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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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 ................................   https://fraser.stlouisfed.org 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 ................................................................................ .   https://fraser.stlouisfed.org 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 ....................................................................................   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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:]   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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-   https://fraser.stlouisfed.org 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'-   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  13 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  14  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  15  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  17  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  18 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  20  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  22 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  24  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   https://fraser.stlouisfed.org 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-   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 93-031 0 - 77 - 3 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  29 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   https://fraser.stlouisfed.org 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-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  31  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  34  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.   https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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.  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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:]   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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••••• I O I Ol I I I 41 I O I lb  I  l  I I I I ••••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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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._   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  107 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   https://fraser.stlouisfed.org 93-031 O - 77 - 8 Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  112  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  120 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  124 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.•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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):   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  145  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  146 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  147 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  148  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  149  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  150 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  151 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- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  152 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  153 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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  154  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  155 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  156 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  157 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  158 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  159 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? ·  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  160 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  161 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  162 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  163  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  164 . . . N.i:ND ~.-.T GCR ..AIN, •• I., CHAl,.MAN  JOHN H, ROUS.SD.OT, CALIP',  "'"'"'" ANNVNZIO. IU..  C'MALMCltS P, WYLIC., OHJO GAIUIT ■ 110-, lr,IIICN,  JAM&S M, HANLCY, N,Y. CAIIIIIOI.L HU■■ aaa, J•.. ICY, lf.AIIY ... PAnC1ltf,oN, CAI.I,., .evn.clt DS.RlttCIC, S.C. TMDMA$ L AS14LET, ONIO NOIIMAN E. D'A""o,.n,s, N,N,  JOHN J, L,rJ'ALCC. N.Y, Al.LCM.. TICHN,  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  165 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!   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  166 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?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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---------------+----------------+------------   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  189 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  193 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  197  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TOTAL ASSETS OF FOREIGN BANKING INSTITUTIONS Source : 886a  Billions of dollars  80  80  70  70  60  60  50  50  40  40  -'° '°  30 20  20   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  '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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  =  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  205 .»17  n, un  tlaa lklMnbte Clifflwd illaa aa-e of liepr--.tatf.fte v..klllgt.oa, D.C.  20515  1'111mrk. Allaa: I - l)leeed to farafA , - • COPJ of 'Ill wtn• reapoaao to a:=- ~U.oa ,ois aaW ac tlll beniag • Jul7 12. I ba'n a1N turaie.S a MPJ of thts ftlSPQnM to ~ St Genalll 6- maluaiaa la t'lle ~ of tfae lliNrilg,.  P1-tet•...,UI-'1eofkt:ha ...i.t:.ma.  .., .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s/ St ::r~~~- :3.-;-ca:;,•;.:i:~  n  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  207  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,  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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".   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  214  SECURITIES INDUSTRY ASSOCIATION MEMORANDUM FOR STUDY AND DISCUSSION   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ON BANK SECURITIES ACTIVITIES  August 1976   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  10  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  13  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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).   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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),   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  22  .   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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).   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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).   https://fraser.stlouisfed.org 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).   https://fraser.stlouisfed.org 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. .   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  254 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  257  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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  260  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.]   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (261)  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  https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  264  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  265 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  266 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  267 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.   93-031 0 - 77 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  18  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  269 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  270 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  271 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  272 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  273 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  oOo  274  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  275 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  276 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  277 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  To THE EXTENT  278 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BANKS AND BANK HOLDING  279 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  281  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  282 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  283 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  93-031 0 - 77 - 19 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  284 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  285  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?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  286 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  287  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  288 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  289 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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  290 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  291 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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  292 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  293 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  294  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  295 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  296 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  298 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Their deposits are required  299 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   93-031 0 • 77 - 20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  300 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  301 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  302 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  300 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3M 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  305 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  306  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  307  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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  308 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  309  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  311 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  312 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  313 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  314 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  315 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,   93-031 0 - 77 https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  317  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  318 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  321  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  322 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  323 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.,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  324  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  325  •  ,  ,  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  326 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Cord7x,  ,  _  ' /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;  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  328  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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  329 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  330  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  331  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  93-031 0 - 77 - 22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  332 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  333 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.]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (335)  336 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  337  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  338  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  339  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  340  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  341 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  House of Representatives July 14,, 1977  342 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  343 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  344  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  345 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  346 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  347 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • 23  348 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  349 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  350 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  351 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  352 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  353 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  354 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  355 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  356 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  357 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  358 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  359 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  360 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  361 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  362 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  363 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 24  364 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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  365 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  366 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  367 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  368  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  369  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  370  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  371  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  372 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  373 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  374  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  375  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  376 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  377  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  378  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  379 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   93-031 0 - 77 - 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  380 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)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Regulatory Environment Range of Permissible Activities Locational Boundaries  -2-  381 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  382 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  383 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  384  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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  385  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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  386 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  387  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  388  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  389 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  390 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  391 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  392 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  393 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  394 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  395 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  396 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  398 STATEMENT OF HART PERRY PRESIDE"NT OF SOGEN-SWISS INTERNATIONAL CORPORATION BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  400 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  401 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  403 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  405 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  411 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.   93-031 0 - 77 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  27  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  418 ATTACHMENT  hgr, .. :.JU Ra,...,_Hou,cC'-.• L1t:m.r•u"" ~(10.1.1i2.•-1.ut  l~ r,...--.r, .....  -..r.  •-:~•••••,;ool• ....... • ~ . ~  ;;·. '.'': ·:·~;:-9r.'f",=-. w ..1.llll.i.l l,..IOIZ'I', Gl"'-  J ....... , , , . ~ , . .. T'l:II, Mll•wua .... ~J:JOT ....T.  M.1t,rn,.CW-'•"'""~NJ<1 W,Hll ... -•,,:,o•C.,La.. s.1,....., ....... :1,..,... _ _  J,u•1.J M, ~WIii, '"•"•  ,..;..... '- ..........-.CM.I,, ,. .. ,u•~- ,.u.-.-, 1..0.  {Dl_..,C-,1  ""a,.•wi-o.1,G,,1,;•••"J,  .,.,,.._. I' CII, lrT ,__,.._ 119, YA.  csxo~i:u  CONGRr;s OF THE UNITED STATES HOUSE OF REPRESENTATIV£S  .._.... . _.......,.,,  ,,,,,................ c,,oe!Vf~lft,,  ea...,-..ntn.•DU,1•---  SUBCOMMITTEE 0,N OVERSIGHT AND INYUTICATIONS OF THI 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  421 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  422 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  423 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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  '"izA  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  425 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  427  "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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  429 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  430 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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  431  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  432  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  433 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  434  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  435  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?  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  436  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  438 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  440 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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  B-14  B-14 B-15 B-16 B-17 B-18  452 -4-  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5 6  C-4  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  454 A-2  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s.  banks abroad;  455 A-3  (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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  456 A-4  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  457 A-5  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s.,  These  Commerce Dept.,  458 A-6  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  They carry federal deposit insurance.  459 A-7  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.   https://fraser.stlouisfed.org 93-031 0 - 77 - 30 Federal Reserve Bank of St. Louis  460 A-8  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  461 A-9  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  462 A-10  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  463 A-11  (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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  464 A-12  (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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  465 A-13  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  466 A-14  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  However, there is no suggestion in any of  467 A-15  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  468 A-16  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The leading banks of other  469 A-17  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Their domestic competitors are not only  470 A-18  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  471 A-19  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  On the contrary, existing  472 A-20  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  473 A-21  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  474 A-22  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  475 A-23  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,   https://fraser.stlouisfed.org 93-031 0 - 77 - 31 Federal Reserve Bank of St. Louis  to do business in the United  476 A-24  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  477 A-25  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  478 A-26  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Some of these may very  479 A-:l.1  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  480 A-28  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  481 A-29  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  482 A-30  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  483  A-31  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  484  A-32  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s.  political constituency, are  485  A-33  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  u.  S.  486  A-34  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  487 A-35  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  There was full  488  A-36  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 e