
and employee benefit and pension plans.93 In addition to
these enormous trust assets, commercial banks have available for lending or other investment approximately $900
billion of their own funds. 94 Thus, commercial banks control over $1,300 billion of assets.9s This concentration of
control over financial assets is thy more noteworthy because nearly two-thirds of banks' trust assets are controlled
by 60 banks, constituting only 1.5% of the number of insured commercial banks with trust departments. 96 These
same large banks constituted less than .5% of all insured
commercial banks but controlled over 55% of commerical
bank deposits. 97 These figures suggest that an overwhelming amount of economic pawer is concentrated among the
very few largest banks.
Banks also have become major competitors in the finance company business, commercial factoring and mortgage banking. For example, as of June 30, 1970, only one
of the top ten mortgage banking firms was affiliated with a
bank;93 as of December 31, 1975, seven were so affiliated.99 Only six of the top fifty mortgage bankers were
associated with banks in 1970,100 but in 1975, 26
were. 101 If banks were to use their competitive advantages
to dominate the securities industry as well, virtually every
major source of business capital-save insurance companies
and mutual funds-would be controlled by a relatively
limited number of large commercial banks, a situation
which currently prevails in Europe.
Comparison of Size of Members
of Securities Industry and Banks
Shareholders' Equity
($ Billions)
22-
$214
20181650 Banks with
14-
greatest equity
1210-
B6-
All NYSE Members Car,ying
Bank of
Public Accounu
America
42-
:Jr Suliordiiiiii"d iiit -, Ma~:itan
E.
F.
"::!~:~I
'''1:,!:.~~
I
Citicorp
0- ~Me~r~n~ll~Ly~•~•h~:::::;;~====::'JL:'.::'._l_
BROKERS BANKS
Source: Blanchard
Concentration of Economic Power
in the Major Commercial Banks
If the incursion of the major commercial banks into the
securities industry goes unchecked, it is likely that they will
come to dominate several aspects of that industry. In addition to the economic advantages cited in the preceding section, the sheer size of these banks in relation to the securities industry suggests thai the securities industry would be
unable to compete successfully against the wealth of resources available to the money-center bankers. The magnitude of the major banks in relation to the securities industry is illustrated by the fact that the shareholders' equity of
Citicorp. Inc., the parent holding company of Citibank,
N.A., was $2.074 billion at the end of 1974, almost as large
as the $2.346 billion which was the aggregate shareholders'
equity and proprietors' capital at that time of all members
of the New York Stock Exchange. (See Table 3.)
The possibility of bank dominance of the securities industry is particularly worrisome because these banks already represent the major intermediary institutions in the
U.S. economy through their commercial and trust departments. There are six principal kinds of institutions in the
economy that act as financial intermediaries: (1) insurance
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Federal Reserve Bank of St. Louis
93
94
Treasury Issues Paper at 7.
summary of Deposits in All Commercial and Mutual Savings
Banks, FDIC (1974). Insurance companies, the second largest
type of asset management institution, manage only an estimated
$300 billion in assetl.
9
s If legislation similar to the Financial Institutions Act of 1975 (S.
96
9 '1
98
99
lOO
101
17
1267)-repealing both interest rate ceilings on time deposits and
restrictions on paying interest on demand deposits-were to become law, commercial banks might be able to absorb some of
the tmposits held by thrift institutions.
As of December, 1974. FDIC, Trust Assets of Insured Commercial Banks -1974 (1975) p. 14.
As of Ju~e 30, 1974, Compiled from "Annual Survey of Bank
Performance". Business We1tk, September 24, 1974, pp. 60-63
and FBderal Reserve Bulletin, June 1975, p. A14.
In order of dollar volume of permanent real estate mortgages
services. American Banker, October 27. 1970, p. 20.
American Banker, April 26, 1976, P, 10.
American Banker. October 27, 1970, p. 27.
American Banker, April 26, 1976, p. 10.
232
It is widely recognized that the inflexibility of the Euro-
such concentration, the large commercial banks would be
able to determine which enterprises are to grow and which
are not, and investment decisions might tend to concentrate
on a particular group of industries at the expense of all
others. 105 The market can allocate capital efficiently only
when there is a broad base of investment decision-making;
overconcentration of descision-making can result in an insufficient allocation of capital to many deserving industries.
Furthermore, there is the increased danger that one area of
enterprise may receive a substantial concentration of bank
investment and then become unprofitable (like the REIT
industry); banks might have to face large write-offs or substantially increase their reserves, which could make it more
difficult for them to attract capital. For these reasons as
pean credit markets-for example, their limited ability to
offer long term credits with fixed maturitie's-is a product
of the lack of sufficient public market alternatives to the
credit facilities of the commercial banks. The public mar-
kets in the U.S., which are supported by the confidence
that comes from independent credit rating agencies and de-
tailed financial disclosure, impose a disciplin~ on borrowers.102 The system quickly reveals financial weakness;and
the markets thus act as a system of checks and balances, as
well as an important safety valve which reinforces the
strength of the private negotiated markets. 1 03
The reason for concern over an undue concentration of
financial power in the major commercial banks is that such
concentration would involve control of the allocation of
business capital in our economy. 104 Under the scenario of
tos Otto Eckstein, former Chairman of the Council of Economic
Advisers, in the fall of 1974, stated the problem as follows:
More fundamentally, a healthy capital market promotes the competitiveness of the American economy.
If the current stock market situation were to persist,
there would be increased concentration of the economy. The largest companies tend to be the most credit
worthy and have the ability to stand at the head of the
line at the lending windows of the large commercial
banks. The banks would become powerful as they are
in Europe and Japan.
See, Kaufman, Henry, partner and member of the Executive
Committee of Salomon Brothers, "The American Credit Markets Viewed From an International Perspective," speech delivered before the Lombard Association in London, England on
March 9, 1976.
1Ol ''In the long run, this dual market structure contributes to the
efficiency of American financial institutions." Id.
184 The commercial departments of banks are already providing
well over half of all external corporate financing through bank
loans. (See Table 4). This is partly the result of the increased
numbers of long term loans extended by banks.
IOl
Cited in paper presented by Alan F. Blanchard in a speech
before Carter Golembe Associates Executive Seminar. (Oct. 16,
1975).
TABLE 4
Sources of External Corporate Financing
- $47.2
$7.4
Corporate
Stock
- $31.1
$5.7
~
--- ---
-
$34.6
$19.8
------
L.___
Bank
Loans
$5.6
$18.8
1970
Source:
, ,,
------
,,
,I
,,
/
,,
,, ,,
,,
i
,
,,
i
i
i
i
,
$19.7
$9.2
----
$30.6
$30.1
1973
1974
$13.5
$4.4
1971
1972
Blanchard speech at 16A.
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Federal Reserve Bank of St. Louis
,i
,i
,,
,,
$12.2
Corporate
Bonds
,/
,/
$36.6
$10.9
$11.4
$53.9
--$4.1
18
233
well, business must have a capital market alternative to the
banking system.
to give its financial advisory customers objective advice and
its own interest as a banker in making loans. For example,
when a corporation seeks advice from a bank on raising
capital, the bank may be tempted to advise the corporation
to take on increased bank borrowings, even though such
terms may not be so favorable as those available in the
public market.
There are also potential conflicts with respect to bank
brokerage customers. A bank, in providing as AIS or dividend reinvestment plan to customers, is in a position to
enjoy the use of the pooled funds without interest simply
by a delay in placing orders. In some instances, such a delay
could result in less favorable execution for such accounts.
Similarly, the trust department can take advantage of its
knowledge of when an order for a paoled account will be
executed in placing orders for its managed accounts.
Conflicts of Interests
A bank's performance of various securities services may
create conflicts of interest adverse to its trust customers
and other managed accounts, to its commercial customers
and to users of its securities services. Although most trust
departments undoubtedly strive to conduct their businesses
in full compliance with the high standards imposed by fiduciary law, serious conflicts can lead to unconsciously distorted judgments. In the securities industry conflicts are
dealt with by measures ranging from disclosure to outright
prohibition} 06 in the banking business, controls are less
clearly defined and more readily waived. 107
A bank's trust department, for example, might be inclined to purchase for its accounts securities which are the
subject of a private placement arranged by the bank for a
corpcrate customer or, in the case of municipal bonds, distributed by the bank as underwriter. Furthermore, if a private placement proves a bad investment for the participants, the bank's trust department might seek to obtain for
the issuer additional investments or loans from other managed accounts in an attempt to assuage the dissatisfaction
of the initial investors.
The allegations in the Microdot-Irving Trust episode earlier this year point out one of the more dramatic examples
of potential conflict stemming from a bank's securities services to its commercial customers. 1011 There Irving Trust
allegedly revealed confidential knowledge of the financial
condition of its credit customer, Microdot, in the course of
providing advisory services to General Cable (another credit
customer) in the latter's attempt to take over Microdot.
Although determination of the facts must await adjudication, 109 the incident illustrates that there are many opportunities for a bank, in the course of providing financial
advisory services, to make improper use of confidential information obtained from its credit customers.
A bank also may have a conflict between its obligation
Investor Protection
Section 3(a)(4) of the Securities Exchange Act of 1934
provides that the term "broker" means "any person engaged in the business of effecting transactions in securities for
the account of others, but does not ;ncfude a bank" 1 1 0
(emphasis added). This statutory exclusion was based on
the Congressional understanding that banks were prohibited
from engaging in the business of dealing in securities under
the Glass-Steagall Act. 11 1
Those who are classified as "brokers" under the Securi·
ties Exchange Act of 1934 are required to conform to a
comprehensive system of governmental and private regulation developed over the years for the protection of invest•
ors. Among the standards and safeguards provided under
this system, but inapplicable to banks and thus unavailable
to their brokerage customers, are those relating to suitabili·
ty, prompt execution, disclosure of adverse information
and insurance under the Securities Investor Protection Act.
Although it often is argued that banks too are subject to
an elaborate regulatory scheme, the principal objective of
bank regulation is protection of depositors and trust customers, not investors, whether they be holders of bank securities or customers of the bank's securities department.
Moreover, understandable reluctance of regulators to unsettle the often delicate public confidence upon which the
banking system depends can result in a different standard
of enforcement in respect of bank conduct of securities
business. Thus, permitting banks to furnish securities services is inconsistent with the policy objective of safeguard·
ing the interests of investors-a goal upon which investor
confidence in the securities markets is built.
106 See, for example, Securities Exchange Act §§S(c) lwritten
consent required before lending customers' securities), 11 (a)(1 J
(prohibition of executing exchange transactions for managed
accounts), and 11 Id) (disclosure of capacity in executing transactions); Rules 15c1-4 (disclosure of capacity and co""'"'sion
in excuting over-the-counter transactions), 15c1-5 (disclosure
of relationship with issuer), and 15c1-6 (disclosure of interest
in distribution).
187 12 C.F.R. §9.12(a).
108 Both the House and the Senate have conducted hearings on this
attempted takeover. The House Financial Institutions Supervi•
sion, Regulation and Insurance Subcommittee of the Committee on Banking, Currency and Housing held hearings on March
26, 1976. The Senate Banking, Housing and Urban Affairs
Committee held hearings on this matter on February 16, 1976.
189 Microdot Inc. v. Irving Trust Company, Index No. 01123/76
IS. Ct. N.Y. filed Januarv 21, 1976),
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Federal Reserve Bank of St. Louis
118 15 U.S.C. §78c(a)(4).
111 Hearings on H.R. 7852 and H.R. 8120 Stlfore the House Committee on lnterstatfl and Foreign Comm11rce. 73rd Cong., 2d
Sess., at 86 {1934).
19
234
Stability of the Banking System
customers of the affiliated business than to customers
of other businesses not so affiliated. 114
The banking system plays an essential role in the capital
raising process. and maintenance of its stability is essential
to the economy. The history of the 1930's serves as a vivid
This is because bankers may find that their ability to grant
scarce credit to users of their other financial services is an
important inducement to potential customers to use those
services. Even bank-sponsored plans for small investors,
which customarily invest solely in blue-chip equities, may
influence a bank to make loans it might not otherwise have
made to prevent itself from being associated in the minds of
its customers with any decline in such securities. 11 s
The common bank practice of extending loans to REI Ts
for which the bank or its affiliate provides investment advisory services and sponsorship offers an illustration of the
temptations to which banks may succumb. For example,
Manufacturers Hanover was one of 13 banks which were
parties to a $106.2 million extension of credit to Citizens
Mortgage Investment Trust, which is advised by Citizens
Mortgage Corporation, a subsidiary of Manufacturer's holding company parent. 116 Similarly, BT Mortgage Investors.
which is managed by BT Advisors, Inc., a subsidiary of
Bankers Trust New York Corporation, owed Bankers Trust
$55. 7 million at June 30, 1975;11 7 and Chase Manhattan
Mortgage and Realty Trust. which is advised by Chase Manhattan Bank, had a line of credit with that bank in August,
1974. 1 1 8 The Hamilton National Bank of Chattanooga was
declared insolvent by the Comptroller of the Currency on
February 16, 1976. Defaults in many of the nearly $100
million in loans originated by a mortgage banking affiliate
of the bank reportedly were responsible for Hamilton's demise.119
In addition, a bank's ability to purchase for its own
account a substantial portion of an offering of government
securities it is underwriting may prejudice its judgment in
reminder of our economy's dependence on that confidence
and its need for a strong banking system. The stability of
the banking system depends on three elements: banks
must ( 1) make prudent and disinterested loans and invest•
ments; (2) maintain a relatively stable flow of revenue;
and (3) continue to enjoy the confidence of depositors.
The first of these elements is essential to bank solvency;
sound loans and other investments result from credit decisions which are the product of an independent banking
judgment. Secondly, bank revenues must be maintained at
relatively steady and predictable levels 112 if banks are to
be able to meet their operating expenses, including the interest they pay for some of the funds they utilize, and to
attract long term capital. Stable bank income typically has
been provided by the revenues generated from the extension of short term credit to commercial enterprises; to the
extent banks engage in nonbanking activities which may
produce volatile or unpredictable levels of revenue, their
ability to maintain a stable flow of revenues may be jeopardized. Finally, the banking system depends on public confidence-the willingness of individual and corporate deposit·
ors to entrust their savings or idle funds to banks. Public
confidence stems, in part, from the public's perception of
the first two elements; however, it is also affected by nonquantifiable psychological influences. The performance by
banks of nonbanking activities must therefore be analyzed
against these three critical elements of a sound banking
system.
To the extent banks acquire an entrepreneur's stake in a
commercial enterprise, conflicts of interest may impair
their ability to make prudent and disinterested credit decisions with regard to that enterprise. In addition, if a bank
becomes associated with investment vehicles like mutual
funds or REITs, it may be tempted to extend favorable
credit terms to those businesses which the fund or REIT
has invested in. 113 Former Federal Reserve Board Chairman William McChesney Martin, in his 1969 testimony supporting legislation to remove the one bank holding company exemption, observed that:
114 s. Rep. No. 1084, 91st Cong., 2nd Sess. 3 (1970).
11 s The SEC's Institutional Investor Study observed a correlation
between bank business relationships (including creditor relationships) with corporations and their portfolio holdings:
Some institutions, particularly banks, have personnel and busine5s relationships with portfolio companies. These relationships may tend to reinforce any
power conferred as a result of stock holdings. They also
create potential conflicts of interest and the possibility
of misuse of inside information. Although the Study
can draw no general conclusions as to whether the,;;e
adverse consequences actually occur or to what extent
they may occur, it appears that there is a strong statistical correlation between bank stock holdings and personnel and business relationships.
If a holding company combines a bank with a typical business firm, there is a strong possibility that the
bank's credit will be more readily available to the
Institutional Investor Study Report of the Securities and Exchange Commission, March 10. 1971, Summary Volume at
112 "Banks have found that earnings stability, one hoped-for bene-
127.
116 Prospectus of Manufacturers Hanover Corporation, June 19,
1975.
117 Prospectus of Bankers Trust New York Corporation, September
17, 1975.
fit of the holding company, has been particularly elusive."
Foldessy, Edward P., "Holding Firm Concept Turns Sour for
Banks as Profits Fall Short," WSJ, April 20, 1976, p. 1.
113 For example, Chase Manhattan Bank bought $160.6 million of
loans from the Chase Manhattan Mortgage and Realty Trust,
for which it serves as an investment adviser, in order to ease the
financial burdens of the Trust. Business Week, May 31, 1976, p.
30.
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Federal Reserve Bank of St. Louis
11 8 Prospectus of Chase Manhattan Corporation, August 2, 1974.
119 J.WJ, February 17, 1976. The bank had also made over $30
million in loans to other affiliates.
20
235
TABLE 5
Relative Stability of Income
14
Federal Reserve Members
I
12
\/
10
Net Earnings
as a Percent of
Total Invested
Capital
.
..
.
..
... \\
.
.
...
.
...
.. ...... ..
\•··
•,
.........
••••••
NYSE
•••
Members Doing
Business With the Public
\
,•
4
\.
':,
.......•·
;•·
0---'---'----'-----'---'---....L.--~---'----'-----'---'--
1965
Source:
66
67
69
68
° Citicorp has lost over $400 million in market value of the state
and municipal securities it was carrying for its own investment
at December 31, 1975. Citicorp Annual Report, p. 24.
93-031 0 - 77 - 16
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Federal Reserve Bank of St. Louis
71
72
73
1974
The term of a loan also must be considered a factor in
analyzing the prudence of the loan. As banks find them•
selves increasingly in competition with investment bankers,
their long term loans to corpcrate borrowers have been
expanding and in some cases their own capital positions
have become tight. Although banks have, to a limited ex•
tent, utilized the capii:al markets for long term funds, their
principal source of funds continues to be demand and other
short term deposits. As the average matllrity of their loans
increases, prudent bank financial practice would dictate
that such loans be matched against equally Jong term
bidding for such offerings. By the same token a bank may
find a home in its own portfolio for securities it has under•
written which it might have declined to buy from an independent source. As a result, a bank may find itself burdened with securities in which it ordinarily would not or
should not have invested. Many banks currently are experiencing the adverse effects of their extensive investments in
general obligation bonds. 120
12
70
Blanchard speech at 20A.
21
236
devastating effect of such a shortage of bank credit.
sources of funds. Failure to do so could lead to disastrous
results. The Senate Banking and Currency Committee observed, in 1932, that
Competitive Considerations
It is impossible to predict with certainty what will occur
if banks are permitted to expand their securities activities.
Nevertheless, the risks of undue concentration of resources
unfair competition, heightened conflicts of interest, inade:
quate investor protection and possible damage to confidence in the banking system cannot be taken lightly, Measured against the principal policy objectives set forth above,
it seems clear that the economy has little to gain and much
to lose from such a gamble.
Even if additional competition in the securities industry
were desirable, it should not be provided by banks in view
of the above considerations; in fact, however, the brokerage
industry already is highly competitive.
The structural characteristics of a competitive industry
commonly accepted by economists include: (1) low seller
concentration, (2) lack of significant barriers to entry,
and (3) low product differentiation. 126 The brokerage industry scores high on all three counts.
First, the brokerage industry's membership is diffuse and
relatively non-concentrated. Second, there do not appear to
be substantial barriers to entry . 1 2 7 Generally, such barriers
include the absolute cost advantages discussed above, 1 2 8
significant economies of scale and high product differentiation.129 Although banks enjoy absolute cost advantages
over members of the securities industry, there are no apparent cost advantages enjoyed by members of the securities industry over potential entrants. Furthermore, empirical studies suggest that there are no significant economies
of scale in the securities industry. 13 Finally, there is relatively little product differentiation in the securities industry; what little product differentiation existed in the industry as a result of the service competition in which brokers
engaged during the period of fixed commission rates will
undoubtedly wane as price competition continues to flow
[aJ very fruitful cause of bank failures, especially
within the past 3 years, has been the fact that the
funds of various institutions have been so extensively
tied up in long-term investments. 1 :n
The second key element of bank stability is a steady
source of revenues. The dangers of banks becoming dependent on revenues subject to volatile fluctuations in operating
results led Congress to adopt the 1970 amendments to the
Bank Holding Company Act, which limit the scope of bank
holding company operations to activities closely related to
the banking business. 12 2 This same concern motivated
Congress in 1933 to restrict the ability of banks to assume
the risks inherent in underwriting and investing in corporate
securities. 12 3 Although banks were permitted to underwrite general obligation bonds because there were felt to be
few risks involved in such underwriting, even this area of
the securities industry has risks for banks: shortly before its
demise the Franklin National Bank lost $5.6 million in the
value of securities "'which had been carried in the bank's
security trading account.' or bond dealer operations." 124
Similar risks exist in the case of municipal revenue bonds,
which are backed only by the revenues of a particular enterprise. Accordingly, it would not appear desirable to permit
banks to increase their activities in an industry whose revenues are subject to extreme fluctuations as well as unpredictable risks. The relative stability of income of the two
industries is illustrated graphically in Table 5.
The third element of bank stability is depositor confidence, which may be affected adversely if banks become
active in promoting a variety of investment vehicles. For
example, if banks sponsor mutual funds, REITs or automatic investment services which fail to live up to investor expectation-not an unlikely possibilitv since such investments hardly can be expected to be risk-free-the image of
banks as riskless deposit-accepting institutions may be tarnished in the minds of the public. Moreover, the confidence
of corporate borrowers often is as sensitive as that of individuals: the recent spate of bank failures reportedly has
prompted many corporate treasurers to narrow their list of
acceptable depositary banks.
Any serious loss of public confidence conceivably could
lead to withdrawal of bank deposits, consequent diminution of the funds available for credit and the possibility of
bank failures. 1 lS Our economy surely cannot afford the
°
their images tarnished. For example, the inability of a California
bank holding company to refinance $11 million in commercial
paper so seriously undermined depositor confidence that heavy
withdrawals forced the otherwise healthy subsidiary bank to declare bankruptcy, (Foldessy, Edward P., "Holding Firm Concept
Turns Sour for Banks As Profits Falt Short," WSJ, April 20,
1976, P. 33.) Similarly, the Fed had to lend nearly $1.8 billion to
cover depositor withdrawals when the Franklin National Bank's
substantial foreign exchange losses became publicly known. (The
Last Days of the Club, pp. 393-4).
126 See, Industrial Organization, pp, 464-66.
121 S. Rep. No. 584. 72nd Cong., 1st Sess., at 8 (1932).
122 See text accompanving note 41 above.
127 During the years 1971 through 1974, an average of 210 securities firms became members of the National Association of Securities Dealers, Inc. each year.
Villi See note 90 above.
129 Industrial Organization, p, 255.
130 See West and Tinic, The Economics of the Stock Market (1971)
123 See text accompanying notes 42-48 above.
~-
124 Foldessy, Edward P., "Franklin New York Puts Deficit at $60
million in First Five Months,'· K5J, June 21, 1974.
125
Although federal deposit insurance has greatly increased public
confidence in the banking system, banks can ill afford to have
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Federal Reserve Bank of St. Louis
22
.
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Federal Reserve Bank of St. Louis
237
from the May 1, 1975 unfixing of commissions. 131 Moreover, the sharp decline in commission charges sine~ May 1,
1975 and the failure of a number of securities firms in the
wake of that decline attest to the intensity of the competition in the brokerage business.
Similarly, bank entry into revenue bond underwriting
would add little to the already strong competition among
broker-dealers in this area. Not only do revenue bond of-
ferings receive on the average over five bids per issue, but
revenue bonds generally receive more bids per offering than
do comparable bonds in the bank-dominated general obligation market. 132 The revenue bond underwriting industry
also exhibits the structural features necessary for competition discussed above with respect to the brokerage industry. I33
Indeed, the employment by the major commercial banks
of their unique advantages in the securities industry is likely
to produce non-productive, and even detrimental, competi·
tion in that industry. The risk of increased economic concentration and the possibility of significant damage to
the capital raising mechanism argue strongly for separating
the two industries legislatively. as Congress attempted to do
more than 40 years ago.
131 See, Mann, H. Michael, "The New York Stock Exchange: A
Cartel at the End of Its Reign," Ch. 9 in Phillips, Almarin, ed.,
Promoting Compatition in Regulated Markers, Washington,
D.C., The Brookings Institution, 1975, pp. 301,311.
132 See, Table I, Testimony of Alvin V. Shoemaker, Hearings on S.
1933, Subcommittee on St1eurities, Senate Committee on Bank·
ing, Housing and Urban Affairs, Senate 93rd Cong., 2nd Sess.
(19741 (hereinafter Municipal Revenue Bond HIIBrings).
133 See, Testimony of Professor Simon Whitney, Municipal Rew,•
nue Bond Hearings.
23
238
LEGISLATIVE PROPOSALS FOR CONSIDERATION
tended by the Act. Banks would also be prohibited, for all
intents and purposes, from engaging in private placement,
as well as merger and acquisition, activities.
The legal analysis contained in this paper demonstrates
the uncertainty under present law of the status of many
bank activities in the securities area, and it seems equally
dear that the various regulators with responsibility for administering the banking laws have done little to clarify the
uncertainty. Set forth below for consideration are several
legislative proposals which we believe should be evaluated
in light of the above discussion.
Clarification of Glass-Steagall Prohibition
on Bank Underwriting Municipal Revenue Bonds
Under the Act, banks are permitted to underwrite only
general obligation bonds~those backed by the general
taxing power of the issuing or guaranteeing jurisdiction-but not revenue bonds. In recent years there have
been proposals that the Act be amended to exempt revenue
bonds from its strictures. Those opposing such an
amendment have observed that the same risks perceived by
the Act's draftsmen in bank underwriting of corporate securities (and the temptation for banks to place such securities in portfolios under their management) exist in the case
of revenue bonds, whose principal and interest are not
backed by the general taxing power of the issuer or guarantor and thus must depend on the fortunes of a particular
enterprise.
Recent events bear out the danger of expanding the
Act's exemptions to permit banks to underwrite revenue
bonds. The decline in the municipal securities market has
resulted not only in a paper decline in the assets of many
banks but also has affected the public's confidence in numerous banks with sizeable investments in municipal securities. The Federal Reserve Board, which had espoused the
underwriting of revenue bonds by banks, recently changed
its mind and, recognizing the potentially deleterious effects,
expressed reservations about permitting banks to underwrite revenue bonds. 138 Moreover, as discussed above, 139
the entry of banks into the revenue bond underwriting
business would not provide any beneficial increase in competition in that industry.
In addition, the Comptroller has interpreted the Act's
exemption for general obligation bonds to include certain
types of debt instruments having the characteristics of revenue bonds.1 40
It is proposed that the Act be amended to preserve and
clarify the distinction Congress intended to draw between
revenue bonds and general obligation bonds.
Broker-Dealer Activities
In every major piece of banking legislation passed in this
century, Congress has indicated its desire that commerce
and banking be conducted separately. 134 However, many
banks and bank holding companies have continued to ex-
pand their commercial activities. 13 5 In many cases, these
activities were authorized by banking regulators, only to be
later found by the courts to be impermissible. 136 Because
of the tendency of bank regulators to permit banks to extend their competitive advantages into fields outside of
banking, it is proposed that Congress declare unambiguously its intent to keep the business of banking separate from other commercial activities.
In particular, it is proposed that banks be prohibited
from engaging in broker-dealer activities. We have discussed
earlier how the offering by banks of private placement services and AIS and other brokerage-related services may have
a deleterious effect on the economy. 137 Under the proposed legislation, in order to remove this possibility, banks
would be prohibited from soliciting orders to purchase or
sell securities other than those securities now explicitly exempt from the restrictions of the Glass-Steagall Act.
Bank brokerage services would thus be limited to those
where the bank provides the service solely at an existing
customer's request as an accommodation-the result in134 Federal Reserve Act of 1913, Dec. 23, 1913, c. 6, 38 Stat. 251;
Banking Act of 1933, June 16, 1933, c. 89, 48 Stat. 162; Bank
Holding Companv Act of 1956, Pub. L. 89-485, 80 Stat. 236;
Bank Holding Companv Act Amendments of 1910, Pub. L.
91-607, 84 Stat. 1760.
135 According to Senator Proxmire's statement introducing the
"Compet1t1on in Banking Act of 1975" (S. 2721) (Cong. Rec.,
Dec. 1, 1975, S20790, et seq.) and based on court cases and
private rulings by the Comptroller of the Currency, 1t appears
that banks have engaged, or attempted to engage, in the following nonbankmg act1vit1es: (1) operating an insurance agency;
{2) underwriting secur1tes other than those exempt under section 24 of Title 12; (3) privately placing non-exempt secur1t1es;
(4) providing financial counseling services, (5) prov1d1ng invest•
ment advisory services to closed-end investment companies;
(6) operating mutual funds; (7) providing securities brokerage
services; (8) operating travel agencies; (9) providing armored
car services; (10) providing data processing services, and (11)
leasing automobiles.
136 See note 62 above.
138 Testimony of Jeffrey M. Bucher, member, Board of Governors
of the Federal Reserve System, Securities Activities of Commercial Banks, Hearings before the Securities Subcomm. of the
Senate Comm. on Banking, Housing, and Urban Affairs 94th
Cong. 1st Sess. at 8 (1975).
139 See text, accompanying notes 132-133 above.
l 3? See general!y, "Policy Reasons for Restricting Bank Securities
Activ1t1es" above.
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Federal Reserve Bank of St. Louis
140 See, Baker, Watts
24
& Co. v. Saxon, note 62 above.
239
Implementation of a Clear and Definitive
National Policy as to What Is and Is Not
Permissible Bank Activity
Experience has shown that where banks are able to
choose among several regulators, each of which interprets
and enforces the standard of permissible bank activities in a
different manner, the possibility will exist that banks can
gain more flexibility to expand their activities by switching
characters; 141 in fact, they may find themselves at a competitive disadvantage if they do not. Non-uniformity of
standards on a question of such importance contains the
potential to frustrate the attainment of national policy
objectives in the banking industry. 142 Although it is not
our intention to offer suggestions on the subject of bank
regulation, one can make the general observation that to
preclude this problem, standards of permissible activity
must be formulated and applied in a uniform manner, perhaps by delegating interpretive and enforcement authority
to a single bank regulator or to a joint body comprised of
representatives from each bank regulator.
141 See, Bray, Thomas J., "Did the Bank Switch Rather Than Fight
the Fed Examiners?" WSJ, April 26, 1976, p, 1, for a discussion of First Pennsylvania Bank's change from a state to a
federal charter, allegedly to take advantage of the Comptroller's
more relaxed regulation.
See also Hackley, Howard H., "Our Baffling Banking System,"
52 Va. L. Rev. 565 (1966) for a discussion of 21 instances of
disputes in the early 1960's between the Comptroller of the
Currency, the Federal Reserve Board, and the Federal Deposit
Insurance Corporation.
142 See, Burns, Arthur F., "Maintaining the Soundness of Our
Banking System," address delivered to the 1974 American
Bankers Association Convention, Honolulu, Hawaii, October
21, 1974.
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CONCLUSION
The Securities Industry Association hopes that the issues
addressed above will continue to be the subject of widespread discussion, in Congress, elsewhere in government and
among members of the public. We believe these issues must
be faced squarely and debated openly; in our view it would
be a serious error to permit them to be resolved by default
or through the momentum of events. We hope this response
to the questions that current governmental inquiries have
raised will serve to stimulate further discussion.
25
240
Appendix
I
Legislative History of the Glass-Steagall
and Bank Holding Company Acts
A review of the legislative history of the Banking Act of
1933 (the Glass-Steagall Act), the Bank Holding Company
Act of 1956 and the Bank Holding Company Act Amend-
ments of 1970 evidences both Congressional recognition
that the combination of banking and nonbanking enterprises is inherently dangerous and a consistent Congressional intent to separate banking from other areas of com-
merce.
I.
The Glass-Steagall Act
The Glass-Steagall Act {the Act) was a product of Con-
the law. It means that a member bank may engage in
any sort of speculative business it may please, and
then, when its reserve in the Federal reserve bank is
impaired, it may take its eligible paper for rediscount
and use the credit and the currency thus afforded to
reestablish its reserve, and not to relend for 'commercial, industrial, or agricultural purposes.'
That is an evasion of the intent, the spirit, and text
of the Federal reserve banking act. It never was intended that its facilities should be used for investment purposes, or for speculative purpases, in that
roundabout way. 2
gressional indignation over the role of national banks in
fostering the prepanic speculation leading to the national
financial crises of the 1920's and 1930's. Congress felt that
the Federal Reserve System had been used to facilitate
speculative securities operations and excessive amounts of
securities loans, in total disregard of the system's purpose.
The "gambling fever" of the prepanic years was attributed to the rapid growth in the securities business of
banks. Senator Walcott, a member of the Senate Banking
and Currency Committee who addressed the Senate on the
provisions of the Act relating to bank affiliates, described
this process to his colleagues:
The outstanding development in the commercial
banking system during the prepanic period was the
appearance of excessive security loans, and of overinvestment in securities of all kinds. The effects of this
situation in changing the whole character of the banking problem can hardly be overemphasized. National
banks were never intended to undertake investment
banking business on a large scale, and the whole tenor
of legislation and administrative rulings concerning
them has been away from recognition of such a
growth in the direction of investment banking as legitimate. Nevertheless it has continued; and a very
fruitful cause of bank failures, especially within the
past three years, has been the fact that the funds of
various institutions have been so extensively 'tied up'
in long-term investments. 1
It reached such a volume, there were so many willing
purchasers, so much credit for investment purposes
was available that there resulted a complete change in
our banking system ... The commercial banking business in consequence of this extraordinary volume of
security business declined ... The net result of it all
was that we were in the flood tide of speculation ...
How was all this expansion passible? ... It took
money, currency; it took a very expansive credit,
which, of course, brought in the banks. As far back as
1911 the banks were investing heavily in securities,
buying and selling securities. Most of the banks had
been engaged in underwriting, and still are. The secu·
rity business became such an important part of the
operations of some of the banks, particularly of two
or three of our larger banks, that some fear was occasioned that they would get away from the strictly
commercial business for which they were organized
and put out securities of doubtful value ... [T) here
was a conflict between the business of marketing securities and the business of protecting depositors'
money ... fT] he national banks engaged in the security business were compelled to divorce their security
business from their banking operations, and the term
'affiliates' came into being as the result of that divorce.3
In this regard, Senator Glass, the Senate sponsor of the Act,
speaking on the Senate floor, stated that:
[NJ ot only has the Federal reserve banking system
been used in an inordinate measure in stockmarket
transactions but there appears to have been an extraordinary misconception by the administrators of the
act of its real purpcse. In large degree the system has
been transformed into an investment banking system,
whereas the fixed purpose of Congress was to set up a
commercial banking system and to preclude speculative operations ...
Let me tell Senators the meaning, and, in the last
analysis, the result of that sort of administration of
The establishment of securities affiliates, which, Senator
Glass said, made one of the "greatest contributions to the
unprecedented disaster which has caused this almost incur-
75 Cong. Rec. 9884 (May 10, 1932).
1 S. Rep. No. 77, 73rd Cong,, 1st Sess. 8 (1933).
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Federal Reserve Bank of St. Louis
Id. at 9904.
241
able depression,"4 had become prevalent as banks became
aware of the profits to be derived from the distribution of
securities,5 despite the fact that the legality of the enterprise was at best questionable.6 The report of the Senate
Committee chronicles the abuses that crept into the affiliate system.
The greatest of such dangers is seen in the growth
of 'bank affiliates' which devote themselves in many
cases to perilous underwriting operations, stock speculation, and maintaining a market for the banks' own
stock often largely with the resources of the parent
bank. 7
the disregard of a great many of the fundamentals of
the banking business, taking chances with depositors'
money, and the incorporation and rapid growth of
the affiliate business, giving an outlet to that speculative type of business quite contrary to legitimate
commercial banking. 11
The banks, having set up sales departments to engage in
the distribution of securities, now needed to cultivate sales
markets in which to sell the securities and required securities to sell. Banks also made loans to facilitate stock purchases. This practice, which fed the securities speculation,
was condemned by Senator Walcott:
As Senator Glass described it:
It is evident from what has been said that the underlying factor in the whole prepanic situation was excessive use of bank credit ... " The excessive use of
bank credit in making loans for the purpose of stock
speculation, or, more generally stated, for the excessive carrying of securities with borrowed money, was
generally admitted before the panic of 1929, and almost universally since that time, to have been one of
the sources of major difficulty, far exceeding in its
scope any total that could be reasonably asked for as
a basis for the financing of legitimate investment business.12
They sent out their high-pressure salesmen and literally filled the bank portfolios of this country with
these investment securities. They actually dealt in the
stocks of the parent bank; and one of them notably
offended by running the stock of a parent bank above
500 and a few days ago it was down to 42. They were
organized to evade the law. That is the very purpose
of their existence-to evade the national bank act and
to do a business outlawed by the national bank act
-and yet they are so interlocked that it is difficult to
tell which is which.1
The practice of the Bank of the United States in creating
affiliates was cited as a "typical case of the excessive abuse
of affiliates." Numerous undercapitalized affiliates were
created, financed by shoe-string operations, and as suggested by Senator Walcott "of course it was inevitable that
this great structure of innumerable affiliates should collapse.'"
Senator Bulkley, another member of the Senate Committee on Banking and Currency who addressed Congress
on the legislation, posed the following question:
When the national banks, through their affiliates, followed into the investment-banking business ... the
idea of increased profits more and more obsessed our
bankers ... Did not professional pride become diverted from the pride of safe and honest banking service to that of profits, greed, expansion, pawer and
domination? 10
Much of the problem, it was believed, stemmed from the
fact that permissive state bank regulation put pressure on
the federal regulators to allow national banks to step beyond the boundaries of sound banking. In the words of
Senator Walcott, the net result was
Id. at 9887.
Id. at 9910 (remarks of Senator Bulkley).
Id. at 9911.
S. Rep, No. 77, 10.
75 Cong. Rec. 9887 (May 10, 19321.
Id. at 9905.
It became necessary to seek out issuers even though in some
instances, it was thought, corporations had little or no need
for long-term capital.
Can any banker, imbued with the consciousness that
his bond-sales department is, because of lack of securities for sale, losing money and at the same time
losing its morale, be a fair and impartial judge as to
the necessity and soundness for a new security issue
which he knows he can readily distribute through
channels which are expensive to develop but which
presently stand ready to absorb the proposed security
issue and yield a handsome profit on the transaction.13
It was easy, Senator Bulkley stated, to see why the security
business was over-developed and why it overloaded the
country with unfortunate investments. 14 On the other
hand, he said, if
the business of originating and underwriting invest•
ment securities is confined to houses not engaged in
deposit banking, then the extent and the desirability
of new issues will be subjected to an independent and
impartial check. 15
Moreover, the business of investment banking necessarily
involved taking risks. If a securities affiliate suffered a loss,
rumors might spread that the bank's financial condition
11
Id, at 9906.
12 Id.
13 Id. at 9911 (remarks of Senator Bulkley).
14 Id.
16 Id.
at 9911.
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IS Id. at 9912.
242
would be impaired due to its loans to the affiliates. Rumors
of stock price manipulation and other abuses of the distri-
bution system, and the pcssibility of litigation against the
banks, also posed a threat to depositors' confidence. Senator Bulkley considered the special role of the banker:
The banker ought to be regarded as the financial confidant and mentor of his depositors .... Obviously,
the banker who has nothing to sell to his depositors is
much better qualified to advise disinterestedly and to
regard diligently the safety of depositors than the
banker who uses the list of depositors in his savings
department to distribute circulars concerning the advantages of this, that, or the other investment on
which the bank is to receive an originating profit or
an underwriting profit or a distribution profit or a
trading profit or any combination of such profits. 16
His conclusion was unequivocal:
If we want banking service to be strictly banking service, without the expectation of additional profits in
selling something to customers, we must keep the
banks out of the investment security business. 17
II. The Bank Holding Company Act of 1956
The Bank Holding Company Act of 1956 (-the 1956
Act), among other things, was intended to separate banking
from other areas of commerce. As stated in the Report of
the Senate Committee on Banking and Currency (hereinafter "Senate Committee"), " ... bank holding companies
ought not to manage or control nonbanking assets having
no close relationship with banking." 18 As the following
excerpts illustrate, such a separation was felt necessary to
prevent banks from employing in nonbanking enterprises
funds entrusted in them by depositors and to guard against
banks taking unfair advantage in competing with nonbanking enterprises.
Concern over the safety of depositors' funds was expressed in several different ways. The then Chairman of the
Board of Governors of the Federal Reserve System, William
McChesney Martin, Jr., ~xpressed concern over the use of
depositors' funds in nonbanking businesses:
Moreover, the ordinary nonbanking business requires
a managerial attitude and involves business risks of a
kind entirely different from those involved in the
banking business. Banks operate largely on their depositors' funds. These funds should be used by banks
to finance business enterprises within the limitations
imposed by the banking laws and should not be used
directly or indirectly for the purpose of engaging in
other businesses which are not subject to the safe-
16 Id.
17 Id.
18
S. Rep. No. 1095, 84th Cong., 1st Sess. 1 (1955).
19 Hearings on S. 2577 Before
a Subcomm. of the Senate Comm.
on Banking and Currency, 84th Cong., 1st Sess., at 75 {1955).
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Federal Reserve Bank of St. Louis
guards imposed by the banking laws. 19
Chairman Martin also stated that the combination of banking and nonbanking enterprises
involves the lending of depositors' money, whereas
other types of business enterprise, not connected
with banking, do not involve this element of trusteeship.20
The report of the House Banking and Currency Committee
put it somewhat differently:
banks are prohibited from engaging in any other type
of enterprise than IJanking itself ... because of the
danger to the depsitors which might result where the
bank finds itself in effect both the borrower and the
lender. 21
Aside from concern that biased and imprudent extensions of credit to nonbanking affiliates of a bank may
seriously jeopardize the funds of its depasitors, the report
of the Senate Committee also warned that such
a bank holding company might misuse or abuse the
resources of a bank it controls in order to gain an
advantage in the operation of the nonbanking acitivities it control. 22
The report of the House Committee provides further illustration of this concern:
If banks were permitted to own nonbanking busi•
nesses they would be compelled in many instances to
extend credit to such businesses to the detriment of
other competitive businesses in the community and
passibly also to a degree which would be unsound
from a banking viewpoint. A bank should always be
at arms' length with its borrowers and such a position
could not be maintained were banks permitted to
own nonbanking businesses and make credit available
to them.
Whenever a holding company thus controls both
banks and nonbanking businesses, it is apparent that
the holding company's nonbanking businesses may
thereby occupy a preferred position over that of their
competitors in obtaining bank credit. It is also apparent that in critical times the holding company
which operates nonbanking businesses may be subjected to strong temptation to cause the banks wtiich
it controls to make loans to its nonbanking affiliates
even though such loans may not at that time be
entirely justified in the light of current banking stand·
ards. In either situation the public interest becomes
directly involved. 23
20 S. Rep. No. 1095, 3.
21 H.A. Rep. No. 609 on H.R. 6227, 84th Cong., 1st Sess., as
reproduced in 101 Cong. Rec. 8038, 8042 (June 13, 1955).
22 S. Rep. No.1095, 14.
23 H.A. Rep. No. 609 in 101 Cong. Rec. at 8039, 8042.
243
Ill. The Bank Holding Company Act
Amendments of 1970
The Bank Holding Company Act Amendments of 1970
(the Amendments) reflect not only the same Congressional
concerns that are revealed in the 1956 Act-that is, the
safety of depositors' funds and unfair competition-but also
concern over the concentration of economic power in bank
holding companies. The primary purpose of the Amend-
ments was to close the 1956 Act's one-bank holding company loophole in order to preserve the basic separation of
bank and bank-related activities from other business activities.:M The testimony at hearings, the floor debates, and
the Congressional reports consistently cite the problems of
bank insolvency, unfair competition and undue concentra-
tion in support of such a separation.
Chairman Martin discussed the patential threats to bank
solvency in his testimony before the House Committee considering one bank holding company legislation:
Considerations of safety and soundness reinforce
the policy of separating banking and other businesses.
A bank should be insulated from pressures that might
lead it to favor customers of affiliated businesses in
its credit decisions. Otherwise, the bank might build
an unbalanced loan portfolio by discounting an excessive amount of obligations of such customers, or a
low-quality portfolio by accepting substandard risks
to foster sales to such customers. An essential part of
the traditions of bank management has been a scrupulous observance of the need for prudence in handling funds entrusted to the bank by its customers; if
management were to become oriented toward the different objectives of other businesses, this tradition
could be seriously weakened. 25
This concern was also mentioned by several participants in
the House's floor debates.
Depasitors' funds in a bank doing business with a
subsidiary business can be threatened because of the
extension of unwise credit to the nonbanking subsidiary. Some of our largest banks in the 1920's were
guilty of this type of activity, which caused detriment
to depcsitors, stockholders, and the public at large. 26
The debates also raised the specter of unfair competition. Representative Patman, Chairman of the House Banking Committee stated as one of the factors requiring closing
of the one bank holding company loophole the threat of
"[I] oan discrimination of banks in favor of enterprises
owned by the holding company and against companies
24 H.R. Rep. No. 1747, 91st
Cong. Rec. 32890, (1969)
House Rules Committee
House debate of one bank
Cong., 2d Sess. 11·12 (1970);see, 115
{remarks of Mr. Smith, member of the
in support of a resolution regarding
holding company legislation).
25 Hearings on H.R. 6118 Before the House Comm. on Banking and
Cuffency, 91st Cong., 1st Sess. at 197 (1969).
26 115 Cong. Rec. 32891 (1969) (remarks of Rep. Bennet, member
of the House Rules Committee). See also, id. at 32903 (remarks
of Rep. Moorhead, member of the House Banking Committee).
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Federal Reserve Bank of St. Louis
which compete with subsidiaries of the holding company.''27 Richard W. Mclaren, then Assistant Attorney General in charge of the Antitrust Division, testified before the
Senate Committee considering one bank holding company
legislation on this subject:
The economic power enjoyed by banks is substantially enhanced by the fact that commercial banking
markets are local markets for most customers. Competitive alternatives in local markets are few, and
entry of new competitors is frequently restricted by
legislative provisions or regulatory action. For substantial classes of financial customers in such markets,
unable to journey conveniently and economically to
distant metropolitan areas, local banks can be the sole
suppliers of the services needed.
Bank expansion in other areas permits the carryover of economic power into such endeavors. There
is, of course, the obvious danger of overt reciprocity
or tying arrangements, as well as general favoritism of
bank affiliates, particularly in times of tight money.
Also, and perhaps more important in terms of the
need for present legislation, there are dangers which
are of a more structural nature-adverse competitive
effects that would tend to develop naturally without
actual overt use of the economic power carried over
from the banking sphere.
I refer to a voluntary form of reciprocity or tie-in
effect, where a potential borrower may independently decide that, just because he might possibly be under watch, it is in his best interest to patronize
bank-affiliated enterprises in the hope of improving
his chances of obtaining credit from the bank on favorable terms, or indeed at all.
This can be illustrated by an example. A potential
loan applicant might voluntarily place his casualty insurance business with a bank-affiliated insurer in
hopes of improving his chances for a mortgage loan
on the insured property on favorable terms. This
would have the same effect as a coercive tie-in. Competition in the tied product, insurance, would be lessened to the extent that customers no longer purchased it entirely on its own economic merit. One
such merger might well trigger others and, as a pattern of such bank-insurance affiliations developed,
market foreclosure in the tied field would become
more and more serious.
Such voluntary tving or tying effect, as we called
it in a recent case, is the product of market structure
-not misconduct.
This structural problem is intensified because present antitrust remedies appear inadequate to deal directly with it. There simply is no illegal practice or
conduct for a court to enjoin. Hence, we must concentrate on avoiding a structure which gives rise to
such effects. 28
In his testimony at the Senate hearings, Federal Deposit
Insurance Corporation Chairman Frank Wille cited both un17 Id. at 32893 !remarks of Rep. Patman). See also, id. at 38291
(remarks of Rep. Bennet); id. at 32903 (remarks of Rep. Moorhead).
28 One Bank Holding Company Legislation of 1910, Hearings Be-
244
fair competition and concentration of economic resources
as reasons for one bank holding company legislation:
The Federal Deposit Insurance Corporation be•
lieves that the activities of one-bank holding companies should be brought promptly under effective
regulatory control at the Federal level in order to
prevent an unhealthy concentration of the nation's
economic resources and to control possible anticompetitive practices in the allocation of credit and
financial services within the nation's economy.29
The possibility of economic concentration received wide
attention in the deliberations leading up to the enactment
of the Amendments. In a statement accompanying the administration's version of a bill to regulate one bank holding
companies, the President said:
Left unchecked, the trend toward the combining
of banking and business could lead to the formation
of a relatively small number of power centers dominating the American economy. This must not be permitted to happen; it would be bad for banking, bad
for business, and bad for borrowers and consumers.
The strength of our economic system is rooted in
diversity and free competition; the strength of our
banking system depends largely on its independence.
Banking must not dominate commerce or be dominated by it. 30
The Conference report accompanying the bill which was
enacted into the 1970 Amendments also discussed the dangers of undue concentration:
The danger of undue concentration of economic
resources and power is one of the factors which led to
the enactment of this legislation, and constitutes a
significant threat to the continued healthy evolution
of our free economy. American trade has always operated on the prir'lciple that relationships between
businessmen, large and small, should be founded on
economic merit rather than monopoly power. Our
national policies of limited government regulation
and interference in trade and commerce, however, do
make it possible for undue concentrations of resources and ecomonic power to override fundamental
fairness and economic merit when responding to the
profit motive. This possibility is enhanced when concentrations of power are centered about money, credit and other financial areas, the common denominators of the economy. The dangers may be more pronounced where resources are more easily capable of
being marshalled, or where the course of business is
likely to lead to the constant realization of the existence of power by buyers and sellers in the marketplace. 31
fore the Committee on Banking and Currency, United States
Senate (hereinafter, Senate Hearings); 91st Cong. 2nd Sess.,
1970, PP- 239-40. See also, Mr. McLaren's remarks before the
House Committee 1n The Bank. Holding Company Act Amendments, Hearings before the Committee on Banking and Currency, House of Representatives (hereinafter, House Hearings), 91 st
Cong., 1st Sess. (1969) pp. 91-92
29 Senate Hearings, p, 172.
30 H.R. Rep. No. 1747, to accompany H.R. 6778 (Conference
Report), 91st Cong., 2nd Sess., 11970) pp, 11-12.
31 td. at 17.
.
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Federal Reserve Bank of St. Louis
Aside from general discussion on the floor of the House of
the dangers of concentration at which the Amendments
were aimed, 32 much concern was expressed over the potential threat to the economy of the rumored merger of four
of the largest banks in New York and four of the nation's
largest insurance companies, including this statement by
Chairman Patman during the House debate:
In addition, serious questions were raised by several witnesses during our hearings on H.R. 6778, including leading economists, concerning the tremendous
economic power that would be created by the concentration of giant insurance companies and large
banks under a single holding company umbrella. The
assets of commercial banks and insurance companies
comprise most of the assets available for use by all
the institutional investors in the United States. Insurance companies and banks combined control roughly
$865 billion, of 77.2 percent of the $1.1 trillion of
institutional investors in the American economy.
Commercial banks alone control $646 billion, or 57.7
percent of this total. Various news media have indicated possible mergers, through the holding company
device, of several of the largest commercial banks and
largest insurance companies in the country. One such
merger was dropped last winter after the Justice Department brought suit. However, we cannot rely in
the long run on such administrative action. We should
legislatively prohibit such massive concentrations of
economic power: There is no justification for them.
By permitting a combination of banks and insurance
companies, a tremendous concentration of financial
resources would be attained to the detriment of the
public interest. 33
To summarize, one of the primary goals of banking legislation since 1933 has been the separation of banking from
other areas of commerce. The Glass-Steagall Act was enacted in reaction to the abuses of banks and their securities
affiliates in participating in the speculative fervor of the
1920's which led to the stock market crash in 1929. The
Act effectively ended bank participation in the securities
industry for many years.
By 1956, the phenomenon of bank holding companies
engaged in businesses other than banking was in part respcnsible for the enactment of the Bank Holding Company
Act of 1956. Behind its provisions separating commerce
and banking were concerns that a combination of the two
would unnecessarily jeopardize the funds of depcsitors and
lead to unfair competition with nonbanking enterprises.
In addition to dealing with the two concerns discussed
above, the 1970 Amendments were passed to prevent the
undue concentration of resources which was feared might
result from the discovery by the nation's largest banks of
the one-bank holding company loophole in the 1960's.
32 115
Cong. Rec. 32893, November 4, 1969 (remarks of Rep.
Patman). S11t1 also, id. at 32891 November 4, 1969 (remarks of
Rep. Bennet!; id. at 32903 (remarks of Rep. Moorhead).
33 td. at 32897.
245
Appendix IIA
[letterhead of The Administrator of National Banks)
November 11, 1974
[Addressee deleted]
Dear
This is in response to your letter of August 14, 1974, and to earlier correspondence dated March 18, 1974 from [name
deleted] of (name deleted] to which we replied on April 19.
(Name deleted], a subsidiary of {name deleted], Inc., requests permission to form an operating subsidiary pursuant to
Interpretive Ruling 7.7376. The activities of the proposed subsidiary are described as follows:
1-The subsidiary will manage the business affairs of First [name deleted], a small business investment company
licensed by the Small Business Administration and wholly owned by the bank. Personnel now employed by [name
deleted) will be transferred to the proposed subsidiary, but [name deleted] will continue to have its own board of
directors.
2-The subsidiary will provide financial counselling services, including advice and counselling regarding appropriate
forms of financing, and will collect fees for such services, except that no fee will be collected from a customer for
counselling related to that part of a financing provided by any direct or indirect subsidiary of the holding company.
3-The subsidiary will provide financial analysis and advice to customers in connection with acquisitions, mergers
and reorganizations.
4-The subsidiary will not perform legal, accounting, insurance or real estate brokerage services.
Financial counselling has long been an integral part of the business of banking. Not only do individual customers
frequently seek bank advice regarding their financial affairs, but business enterprises also need counsel on a wide range of
matters relating to the capitalization and financial structure of their operations. Since loan officers, who have traditionally
been the source of financial counselling to individuals, may not possess the necessary sophistication to advise corporations on
their financial requirements, it is logical that a bank would want to assemble a group of specialists in corporate finance to fill
this need. Indeed, many large banks have organized corporate finance departments.
Financial counselling may take a variety of forms. For the moment, [name deleted) intends to provide customers with
financial counselling services on a long-term basis pursuant to contracts calling for a specified number of hours of counselling
per month at a fixed rate. Customers not under financial counselling contracts will be able to purchase similar advice for
specific projects. In both cases, the advice rendered will cover the whole range of financial problems that businesses must deal
with from time to time.
The subsidiary's services will also include advising customers regarding appropriate types of financing. These services will
include an in-depth review of the customer's current financial condition and future needs, following which the subsidiary will
prepare a detailed plan of financing suitable for the customer (which may consist of debt securities, equity securities or a
combination thereof) based upon conditions in the financial market and the types of lenders most likely to be interested in
providing the suggested financing (e.g., insurance companies, pension plans, SBIC's, trust funds, etc.).
With respect to the preparation of detailed plans of financing for business customers, the bank should understand that its
activities in this area could bring the subsidiary close to the borderline between the permissible activity of financial
counselling and the business of investment banking. This could occur if the subsidiary undertook to locate a purchaser of a
client's securities, or assisted materially in the negotiations between the client and the purchaser, or charged its client a fee
contingent upon successful placement of the securities by the bank. Under section 21 of the Glass-Steagall Act, 12 U.S.C.
378, banks may not, with certain exceptions, engage in the business of issuing, underwriting, selling or distributing securities.
The possibility of a violation of this statute by the bank's new subsidiary is increased by the fact that at least one officer of
the subsidiary was formerly employed by a venture capital firm in New York City. We must caution therefore that the
operations of the subsidiary be confined strictly to those set forth above, namely, the rendering of financial advice only.
Thus, the bank will not be permitted to participate in any significant way in negotiations between its client and prospective
purchaser$ of equity or debt i$sues, and may not charge a fee contingent upon the $UCcessful placement of securities. The
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Federal Reserve Bank of St. Louis
246
extent to which the bank contacts prospective purchasers is a matter we will leave to bank counsel, but as a general matter we
do not believe it would be inconsistent with the Glass-Steagall Act if the bank, after making preliminary inquiries of potential
purchasers, furnished its customer with the names of possible investors with whom the customer could then undertake
negotations on its own.
Very truly yours,
/s/ J.C. Gwin
John D. Gwin
Deputy Comptroller of the Currency
Appendix 11B
[Letterhead of The Administrator of National Banks)
January 15, 1975
[Addressee deleted]
This is in response to your letter of September 24, 1974, with reference to a proposal from (name deleted].
The Proposal
Toe bank proposes to organize a new division, [name deleted] Finance Company, to provide financial consulting advice to
its corporate customers. This service will initially assist a client in determining his long term financial objectives. Alternative
plans of attaining these objectives will then be devised and after a selection is made, the bank, through its new division, will
assist in the implementation.
In the event that a client decides to issue debt or equity securities, the bank will, in the case of a public offering, help the
client in choosing and dealing with an investment banker. In the case of a private placement, the bank will advise the client of
possible sources of capital and assist in preparing a presentation to such sources, including the drafting of an offering
memorandum and providing the necessary financial information.
If the client decides on a merger, the new division will advise and assist the client in negotiations with the other party.
Agreements between the new division and its client will provide for:
(a) Payment of fees for services rendered, based upon the time spent or the results accomplished, or both; and
(b)Permit a complete interchange of information between the division and the bank's loan and credit departments with
regard to any division client who is or may become a borrower of the bank.
Discussion
Financial counselling has long been an integral part of the business of banking. Not only do individual customers
frequently seek bank advice regarding their personal finances, but business enterprises also need counsel on a wide range of
matters relating to the capitalization and financial structure of their operations. Since loan officers, who have traditionally
been the source of financial counselling to individuals, may not possess the necessary sophistication to advise corporations on
their financial requirements, it is logical that a bank would want to assemble a group of specialists in corparate finance to fill
this need. Indeed, many large banks have organized corporate finance departments.
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Federal Reserve Bank of St. Louis
247
Because financial counselling is a general concept, further inquiry is necessary to determine the specific activities that
come under this heading. The purpase of this inquiry is to establish which activities are proper for commercial bankers and
which are reserved to investment bankers under section 21 of the Glass Steagall Act. Cf., Investment Company Institute v.
Camp, 401 U.S. 617,629 (1971).
First, we think that Glass Steagall cannot be read as prohibiting commercial bankers from performing all the activities that
investment bankers perform. Since both commercial and investment bankers are in the business of furnishing financial advice,
there will inevitably be some overlap. In addition, section 21 of Glass Steagall bars commercial banks from only four specific
areas: issuing, underwriting, selling or distributing securities. Activities which fall short of these four areas and which are also
incidental to a commercial bank's function are therefore open to commercial banks.
For example, we feel that assisting a client in determining his long term financial objectives is not only well within what
bankers have done in the past and are expected to do by their corporate customers, but also far short of anything Glass
Steagall intended to prohibit. Preparing alternative routes for achieving these objectives and furnishing advice on the
execution of a memorandum describing the alternative selected, are natural adjuncts to this kind of financial counselling.
None of these activities constitutes issuing, underwriting, selling or distributing securities within the Glass Steagall Act.
On the other hand, underwriting an issue of securities is clearly off-limits to commercial banks. This means that a bank
may not extend a firm commitment to purchase an issue with a view to selling the same, nor may a bank promise only its
"best efforts" to market an issue. These activities rest at the heart of the business known as investment banking and
undoubtedly constitute a proscribed underwriting, selling or distribution of securities.
In the twilight zone lies the degree to which a bank may solicit purchasers for a client's private placement, the extent to
which the bank may participate in the negotiations between buyer and seller, a.nd the fee that the bank may charge its client.
With regard to the bank's role in seeking investors to purchase a new issue, we think the bank is free to pass on to its client
the names of prospective purchasers who in the bank's judgment may be interested in making an investment. This kind of
information comes to a bank every day in the course of its normal business operations. We also would not object if the bank
made preliminary inquiries of several investors to determine their interest in the new issue.
This does not mean, however, that the bank can participate in the actual negotiations between its client and the
prospective purchaser. Inevitably, a banker who engages in negotiations of this sort ends up acting as middleman trying to
bring buyer and seller together. It is precisely this role that lies at the heart of the investment banking business. Caresso,
Investment Banking in America, ix, xi, 1, 9, 13 (1970). A banker who participates to any substantial degree in the direct
negotiations between client and purchaser may well be engaged in underwriting, selling or distributing securities in violation
of the Glass Steagall Act.
With respect to fees, we think the bank cannot, consistent with the above mentioned ban on "best efforts" underwriting,
charge a fee contingent upan the successful placement of a private offering, since the levying of such a fee is a strong
incentive for the bank to locate a purchaser with whom a deal can be made. Therefore, fees will have to be based on time
expended or some criterion other than the success of the placement.
Raising capital by issuing securities can be accomplished in myriad ways. See, for example, the various methods listed in
United States v. Morgan, 118 F. Supp. 621, 651 (S.D.N.Y. 1953). Beyond the guidelines set forth above, it is impassible for
us to define what the role of the bank should be in each case. The degree to which a bank should become involved in direct
negotiations leading to a merger between its client and another party, where new stock will be issued, is another question to
which this letter is no1 addressed. In such situations, bank counsel must guide the bank past the shoals of the Glass Steagall
Act. In the meantime, we ask that the bank follow the guidelines set out in this letter when judging the propriety of its
activities. We will be happy to discuss with bank counsel any aspect of this letter.
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Federal Reserve Bank of St. Louis
Very truly yours,
/s/ J. T. Watson
Justin T. Watson
Deputy Comptroller of the Currency
248
Appendix Ill
Bank Term Loan Syndications
This announcement acpears as a matter of record only,
OXIRANE
$232,800,000
Project Financing
Agent and Manager
CHEMICAL BANK
Funds Provided By
CHEMICAL BANK
Bank of Arnerica N.T. & S.A. • The Bank of New York
The Bank of Nova Scotia• Security Pacific National Bank
Texas Commerce Bank National Association• Irving Trust Company
Bank of Montreal (California) • European-American Bank and Trust Company
Marine Midland Bank• National Bank of Detroit
Republic National Bank of Dallas• Toronto Dominion Bank of California
Bank of the Southwest• First Cit-/ National Bank of Houston • California First Sank
The Bank of Tokyo Trust Company• Dresdner Bank AG (Los Angeles Branch)
Wells Fargo Bank N.A. • Houston National Bank
Source: »'SJ, January 15, 1976, p. 20
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Federal Reserve Bank of St. Louis
249
Tltit IMCUffClffltnl
•~•vsu1nwttt1
olrecotd.
$67,000,000
Production Payment Financing for
The Pittsburg & Midway Coal Mining Company
a wholly-owned subsidiary of
@
Gulf Oil Corporation
From coal production.
Arranged
bit
@ S.?.!'!!!~~"I.~!-~..N~
Funds pravidej by
Continental Bank
C...r,IWlfa lli..,Oi1 NMiOIIM
1.-11.-, r,1u1CM111111Y., ~ 4
Bank of America NT & SA
Philadelphia National Bank
Morgan Guaranty Trust Company
of New Yer!,
Pittsburgh National Sank
First National Bank of Denver
Source: WSJ, January 7, 1976, p. 21
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Federal Reserve Bank of St. Louis
250
$350,000,000
Mobil Oil Corporation
5-year production payment
FINANCING MANAGED BY:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
FUNDS PROVIDED BY:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
FIRST NATIONAL CITY BANK
THE CHASE MANHATTAN BANK, N.A.
BANK OF AMERICA NT & SA
CHEMICAL BANK
MANUFACTURERS HANOVER TRUST COMPANY
BANKERS TRUST COMPANY
THE BANK OF NEW YORK
THE BANK OF Nov A ScoTIA. NEW YORK AGENCY
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO
FIRST CITY NATIONAL BANK OF HOUSTON
FIRST NATIONAL BANK IN DALLAS
THE FIRST NATIONAL BANK OF BosTON
FIRST PENNSYLVANIA BANK, N .A.
IRVING TRUST COMPANY
MARINE MIDLAND BANK
MELLON BANK, N.A.
NATIONAL BANK OF DETROIT
REPl'BLIC NATIONAL BANK OF DALLAS
THE ROYAL BANK OF CANADA
SECURITY PACIFIC NATIONAL BANK
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
TORONTO DOMINION BANK - NEW YORK AGENCY
UNITED CALIFORNIA BANK
UNITW STATES TRUST COMPANY OF NEW YORK
Source: WSJ, February 26. 1976. p. 22
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Federal Reserve Bank of St. Louis
251
This announcement appears as a matter of record only.
The Kingdom of Thailand
U.S. $100,000,000
Five Year Term Loan
Prol'idedby
Manufacturers Hanover Trust Company
Bank of America National Trust & Savings Association
Crocker National Bank
Bank of Montreal
Union Bank of Switzerland
fagapo" B,a,.,h
Londa, B,an,h
The Hongkong and Shanghai Banking Corporation
Standard Chartered Bank Limited
Bangkok Bank Limited
Bankers Trust Company
Chase Asia Ltd.
Commerzbank Aktiengesellschaft
Thai Farmers Bank Limited
London Branch
The Bank of Tokyo Trust Company
Chemical Bank
Citibank, N.A.
Compagnie Financiere de la Deutsche Bank AG
Dresdner (South East Asia) Limited-Dmdne, Ba,k G,oup
The Mitsui Bank of California
Banque Fran~aise du Commerce Extt!rieur
Arranged by
Manufacturers Hanover Limited
March, 1976
Source: WSJ, March 26, 1976, p. 18
93-031 0 - 77 -17
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Federal Reserve Bank of St. Louis
252
•
Bank Sanaye Iran
us $40,000,000
Five-Year Tenn Loan
Arranged by
Iran Overseas Investment Bank Limited
(Iranvest)
Managed and Provided by
Compagnic Financk;n· dl· b J)c-utschc.· HJnkAG
Marine Mkllmd U.mk
5'.Xll1tl\ Gl\llfrJk·
U.1yc.·n!\(:he Vc.·n·im,h.mk lntmtarioiulSA
Tiu· Ch.1sc.· MJ111l:1tt:111 BJnk,N.A.
lr.m Ow™."JS Invc.•stnu-nr BJnk Limiwd
Wc.·ll-.FJrgoBJnkN.A.
Crocker N.1rion.1l B.111k
llihomc.•fll.·.1 lntc.·rn.1rional Bank NV
l11tm1.1rio11;.1I Mc.•xican Bank Limitcll
-lntc.·rn1cx-
Cnn111u-rzb.111kAkric.•11Gc.·~IL'ICltaft
M.nmfat't\m:rs H.mowrTn.1-.t Company
li..111kc.·r.Tn1srCc.,111p.1ny
M.mufa.rturc.'T'i H.1nowr Banc.Jue- Nontiquc.•
B.111c.1m· Comnwrciak· pour !'Europe Ju Noni
(Euroh.mk)
AgentBank
Iran Overseas Investment Bank Limited
(Iranvest)
Source: K+SJ, March 12. 1976. p. 18
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Federal Reserve Bank of St. Louis
253
Appendix IV
Excerpt from Loan Agreement Between Downe Communication, Inc.
and Bank of New York and First National City Bank
13. NBgati1111 Cowtnants. So long as the Company may borrow hereunder and until pavment in full of the Notes and the Term Loan Notes and
performance of all other obligations of the Company hereunder, without the written consent of the Banks, the Company will not:
(al Borrowing. Create, incul", assume or suffer to exist any liability for borrowed money, or permit any Subsidiary so to do, except Ii)
indebtedness to the Banks, (iii indebtedness of the Company or any Subsidiary secured by mortgages, encumbrances or liens permitted by
subparagraph 13(bl hereof, (iii) indebtedness for borrowed money existing on December 31, 1971 as set forth on Schedule 9 hereto, and (ivl
letters of credit and discounted notes as set fo11h on Schedule 10 het"eto,
lb) MOttgaf/11$ and Pl«t~s. Create, incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any kind (including a
charge upon propeny purchased under conditional sales or other title retention agreements) upon, or any securitv interest in, any of its
propeny or assets, whether now owned or hereafter acquired, or permit any Subsidiary so to do, except (i) liffls tor taxes not delinquent or
being contested in good faith and by appropriate proceedings, (ii) liens in connection with workmen's compensation, unemployment insurance
or other social security obligations, liii) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of businm, (iv)
mechanics', workmen's, materialmen's or other like liens arising in the ordinary course of business with respect to obligations which are not due
due or which are being contested in good faith, (vi the pledge being made pursuant to the Pledge Agreement, and (vi) those mortgages, pledges,
liens and encumbrances set forth on Schedule 7 hereto or any retinancings (up to the same amount) thereof.
le) Me,,.r, Acquisition or Sale of A11eh'. Enter into any merger or consol.idation or acquire all or substantially all the auets of any person,
firm, joint venture or corporation, or sell, lease, or otherwise dispose of any of its assets except in the ordinary course of its business, or permit
any Subsidiary so to do.
(di Loans and lnveitmants. Make loans or advances to or investments in any person. firm, joint venture or corporation, or permit any
Subsidiary so to do. except Ii) loans existing on December 31, 1971 as set forth on Schedule 11 hereto, (ii) purchases of direct obligations of
the United States of America or any agency thereof, certificates of deposit or acceptances of banks or trust companies having total assets in
excess of $1,000,000,000, or commercial paper rated prime by a nationally recognized rating service provided that none of the foregoing shall
have maturities in excess of one year at the date of the purchase thereof; (iiil loam or advances to or investments in a presently existing
Subsidiary and, to the extent consented to by the Banks. any new Subsidiary; and livl investments represented by the securities of other
companies being pledged in accordance with the Pledge Agreement,
lel Contingent Liabilitm1. Assume, guarantee, endorse, contingently ag,-ee to purchase or otherwise become liable upon the obligation of any
person, firm, joint venture or corporation, or permit any Subsidiary so to do, except (ii by the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of business and (iii those contingent liabilities set forth on Schedule 12
hereto.
If) Capital Expenditurn. Make any capital expenditures, or permit any Subsidiary so to do, in any one fiscal year exceeding in the aggregate
for the Company and the Subsidiaries $600,000.
lg) Dividends and Purchase of Stock. Declare any dividends (other than dividends payable in capital stock of the Company) on any shares ol
any class of its capital stock, or ,apply any of its property or assets to the purchase, redemption or other retirement of, or set apart any sum for
the payment of any dividends on, or for the purchase, redemption or other retirement of, or make any other distribution by reduction of
capital or otherwise in respect of, any shares of any class of capital stock of the Company, or permit any Subsidiary (all of whose outstanding
shares are not owned by the Company or another Subsidiary) so to do, or permit any Subsidiary to purchase or acquire. any shares of any class
of capital stock of the Company.
(h) Sam and LHffback. Directly or indirectly enter into any arrangement whereby the Company or any Subsidiary shall sell or transfer all or
any substantial part of its fixed a11ets then owned by it and shall thereupon or within one year thereafter rent or lease the assets so sold or
transferred.
Iii Obligations as Lftlflfl. Enter into any agreements as lessee of any tangible or intangible property, whether real propet""ty, machinery,
equipment, personal property or fixtures or permit any Subsidiary so to do. if the aggregate of all rental payments by the Company and the
Subsidiaries shall exceed an annual rate of $2,100,000.
(jl Stock of Subsidiarin. Sell or otherwise dispose of any shares of capital stock of any Subsidiary (except in connection with a merger or
consolidation, to the extent permitted under this Agreement, of any Subsidiary into the Company or into another Subsidiary or the dissolution
of any Subsidiary) or permit any Subsidiary to issue any additional shares of its capital stock except pro rata to its stockholders.
(kl Dioolution, tttc. Dissolve or liquidate or permit any Subsidiary 10 to do.
(II New Busintt,s. Engage in any business, or permit any Subskhary to engage 1n any business. not of the same genflral type1 now conducted
by it. The sale of additional products by mail order, including the sale of addi110nal tYPM of msurance, shall not, for the purposes of this
Agreement, be deemed a new business.
(ml Adwlni1ing. Accept or permit any Sub11d1ary to accept securities of others m payment for adw,tising.
(n) Liabilitin of Subsidiariu Permit any Subsidiary to have any liabilities except (ii liabihtie1 in the ordinary course of business to the
Company or any other Subsidiary, WI liabilities for the payment of borrowed money to the Company, (iii) current liabilities to others incurred
or accrued in the ordinary course of business and (iv) liabilities otherwise permitted under this Agreement.
Source:
Form 8-K filed by Downe Communications, Inc. with the Securities and Exchange Commiuion, May 12. 1972.
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Appendix V
Foreign Banks with Securities Affiliate in U.S ..
as of December 31, 1974
Foteign Bank
Securities Affiliate
Oomeftic Banking Operations (if any)
Algemene Bank Nederland NV
25% interest in ABO Securities
Corp.
New York rep. & branch; Chicago
branch; San Francisco rep.
Amsterdam-Rotterdam Bank NV
Interest in SoGen-Swiss International.
One of six shareholders in EuropeanAmerican Bank & Trust (N.Y.),
European-American Corp. (Cal.) one
of 7 in European Banking Co. Ltd.,
branch in Chig., agency in ~.A.
Banca Commerciale ltaliana
Minority interest in Model,
Roland & Co.
One of seven in European Banking
Co., Ltd., branch in Chig.
Banco Ambrosiano
75% of Ultrafin International Corp.
(None)
Banca Di Roma
33% of Europartners Securities
Corp.
Banco di Roma (Chicago); San
Francisco Agency. New York
Agency Rep.
Bank Leumi Le-Israel B.M.
Leumi Securities Corp. (Israel Secs.)
Branches in N.Y., Miami Rep.
Bank of Tokyo, Ltd.
5% of Nomura Securities Int., Inc.
Rep. in Chicago, majority of Bank
of Tokyo of California, 4.95% of
Chicago Tokyo Bank.
Majority of Bank of Tokyo Trust
Co. (N.Y.) agency in N.Y.;
Portland branch, Seattle branch,
Houston Rep,
Banque de Bruxelles
25% of ABO Securities Corp.
Representatives in New York.
Banque de L'lndochine
50% of Suez American Corp.
Branch in New York.
Banque Lambert
Interest in New Court
Securities Corp.
(None)
Banque Rothschild
Interest in New Court
Securities Corp.
(None)
Bank Julius Baer & Co., Ltd.
Baer Securities Corp.
Baer American Credit Corp., Ltd.
(international finance corp.) (N.Y.)
Bayerische Hypotheken-und-
25% of ABD Securities Corp.
{None)
33% of Europartners Securities
Corp.
Branch in Chicago and New York
Wechsel-Bank
Commerzbank AG
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255
Foreign Bank
Securities Affiliate
Domestic Banking Operations (if any)
Compagnie Financiere de Paris
et des Pays-Bas
20% interest in Becker and
Warbur-Paribas Group, Inc.,
holding co. for: (a) Warburg
(None)
Paribas Becker, Inc.; (bl A.G.
Becker & Co., Inc.; (c) Becker
Securities Corp.
50% of Suez American Corp.
New York representative
Credit Lyonnais
33% of Europartners Securities Corp.
New York Branch and representative
Daiwa Bank Ltd.
6.9% of New Japan Securities Int.,
Inc.; 2.2% of Nomura Securities
New York and Los Angeles agencies
Compagnie Financiere de Suez
International Inc.
Deutsche Bank AG
50% of UBS-DB Corp.
One of six in European American Bank
Trust and one of seven in European
American Bank Co., Ltd.
j
Dresdner Bank AG
25% of ABO Securities Corp.
Chicago and New York branch; L.A.
agency.
Robert Fleming & Co., Ltd
Robert Fleming, Inc.
(None)
Fuji Bank Ltd.
2.3% of Nikko Securities Inter-
L.A. and New York agency; Chicago
Representative, Fuji Bank and Trust
national Inc.; 8.5% of Yamaichi
International
Company (N.Y.).
Hill Samuel & Co., Ltd.
Hill Samuel Securities Corp.
(None)
Industrial Ba~k of Japan
3.4% of Daiwa Securities Co., Ltd.;
9.4% of New Japan Securities International Inc.; 2.3% of Nikko
Securities International, Inc.;
2.1 % of Nomura Securities International, Inc.; 8.5% of Yamaachi
International Inc.
New York and Los Angeles agency;
Industrial Bank of Japan Trust
Co. (N.Y.).
Kleinwort Benson Ltd.
Kleinwort Benson, Inc.
(None)
Kredietbank NV
Partial interest in Ultrafin
International, Inc.
New York representative.
Long-Term Credit Bank of
Japan Ltd.
3.4% of Daiwa Securities Inc.
New York branch.
Mitsubishi Bank Ltd.
2.5% of Nikko Securities International, Inc.; 8.5% of Yamaichi
Los Angeles agency; Chicago representative; Mitsubishi Bank of
California
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International, Inc.
256
Foreign Bank
Securities Affiliate
Domestic Banking Operations (if any)
Mitsubishi Trust and Banking
2.3% of Nikko Securities Inter-
New York agency
Corp., ltd.
national, Inc.
Pierson, Held ring & Pierson
Interest in New Court Securities
Corp.
(None)
N.M. Rothschild & Sons
Interest in New Court Securities
Corp.
(None)
Sanwa Bank Ltd.
2.1 % of Nomura Securities International, Inc.
Sanwa Bank Ltd. (Cal.); San Francisco, and New York agencies; Chicago
branch.
Schroder Naess & Thomas Division
Schroder Trust Co. {New York)
Schroders Ltd.
(investment counselor) of
Schroders, Inc.
Societe Generale
Majority of interest in SoGen-
Swiss International Corp.
One of six in European-American Bank
& Trust {N.Y.); one of seven in European-American BankinQ Co. Ltd.
(Chicago Branch).
Societe Generale A1sacienne
de Banque
Interest in SoGen-Swiss International Corp.
(None)
Sumitomo Bank Ltd.
4.2% of Daiwa Securities, Inc.
San Francisco agency; Chicago Branch;
New York agency; Sumitomo Bank of
California; minority interest in
Central Pacific Bank, Honolulu.
Sumitomo Trust and Banking
Co., Ltd.
3.5% of Daiwa Securities, Inc.;
9% of New Japan Securities
International Inc.
New York representative
Swiss Bank Corp.
Basie Securities Corp.
(None)
Swiss Credit Bank
Swiss-American Securities, Inc.;
interest in SoGen-Swiss International Corp.
Los Angeles agency and representative;
New York branch
Takai Bank Ltd.
2.3% of Nikko Securities International, Inc.
New York agency; Los Angeles
agency, Takai Bank of California
Union Bank of Switzerland
50% of UBS-DB Corp.
San Francisco representative; Chicago
representative; New York branch
representative.
S.G. Warburg & Co., Ltd.
20% in the Becker and WarburgParibas Group, Inc.
Source: American Banker July 31. 1975. pp. 186-89.
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Mr. 8'r GERMAIN. Thank you, Mr. O'Brien, for your contribution.
It's always welcomed.
I note in your testimony you focus on upholding the principle of
separate banking and commerce in this country, in the United
States, yet I note there you say:
There may be practical consideration which will lead the Congress to temper the
potentially disruptive impact of a sound but hard principle with certain
modifications.
What do you see as the problems in section 8 as it is currently
written, and. what suggestions would you have as far as modifying
this section is concerned?
Mr. O'BRIEN. I think the primary point, Mr.-Chairman, is that we
believe that it is timely to indicate precisely in the bill the need for
separation of the securities arm from the commercial arm. This is
the time to handle it, before the problem becomes larger, more
difficult to handle 2 years, 5 years hence.
I think that is the primary consideration that we are bothered
by-Mr. ST GERMAIN. What modifications would you suggest in section
8? You say perhaps it should be tempered.
Mr. O'BRIEN. I think what would have to be done is some
consideration should be given to a grace period which is considered
here. I think there is a grace period which is provided for, I think
about 10 years or so, that is reasonable. With respect to that, that
would be our position.
Mr. 8'r GERMAIN. You heard Governor Gardner testify that the
Fed would be suggesting or actually it did this morning suggest a
permanent grandfathering of certain securities operations of foreign
banks. Were this to be accepted, certainly we would want to know,
we the Congress, whether the regulatory framework would be
adequate.
As I asked Governor Gardner earlier, I voiced a little skepticism
about the oversight being exercised by the Fed alone, and we
inquired and asked him to inquire of his colleagues at the Board
whether it wouldn't be wise to include the SEC in the regulatory
framework for the securities firms if they were, in fact, to be
grandfathered.
Would you have any comment on that?
Mr. O'BRIEN. Mr. Chairman, I think the basic principle which I
would like to rely upon is one of comparable and equal regulation.
The SEC has had 40 years or so of experience in dealing with the
securities activities of the securities business per se, the
underwriting and investment banking and brokerage business. As
such, they are obviously well qualified to handle that subject.
I don't think, as the appendix indicates, that there is the same
level of experience or perhaps even desire on the part of the bank
regulatory side. I did hear Governor Gardner's comment. You have
stated and I would restate, however, our basic principle with respect to the separation between the securities side and the banking
side.
Mr. ST GERMAIN. As you know, and as I mentioned earlier to
Governor Gardner, the specter of retaliation was rampant last year
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Federal Reserve Bank of St. Louis
258
when we considered this legislation. Many witnesses testified that
there would be retaliation against U.S. commercial investment
bankers abroad. They gave this as a justification or a reason for
modifying the legislation.
Do you consider, as a representative from the securities industry,
and therefore, the investment bankers, do you consider that this
specter of retaliation or this threat of retaliation is real, and could
you give us some indication of the extent of U.S. investment
banking operations abroad as a means of measuring the potential
for retaliation?
Mr. O'BRIEN. When I was talking with my colleagues yesterday
and they were asking me this question as well, I guess I responded
in rather colorful language to them that I thought it was an absurd
fear. My honest judgment is I don't think that the alleged retaliation is a genuine fear. So I don't hear about it. I don't fear it. I
don't have anyone telling me that it is something that we should be
concerned about.
Mr. 8'r GERMAIN. How about the extent of investment banking
operations abroad by U.S. firms?
Mr. O'BRIEN. There is, of course, investment banking activity
going on. I am not in the position to furnish you with statistics. Of
course, the United States is still the financial center of the world
because of our markets, but it is a fact that certain firms within the
United States are operating abroad, and sometimes operating in a
variety of ways in a variety of countries, and I might add, operating
with local banks and others abroad.
It is also a fact, however, I think, that principal investment
banking business in terms of volume-and I do not have statistics
for you nor do I know if I can get them-but I think the principal
investment banking business abroad is done by the local banks, the
local large banks abroad.
Mr. ST GERMAIN. Domestic banks abroad, in other words?
Mr. O'BRIEN. Yes. The brokerage business, as distinguished from
the investment banking business abroad, is a relatively small thing
compared to the United States where we have 25 million or 26
million share owners. That is not the case in Europe. So for these
reasons I have concluded that I don't think there is a problem in
that area.
Mr. ST GERMAIN. In your membership, do you include the investment bankers who do engage in this activity abroad?
Mr. O'BRIEN. Yes. We have a number of members, a relatively
small number, but there are members of the association who are
international investment bankers operating here and operating
abroad and in the Far East.
Mr. 8'r GERMAIN. Have these members indicated to your association any apprehension about retaliation?
Mr. O'BRIEN. I have not heard this point made to me with respect
to retaliation.
Mr. ST GERMAIN. Do they subscribe to your position on this
legislation?
Mr. O'BRIEN. The basic thrust of our testimony is, as you know,
that there should be the separation of the banking from the securities business. To that there is a clear and strong support by the
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Federal Reserve Bank of St. Louis
259
association starting with the board of directors and the executive
committee, and it is subscribed to by the others as well.
Mr. 8'r GERMAIN. Thank you.
Ms. Oakar?
Ms. 0AKAR. Thank you, Mr. Chairman.
I have one question for both gentlemen.
Do you feel that there is an adequate mix between the private
lending activities of the U.S. banks overseas and the U.S. involvement in internatinal lending organizations such as the IMF?
Mr. O'BRIEN. I am not qualified to answer that question. I don't
have the experience.
Ms. OAKAR. Perhaps I am not qualified to ask it.
Mr. O'BRIEN. I don't have the knowledge, and I never will
presume to tell you something I am not qualified to tell you. I just
don't know the answer.
Ms. OAKAR. Mr. Walker?
Mr. WALKER. No, nor do I.
Ms. OAKAR. I have no other questions.
Thank you, Mr. Chairman.
Mr. ST GERMAIN. Thank you.
Mr. Rousselot?
Mr. RoussELOT. Mr. O'Brien, we do appreciate your appearance
here today.
To follow up on what Chairman St Germain has already mentioned, on page 5 of your statement, you said:
Foreign affiliated members of your association have argued that this bill could
invite foreign governments to retaliate against U.S. commercial and investment
bankers abroad.
My question is: Given that the foreign activities of U.S. banks are
far more extensive than those of the foreign banks in this country,
how would you evaluate that "threat" of foreign retaliation?
Mr. O'BRIEN. It's very difficult, Mr. Rousselot, for me to evaluate
it, for example, to the same degree Governor Gardner could do it. I
have an old and basic rule that I generally comment only on areas
where I have some, a little experience. As far as commercial
banking abroad is concerned, I am obviously not that well qualified.
Mr. RoussELOT. Could we, since this is a quote from your statement, could you get some of these foreign affiliated members of
your association who have argued this to tell us just how that is
going to occur, in their judgment?
Mr. O'BRIEN. I will be glad to furnish you with something.
Mr. RouSSELOT. That is the big argument which is being made.
Mr. O'BRIEN. It may be Mr. Walker would wish to add to that, but
if he doesn't I will certainly furnish something.·
Mr. WALKER. Mr. Rousselot, there is one point that should be
made, I think, in connection with this question of retaliation.
The United States has had for 44 years a policy of separation of
commercial banking and the securities business, and we believe
most of the foreign banks that have come to the United States and
set up securities affiliates while also engaging in the banking
business did so in the face of this policy and they do so with an
awareness that U.S. banks could not do the same thing in the
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Federal Reserve Bank of St. Louis
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United States. So, essentially what we are pointing to is that this
principle of separation, which does exist in this country, which
domestic banks must comply with and which we would seem to be
asking, we, or you the Congress, should be asking foreign banks to
really play under the same ground rules in this country that our
banks do.
Similarly, abroad, I believe domestic banks, I know for a fact
securities firms must play under the ground rules that exist abroad,
and as a matter of fact, in some cases there are clear discriminations against securities firms abroad.
So in terms of retaliation, it seems somewhat unusual to retaliate
against firms doing business abroad when the host country, our
country, merely asks that foreign banks do the same thing that
domestic banks do.
Mr. RoussELOT. AB long as we are talking about separation, Mr.
O'Brien, I am sure you are well aware that Merrill Lynch has
proposed to implement a program which would combine brokerage
services with payment of interest on demand deposits and bank
card services.
Is it realistic to maintain the traditional separation between
banking and commerce in the light of this development?
Mr. O'BRIEN. I believe it is. I have looked at the Merrill Lynch
plan, not in depth, and I wasn't present at its creation, but I know a
little bit about it and I think it is distinguishable from the commercial banking business, because I think primarily it involves a
different relationship between a broker dealer and a client. It flows
from the account relationship, and I think to that degree, at least
from my analysis, that is a distinguishing feature. I haven't completed or made an exhaustive evaluation but I do think it's
distinguishable.
Mr. RoussELOT. You don't think this is the foot in the door?
Mr. O'BRIEN. It would seem to me to have one firm, Merrill
Lynch, get a foot in the door with 14,500 banks or whatever we have
in this country, is, if it is, a very, very small foot.
I think it's primarily geared to providing some services for the
investment banking and brokerage client, so I personally am not
terribly concerned about it.
Mr. RoussELOT. Thank you, Mr. Chairman.
Mr. ST GERMAIN. Thank you, gentlemen.
We want to express our appreciation to you. There may well be
some questions from some of the other members who cannot be
here this morning that will be submitted to you in writing.
The subcommittee will be in recess until 10 o'clock tomorrow
morning, at which time we will hear from further witnesses as
listed in the subcommittee notice.
[Whereupon, at 12:10 p.m., the subcommittee recessed, to reconvene Wednesday, July 13, 1977, at 10 a.m.]
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Federal Reserve Bank of St. Louis
INTERNATIONAL BANKING ACT OF 1977
WEDNESDAY, JULY 13, 1977
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE OF THE
CoMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Fernand J. St Germain
(chairman of the subcommittee), presiding.
Present: Representatives St Germain, Annunzio, Hanley, Derrick,
Cavanaugh, Rousselot, Brown, Hyde, Hansen, and Leach.
Mr. ST GERMAIN. The subcommittee will come to order.
This morning we continue hearings on H.R. 7325, the International Banking Act of 1977.
We are particularly pleased to welcome to the subcommittee the
Honorable Anthony M. Solomon, Under Secretary for Monetary
Affairs, Department of the Treasury, and to welcome back Deputy
Assistant Secretary of State for Economic and Business Affairs, the
Honorable Paul H. Boeker, who last appeared before our subcommittee in connection with our hearings on loans to lesser-developed
countries.
As you both know, the subcommittee reported out a bill identical
to H.R. 7325 in the 94th Congress. It was subsequently approved by
the House on July 29 by voice vote.
We are looking forward to testimony by the Carter administration on this measure. In the 95th Congress it· is our hope that we
will be able to resolve differences still outstanding, and that at long
last an acceptable regulatory measure will be enacted in law.
I think it is important to point out that the longer we are
delaying this, the more difficult it will become in the future. With
the proliferation and increase in participation by foreign banks in .
our domestic economy, I feel that it is imperative that we take the
steps recommended by the Federal Reserve Board.
Gentlemen, we will first hear from Secretary Solomon.
We will put your entire statement in the record, and you may
proceed.
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Federal Reserve Bank of St. Louis
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262
STATEMENT OF HON. ANTHONY M. SOLOMON, UNDER SECRETARY FOR MONETARY AFFAIRS, DEPARTMENT OF THE TREASURY; ACCOMPANIED BY STEPHEN J. FRIEDMAN, DEPUTY ASSISTANT SECRETARY (DESIGNATE) FOR CAPITAL MARKETS
Mr. SOLOMON. Thank you, Mr. Chairman.
It is a pleasure to appear before this subcommittee to present the
position of the administration on this proposed legislation. We
generally support this legislation with certain modifications that I
would suggest.
International banking operations have been growing in recent
years, although they are still small in relation to our domestic
banking industry. Specifically, while total assets of foreign banks
held in the United States have tripled during the past 4 years,
rising to $76 billion at the end of 1976, this amount still represented
only about 7 percent of the total assets of all domestic banks. In
comparison, the total assets held abroad in foreign branches of U.S.
banks were almost three times that amount, $220 billion.
Growth in international banking is the financial counterpart of
healthy increases in international trade and also reflects desirable
reductions in international obstacles to investment. The United
States, like our major trading partners, recognizes the importance
of this growth to an efficient world economy. In particular, foreign
banking operations in the United States have increased competition
in the financial services industry here.
We expect international banking operations to expand further in
the future. Accordingly, this is an appropriate time for the United
States to consider a national policy toward foreign bank operations
here.
In determining a national policy we must keep in mind that our
regulation of foreign banks may affect foreign government treatment of U.S. banks and other financial institutions operating
overseas.
U.S. policy toward foreign direct investment in America reflects
the principle that foreign companies, in general, should be accorded
the same opportunities and be subject to the same restrictions as
domestic businesses. This policy, known as "national treatment,"
seeks neither to promote nor to discourage foreign investment, but
to ensure regulatory equality. Moreover, it is consistent with U.S.
treaty obligations governing foreign trade and investment. Accordingly, the basic objective of H.R. 7325, which we support, is to treat
foreign banks operating here equally vis-a-vis domestic banks.
Some argue that our policy should reflect reciprocity rather than
competitive equality. In this case, reciprocity would permit foreign
banks operating here to engage in whatever activities U.S. banks
are permitted in selected countries abroad. While reciprocity has a
superficial appeal, it would not be desirable for us to adopt it. Such
a policy could reduce permissible international banking activities to
the lowest common denominator, as countries tighten reg1,1lations to
achieve strict reciprocity. Furthermore, it could be an administrative nightmare to enforce different sets of rules for different foreign
banks operating in this country.
It should be made clear, Mr. Chairman, that the application to
foreign banks of restrictions governing domestic banks does not
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Federal Reserve Bank of St. Louis
263
mean that the administration is reaffirming the desirability of any
or all of these restrictions. As I am sure this subcommittee is aware,
many issues addressed in the foreign bank bill are currently being
reviewed by the Congress, the administration and independent
regulators.
Indeed, in the areas of this bill dealing with the securities
activities of commercial banks, we would prefer that decisions await
these reviews. At the very least, my testimony is not meant to
prejudge any of this work. In supporting H.R. 7325, we have simply
sought to extend the existing regulatory framework, as we find it, to
foreign banking.
Our existing laws and regulations covering foreign banks are not
balanced. On the one hand, they deny foreign banks certain banking opportunities here. For example, foreign banks are deterred
from establishing national banks. In addition, our laws encourage
foreign banks to operate branches or agencies, but these operations
are unable to obtain Federal deposit insurance.
On the other hand, there is no Federal regulation or supervision
of foreign bank branches and agencies, even though almost all
domestic banks come under the regulation of either the Federal
Reserve, the Comptroller of the Currency, or the Federal Deposit
Insurance Corporation.
Mr. Chairman, we support the objective of reducing these disparities of treatment between foreign and domestic banking operations
in the United States. We are pleased that the bill will provide
foreign banks with new Federal chartering opportunities to establish national banks, and Federal branches and agencies.
At the same time, it also is sensible that H.R. 7325 would subject
branches and agencies of foreign banks to Federal regulation comparable to that of domestic banks. In certain respects, the bill
recognizes that branches of foreign banks require treatment as a
special category of banking institution. For example, since State
branching laws are not applicable to interstate branching by foreign
banks, the bill employs Federal law to fill the gap.
While offering our general support for H.R. 7325, Mr. Chairman,
we recommend several modifications to achieve a greater degree of
regulatory equality.
Section 8(a) of the bill applies the Bank Holding Company Act to
foreign banks which maintain U.S. branches and agencies. Section 8
also grandfathers nonbanking activities in existence as of December
3, 1974. We recommend moving forward the cutoff date to July 1,
1977. Also, we recommend exempting from the prohibitions of the
Bank Holding Company Act those nonbank acquisitions by foreign
banks which do not significantly affect the United States. As
suggested in Federal Reserve testimony last August, the proposed
amendment would:
Make clear that the nonbanking prohibitions of the Bank Holding Company Act
are not meant to prevent foreign banks principally engaged in banking abroad from
retaining or acquiring interests in foreign-chartered nonbanking companies that are
also principally engaged in business outside the United States.
However, as a corollary, a domestic office of a foreign bank should be required to
deal with the domestic operations of a foreign company in which it may have an
equity interest on a strictly arms-length basis so as not to give the firm or bank
involved an advantage over their respective U.S. competitors.
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Generally, the administration believes that the Federal Reserve's
proposed amendment would provide greater certainty to foreign
banks concerning their nonbank affiliates and is desirable in light
of the different regulatory frameworks abroad which permit closer
ties between banking and industry.
This amendment is not designed to change the Bank Holding
Company Act as currently implemented by regulations of the Federal Reserve Board. It simply gives foreign banks greater certainty
about the act's application.
It is desirable to amend the Bank Holding Compay Act in this
way for two specific reasons. First, the existing administrative
process for exemptions under the act would create considerable
uncertainty for foreign banks concerning which foreign nonbanking
activities or acquisitions are permissible when they also affect U.S.
commerce.
Second, the present version of section 8(a) could be seen as
applying the Bank Holding Company Act extraterritorially to prohibit foreign banks located abroad from acquiring or providing
assistance to nonbank enterprises abroad.
A second provision of section 8, the proposed treatment of the
U.S. securities operations of foreign banks, also concerns us, Mr.
Chairman. Specifically, H.R. 7325 proposes that foreign banks now
lawfully engaged in securities activities here must terminate these
activities by December 31, 1985. However, foreign banks would be
permitted beyond 1985 to engage in underwriting securities so long
as the securities are sold outside the United States. We recommend
that this provision be amended to provide permanent
grandfathering for the existing securities operations of foreign
banks.
This issue of grandfathering existing securities operations is a
difficult one. A responsible argument certainly can be made that,
when applying to foreign banks here the principle of separating
commercial from investment banking, it produces more uniform
treatment to apply the principle both to prospective entrants and to
existing firms. However, we believe other considerations outweigh
the advantage of such proposed uniformity.
First, divestiture would obviously cause a hardship to the foreign
banks involved, and would eliminate a small foreign presence which
now may have a procompetitive effect on our large domestic securities industry.
Second, we believe that divestiture would be inequitable to the
foreign banks who established themselves here under the rules of
the game prevailing at the time. We should also take account of the
history of ·permanent grandfathering that has been applied for
domestic banks under the Bank Holding Company Act and also
under the McFadden Act. It might be argued that securities activities of domestic banks were not grandfathered in 1933. However, a
lack of grandfathering in that case is not a good precedent for the
treatment of foreign banks today, because divestiture then was
based upon widespread abuses whereas we have no evidence of
foreign banks abusing their positions now.
Since I have made my recommendations in regard to permanent
grandfathering, I will skip over and turn to the question of section 9.
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This is an area where we favor modification, Mr. Chairman.
Section 9 would introduce special Federal screening of applications
by foreign banks desiring to establish operations within the United
States. Specifically, this section would require: First, the Secretary
of the Treasury to issue guidelines containing general criteria for
the admission of foreign banks; second, Federal and State bank
supervisory authorities to solicit the views of the Secretary of State,
the Secretary of the Treasury and the Federal Reserve Board before
acting on the applications; and third, Federal and State banking
authorities to disapprove applications unless foreign banks specifically state that they will comply with U.S. antidiscrimination laws
which apply to domestically chartered banks.
Mr. Chairman, we recommend the elimination of section 9 because it would apply to foreign banks only, and would, therefore, be
discriminatory. The screening procedures, and Mr. Boeker can
speak to this in greater detail, are inconsistent with our policy on
foreign investment, and the consultation process as well sets into
motion a case-by-case review which again is contrary to our foreign
investment policy. We already have a committee on foreign investment established by Executive order which can, in effect, perform
the same function.
In regard to this departure from national treatment provisions,
we also are concerned by the antidiscrimination laws provision.
There is an implication that foreign banking operations were not
subject to the law in the past. We have no evidence of nonadherence
to U.S. antidiscrimination laws. This applies as well to the
antidiscrimination oath, because it singles out foreign banks in a
discriminatory way. There are adequate safeguards in existing law,
administrative procedures and in other provisions of the proposed
legislation.
Now, in regard to another major issue, Mr. Chairman, the question of special deposit insurance. The bill provides for a surety bond
or pledge of assets in a way we believe will be unduly onerous, will
raise costs for the foreign bank branches and not establish the
competitive equality that the overall objective of the bill indicates.
I won't go into technical details, but I understand that the FDIC,
in cooperation with the Treasury, believes it is feasible for the
foreign bank branches to participate in the Federal deposit insurance fund. There might be some additional requirement of pledging
assets, where that would be essential to protect the depositors. We
would urge that the FDIC technical people and their proposals on
this be consulted, Mr. Chairman.
In regard to interstate branching, the final issue of importance on
which we have some suggestions, we propose, as the bill does, that
foreign bank branch, agency, and commercial lending operations in
existence be permanently grandfathered. It would be appropriate to
have July 1, 1977, as the grandfathering date.
We suggest that the State regulatory procedures that apply to
domestic State branches be applied to foreign bank State-licensed
branches, and the Federal law which applies to domestic Federal
branches be applicable to Federally licensed foreign bank branches
rather than that the Federal law on branching be applied to both
categories of foreign bank branches. This would be both fairer, in
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our opinion, and would also achieve more exact equality, as is the
objective of the bill.
Thank you, Mr. Chairman. That concludes my testimony.
[Mr. Solomon's prepared statement follows:]
STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY FOR MONETARY AFFAIRS
U.S. DEPARTMENT OF THE TREA~~RY
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
The International Banking Act of 1977 (H.R.7325)
It is a pleasure to appear before this Subcommittee to
present the position of the Administration on this proposed
legislation. We generally support this legislation with
certain modifications that I would suggest.
Growth of International Banking
International banking operations have been growing in
recent years, although they are still small in relation to
our domestic banking industry. Specifically, while total
assets of foreign banks held in the United States have
tripled during the past four years, rising to $76 billion at
the end of 1976, this amount still represented only about 7%
of the total assets of all domestic banks. In comparison,
the total assets held abroad in foreign branches of U.S.
banks were almost three times that amount, $220 billion.
Growth in international banking is t;~e financial
counterpart of healthy increases in international trade and
also reflects desirable reductions in international obstacles
to investment. The United States, like our major trading
partners, recognizes the importance of this growth to an
efficient world economy. In particular, foreign banking
operations in the United States have increased competition
in the financial services industry here.
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We expect international banking operations to expand
further in the future. Accordingly, this is an appropriate
time for the United States to consider a national policy
toward foreign bank operations here.
In determining a national policy, we must keep in
mind that our regulation of foreign banks may affect foreign
government treatment of U.S. banks and other financial
institutions operating overseas.
Competitive Equality
U.S. policy toward foreign direct investment in America
reflects the principle that foreign companies, in general,
should be accorded the same opportunities and be subject to
the same restrictions as domestic businesses. This policy,
known as "national treatment," seeks neither to promote nor
to discourage foreign investment, but to insure regulatory
equality. Moreover, it is consistent with U.S. treaty
obligations governing foreign trade and investment. Accordingly,
the basic objective of H.R.7325, which we support, is to
treat foreign banks operating here equally vis-a-vis domestic
banks.
Some argue that our policy should reflect reciprocity
rather than competitive equality. In this case, reciprocity
would permit foreign banks operating here to engage in
whatever activities U.S. banks are permitted in selected
countries abroad. While reciprocity has a superficial
appeal, it would not be desirable for us to adopt it. Such
a policy could reduce permissible international banking
activities to the lowest common denominator, as countries
tighten regulations to achieve strict reciprocity. Furthermore,
it could be an administrative nightmare to enforce different
sets of rules for different foreign banks operating in this
country.
It should be made clear, Mr. Chairman, that the application
to foreign banks of restrictions governir.g domestic banks
does not mean that the Administration is reaffirming the
desirability of any or all of these restrictions. As I am
sure this subcommittee is aware, many issues addressed in
the foreign bank bill are currently being reviewed by the
Congress, the Administration and independent regulators.
Indeed, in the areas of this bill dealing with the securities
activities of commercial banks, we would prefer that decisions
await these reviews. At the very least, my testimony is not
meant to prejudge any of this work. In supporting H.R.7325,
we have simply sought to extend the existing regulatory
framework, as we find it, to foreign banking.
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268
Existing Law and Elimination of Disparities Therein
Our existing laws and regulations covering foreign
banks are not balanced. On the one hand, they deny foreign
banks certain banking opportunities here. For example,
foreign banks are deterred from establishing national banks.
In addition, our laws encourage foreign banks to operate
branches or agencies, but these operations are unable to
obtain federal deposit insurance.
On the other hand, there is no federal regulation or
supervision of foreign bank branches and agencies, even
though almost all domestic banks come under the regulation
of either the Federal Reserve, the Comptroller of the
Currency, or the Federal Deposit Insurance Corporation.
Mr. Chairman, we support the objective of reducing
these disparities of treatment between foreign and domestic
banking operations in the United States. We are pleased
that the bill will provide foreign banks with new federal
chartering opportunities to establish national banks, and
federal branches and agencies.
At the same time, it also is sensible that H.R.7325
would subject branches and agencies of foreign banks to
federal regulation comparable to that of domestic banks. In
certain respects, the Bill recognizes that branches of
foreign banks require treatment as a special category of
banking institution. For example, since state branching
laws are not applicable to interstate branching by foreign
banks, the Bill employs Federal law to fill the gap.
Proposed Changes in the Bill
While offering our general support for H.R.7325,
Mr. Chairman, we recommend several modifications to achieve
a greater degree of regulatory equality.
1.
Non-Bank Affiliates of Foreign Banks
Section B(a) of the bill applies the Bank Holding
Company Act to foreign banks which maintain U.S. branches
and agencies. Section 8 also grandfathers non-banking
activities in existence as of December 3, 1974. We recommend
moving forward the cut-off date to July 1, 1977. Also, we
recommend exempting from the prohibitions of the Bank
Holding Company Act those non-bank acquisitions by foreign
banks which do not significantly affect the United States.
As suggested in Federal Reserve testimony last August, the
proposed amendment would
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make clear that the non-banking prohibitions of the
Bank Holding Company Act are not meant to prevent
foreign banks principally engaged in banking abroad
from retaining or acquiring interests in foreignchartered non-banking companies that are also principally
engaged in business outside the United States •
••• However, .•• as a corollary •.. , a domestic office of
a foreign bank should be required to deal with the
domestic operations of a foreign company in which it
may have an equity interest on a strictly arms-length
basis so as not to give the firm or bank involved an
advantage over their respective U.S. competitors.
Generally, the Administration believes that the Federal
Reserve's proposed amendment would provide greater certainty
to foreign banks concerning their non-bank aftiliates and is
desirable in light of the different regulatory frameworks
abroad which permit closer ties between banking and industry.
This amendment is not designed to change the Bank
Holding Company Act as currently implemented by regulations
of the Federal Reserve Board. It simply gives foreign banks
greater certainty about the Act's application.
It is desirable to amend the Bank Holding Company Act
in this way for two specific reasons. First, the existing
administrative process for exemptions under the Act would
create considerable uncertainty for foreign banks concerning
which foreign non-banking activities or acquisitions are
permissible when they also affect United States commerce.
Second, the present version of Section 8{a) could be seen as
applying the Bank Holding Company Act extraterritorially to
prohibit foreign banks located abroad from acquiring or
providing assistance to non-bank enterprises abroad.
2.
Grandfathering of Securities Operations
A second provision of Section 8 -- the proposed
treatment of the U.S. securities operati0ns of foreign
banks -- also concerns us, Mr. Chairman. Specifically,
H.R.7325 proposes that foreign banks now lawfully engaged
in securities activities here must terminate these activities
by December 31, 1985. However, foreign banks would be
permitted beyond 1985 to engage in underwriting securities
so long as the securities are sold outside the United
States. We recommend that this provision be amended to
provide permanent grandfathering for the existing securities
operations of foreign banks.
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This issue of grandfathering existing securities
operations is a difficult one. A responsible argument
certainly can be made that, when applying to foreign
banks here the principle of separating commercial from
investment banking, it produces more uniform treatment
to apply the principle both to prospective entrants and
to existing firms. However, we believe other considerations
outweigh the advantage of such proposed uniformity.
First, divestiture would obviously cause a hardship
to the foreign banks involved, and would eliminate a
small foreign presence which now may have a pro-competitive
effect on our large domestic securities industry.
Second, we believe that divestiture would be inequitable
to the foreign banks who established themselves here under
the rules of the game prevailing at the time. We should
also take account of the history of permanent grandfathering
that has been applied for domestic banks under the Bank
Holding Company Act and also under the McFadden Act.
It might be argued that securities activities of domestic
banks were not grandfathered in 1933. However, a lack
of grandfathering in that case is not a good precedent
for the treatment of foreign bankstoday, because divestiture
then was based upon widespread abuses whereas we have
no evidence of foreign banks abusing their position now.
Third, we feel that our relations with other countries
might be damaged as a result of forced divestiture of
existing operations of their banks.
These are the disadvantages involved in divestiture.
In our judgment, they outweigh the advantages gained
from uniformity.
In any case, as you know, Mr. Chairn.an, the Congress
and a number of agencies are in the process of an intensive
study of the participation of banks in various aspects in
the securities industry. If, as a result of its review of
this area, Congress determines that bank securities activities
are not in the national interest, Congress of course would
not be precluded if it so wished from extending those
prohibitions to presently existing securities activities at
that time.
3.
Special Federal Review of Foreign Bank Applications
I would now like to address, Mr. Chairman, a third
basic area in which we favor modification of this bill.
Section 9 would introduce special Federal screening of
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applications by foreign banks desiring to establish operations
within the United States. Specifically, this section would
require:
(1) the Secretary of the Treasury to issue guidelines
containing general criteria for the admission of foreign
banks; (2) Federal and State bank supervisory authorities to
solicit the views of the Secretary of StQte, the Secretary
of the Treasury and the Federal Reserve Board before acting
on the applications; and (3) Federal and State banking
authorities to disapprove applications unless foreign banks
specifically state that they will comply with U.S. antidiscrimination laws which apply to domestically chartered
banks.
We strongly recommend the elimination of Section 9,
because it would deviate unnecessarily from our overall
Federal policy of national treatment. Section 9 would apply
to foreign-owned banks only and would establish for these
banks new criteria beyond that normally applied to both
foreign and domestic banks. In this sense, establishing
special guidelines and review procedures for foreign banks
operating here would conflict with our traditional policy of
neither promoting nor discouraging foreign investment and
could set an unfortunate precedent for the establishment of
similar procedures for foreign investment in other sectors
of our economy. It also could induce other countries to
introduce or expand restrictions on American financial
activities and investments abroad.
This provision also appears to contradict certain
national treatment provisions of treaties of friendship,
commerce and navigation which we have with most of the major
banking nations because it would apply to establishing
international banking operations which de not involve
depository or fiduciary functions. With regard to the antidiscrimination provision, we understand that foreign bank
operations in the United States already are covered by
existing anti-discrimination laws applicable to domestic
banks. Thus, it would be inappropriate to incorporate
this provision into a new banking law, since such action
could imply that foreign bank operations were not subject to
the law in the past. Moreover, we have no evidence of nonadherence to u.s. anti-discrimination laws.
Furthermore, we also advise against the second part of
the anti-discimination provision that would require only
foreign banks to take an anti-discrimination oath as a
condition of obtaining charters. This proposal singling out
foreign banks is discriminatory. As a final point, Section 9
as a whole simply seems unnecessary because it would provide
no additional protection to U.S. depositors or to national
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interests. Th~re already are adequate safeguards in existing
law, adminjs~rative procedures and in the proposed legislation.
Special Deposit Insurance
4.
Another important provision of H.R.7325, Mr. Chairman,
is Section 6, which would require U.S. branches of foreign
banks to maintain with the FDIC a surety bond or pledge of
assets. We recommend that this section be amended to
provide more equal treatment vis-a-vis domestic banks.
Specifically, we believe the section should be changed
(1) to make insurance optional for those state-licensed
branches which operate in those very few states that do not
require FDIC insurance for state non-member banks and (2) to
offer U.S. branches of foreign banks regular FDIC deposit
insurance.
These changes are designed to take care of two concerns.
First, while we firmly believe that deposit insurance is
highly desirable, we again feel that it should be provided
while avoiding unequal treatment between foreign and domestic
banks in this area. In particular, we want to avoid departing
from the national treatment policy and raising questions
about U.S. obligations under our treaties of friendship,
commerce and navigation.
Second, we are concerned that the special insurance
prograiiic:urrently contained in the bill would be unduly
burdensome. It would not offer foreign-owned branches
access to the federal deposit insurance f..md but instead
would require branches to pledge assets or a surety bond
against their deposits, with the FDIC as custodian of the
assets. In the absence of an insurance fund to pool risks,
the pledge of assets might prove inadequate to protect
depositors.
Last year, the FDIC worked with Treasury to develop a
proposed modification of Section 6 to increase the attractiveness
of the deposit insurance program for foreign banks. Under
this proposal, foreign-owned branches· in the U.S. would
apply for regular FDIC insurance coverage and would pay the
standard insurance premium of domestic member institutions.
In addition, the branch would pledge some assets or a surety
bond to the FDIC to cover any additional risk.
The
However,
for U.S.
in those
Administration supports the FDIC's proposed modification.
we believe that deposit insurance should be mandatory
branches of foreign banks, except, as noted above,
states where state-chartered, non-member domestic
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banks are not required to obtain it. Wita these changes,
deposit insurance should be viable for U.S. branches of
foreign banks.
4.
Interstate Branching
Let me turn finally, Mr. Chairman, to the issue of
interstate branching by foreign banks. In Section 5 of the
bill, interstate branching by foreign banks would be prohibited
unless national banks are accorded the same privilege.
However, foreign bank branch, agency and conunercial lending
operations underway prior to May 1, 1976, would be permanently
grandfathered. We support the grandfathering of these
operations so as to minimize the disruption of ongoing
banking services and we also favor changing the effective
grandfather date to exempt operations underway on July 1,
1977. Currently, foreign banks may establish branches in
more than one state where the law of each state permits,
although domestic banks have no ability to branch outside
their home state. This occurs because foreign bank branches
are not chartered by states and, therefore, state laws
restricting branches chartered by other states are not
applicable. Since we favor equal regulatory treatment of
foreign and domestic banks, we support a prohibition on
interstate branching by foreign banks unless and until U.S.
banks are accorded the same privilege. However, we do not
favor the language of Sections, for it would subject both
state and nationally licensed foreign branches to the
restrictions applying only to domestic national banks.
While the basic prohibitions on branching imposed by state
law are adopted by Federal law, the latter contains additional,
somewhat more onerous requirements (e.g., higher capital
requirements). We suggest that the subcommittee could
attain its intent by having Section 5 phrased to apply the
branching law for domestic national banks to nationally
licensed foreign branches, and for domestic state banks to
state licensed foreign branche~.
Conclusion
Thank you, Mr. Chairman, for providing us with the
opportunity to test~fy on this bill.
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Mr. &r GERMAIN. Thank you, Secretary Solomon.
Now we will hear from Secretary Boeker. We will put your
statement in the record and you may proce~.
STATEMENT OF HON. PAUL H. BOEKER, DEPUTY ASSISTANT SECRETARY FOR ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE
Mr. BoEKER. Thank you, Mr. Chairman.
I will be delighted to summarize, Mr. Chairman, since you are
pressed for time this morning.
I am pleased to appear before this subcommittee in firm support
of the International Banking Act of 1977. We believe the concept of
bringing foreign banks into our system in a more integrated manner is a sound one and strongly back this effort. The assurance of
equal treatment of foreign and domestic banks in the United States
is consistent with our policy of welcoming foreign investment. The
creation of comparable operating and regulatory authority will give
further concrete evidence of our intentions. My testimony is, therefore, in favor of the International Banking Act of 1977, and the
suggestions which follow are intended to enhance further its
effectiveness.
In our review of the bill, we perceive no major foreign policy
problems. We are concerned, however, that certain sections may
impinge upon our international obligations under our Friendship,
Commerce and Navigation (FCN) treaties. U.S. Friendship, Commerce and Navigation treaties with major banking countries generally obligate the signatories to permit freedom of establishment of
enterprises of the other party, and to provide national treatment of
those enterprises once established.
To help resolve these concerns we would like to make the following suggestions:
We believe section 9 could be deleted. The establishment of a
special Federal review of foreign bank applications does not appear
to be in accord with national treatment, nor with our open door
policy toward inward investment, and it appears foreign banks will
receive appropriate guidance under other provisions of this bill, and
other laws and regulations.
Section 6 could, instead, make FDIC insurance optional for State
nonmember foreign banks in those States where FDIC membership
is not required. This, plus the Treasury/FDIC effort to devise a
comparable deposit insurance program for foreign banks, would
help assure national treatment.
To assure comparable treatment under the branching provisions
of section 5, foreign banks which are operating as nonmember State
branches could have applied to them the same laws regarding
branches that the individual State applies to domestic State banks.
The provision in section 8 of a permanent grandfather clause for
existing securities operations of foreign banks would help resolve
that concern, and the Federal Reserve's proposed amendment to the
Bank Holding Company Act could avoid extraterritorial
application.
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With these changes, foreign banks in the United States would be
provided basically national treatment, and there should be little
basis for retaliation by foreign governments against U.S. banks
operating abroad.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Boeker follows:]
STATEMENT BY PAUL H. BoEKER
DEPUTY ASSISTANT SECRETARY OF
ECONOMIC AND BUSINESS AFFAIRS
DEPARTMENT OF STATE
BEFORE THE SUBCOMMITTEE ON FINA~CIAL INSTITUTIONS,
SUPERVISION REGULATION AND INSURANCE QF THE
COMMITTEE ON ~ANKING, ~!NANCE AND URBAN AFFAIRS
U.S. House OF REPRESENTATIVES
THE INTERNATIONAL BANKING AcT OF
1977 (H,R, 7325)
MR, CHAIRMAN:
I AM PLEASED TO APPEAR BEFORE THIS SUBCOMMITTEE
TO DISCUSS THE INTERNATIONAL BANKING ACT OF
1977
(H,R,
7325),
WE BELIEVE THE CONCEPT OF BRINGING FOREIGN BANKS INTO OUR
SYSTEM IN A MORE INTEGRATED MANNER IS A SOUND ONE AND SUPPORT
THIS EFFORT,
THE ASSURANCE OF EQUAL TREATMENT OF FOREIGN
AND DOMESTIC BANKS IN THE UNITED STATES IS CONSISTENT WITH
OUR POLICY OF WELCOMING FOREIGN INVESTMENT,
THE CREATION OF
COMPARABLE OPERATING AND REGULATORY AUTHORITY WILL GIVE FURTHER
CONCRETE EVIDENCE OF OUR INTENTIONS,
MY TESTIMONY IS THERE-
FORE IN SUPPORT OF THE INTERNATIONAL BANKING AcT OF
1977.
IN OUR REVIEW OF THE BILL, WE PERCEIVE NO MAJOR
FOREIGN POLICY PROBLEMS, WE ARE CONCERNED,HOWEVER, THAT CERTAIN
SECTIONS MAY IMPINGE UPON OUR INTERNATIONAL OBLIGATIONS UNDER
OUR FRIENDSHIP, COMMERCE, AND NAVIGATION (FCN) TREATIES,
WILL FIRST BRIEFLY REVIEW THE NATURE OF THESE TREATIES AND
THEN PROCEED TO DISCUSS THOSE SPECIFIC PARTS OF THE BILL WHICH
HAVE AROUSED OUR CONCERN,
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THE
FCN
TREATY
THE TRADITIONAL
fCN
TREATY IS DESIGNED TO ESTABLISH
AN AGREED FRAMEWORK WITHIN WHICH MUTUALLY BENEFICIAL ECONOMIC
RELATIONS CAN TAKE PLACE,
THE TREATY PROVIDES A COMPREHENSIVE
BASIS FOR THE MUTUAL PROTECTION OF COMMERCE AND CITIZENS AND
THEIR BUSINESS AND OTHER INTERESTS,
THE STANDARD TREATY
FIRMLY COMMITS THE UNITED STATES TO PERMIT THE FREE ESTABLISHMENT OF FOREIGN-OWNED ENTERPRISES IN MOST SECTORS OF THE
U,S, ECONOMY AND INCLUDES A PROHIBITION AGAINST DENYING TO
BANKING COMPANIES OF OUR TREATY PARTNERS THE RIGHT TO MAINTAIN BRANCHES AND AGENCIES TO PERFORM FUNCTIONS NECESSARY
FOR ESSENTIALLY INTERNATIONAL OPERATIONS IN WHICH THEY ENGAGE,
MODERN
fCN
TREATIES DO, HOWEVER, RESERVE THE RIGHT
OF EACH PARTY TO LIMIT THE ESTABLISHMENT, OR CARRYING ON,OF
ENTERPRISES ENGAGED IN BANKING INVOLVING DEPOSITORY OR
FIDUCIARY FUNCTIONS,
THE TREATIES ALSO FORBID THE SIGNATORIES
FROM APPLYING AGAINST EACH OTHERS' FOREIGN OWNED ENTERPRISES
ALREADY ESTABLISHED IN THEIR TERRITORIES NEW DEROGATIONS FROM
NATIONAL TREATMENT -- 1,E,, TREATMENT WHICH DISCRIMINATES
AGAINST FOREIGN BANKS AS OPPOSED TO DOMESTIC BANKS,
THE ENACTMENT OR APPLICATION OF LEGISLATION AT VARIANCE
WITH UNITED STATES TREATY OBLIGATIONS WOULD BE UNFORTUNATE NOT
ONLY BECAUSE IT CONFLICTS WITH OUR INTERNATIONAL COMMITMENTS,
BUT ALSO BECAUSE IT WOULD WEAKEN THE ABILITY OF THE UNITED STATES
TO UTILIZE OUR
fCNs,
WHERE NECESSARY, AS A BASIS FOR CALLING
INTO QUESTION ACTIONS OF FOREIGN GOVERNMENTS WHICH ARE NOT IN
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CONFORMITY WITH THE TREATIES,
GIVEN THE IMPORTANT PROTECTION
AND RIGHTS PROVIDED AMERICAN CITIZENS UNDER THESE
fCNs--
lNCLUDING GUARANTEES OF FAIR AND EQUITABLE TREATMENT, THE
RIGHT TO ESTABLISH AND ACQUIRE ENTERPRISES IN THE TREATY
PARTNER'S TERRITORY, AND THE OBLIGATION TO PAY FULL COMPENSATION FOR NATIONALIZED PROPERTY--MAINTAINING THE INTEGRITY
OF THESE TREATIES IS, WE BELIEVE, VERY MUCH IN THE INTEREST
OF THE UNITED STATES,
Poss!BLE FCN
YIPIATIONS
WE BELIEVE THAT THERE ARE THREE POSSIBLE
fCN
VIOLATIONS
IN THE BILL,
1) THE FIRST REGARDS SECTION 9, WHICH WOULD ESTABLISH
A SPECIAL FEDERAL REVIEW OF FOREIGN BANK APPLICATIONS,
THIS
MAY VIOLATE OUR TREATY OBLIGATIONS IN SO FAR AS IT IS A NEW
MEASURE WHICH WOULD APPLY TO THE ESTABLISHMENT OF BANKING
OPERATIONS WHICH DO NOT INVOLVE DEPOSITORY OR FIDUCIARY FUNCTIONS,
THE SECTION WOULD APPLY ONLY TO FOREIGN BANKS AND WOULD ESTABLISH CRITERIA OVER AND ABOVE THOSE NORMALLY APPLIED TO BOTH
FOREIGN AND DOMESTIC BANKS,
THEREFORE, THIS PROVISION WOULD
APPEAR TO BE CONTRARY TO THE NATIONAL TREATMENT PROVISIONS
OF TREATIES WHICH WE HAVE WITH MOST OF THE MAJOR BANKING NATIONS,
2) SECTION 6, WHICH REQUIRES MANDATORY DEPOSIT INSURANCE
FOR FOREIGN BANKS, IS ANOTHER PROVISION WHICH MAY HAVE SIGNIFICANT TREATY IMPLICATIONS DERIVING FROM NEW DEPARTURES
FROM NATIONAL TREATMENT FOR ESTABLISHED BANKS,
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To THE EXTENT
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THIS PROVISION REQUIRES OF ESTABLISHED FOREIGN BANKS DEPOSIT
INSURANCE WHICH IS NOT REQUIRED OF DOMESTIC BANKS, IT APPEARS
TO VIOLATE OUR TREATY OBLIGATIONS, ESPECIALLY IF THIS REQUIREMENT IS SUBSTANTIALLY MORE BURDENSOME,
3) SECTION 5 WOULD PROHIBIT INTERSTATE BRANCHING BY
FOREIGN BANKS, EXCEPT FOR GRANDFATHERED OPERATIONS SO LONG
AS NATIONAL BANKS ARE UNABLE TO OPERATE A BRANCH OUTSIDE
THEIR HEADQUARTERS STATE,
THE PROHIBITION DOES -
APPLY
TO STATE-CHARTERED FOREIGN BANKS WHICH ARE NOT FEDERAL
RESERVE SYSTEM MEMBERS,
THIS RESTRICTION WOULD PROHIBIT
FOREIGN BANKS OPERATING THROUGH STATE-CHARTERED BRANCHES
FROM PARTICIPATING IN ANY FUTURE REGIONAL AGREEMENTS TO PERMIT
INTERSTATE BRANCHING BY DOMESTIC STATE-CHARTERED BANKS, AND
WOULD APPEAR TO CONSTITUTE A NEW LIMITATION ON NATIONAL TREATMENT INCONSISTENT WITH OUR TREATY OBLIGATIONS,
CURRENT STATE
LAWS DO NOT CURRENTLY ALLOW INTERSTATE BRANCHING, SO THIS
CONCERN IS MINOR,
OTHER CONCERNS
I HAVE NOTED THAT SECTION 9 MAY BE IN VIOLATION OF
OUR FCN TREATIES, I WOULD ALSO LIKE TO OBSERVE THAT THIS
SPECIAL REVIEW OF FOREIGN BANK ENTRY CONFLICTS WITH OUR GENERAL
OPEN DOOR POLICY ON INWARD INVESTMENT AND COULD ESTABLISH AN
UNFORTUNATE PRECEDENT FOR REVIEW OF FOREIGN INVESTMENT IN
OTHER SECTORS,
SECTION 8 SUBJECTS FOREIGN
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COMPANIES TO VARIOUS PROVISIONS OF THE BANK HOLDING COMPANY
AcT OF
1956,
THIS RAISES THE PROBLEM OF EXTRATERRITORIALITY
TO THE E~ENT THAT IT MIGHT APPLY TO THE ACTIVITIES OF FOREIGN
BANKS OUTSIDE U,S, JURISDICTION (SUCH AS INVESTMENTS IN OTHER
COMPANIES WHICH HAVE NONBANKING OPERATIONS IN THE UNITED STATES,)
FINALLY, FOREIGN BANKS HAVE EXPRESSED CONCERN THAT
SECTION 8 WOULD REQUIRE DIVESTITURE OF EXISTING SECURITIES
ACTIVITIES IN THE UNITED STATES BY
1985,
SUMMARY
WOULD LIKE TO OFFER THE FOLLOWING SUGGESTIONS TO
HELP RESOLVE THE CONCERNS EXPRESSED ABOVE:
1) SECTION 9, THIS SECTION COULD BE DELETED, FOREIGN
BANKS WILL RECEIVE APPROPRIATE GUIDANCE,WHETHER FEDERAL OR
STATE BRANCHES OR AGENCIES, UNDER OTHER PROVISIONS OF THIS BILL,
2) SECTION 6,
A PREFERRED RESOLUTION OF OUR CONCERN
WOULD BE TO MAKE FDIC INSURANCE OPTIONAL FOR STATE NONMEMBER FOREIGN BANKS IN THOSE STATES WHERE FDIC MEMBERSHIP IS
NOT REQUIRED,
WE SUPPORT THE TREASURY/FDIC EFFORT TO OFFER
A DEPOSIT INSURANCE PROGRAM FOR FOREIGN BANKS COMPARABLE TO
THAT REQUIRED FOR DOMESTIC BANKS,
3) SECTION 5, To ASSURE COMPARABLE TREATMENT, FOREIGN
BANKS WHICH ARE OPERATING AS NON-MEMBER STATE BRANCHES COULD
HAVE APPLIED TO THEM THE SAME LAWS REGARDING BRANCHES THAT THE
INDIVIDUAL STATE APPLIES TO DOMESTIC STATE BANKS,
4)
SECTION 8,
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THIS SECTION COULD CONTAIN A NON-TERMINATING
280
GRANDFATHER CLAUSE,
ALSO, A PROVISION COULD BE PROVIDED
TO AVOID EXTRATERRITORIAL APPLICATION,
IN THIS REGARD WE
SUPPORT THE FEDERAL RESERVE 1 S PROPOSED AMENDMENT TO THE BANK
HOLDING COMPANY AcT,
WITH THESE CHANGES, FOREIGN BANKS IN THE U,S, WOULD
BE PROVIDED BASICALLY NATIONAL T~EATMENT, AND THERE SHOULD
BE LITTLE BASIS FOR RETALIATION BY FOREIGN GOVERNMENTS
AGAINST U,S, BANKS OPERATING ABROAD,
THANK YOU, MR, CHAIRMAN
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Mr. 8'r GERMAIN. Thank you for a well summarized statement.
Secretary Solomon, on page 5 of your statement with respect to
the grandfathering of securities activities, I am intrigued.
In the third paragraph you state:
We believe divestiture would be inequitable to the foreign banks who established
themselves here under the rules of the game prevailing at the time.
Were there any rules and are there any rules today? Is it not a
fact that there has been and is an absence of any rules on a Federal
level?
Mr. SoLOMON. I don't understand your question, Mr. Chairman.
Mr. ST GERMAIN. That is because I don't understand your statement. You say on page 5:
We believe divestiture would be inequitable to the foreign banks who established
themselves here under the rules of the game prevailing at the time.
Mr. SoLOMON. At the time, in 1933, since 1933?
Mr. ST GERMAIN. Right. There have been no rules.
Mr. SOLOMON. Right.
Mr. 8'r GERMAIN. We are attempting to establish rules with this
legislation. There is an absence of rules or regulations, is there not?
Mr. SoLOMON. That is correct, but it was perfectly legal, Mr.
Chairman, in these 43 years for them to establish securities
affiliates.
Mr. ST GERMAIN. Because there were no rules.
Mr. SOLOMON. Isn't that true of many areas of national
economics?
Mr. ST GERMAIN. Because there were no rules. Therefore, how
can you say rules prevailing, when there are no rules? Now, this
legislation was first introduced in 1974, and you are asking us to
extend this grandfathering despite the action taken last year-what
is the recommended date?
Mr. SoLOMON. July 1, 1977.
Mr. ST GERMAIN. That troubles me. I mean, you talk about
competitive equality as opposed to reciprocity. Certainly if that is
the philosophy we are following, I am a little troubled by: One, your
saying no rules and two, your saying let's bring the grandfathering
forward to July 1, 1977, despite the fact that these foreign banks
have known full well that the push was on since 1974 for this
legislation.
Mr. SOLOMON. It's up to the subcommittee, of course, Mr. Chairman, to make its own judgment as to the appropriateness of the
cutoff date. We just felt that since this was the date that you had
previously established, when the bill was considered in 1975 and in
1976, that it would be more equitable to update the cutoff date.
Mr. ST GERMAIN. You don't consider that the actions over the
past 3 or 3l years, should have served notice to these foreign banks
establishing security affiliates?
Mr. SoLOMON. Mr. Chairman, I am not familiar whether, in these
3 years, new security affiliates have been established.
Mr. 8'r GERMAIN. If that be the case, why the request to move the
date forward to July 1, 1977?
Mr. SoLOMON. Normally in grandfathering one tends to use a date
that is not too far distant in the past. I can supply for the record
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what new security affiliates have been established, in the 3-year
interval. That might help the subcommittee.
Mr. ST GERMAIN. It would, yes. At the bottom of page 7, I am
bothered here also:
The administration supports the FDIC's proposed modification. However, we
believe that deposit insurance should be mandatory for U.S. branches of foreign
banks except, as noted above in those States where State-chartered nonmember
domestic banks are not required to obtain it.
We have done a lot of work on bank failures. We had a bank
failure in Rhode Island very recently; no deposit insurance, a rather
tragic situation for the depositors who for the most part were not
sophisticated depositors. They were hard-working people who had
been deceived, so to speak, because the State had granted a charter
to this institution. They readily accepted the judgment of the State
officials who granted this charter, which proved to be very erroneous. As a matter of fact, the State should have been on notice that
the liabilities exceeded the assets when they approved the charter.
Now, it seems to me that we in the Congress, rather than to sit
back and say well, in t}:iose States where they don't require insurance they need not have insurance, we should make every effort
absent saying to the State legislatures you must henceforth require
deposit insurance, to encourage and to twist very gently the arms of
the State legislatures in each and every State of this Union, to
achieve the goal of insurance for every financial institution in the
country this country should have deposit insurance?
Don't you feel that is the goal that we should seek?
Mr. SOLOMON. In general, I would agree, Mr. Chairman. We were
looking in this area to avoid any charges of departing from exact
competitive equality, and there were only nine States involved.
Now, most of the depositors are, of course, corporate depositors,
but there are some individuals who should be protected, where the
deposit insurance is important. That is not in our view an important recommendation on the part of the Treasury.
Mr. ST GERMAIN. That's good to hear, because I really and truly
feel if we are going to require deposit insurance for these foreign
banks, then we should not in any way indicate to these nine States
that are still dragging their heels that we agree with their not
requiring deposit insurance of State-chartered banks. We do require
it of all nationally chartered banks. That is a sine qua non, as you
know.
Mr. SOLOMON. It could possibly be interpreted in some quarters as
a departure from national treatment, but on the other hand, I think
it's a de minimis case, and I don't feel that in itself would be likely
to provoke retaliation.
Mr. ST GERMAIN. Perhaps it's because of the trauma that I
observed in a recent case, the one I cited, of hard-working people
faced with a situation wherein they would lose their entire life
savings, and I am perhaps a little more sensitive in this area.
Mr. Annunzio?
Mr. ANNUNZIO. Thank you, Mr. Chairman.
Mr. Secretary, you have stated in your statement you do not
favor granting the Federal Government review procedures over
State-chartered foreign banks as this procedure would deviate from
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a policy of national treatment. Would it not also deviate from
national treatment to grant the Federal Reserve Board authority to
set reserves on foreign-owned, State-chartered banks?
Mr. SoLOMON. You are right in a certain sense, Mr. Annunzio.
There are some compelling reasons of overall monetary policy as
the presence of foreign banks and particularly big foreign bank
branches begins to grow in this country. I feel that the substantive
attempt to reduce disparities and give something more close to
national treatment is a worthy objective, and, therefore, we support
the subcommittee's bill.
We recognize that in certain areas there will be other factors
which will have to prevail over an exact, formalized type of
equality. The Fed has made a very convincing argument, we feel,
that effective monetary policy does require the right to set reserve
ratios. We believe that this is not the kind of departure from
national treatment in regard to State nonmember banks that would
be badly received abroad to a degree that would cause us serious
problems. But you are absolutely right, sir, that technically it is
different, because reserves are set in the case of State nonmember
banks by the State authorities, not by the Federal Reserve.
Mr. ANNUNZIO. Mr. Secretary, I have sat all through the hearings
the last session on this legislation, and I am sitting through the
hearings doing the best I can to get to all of the hearings. What you
should state for the record so the American people can have a full
understanding is that we do have American banks in Rome, in
London, and in Frankfort and Brussels. We have Bank of America;
we have the Chase Manhattan; we have First National Bank of
Chicago; we have Continental Bank; you name it, we have branches
in these foreign countries.
For the record so that the American people can understand, you
know, we are not just a chosen people, that everybody else is wrong
and we are always right, what about the treatment of American
banks in these foreign countries?
Mr. SoLOMON. You mean as a result of this bill, Mr. Annunzio?
Mr. ANNUNZIO. No. We didn't pass the bill yet. How are they
treated now?
Mr. SOLOMON. On the whole the treatment has been very
generous.
Mr. ANNUNZIO. Take Germany, for example. In Germany do they
comply with the German bank laws? A German bank can have an
interest in a crop corporation, where an American bank cannot.
They have their own laws. In other words, I would like the record to
state that American bankers and American citizens who are in
these foreign countries and are established there, the kind of
treatment that we get. Now if they are getting good treatment, tell
us.
Mr. SoLOMON. They are, sir.
Mr. ANNUNZIO. They are?
Mr. SOLOMON. On the whole, U.S. branches-Mr. ANNUNZIO. On the whole, if they are getting good treatment,
we have to reciprocate. There is a little matter of reciprocity there.
Mr. SOLOMON. You are talking about certain countries in Europe
primarily where I can answer in the affirmative. There are one or
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two other countries of importance where, I believe, if there is not
formal discrimination there may be some de facto discrimination,
but in regard to most countries in Europe and in the European
Economic Community I think they receive comparable national
treatment in their major activities.
Mr. ANNUNZIO. What I am getting at is I would like the record to
show we are treated in Europe in a manner consistent with the
obligations that those people have to their own countries. Are we,
Mr. Chairman? You are shaking your head.
Mr. ST GERMAIN. You know the subcommittee did visit five
countries last year.
Mr. ANNUNZIO. I wasn't one of those, because I read the newspapers, and I didn't go on the trip.
Mr. ST GERMAIN. I would state it's the first trip I ever took.
Mr. ANNUNZIO. I don't care if you have taken 12 trips. I have
taken 15, but I missed that trip.
Mr. ST GERMAIN. The point is that we did determine that as far
as the depository institutions are concerned-Mr. ANNUNZIO. I am happy the chairman is bringing that point
across.
Mr. ST GERMAIN. There are in some countries some differentiation between the domestic banks and our banks operating there,
not on international trade. However, as far as depository institutions are concerned, in their fiduciary capacity, just as Mr. Boeker
cites in his statement, that these are the exceptions from the treaty.
In other countries; they are not allowed to take deposits, domestic
deposits.
Mr. ANNUNZIO. Right.
Mr. ST GERMAIN. So there are some differentiations.
Mr. ANNUNZIO. I appreciate the chairman helping me out, because you see, as Members of Congress, when we get elected from a
district, we don't have a crystal ball, we can't possibly know all of
these things that are going on. Your two witnesses are specialists in
your field. This is all you have to concentrate on. I get 2,000 letters
a month on all different kinds of subjects, and when a committee of
Congress does go to a foreign country to make a study of a particular problem, we have the whole press down on our necks.
How are we supposed to find out what is going on if we don't go
over and look? I want to make that clear, Mr. Chairman, so the
more we cut down these trips the less effective we are becoming,
and the more money it's going to cost the taxpayers, not like some
people who would like to have you believe that we are wasting the
taxpayers' money. We are wasting it if we don't go abroad and find
out what is going on and improve our relationship with some of
these foreign countries. We will be wasting the taxpayers' money as
the years go on.
We are a lot better off going overseas like you fellows to find out
what is going on. There is no reason why we should be deprived
from not going on some of these trips.
I know my time has expired, and that is another good thing in the
Congress that we do. You see we never heard anybody but ourselves. Now I am cut off, I can't ask you any more questions.
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Mr. ST GERMAIN. I assure the gentleman, if he would like the
opportunity on the second round, he will be recognized.
Mr. ANNUNZIO. If I am here I will be recognized for the third
round.
Mr. ST GERMAIN. Mr. Hyde?
Mr. HYDE. Thank you, Mr. Chairman. It's a great temptation to
yield my time to Mr. Annunzio.
Mr. ANNUNZIO. You know, Mr. Hyde, I will accept it.
Mr. HYDE. I know it.
Let me ask, Secretary Solomon or Secretary Boeker, aren't we
giving away a bargaining chip in this bill? Aren't there countries we
don't have treaties with that might present some problems if we
permit them to open banks in this country? I am thinking of the
Bank of Uganda, the Bank of Cuba, and the Bank of Vietnam. We
are really putting no restrictions whatsoever on foreign banks
operating in this country.
Shouldn't there be some reciprocity requirements cranked into
this bill?
Mr. Boeker?
Mr. BoEKER. We have considered that question, and Mr. Solomon
commented in his statement, I think, along the same lines I would,
that in this case reciprocity would not appear to be an efficient
principle in terms of our own interests on which to organize this
bill. It would give us, in effect, a panoply of differing regulations
applying to different foreign banks depending on what kind of
treatment U.S. banks got in their jurisdiction.
I think the basic approach of the bill, which is not reciprocity but
an effort to provide equality in a different plane, that is equality of
treatment between foreign banks operating in the United States
and domestic banks operating in the United States, is a sounder
basis for building U.S. policy on regulation of foreign banks.
I think in most of the countries overseas where we do major
banking business, U.S. banks are treated quite generously, as Mr.
Solomon says. There certainly are cases, and many cases in the
developing world-and some of them you cited-where our banks
are provided very, very limited opportunities or none.
I am not sure that these cost the U.S. banking industry a great
deal in many cases, and I think we probably have other means of
dealing with it, within our overall relationship with those countries.
Certainly, wherever U.S. banking is not offered a fair opportuity to
do business, it would be one of our objectives in our overall foreign
relations to try to deal with that by seeking an FCN treaty, and if
we can't get that, by trying to pursue the same interests otherwise;
but I don't think the best means to do that is through reciprocity
provisions.
Mr. HYDE. In other words, this isn't the appropriate vehicle to
address that problem.
Mr. BOEKER. Right.
Mr. HYDE. All right, I have no further questions.
I yield back my time.
Mr. ST GERMAIN. Mr. Allen?
Mr. ALLEN. Thank you, Mr. Chairman.
Secretary Solomon, will you repeat or clarify for me the statement you made about the requirements in this bill with respect to
antidiscrimination?
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Mr. SOLOMON. Yes, sir.
Our understanding is that the foreign bank branches are
complying fully with U.S. laws. We have no information on any
situation where there has been a complaint. I am not saying it may
not have existed at some time, but we asked throughout the
executive branch, and we have had no reports. Therefore, to single
out bank branches and to say U.S. antidiscrimination laws should
apply, seems to us not only unnecessary but it almost is not worthy
of the dignity of the United States.
It gives the impression in some way they have been exempt from
the law, or they have possibly not even been obeying it. It does
represent a clear departure from national treatment, particularly
the oath-the second part of the antidiscrimination provisionsince we do not require that oath from domestic banks. Therefore,
those were the specific reasons for our recommendation that that
section be deleted.
Mr. ALLEN. Do you mean, Mr. Solomon, that it is your understanding that under the law American banks are not required to
provide employment on an equal basis and to comply with equal
rights and protection under the Fourteenth Amendment of the
Constitution of the United States to employment and otherwise?
Mr. SOLOMON. On the contrary, Mr. Allen. My statement meant
to say-and I thought I said-that both domestic banks and foreign
bank branches are under U.S. law and, U.S. sovereignty, and they
have to comply with those laws.
Mr. ALLEN. If they are already doing it how would they be in any
way hurt by having it written into the law?
Mr. SOLOMON. They would not be hurt; their dignity might be
offended at having to swear an oath which is not being asked of
American bankers. But it would also give them a clear-cut case for
pointing to discriminatory departure from national treatment. They
would not be hurt by it.
Mr. ALLEN. Tell me, Mr. Secretary, if the Arabs have a bank
here, or open a bank here, do you think they will be employing and
seeking the business of the Jewish community and people from the
Jewish community?
Mr. SOLOMON. I am not sure I understand the import of your
question.
Mr. ALLEN. I say, if the Arabs should open a bank here, or a
branch here, do you think that they would give equal employment
opportunities and opportunities to borrow money to the Jews in
America?
Mr. SOLOMON. I believe that the existing laws are quite clear, sir,
and if they were willing to violate those laws, I don't see why they
wouldn't be willing to violate any additional reaffirmation of the
previous laws.
Mr. ALLEN. In other words, it's just reaffirmation in this bill that
bothers you, and not the fact they would be required?
Mr. SOLOMON. That is right.
Mr. ALLEN. To comply?
.
Mr. SOLOMON. I have no substantive problem at all with the laws
on antidiscrimination. I have suffered from it myself and the laws
are a great thing.
Mr. ALLEN. I understand both you and Mr. Boeker have indicated
that in those States whose legislatures do not require Federal
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deposit insurance for deposits, that you do not think that foreign
banks should be required to provide insured deposits for their
depositors? Is that correct?
Mr. SOLOMON. As I explained to the chairman, this is a formal
departure from achieving the stated objective of the bill, which is
equality where it can be achieved. Now, it's not, I think, a major
enough issue to provoke. This is my own personal judgment and Mr.
Boeker may differ, but I don't think it's a major enough issue if the
subcommittee were to disregard that recommendation, to provoke
charges of discriminatory departure from national treatment. But it
is open to that charge. Since there are so few banks that are in that
category, namely State-chartered nonmember banks in those nine
States-there are only nine where FDIC insurance is not compulsory-it seems to me that the subcommittee might consider this
suggestion.
As I said before, Mr. Chairman and Mr. Allen, this is not a major
issue.
Mr. BoEKER. May I just say I don't disagree with that, and it
seems to me this is a small problem of States that do not require
FDIC insurance of State-chartered nonmember banks.
The national treatment question, it seems to me here is also a
nuanced one, in that national treatment in this circumstance would
say that we should not apply to foreign banks treatment that is
substantially different from that applied to domestic banks. This
question relates not only to whether or not deposit insurance is
required, but to whether the form of deposit insurance is, in fact,
roughly comparable to what would be required of others or is
substantially more burdensome. The thought that I had indicated in
my statement was that the same objective might be achieved by
offering to foreign banks, including State-chartered nonmember
banks, deposit insurance which was not substantially more burdensome than that available to domestic banks. If that were attractive
enough, the objective could be achieved for all foreign banks without necessarily making it mandatory for this small category. But it
is not a major issue.
Mr. ALLEN. I have been informed my time has expired, but when
I come back to the second round I am going to ask you to be
considering this question:
If we are not going to require them to insure their accounts with
the Federal Deposit Insurance Corporation, would you-and don't
answer this now because my time has expired-would you favor a
requirement that they put on their pass books and deposit books a
statement, "Your deposit is not insured."?
Mr. ST GERMAIN. Mr. Derrick?
Mr. DERRICK. I have no questions, Mr. Chairman.
Mr. ST GERMAIN. Mr. Leach?
Mr. LEACH. Thank you, Mr. Chairman.
Secretary Solomon, you give a very reasoned case for
grandfathering securities operations. But I would like to make an
observation and ask several questions about this issue.
The goal in law is usually equitability, and it seems to me that we
are creating inequitability vis-a-vis our own banking system when
we allow some banks to do something that other banks are not
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allowed to do, and that the only equitability here is some sort of
quid pro quo abroad, meaning that somehow our banks will be given
greater latitude in their operations abroad in exchange for giving
greater latitude for foreign bank operations here, but this means
equitability for a few banks only. What I would like to know is is
there any danger of retaliation if we do not authorize the
grandfathering provision, and if so, where, and what banks will be
affected?
Mr. SOLOMON. First, Mr. Leach, the reasons for recommending
permanent grandfathering go beyond that of simple retaliation, but
let me answer the question of retaliation.
This is an intangible. Clearly we have had clear expressions of
displeasure and concern from certain foreign governments, Germany and Switzerland to name two, that the whole thrust of the
bill they feel in some way is not fair, given the treatment of
American banks in their countries.
I feel they would have much less of an argument, substantially
less of an argument, if we were not forcing divestiture of existing
operations which have operated here during this last 40-year period.
I do not know what form, if any, the retaliation or the restrictive
actions might take. There might not be any at all. But then there
might very well be. I think it is also fair to recognize the overall
improvement and continued growth of international banking and
multinational banking, the employment giving flows of capital and
trade which are of mutual benefit.
We certainly should not think of this as a one way concession.
Mr. &r GERMAIN. Secretary Solomon, I wish you would look at
Governer Gardner's testimony, both yesterday and when he came
before us as representing the Treasury on this issue of retaliation.
He agreed yesterday that the only indication of any type of retaliation we would get is not from the central banks but rather from
some of the foreign banks that have voiced this, No. 1.
No. 2, you are familiar with the Blundon committee.
Mr. SOLOMON. Let me answer your first point, Mr. Chairman. I
have received two communications from two European governments
which have pointed out the problems that this will give them; that
they have not engaged in restrictions so far on U.S. branches there;
that this whole question became a political question in their countries and they cannot offer any assurances.
Mr. ST GERMAIN. Don't you feel those should be placed in our
record and available to us?
Mr. SOLOMON. If you want them, sir.
Mr. ST GERMAIN. Yes, please.
Mr. SOLOMON. I would have to check with the foreign
governments.
Mr. &r GERMAIN. Right, if you are able to, if there are no
constraints, naturally. We understand.
Mr. SowMoN. But they do not threaten retaliation; they say
there will be-political pressures for retaliation.
Mr. ST GERMAIN. From the banks in their countries?
Mr. SoLOMON. Right. Therefore, just as we in our Government are
responsive to our economic interests, I don't assume that other
governments are completely impervious to their economic interests.
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Mr. LEACH. Mr. Secretary, if we could go on just a minute, it
seems to me we have a fairly strong defense to a divestiture
approach in this situation in that we would not be giving our banks
any particular advantage. We would just be applying national law
universally.
It also seems to me that the prospects are that there will be
massive sums of foreign capital available for investment in the U.S.
securities in the not too distant future, and that we will be seeing a
new situation develop in proportion to that which has held in the
past. In this new era of expanded foreign capital flows, we will be
giving a competitive edge to foreign banks over our own securities
industry, and over our own banking system.
I am just wondering if that is the type of thing we want to do for
the good of our banks as well as for the good of our own securities
industry. We are not talking here about mandating regulations on
these banks that we don't apply to our own banking institutions. I
think we are at a terribly appropriate time period to deal with the
issue now.
In 5 years it's going to be a far bigger issue. Would you comment?
Mr. SOLOMON. Mr. Leach, I can understand your point. I don't
.share it though, because I think there are other considerations.
First of all, I think the competition is healthy; second, in the
banking and financial world, a very big distinction is made between
setting policy on future entrants and forcible divestiture of existing
operations that were legal under the conditions under which they
were established.
We, the United States, are constantly approaching other governments and saying to them, look, you changed the rules of the game
on U.S. business abroad. Now, that is not fair. If you want to set
policy for the future we understand that, but to change the rules as
they affect operations already in existence, is normally in international economic diplomacy considered inequitable.
I think there are some other arguments as well, but I would base
my case primarily on these two factors. Competition is healthy; it
does bring more trade and employment, and investment into this
country. It is inequitable, in our view, to force this divestiture after
they have been operating under certain ground rules for 40 years.
Mr. LEACH. Thank you.
My time has expired.
Your point of view is well expressed. Thank you.
Mr. &r GERMAIN. The Chair is constrained to observe we have a
new philosophy for American business, to wit: That they do not
have enough competition, don't compete against each other, and if
you are going to have true competition you must bring in foreign
interests.
Mr. SOLOMON. That is why we have an open trading system, Mr.
Chairman. We can put a wall around this country and suffer a
decline in our economic standard of living, but I assume you are in
favor of open trade, competitive trade from foreigners as well as
investment flows, and I know you are from your position in other
legislation. So I don't feel this should be any exception, sir.
Mr. ST GERMAIN. You can't compare apples and oranges.
Mr. Cavanaugh?
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Mr. CAVANAUGH. Thank you, Mr. Chairman.
Mr. Solomon and Mr. Boeker, in comparing your testimony with
that of Governor Gardner, I notice remarkable similarities in your
recommendations for suggested amendments to the legislation, with
the exception that Governor Gardner, on page 5 of his testimony,
addressed himself to a perceived defect of section 7, which would
allow for State-chartered subsidiaries of large foreign banks to be
exempted from monetary controls, and he recommended that those
foreign charters with more than $1 billion in world assets be
subjected to monetary controls.
Does State and Treasury not have an opinion, or would you
please express your opinion?
Mr. SOLOMON. Mr. Cavanaugh, I may be wrong, I only got a
second hand report as to his testimony yesterday, but my understanding was that the change in the Fed's position was not with
regard to monetary control; it was in regard to the veto power they
would have over the establishment of State-chartered, State-approved foreign bank branches that were not members of the Fed.
But I understood that that was in regard to the veto approval; it
was not in regard to monetary control. Is that correct?
Mr. BOEKER. I believe, as I understand it, Mr. Gardner's point was
that the monetary controls in section 7 ought to apply to a foreign
banking operation, in effect, regardless of its form of operations. In
other words, the definition of what kind of banking operations these
controls are extended to, whether an agency, branch, subsidiary or
whatever, should be clarified and extended.
Mr. CAVANAUGH. The criteria he set was the worldwide assets in
excess of $1 billion.
Mr. BOEKER. Right, which is, I believe, the criterion in section 7.
His point was, I believe, that the extension of monetary controls in
section 7 would thereby more assuredly be effective.
Mr. CAVANAUGH. To State-chartered subsidiaries?
Mr. BoEKER. Right.
Mr. CAVANAUGH. Do you agree or disagree?
Mr. BoEKER. I don't disagree with that, no.
Mr. CAVANAUGH. Mr. Solomon?
Mr. SoLOMON. We don't disagree with that either. It seems to us
to make sense if we are going to have Fed monetary control
authority to establish reserve ratios you might as well have them
on subsidiaries as well as on branches.
Mr. CAVANAUGH. Mr. Solomon, lou may have responded earlier. I
didn't come in for the chairman s questions on section 9 and the
requirements for Treasury to produce standards and guidelines. Did
you comment on that in greater detail than in your testimony?
Mr. SOLOMON. Yes, I did, sir.
Mr. CAVANAUGH. All right.
Mr. SOLOMON. Do you want me to repeat it?
Mr. CAVANAUGH. No. It's not necessary. I will review the record.
That is all I have, Mr. Chairman.
Mr. ST GERMAIN. Mr. Brown?
Mr. BROWN. Thank you, Mr. Chairman.
Mr. Solomon, I think it is your position that there should be
uniformity of treatment of foreign institutions, foreign financial
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institutions, branches, et cetera, in this country with domestic
institutions. If that is true, there shouldn't be any recrimination or
retaliatory action by other nations, it would seem, if all banks,
whether they be foreign-based or domestically-based, are treated the
same in this country. Is that not your position?
Mr. SOLOMON. My position is that there are certain cases where I
would suggest that equality not be applied to force divestiture of
existing operations. But in the future-Mr. BROWN. I was going to come to the securities aspect of the
special functions of foreign agencies or foreign rmancial branches,
whatever you want to call them. Basically speaking, isn't that,
conceptually, isn't that what you believe we should do, that is deal
with all institutions in this country, whether foreign or domestic,
and treat them all the same?
Mr. SoLOMON. To the maximum extent possible, unless there are
overwhelming factors on the other side.
Mr. BROWN. As I understand, there are certain countries that do
not adopt that policy with respect to U.S. banks in foreign countries. Is that not correct?
Mr. SOLOMON. Well, Mr. Boeker answered that while you were
out of the room, sir, I believe; We believe-in fact, we know-that
the great majority of important European countries do treat our
banks very generously, and they do have comparable treatment.
There are other countries in the world, however, some developing
countries and one or two industrialized countries in Asia, where
there is a significant differentiation in treatment toward U.S.
branches abroad and much more restrictiveness.
Mr. BROWN. But it would be very difficult to administer laws,
don't you agree, if we attempted to treat them with direct
reciprocity?
Mr. SOLOMON. Right. That was the point.
Mr. BROWN. To the extent that we treat foreign institutions in
this country as we treat domestic institutions, don't we provide, in
effect, the encouragement for others to do likewise?
Mr. SOLOMON. I am not sure I understand.
Mr. BROWN. To the extent we treat everyone uniformly, we
provide an incentive for other nations to treat our institutions in
those countries uniformly?
Mr. SOLOMON. Yes. I think to some degree. I don't know how
meaningful that incentive will be in certain countries, but I think
that the great majority of countries, in fact virtually all countries,
would understand our establishing a uniform policy on future
entrants.
I think where real problems may arise are, as you said earlier,
where we try to force a kind of differential discriminatory, nonnational treatment in a couple of selected areas, or on operations
that have existed in the past, which were in accordance with our
situation at that time. As far .as future entrants go, I think that is
entirely true, sir.
Mr. BROWN. The bill before us does not treat foreign branches or
foreign banks in this country uniformly with domestic banks, does
it, because there are certain things that newly established foreign
banks in this country would do, different regulations than domestic
banks would be subject to; is that not correct?
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In other words, don't you require Federal approval? Let me
confess I am still trying to recall the bill of last year, and I presume
this is the same, and I have not had the chance to go over it, but my
recollection of it is any newly established, foreign based, financial
institution in this country would have to have Federal approval,
which is not true of a State-chartered bank.
Mr. SOLOMON. As I understand the bill, sir, there are two tracks
in this bill, and they could get either Federal approval from the
Comptroller of the Currency or they could get State approval from
the State authorities. So I don't think there is any significant
discriminatory treatment.
Mr. BROWN. You are recommending insofar as FDIC insurance
those kinds of things that basically there would be substantial
uniformity between what a domestic bank is required. As I recall
your testimony, you suggested these changes be made.
Mr. SOLOMON. Yes.
Ml".- -BROWN.- Getting back to the grandfathering of securities
functions, as I understand it, those institutions, foreign institutions
in this country at the present time that are dealing in this area are
by and large not the ordinary depository institution we think of. It
was also my recollection that the Glass-Steagall Act was passed
primarily because of the substantial exposure to risk that the
depository institutions had when they got in the securities business;
isn't that true?
Mr. SOLOMON. What happened, sir, was that in 1933 when the
Glass-Steagall Act was passed, the United States was confronted
with major abuses, and there were scandals and shocking ones in
regard to abusing these relationships between banks and associated
securities affiliates. The situation today is quite different. We have
no indication of any abuses. They are run very separately and on an
arm's length basis.
Our feeling is that the conditions, thank God, do not prevail today
as they did in 1933. Therefore the response of the Congress should
be a realistic one, and there is no need, therefore, to force for no
good reason a divestiture of these securities affiliates.
Mr. BROWN. When we talk about flagrant abuses, et cetera, these
are abuses harmful to someone, so the Glass-Steagall Act was to
protect whom from being harmed? Basically depositors, wasn't it?
Mr. SoLOMON. Basically depositors, yes. But also there may have
been shareholders as well who were hurt by the kinds of transactions that went on.
Mr. BROWN. I tend to concur with your conclusion in your
statement regarding this area of the bill, grandfathering, et cetera,
because it seems to me as we know that function now, as it is being
performed by foreign institutions in this country, they are not
depository institutions, that the Glass-Steagall Act was aimed at
back then.
Mr. SoLOMON. I see your point.
Mr. BROWN. That seems a legitimate basis for saying that that
which we feared we should not fear in this case.
My time has expired.
Thank you very much.
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Mr. 8'r GERMAIN. I am going to ask unanimous consent that all
members be allowed to submit questions to you in writing to be
answered for the record, and hopefully prior to the markup. We will
have about a week to work on them.
Some of the members have agreed to do this in view of the fact we
have a second panel to appear before us this morning, and we want
to give them an opportunity to be heard thoroughly.
Do any of the other members of the subcommittee wish to ask
any further questions at this time?
Mr. HYDE. Mr. Chairman, may I briefly be recognized?
Mr. ST GERMAIN. Yes.
Mr. HYDE. Thank you.
I really don't want to ask a question, but I want to supplement
the question I asked before concerning reciprocity in foreign
countries.
I understand the purpose of this bill is to provide a basis of
equality of treatment of foreign and domestic banks in our country,
but I think in that context it's useful to familiarize ourselves with
part 2 of the FINE Study that was so monumentally assembled by
this subcommittee and this committee.
Chapter 4 discusses foreign banking laws and regulations governing overseas operations of our banks. On page 863 of that document
we learn that only Mexico and Sweden prohibit foreign bank
participation in all foreign institutions, seven other countries no
longer allow foreign bank entry, but allow banks which are already
active to continue to operate on a limited basis; Chile; Peru and
Colombia.
Peru prohibits entry, but allows foreign bank participation up to
20 percent.
Venezuela prohibits foreign entry into the banking system, but it
makes an exception for banks from other Latin American countries.
It does not permit foreign banks to establish agencies and
nonbanking opposition. Other developing countries have curtailed
foreign bank entry, Malaysia, the United Arab immigrants. The
Canadian banks are allowed to accept deposits of U.S. residents,
although the lending of these funds is restricted.
Eleven other countries allow U.S. banks entry, but impose substantial restrictions on their activities; Colombia; Costa Rica; Egypt,
and Spain; Argentina; Hong Kong and Singapore. Banks operating
in Argentina must stay in Buenos Aires. Greece requires the
importation of $10 million of capital for each new branch. In Japan
·new entries are not prohibited, but are virtually impossible to
obtain.
The Republic of China limits banks to a single office. Japan and
Nicaragua allow foreign entry only in the form of branches. Once
they are domiciled, treatment of foreign banks is generally inequitable. I guess the trick is to get domiciled.
So reciprocity is a word that ought to be spelled with a capital
"R," and ought to be looked at in that context, it seems to me. I
realize you are saying this is not the vehicle to deal with that. I
think, however, it's part of the background we ought to have before
us.
Thank you. I yield back my time.
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Mr. ST GERMAIN. I might state that when we met with the central
bank in Bern, Switzerland, I observed to the central bank at the
time that reciprocity is a great word but it depends on whose
dictionary you are using.
I am wondering, did you gentlemen have an opportunity to read
the hearings in the Senate and in the House on the bill last year?
For instance, Dr. Jahn's testimony, page 379, as well as the FINE
Study chapters on foreign banking just referred to by our colleague,
Mr. Hyde.
Mr. SOLOMON. I read various sections of it, sir.
Mr. ST GERMAIN. Thank you.
Mr. Allen?
Mr. ALLEN. No questions, Mr. Chairman.
Mr. ST GERMAIN. We want to thank you, gentlemen. As we say,
we are going to submit additional questions in writing and we
appreciate your appearance this morning, and your assistance.
Mr. SOLOMON. Thank you.
Mr. ST GERMAIN. Now we will hear from our second panel, John
F. Lee, executive vice president of the New York Clearing House
Association, and for the Conference of State Bank Supervisors, Dr.
William E. Whitesell, secretary of banking, Commonwealth of
Pennsylvania, accompanied by Alex Neale, vice president and director of Federal legislation.
We will first hear from John F. Lee, executive vice president of
the New York Clearing House Association. He is first on our
witness list, so we are not showing prejudice.
STATEMENT OF JOHN F. LEE, EXECUTIVE VICE PRESIDENT, NEW
YORK CLEARING HOUSE ASSOCIATION
Mr. LEE. Good morning, gentlemen. I am John F. Lee, executive
vice president of the New York Clearing House Association, on
whose behalf I appear this morning.
The bill you are considering, H.R. 7325, we believe, should not be
dealt with as though it were a minor housekeeping measure needed
to tidy up the Federal banking laws. It is a bill, we believe, of
considerable importance. Its passage could signal the beginning of a
fundamentally new approach to bank regulation, not just for foreign banks, but for domestic banks as well. We have submitted a
written statement for the record, pointing out some of the problems
our members perceive should the law be altered in the manner
proposed, and I will say only a few words by way of summary now.
This measure proposed for the purpose of regulating foreign
banks in the United States, we believe, will weaken the dual
banking system. In its striving for equality between foreign banks
and domestic banks, the bill shifts certain regulatory powers from
the States, where they now reside, to the Federal Government. If
the bill becomes law, it will be the Federal Government which will
decide whether foreign bank entry will occur and whether foreign
bank expansion will take place.
The Texas Legislature, for example, will not be able to control
whether Houston becomes an international banking center. The
Georgia Legislature will no longer be at liberty to admit the entry
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of foreign banks into Atlanta. That decision will be made in Washington. As you know, by long historical tradition an option is given
to the U.S. banks to conduct their business subject either to Federal
or State regulation. The present pattern of foreign bank regulation
is consistent with that tradition. Foreign banks are under the
present law in precisely the same position as domestic banks. They
are subject to the provisions of the Bank Holding Company Act;
their deposits are required to be insured with the FDIC to the same
extent as any domestically owned banks. Foreign-owned State
banks, just as domestically-owned State banks, may be, but are not,
required to be members of the Federal Reserve System.
Branches, agencies, or other unincorporated establishments of
foreign banks are subject to whatever regulation is imposed by the
licensing State. They are not subject to any Federal regulation, thus
being precisely equated with domestic State nonmember banks,
which choose not to become insured. The provisions of the bill
restricting interstate banking by foreign banks subjecting nearly all
of them to reserve requirements and other provisions of the Federal
Reserve Act, as well as the requirement of posting a surety bond or
pledge of assets with the FDIC and requiring Federal approval of
such banks' operations in the United States, would, we believe,
deny foreign-owned banks the option of choosing to operate under
State regulation only.
None of these provisions is necessary or desirable. By subjecting
all foreign banks' entities simply by reason of their foreign ownership or citizenship to laws that now apply to some, but not all,
components of the American banking system, this bill would clearly
be perceived as discriminatory by foreign countries. While foreign
central bankers have a traditional reluctance to criticize domestic
proposals of our monetary authorities, I can assure you that our
foreign banking friends have conveyed strong protests to the members of the New York Clearing House Association.
What logic is there in permitting a West German bank the right
to have a branch only in Chicago and West Germany continuing to
permit a U.S. bank to have branches in Frankfort, Munich, and
other German cities?
Just a word about foreign banks' securities affiliates. The argument is put forth that, because banks in this country cannot have
securities affiliates, foreign banks should not be allowed to own
them, either. However, the very banks which must compete against
them do not complain. Even some brokerage firms have acknowledged the beneficial effect of foreign bank securities activities in the
U.S. markets. Their presence here unquestionably helps U.S. firms
gain acceptance in securities markets abroad.
Foreign securities firms compete openly and fairly. Since when
has it been the policy of this Nation to stifle competition? We
should strive to remove anticompetitive laws and not to add new
ones.
In conclusion, I would like to express our view that H.R. 7325 is
unnecessary and undesirable. It will disrupt the smooth and efficient functioning of our banking system. It will engender animosity
here and abroad, and it may even initiate a shift in bank regulation
endangering the dual banking system.
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Thank you.
[The prepared statement of Mr. Lee, on behalf of the New York
Clearing House Association, follows:]
STATEMENT OF JOHN F. LEE
EXECUTIVE VICE PRESIDENT
NEW YORK CLEARING HOUSE ASSOCIATION
ON H.R. 7325--THE INTERNATIONAL BANKING ACT OF 1977
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION,
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REGULATION AND INSURANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U. S. HOUSE OF REPRESENTATIVES
297
I am John F. Lee, Executive Vice President of
the New York Clearing House Association, on whose behalf I
am appearing today.
The New York Clearing House Association has been
vitally interested in the subject of foreign banking legislation
since 1974, at which time the Board of Governors of the Federal
Reserve System first completed its Task Force report.
This
Association filed a 220 page analysis of the bill submitted by
the Board of Governors to the Congress in 1975.
(That analysis
can be found as a part of the record of the hearings held by
Senator McIntyre in January, 1976.)
We are pleased that in the
course of legislative history to date the Board and the Congressional
committees which have considered the proposed legislation have
responded to a number of our suggestions.
In addressing H. R. 7325, our Association still believes
that additional legislation is unnecessary with respect to the
regulation of foreign banks operating in the United States.
The stated purpose of the bill is the elimination
of the disparities existing between the powers of foreign
banks operating in the United States and those of domestic
banks, particularly with regard to the ability of foreign
banks to engage in interstate banking and in investment
banking activities.
In order to achieve such purpose,
the bill would superimpose federal regulations over the
state regulations dealing with foreign banks operating in
the United States.
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An evaluation of this purpose and the legislation
proposed for its implementation must be made within the parameters
of two fundamental principles.
The first is that the right
to elect either a federal or a state banking charter has long
been regarded as best serving the public interest.
The second
is that strengthening the international financial system through
competition best serves our national interest.
It fosters the
commerce of the United States and increases the ability of the
U.S. financial centers to compete with those abroad.
Judged in the light of these principles, the present
bill is undesirable.
It would deny to foreign banks options which
are available to domestic banks under our present system.
By such denial, this bill will inevitably be perceived as
discriminatory by some foreign countries and it will invite
retaliation by such countries against U.S. banks operating
abroad.
Erosion of the Present
Dual Banking System
As you know, by long historical tradition, an
option exists in the United States to conduct the business
of banking subject either to federal or state regulation.
The present pattern of foreign bank regulation is consistent
with that tradition.
Foreign-owned banks are, under the
present law, in precisely the same position as domestic-owned
banks.
Foreign-owned state banks are subject to the provisions
of the Bank Holding Company Act.
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to be insured with the Federal Deposit Insurance Corporation
to the same extent as any domestically-owned state bank subject
to the Bank Holding Company Act.
Foreign-owned state banks,
as domestically owned state banks, may be, but are not required
to be, members of the Federal Reserve System.
Under present
law, direct branches, agencies, or other unincorporated
establishments of foreign banks are subject to whatever regulation
is imposed by the licensing state.
They are not subject to any
federal regulation, thus being precisely equated with domestic
state non-member banks which are not insured.
The provisions of the bill restricting interstate
banking by foreign banks, subjecting nearly all of such banks
to reserve requirements and other provisions of the Federal
Reserve Act as well as the requirement of posting a
surety bond or pledge of assets with the Federal Deposit
Insurance Corporation, and requiring federal approval of such
banks' operations in the United States, would deny foreignowned banks the option of choosing to operate under state
regulation only.
As I will cover in more detail later, none
of these provisions is necessary or desirable.
Federal Reserve Board Approval
for Foreign Banks to Establish
State Chartered Branches and Agencies
The present system has worked well without the additional federal approval provisions proposed by the bill.
Foreign
bank capital in the United States has increased dramatically
during the past decade.
Those states, such as New York, Georgia,
I11inois and California, which have been the most receptive to
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the entry of foreign banks, have augmented their banking
markets and permitted a wider range of choices without in
any way jeopardizing the soundness of their banking systems.
Multi-State Operations of Foreign Banks
No restrictions need be imposed by the Federal
Government on multi-state operations of foreign banks.
operations are already greatly restricted.
Such
A foreign bank
seeking to establish a full scale banking subsidiary is subject
to exactly the same limitations as a domestic bank.
A foreign
bank seeking to operate a branch or agency in a particular
state must obtain a license from that state.
Nearly 40 states
do not permit branches or agencies of foreign banks.
Welcoming
a foreign bank with a branch or agency in another state is the
result of a deliberate choice of the entry state,
For
instance, the Illinois legislature in permitting foreign banks
to branch in Chicago could have provided that no such bank with
a branch, agency or subsidiary in another state could avail itself
of this privilege.
It chose not to do so.
Section 3(d) of the Bank Holding Company Act allows
any state to permit the entry of out-of-state bank holding
companies.
The states are also free to authorize branches of
non-member banks incorporated in other states.
Such recognition
of the right of a state to make its own election .allows
experimentation and development on a state-by-state basis.
There is no need to abandon such principles when dealing
with foreign banks.
This is particularly so, since the
overwhelming majority of domestic banks are in fact not prejudiced
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by the limited extent of interstate banking permitted to foreign
banks, especially in light of the sophisticated international
market in which foreign banks compete as well as the ability
of domestic banks to establish Edge Act Corporations and loan
production offices in various states.
Indirect Membership in the
Federal Reserve System
No showing has been made for the need (i) to impose
reserve requirements on foreign branches and agencies whose
parent entities have assets exceeding $1,000,000,000, or (ii)
to require compliance by foreign branches and agencies with
various provisions of the Federal Reserve Act.
These require-
ments result in a form of indirect membership in the
Federal Reserve System.
Moreover, the benefits of such
indirect membership are of limited value in comparison with
domestic banks.
The unsubstantiated premise that reserve requirements are needed to make banks operating in the United
States responsive to its monetary policies is undercut
by the fact that no such mandatory membership requirement
is imposed on domestic banks.
Foreign banks do maintain
reserves as required by the laws of the states in which they
are located.
Further, they have always voluntarily complied
when requested by the Federal Reserve Board to maintain
reserves identical to those required of U.S. banks, as U.S.
banks have voluntarily cooperated with central bankers of
foreign host countries.
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Surety Bond with FDIC
There is not sufficient justification for requiring
branches of foreign banks to maintain a surety bond or pledge
of assets with the Federal Deposit Insurance Corporation.
Foreign-owned banks that are subsidiaries of bank holding
companies are now required to insure their deposits.
As to
the unincorporated establishments of foreign banks, such
establishments have almost exclusively confined themselves
to activities incidental to the foreign and international
business of their home bank.
Their business is primarily
money center oriented, relating to so-called "big ticket"
transactions.
As presently conceived, deposit insurance,
with its maximum coverage of $40,000, offers such banks no
advantage and their customers no significant protection.
To the extent that foreign banks have sought to conduct a
retail business in the United States by soliciting consumer
deposits, they have done so either by choice or economic
constraints through the vehicle of domestic banking subsidiaries and have obtained deposit insurance.
Furthermore,
the requirement of a surety bond or pledge of assets is
particularly onerous when combined with the generally imposed
state requirement that a foreign branch or agency maintain
approved assets equal to 108% of its liabilities.
Investment Banking
Performed by Foreign Banks
The investment banking business conducted by affiliates
of foreign banks in this country is largely confined to servicing
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their own foreign customers in the U.S. market.
As such,
they simply transact here what their home countries regard
as a true banking business.
This Association recommends that no limitation be
placed on investment banking activities of affiliates of foreign
banks which have commercial banking operations in the United
States.
Such investment banking activities have been modest
in scope with only a minimal impact when compared to the size
of the United States market.
Furthermore, the bill is seriously defective
because in creating a restriction regarding such activities
no permanent grandfather rights have been provided for
existing securities affiliates of foreign banks.
Such
treatment contrasts with the permanent grandfather rights
afforded by the Bank Holding Company Act for domestic bank
holding companies.
The few securities affiliates of foreign
banks which would be granted grandfather rights represent
long-term investments of personnel and funds made in good
faith -- investments which would be rendered largely valueless
in the absence of permanent grandfather rights.
Weakening of International
Financial System
The national interest in strengthening the international financial system is best served by facilitating
foreign activities of United States banks and domestic
activities of foreign banks.
interest.
The bill would undercut that
It would discourage the operations of foreign
banks in the United States by requiring federal approval and
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by subjecting nearly all foreign banks operating in the United
States to reserve requirements and other provisions under the
Federal Reserve Act, certain provisions of the Bank Holding
Cprnpany Act, the need to pledge assets or a surety bond with the
Federal Deposit Insurance Corporation and other similar laws.
By subjecting all foreign-banking entities, simply by
reason of their foreign ownership or citizenship, to laws that
now apply to some but not all components of the American
'banking system, this bill would clearly be perceived as
discriminatory by foreign countries.
While foreign central
bankers have a traditional reluctance to criticize domestic
proposals of our monetary authorities, I assure you that our
foreign banking friends have conveyed strong protest to the
members of the New York Clearing House Association.
What logic
is there in the United States permitting a West German bank
the right to have a branch only in Chicago and West Germany
continuing to permit a U.S. bank to have branches in Frankfurt,
Munich and other German cities.
Foreign policy problems with regard to domestic
activities of foreign banks have thus far been avoided, since
such banks have come to accept our tradition of having banks
geographically circumscribed and supervised on a state-by-state
basis.
Any change in that tradition, particularly if it restricts
the current U.S. activities of foreign banks, would very likely
give rise to unnecessary friction.
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Conclusion
If foreign banks enjoy any competitive edge, they
do so at the sufferance of the states within whose borders
they operate and which the states have the power to remove.
Far from providing for competitive equality between U.S.
and foreign banks, the bill would discriminate against foreign
banks by denying them options available to U.S.
present system.
banks under our
Such discrimination is likely to invite retaliation
by foreign countries against U.S. banks and damage U.S. markets
and the financing of our foreign trade.,
The result can only be
disruptive of the international financial system.
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Mr. &r GERMAIN. We thank you.
Now we will hear from Mr. Whitesell. You may proceed. We will
put your entire statement in the record.
STATEMENT OF WILLIAM E. WHITESELL, SECRETARY OF BANKING, COMMONWEALTH OF PENNSYLVANIA, MEMBER, FEDERAL
LEGISLATION COMMITTEE, CONFERENCE OF STATE BANK SUPERVISORS; ACCOMPANIED BY ALEX NEALE, VICE PRESIDENT
AND DIRECTOR OF FEDERAL LEGISLATION OF THE
CONFERENCE
Mr. WHITESELL. Thank you.
Mr. Chairman, it is a pleasure to appear before you and this
subcommittee. I am William E. Whitesell, secretary of banking for
the Commonwealth of Pennsylvania, and a member of the Federal
Legislation Committee of the Conference of State Bank Supervisors,
in whose behalf I am testifying today.
First, at the outset, may I say that the Conference of State Bank
Supervisors strongly supports provisions of the bill that would
permit the Comptroller of the Currency to waive the requirements
of the National Bank Act that all directors of a national bank be
U.S. citizens and require that only a majority of the directors be
American citizens when the bank is foreign-owned. This proposal is
an extension of the concept of dualism. Our domestic banks now
have this chartering option, and we believe it should also be made
available to foreign banking institutions desirous of operating in
our country. This provision would also add to the Federal "presence" in regard to the regulating of foreign-owned banking institutions in the United States. However, we would oppose a Federal
charter or license for a foreign banking institution carrying with it
the authority to organize and operate within a State irrespective of
State law.
Second, the Conference of State Bank Supervisors opposes the
one-State limitation that would be imposed on foreign branches. At
first glance, this appears desirable from the standpoint of providing
equitable treatment between foreign and domestic banks in their
interstate operations. However, an examination of the facts discloses that our domestic bank holding companies, through their
bank and nonbank subsidiaries and other facilities, conduct far
more extensive interstate banking activities than do the 18 foreignowned banks that have established branches in this country in
more than one State. While the multi-State locations of these
foreign branches are confined principally to New York and Illinois,
data which have appeared in the American Banker newspaper in
1975-76, reflect there are 13 large bank holding companies alone in
this country that have 1,642 nonbanking offices, approximately
1,483 of which are located in States other than that of the anchor
bank of the holding company. These 13 bank holding companies,
through their subsidiaries, are engaged in a wide range of bankrelated activities, including consumer and sales finance, mortgage
banking, leasing, selling and reissuing credit-related insurance, factoring, real estate advice, management consulting, et cetera. These
13 bank holding companies alone make relatively unimportant in
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comparison the interstate banking activities of the small number of
foreign branches that are in more than one State.
In addition, most foreign banks, through their branches, pursue
primarily a wholesale banking business rather than compete with
our domestic banks in local retail markets.
In Chicago, for instance, where there are 27 foreign bank
branches located in the Loop area, only three branches have
ground-floor locations, and actively compete for local retail deposits.
The other branches are in office buildings in off-street locations and
are engaged principally in transactions with multinational corporations. Of the 53 foreign banks with branches in New York, only 4
are actively competing for retail domestic deposits at this time
through their branches. The other foreign bank branches in New
York are competing with our large mon~y center banks there in
wholesale-type banking activities.
Third, the multi-State prohibition on foreign branches contained
in this bill is contrary to our national interests, and Conference of
State Bank Supervisors believes this subsection should be stricken
from the bill. These provisions have the practical effect of limiting
foreign branches to one State for the foreseeable future, and under
such conditions foreign branches would, in all likelihood, locate in
California or New York for their one-State operations. Thus, other
States would be estopped from inviting into their borders a foreign
branch that happened to also be located in New York or California.
This would discriminate against such States which might desire to
increase their roles in international financial affairs.
It is in our national interests to promote other areas than New
York and California as international banking centers.
Fourth, we oppose provisions of the bill which would give the
Federal Reserve Board authority to set reserves on foreign-owned,
State-chartered branches, agencies and New York investment companies where the parent bank has total worldwide assets in excess
of $1 billion.
First of all, affiliation with the Fed for reserve purposes is
optional for domestic State-chartered banks, regardless of size, and
it should be optional for foreign banking institutions operating in
this country.
Second, the Fed has made no clear showing it needs reservesetting authority over all State-chartered domestic banks-let alone
foreign banks-in connection with its monetary policy responsibilities. The Fed carries out its monetary policy objectives principally
through its Federal Open Market Committee operations.
The Federal Reserve Board for a number of years has been
attempting unsuccessfully to extend its reserve-setting authority
over nonmember depository institutions, largely on the ground that
it needs such authority for its monetary policy role. The Conference
of State Bank Supervisors believes this issue should be decided on
its merits in separate and searching hearings, and not tied to the
issue of regulating foreign banking institutions that choose to operate in this country under State charter or license. There simply has
been no showing by the Fed that optional affiliation with the Fed by
our domestic commercial banks-or foreign banks-has impeded
the Fed in carrying out its monetary policy objectives. The confer
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ence considers the Fed's efforts to extend its reserve-setting role
through this bill as unjustified.
A 1974 study commissioned by the Conference of State Bank
Supervisors on the optional affiliation-monetary policy question,
conducted by Professors Ross M. Robertson and Alrnarin Phillips,
holds that while major monetary policy weaknesses have been
revealed in the recent past, and should be anticipated in the future,
optional affiliation of some banks with the Fed for reserve purposes
cannot be considered high on the list of factors contributing to these
weaknesses, if eligible at all for inclusion. I have copies of that
study, which I would like to have inserted in the record.
Fifth, other provisions of section 7 of the bill would give the Fed a
veto power over States in determining whether foreign banking
institutions could be organized under State law. In addition, under
this section the Fed could impose on foreign banking institutions
operating under State license, regulatory controls as though such
institutions were member banks.
These proposals are unwarranted, and we vigorously oppose
them. Why should the Fed have the veto power over a State in one
of the primary areas of a State's responsibilities in the banking
field, namely, the licensing of a bank, a branch or agency to meet
the public interest. Governor Gardner indicated in his testimony
that he had no objection to deleting this veto provision from the
bill. We would favor deletion of the entire section.
Foreign banks have been operating under State oversight for
many years, and the Conference of State Bank Supervisors is not
aware of any showing by the Fed or any source, that under such
supervision any of our national objectives have been impeded in
any way. Foreign banks have been corning to our country in
increasing numbers, and it should be hoped that they continue to do
so, for they have provided a valuable competitive stimulus to our
domestic banks and have aided the presence of American banks
overseas. Additionally, although their assets in this country are
about $76 billion, it should be borne in mind that as of April 1977,
assets of U.S. banking offices abroad were about $223 billion, or
nearly three times as large.
Foreign banks operating as subsidiaries in this country have $11.5
billion in deposits which are under FDIC insurance. The FDIC,
along with State banking departments, examines and supervises
such institutions, as it does our other State-chartered nonmember
banks. Branches and agencies of foreign banks (except in Massachusetts, where one branch is located) submit monthly reports of
condition to the Federal Reserve banks. I am certain our State
banking departments where foreign banking institutions are located
would be willing to furnish the Fed with other data regarding
foreign bank operations under State supervision, which the Fed can
demonstrate it needs in order to carry out its responsibilities.
Sixth, with respect to the provisions in the bill for requiring FDIC
insurance for foreign branches which accept domestic deposits, the
Conference of State Bank Supervisors has no consensus view. I
should point out, however, that State banking departments, in the
absence of FDIC insurance, have resorted to various statutory or
legal substitutes and approaches to assure the safety of domestic
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deposits of foreign branches. The statutory form is generally patterned after New York Banking Law pertaining to foreign banks.
Agencies do not accept deposits.
Seventh, with respect to the securities affiliates of foreign banks
in this country, it is believed that Federal legislation affecting this
activity should properly come only after completion of extensive
congressional review of the Glass-Steagall Act, such as that which is
currently being carried out by the Senate Securities Subcommittee.
If, after completion of such review, prohibitions are continued on
domestic banks engaging in such activities, CSBS would favor
prohibiting these activities by foreign banks. However, even under
these conditions, it is believed only equitable to grandfather-related
existing operations.
Mr. ST GERMAIN. Pardon me for interrupting, Mr. Whitesell. We
will insert your proposed statement in the record at this point and
give members of the subcommittee an opportunity to interrogate
you.
[The prepared statement of Mr. Whitesell, on behalf of the
Conference of State Bank Supervisors, follows:]
STATEMENT OF MR. WILLIAM E. WHITESELL
ON BEHALF OF
THE CONFERENCE OF STATE BANK SUPERVISORS
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION,
REGULATION AND INSURANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
RE:
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H. R. 7325--THE INTERNATIONAL BANKING ACT OF 1977
310
Mr. Chairman, it is a pleasure to appear before you and the
members of this Subcommittee.
I am William E. Whitesell, Secre-
tary of Banking for the State of Pennsylvania, and a member of
the Federal Legislation Committee of the Conference of State Bank
Supervisors, in whose behalf I am testifying today.
The Conference of State Bank Supervisors (CSBS) expresses its
strong support for provisions of this bill that would permit the
Comptroller of the Currency to waive the requirements of the
National Bank Act that all directors of a national bank be United
States citizens, and require that only a majority of the directors
be American citizens when the bank is foreign-owned.
CSBS regards this proposal as an extension of the concept of
dualism.
Our domestic banks now have this chartering option, and
we believe it should be also made available to foreign banking institutions. desirous of operating in our country.
However, the Conference would oppose a federal charter or license for a foreign bank, branch or agency, carrying with it the
authority to organize and operate within a state irrespective of
state lawll.
It is the position of the Conference that a state
should have the right to structure the financial organizations
within its borders in a manner which the state believes best
serves the needs of its residents.
1/ Foreign banks operate in California, Georgia, Hawaii, Illinois,
Massachusetts, New York, Oregon, Puerto Rico, the Virgin Islands
and Washington. A few states specifically prohibit foreign banks
while a number of state statutes are silent in this area.
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Aside from the dual chartering provision, which it supports
as indicated above, CSBS regards certain other provisions of the
bill as entirely too sweeping in their scope and, in their final
analysis, representing an unwarranted derogation of the authority
of states to regulate foreign banking institut"fons desiring to
operate in this country under provisions of state law.
Interstate Banking Operations
One of the provisions of this bill to which CSBS must voice
its strong opposition is the prohibition on multi-state locations
that would be imposed on foreign bank branches until our domestic
national and Federal Reserve member banks can also branch interstate.
Multi-state operations of foreign banks established or approved
before May 1, 1976 would be permanently grandfathered.
At first glance this provision might appear to be desirable
from the standpoint of providing equitable treatment between foreign
and domestic banks in their interstate operations.
Data from the
Federal Reserve Board, for example, disclose that some 18 foreignowned banks have established branches in this country in more than
one state.
These multi-state branches are confined principally to
New York and Illinois, although a few foreign banks have two-state
branch locations in Massachusetts, Oregon, Puerto Rico, the Virgin
Islands and Washington.
A close examination of the facts discloses
that our domestic-bank holding companies through their bank and nonbank subsidiaries and other facilities have far more extensive interstate banking facilities and operations than do a limited number
of foreign bank branches operating in this country.
Our domestic banks utilize a wide range of multi-state bank
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holding company bank and nonbank affiliates, Edge Act Corporations,
loan production offices, traveling loan and deposit-producing offices
and a nationwide correspondent banking network that make relatively
insignificant in comparison, the interstate efforts of foreign banking institutions operating in this country.
In illustration of the above, during late 1975 and early 1976
the American Banker newspaper featured a number of articles reflecting the spread across the United States of nonbank subsidiaries of
bank holding companies~/.
Thirteen bank holding companies were
analyzed in these articles as to the number of offices of each and
the number of states in which they operate.
The identities of
these bank holding companies are set forth in Exhibit No. 1.
The data reflected that while the main office of the anchor
banks of the 13 bank holding companies reviewed are located in
seven states, the offices of their nonbank subsidiaries are located
in 43 states.
These 13 bank holding companies have 1,642 nonbank-
ing offices, approximately 1,483 of which are located in states
other than that of the anchor bank of the holding company.
These
13,bank holding companies utilize 35 Edge Act Corporations in their
interstate operations and 23 loan production offices.
The American Banker articles disclosed that the 13 bank holding companies through their subsidiaries are engaged in a wide range
of bank-related activities.
These activities (the number of the 13
holding companies which engage in the particular type of operation
II American Banker issues of October 23 and 29, November S, 13
and 20, December 4, 12, 22 and 29, 1975; January 6, 13 and
21 and February 9, 1976.
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is listed in parenthesis) are as follows:
consumer and sales fi-
nance (12); mortgage banking (12); leasing (11); selling and reissuing credit-related insurance (10); factoring (7); investment
management advice (7); real estate advice (6); providing venture
capital to small businesses (6); computer services (4); trust services (2); marketing travelers checks (2); commercial leasing (1);
management consulting (2); urban redevelopment (2); credit card
services (1); travel services (1); making and servicing of government guaranteed student loans (10); various accounting services (1);
and underwriting insurance (1).
Most of these lending and ser-
vice-related functions help generate deposits for banks.
In addition to the above-mentioned interstate bank-related
affiliates, there were as of year-end 1976, seven U. S. bank holding companies which owned banks in more than one state through
grandfathering provisions of the Bank Holding Company Act of 1956.
For example, the Western Bancorporation headquartered in Los Angeles,
California owned banks in Arizona, Colorado, Idaho, Montana, Nevada,
New Mexico, Oregon, Utah, Washington and Wyoming.
The Northwest
Bancorporation headquartered in Minneapolis, Minnesota owned banks
in Iowa, Montana, Nebraska, North and South Dakota and Wisconsin.
Aside from the foregoing, I think it is pertinent to point
out also that most foreign banks through their branches in our financial centers pursue primarily a wholesale banking business rather
I
than compete with our domestic banks in local retail markets. Former
Federal Reserve Board Vice Chairman, George W. Mitchell, testified
before the Senate Subcommittee on Financial Institutions during 1976
on S. 958, the Foreign Banking Act of 1975.
At that time, in dis-
cussing the principal reason why foreign banks have entered the
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United States, he stated it has been
• • . to service the needs of multi-national corporations
(both U.S.- and foreign-based) which tend to be customers of these banks and to accommodate home country
customers who do business in the United States. Servicing these customers is likely to remain the primary
business of foreign banks operating in the United
States.
Mr. Mitchell added that some £oreign banks in an effort to diversify their business and to gain a more stable deposit base are
likely to develop a significant retail business in the United
States, but that in all probability this would continue to be a
distinctly secondary aspect of the U. S. business of these companiesY.
It should also be noted that Section 3(d) of the Bank Holding Company Act presently provides the legal mechanism for full-
service banking across state lines by either domestic or foreign
banks.
This section permits the acquisition or establishment of
commercial banks by bank holding companies located out-of-state,
if the statute of the state in which the bank is located specifically authorizes such action "by language to that effect and not
merely by implication."
The State of Maine has enacted legisla-
tion to permit out-of-state acquisitions on a reciprocal basis,
effective in 1978.
New York has on several occasions introduced
legislation to permit reciprocal interstate banking.
However, no
law has been enacted by that State which would actually provide
for such activity.
1/ Hearings before the Subcommittee on Financial Institutions of
the Committee on Banking, Housing and Urban Affairs, U. S.
Senate, on S. 958, The Foreign Banking Act of 1975, p. 163,
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While the interstate prohibitions of this bill are designed
to promote the concept of equitable treatment between foreign and
domestic banks, CSBS regards the problem as largely illusory, and
considers the proposed remedy as being contrary to our national
interests.
The bill, for example, has the practical effect of
limiting foreign branches to one state for the foreseeable future.
In all likelihood foreign branches, under such conditions, would
choose California or New York, our country's leading international
financial centers, as the base for their one-state operations.
Under such conditions, a state desirous of expanding its role in
international banking matters would be estopped from inviting a foreign bank branch to locate within its borders if the branch happen-
ed also to be located in another state.
To prevent what is per-
ceived as a competitive advantage favoring foreign banks, the bill
would in fact discriminate against states other than New York and
California in their international banking aspirations.
It is the
position of the Conference that a state should be permitted to
invite an out-of-state foreign bank branch to operate within its
borders if this is believed in the interests of the state, without
the necessity for Congress to impose its will. on states on the issue of whether our domestic banks can branch across state lines.
Authority of the Federal Reserve System
Section 7(a) of H.R. 7325 would provide that the Federal
Reserve Board could set reserves over foreign-owned state-chartered
branches, agencies or New York investment companies where the parent bank had total world-wide assets in excess of $1B,
The Fed-
eral Reserve Board by letter to this Subcommittee dated May 25,
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Federal Reserve Bank of St. Louis
21
316
1977, is also proposing that reserve requirements be imposed on
state-chartered subsidiaries of large foreign banks where this
asset-size test is met.
These reserve requirements would be
imposed as an alleged prerequisite to the Fed's monetary policy
obligations.
The Conference of State Bank Supervisors opposes the above
provisions.
First of all, affiliation with the Federal Reserve
System is optional for domestic state-chartered banks, regardless
of size.
This affiliation should also be optional for foreign
banking institutions.
The bill attempts to make this affiliation
more palatable simply by attaching a size criterion.
a proper criterion for imposing reserves.
Size is not
To carry this to its
logical conclusion would require that all large_ domestic banks be
affiliated with the Federal Reserve System.
Secondly, the Fed, outside of some~ cathedra pronouncements,
has made no clear show_ing that it needs reserve-setting authority
over all state-chartered domestic banks--let alone foreign banks-in connection with its monetary policy responsibilities.
The Fed
carries out its monetary policy responsibilities principally through
its Federal Open Market Committee operations.
In 1974 the Conference of State Bank Supervisors commissioned
a study on the optional affiliation-monetary policy question.
A
copy of this study, which is being furnished for the record, states
in part!/:
!/
The study by Professors Ross M. Robertson and Almarin Phillips
entitled, Optional Affiliation with the Federal Reserve System
for Reserve Pur oses is Consistent with Effective Monetary Policy,
ol s t at wile major monetary po icy wea nesses ave een revealed in the recent past, and should be anticipated in the future,
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There is substantial agreement that the reserve measure
most useful for control purposes is the monetary base
(base money), which is defined as the net monetary liabilities of the federal government (i.e., the Federal
Reserve and the U. S. Treasury) • . 7 7 Growth of the
monetary base is essentially determined by Federal Reserve holdings of U. S. government securities, the major source component of the base. Although views differ on the precision with which the monetary base can
be regulated, the consensus among monetary economists
is that its size can be· set within very close tolerance
on a monthly basis.
Whether the Fed needs reserve-setting authority in connection with its monetary policy responsibilities was touched on in
an article appearing in the Spring 1973 issue of The Bankers
Magazine entitled, "Where Does American Banking Go From Here?"
authored by Henry C. Wallich, then Professor of Economics at Yale
University, and Mable I. Wallich.
They stated at that time:
. The bulk of commercial banking ha~ been exposed
to a special tax, in the form of reserve requirements.
It makes no essential difference that the revenues from
the tax reach the Treasury via the Federal Reserve.
There is no particular reason for this tax since the
Federal Reserve can uite well conduct
olic
oaerations wit out require reserves.
a ded.) (Page 25.)
As this Subcommittee is aware, the Federal Reserve Board in
connection with a proposal now before the Senate Banking Subcommittee on Financial Institutions on the question of nationwide NOW accounts (S. 1664), has proposed that it be given reserve-setting
authority over all federally-insured depository institutions with
respect to NOWs offered by such institutions.
In testifying on the NOW account issue and the relationship
optional affiliation of some banks with the Fed for reserve purposes cannot be considered high on the list of factors contributing to these weaknesses, if eligible at all for inclusion.
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of nonmember institutions with the Federal Reserve System .for reserve-setting purposes, on June 20, 1977 Mr. George A. LeMaistre,
Chairman of the FDIC, stated in part:
. . . . There have been several studies of the monetary
control issue by economists outside the Federal Reserve.
All of those that I am familiar with have concluded that
increased Federal Reserve membership is not important to
the effectiveness of monetary policy, at least with member
banks comprising the proportion of the money supply that
they do now
The Federal Reserve Board for a number of years has been attempting unsuccessfully to extend its reserve-setting authority
over nonmember depository institutions, largely on the grounds that
it needs such authority for its monetary policy role.
The Confer-
ence believes this issue, which is of considerable importance to
the dual banking system, should be decided on its merits in separate
and searching hearings, and not tied to the issue of regulating foreign banking institutions that choose to operate in this country
under a state charter or license.
There simply has been no showing
by the Fed that optional affiliation with the System by our domestic commercial banks has impeded the Fed in carrying out its monetary policy objectives--let alone that foreign banks operating
here have done so--and the Conference considers the Fed's approach
to extend its reserve-setting role through this bill is unjustified.
Aside from the fact that the Fed has not demonstrated its need
for reserve-setting authority over foreign banking institutions, let
me point out that all states with branches of foreign banks apply
reserve requi~ements equivalent to those of domestic state-chartered
banks.
Even in Illinois, where there are no state reserve require-
ments for domestic banks, branches of foreign banks are required to
maintain reserves equal to those imposed by the Federal Reserve on
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319
member banks.
Foreign agencies do not accept domestic deposits
and reserves are not maintained against them.
In New York,
where fifty-th~ee foreign banks have branches, in addition to
reserves, foreign branches must maintain a special liquidity
reserve in the form of five per cent of assets segregated and
maintained under a restricted deposit agreement subject to
withdrawal only with the consent of the New York State Superintendent of Banks.
This reserve is over and above vault cash and
other liquidity reserves.
Thus, in actual practice, foreign branch
reserves may well be higher than those of domestic banks.
It should be also pointed out that foreign branches (except
in Massachusetts where one branch is located) furnish monthly
copies of condition reports to the interested Federal Reserve
Banks, as well as to their respective state banking departments.
These reports contain data on reserves held by such institutions.
In Chicago, Illinois, where 27 foreign branches are located,
these branches until recently, when the Fed indicated it no longer
needed such data, submitted weekly reports to the Fed indicating
reserves they were holding on deposits.
Other provisions of Section 7 would authorize the Federal
Reserve Board to impose regulatory controls on foreign banking
institutions operating under state supervision as though such
institutions were member banks.
And, Section 7(e) would actually
authorize the Fed to exercise a ~ power over state banking departments as to whether these foreign branches, agencies or investment companies could be organized under state law.
section is an outrageous affront to states.
This sub-
Why should the Fed
have the final authority as to whether a state can exercise a
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320
fundamental prerogative of· its sovereignty, namely the right to
license a· banking institution in its borders that it believes will
serve the public interest--and which the state has the primary
authority and responsibility to regulate and supervise.
The foregoing provisions of Section 7 not only are unwarranted,
but they possess adverse implications for the dual banking system.
In addition, they leave the states with responsibility for supervision but without real authority.
Foreign banks have been operating in this country for many,
many years under state law and supervisory controls.
These insti-
tutions have been growing in this country in recent years and they
have been providing a competitive stimulus to our domestic banks.
Furthermore, they are a vital consideration in connection with the
facilitating of international trade and with respect to the growing
presence of our U. S. banks overseas.
In this regard, according to
data from the Federal Reserve Board, the assets of U. S. banking
offices ab.road, as of April 1976, were some $223B, or approximately
3-1/2 times as great as the $66B in assets held by foreign banking
operations in this country.
I am not aware· of any showing that the absence of the extensive federal controls proposed in this bill has been contrary to
our national interests, or resulted in banking practices that have
been unsafe or unsound.
In fact, state banking department performance
over the span of a century of experience regulating foreign banks has
been generally excellent.
During hearings on S. 958, the Foreign
Banking Act of 1975, former Federal Reserve Board Vice Chairman,
George Mitchell, stated in part:
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There is nothing to indicate that foreign banks are
"abusing" their powers in the sense that they are
using the opportunities available to them under the
present system to engage in any improper or unsound
banking practices. On the contrary, it has been the
experience of the Board that foreign banks operating
in the United States have scrupulously complied with
existing U. S. laws and regulations and have been
generally cooperative in their dealings with the
Board.
In view of the adverse implications of this Section to the
dual banking system, and the absence of any showing that its provisions are needed, the Conference requests this Section be
stricken from
the bill.
FDIC Insurance
Section 6 of the bill would require that any foreign branch
which accepts deposits of United States citizens, residents or
businesses whose principal place of business is in the United
States, must maintain with the FDIC a surety bond or pledge of
assets in amounts determined by the FDIC for the purpose of protecting such deposits to the same extent and in the same amount
that they would be protected in an insured bank.
The Conference of State Bank Supervisors has no consensus
view on the necessity of extending FDIC insurance to foreign
branches which take domestic deposits and to agencies which do not
take domestic deposits.
I would like to point out, however, that
state banking departments regularly examine foreign-owned statechartered subsidiaries, branches and agencies for safety and soundness.
Because the FDIC does not insure deposits of foreign branches
and because capital is a nebulous concept, states have resorted to
various statutory or legal substitutes and approaches to assure the
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safety of deposits.
The statutory form is generally patterned
after New York Banking Law (sec. 202) which requires:
1.(a) Upon opening a branch and thereafter, a foreign
banking corporation . . . shall keep on deposit . • .
with such banks or trust companies or private bankers
or national banks in the State of New York as such
foreign banking corporation may designate and the
Superintendent may approve, interest-bearing stocks
and bonds, notes, debentures, or other obligations
of the United States or any agency or instrumentality
thereof, or guaranteed by the United States, or of this
State, or of a city, county, town, village, school district, or in.strumentality of this State or guaranteed
by this State, or dollar deposits, or obligations of the
International Bank of Reconstruction and Development
or obligations issued by the Inter-American Development
Bank, or obligations of the Asian Development Bank, to
an aggregate amount . . . of not less than one hundred
thousand dollars; provided, however, that the Superintendent may from time to time require that the assets
deposited . . . may be maintained by the foreign banking corporation at such amount as he shall deem necessary
or desirable for the maintenance of a sound financial
condition, the protection of depositors and the public
interest, and to maintain public confidence in the business of such branch or branches . . . .
2. Each foreign banking corporation shall hold in this
State currency, bonds, notes, debentures, drafts, bills
of exchange or other evidences of indebtedness or other
obligations payable in the United States or in United
States funds or, with the prior approval of the Superintendent, in funds freely convertible into United States
funds, in an amount which shall be not less than one
hundred eight per centum of the aggregate amount of
liabilities of such foreign banking corporation payable
at or through its agency, agencies, branch or branches
in this State • . . (The Superintendent) • . • may
require such foreign banking corporation to deposit the
assets required to be held in this State . . . with such
banks or trust companies or private bankers or national
banks located in this State, as such foreign banking corporation may designate and the Superintendent may approve.
The above requirement, generally known as the "108 per cent
rule" has found its way into the statutes or practices of Illinois,
Massachusetts and Washington.
The State of Illinois requires for-
eign branches, in addition to the 108 per cent rule, to maintain
interest-bearing obligations or dollar deposits of not less than
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the greater of $100,000 or five per cent of total liabilities,
such obligations or deposits to be maintained with a state·or
national bank.
Nonbanking Activities
Section 8 of this bill is designed to deal with possible
competitive advantages enjoyed by foreign banks over domestic
banks through securities affiliates of foreign banks operating
in this country.
The securities affiliates of foreign banks are relatively few
in number and are located principally in New York City, where they
engage primarily in brokerage activities for foreign customers of
these banks.
CSBS believes that federal legislation affecting the securities activities of foreign banks should properly come only after
completion of extensive Congressional review of the Glass-Steagall
Act such as that which is currently being carried out by the Senate
Securities Subcommittee.
If, after completion of such review, pro-
hibitions are continued on domestic banks engaging in activities
now forbidden them by the Glass-Steagall Act, the Conference would
favor prohibiting such activities by foreign banks.
However,
should this development occur, CSBS believes it only equitable to
grandfather related existing operations.
Thank you Mr. Chairman.,
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Mr. WHITESELL. In addition to the Conference of State Bank
Supervisors Commission study which I mentioned earlier, I also
have the articles from the American Banker, to which I referred,
and which I would like to submit for the record.
Mr. ST GERMAIN. You can submit them to the subcommittee, and
we will determine how much goes in the record, because we haven't
seen it as yet. Mr. Whitesell, on the subject of the present prospective expansion for foreign banks into other States, can you give us
an estimate of the number of States that are presently actively
attempting to attract foreign banks?
Mr. WHITESELL. I can't give you an estimate of the number trying
to actively attract them. I think the foreign banks presently operate
in 11 States. There may be others that are trying to attract them,
which simply haven't been able to do so.
Mr. ST GERMAIN. Can you discuss for us the situation in Texas
and comment on the growth of international banks in Houston,
despite very severe restrictions on foreign banking operations in the
State of Texas?
Mr. WHITESELL. I cannot, but in answer to that question, as well
as the former one, we would be glad to submit a formal written
statement, Mr. Chairman.
[In response to the information requested by Chairman St
Germain, the following letter was received from Alexander W.
Neale, Director of Federal Legislation, Conference of State Bank
Supervisors, on behalf of Mr. Whitesell:]
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•
,
,
OFFICE OF THE EXECUTIVE VICE PRESIDENT-ECONOMIST
July 22, 1977
Honorable Fernand J. St Germain
Chairman
Subcommittee on Financial Institutions
Supervision, Regulation and Insurance
2128 Rayburn House Office Building
Washington, D. C. 20515
Dear Representative St Germain:
RE: International Banking Act
of 1977 (H.R. 7325)
During the appearance of Mr. William E. Whitesell, Secretary
of Banking for the State of Pennsylvania, before your Subcommittee on July 13 regarding the above bill, you inquired
of Mr. Whitesell as to an estimate of the number of states
presently attempting to attract foreign banks.
As you know, foreign banks are presently operating in California, Georgia, Hawaii, Illinois, Massachusetts, New York,
Oregon, Puerto Rico, Washington and the Virgin Islands. In
addition to the foregoing, the statutes of Missouri and
Ohio would appear to permit foreign-owned agencies. However,
none are located in those States.
In addition to the above states, Florida, during 1977, passed
legislation that would permit foreign-owned banks to establish agencies and representative offices. Florida law
would prohibit foreign banking institutions from taking
domestic deposits, thus the statutes of Florida would effectively prohibit foreign-owned branches from operating
in that State.
The Pennsylvania legislature has passed legislation --- not
yet signed into law -- which would permit foreign-owned
branches and agencies.
During Mr. Whitesell's testimony, you also asked him to discuss the current situation in Texas and to comment on the
growth of foreign banks in that State.
1015 EIGHTEENTH STREET, N.W. • WASHINGTON, D.C. 20036 • (202) 296-2840
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Inquiry of the state banking department at Austin, Texas discloses that the statutes in Texas prohibit foreign corporations
from doing a banking business in that State. As a consequence, there are no foreign-owned subsidiary banks, branches
or agencies operating in that State. There is an Agreement
Corporation operating in the State of Texas.
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Cord7x,
,
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' /luLtlc!e- Yr'
,.,
}r_L ,,j;__
Alexander W. Neale
Vice President Director of Federal Legislation
327
Mr. ST GERMAIN. California and Georgia have limited foreign
banks to the agency at this point, as opposed to the branch form of
operation. Can you tell us whether or not the absence of the power
to accept deposits in these States by foreign banks, since they are
restricted to agency, has interfered with their expansion?
Mr. WHITESELL. I don't know whether I can respond to whether or
not it has interfered with the expansion. I can comment about the
consistency of that with respect to the general view that the
Conference of State Bank Supervisors has of whether States should
have the right to determine whether they want agencies, branches,
or subsidiaries chartered in their respective borders.
Mr. 8T GERMAIN. In Pennsylvania, you are encouraging foreign
banks entering, but Pennsylvania prohibits branching by geographic limitation; is that correct?
Mr. WHITESELL. That is correct.
Mr. ST GERMAIN. And, therefore, you effectively prohibit branching in that manner within the State of Pennsylvania, by these
foreign banks.
Mr. WHITESELL. What we have is what I might term exceptional
legislation there. The bill which is supported by the Pennsylvania
Bankers Association, the administration, and which has not yet
been signed into law, by the way-Mr. ST GERMAIN. Has it passed the legislature?
Mr. WHITESELL. It has passed. We are simply cleaning up a minor
insurance element on that in conference, but that element of our
omnibus bill has passed both houses with no trouble, so there will
be no problem there. Those branches, agencies, or whatever we
allow to be established, can be established anywhere in the State
that the foreign-owned bank wants to establish them, and we had
absolutely no opposition on that from any bankers that I know of,
even though the State law for domestic banks in the Commonwealth has contiguous county prohibition. The anticipation is it
would be only Pittsburgh, Erie, and Philadelphia, since that is
where we have the foreign trade.
Mr. 8T GERMAIN. Figures on foreign bank assets and liabilities
indicate that they operate their multi-State offices as a network; in
other words, substantial borrowing and lending between offices in
different States. If a foreign bank branch takes deposits in New
York and lends them to a branch in Chicago, how can the New
York State supervisor be certain the assets behind the deposits in
New York are sound; to wit, since the loans are being made in
Chicago, doesn't this form of operation imply a need for overall
regulation of the entire foreign bank network in the United States.
Mr. WHITESELL. I believe last year concerning the Foreign Banking Act of 1975, first deputy superintendent of banks Len Lapidus
testified on that before the Senate, and he expressed considerable
confidence that the New York State banking authorities were, in
fact, able to determine to his satisfaction whether or not those
foreign banks are operating soundly and safely, which I take it is
the import of your statement about are we engaging in some undue
risk here to allow them to lend wherever they like.
We have a comparable situation in Pennsylvania with the Statechartered banks that I supervise, that is, Girard has foreign loans;
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Girard Bank gets deposits domestically and loans those moneys
abroad, and we don't have hesitancy with examiners.
Mr. ST GERMAIN. Doesn't the FDIC also examine Girard Bank?
Mr. WHITESELL. They always examine-Mr. ST GERMAIN. FDIC examines Girard Bank, also?
Mr. WHITESELL. That is correct.
Mr. ST GERMAIN. Not only here but the foreign branches except
in Switzerland?
Mr. WHITESELL. FDIG does not examine Girard Bank. I misspoke
there. I think we do a joint examination with the Federal Reserve.
Mr. ST GERMAIN. Girard is international?
Mr. WHITESELL. No, it is a State member bank.
Mr. ST GERMAIN. It is a State member bank; therefore, the
examinations are performed by a Federal regulatory body, both
within the State of Pennsylvania and its foreign operations in the
foreign countries in which it operates?
Mr. WHITESELL. Concurrently with ours.
Mr. ST GERMAIN. So you can't draw a parallel between that and
what you refer to.
You say Mr. Lapidus said New York State supervisors he thinks
are competent. New York is an exceptional State. For State-chartered banks, I think that our experience on this subcommittee in
going to various States, examining failures of various banks, indicates to us that there is still, and I am sure you will agree with me,
some room for improvement in State bank supervision?
Mr. WHITESELL. I wouldn't argue for a minute that there isn't
room for improvement in the State system and the national system.
Now I think those banks by and large that have failed have l;>een
banks where the FDIC has also done examinations, and that has
not prevented bank failures there. So I wouldn't want to lay bank
failures at the door of the State supervisor, especially when you
look at the biggest banks that failed, like the Franklin National and
San Diego case, where they were national banks chartered with the
Federal Government and were not State banks at all, and State
authorities did not even get into those banks to examine them.
Mr. ST GERMAIN. We won't have a long debate on this, but I still
have my reservations about the efficacy of some of the State banks'
supervision in some of the States.
Mr. WHITESELL. Mr. Chairman, I don't want to engage in the
debate with you on that at all. I just would like to point out-Mr. ST GERMAIN. They are not all as fortunate as Pennsylvania.
Mr. WHITESELL [continuing]. That the biggest failures have been
nationally-chartered banks and not State-chartered.
Mr. ST GERMAIN. Because nationally-chartered banks are the
large banks, but we have had also failures on the State level in
many cases attributable to poor State supervision.
Mr. WHITESELL. Well, I would be-Mr. ST GERMAIN. I am not going to go back and forth with you all
day on this. I expressed an opinion, and you have an opinion.
Fortunately, I have the vote.
Mr. WHITESELL. I am well aware of that, Mr. Chairman.
Mr. ST GERMAIN. My time has expired.
Mr. Allen?
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Mr. ALLEN. Mr. Chairman, you are doing so well, take my time
and continue on.
Mr. ST GERMAIN. Thank you.
Mr. Whitesell, do the State supervisors establish a liaison to meet
the problem that I referred to earlier, where, if deposits are acceptable in one State and loans are made in another State through an
exchange of information?
Mr. WHITESELL. Does that secure the loan?
Mr. ST GERMAIN. No;
Mr. WHITESELL. Oh, does this occur. I am sorry.
Mr. ST GERMAIN. An exchange of information between State bank
supervisors. Let's take the example I cited earlier of New York
deposits their loans made in Chicago. Is there a liaison established
between the Illinois State bank supervisor and the New York State
bank supervisor?
Mr. WHITESELL. I suspect not in the way in which you mean that,
though there is a classification of what we call national credits, that
is, credit lines of a certain amount are established, examined, and
looked at by a kind of joint venture with the regulatory bodies in
general, not just the bank supervisors, that is, the State bank
supervisors participate in that as well.
Mr. ST GERMAIN. Mr. Lee, on page 2 of your statement, you state
the bill will be perceived as discriminatory and invite retaliationwe are hearing that word time after time after time-against U.S.
banks operating abroad.
We have asked many witnesses about this, both in these hearings
yesterday and today, and we will ask more of them in the next few
days. The question has been asked in the Senate in their hearings,
and we asked them in our hearings last year, and we find it difficult
to pinpoint even this morning with Mr. Solomon-whether or not
we ever see those statements, those memoranda, is questionablebut this subcommittee did discuss this matter with the foreign
central banks, and that is why we asked the question.
What evidence do you have that this will invite retaliation? I am
not talking about banks, but rather the regulatory authorities in
the foreign countries.
Mr. LEE. Mr. Chairman, I am well aware that your subcommittee
made a study of foreign central banks principally in Europe and
elsewhere as well, and I know Mr. Mitchell made a serious effort to
discuss the possibility of retaliation with foreign central bankers.
As I tried to bring out in my statement, there really is a
reluctance on the part of foreign central bankers when speaking
with Government officials to be completely candid. They shade
what they say, to be very polite about it. They don't want to
threaten, and I am sure that is not their intention.
We feel, and we hear, and we firmly believe, if a bill of this sort is
passed, there will be a very gradual ratcheting down and tightening
up. It won't be one day somebody standing up and saying we are
embarrassed about the United States and we are going to hit them
with retaliation. It won't come that way at all, but it will come in a
very subtle way, and we are very much concerned that over a
period of time the climate for international banking will become
less favorable than it is today.
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Mr. ST GERMAIN. So it is a feeling you have?
Mr. LEE. It is a feeling; that is correct.
Mr. ST GERMAIN. Perhaps the observation of the way an eyebrow
is tilted?
Mr. LEE. Absolutely. No one comes to us and says you had better
get to Washington and testify on this bill because if it passes, we are
going to do this to you and that to you. No one says that. There is
no evidence I can present to you.
Mr. ST GERMAIN. So it is a feeling?
Mr. LEE. It is a feeling.
Mr. ST GERMAIN. I was very fortunate; since I am French, I had a
private luncheon with the Bank of France, and we took our jackets
off, and we ate too much, but we talked a great deal, and I didn't get
that feeling in discussing this legislation with them, and that was
the primary purpose of our inquiry and our trip.
Mr. Lee, on page 7, you referred to the permanent grandfather
rights traditional in U.S. banking legislation. However, there were
divestitures required on the Bank Holding Act Amendments of
1970, and, moreover, as has been testified to earlier this morning,
on the Glass-Steagall, there was absolute divestiture required
within 1 year. So that it is not unheard of.
Mr. LEE. It is not unheard of. It is very traumatic, I think, Mr.
Chairman, you will agree.
Mr. ST GERMAIN. Of course.
Mr. LEE. There is certainly one precedent-Mr. ST GERMAIN. It is like if you get gangrene in your leg and
have to have it amputated, it is traumatic, but necessary?
Mr. LEE. That is not our perception.
Mr. ST GERMAIN. If it is considered necessary, it is traumatic, but
if considered necessary, you nonetheless have to do it.
Mr. LEE. We don't equate foreign bank affiliates with gangrene in
the leg.
Mr. ST GERMAIN. I didn't mean to imply that. Let's equate it with
something else. Eminent domain: I have a business along a highway, but they are going to widen that highway, so they take my
business away or make it an 8 lane or 4 lane with divider and, as a
result, my customers are gone. It is traumatic. I lost my source of
income, but it happens.
Mr. LEE. You are right, sir; in eminent domain it is also traumatic, yet there is an effort by the court to make the entity whole.
In this case foreign investments made over a long period of time in
this country with the expectation that the rules would remain the
same will be suddenly cut off and no recompense given.
Mr. ST GERMAIN. On page 3, you say nonmember domestic State
banks which are not insured are not subject to any Federal regulation. This may be true, but is it not true they are subject to certain
forms of Federal banking laws, for example, under the GlassSteagall Act that prohibited dealing in securities, and this applies to
noninsured State banks as well as all U.S. banks; is that not
correct?
Mr. LEE. That is correct.
Mr. ST GERMAIN. My time has once again expired, as well as Mr.
Allen's time.
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Thank you, Mr. Allen.
Mr. Hyde?
Mr. HYDE. Mr. Lee, with reference to section 8, we have heard
arguments that foreign banks that have securities affiliates have
enjoyed some significant competitive advantages over the U.S.
banks. In your experience, is this the case?
Mr. LEE. No, indeed. We feel quite the opposite. Our banks feel
that their presence in this country, even though the business they
do in this country is very minimal, is of assistance to us, not only
here but especially in allowing us access to and gaining us access in
the markets abroad.
Mr. HYDE. Mr. Whitesell, we were treated to an interesting
colloquy about the demerits of State examination versus FDIC,
Comptroller µeneral, and Federal Reserve examination. Is it your
experience that Federal bank examiners put their trousers on one
leg at a time just like State bank examiners do?
Mr. WHITESELL. I could say facetiously we require ours to jump
into them two legs at once.
Mr. HYDE. There is no infusion of genius .that suddenly happens
to a Federal bank examiner that is not available to a State bank
examiner?
Mr. WHITESELL. I think that is correct, sir. Actually, we use some
of the same schools the FDIC uses. We do not use any of the schools
that the Comptroller of the Currency puts on.
Mr. HYDE. I have no further questions, and I yield to the gentleman from Michigan.
Mr. BROWN. As I recall, Mr. Whitesell, when we were having
hearings of my subcommittee of the Government Operations Committee, it was alleged there was shopping around being done by
banks, based upon the strictness of regulation, examination, et
cetera, and isn't my recollection correct that the allegation was
made that a very substantial Pennsylvania bank switched from a
State charter to a national charter on the basis that the regulation
by the Comptroller's Office was less stringent than that of the
State?
Mr. WHITESELL. Let me say, sir, the only thing I know about that
is what I read in the newspaper, but I read in the newspaper that
was, in fact, the case.
Mr. BROWN. I wanted to bring this out because the chairman
suggested that maybe States don't do as good a job.
Mr. WHITESELL. You are correct, I think, in stating that was one
of the assertions in that hearing, and that certainly was a major
part of one or more articles that appeared in the Wall Street
Journal, and I don't think it was ever really denied by the people in
that bank.
Mr. BROWN. Wasn't that a rather substantial bank, as I recall?
Mr. WHITESELL. Yes, it was, almost $7 billion in total assets now,
the second largest bank in Pennsylvania.
Mr. BROWN. After hearing your statement and Mr. Lee's statement, as I indicated to Mr. Solomon, I haven't had a chance to go
over the £resent bill, but I presume it is substantially the same as
last year s bill, and when I asked him the question about this bill
not providing uniformity, the chairman and Mr. Solomon said it
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does provide uniformity, and I think you and Mr. Lee pointed out it
doesn't grant uniformity?
Mr. WHITESELL. I would agree it does not give uniformity. For
instance, I think we need only to point to the fact that if Pennsylvania and New York wanted to currently allow banks from each State
to branch into the other, that is possible under present law. Now, if
this bill is passed, Pennsylvania then doesn't have the same right
with respect to foreign banks that it has with respect to domestic.
Mr. BROWN. That is the point I was making and the response
from Solomon was that, oh, no, we have taken care of that. I
thought maybe this was a different version of the bill.
Mr. WHITESELL. No, I think he probably isn't as sensitive to that
as a State bank regulator would be.
Mr. BROWN. Thank you very much. I appreciate both of your
statements.
Mr. ST GERMAIN. Mr. Cavanaugh.
Mr. CAVANAUGH. I have no questions.
Mr. BROWN. Mr. Chairman, one second.
I think, Mr. Whitesell, in your statement you testified on the
Glass-Steagall aspect of this matter. It is your proposal that foreign
institutions presently functioning in this country be grandfathered
in, both as far as the institutions and the ongoing functions; is that
not correct?
Mr. WHITESELL. That is correct.
Mr. BROWN. Pending some determination of change or continuance of the policy of the Glass-Steagall Act?
Mr. WHITESELL. Our general position is that those things really
shouldn't be changed until we have had a thorough review of GlassSteagall; that is correct.
Mr. BROWN. Let me presume a little further. As I understand it,
those institutions that are engaging in the securities business are
not depository institutions as we know them, not retailers as such.
Should any grandfathering of institution and function bear with it
the complementary grandfathering restriction that they may not
engage, in effect, in a retail depository function so long as they are
permitted to engage in all the activities they are presently engaged
in that are more liberal insofar as applied to domestic banks?
Mr. WHITESELL. You are asking, should that happen; was that the
question?
Mr. BROWN. Yes.
Mr. WHITESELL. I think the position of the Conference of State
Bank Supervisors is that we would simply grandfather them as if it
exists now; we let it continue to exist.
Mr. BROWN. Should they be able to then participate in the
additional function of a retailing depository institution which they
don't engage in at the present time?
Mr. WHITESELL. I think-I just have to look to see if any of those
banks currently engage in a retail business, and I don't know
whether the answer to that is affirmative or negative. But we would
be glad to check on that and see, if you like. I think our position
would be regardless of whether they are engaged in a retail or
strictly wholesale, they should be grandfathered.
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Mr. BROWN. You still haven't answered my question.
Grandfathered as to what they are doing or as to what they are
doing plus whatever else they might be able to do under the
legislation?
Mr. WHITESELL. I think the latter, instead of the former
characterization.
Mr. BROWN. Thank you.
Mr. &r GERMAIN. Gentlemen, without objection, there will be
additional questions submitted to you in writing, and we will ask
you to answer for the record.
The subcommittee will be in recess until 9 a.m. tomorrow morning, at which time we will hear from the witnesses as listed on the
witness list which was distributed on July 12, the revised witness
list.
[Whereupon, at 12 noon, the subcommittee recessed, to reconvene
at 9 a.m., Thursday, July 14, 1977.]
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INTERNATIONAL BANKING ACT OF 1977
TUESDAY,JULY 19, 1977
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.C.
The subcommittee met, pursuant to recess, at 9:00 a.m., in room
2128, Rayburn House Office Building, Hon. Fernand J. St Germain
(chairman of the subcommittee), presiding.
Present: Representatives St Germain, Annunzio, Hanley, Wylie,
and Hyde.
Mr. ST GERMAIN. The subcommittee will come to order.
This morning the subcommittee resumes hearings on H.R. 7325,
the International Banking Act of 1977. Unfortunately, due to the
business of the House last week in connection with our deliberations on the National Consumer Cooperative Bank Act, it was
necessary, with very little notice, to cancel last Thursday's hearing
and to reschedule those witnesses for today. We certainly apologize
for the inconvenience that we realize this has caused a number of our
witnesses, particularly those witnesses who have traveled a great
distance, to express their views on the pending legislation.
In order to accommodate our guests from overseas, we are pleased
to grant their request to be heard first this morning. I do apologize
for the early hour, but in order to cover all of the witnesses
essential for us to consider, it has been necessary to begin early and
I have no doubt we will be continuing late into the afternoon today.
We will hear from the first panel-the European Economic Community panel-and the witnesses are Lord O'Brien of Lothbury,
president, British Bankers Association; Dr. Wolfgang Jahn, member
of the board, Commerzbank AG; and Paul Fabre, deputy managing
director, French Bankers Association, accompanied by William D.
Rogers, partner, Arnold.& Porter.
Gentlemen, we will hear from Lord O'Brien first.
We will put your statement, the statement of the European
Economic Community Banking Federation, into the record along
with the annex accompanying it, at the conclusion of your individual statements, and you may proceed.
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STATEMENT OF THE RT. HON. LORD O'BRIEN OF LOTHBURY,
PRESIDENT, BRITISH BANKERS ASSOCIATION
Lord O'BRIEN. Thank you, Mr. Chairman, and thank you for
giving us the opportunity to meet with you today. We apreciate why
it was not possible last week and we have been enjoying the
pleasures of Washington meanwhile, so don't worry on that
account.
Mr. &r GERMAIN. We hope you helped our economy out a little bit
despite the heat.
Lord O'BRIEN. Mr. Chairman, my colleagues and I much appreciate the opportunity you have given us to testify before your distinguished committee concerning the bill to provide for Federal regulation of participation by foreign banks in U.S. domestic financial
markets. (H.R. 7325)
May I introduce my associates. On my right, Dr. Wolfgang Jahn,
member of the board, Commerzbank, Germany, and on my left, Mr.
Paul Fabre, deputy managing director, French Bankers Association,
who is appearing in the place of Mr. Georges Smolarski, Credit
Lyonnais, who was originally to appear at the July 14 session. I am
Lord O'Brien, president of the British Bankers Association.
We three are spokesmen for the European Banking Federation,
which represents the commercial banks in the member states of the
community-Belgium, Denmark, France, Germany, Holland, Ireland, Italy, Luxembourg and the United Kingdom.
We have behind us a strong supporting panel, the names of whom
I will not give now, although I hope they may be written into the
record.
We are sure you will study with care the written submission we
have made to you.
Since we hope, all three, to speak during this 10-minute opening I
must be brief.
Your committee, Mr. Chairman, are the representatives of the
strongest economy in the world. For many years by firm support of
free trade and fair and open competition you have been largely
instrumental in bringing the free world out of the ruins of war to
greater prosperity than ever before. You have been in the forefront
of the internationalization of business and commerce. Nowhere has
this been more striking in the past 20 years than in the banking
industry where the worldwide activities of American banks have
exceeded all others. The world has benefited greatly from these
developments-never so more than in the financial aftermath of
the energy crisis which began towards the end of 1973.
We hope the United States is going to continue to encourage
freedom of development and competition in the banking industry
across national boundaries.
The banks we represent naturally have no desire to see their
present opportunities in the United States constrained by new
legislation. We know also that there are strong feelings in certain
quarters in the United States that foreign banks should be
permitted to operate in more than one State and, in the interests of
furthering international trade, this would no doubt be desirable.
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Nevertheless our banks accept that it is for the U.S. authorities to
decide how their banking system should be regulated. If further
regulation is considered necessary, our banks press most strongly
that it should be based strictly on nondiscrimination between domestic and foreign banks operating in the United States.
Even if the principle of nondiscrimination is fully observed in all
matters covered by the bill, our banks will feel that they have been
harshly treated if there is not at the very least permanent
grandfathering of all existing operations, both of branches and
securities affiliates. These operations represent much investment of
money, time, personnel and experience which we believe has
sharpened competition and benefited the U.S. economy. We can see
no good reason for bringing operations which now exist to an end
and hope your committee will agree. I would add that even permanent grandfathering will not save some foreign banks from considerable hardship.
We note that the operations of existing securities affiliates are, in
the present draft bill, to benefit only from temporary
grandfathering. This is a meaningless concession which ensures a
gradual rather than sudden death-but death all the same.
Finally, on the subject of grandfathering, so far as multistate
branches are concerned, we strongly question whether it is fair that
the effective date should be so far back as May 1, 1976, and note
with approval that the Fedral Reserve Board appears to share this
view.
Not all aspects of the proposals now before you are of equal
concern to the banks in each of our countries. But they are united
in their support of all the objections we are placing before you. I
have not covered all of them in this brief resume, knowing that my
colleagues wish to emphasize some of them in their remarks which
follow.
In conclusion, all I will say is that we have read the written
submission by the Institute of Foreign Bankers and, if we may,
would commend it to you as an excellent paper.
Now, Mr. Chairman, if I may, I will pass the word to Mr. Paul
Fabre.
STATEMENT OF PAUL FABRE, DEPUTY MANAGING DIRECTOR,
FRENCH BANKERS ASSOCIATION; ACCOMPANIED BY WILLIAM
D.ROGERS,PARTNER,ARNOLD &PORTER
Mr. FABRE. Mr. Chairman, members of the subcommittee, the
investment banking and securities affiliates of European banks play
a small but constructive role in the U.S. capital markets. They have
introduced new capital resources and healthy competition for
underwriting, trading, and market making. They have also contributed to the development of a central securities market through the
liquidity they have brought to U.S. securities markets. This is
particularly true as regards the regional exchanges such as the
Boston, Philadelphia, Midwest and Pacific Stock Exchanges. We
believe this is supportive of the procompetition policy embodied in
the Securities Acts Amendments of 1975.
In the decade during which most of these firms have been in
existence, neither we nor any of the experts who have testified
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before you, have become aware of any regulatory problems that
would suggest a need for correct legislation. Furthermore, investment banking and securities affiliates of European banks have the
status of SEC registered broker/dealers. They are under regulatory
supervision not only of the SEC, but also the NASD and the stock
exchanges of which they are members.
Due to the structural differences between the U.S. banking system, with its separate commercial banks and securities firms, and
the "universal" banking system in Continental Europe where banks
perform both functions, the practical effect of H.R. 7325 would be to
preclude effective European competition with U.S. securitites firms.
Moreover, it would force dissolution of existing securities affiliates
established with great effort and at considerable cost. On the
Continent, investment banking is exclusively undertaken by the
banks. Therefore, to exclude European bank related securities firms
from the U.S. market is to exclude Europe.
The provisions contained in section 8 of the bill, which would
grandfather existing securities activity until 1985 and thereafter
allow foreign securities affiliates to underwrite, but not distribute
or deal in securities in the United States, is not a solution. Such
partial grandfathering would permit foreign banks to take the risks
of underwriting, while denying them the freedom to distribute
securities in the U.S. market for which an issue is tailored and the
underwriting risk calculated. This, and the ability to act as a dealer
in secondary markets in the United States, are necessary, even with
important European placement capabilities for some issues, if we
are to continue as an active underwriter in your market. Moreover,
our securities affiliates would be crippled immediately upon passage
of H.R. 7325 because they would be unable to offer a meaningful
future to employees or customers. Passage of the House bill would
not be slow, but quick death for our securities affiliates as viable
entities.
We would hope that upon review, and realizing the serious
problems we have with this legislation, the committee would revise
it, preferably to eliminate section 8 in its entirety. That failing, we
would hope to see at the very minimum a full grandfathering of
securities activities existing at the present time and some flexibility
for future such activities by the very few foreign banks not already
shareholders of a securities affiliate who might like to enter into
such activity. This would not open the possibility of any significant
increase in such activity by foreign banks. It would avoid an
unnecessary arbitrary result.
Thank you Mr. Chairman, with your permission, I would now
tum the presentation over to Dr. Jahn, who will address problems
of other ·nonbanking activities of foreign banks.
STATEMENT OF DR. WOLGANG JANG, MEMBER OF THE BOARD,
COMMERZBANK AG
Dr. JAHN. Mr. Chairman, members of the subcommittee, I am
most grateful for the opportunity of appearing before you. I will
limit my comments to section 8 of H.R. 7325 insofar as this section
would prohibit nonbanking activities, other than the investment
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banking activities that have been discussed by my colleague Mr.
Fabre.
For European banks that wish to do or continue doing business in
the United States, the prohibitions of section 8 are most troublesome. We fully understand the policies of the Bank Holding Company Act; we accept them as the law of the United States; and you
may be sure that there is a separation between our banking in the
United States and any nonbanking companies in the United States
of which our banks have ownership or control of the kind prohibited by the Bank Holding Company Act.
But by accepting the law and the public policies of the United
States in the United States we still are not able to apply that law
and those policies to the home offices of our banks. These banks are
subject to the law and policies of their home countries.
We appreciate that the Federal Reserve Board has recognized
these problems of extraterritorial application. At least one of the
amendments to section 8 proposed by the Fed, namely, to exempt
nonbanking activities principally conducted outside the U.S., looks
to a solution of our problems; however this apparent liberalization
is subjected to conditions which raise genuine questions about the
sufficiency of these amendments.
But let me come back to the problems of section 8 as set forth in
the bill itself. The main problem results from the fact that, for
various historical and economic reasons, many foreign banks have
interests in industrial and commercial companies in their own
country. These companies would be precluded from making new
capital investment in the United States. Also, in the case of foreign
banks operating in the United States which have interests in
nonbanking companies already operating here, such banks would
either have to terminate their U.S. activities or divest themselves of
their holdings. Even permanent grandfathering would not avert
these adverse consequences because grandfathering applies only to
the status quo.
Let me remind you that the appointed institutional role of continental European banks in their ce>untries' economy-not an accidentally appointed role, but a role developed over a century of
deliberate governmental decisions-that the appointed role of European banks is not identical with that of American banks. It is
different in more ways than I have time to explore fully here.
But in the context of nonbanking activities it is essential to know
first that many banks-that is they are depository institutions, as
well as investment banks and brokers. As such, continental banks
acquire and sell shares in industrial and commercial enterprises.
That is part of their legally constituted business. But apart from
that, our banks were at times-and may be again-urged by their
governments, or forced by economic necessity, to acquire such
shares. Many such industrial and commercial holdings had to be
acquired by bans during the Great Depression in order to prevent
the collapse of enterprises-others were acquired at the request of
the government to prevent a take-over deemed contrary to the
public interest. In my country many of these holdings were ac,
quired as long as 50 years ago.
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And one more most significant factor must be known: European
security markets are incomparably thinner than those of the
United States, and divestiture would be impracticable and extremely unsettling.
With this background I hope you will understand why section 8 in
its present form would face us with an unacceptable dilemma:
either to attempt to sell shares in inadequately receptive markets
against our own economic interests and perhaps even against the
public policy of our own countries, or to liquidate our banks in the
United States. Either step would be destructive and would threaten
the equilibrium and the functioning of what is left of a free
international economy. During the recent recession we had to
relearn that our economies are interdependent. None of the free
industrial nations can any longer adopt policies that ignore its
trading partners and allies. We share the same fate.
Thank you.
Mr. &r GERMAIN. At this point we will put your entire statement-the statement of the European Economic Community Banking Federation-into the record.
[The statement of the European Economic Community Banking
Federation follows:]
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E. E. C.
BANKING
FEDERATION
St ate.men t
on H.R. 7325
International Banking Act of 1977
Hearings before the
Subcommittee on Financial Institutions
Supervision, Regulation and Insurance
of the Committee on Banking, Finance and Urban Affairs
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1. The Banking Federation of the European Economic Cammunity
appreciates the opportunity to express its views on H.R.
7325, a bill to regulate foreign banks in the United
States. The E.E.C. Banking Federation represents the
bankers associations of each of the nine member-countries
of the European Common Market, hereinafter referred to as
the European banks.
2. All of the European banks would be adversely affected by
the proposed legislation, although the impact on each of
them would not be exactly identical because of certain
diversities in the banking regulations of their respective
countries. To the extent that there is an impression that
the bill which the House of Representatives passed last
year, and to which H.R. 7325 is virtually identical, is
generally acceptable to European banks, the purpose of
this statement is to dispel this impression.
3. Europeans are somewhat confused at this stage as to what
United States policy toward foreign banks really is. On
the one hand, bills like H.R. 7325 aim to restrict the
activities of foreign banks in the United States. At the
same time, European bankers are constantly receiving delegations of American business and political leaders from
various states and cities of the United States - even
delegations led by Governors and Mayors - encouraging them
and through them, their clients, to expand their activities in banking and in industry, and otherwise to invest
in different American countries.
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4. While prohibiting interstate banking, H.R. 7325 attempts
to deal with the already existing multistate branches of
foreign banks by permanently grandfathering such branches.
Although it is appreciated that this is an attempt to
deal with existing branches in an equitable way, the
Subcommittee's attention is drawn to the fact that the
bill would nevertheless prohibit banks presently operating in the United States from branching in the future
and would also preclude banks not now present in the
United States from establishing branches in more than
one state. It would thus prevent European banks from
responding affirmatively to the4desires of various
states and cities that they establish themselves there.
5. Then, there is the crucially important issue of what, iin
the United States, is called non-banking activities of
foreign banks. Thia is an area in which the differences
of organization and practice in the overall financial
and industrial field between the United States and moat
E.E.C. countries are particularly sharp, and where the
proposed bill does not adequately take such differences
into account. The so-called universal banking, 1. e. full
range service banking, has been the traditional system
in continental European countries so that investment,
securities and coDD11ercial operations as well as the
owning of equity positions in non-financial institutions
are generally integrated into the activities of a single
bank.
6. With respect to securities operations, in the nine years
during which moat of the investment banking and securities
affiliates of European banks in the U.S. came into existence,
there seem to have been no problems that would necessitate
corrective legislation. 'these investment banking and securities affiliates have the status of SEC registered broker/dealers and are under regulatory supervision, not only
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of the SEC, but also the NASO and the stock exchanges of
which they are members.
7. The practical effect of H.R. 7325 would be to force the
dissolution of foreign bank owned securities firms and
prevent many European institutions from doing business
in the United States securities markets. This is so because in their home countries, the only entities that
can perform securities transactions are banks having connercial activities as well. These banks are not asking that
the American unit of a European bank be allowed to perform both commercial and secu~ities activities within the
United States. They ask only that the foreign banks not
be prohibited from establishing two separate units in the
United States, one to perform commercial banking activities and the other, investment banking activities, solely
because outside the U.S., in their home country, the parent banks perform both functions. If Europeans are not
to be excluaed from the American securities market altogether, it is the European banks which must have the
opportunity to establish securities operations because
the simple fact is that on the Continent no one else
engages in this business.
8. The United States, as a matter of public policy, seeks
vigorous competition in the securities field. One effective way to encourage such competition is to permit European securities operations in the U.S. And the only way
to achieve this is to allow European banks to establish
American securities affiliates. It should be borne in
mind, of course, that total turnover in U.S. securities
by E.E.C. banks is of very modest size relative to the
total U.S. market.
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9. The provisions contained in Section 8 of H.R. 7325, which
would allow foreign securities affiliates to underwrite,
.but not distribute or deal in securities in the United
States after 1985, are unrealistic. This 1985 cutoff date
- or partial grandfathering - would mean that foreign banks
could continue to take the risks of underwriting, but lose
their ability to resell the underwritten securities. Without the freedom to distribute securities in the United
States market for which an issue is tailored and the underwriting risk calculated, as well as the ability to act as
a dealer in secondary markets in the United States, it is
impractical, even with important European placement capabilities for some issues, for those firms already established to continue as active underwriters in the United
States market.
10. Existing European banks' securities activities in the
United States would be crippled immediately upon passage
of such a bill. With a cutoff date of 1985, they would be
unable to offer a meaningful future to their customers or
to their employees. In short, passage of this bill would
not be slow, but quick death for existing European securities affiliates as viable entities. Limited grandfathering
is no grandfathering.
11. However, even with unlimited grandfathering, the bill would
close the door to new continental European securities operations in the United States because no one else but banks
are in the securities business in most European countries.
Passage of the bill as presently worded means a decision
effectively to keep Europeans out of the securities
business in the United States. Thus what is supposed to
be equal, national treatment is in reality unequal and
discriminatory.
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12. As regard~ the other aspect of non-banking activities,
particularly industrial investments, the impact of the
bill presently before the Subcommittee would be extremely disruptive. While it purports to permit grandfathering
of banks' participation in non-banking activities acquired
prior to December 4, 1974, it would prevent many European
companies from establishing industrial plants and commercial operations in the United States. This is so, because
for various historical and economic reasons already referred
to, many foreign banks, in their own country, have interests in industrial and commercial companies. These companies would be precluded from making new capital investment in the United States. Also, as section 8 of the bill
is now worded, foreign banks operating in the United States which have interests in non-banking companies already
operating there, would either have to terminate their
United States activities, or divest their holdings. Even
permanent grandfathering could not cope with the problem
because grandfathering assumes a static situation and does
not allow for any changes in existing investments or permit new investments. T~e result of H.R. 7325 would be completely contrary to the efforts to attract European investment to the United States which, as we understand it,
is current federal policy and the policy of individual
states.
13. The bill would also produce the serious result that United
States law would, in effect, apply to European banks and
corporations in their own country. This occurs, of course,
if a European bank that does business in the United States
wishes to invest or expand its investment outside America
in a foreign company that happens to be doing business in
the United States. Such an investment would, for all practical purposes, be prohibited by the bill~ Thus, the bill
would have an indirect extra-territorial effect and create
a conflict with the doimrst.ic laws of sE!veral continental
countries.
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14. We believe that European banks already established should
be permitted to continue to operate in the Unit_ed States,
in the manner in which such activities are now carried on.
We do not see why there should be a December 1974 cutoff
date, as there is in the bill. The European banks that
have entered the United States in commercial banking, investment banking, or both, have done so in good faith.
Thus it is unfair and unjustified to destroy their existing interests. Even full grandfathering, however, would
not solve the problem of the extra-territorial impact of
this bill and the discouragement it would create for
future European investment in the United States.
15.There is attached to this statement a fuller analysis of
Section 8 of the International Banking Act of 1976 (which
is identical to Section 8 of H.R. 7325) prepared by the
E.E.C. Banking Federation for the Senate Subcommitte on
Financial Inst·i tutions and which describes in fuller detail our views on the non-banking provisions of the bill.
16. As regards both the securities and-industrial participation aspects of European banks, the Federal Reserve Board
has on June 1, 1977 offered amendments which contain some
elements improving the bill; but they are not sufficient
to meet many of the concerns discussed in this paper and
raise new complex problems.
17. There are other reservations which the European banks have
concerning H.R. 7325. Among these are the following:
93-031 0. 77
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a) The provisions authorizing the Federal Reserve Board
to impose reserve requirements on foreign banks are
in effect a denial of equal treatment. While federally chartered U.S. banks are subject to such requirements, State-chartered banks do riot have to be. American banks would thus have an option which is to be
denied to foreign banks.
bl The provision requiring federal charters for new
foreign branches is also discriminatory because not
all branches newly established by American banks will
be under the same requirement.
c) Requiring surety bonds or a pledge of assets with the
Federal Deposit Insurance Corpora.tion could also be
said to be discriminatory, since FDIC-insurance is
optional for many American banks and is, indeed, because of its 40.000 dollars limitation irrelevant for
the wholesale operations of foreign banks, which is
their major activity.
d) The citizenship requirements in sections 2 and 3 of
the bill for directors of national banks and Edge Act
corporations remain much stricter than in most countries in the European Community.
18. The Subcommittee's attention should also be invited to the
various treaties of friendship, commerce and navigation
between the United States and other countries. These treaties provide that each party must treat enterprises controlled by nationals of the other party in. a: manner no
less favorable than that afforded its own _nat;i.onals. If
one looks behind the letter of H.R. 7325'.~nd examines the
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business and structural realities in some of the European
countries, a serious question arises as to whether H.R.
7325 is consistent with existing treaty commitments.
19. Aside from the major problems which European bankers find
with H.R. 7325, they are also aware of the debate taking
place in the United States over possible reform of the
international banking system and of the various proposals
which exist in this regard. European banks thus see themselves having eventually to adjust to further changes,
beyond those proposed in H.R. 7325 - changes which in
certain areas will perhaps move in different or diametrically opposite directions. For example, it has been suggested that it would make economic sense for American banks
to be permitted to branch interstate. While it would be
improper for us to participate in the internal U.S. debate
on bank reform, we cannot help wondering whether much uncertainty and disruption could not be avoided, if the subject of foreign banks were dealt with in the global context of the proposed overa.11· reforms.
20. In conclusion, the E.E.C. Banking Federation feels certain
that it is not the intention of the bill before the subcommittee to exclude its banks and major companies from
investing or trading inside the United States market. Yet
this would be its ·effect mainly because of i1's failure to
take adequately into account the financial and industrial
structures of Europe. In this interdependant world in which
the United States and Europe must cooperate for their mutual economic well-being, ways must be found to adapt the
respective institutions and traditions to each other's
needs and to avoid discriminatory legislative constraints.
Banking legislation on both sides of the Atlantic should
be based on the principle of reciprocity.
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ANNEX TO STATEMENT
ON H.R. 7325
PRESENTED ON BEHALF OF
EEC BANKING FEDERATION
The attached comments on Section 8 of the International
Banking Act of 1976 were prepared by the EEC Banking
Federation and presented last year to the Subcommittee
on Financial Institutions of the Banking, Housing and
Urban Affairs Committee of the United States Senate.
Since H.R. 7325, the International Banking Act of 1977,
is virtually identical with the Act passed by the House
of Representatives in 1976, these comments remain applicable. They are offered as a constructive contribution
in the belief that some amendments to alleviate the
problems outlined would not conflict with the spirit of
the legislation now under consideration.
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COMMENTS ON SECTION 8
4. Section 8 of the International Banking Act of 1976 applies
the restrictions of the Bank Holding Company Act of 1956/
1970 to the non-banking operations in the United States of
foreign banks which control branches, agencies or commercial
lending companies in the United States. It requires that
they terminate all non-banking activities as of December 31,
1985, except that existing industrial participations may be
maintained under certain conditions and that foreign banks
which have subsidiaries or affiliates engaged in underwriting may continue to underwrite after that date if they
do not sell securities in the United States. To qualify to
continue to underwrite, such subsidiaries or affiliates
must have been estaulished by
~ecember 3, 1974, or
acquired pursuant to a contract entered into before or on
that date.
5. We respectfully submit the following comments on the effect
the proposed Section 8 of the International Banking Act of
1976 would have on the non-banking activities and the
securities operations of European banks.
I. Industrial participations of foreign banks and foreign
Bank Holding Companies
6, We generally have no objection to the application of the
Bank Holding Company Act to the extent that it limits
associations between U.S. subsidiaries or affiliates of
foreign banks and U.S. subsi~iaries or affiliate~ of
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foreign firms. A problem would arise only if Section 8 would
impose the provisions of the Bank Holding Company Act on the
associations outside the United States which exist between
foreign banks and ~oreign firms and which are established in
compliance with the legislation in their own country.
7. As it is worded, Section 8 would definitely preclude the
operation in the American market of:
a) all the foreign banks which, in their home country and
in conformity with their country's legislation, retain
an industrial ownership in non-banking firms established,
or to be established, in the United States or arerontrolled
by holding companies also controlling such firms;
b) all non-banking firms which, in their home country and in
conformity with their country's legislation, are controlled
by a bank which has a unit in the United States, or by a
holding company also controllin~ such a bank.
8. In other words, if Section 8 were not modified, even with a
permanent grandfathering, the only foreign banks or firms
which could maintain or establish units in the United States
would be those ba~ks or firms from countries which have the
same legislation as the United States - as far as industrial
connections are concerned - or banks or firms from other
countries having different legislation but which voluntarily
forego the benefits of such legislation.
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9. In the countries where they are authorized, such connections
exist generally between major banks and major firms which,
owing to their size, are among those which may wish and
which have the means to establish units in the United States.
These banks and firms are therefore faced with the following
dilemma: They must
- either waive their national structures in order to establish
units in the United States - a harsh requ1rement and
generally highly impractical;
- or, while maintaining their domestic structures, give up
either for the bank or for all the industrial firms belonging to the group - any prospect of establishing units in
the United States.
10. The consequences mentioned above would, of course, immediately
affect those foreign banks already established in the United
States.
11. Therefore, the provisions of Section 8 have to a large extent
extra-territorial implications which consequently create a
very serious conflict between the American legislation and
that of a certain number of European countries.
12. European banks consider that such an extra-territorial
application of the Bank Holding Company Act is neither
fair nor necessary and that it gives rise to the most
serious difficulties.
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13. It is generally accepted that any foreign bank unit must
comply with the host country's legislation for all its
operations in that country. On the other hand, in most
countries and especially in Europe, the banking legislation
applicable to foreign banks generally respects the parent's
legal status and accepts that this status is drawn from
different legal principles. These countries are aware that
such differences at the parent's level may have certain
consequences for the subsidiaries or branches established
in their territory. TheJ however consider that, provided
the banks comply witn the host country legislation for their
operations in that country, the differences existing between
the legal status of domestic banks and that of the foreign
bank's parent cannot seriously affect the operations of the
foreign banking unit in the host country and that it is
therefore unnecessary to take them into consideration.
14. Compliance of the foreign banking unit's operations in the
host country with the host country's legislation, together
with the host country's non-interference with the domestic
legislation which governs the foreign bank's parent, are
the general foundations on which all international banking
networks have been created and have developed for the common
good of all the countries concerned. Of course, any country
may deny a foreign bank access to its territory if it
believes - after due review of the specific features of
the bank - that it is not trustworthy. But to deny a bank
access to a country on t~e grounds thet it has at home a
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different legal status whose consequences are mainly felt
in another country would be - in relation to the accepted
custom - a quite new development .and a most dangerous
precedent.
15. Such a precedent should also be avoided because it does not
seem to be, in the specific case of non-banking connections,
a practical solution to the problem of relationshi~ between
banks and their industrial clients.
16. First of all, it is well-known that any industrial firm
established in a foreig~ country tends to look to the
bank it uses in its home country, if this bank is also
present in the same foreign country; or, if such is not
the case, to another bank from its home country. It is
also well-known that this trend rarely results in the
establishment of exclusive relationships, because the
foreign firm nearly always requires the services of the
host country's banking syste~. The fact that the foreign
bank and firm belong to the same financial group does not
give rise, in the foreign country where both are established,
to any substantial difference from this pattern.
17. Secondly, why give more importance to the legal relationships between the banks and firms of a foreign group than
to the financial relationships that exist between any
industrial firm and a bank? Such financial relationships
are often more important since the bank, if it were to
withdraw its financial support, could place the firm in
a difficult position.
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13. Thus, the provisions of Section 8 which deal with nonbanking activities do not necessarily prevent or put an
end to the practical problems caused by financial and
personal relationships between banks and their industrial
clients. They at best further one method of enforcing
principles, which the United States is legitimately devoted
to, but which are not acknowledged, at least to the same
extent, in many other countries of the free world.
19. Certainly, a foreign bank holding company created in the
United States should abide by the methods used in the
United States. But in the United States, the coexistence
of a bank and a firm whose connections are e•ablished in
a foreign country which legally authorises them reflects
neither a violation, nor even an iqnorance of the principles
of American legislation. In so far as it does not give rise
to disturbing effects
in practice - and we have seen that
such is not the case - it only adds to all the specifically
national characteristics that the bank and firm retain in
the host country, another feature whose importance should
not be overestimated.
20. The extensive application of the Bank Holding Company Act
to industrial ownership that foreign banks may retain does
not therefore seem necessary either in order to protect
the principles of American legislation or to prevent
situations likely to threaten the interests of the United
States.
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21. Conversely, such an extensive application would have
extremely re~rettable consequences on the development
of the economic relationships between American and Europe.
As already pointed out, the banks and the firms which
would be affected by Section 8 are among the major banks
and industrial firms in several European countries. Since·
they generally cannot contemplate waiving their domestic
structur~s in their own country they would be unable to
establish or to carry on their activities in the United
States, which is precisely the country in the world where
they have the strongest incentives to become established.
22. Taking into co~ideration the importance of the American
market, it is unnecessary to emphasize the important and
serious distortions - as far as competition is concerned
which would arise at the international level between the
banks or the firms which would not have access to this
market and those which would. In this way, the implications
of Section 8 are going much further than banking policy;
they are also dealing with foreign investment policy as a
whole. In fact, it is the frail balance presently existing
in internatiooal competition, especially between the United
States and Europe, which may be gradually but deeply affected.
23. The European banks are convinced that the Congress of the
United States does not mean to go so far. Consequently
they respectfully ask Congress to reconsider - after a more
exhaustJve review of thi problem - the provisions of
Section 8.
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24. Even permanent grandfathering of the prior situations does
not solve the problem. The only fair and convenient solution
would be to apply the Bank Holding Company Act exclusively
to the legal relationships established in the United States
and not to take into consideration those relationships
established outside the United States between foreign banks
and non-banking firms in accordance with their domestic
legislation.
25. The European banks are convinced that modifying Section 8
to the extent referred to above will not be prejudicial to
the interests of American banks or to the American economy
as a whole and that it will avoid important ,nd serious
problems in the economic relationships between America
and Europe.
II. Securities operations
26. Our comments concerning the application of the Bank Holding
Company Act to foreign banks which have in the United States
both a commercial bank and a unit engaged in securities
operations are similar to those comments dealing with other
non-banking activities expressed above.
27. As a practical matter, the consequences of such an application,
though limited to banking and accompanied by a nine year
phasing-out period, would also raise problems for foreign
banks far Qut of proportion with the practical difficulties
sought to be addressed by this legislation.
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28. The Glass-Steagall Act, as summed up by Congressman Rees
before the House of Representatives, was aimed at keeping
American commercial banks' resources for the purposes within their own sphere and at avoiding their being used through subsidiaries - to investment in securities likely
to prove too risky an investment. Many other countries,
especially those in Europe, were also concerned with these
problems. Most of these countries adopted less sweeping or
different measures because they were better adapted to their
own domestic situation.
29. It is fair that the American legislation should not allow
the American unit of a foreign bank to perform both commercial
banking and investment banking activities. This would indeed
be a formal violation of U.S. law. But inversely, if the
banking units are quite separate, as in the case of two
subsidiaries or of a subsidiary and a branch, and if these
units have no inter-relationship whatsoever other than those
existing outside the United States at the foreign bank's or
a foreign holding company's level, there does not seem to be
any formal violation of the Glass-Steagall Act, at least
according to the accepted custom applied in Europe to a
problem of this nature. It would be sufficient to establish
clearly the total separation of the two units. Indeed, with
the full agreement of the competent American authorities, a
number of foreign banks have already established securities
affiliates in the United States.
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30. In order to justify the application of the Bank Holding
Company Act abroad, it has also been argued that the
foreign bank, with a commercial bank and a security
affiliate at its disposal in the United States, would
have a competitive advantage in the American market over
other, American banks.
31. This assertion does not appear to be justified. It is not
the foreign bank which is operating in the Unit~d States,
but its two banking units; both units are c9mpletely
separate. The unit with the status of a commercial bank
competes with other American commercial banks; the foreign
investment banking unit competes directly with American
investment banks. Granted, some customers of one unit may
tend to also become customers of the other, but obviously
this cannot go very far.
32. On the other hand, as American legislation is more restictive
than most European legislation in this regard, the rule of
equal treatment applied in the same way on both sides of the
Atlantic does not guarantee, as it should, a fair and equal
reciprocity.
33. If investment and commercial banking were as separate in
Europe as they are in the United States, both European
Commercial and investment banks could establish units in
the United States without violating the laws of the United
States. Reciprocity would be complete because European
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countries permit American investment and commercial banks
to operate in their countries. But due to different laws
in European countries, securities operations are generally
performed by banks which have a commercial bankin~ activity.
It would therefore be difficult for them to c·ease commercial
banking operations in the United States so that they could
establish investment banking operations there. It they could
not establish or maintain investment activities in the
United States, the U.S. investment banking market would be
closed to many banking units representing an important
section of European investment ~anking, while European
countries would still be open to i~erican investment banking.
After all, foreign banks would be prohibited from doing in
the United States what u.S. banks arc permitted to do in
Europe. Therefore, the reciprocity which has hitherto
existed would be seriously impaired.
34. As a matter of fact, by restricting in such a way the U.S.
investment banking market for foreign banks, one would
practically reduce competition in that market, whereas
the constant trend of the U.S. Legislation - such as the
1975 securities acts amendments - is to maximize competition.
35. Neither the phasing out period provided for in Section 8,
nor the possibilities it allows for certain activities
after Qecember 31, 1985, seem satisfactory.
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36. In the first place, the operations which will continue to
be authorized will not produce enough profits for the units
concerned. These banking units would immediately be faced
with the problems of a bank which is known - ~Y staff and
customers - as having no ~rospects whatsoever in the future.
Therefore even these operations will disappear. The question
for European banks will not be to terminate some activities,
but to close their units long before the deadline. In fact,
they will have to close as quickly as possible in order to
avoid losses in addition to those inevitably arising from
divesture.
37. Therefore, the measures provided for cannot in any way be
presented as achieving the results of a real grandfather
clause. While the Congressmen who passed the bill certainly
meant to achieve this aim, the actual consequence of Section
8 will be a harsh dismissal. The prejudice caused to the
banks concerned would be most unfair, all the more because
they started their activities in the United States in good
faith and in full compliance with American law.
38. As far as both securities operations and industrial ownership are concerned, the solution which would best reconcile
the national principle of equality of treatment and the
international principle of reciprocity, would be to adhere,
for foreign banks, to a purely territorial iflterpretation
of the Bank Holding Company Act.
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39. European banks are convinced that their present investment
banking activities do not represent an excessive share of
the American market. They are also convinced that by
operating through separate units on the commercial banking
and the investment banking markets they do not imperil
either fair competition or the soundness of banking
operations in the United States.
93-031 0 - 77
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Mr. 8'r GERMAIN. I would like to state that this subcommittee,
along with staff, did in fact take the time during one of the hottest
Augusts on record in Europe 2 years ago, to go to the Central Bank
of Europe during the congressional August recess and speak with
the Central Bank of Europe relative to this legislation, to visit with
our American banks who are present in many of the European
countries.
I assure you what the subcommittee has undertaken in this area
has not been taken in a manner that is not cognizant or that has
not attempted to be as cognizant and as sympathetic as possible to
the interests of the foreign banks who have established their
presence in this country and who might want to establish a presence in this country.
By the same token, we also are dealing with our own domestic
banks.
Now, in the statement last night when I read the plea about
mayors and Governors and businessmen going to European countries asking that businesses and banks establish an estate, frankly,
gentlemen, that plea isn't that overriding because there are a
number of factors which are responsible for that.
I would certainly state that there is definitely an amount of
sincerity involved. By the same token, it makes for good headlines
at home, particularly when reelection time comes around for the
Governors and the mayors.
If we in the Congress were to be guided by the desires of mayors
of large cities, small cities and Governors of States-all on a very
legitimate basis-I think you would find that our trade with the
European Economic Community would be chaotic because whenever a particular industry in Europe might be producing and
exporting to the United States an item that would be in competition
with that being produced in one of those States, they would immediately insist upon retaliatory practices so that the imports from
Europe in competition with the products being produced in their
States and large cities might be excluded to eliminate the
competition.
Fortunately, we in the Congress are here to exercise an overview
in the best interests of the country as an entity and in the best
interests of trade with our friendly nations. We must keep that in
mind and understand that the actions of mayors and Governors are
not the dominant factors, but rather the conclusions reached as to
what is better for our Nation as a whole.
I have a series of questions here that could be answered by any
one of you. I will ask one of the three of you to undertake the list.
In a few instances, however, I will refer to Lord O'Brien directly
and I imagine he might want to address the questions himself.
In the conclusion of the statement you gentlemen state the bill
fails to take into account the financial structure of Europe and
ways must be found to adapt institutions and traditions to one
another's needs.
Now, you must help us to understand this view. Do you mean
that we are to permit EEC banks to do business in the United
States in te:rms of their needs and traditions or should EEC banks
adapt their business to the financial and industrial structure of the
United States and adjust to our needs and traditions?
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Lord O'BRIEN. Mr. Chairman, may I attempt to answer that
question?
Mr. ST GERMAIN. Surely.
Lord O'BRIEN. I think we would all accept that banking business
conducted as a visitor in any country must be conducted in accordance with the regulations and laws of that host country.
Speaking for the United Kingdom, we would certainly expect any
foreign bank coming to the United Kingdom to accept our laws and
our ways and we don't in any way wish to contest your undoubted
right to require the same of any banks here.
All we do say is that in the interests of promoting freedom of
competition and the international work of banks, if those laws can
be framed in a way which encourages banking rather than discourages it, that is very much to our taste.
Mr. ST GERMAIN. I certainly must agree with you that we in no
way in this legislation wish to discourage the very welcome presence of foreign banks in this country. That is why we are happy to
have your contributions.
Now, Lord O'Brien, in this instance during the January 1976
Senate hearings, the following exchange took place between yourself and Senator McIntyre.
Senator McINTYRE. Would you agree the Federal Reserve does have a legitimate
concern over the impact of foreign banking operations in this country on the conduct
of domestic monetary policy?
Lord O'BRIEN. Certainly.
Now I ask you, Lord O'Brien, would your reply to that question
today be the same as it was in January 1976?
Lord O'BRIEN. It can't be otherwise, Mr. Chairman. I am a
lifelong Central Bank person and I must recognize the overriding
authority of the Central Bank in any country. Of course, pur
country is different from ours. You have a dual banking system; you
have State law and Federal law which we don't have. In my country
there would be absolutely no doubt the Central Bank has these
functions and must be enabled to carry them out and I have no
question that is also true in the United States.
Dr. JAHN. Obviously none of us would dream of denying the right
of a Central Bank system to control its operations in the working of
the system. However, the European system is different from that of
the United States. We have observed that the Federal Reserve
System of this country conducts open market operations.
It has been said the foreign banks are not subject to reserve
requirements. Although the reserves are not kept with the Federal
Reserve system, all of our banks operating under State charters are
maintaining the same financial reserves in some States in the same
amounts that the Federal Reserve would require. They are also, of
course, dependent on the whole regulatory structure which requires
the States to go along with certain overall rulings.
In addition, all funds which our banks bring in from abroad to the
extent they are good assets-that is, in U.S. dollars-a certain
amount would be subject to a reserve requirement with the Fed.
Essentially what I am saying is, we not only do not deny the right
of Federal Reserve control, but in fact the Federal Reserve does
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exert control over us-all we do is operate a State bank in the same
way other e.tate banks would operate and no more.
Mr. 8'r GERMAIN. Lord O'Brien, referring to the statement submitted and which I read last night, you state:
To the extent there is an impression that the bill which the House of Representatives passed last year in which H.R. 7325 is virtually identical and acceptable to the
European banks, the purpose of this statement is to dispel that impression.
Now, I must as an individual agree with you that there was such
an impression based upon previous testimony in January 1976
before the Senate Subcommittee on the Federal Reserve bill S. 958.
At that time you made the following statement:
In general, the Federal Reserve bill is one which, if it were to become legislation,
would make the position of foreign banks in the United States of America not too
uncomfortable.
Now, the Fed, as testified both last year and this year, does not
view the bill as substantially different from its own legislative
proposal. What has occurred in the last year and a half might have
made the EEC banks more uncomfortable with the legislative
proposal before us today.
Lord O'BRIEN. As I say, while we are a delegation representing
the banks of the nine nations of the European Economic Community as a whole, the effect of this legislation now proposed on the
banks in each of our countries is somewhat different. For my part, I
would say that the bill now before you, if it were modified along the
lines proposed by the Federal Reserve, by Mr. Steve Gardner the
other day, would certainly not make the British banks too
uncomfortable.
I think it would still leave some of the German banks and the
French banks less comfortable than the British banks because they
have a different type of business in this country.
Mr. 8'r GERMAIN. Gentlemen, in your statement you assert you
would object to mandatory deposit insurance. Am I correct in that
impression?
Lord O'BRIEN. Yes.
Mr. ST GERMAIN. How do you view the situation in California
where a number of EEC banks have established agencies, where
foreign banks are not allowed to accept domestic deposits unless
they can obtain deposit insurance? Do you feel this is a discriminatory act on the part of the State of California?
Dr. JAHN. Mr. Chairman, I think we ought to make a basic
distinction. Those banks, branches or subsidiaries operating in the
United States which do retail banking, which ask for everybody's
deposits, ought to be members of an insurance system and I do
think that some States require them to be members. In most cases
they realize that they have to be members anyway because they
just wouldn't get the man in the street to place deposits with them
otherwise.
However, the case is different with other types of banks which sit
up on the 40th story of some big building and haven't the machinery to do retail banking and don't want to do it.
My own bank, for instance, has operations in New York City and
Chicago and has an explicit policy not to solicit small deposits nor
to offer small loans.
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We do not have the technical machinery to cope with retail
deposits, and we don't intend to compete with the local banks for
this business. We solicit large deposits; one, five, ten or twenty
million dollars, from big corporations.
Mr. ST GERMAIN. Would these be, in many instances, compensating balances?
Dr. JAHN. Absolutely. We abide by the rules generally applied in
the country by the leading banks of the country. We would hope
that we get big deposits.
Now, if we go bust, the big corporation which has $10 million on
deposit with us would be compensated $40,000, which we think is
perfectly meaningless. As a matter of fact, our own deposit insurance system at home is probably more effective for the big deposits
because it covers far larger amounts than could be covered by FDIC.
Those banks which do retail business in the United States could
legitimately be asked to be members of the system, but those that
only may have a few small depositors, but otherwise do nothing but
wholesale business-and most of them. do not even have their
offices at street level-should be excluded or have the option to
belong.
If we had a certain number of individual deposits in the United
States, I wouldn't mind having them insured the same way as the
others, but the structure of our bank is fundamentally different.
Mr. ST GERMAIN. I must state to the panel this is probably one of
the more difficult areas in this legislation because there is much
disagreement by proponents of the legislation as to how this should
be handled.
You state that in your country you now have deposit insurance
that is more effective. In other words, you cover a larger portion of
the deposits than is covered by FDIC?
Dr. JAHN. Yes, sir.
Mr. ST GERMAIN. Could you tell the subcommittee-Dr. JAHN. It is very simple. We had some international mishaps;
one major breakdown of a bank in Germany. Following that, we
worked under a system where all the banks pay a large amount into
a joint fund by which up to two-thirds of their equity would be
covered for losses which might occur.
If somebody has $20 million with us, he might be fully covered-I
am sorry. One-third of our equity. In the case of my bank, that
would be roughly six or seven hundred million deutsche marks.
That would be the limit that would be covered. To all practical
purposes, everybody would be.
Mr. ST GERMAIN. You say one-third of your equity. How would
that apply as to the depositors?
Dr. JAHN. Each one. Mr. A, Mr. B, Mr. C. Each would be fully
covered up to the individual total of one-third of our total equity.
That is a very large amount. For all practical purposes, I don't
think we have any difficulty.
Mr. ST GERMAIN. The fund was recently established.
Dr. JAHN. In the last two or three years. It is still being built up.
Mr. ST GERMAIN. Should there be a major-let's hope it never
happens-but, God forbid, a major catastrophe, and should the fund
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not have sufficient assets to cover that for the other banks to
participate, is that how it is structured?
Dr. JAHN. We have several things. We have first the obligation of
all the member banks to pay in additional amounts if needed. In
addition, we have under the auspices of the Central Bank an
additional system under which banks which are not necessarily
bankrupt but in difficulty would be supported by providing liquidity
for them temporarily to get them straight again.
This system is still being built up and includes all our depositors
in the United States, by the way, so people who deposit money with
us in this country would be equally covered. I admit this is not a
universal system and doesn't apply to every country, but what does
apply is that most foreign banks would not solicit small deposits
and if they do they should be members and in fact most of them are
members.
Mr. ST GERMAIN. This has been very helpful.
I wonder if you gentlemen could put your collective brilliant
heads together-and I say that very sincerely-and give us some
concrete suggestions as to how you might like to see this handled?
You state at the present time you are not accepting any street
deposits from individuals. However, here is one of our concerns.
There is nothing that guarantees that a year, two years from now,
you might not change your policy and decide, "Well, we are going to
go out and see if we can't solicit some of these deposits."
Of course, with the structure the parent bank has, this is encouraging to us, but nonetheless we still have to look at the possibilities
that may occur. Frankly, with this deposit insurance, which you
now have in effect, it also reduces the problems-if this was in
existence in all the other countries it would make our deliberations
much easier because one of the problems we have is, "Oh, sure, we
will insure the deposits here through FDIC. However, FDIC has no
control over the parent."
If the parent should have problems, there is no control by FDIC
and there is nothing they can do to oversee this and, as a result
thereof, you might say that FDIC, with no control whatsoever, finds
the fund called upon to pay off these depositors. It is not an easy
area.
Whatever assistance or suggestions you can give us in this area
will be ar,preciated deeply.
Lord OBRIEN. Thank you very much, Mr. Chairman. We would
greatly appreciate the opportunity of putting in a paper which we
hope might make suggestions which would meet your very legitimate concern in this area, and also we feel deal fairly with your
visiting banks, if I may so describe them.
Mr. ST GERMAIN. That would be very much appreciated. Frankly
we would like to receive this at the earliest possible date.
Dr. JAHN. We agree with the FDIC proposal put forward last year
which creates a system under which a voluntary membership would
be possible. I think nobody ever denies that the foreign banks abide
by whatever is requested by the Federal regulatory authorities. I do
think that if the Fed or FDIC would say: "Now, you have 5 percent
or 7 percent of your deposits in amounts under $100,000; you must
become a member," we at least would do so. I think that could be
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said for all foreign banks, looking at past experience, and at how
they have behaved toward your regulatory authorities. I don't think
any bank working in the environment of a guest country would
consider not doing what its regulators request.
Mr. ST GERMAIN. I want to make it clear to all witnesses who
have appeared and who will appear, in introducing this legislation,
none of us want to convey the impression that there have been any
foreign banks functioning in this country in an insidious manner.
That is not the point. The point is, the Fed has requested more
regulatory powers.
The other factor is that we want to ensure there is competitive
equality between the foreign bank presidents and our domestic
banks. On the question of interstate banking, I think everyone is in
agreement if there should be a change in the legislative picture for
our domestic banks, this would automatically be accompanied by a
like change for our very welcome foreign banks functioning in this
country.
No one is trying to exercise any prejudice here. There is no
reason to. Your banking interests here have been helpful to us and
we want to encourage you to stay on and to participate with us. Are
there questions? Mr. Wylie.
Mr. WYLIE. I am sorry I was a little bit late. You may have
answered this question.
I was in Europe with the chairman of the subcommittee and
talked to various bank officials in Europe about this bill. When I
came back for a television interview the question was put to me:
Why shouldn't foreign banks operating in the United States be
treated the same as domestic banks?
What would your capsulized answer be to that? I realize it may be
a very elementary question for you, but that is the kind of a
question we are asked to explain to the public.
Dr. JAHN. I think we are all in agreement on equal treatment.
The problem is that equal treatment for essentially different things
is a difficult matter .to achieve. First of all, we, of course, ought to
know what order of magnitude we are discussing. Latest statistics
show that all foreign bank branches in the United States of America have about .7 percent of the total deposits of the whole banking
system in their accounts. If you include all subsidiaries, and agencies, in California and elsewhere, of foreign banks, you arrive at just
under 2 percent out of a total of roughly $750 billion total deposits
of U.S. banks.
Mr. WYLIE. But that is increasing.
Dr. JAHN. It is increasing. If you consider the last 3 years, foreign
bank assets increased by 1 percent from 6 percent to 7 percent. If
you take the total bank assets, not just of the big reporting banks,
but the total of the entire banking community, and compare them
with the total assets of foreign banks you will observe an increase to
7 percent from 6 percent when the Fed bill was introduced.
I think we are really looking at something quite limited. Compare
$66 billion, which I think are the total assets now with American
assets abroad, which are over $320 billion. I don't argue against any
legislation, but I do say we are talking about a limited field of
interest to a few people.
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Now, on equal treatment, we haven't asked for any privilege. We
have, in fact, used the existing legislative background to operate in
State-licensed systems where we thought we would follow our
customers coming to the United States-and a great many have
come over these last years and invested in the United States. It
went the other way around over long years when American banks
followed American industries to Europe. We have 35 American
banks in our country.
We used the State system and the opportunities offered by
certain States that actually changed their laws to permit foreigners
to operate in their States. We are not national banks or member
banks, but State nonmember banks. If we were unable to be that,
there would be two consequences. First, we couldn't follow our
customers, some of whom are American corporations with whom we
are friends on the European side, and, setond, the possibility of
major cities in the United States becoming more international
centers would be precluded. New York would- probably be the No. 1
choice and everybody who comes here would go to New York, and
other places would probably be ignored because the relative sizes
are such that people might tend to stick to New York and not go
elsewhere, to Chicago, or Atlanta, any other place. This would be
difficult.
Mr. WYLIE. Apparently there isn't an_y really simple answer to
the question, but when you talk about a :i;66 billion operation in the
United States, that isn't exactly peanuts any more, regardless of
percentage. What we are really talking about is reciprocity versus
national treatment. Isn't that it?
Dr. JAHN. Yes.
Mr. WYLIE. As long as the domestic banks are similarly restricted,
how canlou say this bill does not represent equal national treatment an is discriminatory?
Dr. JAHN. Apparently it is the view of the States that they should
be free to invite whomever they please to invest on the nonmember
level. Even in the proposed law, the Fed doesn't ask us to become
full members, which would automatically give a number of answers
to other structural problems. The dual banking system exists. It is
not our invention. We have used the framework in which the
American bank system operates, no more than that. We never
asked for anything beyond that.
Lord O'BRIEN. Mr. Chairman, could I say one word? I wouldn't
want the record to go forward without a reply from me to your very
welcome remarks about the nature of your inquiry and what
motivates it. I am quite sure it is not motivated by prejudice, and
from my own observation it has been perfectly obvious it has been
conducted with extreme diligence, both within the United States
and in many countries abroad, which you have visited-and I am·
quite sure that you are attempting to find an answe:r:, which does
the things which need to be done for the U.S. authorities, while
being fair to those to whom they are done and we are most grateful
for that.
Mr. 8'r GERMAIN. In other words, we are trying to find medication
that is as palatable as possible. We are getting the chocolate syrup
and strawberry flavoring and everything that we can.
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Mr. FABRE. Allow me to make a remark about equal national
treatment with regard to affiliates. In the United States you have a
divided banking system which separates banking and securities
firms while in the countries of Europe, the banks have not this
difficulty. The practical effect of applying this principle against the
European banks would be to give free rein to U.S. banks and
securities firms to compete very strongly in Europe in all areas-I
can tell you in my country where at least we have more than 10
securities firms, and they are very, very active and very, very
competitive-while telling our banks that they would not be allowed to compete in one or the other area here. This is really the
point.
If one is barred from doing either banking or securities here, it is
difficult for the European banks. This is the point I would like to
make. So we think it.is an essential issue. Moreover, with full
respect for U.S. laws, which we want to abide by, we do not think
that fair international competition should be excluded in order to
preserve the regulatory soundness of the U.S. system to which we
have committed our operation here.
Thank you, Mr. Chairman.
Mr. HYDE. Referring to what Mr. Wylie said, I think the major
problem is trying to dissolve the essential conflict between reciprocity and national treatment. I think the banking industry and this
Congress has to decide whether we are ready to operate under the
restrictions that may well be placed on our overseas banking
activities if we impose similar restrictions on foreign banks in this
country.
I think we have to be fair to our domestic banking industry by
not giving foreign banks privileges or liberties that are not available
to them, but I think if we do that, we must be prepared for similar
restrictions overseas. It is a matter of fine tuning and adjusting the
rights and relationships between the various parties. I think America gains considerably by its foreign banking operations and I think
domestically we gain considerably by having banks from foreign
countries operate over here. I see no serious problem other than one
of fine tuning the process, the benefits and advantages to each. I am
confident this subcommittee will do that too.
Mr. WYLIE. Will the gentleman yield?
Mr. HYDE. I will be happy to yield.
Mr. WYLIE. Ancillary to that is an example of what my previous
question was directed toward.
What role do the European banks play in channeling Arab oil
money into the United States through investment banking and
securities affiliates?
Dr. JAHN. Did I get your question correctly? The question is
whether and to what extent European banks would channel
petrodollars into the United States?
Mr. WYLIE. Not so much to what extent, but in what role. What
role do you play? You play the role your customers dictate, of
course.
Dr. JAHN. I think this is not a real factor. I think the bulk of the
money which comes from petrodollars stays in the Euromarkets
somewhere in Europe or in Asia and is used there widely, and all
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large American banks participate in relending, reorgamzmg,
rechanelling this money. In fact, had it not been for that vast and
fully functioning system, I think the recycling in 1973 would have
been a catastrophe for the financial system of the world. It is only
because of this enormous integrated system which exists that this
sudden change could have been coped with. Most people hadn't
expected that. You will remember the World Bank statistics on
what would happen. Nothing of the kind has happened, regardless
of how difficult the problem is. I don't think there is a great
movement of"funds. A bank wouldn't take funds from outside the
United States if they don't need them for their actual lending
business, possibly in lieu of insufficient deposits which they need for
lending operations.
I think all this is very well known and very well controlled by the
Fed-each and every dollar being moved around.
Mr. WYLIE. The big money in Europe right now is from the Arab
countries and there is quite a bit of it going into European banks, of
course. The apprehension in some circles is, of cour~, that some of
this is channeled into the United States and is invested in operations in which domestic banks cannot participate.
Dr. JAHN. There is no support for that idea.
Lord O'BRIEN. Mr. Wylie, could I say a word about that?
Mr. WYLIE. Yes.
Lord O'BRIEN. Insofar as the dollars earned by oil exporters are
concerned, that are invested long term in particular countries, I
would expect that insofar as they are invested in the United States,
it would be mainly through U.S. banks who are pretty powerful in
the Middle East. Insofar as it is invested in other countries in
Europe, for example, the National Banking system which also has
contacts with the Arab world would be the intermediate, but I
would be very surprised if foreign banks played a big part in
channeling the investment of Arab and other oil dollars in this
country.
Mr. WYLIE. So you see no need for concern in that regard?
Lord O'BRIEN. No, I don't.
Mr. FABRE. The experience of the securities affiliates of European
banks is that they see a very, very small amount of this money and
their experience is that this kind of money is going to the major
American banks who are recognized as the experts so they send this
money to major American banks.
Dr. JAHN. That is correct.
Lord O'BRIEN. And, of course, the Arabs have their own people in
various countries, including the United States. I am, in fact, a
director of a Saudi Arabian bank, a majority owned by Saudi
Arabians with participation of other banks throughout the world,
which is beginning to undertake this function.
Dr. JAHN. Perhaps some large American banks handle this
money, but I am not sure it stays in this country. I believe most of
the funds which have been created by the oil countries on the
European markets will be used otherwise, floating around the
European II\arket-the Arab countries prefer to use an Arab bank.
There is no evidence at all that major amounts have ever come to
the United States and if they have, they are controlled by the
Federal Reserve.
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Mr. WYLIE. I am a cosponsor of the bill and through knowledge I
gained from our hearings and from my trip to Europe, I feel if the
United States has decided to force a separation between domestic
banking and commerce, is it really unfair not to do so with respect
to foreign banks? I think you have already answered that. Do you
want to expand on your answer, Lord O'Brien?
Lord O'BRIEN. As to the future, if you so desire, Congressman, the
foreign banks will have to live with it on the basis that they are
treated equally with the domestic banks. All they ask is that
previous arrangements established under present laws should not
be terminated.
Dr. JAHN. I have never taken any other position than equal
treatment with domestic banks. We have been operating at the
State level and we wish to continue to do so. We do want to accept
the FDIC philosophy that people who solicit small or regular
deposits from everybody ought to be members. However, the wholesaler should be subject to a voluntary system. That would mean
they would be insured by the FDIC if and when they ask to become
members. I think our main point of trouble is section 8 of the bill.
That is the securities side-again quite small compared with your
large investment community, and, as the Securities Act of 1975
stipulates, there should be vigorous competition. Without Continental Europeans, there cannot be foreign competition because there is
nobody else in Europe who does securities business.
_ The other thing, of course, is the nonbanking activities of European banks which, under the present wording of the bill, the whole
thing would be most troublesome to all of us. In fact, we couldn't
continue. We would have either to close down our banks, or to
prevent industries that might wish to come here from doing so. It
would be an insoluble point if you don't find an equitable answer to
that problem. I think section 8 is the main stumbling block.
Mr. WYLIE. If we tried to use as a standard equal treatment with
the treatment received by American banks in foreign countries,
there would be a real problem because we receive different treatment in different countries.
Dr. JAHN. I think the most liberal treatment is in our country
and for that matter London.
Mr. WYLIE. That is true and probably the most conservative is
Switzerland.
Dr. JAHN. Even so, there are many American banks.
Mr. WYLIE. But they receive different treatment in different
countries?
Dr. JAHN. Not in Germany, France or England.
Lord O'BRIEN. I don't want to have a disagreement with you
before this distinguished subcommittee, but we couldn't be more
liberal than we are in London.
Mr. WYLIE. That is a good place for me to end, Mr. Chairman.
Thank you.
Mr. ST GERMAIN. Gentlemen, I understand you had asked to go on
early so you could all catch the Concorde back.
Lord O'BRIEN. If we may, Mr. Chairman.
Mr. ST GERMAIN. I want to point something up to you. The
dilemma that you now face and that we face. The Concorde would
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like to be flying in and out of New York but the State of New York
has said no to date. That is because the people in that area around
the airport in New York vote for mayors and Governors and State
representatives and State senators. Whereas out here the Federal
Government is allowing the Concorde to land and to come in and
out. So the dilemma that we face and that you face is the fact do
you want State law or do you want Federal law in the United
States?
Gentlemen, we want to thank you for your patience in the
situation you faced last week. It is too bad you are taking the
Concorde because that is a fast flight. I was hopeful on your flight
back you might put your collective heads together and start to work
on that paper for us with respect to insurance on deposits.
Lord O'BRIEN. I promise you, Mr. Chairman, we will as soon as
we get back and, of course, we shall get back very quickly. I am
pleased to see how many of my American friends are simply
delighted with Concorde and maybe one day other American cities,
if not New York, will take it.
May I, on behalf of my colleagues and myself, Mr. Chairman,
thank you and your subcommittee most cordially for the courteous
way in which you have received us and the freedom with which you
have allowed us to express our views, and we hope that we have
helped _you in a little way to come to the best conclusion for us all.
Mr. ST GERMAIN. Very definitely.
Gentlemen, without objection we may be submitting additional
questions that have not been asked because we have other panels
and we want to also get you out to the airport on time, so we will be
submitting additional questions we would ask you to answer for the
record.
Lord O'BRIEN. Of course. Delighted.
Mr. ST GERMAIN. Our second panel consists of the Bankers'
Association for Foreign Trade. The witness for this panel is Robert
B. Palmer, vice president of the association. He is accompanied by
James B. Sommers, chairman of their Committee on Foreign Banking in the United States, and Thomas L. Farmer, general counsel.
You may proceed, Mr. Palmer.
STATEMENT OF ROBERT B. PALMER, VICE PRESIDENT, BANKERS'
ASSOCIATION FOR FOREIGN TRADE; ACCOMPANIED BY JAMES
B. SOMMERS, CHAIRMAN,. COMMITTEE ON FOREIGN BANKING
IN THE UNITED STATES; AND THOMAS L. FARMER, GENERAL
COUNSEL
Mr. PALMER. t would like to thank you for allowing us to testify
on what we feel to be a very important piece of legislation. This is a
subject which we in the Bankers' Association for Foreign Trade
(BAFT) have taken great and continuous interests in over the past 3
years and I believe we have been invited and have been willing to.
testify each time this type of legislation has been put to either
House or Senate committees.
I would like to say something about what is the BAFT and what
is our constituency. As you noted, sir, I am from the Philadelphia
National Bank. My colleage, Jim Sommers, is the senior vice
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president of North Carolina National Bank and we are joined by
our resident counsel in Washington, Thomas Farmer.
Our association constitutes 142 voting members. Our banks are
represented in 56 cities and 32 States. We certainly do include the
very largest banks in cities such as New York, Chicago, San Francisco, et cetera, which are very active in international banking, but
we include also important regional banks in States such as the
Carolinas, Louisiana, Nebraska, et cetera, which banks are important in financing exports and drawing foreign business into their
locales, et cetera. We are a broadly based organization.
You have our written testimony, as you said, sir, so I will not
read it.
I will take a few minutes to highlight what we feel are a few of
the primary points.
Mr. &r GERMAIN. Without objection, the entire written statement,
I think with one change, to-wit, that the clearinghouse people
testified last week. You might want to make that one change in the
statement, but it will be put in the record as submitted.
Mr. PALMER. There are a couple of different opinions on certain
matters coming out of the members of our association.
I think that the goal of the BAFT, as I believe, is the goal of the
sponsors of this legislation, is that we strongly believe that the
domestic banking environment is one in which foreign banks should
be encouraged to participate, to do so on a healthy and
nondiscriminatory basis, and that this would foster competition
among all institutions in this country and offer benefits to all the
users of bank services.
At present, however, it would seem that there is no Federal or
even uniform regulation throughout the United States on the activities of foreign banks in this country. In practice, out on the streets,
where we all solicit our business, there is in fact quite a range of
different opportunities available in relation to such areas as multiState banking, securities, investment banking activities, the costs of
reserve requirements, deposit insurance, et cetera.
As a result of this, the great majority of our members think that
it is appropriate at this time to pass legislation that would make the
regulation of such activities uniform, fair and easily understood for
all parties, those who are here now, and those that are intending to
come in the future.
After some thorough examination of your bill, sir, we are appreciative in that we think it is well thought out, and well researched.
We are very much aware of your travels, your conversations with
Central Banks around the world. The great majority of our members do support the passage of this legislation, although, as you will
see, we do recommend a few significant changes.
I should mention that a small number of our members who do a
significant amount of the international banking activities in this
country, this group being headquartered primarily in New York,
differ from the vast majority as to the need for legislation on this
point at this time. I believe that you heard from them last week,
from John Lee, and therefore I won't go into the specifics of their
feeling other than to just recognize there is that opinion.
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As we look at this legislation, we see it dividing roughly into
three basic parts: the regulatory environment under which foreign
banking activities would be carried on here; the range of permissible activities for those banks; and the locational question of where
they may place facilities in this country.
I will approach the legislation on that basis. In terms of the
regulatory environment, we believe that foreign banks should be
able to operate in this country choosing State or Federal charters as
they might choose, whichever they see best for the particular needs
that they have.
We urge that FDIC insurance be made available to a foreign bank
on an optional basis except that it should be required where we are
talking about consumer deposits. We do not advocate mandatory
Federal Reserve membership. We don't think this is appropriate.
We don't think it is appropriate in terms of the dual banking
system, et cetera, where American banks are not so required. We
do, however, understand there might be some point in the size and
scope of activities of foreign banks in this country at which point it
would be necessary to have some form of reserve requirement both
for the orderly conduct of monetary policy and also in relation to
the fairness of competitive activities with other U.S. banks.
As you know, reserve requirements are a significant cost to U.S.
banks, as they make their loans and we do think there is a size at
which it would probably be appropriate for foreign banks in this
country to come under essentially the same reserve requirements as
our American banks.
As to the range of permissible activities, here again we would
hope that foreign banks would be subject to essentially the same
regulations for activities as is the case with the American banks.
This is equal national treatment. We do, however, advocate full
grandfathering of nonconforming activities. In practice what we are
probably talking primarily about is the securities and investment
banking business of our foreign banking friends and we would
recommend full grandfathering of those activities. We would also
suggest that the date for grandfathering be brought up to the
present time as best you see fit.
In terms of locational boundaries-and now I think we are
talking primarily about the multi-State branch and subsidiaries, et
cetera-I want to emphasize that this is probably the issue that is
most important to the majority of our members.
This is the area where they see their activities and the activities
of the foreign banks meeting on the sidewalk in real life
competition.
In practice, of course, we would suggest equal national treatment
which would have the foreign banks operating in this country in
terms of location on basically the same set of rules that the
American banks currently operate. We do again, however, strongly
advocate full grandfathering of those facilities which have already
been created. The grandfathering is not just a matter of support of
grandfathering-it is not just a matter of trying to appeal to foreign
banks who are already here, and who are good banking friendsthere is also a very solid principle behind it and that is the
principle of a given government, whether it be our government or
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the government in the foreign country, not inviting foreign investment and then significantly changing the rules on that investment
after it has arrived.
This investment, whether it be in multi-State branching as it has
been allowed, or securities activity, was brought here with the very
best of intentions. These banks have conducted themselves with the
best interests of this country and its commerce in mind and we
think it would be absolutely inappropriate to change the rules in
that fashion after they have arrived here.
One very significant point is that we do urge the elimination of
section 7(e) from your bill. We do not think that the Federal
Reserve must have the power to approve or have the power to
disapprove foreign banks who choose to go what we would call the
"State route," who choose to take a State charter. Moreover, we just
want to say that we urge that you leave unchanged the fact that
agencies are not included in the prohibition against multi-State
banking.
In summary, sir, I would just like to wind up by speaking a little
bit about some_ of the comments we have heard in the last week
which are criticisms of the bill by various parties. Criticisms we
simply don't understand as we feel there is no rationale behind
them.
No. 1, we have heard of retaliation from some parties. We don't
think there should be any importance placed on retaliation.
First of all, we have never heard retaliation mentioned in a
serious way by any official authorities. It seems that we hear that
primarily only from those groups whose interests would be
furthered if you all would believe that there would be such
retaliation.
Mr. ST GERMAIN. If I could interrupt, I see you obviously don't
have ESP because in answer to a question on that very point we
were told last week some people get the feeling that there might be
retaliation.
Mr. PALMER. I read that exchange and I can't dispute anyone's
feelings. That is a personal thing. To our knowledge we do not hear
official parties saying there will be retaliation.
Second, last August 31st, when this same group was testifying
before the Senate Committee on this type of legislation, our good
friend, Dr. Wolfgang Jahn, who just left this table, jumped up and
said, "I want to disassociate myself and the German banking groups
from that idea."
Who knows where that leads? "If you do this to us, then we do
that do you." It is a very destructive road to start going down.
I would also suggest that responsible foreign bankers do not agree
with the idea.
This is very important as we consider this legislation. I think
there is no rationale for anyone to take such actions because in
doing so they simply would not show an understanding of how, I
believe, public policy is formed in this country. It doesn't matter
whether we are talking about banking, public health, education or
whatever. I think public policy is formed by the broad body politic
of the country deciding what sort of banking structure they want to
have in their country, or education, or whatever it may be. They
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choose, whether they choose wisely or unwisely, they choose to
create a structure and then the various parties operating in that
environment play by those rules.
Now, one person testifying last week said he saw no logic that a
German bank should not be allowed to put branches in many States
since an American bank could put branches in several German
cities. I think there is no logic to say a foreign bank should be
permitted in the future to put branches in various cities if in fact
an American bank cannot put branches in those same locations. We
are talking about the structure of banking in this country.
Whether we agree or disagree with the various acts, for example,
McFadden, Glass-Steagall, et cetera, those are not at issue at this
time. They may be valid issues to be taken up at some time, but
those are not the issues at this time.
A second argument we have heard from some is that the legislation would be discriminatory. I think probably there are some very
small bits of it which would possibly allow for slightly discriminatory regulation of foreign banks versus American banks, but
frankly, Mr. Chairman, where we stand right now is that the
discrimination is about 2 feet wide and I think this act, especially if
you were to follow the few recommendations that we have mad~,
such as taking out section 7(e), et cetera, would bring it down to a
few inches.
I think you have to look at the trend line and that is a very
~
positive thing indeed.
I think foreign banks who want to be tremendously active in this
count'ry have nothing to fear from this type of legislation. It allows
a foreign bank to be active in this country through the bank holding
company, through Edge Act corporations, through agencies, et
cetera, in a way that will allow them to do commercial banking on
as national an extent as is allowed to American banks.
Another comment is, "This would eliminate certain places from
being financial centers." That is not the case. This legislation would
open up Edge Act and agency opportunities for foreign banks to go
into various locales and we have the proof of the active efforts of
American banks under the Edge Act of going to such cities as
Chicago, Miami, Houston, Los Angeles, and even New York, for
non-New York banks and assisting very much in the development
of those centers as international financial centers.
Moreover, the agencies are even permitted to make domestic
loans, so it is not only a question of international financial centers,
but international banks, to be active on the domestic sides under
this legislation.
So, therefore, Mr. Chairman, on balance, with a few suggestions
that we have made for change, the vast majority of the Bankers'
Association for Foreign Trade supports this legislation.
Thank you.
[The prepared statement of Mr. Palmer, on behalf of the Bankers'
Association for Foreign Trade, follows:]
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STATEMENT OF
ROBERT B. PALMER
VICE PRESIDENT
BANKERS' ASSOCIATION FOR FOREIGN TRADE
ON H.R. 7325
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
HOUSE COMMITTEE ON BANKING, CURRENCY AND HOUSING
My name is Robert B. Palmer, and I am the Vice President of the
Bankers' Association for Foreign Trade. I am also Executive Vice
President of the Philadelphia National Bank. I am accompanied by
James B. Sommers, Chairman of the Association's Committee on Foreign
Banking in the U.S., who is also Senior Vice President of the North
Carolina National Bank, and by the Association's Counsel, Thomas L.
Farmer, of the Washington law firm of Prather Seeger Doolittle Farmer
& Ewing.
The Bankers' Association for Foreign Trade (BAFT) was founded
in.1921. Today, BAFT's voting membership of 142 U.S. banks consists
of banks in 56 cities located in 32 states, the District of Columbia
and Puerto Rico, and includes almost every U.S. bank which has a
significant international operation. The Association also provides
non-voting membership to 78 foreign banks with operations in the United
States.
Following World War II American industry set the pace in a tremendous expansion of world trade and investment. During this period the
U.S. dollar established its role as the principal reserve currency and
medium of exchange for international transactions, and American banks
expanded overseas to meet the needs of their customers and to take
advantage of new opportunities to finance foreign commerce and investment.
They opened representative offices and branches, established specialized
subsidiaries, associated themselves with overseas ventures and participated substantially in the Euro-currency market. Similarly, non-u.s.
banks expanded their international operations, including the establishment of agencies, branches and subsidiaries in the United States. The
worldwide activities of BAFT member banks, both U.S. and foreign,
contributed greatly to the growth of international trade, the improvement
of living standards throughout the world, and the maintenance of peace
through an orderly interdependent world economy.
As the American banking community has expanded into foreign
financial markets it has not asked for, nor received, preferential
treatment. Our aim has been mutual non-discrimination among U.S. and
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foreign banks. To demand more would be unrealistic and not in the
spirit of the free enterprise system; to accept less would be a disservice to the American business community and ultimately the American
public.
BAFT members strongly believe that the domestic banking environment
should be one in which foreign banks are encouraged to participate,
and to do so on a healthy and non-discriminatory basis. This would
foster competition among all institutions operating in this country
and offer benefits to all users of bank services.
At present, there is virtually no Federal regulation of foreign
banks. Foreign banks are subject almost exclusively to state laws.
This has led to unevenness of treatment, particularly with respect to
multi-state banking, securities and investment banking activity, reserve
requirements, deposit insurance, and ease of entry into U.S. markets.
As a result, the vast majority of our members support the passage
of legislation this year which would effectively equalize the operating
environment for both foreign and domestic banking activities in the
U.S. Such legislation should be based on the p:rinciple of equal national
treatment. At the same time, these banks believe that the principle
of grandfathering should be employed for those operations of foreign
banks which have been established here in full accord with prevailing
laws and regulations.
A careful examination of H.R. 7325 has led us to conclude that
these principles are generally reflected in that legislation which we
endorse, although we will recommend some significant amendments.
However, I want to advise the Committee that there is a group of
about a dozen of our member banks who do not support this legislation.
This group, consisting generally of the largest banks in the country
domiciled principally in New York and accounting for a major share of
this country's international banking a.ctivities, takes the position
that the present regulatory environment is satisfactory, and that the
proposed changes could lead to retaliation by foreign governments against
overseas operations of American banks. The views of these banks have
.been presented in testimony last week by the New York Clearing House and
therefore do not require elaboration from me.
To clarify the discussion of H.R. 7325 we have divided our
testimony into three broad categories as follows:
1)
2)
3)
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Regulatory Environment
Range of Permissible Activities
Locational Boundaries
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I.
Regulatory Environment
With respect to the overall regulatory scheme for foreign banks
operating in this country, we believe that the established principles
of the dual banking system require that the American branches or
operating subsidiaries of foreign,banks be permitted to register or
charter with the appropriate regulatory entity, state or Federal, as
they might choose. To facilitate the operation of foreign banks as
national banks and Edge Act corporations, we urge the elimination of
the nationality restrictions for the directors of these corporations.
In addition, we urge that FDIC insurance be made available to
any foreign bank that desires such insurance but that such coverage
be required of a foreign bank only to the extent that such bank engages
in retail activity.
Virtually all foreign banks operating in this country conduct a
banking business which when carried on by U.S. banks makes non-membership
in the Federal Reserve System a practical impossibility. Nevertheless,
we do not advocate mandatory Fed membership -for foreign banks since
that would violate the principle of mutual non-discrimination. We do,
however, recommend that the central bank have adequate powers relating
to the activities of foreign banks operating here to assure the proper
functioning of domestic monetary policy, including the power to impose
reserve requirements where appropriate.
Reserve requirements are also important with respect to competitive
equity. The cost considerations of reserve requirements are of crucial
importance in the highly competitive market of wholesale banking. For
example, the funding of a large commercial loan to an American borrower
would be significantly more expensive to an American bank, which would
have to maintain reserves under either Regulation Dor M, than would
be true for a foreign bank, which would have a lower requirement under
Regulation Dor no reserve requirement under Regulation M.
II.
Range of Permissible Activities
Consistent with the principle of equal national treatment, we urge
that the operations of foreign banks in this country be subject by law
and practice to the same regulations regarding permissible activities
as are American banks.
We are therefore pleased to note that H.R. 7325 grants important
new operating authority to foreign banks by enabling-them to carry out
international banking activities in most of the major banking centers
through the establishment of Edge Act corporations now available only
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to U.S. banks. The bill also establishes a valuable precedent by
removing entirely the requirement that directors of Edge Act corporations be U.S. citizens. We urge that similarly Section 2 be
broadened to remove the requirement that a national bank controlled
by a foreign bank have a majority of its directors be U.S. citizens.
The BAFT has consistently favored full grandfathering of nonconforming activities on the part of foreign banks in the U.S., both
with respect to multi-state banking activities and to bank-owned
securities affiliates and has so testified in its previous appearances
before the Senate and House Banking Committees. It is our belief that
these questions should be viewed not in a narrow context, but should
be seen as an important element of foreign investment generally. In
our view the question before your Committee in considering Section 8
of this bill is not so much the future development of the Glass-Steagall
Act as it is basic policy with respect to foreign investment.
The U.S. has for many years been the principal advocate of the
benefits of foreign investment for both the recipient and the investing
country. Many foreign countries have changed the rules for U.S.
investment in their country after such investments have been in place,
and invariably the U.S. has argued that changing the operating rules
for foreign investment after the fact has been detrimental to foreign
and domestic commerce, and has urged that such changes be kept to a
minimum. This broad principle with respect to foreign investment is
sound and should be followed in the treatment we accord foreign investments in the U.S.
We urge therefore that all securities and investment banking
activities presently being carried on by foreign bank affiliates in
accordance with presently effective U.S. laws and regulations, be
grandfathered and that Section 8 of this bill be amended accordingly.
III.
Locational Boundaries
Under present law foreign banks operating in the U.S. through
direct branches or through a combination of branches and subsidiaries
may, and do, engage in commercial banking functions in more than one
state. On the other hand, domestic national banks and member banks
may not engage in in-terstate branching, al though domestic non-member
banks under reciprocal state branching laws theoretically have this
option, In practice this has resulted in a competitive disadvantage
for American banks. Accordingly, we support the provision of the bill
restricting interstate branching of foreign banks, but with an amendment
to allow non-member foreign banks the interstate branching option
available to domestic non-member banks under reciprocal state laws.
At the same time we strongly support those provisions of the bill which
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provide for the permanent grandfathering of all agencies, branches,
or subsidiaries of foreign banks that are already established in
the United States as of a current date to be established by the
Subcommittee. We assume, moreover, that the effective date for
grandfathering presently in the bill will be moved forward and urge
that the Committee designate the most liberal possible date.
Furthermore, we urge that H.R. 7325 be left unchanged so that
agencies are not included in the prohibitions on multi-state banking.
Agencies generally are not allowed to accept deposits and are thus
not akin to multi-state branches of domestic banks.
In addition, we urge the elimination of Section 7(e) of H.R.
7325 granting to the Federal Reserve Board the power to disapprove
the establishment by a foreign bank of a branch or agency pursuant
to state law. The Federal Reserve Board does not have such authority
with respect to domestic bank applicants, and to provide such veto
power with respect to foreign applicants would run counter to the
principle of national treatment, as well as unnecessarily interfering·
with state authority under the dual banking system.
In conclusion, Mr. Chairman, I want to say that while this
legislation deals with a number of complex, technical issues, the
central point is rather simple. For the health of the financial
system it is important that the relevant laws and regulations place
all participating institutions on an equal footing. The vast majority
of our members after careful deliberation have concluded that the
legislation before you represents a liberal and farsighted approach
to a complex and very technical problem, and with the changes as outlined above, deserves the support of your Committee.
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Mr. 8'r GERMAIN. Thank you, Mr. Palmer, for a very excellent
presentation. We appreciate your support of the legislation and
your constructive recommendations will be given thorough consideration, naturally.
One of your recommendations is that State chartering under
section 7(e) be eliminated. You argue it interferes with State authority under the dual banking system.
However, almost all banking operations in the United States,
unless they are noninsured State banks, are subject to veto at the
Federal level. The vetoing of State charter operations can be done
by FDIC. Since the insurance will not be given to foreigners, isn't it
true the agencies would have a competitive advantage under your
proposal in not being subjected to a Federal veto over chartering in
any form?
Mr. PALMER. To some extent that is true. However, we see
significant importance in the ability to take deposits which agencies
are not permitted to do. We think the classical banking function of
taking deposits in a given location is a primary criteria for
classifying something as a banking entity and therefore we are not
unduly troubled by more liberal treatment for agencies. ·
Mr. 8'r GERMAIN. It would seem that the oversight of approving
charters would be useful.
If you don't favor a Federal veto, what other checks with regard
to State banks would you suggest?
Mr. PALMER. It seems appropriate to us for a bank coming to this
country to have the ability to create a branch or subsidiary in a
State which would be, by taking a State charter, subject only to the
desires of that State as to whether or not it should be located there
on the assumption that it is choosing that State as its home State.
Mr. ST GERMAIN. With respect to the subsequent establishment of
agencies in any number of other States, you don't feel as though
there should be-Mr. PALMER. We would not limit agencies.
Mr. ST GERMAIN. AB you stated, agencies could accept deposits,
but agencies are primarily loan-generating offices.
Mr. PALMER. That is right.
Mr. ST GERMAIN. That type of presence does have an effect or
could very well have an effect, either salutary, or in some instances
perhaps an adverse effect, on the State in which the agencies are
established.
Mr. PALMER. I can conceive of situations in which it would
although we do believe that while an agency is a very useful way of
conducting a loan business on a more local basis, that in fact most
loans in a given area could be made across State lines anyway by a
branch in a different State.
Mr. ST GERMAIN. Mr. Wylie.
Mr. WYLIE. Thank you, Mr. Chairman.
I want to compliment you, Mr. Palmer, for a very discerning
statement. To me, you put the issue in succinct perspective, better
than I. I was attempting to say it a little earlier, if you were here
and heard my exchange ·with the other gentlemen.
What we are suggesting here is not too much different than what
we did with our own domestic banks, through the One-Bank Holding Company Act and other laws, is it?
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Mr. PALMER. I think it is really quite similar, although, as you
know, we are recommending the grandfathering for the reasons I
have outlined, but going forward essentially we believe that the
regulation Y, the bank holding company laundry list, if you will,
would be appropriate.
Mr. WYLIE. Would you grandfather forever?
We have a divestiture provision in the Bank Holding Company
Law which requires divestiture of nonbank related activity by 1985.
Do you think that is too restrictive for foreign banks?
Mr. PALMER. In terms of the securities business, we would grandfather permanently. In terms of relationships of foreign banks who
have banking activities here and who through maybe investments
that they have in their home country, in, say, a manufacturing
company which then chooses to put a manufacturing company in
the United States, we would think that at that point where the
manufacturing activity in the United States became a strong, functioning organization and they would have a banking relationship
with the foreign bank or possibly control, or significantly invested
in that, it might be necessary to take some steps to see that they
truly were at arm's length.
We would hope there is some appreciation or understanding, as
Dr. Jahn and others explained today, of why that happens in those
countries.
Mr. WYLIE. You have made an interesting suggestion on page 3'of
your testimony that FDIC insurance should not be required of a
foreign bank except to the extent that such bank engages in retail
activity.
Do you foresee any undue difficulty there in making sure that it
is only domestic retail deposits which are insured?
I think what you are saying is that FDIC should be required to
provide insurance for foreign banks operating in this country or
foreign banks should be required to have FDIC insurance to guard
against loss for American citizens who make deposits in foreign
banks operating here. Is that what you are suggesting?
Mr. PALMER. We mean to say individuals as citizens as opposed to
corporations as citizens. We believe it should be required to the
extent that they are taking deposits from individuals, not from
corporations, in the CD market, large institutions, and so forth.
Mr. WYLIE. West German citizens? It is not as likely that deposits
would come West German citizen?
Mr. PALMER. To be honest, I haven't thought that through.
Mr. FARMER. I don't think we would think that distinction to be
on the basis of citizenship as much as on the basis of retail versus
commercial business, which I think is the basic intent.
I would think any retail customer, whether he was foreign or
domestic or whatever, would be insured, just the way an American
bank would be. It is the nature of the banking business we are
looking at rather than the citizenship of the individual conducting
it.
Mr. WYLIE. Just deposits of retail customers in the United States.
Do you think that the acceptance of foreign banks for FDIC insurance could cause an undue risk to the Federal Deposit Insurance
Corporation?
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Mr. PALMER. I don't believe so, sir. I am not an expert such that I
could explain how that would have to be worked out, and I know
that it would not be easy, but I believe that one would be able to
work out a policy whereby the deposits in this country of foreign
banking operations of simply individuals could be insured against.
And there was a situation back in 1965-some of you may remember-the Intrabank, then the largest private bank in Lebanon, with
a branch in New York, which did fail and it did have some
individual deposits from residents of New York, et cetera, and there
was some money loss by individuals.
I think there could have been a way in which FDIC could have
insured those deposits, worked out an arrangement with the bank,
with assets in this country sufficient to protect, to assure that there
would be that-Mr. WYLIE. My question is based on a statement made by Mr.
George A. LeMaistre, Chairman of the Federal Deposit Insurance
Corporation. He says,
In the event of insolvency of a foreign bank, it is possible that: assets could be
easily and quickly shifted from the U.S. branch and out of U.S. jurisdiction, while
deposits could be shifted to the U.S. branch.
Then he says,
Legal obstacles and transactions involving other offices of the foreign bank might
pri:vent FDIC from obtaining the usual subrogation of claims that normally it gets
from depositors in failed U.S. banks before making payments.
Would you comment on his statement?
Mr.PALMER. It would seem to me, not as an expert in the this
area, but it would seem to me that there would be a way, such as
the capitalization rules for foreign banking activities here, or the
New York State 108-percent rule, or something of that nature,
which would assure that funds would be in a local location, not out
of that location.
Mr. WYLIE. Thank you, Mr. Chairman.
Mr. ST GERMAIN. Gentlemen, many of the witnesses who testified,
some who will testify, about equal treatment, state, well, that is not
really the case because bank holding companies now or domestic
banks can operate in many States; but is there anything that
precludes or prohibits foreign banks from establishing bank-holding
companies and using that same modus operandi?
Is that not allowed a holding company 'in this country?
Mr. SoMMERS. Yes, sir, they have that availability.
If I may make make a distinguishing point, there is a vast
difference in being able to go across State lines with the finance
companies as opposed to the basic banking business where you are
taking deposits, the deposits being the life blood of commercial
banks, deposits that you gather in the marketplace being the most
stable funds that a bank has to expand its operations within their
own State.
Mr. ST GERMAIN. And this is why you subscribe to the establishment of agencies in other States?
Mr. SoMMERS. That is correct.
Mr. ST GERMAIN. One last question. In your testimony you note
that agencies are not included in the prohibitions on multi-State
branching in the present bill.
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Would you agree to permitting agencies to operate in more than
one State as a means by which States that do not now have
substantial foreign banking operations car. attract them in the
future, which would say a foreign bank is less likely to enter a new
State if it cannot establish a branch and can only establish an
agency; and could you ar.swt:r the question. taking jnta ac1-:0L1.nt the
fact of the existing situation in California and Georgia in which
branches now are effectively prohibited?
Mr. PALMER. One could only surmise what people would do at a
future time, but I would think if this legislation were passed
allowing activity under the Edge Act and allowing multi-State
agencies to the extent that the new host States would permit same,
I would think that many, many foreign banking institutions who
want to be active commercially in this country would utilize those
channels and would spread activities across the United States and
do a healthy banking business.
Mr. ST GERMAIN. Gentlemen, we want to thank you for your
presentation. There will be additional questions from other members who couldn't be here this morning as well as from myself,
because I want to move along here, presented to you, and we would
ask that you answer them as expeditiously as possible. They are, I
think, relatively easy to answer.
Mr. PALMER. Thank you, Mr. Chairman. We would be happy to do
that and we repeat our thanks for inviting us to testify on this
legislation.
Mr. ST GERMAIN. Now we will hear from our third panel, representing the regional stock exchanges: James E. Dowd, a neighbor
from Massachusetts, I assume, because he is president, Boston Stock
Exchange; Michael E. Tobin, president, Midwest Stock Exchange,
Inc., and Hart Perry, president, SoGen-Swiss International Corp.
Gentlemen, we have your statements that were presented to us
and we appreciate receiving them ahead of time so that we could
have an opportunity to review them.
I would ask, since they are rather substantially put, all three of
them together, that you attempt to summarize, because that will
then give us a little more time for questioning. We would like to
move right along.
So, at this point, without objection, we will put all three statements into the record in their entirety.
[The prepared statements of Mr. Dowd, on behalf of the Boston
Stock Exchange, Inc.; Mr. Perry, on behalf of the SoGen-Swiss
International Corp.; and Mr. Tobin (who was unavoidably detained
and was represented at the hearing by Kenneth I. Rosenblum,
senior vice president and general counsel of the Midwest Stock
Exchange, Inc.), on behalf of the Midwest Stock Exchange, Inc.,
follow:]
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BOSTON STOCl'i EXCHANGE,INC.
S3 STATE STREET. BOSTON, MASSACHUSETTS
STATEMENT OF JAMES E. DOWD, PRESIDENT
OF THE BOSTON STOCK EXCHANGE, INC.
BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF THE HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
We welcome this opportunity to express our views on the impact on regional stock
exchanges from the provisions of Section 8 of H. R. 7325, the International Banking Act
of 1977. As written, it would prohibit a foreign bank, or a person directly or indirectly
associated with such a bank, which maintains a commercial banking presence in the
United States, from engaging in securities activities in the United States unless that entity was engaged in those activities on or before December 3, 1974. "Grandfathered"
firms could retain intact their investment banking arms in this country only until 1985.
Thereafter, they would be required to restrict their investment banking activities to
such a degree as to render them, for all practical purposes, incapacitated competitors
in this country's securities industry.
We would like to demonstrate to the Subcommittee the severe impact these restrictions would have, particularly to regional stock exchanges, and how contrary they
will be to the fostering of comp~tition among market centers, which was one of the principal thrusts of the Amendments to the Securities Acts enacted by Congress in 1975.
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To appreciate the impact of H. R. 7325 on regional exchanges, it may be helpful
to the Subcommittee to understand the types of foreign members we now have. As is
well known, the rules of the New York and American Stock Exchanges have not permitted, until very recently, foreign-controlled firms to become members of these exchanges,
whereas the four major regional exchanges have allowed such memberships. These
foreign-controlled members, aHof which are registered as broker-dealers with the Securities and Exchange Commission and most of which are domestically chartered corporations, pay state and federal taxes and are subject to all of the requirements as a
United States registered broker-dealer.
In general, our 22 foreign firms fall into three categories: those which are
United States affiliates of foreign broker-dealers, from Japan or the United Kingdom,
for example; those which are affiliates of a foreign bank which is!!£!. engaged in commercial banking in the United States; and those which~ affiliates of one or more foreign banks, some of which are engaged in commercial banking in this country. It is this
third category of foreign members on which the impact of the pending legislation is most
severe, and because of their relative importance to the regional exchanges, these exchanges will suffer as well. Other speakers today will describe in more detail the wide
range of services these firms provide to both domestic and foreign investors, but I would
like to confine my comments to two of their activities- - those as dealer specialists on
regional exchanges and as dealers for their own accounts and risk in international arbi trage, both of which activities would be prohibited by H. R. 7325.
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Since ABO Securities Corporation was the first foreign-controlled firm to become
a member of the Boston Stock Exchange in December, 1968, and subsequently acquired
memberships on the Midwest and Pacific Exchanges, I will use it as an example, ABO
is, and since 1969, has been on the Floor of the Boston Stock Exchange as a dealer specialist in 31 issues, It is also a dealer specialist on the Midwest Stock Exchange in 32
issues. Many of these issues are instantly recognizable, such as Boeing Corporation,
Bank of America, International Telephone & Telegraph and Sperry Rand. It is the specialist in four New England based Big Board issues, as well as in one issue that is solely
listed on the Boston Stock Exchange. It is one of 19 specialist units on the Boston Floor
and holds six seats for its personnel. Its volume as a dealer specialist in 1975 and again
in 1976 amounted to over 1 1/4 million shares, and in 1977 through June 30, to nearly
3/4 of a million shares. Its average equity for dealer activity on the Boston Floor is a
half million dollars, which amounts to 11. 8% of the total equity of all floor dealers com-
bined. The firm, as of June 30, 1977, had net capital of seven million dollars, of which
2 to 2 1/2 million is earmarked for specialist activity on the Boston and Midwest Exchanges.
Having established itself on the Exchange Floor as a dealer specialist, ABO is
thus permitted to act as a broker for other members who do not have their own personnel on the Floor. This is a substantial segment of its business. It maintains a highly
professional block trading staff, and in connection therewith, is sometimes forced to
take into position, and at risk, substantial blocks of securities pending location of buyers or sellers. Its international arbitrage activity, by its nature a dealer or principal
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function, has also been substantial and through it, helps to make more liquid markets
in the more popular internationally known issues.
Obviously, with an average daily settlement of over eight million dollars in its
own and its parents' accounts in Boston banks, to say nothing of its Chicago and West
Coast settlements, this is not an insignificant operation.
The Exchange and its subsidiaries offer a number of services to brokers and
their customers, both domestic and foreign. Among these are full backoffice accounting through our Service Corporation and full custodianship of United States issues owned
by customers of the parent banks of ABO and other foreign members, a service which
-is handled by our subsidiary, the newly-chartered New England Securities Depository
Trust Company. This limited-purpose trust company acts as the New E'lgland link to
the national depository system. Last last Fall, we received a substantial deposit of issues by the Auslandskassenverein of Frankfurt, Germany, which is the principal clearing and depository agency for German banks for shares held outside Germany. There
is no question in my mind that we would not have attracted this account to Boston were
it not for the track record of the custodian service designed for the Dresdner Bank, one
of ABD's parents, and its powerful assistance. The presence of this and similar custodianship accounts in Boston also brings substantial deposits of funds for banks in Boston,
thereby benefiting the city's and the region's banking position.
To say that ABD's presence on the Floor of the Boston Stock Exchange is important would be a gross understatement. Indeed, ABO and two other foreign-controlled
member firms, Sogen Swiss and UBS/DB, who would also be impacted by the Bill as
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written, paid in 1975 and 1976 to the Exchange in net commission income assessments
$95,350 or 21% of the total, and for 1977's first five months, $12,642 or 16%, They
paid to our Clearing Corporation, for clearing and processing services, $821,527 or
24% of total revenues in 1975 ~nd 1976, and $159,239 or 17% for the first five months
of the current year. Custodial fees paid by these members amounted to $782,350 or
98. 9% in 1975 and 1976, and $182,675 or 99% in the first five months of this year. These
firms are currently paying about 36% of the total revenues for all functions of our Clearing Corporation. ABD also uses the backoffice accounting services of our Service Corporation and presently accounts for 7% of the revenues for this entity. In total, of all
of the entities combined in all functions, the impacted firms' payments accounted for
21. 8% in 1975, 23. 9% in 1976, and 22, 5% in the first five months of 1977,
Less easily identified are the charges paid by other members who brought business to the Boston Floor because of ABD's presence, either as the other side of a block
trade or to use its service as floor broker. The foregoing figures demonstrate the high
percentage of the Exchange entities' income resulting from the presence of these potentially impacted firms, which income has permitted the Exchange and its subsidiaries to
continue to provide an active, viable and competitive marketplace for the 203 Exchange
members, about one-half of whom are not members of any other exchanges.
What would be the perceived consequences to the Boston Exchange were H. R. 7325
to be passed by the House and the Senate and enacted into law?
First,
The loss of specialist capital for the marketmaking activity in 31 issues
traded on the Exchange, and if replacement capital were not located and committed,
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Boston only members would be forced to give over their customers' orders in these issues to some New York Stock Exchange member firm and hope to negotiate a commission rate sufficient to enable them to earn some measure of profit on such a trade.
Second.
It would result in the immediate loss of a highly professional staff of
block traders and arbitrageurs, whose activity most definitely contributes to the liquidity
and depth of our markets.
Third.
Should such firms be prohibited from all dealer activity, they might
well find it unattractive to remain as Exchange members or brokers in the United States
at all.
The taxes they pay to the various states and to the Federal government might
well persuade them that their parents' agency business could be executed by a New York
Stock Exchange member firm on the New York Exchange at negotiated rates of commission that would make neither a United States brokerage subsidary or an exchange membership of any United States exchange any longer attractive.
Fourth.
If such firms withdraw completely from the exchange community, the
revenues of the exchanges would be severely and adversely affected, and the ability to
provide the only exchange marketplace for the 86 Issues solely traded on Boston would
be questionable. Incidentally, these issuers are, for the most part, located in New
England and upstate New York, and as newer and emerging companies, they are not yet
eligible for listing and trading on the New York or American Exchanges.
Fifth.
Without these revenues, the wide variety of trading, accounting, clear-
ing and depository services that are available to regional members, might not be provided, and regional members might not find it sufficiently attractive to attempt to survive
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under negotiated rates with little, if any, competition being given to the larger national
wire houses.
In their consideration of the Securities Acts Amendments of 1975, the House Commerce Committee and the Senate Banking Committee concluded that affiliates of foreign
banks ought not be prohibited from membership on the nation's securities exchanges or
from related securities activities. In its desire to maximize competition in the securities industry, Congress adopted a policy of open membership, and under that policy, a
firm may be denied membership only if minimum capital or competency requirements
are not met, or if the applicant has a statutory disqualification. Parentage of a foreign
bank is not a statutory disqualification.
If the resolution of this issue by Congress in 1975 might appear to allow a foreign bank or its subsidiary to do something which some domestic banks or their affiliates may not do, 1 suggest that the anomaly can be explained by reference to how foreign governments treat entities which provide commercial and investment banking services. Unlike the United States, banking policies in most of our major European trading
partners permit on!:__imtity or its subsidiaries to engage in both banking functions.
In
those countries, banks traditionally have been the entities which provided commercial
and investment banking services. Thus, when a European entity expands its securities
operations to this country, it is generally a bank which does so.
Another apparent anomaly is that we allow domestic banks, through their Edge
Act affiliates, to engage in securities activities abroad. In terms of international relations, we have permitted foreign banks to engage in ~ecurities activities, although domestic banks are limited in this regard. Our trading partners have permitted United
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States banks to engage in securities activities, although those activities might not be legal in this country. Requiring foreign banks to divide their banking function in this country is not likely to change their respective governments' internal banking policies. However, such a requirement may prompt a change in how foreign governments treat United
States multinational banks and securities firms. It would indeed be inconsistent if we
were to prohibit foreign banks from doing in this country what we permit United States
banks to do abroad.
It would be equally inconsistent for Congress, on the one hand, to prohibit a
United States securities exchange from discriminating against a securities firm of foreign bank parentage, and on the other hand, to forbid a securities firm of foreign bank
parentage with a commercial banking presence in this country from being a specialist
member of a United States stock exchange pursuant to the International Banking Act of
1977 as it is drafted.
Enactment of Section 8 as written would do Just that.
The primary purpose of the 1975 Securities Acts Amendments was to maximize
competition in our securities marketplaces by removing unnecessary regulatory restrictions and other impediments to competition.
Equally important is the statutory
objective of developing the National Market System through the interplay of competitive
forces whereby brokers and dealers, exchange markets, and markets otherwise than
on exchanges would compete fairly and be linked together through communication and
data processing facilities.
One of the most important ways in which the National Market System will maintain strong, effective and efficient markets is by opening up the function of marketmaking
to competition. Dealers who stand ready and willing to buy or se!1 in certain stocks
compete by narrowing the spread between bid and asked quotations. Increasing the
93-031 0 - 77 - 26
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number of dealers making markets in given stocks also will improve the depth and li·
quidity of the securities marketplaces. Narrowing spreads and building greater depth
and liquidity are essential for bolstering sagging public, particularly small investor,
confidence.
What competition there is today in making markets in New York Stock Exchange
listed stocks comes from specialists on regional stock exchanges and from the Third
Market. If the mnnber of marketmakers and the amount of capital committed to the
marketmaking function are reduced, how can the regional exchanges compete fairly with
the New York Stock Exchange? Likewise, regional exchanges would be at a disadvantage
in competing with third marketmakers. Both of these expected results would be contrary
to the letter and spirit of the law which directs the SEC, in facilitating the rapid development of the National Market System, to assure fair competition among brokers and
dealers, among exchange markets, and between exchange markets and markets otherwise than exchange markets.
Another element essential to good marketmaking is order flow.
In fact, market-
making cannot be sustained without sufficient order flow. Thus, reducing the number
of member firms on an exchange, even though the member firm is not a marketmaker,
would be detrimental to that exchange's efforts to compete with marketmakers on other
exchanges and third marketmakers. Foreign members on the Boston Stock Exchange
account for about 13% of total membership; on the Midwest Stock Exchange, foreign members are 8% of the total; on the Philadelphia, 6%; and on the Pacific, they are 5%.
be reasonably expected that many of these members will be affected by Section 8.
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It can
397
Although the percentages are small, they are significant. Since the total number of competitors is small, eliminating even a few of them could be expected to reduce order flow
significantly and to decrease competition drastically.
Another way to evaluate the effect on competition is to identify the beneficiaries
of the Section 8 prohibitions. Since the primary market is the New York Stock Exchange,
which accounts for approximately 85% of this nation's equity trades in terms of volume,
any reduction in the regional ·exchanges' order flow, number of marketmakers, and
amount of capital committed to marketmaking would redound in two significant ways to
the benefit of New York Stock Exchange member firms.
First, it would tend to make the regionals, in terms of retail trading activity,
marketmaking and quality of markets, less competitive relative to the New York Stock
Exchange. Second, it would have the effect of forcing foreign securities firms and other
foreign interests to channel their transactions in United States securities marketplaces
through many of these same New York Stock Exchange firms which do a profitable foreign securities business. Since these firms are New York Stock Exchange members,
it is almost certain that the increased order flow received by them would be transacted
on the Big Board, placing both regional exchanges and very possibly third marketmakers
at an even greater competitive disadvantage.
We suggest to the Subcommittee that, in addition to the grandfathering until December, 1985, of all current activities of foreign bank affiliates, it give serious consideration to amending H. R. 7325 to provide for the specific exemption of the dealer
specialist and bona fide arbitrage functions that are clearly delineated and permitted
in Section ll(a) of the Securities and Exchange Act as amended in 1975.
I appreciate most sincerely this opportunity to present our views.
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STATEMENT OF HART PERRY
PRESIDE"NT OF SOGEN-SWISS INTERNATIONAL CORPORATION
BEFORE
THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION,
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Federal Reserve Bank of St. Louis
REGULATION AND INSURANCE
OF
THE COMMITTEE ON BANKING, HOUSING,
FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
ON H.R. 7325
399
My name is Hart Perry.
I am President of SoGen-Swiss
International Corporation, the oldest foreign-owned investment
banking firm in the United States.
I am accompanied by our
Washington counsel, Albert J. Beveridge, III, of the firm of
Beveridge, Fairbanks
&
Diamond.
I greatly appreciate the
opportunity to appear before this Subcommittee today to express
my views on H.R. 7325.
The Bill as presently drafted would
prohibit certain foreign-owned securities affiliates from distributing or selling securities in the U,S, after a grace period
of less than nine years.
It would permit them to underwrite
securities but limits their distribution to foreign countries.
In its present form we believe the Bill would effectively put
us .out of business and may be based on a lack of understanding
of how firms such as ours operate as well as the realities of
the international financia.l markets.
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I.
History
SoGen-Swiss is the largest exclusively foreign-owned invest-
ment banking firm in the U.S. with capital of approximately $15 million
and about 110 employees.
We have offices in New York, Los Angeles,
San Francisco, Paris and Brussels.
In 1976, we were ranked 52nd
out of 300investment banking firms in the U.S. on the basis of
total capital, far behind such giants as Merrill Lynch ($632 million)
and Salomon Brothers ($175million), but nevertheless a significant
firm in terms of the total industry.
SoGen-Swiss is the result of the merger on July 1, 1973,
of two existing foreign-owned U.S. securities firms - Swiss
American Corporation, founded in 1939 as a wholly owned subsidiary
of Credit Suisse in Zurich, and SoGen International Corporation,
founded in 1968 as a wholly owned subsidiary of Societe Generale
in Paris. Our history in the United States, therefore, goes back
38 years.
At the time of the merger, the Swiss and French owners
were joined by the Amsterdam-Rotterdam Bank N. V. (Amro), the Societe
Generale de Banque (Brussels), SOFINA (a large Belgian investment
company), and Societe Generale Alsacienne de Banque (Strasbourg).
Our owners, therefore, come from four different countries and
include some of the larger international banks which operate
on a worldwide basis.
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l,
Our Firm's Operations
SoGen-Swiss offers to corporate and individual clients a
complete range of investment banking services,
include:
Our services
stock brokerage for U.S. and European institutions;
primary distribution, principally in the U.S., of both fixed
income and equity securities; secondary market activities in
corporate and municipal bonds; market-making in money market
instruments; investment advisory services; institutional research;
mergers and acquisitions for U.S. and European clients; management
of both private placements and public securities issues for U.S.
and European clients.
We execute most of our brokerage business
on regional stock exchanges, i.e., the Boston, PBW, Midwest and
Pacific Coast exchanges.
On the latter exchange we act as a
specialist market-maker.
we are fully regulated on three levels.
We are regulated
first at the federal level by the SEC as a broker-dealer under
the provisions of the Securities Exchange Act of 1934; second, at
the state level by the State Securities Commissions; and third,
by various self-regulatory bodies such as the NASD and the regional
stock exchanges.
2.
Our Shareholders' Banking Activities
All of our owners have interests in commercial banking
operations in the United States,
The commercial banking
activities of Credit Suisse in the United States are carried
out through a branch in New York and agencies in Los Angeles
and Atlanta.
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Federal Reserve Bank of St. Louis
Amro, Societe Generale and Societe Generals de
402
Banque have no branches or agencies in this country but do
own stock in European-American Bank and Trust Co., which has
three additional European bank owners as well.
All of these
commercial banking activities are completely separate and
apart from our operations.
These commercial banking activities
are closely supervised and are regulated by federal or state
banking authorities.
Credit Suisse offices are regulated by
state banking authorities, and European-American Bank and Trust
Company is a New York State Bank and a member of the Federal
Reserve System.
3.
Other Foreign-Owned Securities Affiliates
With minor variation, the above description of my own
firm applies also to several other firms similarly situated,
including ABD Securities, EuroPartners Securities Corporation,
UBS-DB and others.
At least two of those firms, ABD and
EuroPartners are submitting written comments for the record.
These two firms have asked that I also call t~e attention
of the Subcommittee to the separate written statements they
are submitting for the record of these hearings.
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Ii.
The Identity of SoGen-Swiss as an Independent U.S.
Securities Firm
As the Committee is no doubt aware, the structure of the
European banking system is different from that of the United
States.
As is customary in Europe, our bank stockholders, as
"universal" banking institutions, perform multiple functions
in their own markets.
They provide deposit and lending services
of the type offered by commercial banks in the United States.
They also offer securities brokerage and distribution services
normally provided in this country by investment banking firms.
United States banks operating in Europe also engage through subsidiaries in securities brokerage and distribution activities,
although they are prohibited from doing so in the
».s.
under
domestic law.
The predecessor firms of SoGen-Swiss were formed
primarily to ensure that customers _of our shareholders could
receive the same services from them in the United States
securities market which they were accustomed to receiving in
Europe.
This interest continues to be the primary reason for
our existence.
To serve these clients adequately we must be a
"full service" firm.
These are the same reasons U.S. banks
have entered foreign banking and securities markets.
SoGen-Swiss engages in no commercial banking activities.
We do not take deposits; we make no loans.
We are exclusively
involved in traditional investment banking matters.
Our operations
are distinct from and not related to the commercial banking
activities of our shareholders.
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Federal Reserve Bank of St. Louis
Each of the commercial banking
404
operations of our shareholders in the United States has its own
management; we have our own; there is no common management.
The
several operations are also separately capitalized and have their
own profit and loss responsibility.
In the daily conduct of our business we maintain arm's
length relationships with the branch and agencies of Credit
Suisse and with any banking facility of European-American.
These
relationships are no different than the ones we enjoy with such
u.s.-owned banks as the Morgan Guaranty Trust Company of New York,
the Harris Trust Company (Chicago), and the Bank of America,
just to mention a few.
For example, since the formation of
SoGen-Swiss, the firm has participated as an underwriter in more
than 1060 public issues; it has sold none of such issues to
European-American and only nine to the New York branch of Credit
Suisse.
During that same period, we estimate we have completed
more than 10,500 transactions in the secondary bond market of
which none were with European-American and only five with the
New York branch of Credit Suisse.
Let me emphasize, that even though we are owned by
foreign banks, we are an American firm with an American management
and a staff which is 90% American.
Although our clientele is
international in nature, we sell to and trade securities principally
with U.S. institutional clients.
Just as American institutions are
offering a healthy competition in the European markets, so are the
European affiliates increasing the competition in the U.S. markets.
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III.
Contribution to the U.S. Securities Market
While the expansion of our firm resulted primarily from
our shareholders' wish to better serve their customers, our
growing activity, together with that of the other foreign affiliates,
has been important to the U.S. securities industry as a whole.
In 1973 and 1974, you will recall, the securities industries
faced a severe crisis.
Many securities firms, both large and
small, suffered simultaneously a loss of business and disinvestment by their owners.
NYSE member firms' total capital
shrank by $438 million, due to withdrawals, losses and failures
during the period from mid-1969 to the end of 1974.
During that
same period, the public financing requirements of American industry
increased 50%, aggravating the impact of the capital loss in the
investment banking industry.
The forejgfi firms which brought
permanent capital to our industry during that period were among the
few sources of new capital to offset the contraction of its capital
base.
We submit that the capital so provided continues to be
needed by the securities industry, and its withdrawal would make
it more difficult for American industry to meet its financing
requirements in the future.
Nor should our shareholder's investment in the American
securities business be seen as passive.
SoGen-Swiss and other
foreign-owned firms have used their capital, side-by-side with those
domestic investment banking firms to help smooth out fluctuations
in the markets - for example, by participating, at a predictable
loss I should add, in the extremely difficult competitive bidding
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Federal Reserve Bank of St. Louis
406
market in 1974, when it was either difficult or impossible for
all except blue chip utility companies to come to that market.
Although we believe our contributions have been
important, it should be recognized that the industry has been
and will continue to be dominated by the larger u.s.-owned firms
such as Morgan Stanley, First Boston, Merrill Lynch, and Salomon
Brothers, to mention a few.
In addition, our shareholders' investment provides an
additional channel for direct investment in the U.S.
Many
customers of our shareholders prefer to deal with their own
bankers in direct investment as well as portfolio investment
transactions, just as many u.s. corporations prefer to deal with
U.S. banks and investment banking firms abroad.
They view
SoGen-Swiss and other foreign-owned firms as their bankers'
U.S. representatives.
Without the comfort derived from this
relationship, I believe that some foreign investors might be
reluctant to make direct investment in the U.S.
This foreign
investment continues to grow and has become a significant factor
in expanding the capital base of American industry which has
contributed to increasing employment within the U.S.
Finally, we are contributing to the developing of
decentralized securities markets in the United States.
In our
capacity as a specialist on the Pacific Coast Stock Exchange during
the 18 months ending June 1977, SoGen-Swiss handled approximately
16.5 million shares or 3.51 of the total volume on the Exchange
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Federal Reserve Bank of St. Louis
407
for that period.
The firm also executed as broker an
additional 8.2 million shares or 1.8% of the total for the
Exchange.
Other securities affiliates are even more important
factors in the regional exchanges.
For example, ABO plays
a major role in the Boston Stock Exchange, and ABD's chief
executive officer is currently the Chairman of the Exchange.
In addition it acts as a specialist on the Midwest and Pacific
Exchanges.
During 1976 ABO handled 1.9 million shares and during
the first six months of this year 1.2 million shares on the
Boston Exchange.
During those same periods it handled 10.l
million and 8.2 million shares respectively on the Midwest
Exchange.
On the latter exchange it is among the top three
specialist firms in terms of total volume handled.
A strong indication of the overall significance of
foreign-owned securities affiliates to the regional exchanges
appears in membership statistics aired by Congressman Moss in
last year's floor debate on H.R. 13876, the predecessor of
H.R. 7325.
In 1976, according to Congressman Moss, foreign
members accounted for 13% of the total membership on the Boston
Stock Exchange; 8% on the Midwest Stock Exchange; 6% on the
Philadelphia Stock Exchange; and 5% on the Pacific Coast Stock
Exchange.
Disappearance of these members would have obvious
adverse impact on the standing and liquidity of these markets.
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408
IV.
Impact of H.R. 7325 on SoGen-Swiss
Section 8 of H.R. 7325 would exclude from those nonbanking
activities of foreign banks qualifying for permanent grandfather
treatment "the business of underwriting, distributing, or
otherwise buying or selling stocks, bonds and other securities
in the United States."
This special category of securities
activities would be required to be terminated or divested by
foreign banks by December 31, 1985, to the extent that such
activities exceed the bounds of permissible activities for
national banks (principally, underwriting of Government securities
and general municipal obligations), with one limited exception
discussed below.
It should be clearly recognized that H.R. 7325 would
substantially alter the legal environment in which SoGen-Swiss
and other securities affiliates of foreign banks operate and
would inevitably diminish competition in the U.S. securities
markets.
It is the essence of investment banking to buy and
sell securities for one's own account, both in the course of
underwriting securities to be distributed in the primary market
and in the course of distributing or making a market in
securities in the secondary market.
Thus H.R. 7325 in its
present form would prohibit the securities affiliates of foreign
banks from performing after December 31, 1985, their customary
functions as broker-dealers, underwriters of securities and
specialists on exchanges.
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409
In a limited exception, the Bill would permit securities
affiliates of foreign banks to continue to participate in
domestic underwritings, so long as their distribution is effected
only outside the United States.
This is not a practical option.
A franchise to underwrite U.S. securities, but to sell only outside
the United States is no franchise at all because the primary and
secondary markets are inextricably interrelated.
Even if the selling efforts of SoGen-Swiss were
directed entirely outside the United States, it would be confronted, upon the failure of an offering to be fully placed, with
the need for access to the secondary market to distribute the
unsold securities in the customary manner.
The secondary market
for securities underwritten in the United States will almost
always be the United States.
Most managing underwriters would
be reluctant to include in their syndicates foreign-owned firms
which have such severe restrictions on their distribution.
In
any event, since U.S. issues are structured and priced for the
U.S. market for which the underwriting risk is calculated,
SoGen-Swiss, as an underwriter, would incur an undue risk if it
were required to distribute securities exclusively outside the
United States.
These difficulties are exacerbated by severe
limitations on the market for U.S. securities abroad.
Due
to withholding tax considerations, foreign investors rarely
participate in the U.S. corporate bond market and the interest
in new equity issues is at best sporadic.
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Federal Reserve Bank of St. Louis
The volume of
410
foreign investment in new issues in the U.S. has been
relatively small, and therefore the authority granted by the
Bill to underwrite in the u.s. but sell only abroad is of .no
real use.
It is argued that the nine-year grace period offered in
the Bill would allow firms such as SoGen-Swiss and their owners
ample time to restructure both their activities and relationships in the U.S. securities markets.
advantage is more hollow than real.
The presumed time
We know of no way in which
our shareholders could restructure their activities to gain direct
access to the securities markets of the U.S.
The elimination
of our essential securities distribution activities in the U.S.
would so undermine our profitability as to cast doubt on our
continued viability as a competitor.
The effect of the legislation on us would be immediate.
It is impossible to build or maintain a dynamic organization if
the principal activities of that organization are to be taken
away from it at a specific date.
The Bill would create severe
morale problems among existing employees and could make the
recruiting of additional or replacement staff virtually impossible.
Furthermore, customers would not be interested in the services of
a firm which they could not look to for assistance in the future.
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v.
Publie Policy Considerations
We believe this Committee and the House should take into
account other important and relevant public policy considerations
in addition to purely domestic banking policy objectives.
In 1975, Congress enacted the Securities Act Amendments,
premised on the need for increased competition and economic
efficiency in the country's securities markets.
Among other things,
that legislation opened markets to all qualified applicants,
including foreign-owned firms, which had been excluded from
membership on the New York and American Stock Exchanges.
away with fixed fee schedules unrelated to costs.
It did
The adverse
impact of H.R. 7325 on competition in the securities markets must
be weighed against the objectives of this most recent legislation.
The seriousness of ignoring national policy with respect to the
securities markets is detailed in a letter dated July 16, 1976,
from Congressman Moss to Chairman Reuss of the House Banking
Committee, a copy of which is attached to this statement so that
it wjll be included in the record.
The anticompetitive effects of H.R. 7325 cannot be
justified by reference to the purpose for which the Glass-Steagall
prohibition was initially imposed:
The protection of depositors
and the elimination of conflicts of interest arising through
affiliations between commercial banking and investment banking.
No abuses involving a securities affilate of a foreign bank have
been cited.
The potential for abuse has been substantially reduced
by improvement in banking supervision and more comprehensive
U.S. securities laws which have been administered with increasing
sophistication in recent years.
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Federal Reserve Bank of St. Louis
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412
In addition, federal banking policy is able to allow
deviations from Glass-Steagall when it is deemed consistent
with the national interest to do so.
Thus, despite all the
arguments which were advanced for enacting Glass-Steagall in
the first place, the Act has not been carried over to the
foreign activities of U.S. banks through affiliates abroad.
They are even permitted to underwrite securities of U.S.
corporations whose deposits they hold.
We understand this
to reflect a policy decision favoring the accommodation of
these securities activities to facilitate competition by U.S.
banks with foreign banks in both banking and securities markets
abroad.
I believe this to have been a healthy development.
Similar considerations should lead to an accommodation of the
banking and securities activities of foreign banks and securities
affiliates in this country to promote competition. Moreover,
there is an additional reason, encouraging capital formation,
which favors such a policy.
In the absence of a traditional Glass-Steagall rationale,
it has also been argued that, since foreign banks enjoy a power
not shared by domestic banks, they must necessarily enjoy an
unfair competitive advantage.
It seems to us that this supposed
competitive advantage is being distorted out of all proportion
to the underlying realities of the market place.
To our knowledge,
no industry group nor any study has suggested that the affiliation
of a limited number of foreign banks with securities affiliates
has produced any competitive imbalance in the banking industry.
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In
413
fact, Mr. John F. LeP. whn f"Ps:t1f1Pc1 -,n behalf of the New York
Clearing House, said that in his opinion quite the opposite
was true in that the presence of such foreign banks in the
U.S. helped U.S. banks gain access to markets abroad.
Existing legislation already limits the competitive
position of foreign banks vis-a-vis domestic ones.
A foreign
bank may not, on its own, maintain an investment banking affiliate
and also engage competitively in the retail banking business in
this country.
If a foreign bank merely has a branch or an agency
in the U.S., it is permitted to maintain an investment banking
affiliate,but its deposits may not be insured by the FDIC,and
therefore it cannot compete at the retail bank level_,with the
attendant benefits of a broad customer base.
On the other hand,
if the foreign bank were to establish a banking subsidiary, it
would be required to obtain FDIC insurance, which would permit
it to engage in reta.il banking, but it could not maintain an
investment banking affiliate, since the Bank Holding Company Act would
then be applicable.
These legislative restrictions are sufficient
to preclude any competitive disadvantage to U.S. commercial banks.
Let me also stress that this problem cannot be considered
outside its international framework.
In Europe, commercial banks
are often the dominant force in the securities markets and their
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Federal Reserve Bank of St. Louis
414
customers expect a broader range of services.
Thus, when they
expanded to the American market, foreign banks were already a
part of the securities industry outside the U.S. and were
logical new entrants into the U.S." securities markets.
From
this same perspective,if this Bill is enacted in its present
rorm it will produce a curious competitive structure.
In their
home countries European banks will face competition from other
European banks, from a large number of U.S. commercial banks and
from about 25 major United States securities firms.
Those same
European banks, who will be forced by this legislation to choose
between existing commercial banking operations and existing
securities affiliates, will be prevented from competing fully
in this country against the same firms who are competing against
them at home.
We know that there is no discriminatory intent
in this legislation, but it is understandable that some might
draw a different conclusion about the effects of the Bill.
VI.
Alternatives
As we view it, Congress has at least two alternatives to
H.R. 7325:
(ll no legislation at all with respect to securities
firms owned by foreign banks ~n this country; and (2) a flexible
permanent grandfathe~ing arrangement of the activities of
existing affiliates subject to a review of their activities by
an administrative body or bodies under appropriate legislative
standards to prevent possible future abuses.
We favor the first alternative of no legislation.
is necessary because no abuses have been shown.
cant potential for abuse exists.
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Federal Reserve Bank of St. Louis
None
No signifi-
There is no imbalance in
415
the competition between domestic and foreign banks in this
country by virtue of the present ability of foreign banks to
own securities affiliates under certain limited conditions.
However, if Congress feels it must take some
precautionary action, the second alternative, permanent and
full grandfathering, offers less drastic measures than those
imposed by the House Bill.
It will protect the public interest,
while at the same time preserving the recognized contribution
which firms like SoGen-Swiss and similarly situated foreign-bankowned securities firms make to the U.S. securities markets so
long as there are no abuses.
This is the basic approach
supported by the Federal Reserve Board, the Treasury, the State
Department, and virtually every other witness who has discussed
the issue before this Committee.
This would assure the continued
viability of existing firms as vital competitive forces, as
H.R. 7325 does not, and it would avoid the international complications which might arise from forcing divestiture of these firms.
Full grandfathering is also a matter of simply equity.
If Congress wants to change the rules, it may do so, but it should
not penalize those who have established businesses in this
country in good faith and·in conformity with all applicable laws.
Under the well established rules and principles of the dual
banking system, Credit Suisse chose to submit its activities to
regulation by the State of New York.
The banking activities of
our other shareholders are federally regulated and their investment in us complies with the Glass-Steagall Act and was specifically approved by the Superintendent of Banks of New York.
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Federal Reserve Bank of St. Louis
416
In the Bank Holding Company Act Amendments of 1970,
Congress consciously chose to exclude foreign banks with
branches from the coverage of the Act.
But if Congress
considers grandfathering at this time, it surely will
perceive that the equities of our shareholders are certainly
as strong as those of the domestic one-bank holding companies
grandfathered in 1970,
I am struck by the analogy of zoning laws.
When a
community imposes a new zoning code, it does not tear down
existing buildings but permits prior inconsistent uses to
continue.
This well recognized policy is based both on
principles of equity and on the recognition that it is
economically wasteful to make all structures meet the new
standard.
Those same considerations are applicable here, where
changes are proposed in laws which fostered substantial investments and commitments of manpower by the shareholders of
SoGen-Swiss and other securities affiliates.
Credit Suisse is no late entry into the securities or
commercial banking business in the United States.
It has been
affiliated with our company since 1939, and it opened its
commercial bank branch in New York City in April 1940.
Our
other shareholders and the principal shareholders of other
major foreign securities affiliates have been active in this
business for 4 to 10 years.
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Federal Reserve Bank of St. Louis
417
Today, Credit Suisse has been operating in the
commercial and invesbnent banking fields in the United States
in good faith and in conformity with applicable law for a
period of more than 35 years.
Under the circumstances, it
appears unduly harsh to deny it grandfather treatment.
Although we believe that existing securities affiliates
should at the very least be permanently grandfathered, we urge
this Committee to give serious consideration to permitting
additional foreign banks to engage in U.S. securities activities
under appropriate legislative safeguards.
This is a complex
question which I will not discuss further at this time.
However,
I call the attention of the Committee to the suggestions contained
in the statement of the Institute of Foreign Bankers to extend
to securities affiliates the exemption which the Federal Reserve
Board has recommended be granted to other non-banking affiliates.
We believe this to be a useful suggestion which should be further
explored.
I wish to thank you once again for the opportunity to
present our views.
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SUBCOMMITTEE 0,N OVERSIGHT AND INYUTICATIONS
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COMMITTEE ON INTERST.\T! AND FOR!IC.N COMMERCE
WASHINGTON, D.C.
20515
July 16, 1976
Honorable Henry 5. Reuss
Chairman
Committee on Banking, Currency,
and Housing
U. 5. House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
The prohibitions on domestic securities activities of
foreign banks, or firms associated directly or indirectly
wit~ foreign _banks, which have a commercial presence in this
country give me great pause. I hope you will find the concerns raised in this letter worthy of your usual thoughtful
consideration.
As I read section 8 of H.R. 13876, the International
Banking Act of 1976, and the accompanying committee report
(Report No. 94-1193), it would prohibit a foreign bank or a
person directly or indirectly associated with such a bank
which maintains a commercial banking presence in the United
States from engaging in securities activities in the United
States, directly or indirectly, unless that entity was
engaged in those activities on or before December 3, 1974.
"Grandfathered" firms could retain unchanged their investment banking arms in the United States only until 1985.
Thereafter, they would be required to restrict their United
S:ates investment banking activities to such a degree as to
render them, for all practical purposes, incapacitated competitors in the United States securities industry. If a
foreign bank were to surrender its commercial banking presence in the United States, then, and only then, could it
remain in the United States securities business. I understand, howe,er, that surrendering commercial activities
would be impracticable for an international banking organization.
Given my responsibilities as Chairman of the Interstate
and Foreign Commerce Committee's Subcommittee on Oversight
and Investigations and given my role as former Chairman of
the Consumer Protection and Finance Subcommittee which
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Federal Reserve Bank of St. Louis
419
extensively considered securities issues addressed in the comprehensive Securities Acts Amendments of 1975 (P. L.· 94-29),
those grandfather and prospective prohibition provisions raise
two major concerns. First, they appear to represent a policy
totally inconsistent with the 1975 Securities Acts Amendments.
Second, they could initiate a rapid deterioration of United
States economic relations with governments which currently permit United States commercial and investment banking firms to
operate in their respective countries.
Apparently, the issue which the House Banking Committee
perceived it faced was: the extent to which a foreign bank or
its securities affiliate operating in the United States should
be subject to the same limitations on its securities activities
as are applicable to national banks·. When this same issue was
before the House Commerce and the Senate Banking committees
during consideration of the securities legislJtion which ultimately became the 1975 Securities Acts Amendments, the New
York Stock Exchange and the Securities Industry Association
argued that a foreign bank or its subsidiary ought to be prohibited from exchange membership and related securities
activities, because·to do so would violate''national policy,
embodied in the Glass-Steagall Act of 1933, excluding national
banks from engaging in investment banking activities.
This reasoning was rejected by both the House and the
Senate. Indeed, an exactly contrary conclusion was reached
in light of the Congress' desire to• maximize competition in
the securities industry. With respect to exchange membership,
the Congress adopted a policy of open membership. A firm may
be denied ~embership only if minimum capital or competency
requirements are not met or if the person is otherwise statutorily disqualified.~ Foreign bank parentage is not a statutory
disqualification. (Section 6(b)(2) and Section 6(c)(3) of the
Securities Exchange Act of 1934,15 U.S.C. 78f(b)(2) and
7Sf(c) (3)).
The situation resulting from the Congress' resolution of
this issue in the 1975 Securities Acts Amendments may appear
on the surface to allow a foreign bank or its subsidiary to
do something which at least some domestic banks or affiliates
thereof may not do. This apparent anomaly is explained, however, by examining how foreign governments treat entities
which provide commercial and investraent banking services.
Unlike the United States, banking policies of most of our
major European trading partners perrait one entity or its
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Federal Reserve Bank of St. Louis
420
subsidiaries to engage in both banking functions. In those
countries, banks traditionally have been the entities ~hich
provided commercial and investment b11J1king services. Thus,
when a European entity expands its securities operations to
this country, it is generally a bank which does so.
Another apparent anomaly is that we allow domestic banks
through their Edge Act affiliates to engage in the securities
business abroad. In terms of international relations, we
have permitted foreign banks to engage in securities activities, although domestic banks are limited in that ·regard; our
trading partners have permitted United States banks to engage
in securities activities, although it may not be -legal in
this country. Requiring foreign banks to split their banking
functions in this country is unlikely to change their respective governments' internal banking policies. Such a requirement, however, may change h~w foreign governments treat United
States multinational banks irnd securities firms. After all,
it would be indeed inconsistent if ,te were to prohibit foreign
banks from doing in this country what we permit United States
banks to do abroad.
It would be equally inconsistent for the Congress, on
one hand, to prohibit a United States stock exchange from
discriminating against a securities firm of foreign bank
parentage .pursuant to the 1975 Securities Acts Amendments a~d,
on the other, to forbid a securities firm of foreign bank
parentage with a commercial presence in this country from
_being a member of a United States stock exchange pursuant to
the International Banking Act of 1976 as it is drafted. Enactment of section 8 certainly would give the Congress the image
of not knowing what we are doing.
It would be most unfortunate for this to occur, because
we did know what we were doing when we considered ·the problem
of foreign exchange members owned or associated with foreign
banks. Fearing that I might be impinging, at least partially,
upon -the jurisdiction of the Banking Committee, I maintained
the closest of liaison with the former distinguished chairman
of the Banking Committee, the late Honorable Wright Patman of
Texas, throughout our consideration of the foreign exchange
member provisions of the securities legislation which became
the Securities Acts Amendments of 1975. Having done so, he
voiced no dissent when the matter came before the full House
in 1974.
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The primary purpose of the 1975 Securities Acts .Amendments is to maximize competition in our securities marketplaces by removing unnecessary regulatory restrictions and
other impediments to competition. Equally important is the
statutory objective of developing the national market system
through the interplay of competitive forces whereby brokers
and dealers, exchange mark!ts, and market.s 9therwi~e ·than on
exchanges would compete fairly and be linked together through
communication and data processing facilities, In summary,
.The rapid attainment of a national market system as
envisaged by this bill. is.important, therefore, not
simply to provide greater investor confidence but
also to assure that the country maintains a. strong,
effective and efficient capital raising and capital
allocating system in the years ahead • . (Conference
Report, Securities Act~Amendments of 1975,.No. 94-229,
May 19, _1975, p. 91.)
One of the most important ways in which the national market
system will maintain strong, effective, and efficient markets is
by opening up the function of marketmaking to competition.
Dealers who stand ready and willing to buy or sell in certain
stocks compete by narrowing the spread between bid and asked
quotations. Increasing the number of dealers making markets in
a given stock also will improve the depth and liquidity of the
securities marketplaces. Narrowing spreads and building greater
depth and liquidity are essential for bolstering sagging public,
particularly small investor, confidence.
What competition there is today in making markets in New
York Stock Exchange listed stocks comes from third market
makers and specialists on regional stock exchanges. To provide
an idea of the anti-competitive impact of the section 8 prohibitions, consider the fact that one foreign securities firm
associated with a foreign bank having·a commercial presence is
a member of three regional exchanges and makes markets in about
55 stocks, most of which are major stocks. If the number of
market makers and the amount of capital committed to the market
making function are reduced, how can the regional exchanges
compete fairly with the NYSE? Likewise, regional exchanges
would be at a disadvantage in competing with third market
makers. Both of these expected results would be contrary to
the letter and spirit .of the law which directs the S·EC in facilitating the rapid development of the national market system, to
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assure "fair competition.among brokers and dealers, among
exchange markets, and between exchange markets and markets other
than exchange markets." (Section llA(a)(l)(c)(ii), Securities
Exchange Act of 1934.)
Another element essential to·good market making is order
flow. In fact, market making cannot be sustained without
sufficient order flow. Thus. reducing the number of member
firms on an exchange, even though the member firm is not a
market maker, would be detrimental to that exchange's efforts
to compete with market makers on other exchanges and third
market makers. Foreign members on the Boston Stock Exchange
account for about 13 percent of total membership; on the Midwest Stock Exchange, foreign members are 8 percent of the total;
on the Philadelphia, 6 percent, and on the Pacific they are 5
percent. It can be reasonably expected that many, if not most,
of these members will be affected by section 8. Although the
percentages are small, they are significant. Since the total
member of competitors is small, eliminating even a few of them
could be exp_ected to reduce order flow. significantly and to
decrease competition ·drastically.
Another way to evaluate the effect on competition is to
identify the beneficiaries of the section 8 prohibitions. Since
the primary market is the NYSE, which accounts for approximately
85 percent of this Nation's equity trades in terms of volume,
any reduction in the regional exchanges' order flow, number of
market makers, and amount of capital committed to market making
would redound in two significant ways to the benefit of l't'YSE
members firms. most of which, not surprisi,ngly. support section 8.
First, it would tend to make the regionals in terms of
retail trading activity, market making,.and quality of markets
less competitive relative to the NYSE. Second, it would have
the effect of forcing foreign securities firms and other foreign
interests to channel their transactions in United States securities marketplaces through many of these same NYSE firms which do
a profitable foreign securities business. Since these firms ~re
NYSE members, it is almost certain that the increased order flow
received by them would be transacted on the Big Board, placing
both regional exchanges and very possibly third market makers at
an· even greater competitive disadvantage.
Competition with the big NYSE member firms would be reduced
further in the arbitrage function. Many .f.oreign and domestic
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securities firms risk their own capital after United States markets close by offering blocks of United States stocks to institutional investors abroad at a price in relation to the NYSE close
in that stock. If the firm succeeds, not only can it be a very
profitable business, but also United States markets benefit in
terms of heightening interest in our securities marketplaces,
improving o.ur markets' depth and liquidity, and ultimately making
our markets better for all public investors. By prohibiting
foreign securities firms associated with foreign banks from
engaging in this arbitrage business, United States securities
firms gain a larger share, if not all, of this foreign business.
When foreign securities firms and their parent banks see
their-United States-directed securities business dry up, not
because of competition by superior .American securities firms,
but because of protectionist laws, we invite retaliation and
risk lessening foreign participation in our secu_rities marketplaces to the detriment of our public investors in the short
run and our economy in the long run.
It is for the reasons set forth above that I strongly
oppose section 8 of the International Banking Act of 1976.
At the very least, I suggest that this matter has not been
adequately heard in regard to its' irapact on competition in
our securities marketplaces, the development of the national
market system as envisioned by the 1975 Securities Acts Amendments, and its inconsistency with respect to that statute's
mandate for open membership on United States stock exchanges.
Therefore, I urge you to seek referral of this matter to the
Int,r,tate and Foroign co-e,c,
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Chairman
Oversight and
Investigations Subcommittee
424
STATEMENT OF MICHAEL E. TOBIN
PRESIDENT, MIDWEST STOCK EXCHANGE,1 INCORPORATED
ON H. R. 7325
INTERNATIONAL BANKING-ACT OF 1977
BEFORE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION,
REGULATION AND INSURANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
My name is Michael E. Tobin.
Stock Exchange, Incorporated.
I am President of the Midwest
I am accompanied today by Mr. Kenneth
I. Rosenblum, Senior Vice President and General Counsel of the Exchange.
We are pleased to hav_e this opportunity to com:ment on H. R. 7325.
This bill is addressed to a large nu:mber of important and difficult
questions.
~/lost of the provisions concern be.nking activities the.t do not
affect Midwest or its members, and I will not comment on then,.
Section
8 of the bill, however, wouid regulate or prohibit the securities activities
of firms affiliated with foreign banks.
A number of these firms are men1bers
of Midwest and, therefore, this section of the bill does concern us.
My
statement will be brief and limited to the reasons we believe Section 8 of
the pending legislation is unnecessary and inappropriate.
By way of background, the Midwest Stock Exchange is the second
largest stock exchange in the United States measured by dollar value.
During 1976, the trading volume on Midwest was approximately 282. 7
million shares with a total dollar volume of $9. 3 billion dollars.
Through
Junl? 30 of this year,. the volume on Midwest has been 142. 9 million shares
with a dollar volume of $4. 6 billion.
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Midwest has 310 member firms doing business with the public,
Of these, 150 are not members of the New York Stock Exchange.
Approximately
30 of our members are affiliated with foreign banks or securities firms.
Ten of our members are affiliated with foreign banks that maintain branches
or agencies in the United States and thus would be affected by this legislation,
(I will refer to these firms as foreign members.}
With respect to market making or specialist activities on Midwest,
we presently have 25 specialist units making active markets in approximately
400 securities.
Three of the foreign members act as specialists on our
floor or supply capital for specialists.
These firms are responsible for
market making in 41 securities or approximately 10% of all securities
traded on the Exchange.
In terms of order flow, during 1976, 736,694 transactions were
effected on Midwest.
Of this number, a foreign m,·.mber was -on one side
or another of approximately 6%.
My purpose in recounting this information is to make clear that our
foreign members are substantial and important memoers of our Exchange.
They are a significant source of order flow to our market and represent
an important and growing source of market making capital and expertise,
Obviously, Midwest is not dependent on foreign members for the viability
of its market,
But, the loss of order flow and market making commitments
from the affected firms would, unquestionably, adversely affect the liquidity
of that market to some degree.
Such a loss of liquidity might lead in turn
to the redirection of other orders to other markets and thus a further
weakening of our Exchange.
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As we work toward a national market system,
426
it is important--as was so forcefully argued by both Houses of Congress
in their Reports on the bill that became .the Securities Acts Amendments
of 1975 {the "Act")- -to strengthen, not weaken, the regional stock exchanges
as competitive trading centers.
Midwest is concerned that Section 8 of
H. R. 7325 would work against that objective.
Given the fair field for competition mandated by the Act, we
expect that the regional exchanges will play a much more important role in
the developing national market system,
We emphatically believe that
passage of the Bill in its present form would severely reduce our ability
to compete effectively.
Apart from the adverse consequences that Section 8 would have
on the Midwest market, we believe there are two further considerations
that argue ag<l.inst the enactment of this legislation.
First, there does not appear to be any der.1onstrated _regulatory
need for a prohibition on-foreign securities activities in the United States.
The foreign members on our Exchange have been good "regulatory" citizens.
Their capital is strong and their trading activity contributes to the maintenance
of fair and orderly markets •. Indeed, during the nine years that we have had
foreign members, not one disciplinary proceeding has been instituted against
such a firm.
Our view as to the absence of demonstrated abuses or regulatory
needs as to the securities activities of these foreign firms appears also to
be true as to their banking activities,
For example, last year in the Senate
hearings on a similar bill in response to a series of questions from Senator
Mcl11tyre, Arthur Burns, Chairman of the Federal Reserve Board, stated:
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"There is nothing to indicate that foreign banks
arc 'abusing' their powers in the sense that they are
using the opportunities available to them under the
present system to engage in any improper or unsound
banking practices. On the contrary it has been the
experience of the Board that foreign bc..nks operating
in the United States have scrupulously complied with
existing U.S. laws and regulations and have been
generally cooperative in their dealings with the Board.
11
We are pleased that the Federal Reserve Board Vice Chairman
Stephen Gardner,in his testimony before this Subcommittee last week,
proposed amending Section 8 of H. R. 7325 to allow foreign owned banks,
which buy and sell stocks and bonds for their customers through U.S.
securities affiliations, to continue in business after 1985.
In the absence of a demonst:r;ated need for action at this time-either because of the banking activities or· the securities activities of foreign
banks--we find it difficult to understand the need for hasty legislative action.
The questions concerning the appropriate role and regulation of foreign
affiliated broker-dealers in the United States markets are complex.
What
is needed, therefore, is not hasty, broad-brush action from the Congress,
but a thorough study of the activities of foreign firms.
This involves a careful
balancing of the benefits these firms provide for our domestic markets
against the potential dangers--competitive and regulatory.
The study should,
in addition cover the long-range implications of a bill such as this for the
overseas activities of United States securities fir1ns.
We believe the Congress
and the industry should be doing everything possible to enhance the opportunities
for domestic firms to compete abroad.
93-031 0 - 77 - 28
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H. R. 7325 may run counter to this
428
objective.
In a broader sense, all of us should be working to strengthen the
international capital markets--rather than building obstacles to their
operation.
The growing interdependence of the world's economies has
led to an increasing need for integrated financial markets.
The presence
of foreign firms in the United States and of domestic firms abroad is a
clear sign that multinational securities firms are necessary for the capital
markets of the future.
The Midwest Stock Exchange is opposed to any
legislation that would have a restrictive effect on such international development.
The second reason for postponing action on this legislation is the
studies of banks' secur_ities activities that have recently been concluded
and are now in progress.
I think we all agree that the securities activities
of foreign bar;ks present only a small part--a very small part indeed--of
the overall question of regulatory and competitive fairne3s in the United
States securities markets.
We have encouraged .and supported the studies
of bank securities activities by the Senate and the Securities and
Exchange Commission.
It is our understanding that the Securities and
Exchange Commission has recently forwarded its final reports to
the Congress and that the Senate study will be completed this year.
There
have been and undoubtedly will be, numerous recomm!a)ndations exposed for
public comment and debate.
When that occurs, I am sure we will all be
back here discussing much the same issues as are u·nder consideration today.
The difference, however, is that we will then have much greater knowledge
about the entire phenomenon of bank security activity and it will be possible
to place the issue of foreign bank participation in our s.ecurities markets in
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its proper context.
We agree with the former Comptrolle.r of the Currency
that "the wise course would seem to be to permit these current reviews
of 1930's policies [the Glass-Steagal studies] to be completed before concluding
action on this proposed legislation."
In closing, I want to emphasize that the Midwest Stock E.'<change
is committed to the principles of open competition embodied in the Securities
Acts Amendments of 1975.
In our view, our foreign :inembers have
contributed to the competitiveness of our marketplace and the vitality of the
United States securities markets generally.
Because of the absence of
demonstrated abuses and in light of the ongoing studies of the entire subject
of bank securities activities, we believe the constructive, competitive
securities activities of our foreign members should be allowed to continue.
Therefore, while we express no -view on the other parts of H. R. 7325, we
urge that Section 8 in its entirety be rejected.
Thank you.
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Mr. 8'r
GERMAIN.
You may now proceed.
STATEMENT OF JAMES E. DOWD, PRESIDENT, BOSTON STOCK
EXCHANGE, INC.
Mr. Down. Thank you, Mr. Chairman.
There is one change in the constitution of the panel this morning.
On my right is Kenneth I. Rosenblum, senior vice president and
general counsel of the Midwest Stock Exchange, representing Michael E. Tobin, who was unavoidably detained in Chicago.
On my left is Hart Perry, the President of SoGen-Swiss International Corp., as published.
We welcome this opportunity to express our views on the impact
on regional stock exchanges from the provisions of section 8 of H.R.
7325, the International Banking Act of 1977. As written, it would
prohibit a foreign bank, or a person directly or indirectly associated
with such a bank, which maintains a commercial banking presence
in the United States, from engaging in securities activities-Mr. 8'r GERMAIN. Mr. Dowd, in view of the fact that I just
consulted with Mr. Wylie, and he and I both had an opportunity to
read your entire statements-as a matter of fact, we read them and
we analyzed them as well--since we put your statements in the
record in their entirety, if you don't mind, what we would like to do
now is ask you a few questions based on these statements.
Mr. Dowo. Certainly.
Mr. 8'r GERMAIN. Mr. Dowd, in the conclusion of your statement I
have a problem. The way I read it, you are not asking that section 8
be deleted or that it permit permanent grandfathering.
You seem to be asking that it be amended to provide specific
exemption for the dealer specialist and bona fide arbitrage funds. Is
that a correct analysis, and in your view would that take care of the
problem?
Mr. Dowo. From my personal view, the grandfathering is only a
part because I think if there is a definite date for the cutoff of
grandfathering you will immediately lose capable people in these
houses. Even though 1985 is somewhat down the road, I think the
prospect of a limited or definite termination of some very capable
block traders and arbitraguers will have them immediately looking
elsewhere.
The principal argument that I have, however, sir, is that in 1975
the Congress did specify certain permitted dealer activity which
they found to be necessary to the functioning of securities markets,
and No. 1 on that list was bona fide dealer activity. Another one
was bona fide arbitrage; and it would seem to me that if we
incorporated the exemptions that were specified in the Securities
Act Amendments of 1975-it is a complex issue, but this Congress
did get through it and carved out those exemptions on permitted
activities in 1975-that at least to me, to that extent this International Banking Act should provide a similar exemption for the
foreign-affiliated firms.
Mr. ST GERMAIN. But you really haven't answered the question.
If that recommendation were to be accepted, would that, in your
view, answer the arguments as far as grandfathering is concerned?
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Mr. Down. AB long as it was a full grandfathering of dealer and
arbitrage activity, I would.
Mr. Perry may have some different views, and Mr. Rosenblum
may have some different views.
Mr. 8'r GERMAIN. Why don't we hear from the other two?
Mr. Perry?
STATEMENT OF HART PERRY, PRESIDENT, SOGEN-SWISS INTERNATIONAL CORP.
Mr. PERRY. AB previous witnesses have indicated, the reason for
our being established in the United States is to be able to serve the
domestic, that is European customers principally of our foreign
shareholders, and while what Mr. Dowd speaks of as an important
activity-and we do undertake it on the Pacific coast-we feel we
cannot really give the kind of service to our clients from our
shareholder banks and others unless we are permitted to engage in
the broad range of investment banking activities.
AB I say, we are a specialist but it is only a small part of the type
of business that we do. We do have to be fully involved in the
securities business in order to give the kind of service that is
required.
Thank you.
Mr. ST GERMAIN. Mr. Rosenblum?
STATEMENT OF KENNETH I. ROSENBLUM, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, MIDWEST STOCK EXCHANGE,
.
INC.
Mr. ROSENBLUM. Yes, Mr. Chairman. From the perspective of
Midwest, we have the concern that Mr. Perry is reciting, that the
firms that we are depending upon for dealer activity may well
determine that it is not sufficient for them to just be in that
activity, so that our concern is that by carving out a piece like Mr.
Dowd is suggesting, that that really would not do the job.
Again, from our perspective-I can understand the reason for Mr.
Dowd's recommendation because it is similar to our situation-if
you look at the direct importance of the foreign affiliates or the U.S.
affiliates of the foreign banks and what they add to exchange
liquidity, the easiest thing to perceive is their dealer activities and
the liquidity that adds to the exchange; so I think that as a fallback
position, what Mr. Dowd suggests would be considerably better to us
than the way the section reads, but our own opinion is that it
should be a full grandfather for all activities.
Mr. ST GERMAIN. If grandfathering were to be permanent, what
would your reaction be to the suggestion that I made to Governor
Gardner of the Fed last week, that jurisdiction over securities
affiliates be jointly shared by both the Fed and the ISEC?
Mr. PERRY. We have no problem with that, sir.
Mr. Down. I don't think we would have any problem with that
either. I think it is an excellent suggestion.
Mr. 8'r GERMAIN. Do you thhlk it is a constructive suggestion in
view of the fact that the SEC is more, I feel, with all due deference
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and all respect for the Fed, nonetheless more knowledgeable in this
area?
Mr. PERRY. I agree, sir.
Mr. Down. I do too, sir.
Mr. ROSENBLUM. I think there is a pattern for that in the 1975
Act amendments in the clearing and transfer area. I think if it· is
working, there is no reason why the same suggestion could not work
that you are offering.
Mr. ST GERMAIN. Thank you.
Mr. Perry, to what degree would it be practicable to permit U.S.
investment and commercial banks full or equal participation in the
domestic securities markets of the countries represented by the
parent banks of SoGen-Swiss?
We are aware as a result of our studies, our travels, that there
have been limitations on the banking operations of foreign banks,
including U.S. banks in Switzerland, since the late 1960's as a result
of a policy decision to protect the Swiss economy against
overbanking.
To what extent has this occurred or might it occur with respect to
domestic securities businesses in these countries in view of the
limited size of the economies involved?
Mr. PERRY. Could you repeat that again, sir?
Mr. ST GERMAIN. All right. To what degree would it be practical
to permit U.S. commercial investment banks full or equal participation in the domestic securities markets of the countries represented
by the parents of SoGen-Swiss, keeping in mind the fact that there
have been limitations on the operations of foreign banks including
U.S. banks since the late 1960's in Switzerland because of a policy
decision at that time to protect the Swiss economy against
overbanking?
Now, to what extent has this occurred or might it occur with
respect to domestic securities businesses in the countries that are
participants of SoGen-Swiss in view of the limited size of some of
the economies involved? Start with Switzerland.
Mr. PERRY. I cannot really discuss the commercial banking situation because I am not familiar with it. I do know we made a brief
analysis-I believe it was sent to the Treasury Department some
months ago-about the nature of the restrictions in the securities
markets in the other countries. I would be very happy to submit
that for the record. It is rather long. It varies from country to
country and I don't have the information with me here, but I would
be happy to submit it.
Mr. ST GERMAIN. If you would submit it to the subcommittee,
then we could have our very competent staff analyze it for us.
Mr. PERRY. Very good, sir.
[The following information regarding access to European stock
exchange was submitted by Mr. Perry for inclusion in the record:]
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STATEMENT BY HART PERRY
PRESIDENT OF SOGEN-SWISS INTERNATIONAL GORP.
ON
ACCESS TO EUROPEAN STOCK EXCHANGES
At present only two important European stock exchanges are not open
directly for U.S. membership as a member has to have the local nationality,
i.e., Brussels and Paris. However, in both countries the role of a stockbroker
cannot be compared with the status that the U.S. broker-dealers enjoy in this
country. The French and Belgian broker-dealers - the so-called agents de change engage in no activity other than the pure execution of orders. They will generally
not provide the full range of investment banking activities - including dealings as
principals - as is usual in the case of most U.S. broker-dealers. The latter type
of activities are fulfilled by investment or commercial banks, which have no
overriding impediments against foreign ownership or participation and which
enjoy, in case of a foreign ownership, the same rights and discounts on broker
commissions as their local national equivalents. Besides, in Belgium, all transactions with a market value exceeding the counter value in Belgian Francs of
U.S. $280, 000 can be executed off the exchange a"nd foreign brokers can therefore
trade blocks directly with Belgian institutions.
It has been asserted that U.S. broker-dealers would be seriously restricted
in their potential business with French nationals by the regulation, that French
citizens have to deposit their securities with a registered financial in~titution or
so-called 11 intermediaire agree, 11 for which classification a U.S. broker-dealer
could not qualify. However, we have been advised by our French shareholder,
the Societe Gene,rale, that U.S. broker-dealers can in principle be registered
as financial institutions with the right to act as custodian. In practi.ce it will be
an easier solution to take a participation in or to acquire an existing registered
financial institution, which will give U.S. broker-dealers the indirect possibility
to act as custodians.
The remaining major European continental stock exchanges - Amsterdam,
Frankfurt and Zurich - all have examples of foreign owned firms as full members
of the stock exchange. In the case of Switzerland one A licensed securities dealer
is owned by a large U. K. commercial bank. In Holland and Germany foreign
owners of local stock exchanges' member firms include U.K. merchant banks,
which are more or less comparable with U.S. investment banks as far as capital
strength, activities and legal structure are concerned. If the U. K. merchant banks
have been able to comply with the various rules in those countries, there is no
reason to doubt that the larger U.S. broker-dealers could comply with those rules.
As far as London is concerned, the present rules would appear to make it
difficult for a foreign broker-deale·r to become a full exchange member.
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I have been less explicit about the regulations on the London stock
exchange since our shareholders are all continenfal Europeans. We feel
ours elves better qualified to comment on the exchanges situated on the
continent.
To summarize, out of six exchanges investigated, only two - Paris and
Brussels - officially bar foreign membership because of the nationality requirement. However, in the case of Paris and Brussels the role of a broker is
extremely limited since in France a broker cannot act as a principal and in
Belgium a block with a value of over $280,000 can be traded off the floor. In
three countries - Germany, Holland and Switzerland - foreign owned members
of the local exchanges do exist and is therefore a possibility for U.S. brokerdealers. Finally, in one country - U.K. - there exists a theoretical possibility
for foreigners to acquire or become a member of the exchange, but in practice
this is hard to realize.
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Mr. ST GERMAIN. Mr. Wylie?
Mr. WYLIE. Thank you, Mr. Chairman.
I would point out Switzerland did take this action as far as
commercial banking is concerned in the late 1960's and it is still in
effect.
Mr. PERRY. I do think one should look at the international
markets, however, particularly where the American commercial
banks are permitted by the U.S. authorities to engage in investment
banking operations, where the principle lying behind the GlassSteagall Act appears to us to have been waived in accordance with a
legitimate U.S. national objective, and permit the commercial banks
to actually underwrite the securities of companies with whom they
maintain deposit relationships in the United States and, in addition, they do participate in the Eurobond market, which is a
completely unregulated market.
Mr. ST GERMAIN. I am still repeating that Switzerland did take
this action in the late 1960's and that is what we want to be
reassured of. I hope your paper will shed some light on this.
Thank you.
Mr. Wylie?
Mr. WYLIE. Thank you, Mr. Chairman.
Mr. Perry, in your statement on page 6 you say there is no
common management between your organization and the bank
which owns you, so that in effect you say you hardly do any
business with them. Is that a fair analysis of what you say?
Mr. PERRY. Yes, that is a fair analysis. I could cite one example.
Recently, where we helped a foreign client in acquisition in the
United States, they were looking for term loans in order to finance
the acquisition, we exposed them to at least a half dozen or more of
the U.S. banks as well as European-American banks.
Mr. WYLIE. So the policy of the Glass-Steagall Act for domestic
companies is in effect being carried out?
Mr. PERRY. That is right.
Mr. WYLIE. So what is the harm in putting it in the statute?
Mr. PERRY. You put it in a statute in a way it would put us out of
business.
Mr. WYLIE. You mean you don't think your securities business
could be maintained as a separate entity?
Mr. PERRY. No, we would not because our basic business is
investment banking and that includes the very important activities
such as underwriting and selling securities in the United States,
being a specialist here, et cetera, and those we would no longer be
permitted to undertake.
Mr. WYLIE. Although there might be a transfer of ownership, do
you honestly think that you would be put out of business as a
securities dealer?
Mr. PERRY. Oh, absolutely.
Mr. WYLIE. What do you think of a recent announcement which
was made from Columbus, Ohio, which is my_ own hometown,
wherein the City National Bank in concert with Merrill, Lynch has
proposed to implement a program which would combine brokerage
services with the payment of interest on demand deposit and credit
card services? Would you be likely to branch off into that area with
your parent bank?
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Mr. PERRY. No; we are a completely different kind of bank. In the
investment banking community you have the large retail firms such
as Merrill, Lynch who operate nationwide. We are strictly a wholesale bank. Our clients are all the large, major trust institutions,
insurance companies. Those are the ones to whom we sell fixedincome securities, for example.
Our clients to the extent that we have them in the United States
are all large corporate kinds of clients.
Mr. WYLIE. So you would not become involved with retail customers and you envision this arrangement between Merrill, Lynch and
City National, as being a retail arrangement?
Mr. PERRY. Right.
Mr. WYLIE. Would you care to comment, Mr. Dowd?
Mr. Down. I do not see SoGen-Swiss as being even a junior-grade
Merrill, Lynch because, as Mr. Perry has described, Merrill, Lynch
has many customers with substantial retail credit balances and it
would be through the use of these credit balances, as I understand
the proposition, that this credit card arrangement could be operated. I don't see SoGen-Swiss either with the incentive or with the
credit balances with which to work that type of arrangement.
Mr. WYLIE. You don't. You don't envision it as a development
which you might look into as a possibility for your operation?
Mr. Down. From an exchange standpoint, there are very few
Merrill, Lynches on this earth. What might be possible for Merrill,
Lynch as an incentive would probably not be possible for many
others in this world.
Mr. WYLIE. Mr. Rosenblum, do you want to comment on that?
Mr. ROSENBLUM. I have nothing to add to that, sir.
Mr. WYLIE. Thank you, Mr. Chairman.
Mr. 8'r GERMAIN. Mr. Dowd, on page 8 you state:
It would indeed be inconsistent if we were to prohibit foreign banks from doing in
this country what we permit U.S. banks to do abroad.
This appears to support the argument for reciprocity which I feel
Under Secretary of the Treasury Solomon to have repudiated very
effectively in his testimony last week, but let me now take you for a
little walk.
If we permit foreign banks to do in this country what the U.S.
banks do abroad, would it not be inconsisent to prohibit U.S. banks
from doing in this country what foreign banks can do and what the
same U.S. banks can do abroad? That being the case, if that were in
the affirmative, would this not be a case for repealing the GlassSteagall Act and allowing U.S. banks to underwrite and sell securities here in the United States?
Mr. Down. I think you would have inconsistency upon inconsistency and you could go down the road indefinitely, one offsetting
the other. I can foresee some real problems. I agree with you, sir.
Mr. ST GERMAIN. So you see a problem with the State?
Mr. Down. I do indeed. I do indeed.
Mr. ST GERMAIN. Because I don't think that the Boston Exchange
and Mr. Down are prepared to come and testify in behalf of repeal
of Glass-Steagall.
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437
Mr. Down. No, indeed.
Mr. ST GERMAIN. I don't think so.
Mr. Rosenblum?
Mr. ROSENBLUM. Mr. Chairman, there are obviously
inconsistencies no matter what, I am afraid, your committee ends
up doing. I think though that the main difference between the kind
of things we are talking about is that when you start talking about
amending the Glass-Steagall to permit domestic banks to do some of
the same things, you have a whole series of different questions
relating to relative power and what the strength of these domestic
banks might be in the U.S. securities markets compared to what the
U.S. affiliates of foreign banks can do in the U.S. securities
business.
I certainly recognize the inconsistency that you pointed out.
Mr. ST GERMAIN. You are not telling me that the securities firms
that are affiliates of foreign banks are affiliates of banks that are
without substantial assets, are you?
Mr. ROSENBLUM. No, but I am saying that-Mr. 8T GERMAIN. They are pretty comfortable, aren't they?
Mr. ROSENBLUM. The key thing you would be looking to regulate
in terms of a foreign bank that is operating in the United States
would be its banking activity, not the minor securities activity that
it might be doing in the United States.
Mr. ST GERMAIN. I guess it boils down to whose ox is being gored,
doesn't it? But you have to understand that you may be in a
position where you cannot have it both ways.
Gentlemen, we will have additional questions to submit to you in
writing. I would ask that you assist the subcommittee in that
manner because there are members who have conflicting meetings
and couldn't be here this morning.
Mr. ST GERMAIN. I want to thank you for your presentation. We
are certainly grateful to you for your replies as far as joint jurisdiction is concerned should there be a decision for permanent
grandfathering.
Mr. PERRY. Mr. Chairman, I wonder if I could ask that my
comments that I prepared for oral presentation, which were not
delivered, be also included in the record?
Mr. ST GERMAIN. Absolutely. Without objection.
[Prepared testimony for oral delivery by Mr. Perry follows:]
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TESTIMONY OF HART PERRY
PRESIDENT OF SOGEN-SWISS INTERNATIONAL CORPORATION
My name is Hart Perry.
I am President of SoGen-Swiss
International, a New York corporation, which is the oldest
foreign-owned investment banking firm in the United States.
I appreciate very much the opportunity to appear before this
Subcommittee.
In my testimony I will describe the activities of my
firm and how the proposed legislation would effect it.
I will
examine the need for legislation and will make certain
recommendations.
Our company is jointly owned by a group of foreign
banks and companies.
It is the product of a merger in 1973
between securities affiliates of two foreign banks, Credit
Suisse and Societe Generale, joined at that time by additional
foreign shareholders.
Under the "universal" banking system in
Europe, our sharehol~ers provide both investment and commercial
banking services to their clients.
We were established to
service the investment banking needs of those clients.
Credit
Suisse has separate commercial banking offices in the United
States while our other bank shareholders are participants in the
European-American banking group.
Our company has been serving the U.S. securities markets
for a period of 38 years as an affiliate of Credit Suisse.
The
prospect of legislation which could terminate this relationship
of many years naturally disturbs us.
We are proud of our achieve-
ments and would like to familiarize this Subcommittee with our
role in the country's securities markets.
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439
We have no common management with any of the commercial
banking offices of our shareholders.• We operate wholly
independently of them.
Our dealings with their offices will
measure up to scrutiny as arms-length transactions no different
than our relationship with many U.S. banks with whom we do
business.
For example, since 1973 of the 1060 public issues
we have participated in as an underwriter, we have sold none
of such issues to European-American and only nine to the New
York branch of Credit Suisse.
SoGen-Swiss makes no loa11s and takes nu deposits.
Its largely American staff offer,s a full range of investment
banking services to institutional and corporate but not·retail
clients.
We engage in both primary distribution and ~econdary
market activities, furnish investment advice, institutional
research, arrange private placements, and advise on mergers
and acquisitions.
Our activity, together with that of other foreign-owned
affiliates like ABD, and EuroPartners, who are not testifying
today, but who will submit statements for the record, has been
important to the U.S. securities industry.
In the crisis which
the industry faced in 1973 and 1974, we were among the few
sources of new capital to offset the contraction of the industry's
capital base.
We have also used our capital, side-by-side with
domestic firms, to help overcome the difficult market conditions
of that period, such as the competitive bidding markets.
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SoGen-Swiss and the other foreign securities affiliates
have contributed importantly to the regional stock exchanges.
ABD, for example, is. the third largest specialist on the
Midwest Stock Exchange in terms of volume.
Most of our business
is transacted on the regional exchanges.
H.R. 7325 would compel our company after nine years to
terminate vital segments of our business.
For example, we could
not act as specialists on the regional stock exchanges or underwrite securities for distribution in the U.S.
The Bill would permit us to sell underwritten securities
abroad.
This is not a practical solution. For example, because
of the interest withholding tax, virtually no U.S. issued debt
securities are sold abroad.
No managing underwriter would include
us in syndicate participations because we would not be able to
sell into the only meaningful market for such underwritten
U.S. securities.
These drastic restrictions would diminish competition
by restricting access to the securities markets in a manner that
seems wholly out of character with the Securities Act Amendments
of 1975, which promised open access to all qualified applicants.
The effect on our operations would be immediate.
With a death
sentence hanging over our head, it would be impossible to keep
or recruit qualified personnel to carry out our activities.
Let me turn now to the need for legislation.
We are
puzzled as to why securities affiliates have become an issue.
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441
It appears to us tha_t we have been included in the legislation
almost as an historical accident since the major economic
issues lie in other sections of the Bill.
In most cases legislation is introduced because there
is an existing problem or clear evidence that a problem will
arise.
But what is the situation here?
We know of no abuses and none have been cited.
On the
contrary, securities affiliates have contributed to the smooth
functioning of the securities market and have enhanced competition.
Do our shareholders enjoy a competitive edge in commercial
banking in the U.S.?
Mr. Lee of the Clearing House Banks says
"no".
Do we have an unfair competitive advantage over U.S.
securities firms because we compete with them?
I know that
the SIA has spoken in favor of the legislation, but I can't believe
that in New York,where we compete,such large firms as Merrill
Ly.nch, Salomon Brothers or Morgan Stanley believe that the
foreign affiljates, with a total market share of less than 4%
in underwriti11g, are a threat or have a competitive advantage.
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442
Is there a need for perfect symmetry in the separation
between investment banking activities and commercial banking
activities?
Are there no exceptions to the principles which lie
behind the Glass-Steagall Act?
I would ask the committee to
examine the legislation in a way that a continental European
would.
The main purpose of the Glass-Steagall Act, as explained
to him, is to protect depositors of U.S. banks from the risks
of the securities business and to eliminate conflicts of
interests which could undermine sound banking practices.
It is
hard for him to understand why these same policies are not
being followed abroad where U.S. commercial banks through
affiliates are permitted by U.S. authorities to engage in
securities activities which are denied to them in the U.S.
Indeed, abroad U.S. banks can underwrite securities issues of
U.S. c~ients with whom they have deposit relationships and
partici'pate broadly in the securities markets including the
Eurobond market which is completely unregulated.
He could only
conclude that other national objectives can override the basic
policies of the Glass-Steagall Act.
Is it not reasonable then for him to suggest that in
the present situation there are compelling arguments that other
U.S. economic policy objectives, such as capital infusion and
competition in the securities industry as affirmed by the Congress
in 1975, outweigh
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the rigid application of Glass-Steagall to
443
foreign securities affiliates particularly in light of this
nation's consistent post war policy of encouraging free
capital movement among nations.
For all of these reasons, there appears to be no need
for new federal legislation with respect to the activities
of foreign-owned securities affiliates.
Certainly, H.R. 7325
in its present form does significant harm without achieving
any tangible benefits.
Divestiture is a very harsh remedy.
It is justifiable
only when there is evidence of widespread abuse or threat of
competitive dominance.
That is not the case here.
At the very least the Bill should permanently grandfather existing securities affiliates.
This is a matter of equity.
We have followed the rules of the game.
The investments of our
bank shareholders have been specifically approved by the New York
Superintendent of Banks under provisions of the New York Banking
Law parallel to the Glass-Steagall Act.
The election of our con-
trolling shareholder to operate exclusively under State banking
law is in our well established dual banking tradition.
In
addition, SoGen-Swiss is governed by the rules and regulations
of the SEC, NASO, and regional exchanges.
Grandfathering is supported by the Federal Reserve Board,
the Treasury and the State Department and virtually every witness
who has testified before this Committee.
We believe the case
for grandfathering SoGen-Swiss and the other securities affiliates
who have been operating for many years in the U.S. is compelling.
Thank you very much.
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93-031 0 - 77 - 29
Federal Reserve Bank of St. Louis
444
Mr. Down. Thank you, Mr. Chairman, on behalf of the panel for
your courtesy and for the attention of the subcommittee.
Mr. 8'r GERMAIN. As I said, it is always good to have a neighbor
from Massachusetts.
Mr. PERRY. Thank you very much, Mr. Chairman.
Mr. WYLIE. Mr. Chairman, I wonder if I might ask them to
comment a little more fully on my question which relates to their
ownership by foreign banks?
The suggestion was made if this bill passes they are out of
business, that they have no value beyond being an affiliate of a
foreign bank; and I would like for you just to expand a little bit as
to why you say that for the record.
Mr. PERRY. I am sure that if my shareholders were given the
alternative of operating in the commercial banking field or investment banking field, which this legislation appears to do, they would
wish to withdraw the capital they have put in our firm. Whether
any other buyers would come along to buy them out, I haven't any
idea. The history for the last 10 years or so has been one of a steady
contraction of capital in the securities industry and more and more
capital has been withdrawn and, in fact, the foreign capital has
been one of the few sources of capital that has gon~ into the
industry over the last 10 years.
Mr. WYLIE. As I understand it right now, you operate pretty
much as a domestic securities dealership would operate.
Mr. PERRY. That is right, sir, a wholesale firm largely with
international clientele. Most of the clients that we serve are those
who come to us from Europe. Our shareholders feel it is important.
Just to cite an example as the reason for this. One of our shareholders competes in the European market very aggressively with the
major U.S. security houses such as Morgan, Stanley. They feel that
in order to preserve their relationships in Europe it is important
that they have a representative in the United States who can
service the investment banking needs of European companies in the
United States.
Otherwise, they are at a competitive disadvantage as they compete, and they do compete strenuously in Europe. It is just a small
example but a typical one.
Mr. Down. I would like to redirect your attention to point 4 in my
prepared testimony on page 6.
The perceived consequence that we saw from passage of the bill
as written would be exactly as Mr. Perry has described it. This
business is not without its headaches, with taxes, SEC regulations,
et cetera.
If you did cut off a substantial segment of their potential business
here, they might just decide that it is not worth the aggravation and
give their customers securities business, whatever it is, to the New
York Stock Exchange firms, again compounding the almost monopoly that that exchange now has.
Mr. WYLIE. Thank you very much.
Thank you, Mr. Chairman.
Mr. ST GERMAIN. Once again, thank you.
Mr. PERRY. Thank you, Mr. Chairman.
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445
Mr. ST GERMAIN. At this time we are very fortunate the way the
panel has been proceeding here that we have a good deal of time
remaining before the House goes into session, and we are indeed
additionally fortunate in that the panel representing the Institute
of Foreign Bankers is present and we hope that we can get through
a good part of their presentation.
If they would come forward now, Mr. Mario R. de Luca, executive
vice president, the Bank of Rome, accompanied by Isao Ichikawa,
general manager of the Mitsubishi Bank, Ltd., Tokyo; Rudolph
Kuchler, senior vice president, Union Bank of Switzerland; and
Steuart L. Pittman, counsel, Institute of Foreign Bankers.
Mr. DE LucA. Thank you very much for hearing our testimony
now.
Mr. ST GERMAIN. Mr. De Luca and members of the panel, I must
say you have been very diligent. You have a very exhaustive
presentation and without objection, we will put the entire presentation in the record following your oral presentation, and the time is
yours.
Mr. ST GERMAIN. You may orchestrate as you would like to be
heard.
Mr. DE LucA. Thank you. Our verbal presentation will be much
shorter, not to trespass on your time. Copies of this verbal statement will be distributed to you for quick reference.
STATEMENT OF MARIO R. DE LUCA, EXECUTIVE VICE PRESIDENT, BANCO DI ROMA (BANK OF ROME), CHAIRMAN, INSTITUTE OF FOREIGN BANKERS; ACCOMPANIED BY ISAO
ICHIKAWA, GENERAL MANAGER, MITSUBISHI BANK, LTD., TOKYO; RUDOLPH KUCHLER, SENIOR VICE PRESIDENT, UNION
BANK OF SWITZWERLAND; AND STEUART· L. PITTMAN, COUNSEL FOR THE INSTITUTE
Mr. DE LucA. Mr. Chairman, I am Mario de Luca, chairman of
the Institute of Foreign Bankers and executive vice president of the
Banco di Roma. With me are Mr. Rudolph Kuchler of Union Bank
of Switzerland, vice president of the institute; Mr. Isao Ichikawa of
Mitsubishi Bank, a trustee of the institute; and Mr. Steuart
Pittman, our counsel.
The institute has at present 142 members composed of the offices
in the United States of foreign banks in over 35 countries from
different parts of the world.
Our written statement is longer than we would like, but the
subject is complex and all that we have written seems to us
necessary and important. These statements of the institute will be
the only available reaction from those who would be directly
regulated by the bill you are contemplating. We hope they will have
the personal consideration of the members of the subcommittee.
Mr. ST GERMAIN. Of that you may rest assured.
Mr. DE LucA. Thank you, sir.
The bill is unnecessary. We appreciate the suggestions of the
Federal agencies for moderating the bill and recognize that some of
these are improvements. Nevertheless, our view continues to be
that this bill is unnecessary and has the effect of aggravating
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Federal Reserve Bank of St. Louis
446
inequality of treatment of foreign and domestic banks rather than
the stated purpose of placing them on an equal footing.
This view was not accepted by your subcommittee last year. We
have been advised by some that we should go along with the best
available bill and stop arguing. We have reviewed the question
again with our members and others concerned with this subject.
Our conclusion is that our reasons have not been fully appreciated
and that we have a duty to try again to explain the difficulties we
perceive in this bill.
We believe that this hearing is again demonstrating that this is
not a bill of consensus but one of controversy, and that the controversy is between regulators and between differently situated domestic banks, not merely the anticipated differences between the regulators and those regulated.
Governor Gardner said on Tuesday that the United States is the
only nation in which the central bank does not regulate foreign
banks. This is a consequence of the U.S. dual banking system which
is unique in the world. Foreign banks are extensively and competently regulated by the State banking departments who all impose
reserve requirements.
Furthermore, foreign banks supply regularly information reports
as requested by the Fed, and voluntarily comply with the marginal
reserve requirements as laid down by the Fed.
The figure of $76 billion in total assets of the foreign banks in the
United States is often quoted together with the increase of operations in these last years to demonstrate the necessity of Federal
regulation. Actually, the Fed statistics submitted at this hearing
show only $66 billion and not $76 billion of assets.
What may have been overlooked is the fact that U.S. banks
expanded abroad at a much faster pace in the preceding decade and
that the total assets stood, as of April 1976, at about $220 billion
which is over three times as much as the foreign banks have in the
United States. Measured by assets, the foreign bank share of the
U.S. market was 6 percent in 1974 and is only 7 percent in 1977, a 1
percent increase through the years, hardly alarming.
More realistically measured by deposit business, the foreign bank
share is under 2 percent.
Multi-State branching is perhaps the key issue. Section 5 of the
bill assigns a priority for equal treatment among banks over equal
treatment among cities competing for the business which derives
from international financial center status. It would impose a Federal veto on efforts by this country's most important business
centers to attract foreign bank branches.
The recent success of Chicago in attracting over two dozen foreign
bank branches would have been aborted by this bill. New foreign
bank activities in the United States would tend to concentrate in
New York City to the detriment of other growing financial centers.
Foreign banks' branching in more than one State are primarily
those with New York branches which have opened second branches
in Chicago. Illinois has solved the conflict between the aspirations
of Chicago for international financial center status and the concerns of Illinois banks against competition from out-of-State banks
by the simple expedient of limiting foreign bank branches to a
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Federal Reserve Bank of St. Louis
447
single location in the financial district of Chicago. They are thus
effectively kept out of retail banking and confmed to their principal
interest which is wholesale banking.
The large domestic banks which are the competitiors of foreign
banks are far more active by any count in interstate wholesale
banking than are foreign bank branches. In comparison with foreign banks, these large U.S. banks have about 23 times the number
of locations outside their home State in about ten times the number
of States. The alleged competitive advantage is therefore illusory.
Nondepository institutions and State-chartered subsidiaries
should not be covered by this bill. This bill is intended to provide
equal treatment under Federal laws which are designed to regulate
depository institutions. However, foreign bank agencies and commercial lending companies are nondepository institutions and as
such should not be covered by this bill. State-chartered subsidiaries
should not be covered either because they are already federally
regulated under both the Bank Holding Company Act and the
Federal Deposit Insurance Act.
The Chairman of the FDIC has correctly advised this subcommittee that foreign bank branch business in the United States is not
the type of retail deposit business which FDIC insurance can
protect and that foreign-owned retail banks, which as a practical
matter must be organized as State-chartered subsidiaries, in all
cases are required by the Bank Holding Company Act to carry FDIC
insurance. I emphasize this last point as it was a matter of some
confusion on the first day of these hearings. Also, part of the
reserves foreign branches have to maintain at State level are
already pledged for the protection of depositors.
We concur in the FDIC conclusion that mandatory insurance
unduly discriminates against foreign bank branches in the United
States, particularly because the FDIC insurance fund must be
protected by security arrangements uniquely applied to foreign
bank branches.
Turning to monetary policy: Section 7 authorizes the FRB to
impose on certain foreign bank operations in the United States any
or all of the Federal Reserve Act restrictions on domestic member
banks. This is not equal treatment; on the contrary, this is discrimination against foreign banks. Federal Reserve Board reserve requirements and other restrictions, optional for domestic banks,
become mandatory for foreign banking in the U.S.
Monetary policy is the only specific need alleged in the hearings
for a greater Federal role in foreign bank regulation. This need has
been merely asserted as self-evident, without factual support or
argumentation about the monetary quantities involved or about the
ample opportunities for the movement of funds to bypass the U.S.
offices of foreign banks.
The bill attempts to use a size distinction to overcome these
obvious discriminations. Even if size distinctions made good law,
which they clearly do not, the logic fails for two reasons. First,
while the large domestic banks may all be members of the Federal
Reserve System, this is their choice and they can withdraw if and
when the benefits are outweighed by the burdens.
Second, if size is relevant, realistic comparisons with domestic
banks should be made with the U.S. operations and should not
include the many diverse overseas operations.
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448
EEC witnesses have focused on the subject of nonbanking activities and, as submitted in our written statement, we concur with
their views.
If this legislation is enacted, the grandfather date should be the
date of enactment. If this is unacceptable, it should be at least no
earlier than the date of reporting the bill to the House floor.
In conclusion, to our view, foreign bank operations in the United
States do not subject domestic banks to any unfair competition and
in practice do not impair the Federal Reserve Board's conduct of
monetary policy. Rather than offering evidence on these key issues,
proponents of the bill have tended to assert as a matter of principle
that foreign banks require Federal regulation. The inherent diversity in U.S. banking is not called unfair competition as between
domestic banks; to do so in the case of foreign banks appears
illogical.
We do not object to changes in law applied equally to foreign and
domestic banks, but we believe this bill, while purporting to cure
differences in treatment, creates significant new discriminations
against foreign banks.
Thank you very much, Mr. Chairman.
[The.entire statements of the Institute of Foreign Bankers follow:]
Statements of
THE INSTITUTE OF FOREIGN BANKERS
Before the
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND -INSURANCE
of the
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
on
LEGISLATION FOR FEDERAL REGULATION OF FOREIGN BANKS
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Federal Reserve Bank of St. Louis
A.
COMMENTS ON H.R. 7325
B.
COMMENTS ON FRB AMENDMENTS
C.
PROSPECTS FOR IMPROVING H.R. 7325
449
TABLE OF CONTENTS
Page
STATEMENT A
COMMENTS ON H.R. 7325
I
Background
A-2
1.
2.
A-2
3.
4.
5.
6.
II
Foreign Bank Legislation is Not Needed Now
The Allegations of Competitive Advantage are
Applicable Only to Foreign Bank Branches,
Not to Agencies or Subsidiaries
Regulatory Diversity Creates Bifferences but
Not Unfair Competition
The Proposals Discriminate Rather than
Equalize Treatment
Foreign Bank Operations in the u. s. are Heavily
and Effectively Regulated
Growth of Foreign Banks in the u. s. Has Been
Beneficial to the u. s. and Consistent with
World Trends
A-5
A-8
A-10
A-13
A-14
Key Issues of H.R. 7325
A-18
1.
2.
3.
4.
5.
A-18
A-22
A-26
A-28
Interstate Branching
Nonbank Affiliations
Securities Affiliations
Mandatory FDIC Insurance
Mandatory FRB Reserve Requirements and Other
Member Bank Restrictions
a. The Section 7 Issue Should be Narrowed
to Requirements Related to Monetary Policy,
i.e., Reserve Requirements
b. The Billion Dollar Size Distinction Fails
to Cure the Discriminatory Denial of the
Choice to be a Nonmember Bank Subject to
State Rather than Federal Reserve
Requirements
c. Mandatory FRB Reserve Requirements are
Not Needed to Carry Out Domestic Monetary
Policy
d. The Requirements of International Monetary
Policy, While Potentially Important, Cannot
be Met by Nondiscriminatory FRB Reserve
Requirements
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A-29
A-29
A-31
A-33
A-35
450
-2-
Page
e.
f.
Equal Treatment Does not Justify Imposing
the Burdens of System Membership on Foreign
Banks
A-38
There is No Monetary Policy or Other Justification for Subjecting Credit Balances to
Reserve Requirements
A-40
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451
-3STATEMENT B
ANALYSIS OF FEDERAL RESERVE BOARD
PROPOSED CHANGES IN H.R. 7325
Page
(Bracketed references are to
paragraphs of FRB Staff Memorandum)
I
Interstate Branching
B-1
1.
2.
B-1
B-2
B-3
B-5
3.
4.
II
III
V
Reciprocal Interstate Branching
Agencies and commercial Lending Companies
Grandfathering
Home State
Mandatory FDIC Insurance
B-5
5. [18]
B-5
Deposit Insurance
Restrictions on System Members
B-7
6.
B-7
7.
IV
[15(a)]
[15(b)]
[16]
[17]
[19,20, Foreign Bank Subsidiaries
22-30]
[21]
Discriminatory Reserve Ratios
B-8
Nonbank Holdings and Activities
B-9
8. [32&33] Grandfathering
9. [34]
Exemption for Business Principally Abroad
B-9
B-10
Less Critical Amendments
B-12
10.
11.
12.
13.
14.
15.
16.
17.
18.
B-12
B-13
B-13
[1&2]
[3]
[4]
[SJ
[6]
[7-14]
[31(a)]
[3l(b)]
[35-4U
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Definition of "Agency• and "Branch"
Definition of "Foreign Bank"
U.S. Accounting Principles
Section 2, Title change
Edge Corporation Reserves
Federal Branches and Agencies
Uniformity of State Regulation
Representative Office Reporting
Other Amendments
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STATEMENT C
SUGGESTIONS FOR PROSPECTS
Page
FOR IMPROVING H.R. 7325
C-2
I
Interstate Branching, Section
II
Mandatory Federal Insurance, Section
III
System Membership Restrictions, Section 7
C-6
IV
Nonbank Holdings and Activities, Section 8
C-8
V
Grandfather Dates, Section S(fl and 0(c)
C-10
VI
Nondepository Institutions
C-12
VII
Federal Reports and Examination
C-14
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6
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453
July 12, 1977
A-1
INSTITUTE OF FOREIGN BANKERS
COMMENTS ON H.R. 7325
We appreciate the invitation to give you the views of
the Institute of Foreign Bankers on H.R. 7325.
The Institute
membership includes subsidiary banks, branches, agencies
and representative offices of foreign banks from over thirty~
five countries directly affected by the issues before you.
The total institutional membership is 142 and includes the
vast majority of the foreign bank's operating offices in the
u.
s.
Although its members have diverse interests and views
on some subjects, the Institute is here speaking for the
management of the great majority of operating foreign bank
offices in the United States which would be most directly
affected by the proposal before you.
Because these foreign
bankers live with the peculiarly diverse system of regulation
in the U.
s., these conunents derive from that experience, not
from philosophical views about the role of the Federal
Government in the dual banking system.
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The job of analyzing proposed changes in foreign bank
regulation and presenting the foreign bank point of view was
given to the officers of the Institute and to the Institute's
counsel, Shaw, Pittman, Potts
&
The responsibility
Trowbridge.
for preparing and presenting these statements is shared by
the following who are here to answer your questions:
Mario R. de Luca, Chairman, Institute of Foreign Bankers
and Executive Vice President, Banco di Roma, N.Y.C.
Isao Ichikawa, General Manager, Mitsubishi Bank, Ltd., N.Y.C.
Rudolph Kuchler, Senior Vice President, Union Bank of
Switzerland, N.Y.C.
Steuart L. Pittman, Counsel, Institute of Foreign Bankers,
Shaw, Pittman, Potts & Trowbridge, Wash., D. C.
I
1.
Background
Foreign Bank Legislation is Not Needed Now
In a series of statements the FRB has offered three
major reasons why new legislation is needed:
(a)
foreign
banking in the u. s. has grown rapidly in the last 2 years;
(b)
the "patchwork" system of bank regulation in the
u.
s.
results in differences in the regulatory treatment of foreign
banks and domestic banks; and (c)
regulation of foreign bank
offices in the u. s. is more appropriate under federal than
state administration.
In a few words, our response is (a) that the
u.
S. growth
of foreign banks has conformed to world economic trends and
remains low relative to expansion of u.
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banks abroad;
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(bl
that the "patchwork," whether it be chaos or healthy
diversity, is an integral part of bank regulation in the
United '_states, creating many regulatory differences or "advantages"
among the various classes of domestic banks, and provides no
justification for singling out a few selected differences in
foreign bank treatment for correction, when neither domestic
nor foreign banks complain of any impact from unfair competition;
(cl
that the proposed elaborate federalization of foreign bank
regulation serves no clearly defined needs, trading in a system
which has proved workable for many years for one which would
increase the cost of doing business and create years of uncertainty as new administrators come to grips with unforeseen
problems; and (dl we believe that the FRB capability to administer
national monetary policy is not in doubt or in need of reinforcement and that no attempt has been made to show that the
FRB should or would take any presently unauthorized action with
respect to foreign banks which would significantly affect the
supply of money and credit in the U. S.
H. R. 7325 and similar proposals are not the product of
complaints from injured domestic banks about the regulation of
foreign banks; they have their main impetus from the Federal
Reserve Board's accelerating efforts towards centralizing and
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federalizing of bank regulation.
While it may be understandable
for regulators to seek to extend their jurisdiction to the extent politically and legally possible, in this time of proliferating regulatory burdens, Congress should insist that
specific public benefits be demonstrated; it is not enough to
rely upon philosophical concepts.
Conceptually, some of the Bill's proposals have a certain
logic.
But we have yet to see any analysis, from the practical
standpoint of business and economics, of the precise need for
each specific change proposed and of the potential effect of
these changes.
There are no high principles which require
federal rather than state regulation of foreign-owned businesses
or foreign commerce.
We all subscribe to the generalization that bank regulations should not give unfair competitive advantage to either
foreign or domestic banks.
We also agree that foreign bank
activities in the u.
s.
of monetary policy.
The many witnesses in the four Congressional
should not impair the administration
hearings last year produced no evidence of such unfair competitive
impact or that monetary policy has been impaired.
We believe
each of these possibilities to be theoretical and not likely
to become realities under foreseeable circumstances.
It
appears to us that bank regulators, including the Federal Reserve
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Board, and our domestic bank competitors are generally in
agreement that foreign banks are not causing any-such adverse
effects at this time.
This view is supported by an independent
study two years ago in the Commerce Department report to
Congress required by statute on the status of foreign investments.* We urge that a present, not a future, necessity should
be established at these hearings to justify any such far-reaching
legislation.
We believe the Bill continues to be premature.
The need
for, and nature of, any change intended to achieve equal treatment will be more readily perceived after disposition of
proposals pending before Congress which may change the comparable treatment of domestic banks with respect to certain
critical issues of the Bill:
interstate branching; Glass-
Steagall policy; mandatory universal Federal Reserve System
membership; and interest earning FRB reserves.
We do not
oppose any legislative changes creating new rules applicable
to domestic banks as well as to foreign bank offices.
2.
The Allegations of Competitive Advantage are
Applicable Only to Foreign Bank Branches, Not to
Agencies or Subsidiaries
New York, California and, within the last several years,
Illinois are the main states attracting foreign banks.
*Foreign Direct Investments in the U.
Oct. 1975, Appendix VIII, p. 26.
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s.,
These
Commerce Dept.,
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states are motivated to augment and protect the roles of
their leading cities as international financial centers.
For competitive reasons, the international foreign and
domestic banks must follow the market of international commerce
to the world financial centers.
Foreign banks in the
u.
s.
financial centers pursue primarily a wholesale banking business incidental to their international activities.
Thus, with
a few exceptions, they canpete in the wholesale market with
the large big city domestic banks, and not in local retail
markets.
The exceptional foreign entry into retail banking has
been successfully pursued almost entirely through a statechartered subsidiary branching within its state.
Such banks
are regulated in essentially the same manner as domestic banks.
They are limited to a single state (with one two-state exception
as a result of a grandfather exemption under the Bank Holding
company Act, which is no different than that accorded to a
number of domestic bank holding companies operating in more
than one state).
as well as
These subsidiary branching systems,
subsidiaries
mainly
in wholesale
banking,
are owned by registered foreign bank holding companies and submit to the nonbanking prohibitions of Section 4 of the Bank
Holding Company Act.
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They carry federal deposit insurance.
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Some of them have also joined the' Federal Reserve System as
their growth requires the benefits of membership; just as do
expanding dC111estic banks.
Thus, neither retail banking in
the u. s. nor subsidiary state banks of any kind owned by
foreign banks are significantly affected by most of the changes
proposed by the Bill.
The Bill would make the more modest objectives of wholesale
banking more difficult to attain and will have little effect
on the few foreign bank subsidiaries ambitious enough to compete in the retail domestic market.
The likely result is to
discourage foreign bank wholesale competition in the U.S.
and to encourage competition at the retail level.
The only
clear complaint about foreign bank competition arose several
years ago in California, largely because of foreign retail
expansion.
It was voted down in the California legislature.
Thus, if there is any protectionist domestic bank support for
this Bill, it is probably predicated on a misunderstanding of
the Bill's probable consequences.
The agencies* of foreign banks are not depository institutions.
They exist only under New York and California laws
which deny them access to the deposit market and do not permit
*We are following the growing practice, and the definition in
this Bill, of including as agencies, in addition to the nondepository New York and California agencies, the California
"branches" which differ only in that they can accept foreign
deposits.
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them to act as fiduciaries.*
They are not banks within the
meaning of the Bank Holding Company Act and other federal banking laws regulating depository institutions.
They compete
with nonbank lending institutions as well as in the wholesale
commercial banking market.
Large domestic banks also compete
extensively, by various methods, in the same market, and in
doing so also operate largely outside the framework of federal
laws governing depository institutions.
The issue of competitive advantage may well come down to
the treatment of foreign bank direct branches (without an
intermediate state su~sidiary) in the only two states where
they exist in significant numbers, New York and Illinois.
Most
of the recent new branches have been in Illinois, which has
successfully promoted downtown Chicago as a site for foreign
bank branches restricted to one location.
The branches compete
with the big city international domestic banks for the business
of depositors and borrowers in their home countries or their
u. s.
subsidiaries and for the business of the
u.
S. based
multinational corporations.
3.
Regulatory Diversity Creates Differences but
Not Unfair Competition
We believe that some degree of competitive advantage or
disadvantage from regulatory differences is inherent in the
*Georgia and Florida have recently adopted New York type agencies
laws to attract nondepository offices of foreign banks to Atlanta
and Miami, but substantial agency activity has not yet developed.
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diverse American system of bank regulation.
It is difficult
to say whether foreign banks are favored or disfavored by this
system; the FRB has drawn no conclusion.
But, we repeat, it
is clear that they compete only with large domestic banks
in the wholesale, largely international, markets, except for
the small number of retail banks which have no regulatory
advantages and are largely unaffected by H.R. 7325.
Protecting
the big city domestic international banks from foreign bank
competition,without their asking Washington for such help,
over the objection of affected states, is not an issue requiring
priority in a full Congressional schedule.
Congress is not
busy equalizing regulatory burdens of different classes of
domestic banks which do not expect such perfect justice.
Why
are foreign banks singled out for an analysis of legal "advantages"
resulting from the diversity of the American scheme of bank
regulation?
It is a system of choices of benefits and restric-
tions, intelligently made, with competitive implications taken
into account at the time, not complained of later on.
To
deny the benefits of this diversity only to foreign banks
would be clearly discriminatory and cannot be justified by
comparisons to centralized mandatory foreign regulatory systems.
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4.
The Proposals Discriminate Rather than Equalize
Treatment
The regulation of banks in the United States is unique
in the world in that it offers those regulated greater flexibility and diversity in choosing among methods of regulation.
The most important federal banking regulations allow their
jurisdiction to depend on whether or not banks elect to submit
to that jurisdiction, which means that the banks decide whether
or not the benefits outweigh the restrictions.
Among the
major regulatory options pertinent to this Bill are:
(a)
membership in the Federal Reserve System which imposes reserve
requirements and many other regulations flowing from the
Federal Reserve Act; (b)
membership in the FDIC with its
system of regulations as a condition of obtaining deposit
insurance; (c)
expansion through subsidiaries under the Bank
Holding Company Act with its closely regulated exemptions from
prohibited nonbank affiliations; (d) organization under either
federal or state law, with important resulting differences
in regulation.
The essentially discriminatory nature of this
Bill arises from the denial of the most important of these
choices to foreign banks.
More specifically, the major
discriminations of this Bill against foreign banks are as follows:
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(al
One-state location restrictions on branches and
agencies engaged in wholesale banking, proposed
to equalize conditions for foreign bank domestic
banks, would in fact accentuate the disadvantage
under which foreign banks now operate in competition with the extensive multistate wholesale banking
activities of their domestic competitors.
(bl
This Bill would deny to branches and agencies the
opportunity to branch in secondary states which permit
entry explicitly by statute, a possibility open to
domestic state banks in the event reciprocal interstate branching arrangements.
(cl
Whereas domestic banks may elect to expand either
by the subsidiary route under the Bank Holding
company Act restrictions or by branches under applicable federal or state statutes, foreign banks are
denied a choice because they are compelled to become
bank
holding
companies without owning any shares
in a bank subsidiary in the u.
(dl
s.
Despite the fact that Congress for good reason limited
the Bank Holding Company Act to holdings of depository
banking institutions, this Bill would apply the prohibitions of that Act to nondepository foreign bank
agencies but to no domestic nondepository institutions.
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(e)
As repeatedly and again recently pointed out by
the Chairman of FDIC, mandatory deposit insurance
or substitute surety arrangements are either unworkable or discriminatory.
(f)
FRB reserve requirements and other restrictions
on members in the Federal Reserve System
mandatory only for foreign bank branches and agencies
which are part of foreign banking systems with worldwide assets exceeding $1 billion is another special
rule exclusively for foreign banks.
The growing
interest in the opportunity to withdraw from System
membership and the FRB responsive proposal to equalize
the burdens of FRB and state reserves demonstrates
the importance to domestic banks of the option not
to become a System member.
We believe it is misleading to justify the proposals which
are discriminatory in terms of the principle of national or equal
treatment of foreign and domestic banks.
If discriminations
are imposed, it should be anticipated that they will be questioned
in the light of the bilateral and multilateral treaties and
agreements which express principles of nondiscrimination on
which the u.
s.
has provided world leadership in recent decades.
The rhetoric of equal treatment cannot soften discriminatory
results.
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5.
Foreign Bank Operations in the U.
Heavily and Effectively Regulated
The myth has aris~n that the U.
s.
s.
are
offices of foreign
banks have an advantage in being under-regulated relative to
u.
u.
s.
s.
national or state banks.
In fact, foreign banks in the
are more heavily regulated than many domestic banks.
At the state level, they are regulated by the banking departments of New York and California, and, more recently, Illinois,
all money center states
with more in-depth experience in
foreign bank regulation than any federal agency at this time.
These states have learned to administer reciprocity successfully and to reflect national policy as necessary through
regular consultation with appropriate federal agencies.
They
have developed special rules to assure adequate resources in
the
u.
S. for the protection of
u.
S. customers.
They know
how to examine banks which mainly operate in the international
market.
Foreign bank applications for licenses or charters
are granted by New York, California or Illinois only after a
full investigation of community need and prospective soundness.
Despite the contrary impression created by proponents of
last year's foreign bank bill, all foreign banking activities
in the u. S., including branches and agencies, are subject to
significant federal regulation and reporting because of the
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foreignness either of their ownership or of their operations.
This includes for example, in addition to reporting to and
examination by the state supervisors:
universal voluntary
compliance with FRB marginal reserve requirements (comparable
to certain
Regulation Mand D requirements); recordkeeping
and reporting required by federal statute, administered by
the Treasury Department, in connection with specified international transactions; periodic foreign exchange reports to
Treasury; monthly foreign bank status reports to the FRB,
from which the FRB receives any and all information it requests
for monetary policy or other purposes.
Furthermore, most of
the deposit business of foreign banks is conducted by state
chartered subsidiaries which are subject to the Bank Holding
~
Company Act and the Federal Deposit Insurance Act; no new
legislation is needed to provide them with national or equal
treatment.
6.
Growth of Foreign Banks in the U. s. Has Been
Beneficial to the U. s. and Consistent with
World Trends
The widespread assumption of extraordinary foreign bank
growth in the u. s. may go to the question of whether foreign
bank legislation is too urgent to wait for the legislative
decisions mentioned earlier, which may equally affect foreign
and domestic banks.
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However, there is no suggestion in any of
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the various proposals for foreign banks regulation that their
purpose is to curtail the growth of foreign banks in the United
States because they have too much of this country's banking
business; rather there is general acknowledgement in the
four hearings last year that this growth has been beneficial
to the United States.
The growth of foreign bank OJilerations in the u. S. is
not one of the many problems facing the domestic banking
industry.
The increase in foreign bank assets in the United
States over the last decade, and particularly in commercial
lending,* is a response, which should have been anticipated
and welcomed, to the growth of U.
s.
banking activities jlbroad,
the growth of multinational banking worldwide and the growth
of international trade and investment worldwide.
of foreign branches of
u. s.
The assets
banks continue to be three times
that of the assets of all forms of foreign banking in the United
States and both are growing at comparable rates.
The United States has more banks in the top 100 banks of
the world than any other country.
The u.
s.
banks are better
represented in the world's leading financial centers than the
banks of any other country.
If New York City, the leading
financial center of the world, failed to attract and hold the
presence of most of the largest banks in the world, there would
*Except as otherwise noted, all statistical comments are based
on sources originating with the Federal Reser~e Board Bulletin,
its monthly summaries of foreign bank reports and its other
published data.
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be cause for concern about the future role of that city as
an international financial, monetary and payments center and
perhaps also about the role of the
u. s.
leading means for internatinal payments.
dollar as the
If New York City,
because of federal law, was the only window for foreign bank
participation in the
u. s.
market, other money center cities
would have a justifiable complaint.
If there were cause to worry over foreign invasion of
u.
S. banking markets, the critical fact would be the relative
levels of deposits because deposits are the basis on which
commercial banking is built.
Even given the benefit of all
interpretations, foreign banks still have less than 3% of all
U. S. commercial banking deposits, composed mostly of deposits
of foreign customers, of
u. s.
and of foreign central banks.
on u.
s.
affiliates of foreign corporations,
The comparable deposit figures
bank invasion of the banking markets of foreign countries
are in most cases many times greater.
Even if one is willing to compare the growth of foreign
banking in the u.
s.
and U.
s.
banking abroad solely in terms
of assets, the last several years or even the last ten years
are misleading periods.
u. s. banks made their surge in
expansion abroad between ten and twenty years ago and led the
way towards multinational banking.
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The leading banks of other
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major capital exporting countries have followed in the last ten
years, particularly in the last several years.
To improve further the perspective on growth, we should
break down the forms of foreign bank activity which allegedly
have advantages over domestic banks.
FRB statistics show foreign bank assets to be roughly one
half attributable to agencies, one quarter to subsidiaries
and one quarter to branches.
A large part of these subsidiary
assets are those of the small number of subsidiaries branching
intrastate into retail banking.
The most rapid foreign bank
expansion in recent years has resulted from one-shot acquisitions
by those few banks electing to compete in the retail markets
through state chartered banks with intrastate branching systems.
These retail banking systems do not have the advantages alleged
by proponents of foreign bank legislation, as explain~d earlier.
Thus, subsidiary growth, one quarter of foreign bank assets
in the u. S., is to a large extent irrelevant to the-issues
presented by H.R. 7325.
The agencies of foreign banks are not depository institutions.
As mentioned earlier, they exist to date under New York and
California laws, which deny them access to the market for deposits
and the opportunity to act as fiduciaries.
They are not banks
within the meaning of the Bank Holding company Act and other
federal banking laws.
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Their domestic competitors are not only
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the big wholesale banks but also nonbank lending institutions
of various types.
The growth of agencies, about half of all
foreign bank assets, is of questionable significance to the
issues at hand.
Thus, the growth of branch assets,about one quarter of
foreign bank assets in the
u.
s., is the growth primarily
relevant to this Bill.
II
1.
Key Issues of H.R. 7325
Interstate Branching
Multistate branching is the threshold
issue without
which foreign bank legislation would not have gotten started.
This Bill gives equal treatment among banks priority
over equal treatment among cities competing for the business
which derives from international financial center status.
It would impose a federal prohibition to block effectively
efforts to attract foreign bank branches to many important
cities.
The only justification, the protection of competing
domestic banks, does not stand up.
Existing law and practice effectively limits foreign banks
seeking to compete in u.
s.
retail markets to the same one-
state restrictions as apply to domestic banks.
Any substantial
penetration of retail banking markets requires that foreign
banks operate by means of subsidiaries which are able to branch
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within their state of incorporation.
Such foreign banks are
subject to Sectipn 3(d) of the Bank Holding Company Act, which
restricts banking in any secondary state except as expressly
authorized by a statute of that state.
The interstate branching
issue posed by this Bill, therefore,relates solely to the
wholesale banking market.
In contrast the emotional and
philosophical controversy among domestic banks is mainly concerned with branching for purposes of expanding retail markets.
This Bill should be extricated from the domestic interstate
branching controversy.
The recent success of Chicago in attracting several dozen
foreign bank
branches in about two years could not have occurred
under the House or FRB bill.
the
u.
New foreign bank activities in
s. would tend to be concentrated in the several largest
money center cities to the detriment of other growing financial
centers.
Geo:cgiaand Florida have recently adopted an agency
law of the New York type.
They are watching the Chicago ex-
perience to see if limited branchin9 will be necessary.
Over
the next decade Houston, Philadelphia, Minneapolis, New Orleans
and many other leading cities may decide to attract foreign
banks in an effort to stimulate international finance and
commerce.
There are no public policy grounds on which the Federal
Government should block such forward-looking and constructive
civic and economic aspirations.
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On the contrary, existing
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federal law (Section 3 (d) of the Bank Holding Company Act)
enables any state, explicitly by statute, to admit subsidiary
banks owned by out-of-state banks, whether foreign or domestic.
It has been federal policy to discourage anticompetitive
geographic restraints on commerce of all kinds,and an exception
in the case of the rights of states to determine whether to
admit foreign banks serves no public interest.
Significant multistate branching by foreign banks is
largely the result of Chicago opening up to foreign banks,
many of which were already branching in New York and San
Francisco.
Illinois concluded, after carefully studying
experience in other states, that foreign banks could most
effectively be attracted to Chicago in the form of branches.
The controversial issue of retail branch banking was avoided
by limiting foreign banks to a single site in downtown Chicago.
The result has been no controversy with the Illinois banking
community and a boost to international commerce and finance in
Chicago.
Should this have been prevented by federal law?
If
not, it is difficult to justify denial of a comparable opportunity to other cities, which may in the future have similar
progressive plans, if and when the laws of their states are
amended to permit such entry.
This Bill would bring about an
artificial concentration of new foreign banking in New York
City, the dominant U.
s.
money center and logical "home state"
choice for most foreign banks, and would lock in the preeminent
positions of California and Illinois as well, because many large
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foreign banks are already there.
It is interesting that
these beneficiary states do not seek and vigorousty oppose
any such preferred positions bestowed by federal intervention.
The hearing records of last year establish that large
domestic banks are far more active, by any count, in interstate wholesale banking than are foreign bank branches.
comparison with 44 foreign banks, 12 large
u. s.
In
banks have
about 23 times the aggregate number of locations outside their
home state in about 10 times the number of states.
Neither group
of banks do any appreciable interstate retail deposit banking
outside their home state.*
Multistate banking by large
domestic banks takes various forms, which, put together, make
up a formidable capability including:
loan production officesi
operating nondepository subsidiariesi grandfathered multistate
holdings of banks by bank holding companiesi multistate 4(c) (8)
closely related activities of bank holding companiesi and Edge
Act C<itporations. The inability to accept deposits does not
restrain a ~ew York bank from performing other valuable banking
services in, for example, Houston for a Houston-based customer
and arranging to accept that customer's deposits in New York.
From the standpoint of competition in wholesale banking the
location of deposits can be a relatively minor aspect of the
relationship.
* The retail banking exceptions are subsidiaries grandfathered
under the Bank Holding Company Act, which could be insured
retail banks. There is one such foreign-owned bank and more
than 8 domestic banks grandfathered.
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The combined effect of these multistate activities, as
reported in the American Banker's series last ye~r on this
subject, is summarized i~ Exhibit A.
It shows that 12 domestic
banks have 1,550 offices, other than their home state branches,
in up to 34 states.
By canparison 44 foreign banks have 67
operating locations, largely in 3 states, outside the state of
their main business.*
Existing law permits uninhibited multi-
state wholesale banking and financing by domestic banks.
bank opportunities
restrictions.
Foreign
are far more limited, largely due to state
To illustrate how these figures are composed,
we are appending as Exhibit Bone of the serials which cover
one large bank's nationwide activities.
Foreign bank multistate branching, primarily in the wholesale banking markets of New York and Illinois, constitutes
the belated catching up with large domestic competitors which
are active wherever the money markets take them, at home and
abroad.
2.
Nonbank Affiliations
'.ibis Bill proposes that foreign bank branches and agencies
be treated as though they were subsidiaries in order to bring
them under the restrictions against nonbank holdings or
affiliations presently contained in Section 4 of the Bank
* From Table 17 of Appendix to Governor Mitchell's Dec. 12, 1975
statement before the House Subcommittee on Financial Institutions Supervision, Regulation and Insurance.
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Holding Company Act.
The Act has not been applied to bank
branches or agencies, whether foreign or domesttc owned.
To do so would distort the Act's structure which is designed
to regulate controlling shareholdings.
On this point, the
Association of Bank Holding Companies, commenting in
September, 1975 to the House, Banking, Currency and Housing
Committee on the Federal Reserve Board bill (H.R. 5617),
objected to the application of the Bank Holding Company Act
to foreign bank branches and agencies, calling it a "legal
fiction" inviting misinterpretations of federal and state
statutes governing domestic bankin~ activities.
We submit that it is discriminatory to apply the prohibitions of that Act as though foreign branches and agencies,
and not domestic branches, were subsidiaries owned by their
head offices.
It is more sharply discriminatory to apply
the prohibitions of an Act clearly focused on depository
institutions, because of the potential for abuses by those
permitted to take the public's freely deposited money,
to a class of nondepository institutions, namely, foreign bank
agencies, solely because of foreign ownership.
The Section 4 prohibitions of that Act are peppered with
many exemptions because Congress has found that many nonbank
affiliations may be useful or at least harmless.
One of these
(Section 4 (c) (9)) reflected Congressional recognition in 1970
that foreign banks are permitted many nonbank affiliations abroad
and that these affiliations might be expected, in·creasingly in a
world of growing international commerce,
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States.
The Congress left it to the expertise of the Federal
Reserve Board to define by regulations what exemptions applicable to foreign bank holding companies would be permitted
without conflicting with the essential objectives of the Act.
The reason for this restraint still makes sense:
in the
absence of abuse, the Federal Reserve Board should not become
unnecessarily entangled in direct regulation of foreign banks,
requiring disclosure and policing of shareholdings abroad
to an extent without precedent in many foreign countries.
The resulting FRB regulations under Section 4(c) (9) are
concerned with whether the foreign bank holding company is
mostly active abroad, whether the nonbank holding is mostly
active abroad and whether the U. S. activities are incidental
to foreign or international business.
However, securities
affiliations prohibited by the Glass~Steagall Act were expressly
not exempted by the FRB regulations, so that foreign and
domestic bank holding companies are treated alike in this respect.
This recent history is pertinent because it tells us something about the extent of the problem of nonbank holdings by
foreign banks with U.S. activities.
There have been very
few divestitures ordered by the Federal Reserve Board, mostly
involving smaller businesses without significapce to bank
competition or to the economy.
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Section 4(c) (9) and the exemptive regulations issued
thereunder were intended to compromise the principle of
equal treatment with the recognition that many foreign banks
have more diverse activities than domestic banks and that the
u.
S. Government should be restrained from attempting
extraterritorial regulation of the affairs of foreign banks.
Special FRB forms were developed for registration and reporting
by foreign bank holding companies to avoid undue disclosure
of information not required to regulate their activities in
the
u.
s.
It will be much more difficult to draw this line
in the case of home offices and their branches and agencies,
which are a single legal entity, than in the case of separately
incorporated parents and subsidiaries.
The problem could bear
some resemblance to the difficulties which FDIC has perceived
in the extraterritorial administration of its Act.
We draw the conclusion (a) that foreign banks do not, to
any significant extent, have nonbank holdings which would not
be exempted under Section 4 and (bl that coverage of branches
and agencies would require a troublesome degree of control and
reporting requirements imposed by the U. S. Government on the
foreign activities of foreign banks.
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3.
Securities Affiliations
The question remains as to whether our conc~usions on
nonbank holdings and activities in general can be applied to
the controversial subject of u. S. securities affiliates of
foreign banks.
The proponents of the need for new legislation
have viewed Section 8 of the Bill as primarily a Glass-Steagall
issue.
Controlling foreign bank interests in securities firms
are almost entirely in New York City.
While most of these
firms engage primarily in the distribution and dealing in
securities for foreign account, some participate in underwriting
syndicates where interdational capability is required.
The
appropriate Congressional committees should perhaps consider
whether the Glass-Steagall Act should be extended to foreign
shareholders, including banks, in the context of the advantages
and disadvantages of foreign investment in the U. S. securities
industry, as well as in the context of commercial bank regulation.
We doubt that the full scope of this issue fits easily
into the subject of this Bill.
We suggest that the pro_blem of securities affiliations is
limited to foreign bank branches.
Subsidiaries are already
covered and agencies are nondepository institutions which probably were not intended to be covered by the Glass-Steagall Act.
Less than a dozen foreign banks with U. s. branches own
over 5% of the voting shares of U. S. affiliates which might
be subject to Section B(a) of the BilL
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Some of these may very
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well not be engaged in the type of securities activities which
would be prohibited by an amendment to the Glass-Steagall
Act to cover foreign banks and clarify its prohibitions.
The Federal Reserve has said, upon proposing its original bill
in December, 1974, that the securities affiliates "have little
competitive impact within the securities or banking industries."
While not disagreeing in principle with the stated
national or equal treatment purpose of this Bill, we would
point out that the Glass-Steagall issue poses a needless
confrontation with those foreign banks and central banks which
are concerned with reciprocity.
The foreign banks are engaging
in securities activities in order to compete at home and in
most parts of the world.
abroad.
u. s.
banks engage in these activities
To the extent that foreign banks are engaged in
securities activities in the United States as a natural extension
of their major securities activities which are abroad, there
are practical reasons for exemption from or compromise with a purist
application of the adage "in Rome do as the Romani; do."
Whatever is done, there is sound reason to do it by
amending the Glass-Steagall Act and avoiding Glass-Steagall
reasons for burdening this Bill with the complex nonbank holding
prohibitions of the Bank Holding Company Act.
Finally, our later comments to the effect that nondiscrimination requires grandfather exemptions apply as much
to securities affiliates as to the divestiture of any other
type of business.
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4.
Mandatory FDIC Insurance
The Bill provides in Section 6 for surety bonds or asset
pledges as a substitute for admittedly unworkable mandatory
federal deposit insurance.
The justification for mandatory federal deposit insurance
must either be a perceived need to protect the public depositors (the purpose of the Federal Deposit Insurance Act) or a
novel concern that the uninsured have a competitive advantage
over insured institutions.
As pointed out earlier, foreign
banks are generally disinterested in the retail banking market,
with the exception of those few subsidiary banks which branch
intrastate for retail purposes.
The latter, along with all
other foreign bank subsidiaries, for both business and legal
\
reasons,are in every case already members of FDIC.
Thus, the
issue concerns only those foreign bank offices which do not
deal with the depositing public to any significant extent.
It seems obvious that mandatory insurance should not
apply to agencies which do not take domestic deposits.
The
deposit business of branches is composed of foreign customers,
subsidiaries of foreign corporations or the multinational
u. s. corporations.
As the Chairman of the FDIC has repeatedly
advised, the deposit business of foreign banks is not with bank
customers requiring the FDIC type of protection.
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We cannot believe that a serious argument is being made
that insurance should be required of foreign bank branches
not dealing with a public requiring FDIC protection in order
to burden them with an unnecessary cost merely because their
domestic competitors incur that cost and in exchange buy the
benefits of the insurance which increases their access to
free funds from depositors with accounts small enough to be
protected under the FDIC ceilings on insurable amounts.
If, as FDIC has advised, deposit insurance cannot be
imposed without either unduly exposing the FDIC fund to foreign
risks or imposing surety conditions which are clearly discriminatory, it seems clear that the solution offered by the
Bill of surety conditions without benefit of insurance is the
most discriminatory solution of any which have been proposed.
There is no compensating justification in terms of federal
policy or the public interest.
5.
Mandatory FRB Reserve Requirements and Other Member
Bank Restrictions
a.
The Section 7 Issue Should be Narrowed to
Requirements Related to Monetary Policy, i.e.,
Reserve Requirements
Section 7 authorizes the FRB to impose restrictions
applicable to System member banks to foreign bank branches,
agencies and commercial lending companies.
The key question
is what, if any, of such restrictions are required by federal
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monetary policy.
Although many disagree that monetary policy
justifies Section 7, it is a more respectable justification
than the notion that nonmembership in the System is unfair
competition.
The FRB authority in Section 7(d) to apply the many
and diverse restrictions of the Federal Reserve Act regulations,
in addition to reserve requirements more specifically authorized
by Section 7(a), would make Section 7 tantamount to mandatory
System membership.
If the Subcommittee means to reject mandatory
membership, as indicated last year, _Section 7(d) should be
deleted.
It has little to do with mandatory policy, and its
discriminatory results are not even softened by the billion dollar
size condition applied to mandatory reserve requirements
(Section 7(a)).
Likewise, if monetary policy is the concern, FRB power
in Section 7(e) toveto the approval by state authorities of
foreign bank applications for licenses of branches and agencies
and for state charters for commercial lending companies is
extraneous and seems unduly aggravating to the states concerned.
It should be dropped.
To avoid compounding the discriminatory results of
mandating federal reserve requirements, the FRB authority
should be curtailed so that reserve ratios on foreign bank
operations could not be higher than for domestic banks and
so that reserves could not be required for types of foreign
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bank transactions which are not applied to comparable domestic
bank transactions.
The most likely examples of the latter
are the application of reserve requirements to credit balances
held by nondepository agencies and advances from foreign home
offices, both of which the FRB has indicated would probably
be subjected to reserve requirements.
b.
The Billion Dollar Size Distinction Fails to
Cure the Discr1.111inatory Denial of the Choice
to be a Nonmember Bank Subject to State Rather
than Federal Reserve Requirements.
If Section 7 is thus stripped down to nondiscriminatory reserve requirements, the central questions are whether
federal reserve requirements are discriminatory and whether
they are needed.
The fundamental argument that what is right for over
half of the domestic banks, namely, the option to be outside
the System, cannot be wrong for foreign bank branches, has been
met by proponents of the Bill by the application of a size
distinction.
Under the Bill, FRB reserve requirements would
only be applied to foreign banks with worldwide assets exceeding
$1 billion.
Even if such a novel and arbitrary distinction
based on size made good law, which is highly doubtful, the
standard is grossly distorted by including the overseas assets
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of a worldwide banking system for purposes of comparing sizes
of banking businesses in the u. S. subject to u. S. regulation.
The subsidiary, branch or agency in the u. s. is a separate
enterprise which must return a profit to its foreign owners
or be abandoned.
Furthermore, the home office and other
overseas components of the system are subject to the reserve
requirements of foreign governments and foreign central banks.
To compound the discrimination, Section 7 makes no
provision for foreign banks to be allowed access to Federal
Reserve privileges on equal terms with domestic banks.
Further-
more, the size distinction is only available as a limitation
on mandatory reserve requirements (Section 7(a)); the FRB
is authorized to impose the many other-restrictions applicable
to member banks on the operations of smaller foreign banks.
It would seem that the size distinction is more window dressing
than a reflection of any intention to purge the Bill, or even
Section 7, of discriminatory consequences.
The denial to foreign bank agencies and branches of
the choice of being members or nonmember banks cannot be viewed
from abroad as anything but discrimination unless the arbitrary
size distinctions are applied to domestic banks as well as to
foreign banks.
The fact that domestic bank policies will not
accommodate such a change points up the fact that the foreign
banks, because they lack au.
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political constituency, are
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the targets of proposed treatment unacceptable to domestic
banks, which is precisely the circumstance that the principle
of national or equal treatment is intended to prevent.
c.
Mandatory FRB Reserve Requirements are Not Needed
to carry Out Domestic Monetary Policy
There has been no attempt by the FRB to demonstrate
the need for FRB, rather than state, reserve requirements in
the specific terms of the aggregates of types of transactions
to be covered.
We think it necessary for the sake of clarity
to separate domestic monetary-requirements from the much more
complex issue of whether and how the U. s. Government should
influence the flow of funds in and out of the country.
We
can conclude rather quickly that deposits subject to reserve
requirements controlled by foreign banks are inconsequentially
small in relation to domestic deposits beyond the reach of
FRB reserve requirements.
We believe that only foreign bank
branches are relevant for this purpose:
agencies do not have
deposits; Section 7, we hope, deliberately and correctly avoids
coverage of foreign-controlled state bank subsidiaries because
to do so would be blatantly discriminatory.
As of June 30,
1976 subsidiaries accounted for about 70% of deposits of the
u. S. operations of foreign banks.
Foreign bank branches
account for a fraction of 1% of deposits of all banks in the
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S.
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It can hardly be disputed that t-he quantities of
transactions by foreign bank branches subject to_reserve
requirements are far too small, actually or potentially, to
affect adversely u.
s.
domestic monetary policy.
Even if the
quantities were to become much larger or even if subsidiary
deposits and agency credit balances were added, the impact
would still not be significant, particularly after allowing
for the effect of state reserve requirements,which approximate the federal ratios.
The principal difference between
state and federal reserves is that the state requirements are
so applied as to permit a moderate yield on funds in reserve,
whereas FRB reserve funds are sterile.
The FRB has recently
asked Congress to reduce membership burdens by liberalizing
this sterility policy in the face of the increased withdrawals
of domestic bank members of the System.
This move demonstrates
that voluntary membership is profoundly important to the
domestic banking industry.
We will not pause over the debate on whether reserve
requirements are an effective tool of monetary policy, except
to say that the respectable doubts have been well set forth
before your Subcommittee by other witnesses during last year's
hearings on this subject.
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It can be reasonably concluded that the need for
Federal Reserve Board jurisdiction over foreign bank operations
in the United States to avoid impairment of domestic monetary
policy has not been established, probably because the need is
not there.
It has merely been asserted and not seriously
argued by the Federal Reserve Board in the four Congressional
hearings last year.
d.
The Requirements of International Monetary
Policy, While Potentially Important, Cannot
be Met by Nondiscriminatory FRB Reserve
Requirements
International monetary policy is a thornier problem
than domestic monetary policy.
It cannot be denied that
foreign bank operations in the u.
s.
are on the fringe of the
serious problem of whether and how national governments can
or should influence the international flow of funds.
U.S.
foreign economic policy in general seeks by example and by
influence to discourage nationalistic controls over the international flow of investments and money.
The international
monetary controls attempted by the United States in the past
have been deliberately moderate and limited to times of stress.
The most notable effort has been the Federal Reserve Board
voluntary control program of the early seventies, which used
persuasion without teeth to induce commercial banks to cooperate
with national balance of payment objectives.
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There was full
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compliance, demonstrating the value of voluntary programs.
Current restraints are limited to the 4% reserve·requirements contained in Regulations Mand D affecting, among other
s.
things, borrowings by U.
banks from foreign offices of
foreign banks and from
U. S. banking offices abroad, primarily
Eurodollar borrowings.
Comparable reserve requirements were
effectively imposed in 1973 on foreign banks with U. S. operations
by the simple expedient of a letter request by the FRB to
each foreign bank office, and compliance by foreign banks has
been complete, demonstrating again the inherent power of the
FRB to regulate by request for voluntary action, whether by
domestic or foreign banks.
What new authority, then, is needed to enable the Federal
Reserve Board to implement international monetary policy through
regulation of foreign banks?
This question must be considered
in the context of controls over the large international domestic
banks, which account for most of the in and out movement of
funds, and of controls over multinational corporations and
nonbanking financial institutions, which account for a significant part of such movements of funds.
If standby or emergency
controls are what is needed, they probably must be direct controls,
not reserve requirements.
If they are to be effective, prior
negotiation on coordinated action is necessary between the major
capital exporting countries at the level of governments or
central banks.
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In any event, it is clear that foreign bank operations
in the United States provide merely a facility f9r the movement
of funds which also move through domestic banks or nonbanks
as economic forces dictate.
The volumes would be only slightly
affected by the availability of foreign bank offices in the
United States.
The FRB could indeed have problems arising
from flows or potential flows of dollars between other countries
and the U.
s.
But the more important international pressures
and movements are not dependent upon the foreign banks having
offices here.
Effective dealing with problems of these kinds
would depend upon international economic negotiations of very
broad scope.
It would therefore not be realistic to expect the
regulation of the
u..
s. offices of foreign banks to achieve
any significant results in governing the movement of funds
into or out of this country.
Obviously, the FRB does need information about banking
operations in this country, but it has ample access and no
limits on its opportunity to obtain whatever it needs.
Foreign
banks operating in the United States already supply more data
through their monthly reports than do the domestic nonmember
banks and have always supplied whatever data have been requested,
whether directly or through state supervisors.
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If serious consideration is to be given to standby
or permanent controls over the international flow of funds,
the subject requires far more study than it has yet received.
Legislation, if appropriate at all, must be designed in the
broader context of the regulation of domestic international
banks, as well as foreign banks.
This Subcommittee has shown
interest in studying this larger question.
Committee has initiated such a study.
The Senate Banking
The Federal Reserve
Board has apparently not completed its study of the foreign
operations of U.S. banks, part of the work of the task force
which recommended the foreign bank legislation proposed by
the FRB in December, 1974.
It seems to us that neither domestic nor international
monetary policy requirements have yet been defined which
dictate an urgent need for legislation of the kind under
consideration for foreign bank -regulation.
e.
Equal Treatment Does not Justify Imposing
the Burdensof System Membership on Foreign
Banks
Quite apart from monetary policy requirements, the
past testimony of the Federal Reserve Board has suggested that
the principle of equal treatment requires that foreign bank
operations in the United States be subject to FRB reserve
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requirements for the reason that the FRB reserves are sterile
while state reserves have some earning capacity.
The argument
was persuasively disputed by the testimony last year of the
Conference of State Bank Supervisors.
For present purposes
it is enough to say that the analysis of economic effects of
FRB reserve requirements and the compensating benefits of
membership is complex, but leads to no conclusion.
It is
improper to add unnecessary regulations for the purpose of
equalizing burdens.
Furthermore, the FRB has proposed removing
cost inequality between domestic member and nonmember banks by
allowing earnings on FRB reserves.
It may be noted that this
proposal, now the subject of hearings in the Senate, is one
more reason why the disposition of the foreign bank problem
might reasonably be deferred until larger reform issues involving
the domestic banking industry have been resolved.
Even if attempting to equate costs made sense, foreign
banks have found that in general the cost of funds for their
operations in the United States are higher than the cost of
funds of their u.
s.
competitors.
The funds of foreign bank
branches and agencies in the United States must all be acquired
at a price, whether they be from foreign or domestic sources,
whereas their domestic competitors acquire a large part of their
funds at little or no cost as deposits from the public.
Coupled
with the fact that money costs somewhat more in most foreign
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countries than in the United States today, it appears to be
a safe conclusion that the average cost of funds ·of foreign
bank branches and agencies in the United States is higher
than the average cost of funds of the large domestic international
banks.
Thus it appears likely that the imposition of sterile
federal reserve requirements on a mandatory basis would not
equalize but rather would exaggerate an inherent advantage
of domestic banks over foreign banks.
The desirability of mandatory FRB reserve requirements
should be judged strictly in terms of the requirements of
monetary policy and not colored by allegations of cost advantages based on too narrow an analysis of this complex subject.
f.
There is No Monetary Policy or Other Justification
for Subjecting Credit Balances to Reserve
Requirements
An incidental question is whether nondepository foreign
bank agencies or "commercial lending companies" (N.Y. investment
companies) should be included in any proposal for mandatory
FRB reserve requirements.
Agencies and New York investment
companies are not subject to domestic reserve requirements, state
or federal, because, not being banks in the ordinary sense,
they are not permitted to accept domestic deposits.
Domestic
nonbank lending institutions are also free of reserve requirements.
Neither have deposits on which reserves might be maintained
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but both have credit balances, which are maintained for
purposes of specific transactions, unlike deposits.
Savings
and loan associations, savings banks, finance companies, factors
and others who extend credit are not subject to bank-type
regulations.
The FRB intention to use Section 7 to classify credit
balances as deposits to extend the reach of its reserve requirements disregards state and federal classifications of long
standing.
It is important to understand that credit balances main-
tained by agencies, by commercial lending companies for foreign banks
and by other domestic nonbank lenders are different than the
deposits maintained by banks and have not been subjected to
FRB or state reserve requirements because of that difference.
The New York Banking Department has extensive experience in
administering the distinction between credit balances and prohibited deposits.
Credit balances are liabilities to customers
that arise out of, or are related to, business transactions
conducted by the agency or other lender for a customer.
Examples
are funds received as proceeds of a draft collected for the
customer, or cash collateral for a letter of credit, or the
balance of a loan that the customer has not yet used, or payments
for drafts discounted for a customer.
The customer may not
draw checks against these credit balances, or maintain such
balances for purposes unrelated to transactions with the agency.
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These balances normally change rapidly as transactions are
completed.
Because of their special origin, use and duration,
they do not serve as a means by which an agency can acquire
funds for its lending purposes.
For these reasons, credit
balances are essentially similar, not to bank deposits, but
to the customer accounts maintained by nonbanks, such as
finance companies, stock brokers and factors.
We want to
emphasize that credit balances of agencies or any other organizations, lumped with deposits in the Federal Reserve statistics,
are not the type of funds which should be, or have been in
the past, subject to federal or state reserve requirements
of any kind.
*
*
*
We should add that the Institute does not object to foreign
bank offices in the
u. s.
being subjected to mandatory FRB
reserve requirements at any time when such requirements are
imposed universally on domestic banks, as the Federal Reserve
Board has proposed from time to time.
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B-1
INSTITUTE OF FOREIGN BANKERS
ANALYSIS OF FEDERAL RESERVE BOARD
PROPOSED CHANGES IN H.R. 7325
The Federal Reserve Board has proposed to this Subcommittee amendments to H.R. 7325, which are so extensive
as to be tantamount to a new bill.
We assume that the
Subcommittee will be seriously considering this latest FRB
version of foreign bank legislation along with H.R. 7325.
Accordingly, the Institute offers for the Subcommittee's
use its analysis of these changes in H.R. 7325 recommended
by the Federal Reserve Board.
Our comments are grouped by
subject and carry bracketed references to the numbering of
the proposals in the staff memorandum of the FRB forwarded
to the Senate and House Banking Committees under Dr. Burns'
letters of June 1.
I
1. [15(a)J
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Interstate Branching
Reciprocal Interstate Branching.
Section 5(a)
would be modified to permit reciprocal interstate branching arrangements to include foreign
bank branches.
Although this federal concession
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to the dual banking system is better than
nothing, unless and until there are reciprocal
arrangements covering domestic banks, it would
provide no relief from Section 5 for those
states seeking foreign bank participation in
their money-center banking markets but not
ready to admit the large domestic banks from
out of state.
2. (15 (bl
J
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Agencies and Commercial Lending Companies.
As amended Section S(a) would apply interstate
branching restrictions to agencies and N.Y.
investment companies ·( "commercial lending
companies"), in addition to branches.
The
result would be discriminatory because no such
restrictions are applied to domestic nondepository
financial institutions.
Edge corporations, which
the FRB seems to equate with agencies, are widely
used by large domestic banks to cross state lines.
Of the dozen or so N.Y. investm~nt companies
over half are owned by domestic shareholders who
would not be subject to Section 5 restrictions.
There is no escaping this blatant discrimination
on account of shareholder nationality.
More
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generally, the FRB's underlying premise that
credit balances maintained by agencies and
investment companies are the same as deposits
is not well founded in law.
The distinction
is important and enforced under New York and
California law which provide the principal
experience in this country in regulating
nondepository institutions.
3. [16 I
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Grandfathering.
Section S(b) would be changed
to update to May 23, 1977 the May 1, 1976 grandfather date applicable to interstate branching.
The FRB correctly points to the need for updating.
But we assume that the relevant date
should be the time at which foreign banks are
effectively on notice that the law is likely to
be changed.
Taking account of the legislative
position since the introduction of the FRB
bill on December 3, 1974, we think it is unreasonable to have expected foreign banks to have
suspended their plans for investing in banking
in the United States in anticipation of any of
the restrictions in the various bills given
consideration since that time.
There was a
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close vote last year on the floor of the House
on whether to retain significant interstate
branching restrictions, and the Conference of
State Bank Supervisors has indicated renewed
opposition this year.
Senator McIntyre's
subcommittee has expressed tentative views for
purposes of obtaining comments last year which
included dropping the interstate branching
restrictions.
Against this background, foreign
banks have had no reason either to accelerate
or postpone plans to apply for branch licenses
in the few states available, nor do they yet
know how to assess the likelihood of passage
of Section 5.
If the Committee were to take
the position adopted last year, it would use
the approximate date of reporting out a bill.
We see no "reasonable notice" in the FRB proposed date of introduction of the Bill (May 23),
which has in effect the reintroduction of. an
identical bill in the last Congress, without
benefit of the current hearings.
We urge that
the date be the date of enactment, but if this
is unacceptable a date no earlier tha.n the date
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this Bill is reported to the House floor.
4. [17]
Home State.
Section 5(c) would also be
changed to conform the selection of a home
state for interstate branching restrictions
to expanded coverage of agencies and investment companies.
The resulting simplification
and liberalization of the choice of home state
by foreign banks operating in more than one state
makes sense.
In fact, there appears to be no
public interest served by denying maximum flexibility to foreign banks to change the election
of the home state at any time to keep pace
with the changing market conditions so long as
they do not increase the extent of their interstate branching, that is to say, that they do
not increase the number of states in which they
were operating on the grandfather date and; of
course, are confined to states welcoming their
entry.
II
5. [18]
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Federal Reserve Bank of St. Louis
Mandatory FDIC Insurance
Deposit Insurance.
Section 6
would be changed
in accordance with the recommendations of the
500
B-6
Federal Deposit Insurance Corporation, except
that the FRB would make deposit ·insurance
mandatory, rather than voluntary.
FDIC has
made it clear that the insurance must be
coupled with special and inevitably·burdensome
arrangements for surety because of the foreignness of the insured corporation, and, therefore,
that there is no way to impose mandatory insurance
in a nondiscriminatory fashion.
The FRB explana-
tion does not address the FDIC position that the
insurance is not needed to protect either bank
customers or the banks themselves for the type
of operations conducted by foreign bank branches
in the United States.
The FRB has implied in
the past an equalizing justification on the
assumption that foreign bank branches are
advantaged by avoiding FDIC premiums.
We believe
that the insurance is a service carrying benefits
bearing some reasonable relationship to the cost
and that those banks not engaged in retail banking
(which with rare exceptions are foreign, not
domestic banks) should not be penalized with
compulsory insurance costs for insurance which
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Federal Reserve Bank of St. Louis
501
B-7
is not needed.
The FRB proposal for mandatory
insurance ~s an unnecessary discrimination
with no relevance to federal monetary policy,
thereby undermining the integrity of the Bill.
III
Restrictions on System Members
~-[19,20,22-30] Foreign Bank Subsidiaries. Section 7 would
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Federal Reserve Bank of St. Louis
be changed to subject foreign bank subsidiaries
to the FRB reserve requirements and to the many
other restrictions imposeq on banks which are
members of the System.
Whatever tenuous arguments
are available to apply the billion dollar size
distinction to the worldwide assets of foreign
banks with U.S. branches, they do not apply to
subsidiaries, whether wholly owned or merely
controlled (25%
@FedFRASER