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Press 202-622-296
For Immediate Release
November 2,
1992
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank,
announced the following activity for the month of September 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $164.4 billion on September 30,
1992, posting a decrease of $9,580.7 million from the level on
August 31, 1992. This net change was the result of decreases in
holdings of agency debt of $9,428.5 million, in holdings of
agency assets of $30.3 million, and in holdings of guaranteed
loans of $122.0 million.
FFB made 26 disbursements in
September.
During the fiscal year 1992, FFB holdings of obligations
issued, sold or guaranteed by other Federal agencies posted a
net decrease of $29,811.8 million from the level on September 30,
1991. This net change was the result of a decrease in holdings
of agency debt of $21,161.7 million, in holdings of agency assets
of $7,799.6 million, and in holdings of agency-guaranteed loans
of $850.5 million.
Attached to this release are tables presenting FFB
September loan activity and FFB holdings as of September 30,
1992.
NB-2050
Page 3 of 3
FEDERAL FINANCING BANK
(in millions)
Program
Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sub-total*
SeDtember 30. 1992
$
7,692.5
10,160.0
0.0
46,535.9
7,175.0
9.903.4
81,466.8
Auoust 31. 1992
$
8,150.0
15,160.0
0.0
50,406.8
7,275.0
9.903.4
90,895.2
Net Change
9/1/92-9/30/92
$
-457.6
-5,000.0
0.0
-3,870.9
-100.0
0.0
-9,428.5
FY '92 Net Change
10/1/91-9/30/92
$
-3,568.5
1,864.0
-113.6
-16,346.5
-4,700.0
1.702.8
-21,161.7
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*
42,979.0
55.2
64.3
4,598.9
4.1
47,701.5
43,009.0
55.2
64.3
4,598.9
4.4
47,731.8
-30.0
0.0
0.0
0.0
-0.3
-30.3
-7,715.0
-6.0
-11.5
-65.0
-2.1
-7,799.6
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DEPCO-Rhode Island
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
4,344.3
4,820.0
125.0
174.4
1,853.2
776.9
27.0
23.7
0.0
1,576.2
18,143.0
143.4
633.7
2,416.8
19.1
177.0
35,253.6
4,387.0
4,820.0
125.0
176.9
1,853.2
759.1
27.7
23.7
0.0
1,576.2
18,238.0
148.6
636.9
2,407.1
19.2
_ 177.0
35,375.6
-42.7
0.0
0.0
-2.5
0.0
17.8
-0.7
0.0
0.0
0.0
-95.0
-5.2
-3.3
9.7
-0.1
0.0
-122.0
-255.7
-30.0
125.0
-30.1
-50.2
116.3
-1.4
-0.8
-32.7
-48.3
-454.0
-101.6
-54.6
-30.3
-2.2
0.0
-850.5
$ 164,421.9
$ 174,002.6
-9,580.7
$ -29,811.8
grand-total*
*figures may not total due to rounding
+does not include capitalized interest
$
NEWS
** l?£ {j i I ¡1 j ~T
Bureau of tnéT^bllc Debt • Washington, DC 20239
?£4$ U i % y CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,808 million of 13-week bills to be issued
November 5, 1992 and to mature February 4, 1993 were
accepted today (CUSIP: 912794A53).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.03%
3.05%
3.05%
Investment
Rate
3.10%
3.12%
3.12%
Price
99.234
99.229
99.229
Tenders at the high discount rate were allotted 96%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED' AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,910
28,710,720
11,840
34,380
48,375
35,680
1,490,765
7,410
'10,055
23,070
19,790
915,965
897.780
$32,231,740
Accepted
25,910
10,472,520
11,840
34,380
43,175
35,400
64,765
7,410
10,055
23,070
19,790
161,965
897.780
$11,808,060
Type
Competitive
Noncompetitive
Subtotal, Public
$27,258,865
1.469.360
$28,728,225
$6,835,185
1.469.360
$8,304,545
2,767,215
2,767,215
736.300
$32,231,740
736.300
$11,808,060
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2051
PUBLIC DEBT NEWS
Department of the Treasury « I^freautof tlie Public Debt • Washington, DC 20239
* Q Q
FOR IMMEDIATE RELEASE
November 2, 1992
Q f r .,
Q.
5 7a
^CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,830 million of 26-week bills -to be issued
November 5, 1992 and to mature May 6, 1993 were
accepted today (CUSIP: 912794C51).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.25%
3.27%
3.27%
Investment
Rate
3.35%
3.37%
3.37%
Price
98.357
98.347
98.347
$4,600,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 82%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
19,755
28,581,560
8,565
30,875
47,585
27,130
1,477,720
11,920
9,675
24,680
10,780
708,845
599.120
$31,558,210
Accepted
19,695
10,689,720
8,565
30,875
47,585
21,130
48,220
11,920
9,675
24,680
10,780
307,545
599.120
$11,829,510
Type
Competitive
Noncompetitive
Subtotal, Public
$27,394,965
966.545
$28,361,510
$7,666,265
966.545
$8,632,810
2,700,000
2,700.000
496.700
$31,558,210
496.700
$11,829*,510
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2052
FOR RELEASE WHEN AÜ^Hbéiè;yeM
November 3, 1992
pfeiss
conference
CONTACT:
Office of Financing
202/219-3350
TREASURY NOVEMBER QUARTERLY FINANCING
The Treasury will raise about $13,900 million of new cash
and refund $23,096 million of securities maturing November 15,
1992, by issuing $15,500 million of 3-year notes, $11,250 million
of 9-3/4-year 6-3/8% notes, and $10,250 million of 30-year bonds.
The $23,096 million of maturing securities are those held by the
public, including $4,692 million held, as of today, by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
The three issues totaling $37,000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold $4,095
million of the maturing securities that may be refunded by
issuing additional amounts of the new securities at the average
prices of accepted competitive tenders.
Treasury decided to reopen the 6-3/8% Treasury note maturing
on August 15, 2002, in order to alleviate an acute, protracted
shortage of this security. If next week's auction of this note
results in a price or prices below par, the discount will be
treated for Federal income tax purposes as market discount, not
as original issue discount. This Federal income tax treatment
is provided for under Internal Revenue Notice No. 92-13, released
March 25, 1992.
The 9-3/4-year note and 30-year bond being offered today
will be eligible for the STRIPS program.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
oOo
Attachment
N B-2053
TALKING POINTS
FOR THE
FINANCING PRESS CONFERENCE
November 3, 1992
Today, we are announcing the terms of the regular Treasury
November midquarter refunding.
I will also discuss Treasury
financing requirements for the balance of the current calendar
quarter and our estimated cash needs for the January-March 1993
quarter.
1.
We are offering $37.0 billion of notes and bonds to
refund $23.1 billion of privately held notes maturing on November
15 and to raise approximately $13.9 billion of cash.
The three securities are:
First, a 3-year note in the amount of $15.5 billion,
maturing on November 15, 1995.
This note is scheduled
to be auctioned on a yield basis on Monday, November 9,
1992.
The deadline for competitive tenders will be
12:00 p.m., Eastern Time.
The deadline for competitive
tenders in the bill auction to be held the same day
will be the usual 1:00 p.m., Eastern Time.
The minimum purchase amount in the 3-year note auction
will be $5,000.
Purchases may be made in any multiples
of $5,000.
Second, a 9-3/4-year note in the amount of $11.25
billion, a reopening of the 6-3/8 percent note of
August 15, 2002.
This note is scheduled to be
auctioned on a yield basis on Tuesday, November 10,
2
1992.
The minimum purchase amount will be $1,000.
Third, a 30-year bond in the amount of $10.25 billion
maturing on November 15, 2022.
This bond is scheduled
to be auctioned on a yield basis on Thursday, November
12, 1992.
The minimum purchase amount will be $1,000.
The 52-week bill auction that usually would be held on
November 12 will be postponed to Tuesday, November 17
for settlement on Thursday, November 19.
2.
We will accept noncompetitive tenders up to $5,000,000
for each of the note and bond auctions.
3.
As announced on Friday, October 30, 1992, we estimate a
net market borrowing need of $87 billion for the October-December
quarter.
The estimate assumes a $30 billion cash balance at the
end of December.
Including this refunding, we will have raised $25.3 billion
of the $87.0 billion in net market borrowing needed this quarter.
This net borrowing was accomplished as follows:
—
$4.1 billion of cash from the 7-year note that settled
October 15;
—
$2.9 billion of cash from the 2-year note that settled
November 2;
—
$11.1 billion of cash from the 5-year note that settled
November 2;
—
$1.2 billion of cash in the 52-week bills?
—
paydowns totaling $7.9 billion in the sales of the regular
3
weekly bills, including the bills announced today; and
—
$13.9 billion of cash from the refunding issues announced
today.
The $15 billion cash management bills that will be auctioned
on November 5 and issued on November 6 will mature on December 17
and therefore do not affect the borrowing need for the quarter as
a whole.
The $61.7 billion to be raised in the rest of the OctoberDecember quarter could be accomplished through sales of regular
13-, 26-, and 52-week bills, and 2-year and 5-year notes at the
end of November and December.
Cash management bills may be
necessary in December to cover the low point in the cash balance.
4.
We estimate Treasury net market borrowing needs to be
in the range of $65 to $70 billion for the January-March 1993
quarter, assuming a $20 billion cash balance on March 31. The
borrowing estimate for the January-March 1993 quarter assumes
that Congress will not enact additional funding for thrift
resolutions before early next year, which will prevent
significant Resolution Trust Corporation spending during the
period ending in March.
5.
The Treasury decided to reopen the 6-3/8 percent
Treasury note maturing on August 15, 2002 in order to alleviate
an acute, protracted shortage of this security.
If next week's
auction of this note results in a price or prices below par, the
4
discount will be treated for Federal income tax purposes as
market discount and not as original issue discount.
This Federal
income tax treatment is provided under Internal Revenue Service
Notice No. 92-13, released on March 25, 1992.
6.
The 10-year notes and 30-year bonds being announced
today are eligible for conversion to STRIPS (Separate Trading of
Registered Interest and Principal of Securities) and,
accordingly, may be divided into separate interest and principal
components.
7.
The February midquarter refunding press conference will
be held on Wednesday, February 3, 1993.
TREASURY FINANCING REQUIREMENTS
-i $Bil.
160
120
- 80
- 40
Jo
10, 1992-13
a&pp^
TREASURY FINANCING REQUIREMENTS
October - December 1992
$Bil.
200
200
175
175
150
150
125
- 125
100
100
75
75
50
50
25
-25
.0
0
1/ Includes budget deficit, changes in accrued interest and
checks outstanding and minor miscellaneous debt transactions.
f / Issued or announced through October 30, 1992.
Department of the Treasury
Office of Market Finance
_3y Assumes a $30 billion cash balance December 3 1 ,1992.
D, 1992-14
TREASURY OPERATING CASH BALANCE
Semi- Monthly
TREASURY NET MARKET BORROWING v
Coupons
103.5
Over 10 yrs.
2-10 yrs.
-40
III
1988
IV
I
II
III
IV
I
II
1989
V,Excludes Federal Reserve and
Department of the Treasury
Office of Market Finance
III
1990
IV
I
III
IV
1991
I
II
III
IV
-40
1992
Government Account Transactions.
October 30,1992-5
NET STRIPS AS A PERCENT OF PRIVATELY HELD
STRIPPARLE SECURITIES
$Bil.
140
Held in S trippable Form
(Left Scale)
m il 30 Year
M M 20 Year
10 Year
■S
Percent
(Right Scale)
30 Year
20 Year
10 Year
%
70
120
60
100
50
40
30
20
10
0
O N D
1990
J
F M A M J
J A S O N D J
1991
A
M J J
1992
A
S
0
*Through October 23, 1992.
Department of the Treasury
Office of Market Finance
1992-27
NET NEW CASH FROM NONCOMPETITIVE TENDERS IN
WEEKLY BILL AUCTIONS v
Discount Rate %
Oct
Nov
Dec
Jan
Feb
Mar
Apr
1991
May
Jun
Jul
Aug
Sep
OctP
1992
■1/Excludes noncompetitive tenders from foreign official accounts and the Federal Reserve account.
Department of the Treasury
Office of Market Finance
Pg
«
30,„
NONCOMPETITIVE TENDERS IN TREASURY NOTES AND BONDS^
1990
1991
J/Excludes foreign add-ons from noncompetitive tenders.
1992
p Preliminary
Treas u ry increased the m axim um noncom petitive aw ard to any noncom petitive bidder to $ 5 million effective N o vem b er 5, 1991.
Effective Feb ru ary 11, 1 9 9 2 a noncom petitive bidder m ay not hold a position in W l trading, futures, or forward contracts,
nor subm it both com petitive and noncom petitive bids for its own account.
Department of the Treasury
Office of Market Finance
October 30, 1992-24
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
IV
I
III
II
1989
e
Department of the Treasury
Office of Market Finance
IV
I
II
III
1992
IVe
estimate
October 30, 1992-26
SALES OF UNITED STATES SAVINGS BONDS
1980- 1992
e estimate
Department of the Treasury
Office of Market Finance
October 30. 1992-10
$Bil.
Department of the Treasury
Office of Market Finance
STATE & LOCAL GOVERNMENT SERIES
$Bil.
October 30, 1992-4
1992
Department of the T reasury
Office of Market Finance
1993
1994
October 30, 1992-11
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
$Bil
$Bil.
Nonmarketable
II
III
1988
IV
I
1989
II
III
1990
IV
1991
F.R.B purchases of marketable issues as agents for foreign and international monetary
authorities which are added to the announced amount of the issue.
2 / Preliminary
Department of the Treasury
Office of Market Finance
October 30, 1992-15
FOREIGN ADD-ONS IN TREASURY BILL AND NOTE AUCTIONS
$Bil.
$Bil.
16.3
Notes
5 years and over
16
14
12
10
8
I
II III IV
1988
I
II III IV
1989
I
II III IV
1990
Quarterly Totals
1991
1992
iv?/
1 /4 year notes not issued after December 31, 1990.
2 / Through October 30, 1992.
Department of the Treasury
Office of Market Finance
October 30, 1992-9
SHORT TERM INTEREST RATES
Quarterly Averages
%
18
16
14
12
10
8
6
4
2
Depé iment of the Treasury
of Market Finance
%
18
16
14
12
10
8
6
4
2
October 30, IS 12.-20
SHORT TERM INTEREST RATES
Weekly Averages
%
7
6
5
4
3
2
Department of the Treasury
Office of Market Finance
October 30, 1992-19
LONG TERM MARKET RATES
Quarterly Averages
Department of the Treasury
Office of Market Finance
%
October 30, 1992-22
INTERMEDIATE AND LONG TERM INTEREST RATES
Weekly Averages
Department of the Treasury
Office of Market Finance
0ctobef ^
1992.21
Department of the Treasury
Office of Market Finance
November 2, 1992-29
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
tn
CO
>2.8
s
\\\\
X \ •
.2363.8
8‘ 0.2
3*>2.0
I3
1.2
I 4$>7.6
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991 1992
As of December 31
Department of the Treasury
Office of Market Finance
October 30, 1992-2
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
Percent Distribution By Maturity
As of December 31
Departm ent of tin? I'eaFu rv
Office of M a iK P f Finance
'« • fo b r i
30 . IO').?
AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
Years
Department of the Treasury
Office of Market Finance
October 30, 1992-1
MATURING COUPON ISSUES
November 1992 - March 1993
______ (in millions of dollars)______
September 30,1992
Held by
Maturing Coupons
10
8
7
7
9
7
8
7
10
8
8
4
6
7
6
9
7
1/2%
3/8%
3/4%
3/8%
1/8%
1/4%
3/4%
%
7/8%
1/4%
3/8%
%
3/4%
7/8%
3/4%
5/8%
1/8%
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Bond
Bond
Bond
Note
Note
Note
Totals
J/
Department of the Treasury
Office of Market Finance
11/15/92
11/15/92
11/15/92
11/30/92
12/31/92
12/31/92
01/15/93
01/31/93
02/15/93
02/15/93
02/15/93
02/15/93
02/15/93
02/15/93
02/28/93
03/31/93
03/31/93
Total
Federal Reserve
& Government
Accounts
Private
Investors
ForeignJ/
Investors
4,330
8,549
14,311
13,852
8,287
14,237
6,515
14,120
5,162
8,256
14,744
60
627
1,501
13,736
9,204
14,404
300
115
3,707
502
645
926
320
882
780
52
3,730
42
112
162
1,225
945
1,657
4,030
8,434
10,604
13,332
7,642
13,311
6,195
13,238
4,382
8,204
11,014
18
515
1,339
12,511
8,259
12,747
13
1902
503
1,570
716
713
963
928
55
1,017
1,605
151,895
16,120
135,775
13,978
—
—
—
490
1,660
1,843
F.R.B. custody accounts for foreign official institutions; included in Private Investors.
October 30, 1992-12
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
F
Securities issued prior to 1990
Department of the Treasury
Office of Market Finance
M
A
M
J
J
A
S
O
N
D
New issues calendar year 1991
Issued or announced through October 30, 1992
October 30, 1992-6
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
| ------------------------------------- r
2007
2.7
4 2 6 4 2 -
2008
6 4 -
|
1.2
3.6
j
■
2009
3.2
■
2 —
3.8
2010
------------ ■ ------------------ Ï-------------- --,8
2002
11.0
11.0
|
—
—
o'
-
■
i -
2.8
\
■
9.8
s
1
7.1
1
3.3
3.2
____ ■ ____ ____ ■ _____
TTTTTT
—
20 04
20
|
2014
«
—
8.1
4.0
3.6
3j---------------------------------------
____ ■ _____ ____ I ____
«
\ -
5.1
1
2 —
^
o
8
«
20 05
2
1
____ ■_____
u
Ì
F
M
Department of the Treasury
Office of Market Finance
A
M
J
J
.
9.0
I
6.3
-
6 4 2 -
J
2011
2 —
20 03
-
4.2
20 12
-
2.6
1.7
■
A
2015
11.8
6.7
6.5
S
O
N
F
D
| Securities issued prior to 1990
3 New issues calendar year 1990
eh
M
A
M
J
J
A
S
O
N
D
New issues calendar year 1991
Issued or announced through October 30, 1992
October 30, 1992-7
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN NOVEMBER 1992v
Monday
2
Tuesday
4
3
Friday
Thursday
Wednesday
6
5
Announce
52 week
9
11
10
Auction
3 year?/
16
Holiday
Auction
52 week37
Announce
2 year
5 year
17
24
23
Auction
2 year 4/
25
13
12
Auction
10 year?/
Auction
30 year?/
19
20
26
27
Auction
5 year4/
Holiday
30
Department of Treasury
Office of Market Finance
1/Does not include weekly bills
2/For settlement November 16
3 / For settlement November 19
4 / For settlement November 30
November 2, 1992-16
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN DECEMBER 1992^
4
3
2
1
Friday
Thursday
Wednesday
Tuesday
Monday
Announce
52 week
7
11
10
9
8
Auction
52 w e e k ^
14
15
21
22
16 Announce
2 year
5 year
17
18
23
24
25
Auction
5 year^/
Auction
2 year3/
28
29
Holiday
31
30
Announce
52 w e e k!/
y Does not include weekly bills
Department of Treasury
Office of Market Finance
2 / For settlement December 17
3 / For settlement December 31
4/ For auction January 7 and settlement January 14
1
2 1992-17
November ,
SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN JANUARY 1993^
Monday
Tuesday
Friday
Thursday
Wednesday
1
Holiday
4
6
5
7
11
12
13
18
19
20
Auction
7 year?/
26
Auction
2 year 4/
27
?1
Auction
5 year^/
15
14
Holiday
25
8
Auction
52 w e e k ^
Announce
7 year
Announce
2 year
5 year
28
22
29
Announce
52 w e e k^
y Does not include weekly bills
2 /For settlement January 14
3/ For settlement January 15
4 / For settlement February 1
5/For auction February 4 and settlement February 11
Department ot Treasury
Office of Market Finance
November 2,1992-18
li
UuGG
FOR RELEASE AT 2:30 P.M
November 3, 1992
2
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 23,600 million, to be issued November 12, 1992.
This offering will result in a paydown for the Treasury of about
$ 225 million, as the maturing bills are outstanding in the
amount of $ 23,835 million. Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, Monday, November 9, 1992,
prior to 12:00 noon for noncompetitive tenders and prior to
1:00 p.m., Eastern
Standard
time, for competitive tenders.
The two series offered are as follows:
91 -day bills (to maturity date) for approximately
$ 11,800 million, representing an additional amount of bills
dated February 13, 199 2
and to mature February 11, 19 93
(CUSIP No. 912794 A6 1), currently outstanding in the amount
of $24,573 million, the additional and original bills to be
freely interchangeable.
182 -day bills for approximately $ 11,800 million, to be
dated November 12, 19 92 and to mature' May 13 1993
(CUSIP
No. 912794 C7 7).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
November 12,- 1992. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders' for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1,476 million as agents for foreign and international
series).
NB-2054
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must: state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must-be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued” trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name,
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par-amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive b i d s . The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date.
Any customer that is
awarded $500 million or more of securities in an ^auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities.
Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 6
Author(s):
Title:
Date:
Treasury Undersecretary for Finance Jerome Powell News Conference to Announce Quarterly
Refinancing Results
1992-11-03
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
FOR IMMEDIATE RELEASE
November 5, 1992
CONTACT: Scott Dykema
(202) 622-2960
UNDER SECRETARY DAVID C. MULFORD TO LEAVE TREASURY
Secretary Nicholas F. Brady announced today that David C.
Mulford, Under Secretary for International Affairs, will leave the
Treasury to accept a position in the private sector.
In announcing Dr. Mulford's departure, Secretary Brady said
"David's long career at Treasury is marked by exceptional
achievement and distinguished service to the nation. His in-depth
knowledge of global markets, negotiating acumen, and boundless
energy will be missed by me both professionally and personally."
Dr. Mulford leaves Treasury to join the CS First Boston
Group, Inc., where he will be Vice Chairman of First Boston
Corporation in New York and Deputy Chairman of Credit Suisse First
Boston, Ltd. , in London.
In addition, Dr. Mulford will have an
association with the Center for Strategic and International Studies
in Washington, D.C., as Special Advisor and Distinguished Scholar.
Dr. Mulford has served as Under Secretary for International
Affairs, since May 1989.
Prior to taking that post, he was the
Assistant Treasury Secretary for International Affairs from March
1984 until April 1989. As the top international economic policy
official at Treasury —
a post he has held longer than any
presidential appointee since the end of World War II, Dr. Mulford
has played a key role in many aspects of U.S. policy-making.
He
was the G-7 Deputy for the United States with responsibility for
coordinating economic policies with other G-7 industrial countries
and was responsible for exchange market policies. He developed the
Plaza Accord strategy with Secretary Baker in 1985 and has been the
Administration's leading official in developing the G-7 economic,
policy coordination process since the mid-1980s.
Since 1986, he
acted for the President as "financial sherpa" in the preparation of
the annual Economic Summits of industrial nations.
Among his many accomplishments at Treasury, Dr. Mulford:
played a key role in developing and implementing both the Baker and
Brady international debt strategies; chaired the yen/dollar
negotiations to open and liberalize Japan's capital markets; was
a key architect of President Bush's Enterprise for the Americas
NB-2055
2
Initiative; chaired the Gulf Crisis Financial Coordination Group to
coordinate resource flows for front-line states during the Gulf
War; led the U.S. delegation that negotiated the formation of the
European Development Bank; negotiated Poland's debt reduction
agreement in 1991; served as the Administration's point man on
financial assistance to Russia; and negotiated the 1991 external
debt deferral agreement with the former Soviet Union and this
year's $24 billion aid package assembled by major industrial
nations. Dr. Mulford also was responsible for U.S. exchange rate
negotiations with the new industrial economies of Asia and for U.S.
participation in the International Monetary Fund, the World Bank,
Inter-American Development Bank and the European Development Bank.
Prior to serving at Treasury, Dr. Mulford spent 20 years in
the international investment banking business. He served as Senior
Advisor at the Saudi Arabian Monetary Agency in Riyadh, Saudi
Arabia, as well as Director of Merrill Lynch, Pierce, Fenner &
Smith (1974-1984) and Director of White, Weld, & Co., Inc. (19661974).
Dr. Mulford was a White House Fellow during 1965-66,
serving as Special Assistant to the Secretary of the Treasury.
Dr. Mulford earned a doctorate in philosophy in 1965 from
Oxford University and his M.A. in political science from Boston
University in 1962, specializing in African Studies. He graduated
from Lawrence University with a B.A. (cum laude) in economics in
1959.
He was awarded the Legion d'Honneur by the President of
France in 1990 and received an Honorary Doctor of Laws Degree in
1984 from Lawrence University, where he serves as a member of the
Board of Trustees. In 1992 Dr.. Mulford was recognized as a member
of the Academy of Distinguished Alumni of the Graduate School of
Boston University. He is also a member of the Council on Foreign
Relations.
Born and raised in Rockford, Illinois, he now resides with his
wife, the former Jeannie Simmons, in Alexandria, Virginia.
-
0 -
■■PRà
W Ê Ê
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
If
nUf
FOR IMMEDIATE RELEASE
November 5, 1992
CONT^dÌP fefkice of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 41-E)AY BILLS
Tenders for $15,042 million of 41-day bills to be issued
November 6, 1992 and to mature December 17, 1992 were
accepted today (CUSIP: 912794ZB3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
2.98%
3.00%
3.00%
Investment
Rate_____ Price
3.03%
99.661
3.06%
99.658
3.06%
99.658
Tenders at the high discount rate were allotted 91%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
N B-2056
Received
Accepted
0
40,680,000
0
1,000
130,000
0
14,963,350
0
0
50,050
0
0
1.451.000
23,660
0
0
0
0
0
1.505.000
0
0
0
4,550
___ ______ 0
__________ 0
$43,767,000
$15,041,610
$43,767,000
$15,041,610
_________ 0
__________ 0
$43,767,000
$15,041,610
o
0
o
$43,767,000
__________0
$15,041,610
Temivi uniPKnrinr^mrAHHTT'irnnTmrTinrsiRippeo'fowm^octobeh~3i ,-~iw2
*=28
(In thousands)
Principai Amount Outatandng
lo a n Oaecnpoon
Mammy Data
11-5«» Nota C-1994 ..................................
11/15/94 ....................
11-1/4%,
M a t*
...........
A.1D%
11-1/4% Nota B-1995
Total
................................
9-1/2% Nota 0-1995
8-7/8% Nota A-1996
$6.658.554
S4.743.3S4
$1.915200
$112.000
2/15/95 .....................
6.933J61
... 5.484,901
1.448.980
24.800
5/15/95
7.127,086.
4,777.326
2.349.760
-0-
7.955.901
5.784.701
2.171.200
5.200
11/15/95 ..................
7.318.550
4.838.550
2.480.000
20.400
2/15/96
................
8.415.119
7.723.919
691200
20.800
5/15/96
....................
20.085.643
19.503.243
582.400
20.258.810
18.641.210
1.617.6001
165.600
....................
8/15/95 .....................
10*1/2% Note C-199S
...........................
.............................
7-3/8% Noi« C-1996
7-1/4% Nota 0-1996
................................
8-1/2% Nota A-1997
...................................
Reconeatuttd
This Manta1
Portion Hold in
Stnppod Forni
Portion Hold in
Unstnppod Fo#m
11/15/96
-0-
....................
9.921237
8.930.437
990.800!
56.000
8/15/97 .....................
9.362.836
8.498.836
864.000 j
-0-
11/15/97
9.806.329
7.997.129
1.811.200 j
2/15/98.....................
9.159.068
8.952.028
207.040
9.165.387
8.541.387
624.000
112.000
11.342.648
11.013.048
329.600
120.000
9.902.875
8.917.275
985.600
28.800
2/15/99
9.719.623
9.286.023
433.600
-0-
9-1/8% Note B-1999
5/15/99
10.047.103
8.754.303
1.292.800(1
8% Note C-1999
8/15/99
10,163.644
9.913.119
250.525
8-5/8% Nota B-1997
................................
8-7/8% Nota C-1997
8-1/8% Nota A-1998
................................
5/15/97
9% Nota B-1998
5/15/98
9-1/4% Nota C-1998 ...................................
8/15/98.....................
8-7/8% Note 0-1998
11/15/98
8-7/8% Note A-1999
...................................
................
-01.600
0
,
-0-
7-7/8% Note 0-1999
11/15/99
10.773.960
10.473.160
300.80011
22.400
8-1/2% Note A-2000
2/15/00
10.673.033
10.657.033
16.000 li
100.800
8-7/8% Note 8-2000
5/15/00
10 496.230
9.843.430
652.8001!
0
8-3/4% Note C-2000
Í 8/15/00
11 080.646 !
10.923.206 '
157 44011
8-
I 11/15/00
11.519.682 ¡
11.349,282 O
170.40011
12.000
7-3/4% Note A-2001
j 2/15/01
11 312.802 !
11.246.402 j
66.400 jj
-0-
3% Note B-2001
i 5/15/01
12.396.083 i
12.085.083 j
313.00011
-0-
7-7/8% Note C-2001
j 8/15/01
12.339.185
j
11.918,385 I
420.8001!
-0-
7-1/2% Note 0-2001
I 11/15/01
24 226.102 !
24.226.102 !.„
7-1/2% Note A-2002
I 5/15/02
11.714,397 I
11.461.037 I
5-3/8% Note 8-2002
I 8/15/02
11.749.270 j
11.712.470 I
36.800 il
■0-
8.301.806 I
4.956.206 I
3.345.6001j
1.089.600
1/2% Note 0-2000
11/15/04
11-5/8% Bond 2004
B
253.360!!
0
-0-
12% Bond 2005 ..
! 5/15/05
4 260.758 I
3.143.108 I
1.117.6501Í
65.000
10-
3/4% Bond 2005
I 8/15/05
9.269.713 i
8.583.313 I
686.4001!
646.400
9-
3/8% Bond 2006
2/15/06
4 755.916 j
4.755.916 !
•0-jj.
0-
11-
3/4% Bond 2009-14
11/15/14
6.005.584 i
1883.184 H
4.122.40011
1.046 400
t.550.240
11-1/4% Bond 2015
2/15/15
12.667.799 i
3.107.959 i
9.559.840 Ü
10- 5/8% Bond 2015
8/15/15
7 149,916 I
1.762.396 I
5.387.52011
198.4Ó0
9-7/8% Bond 2015
11/15/15
6 899.859 !
2.119.059 :
4 780.80011
553.600
5.819.654 I
1 447.200 II
88.000
7.266.854 lii
9-1/4% Bond 2016
2/15/16
7-1/4% Bond 2016
! 5/15/16
18.823.551 i
18.140.351
i
683.20011
13.600
7-
1/2% Bond 2016
I 11/15/16
18.864.448 I
17.395.648 i
1 468.800 li
138.000
8-
3/4% Bond 2017
! 5/15/17
12.894 40011
198.080
18 194 169 I
5.299.769 '
8-7/8% Bond 2017
8/15/17
14 016.858
8.154.458
9-1/8% Bond 2018
5/15/18
8.708.639
2.039.839
9% Bond 2018
..........................................
8-7/8% Bond 2 0 1 9 ...................................
11/15/18 ................
2/15/19
...............
5.862.4001
.
6.668.8001
i
273.600
9.032.870
1.437.470
7.595.4001
243.800
19.250.798
6.089.998
13.180.800 j
332.800
8-1/8% Bond 2019
8/15/19
20.213.832
13.025.672
7.188.160
216.000
3-1/2% Bond 2020
2/15/20
10.228.868
4.706.868
5.522.000
224.400
8-3/4% Bond 2020
5/15/20
10.158.883
2.342.083
7.816.800
•76.320
8-3/4% Bond 2020
8/15/20.............
21.418.606
4.613.326
16.805.280
228.160
7-7/8% Bond 2 0 2 1 ...................................
2/15/21
11.113.373
10.182.173
8-1/8% Bond 2021
5/15/21
11.958.888
5.504.808
8-1/8% Bond 2021
8/15/21
12.163.482
10.496.922
1.666.560 jj
8% Bond 2021
11/15/21
32.798.394
24.519.219
8.279.175
8/15/22
10.352.790
10.335,990
16.800 |j
200.000
635.506.316
478.591.766
156.914.5501
14.430.940
.
7-1/4% Bond 2022
Total
............................................................
................
931.200!
6.454.080
-0778.560
625.280
4.842.300
'Efle eiM May 1. 1987. s a c u m s
n «"TTl" rl torn «vara sagest« tor leoonaatuoon to me* unstrpoed tarnt.
Nota: On the 4ta worttdey ol at
a recnrdng of Table VI wd p a anatanta attar 1:00 pm. Tha istapnona numoar a (202) 874-4023. Tha datanoaa tn ina tette am auotao to aud* and auPaaraian^
0EFT. OF THE TftEASURY
FOR RELEASE AT 2:30 P.M.
November 6, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $14.,250 million of 364.-clay
Treasury bills to be dated November 19, 1992 and to mature
November 18, 1993
(CUSIP No. 912794 E5 9). This issue will
provide about $ 1 ,975 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$ 12,276 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Tuesday, November 17, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 19, 1992.
In addition to the
maturing 52-week bills, there are $ 23,959 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks currently hold $ 2,24.1 million as
agents for foreign and international monetary authorities, and
$ 8,592 million for their own account. These amounts represent
the combined holdings of such accounts for the three issues of
maturing bills. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international mone
tary authorities will be accepted at the weighted average bank
discount rate of accepted competitive tenders. Additional
amounts of the billj may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held
by them. For purposes of determining such additional amounts,
foreign and international monetary authorities are considered to
hold $ 4.30 million of the original 52-week issue. Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-2057
TREASURY'S 13— , 26 — , AND 52—WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000* Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate m excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a singls bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in ''when-issued” trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customersi depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer-identification number
of the trust.
A competitive bidder must report its net lonq position in
the bill being offered when the total of all its bids for that
hili^nd its net long position in the bill equals or exceeds $2
billion, with the position to be determined as ot one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders -ho meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
ror that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be wade on all accepted tenders accompanied by payment in
lull for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
^• e auction,
in each auction, noncompetitive bids for $1,000,000
or less without stated discount rato f m m -*»-*»*
bidder wt 11 he
m
rWmWBm
i ^hew
Gi^tGd
h
GcceP^Gd competitive bids.
WmIII tw
o
Competitive bids will then
from those at the lowest discount rates through suc1 9 1
higher discount rates, up to the amount required to meet
IttSCtiS £
I Bid? at the highest accepted discount rate
prorated if necessary. Each successful competitive bidder
l
i n f i l l
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred., e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of Securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or mote through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tehders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a fUhds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are net overdue as
defined in the general regulations governing United States secui Also, maturing securities held on fho book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
r,rpT A
,r REMARKS BY
DEPUTY SÉdRÈtfÂÎiYS ÖF THE TREASURY JOHN E. ROBSON
KELLOGG ALUMNI CLUB OF NEW YORK
NEW YORK, NEW YORK
NOVEMBER 9, 1992
Thank you. As business professionals, we are used to
planning ahead, to recognizing and seizing the opportunities of
the future. For the past three years I have served as one of
President Bush's Coordinators of U.S. Assistance to Eastern
Europe (as well as the former Soviet Union), and have witnessed
the potential opportunities of the future in that part of the
world. Tonight, I would like to talk with you about what we have
done and what more can be done to help the reform efforts in
Eastern Europe, and in so doing, open the door for American
businesses to capitalize on these opportunities.
In the past four years, democracy and free enterprisehave
brought new ideas and new hope to lands which were shrouded
behind the Iron Curtain for over four decades. From Budapest to
Bucharest, from the Baltic to the Black Sea, the former command
economies of Eastern Europe and the former Soviet Union are being
transformed into market-oriented economies. It has not been an
easy process, and it is by no means finished. But recent
developments in a number “oT countries provide encouragement to
hope for ultimate success.
Eastern European countries suffered a predictable and harsh
decline in economic output in the past couple of years. But
several countries — Czechoslovakia, Hungary and Poland — have
stabilized this slide in 1992, and have a chance to register
positive growth in 1993. These countries have reoriented trade
toward convertible currency markets, and their efforts have been
rewarded as their exports have risen sharply recently. We in the
West must open our markets and pursue strong domestic growth
policies to nurture these first signs of positive economic growth
in Eastern Europe.
Private sector entrepreneurship is rising rapidly in
countries like Poland, where, for example, the Polish-American
Enterprise Fund has enjoyed tremendous success with its Windows
Program of small loans to entrepreneurs. Since the end of 1990,
there has been only a handful of problem loans — only around
20 — out of a portfolio of more than 1,400 approved loans. Such
an admirable record should inspire us to expand on successful
programs like this one and to create others like it.
2
Success stories like this — along with the holding of free
elections and progress on currency stabilization, price reform,
and trade liberalization — are solid evidence of the wave of
political and economic reform that has swept through the
countries of Eastern Europe. But let's not kid ourselves —
there is still a long road ahead.
And the road to successful and durable economic reform for
these former communist political and economic systems will not be
a straight or well-paved one. Rather, it will be full of hidden
curves, bumpy stretches, and unexpected detours. We must all be
prepared to endure some wrong turns and a few pit stops. And it
is important that the American government and our private sector
continue to provide support along the way.
It is also important that we help teach the emerging
business professionals of Eastern Europe the skills they will
need to drive this road to reform — an economic Driver's Ed, if
you will. Simply throwing money at them won't work, and is a
huge waste. This is not the time for a second Marshall Plan for
the countries of Eastern Europe and the former Soviet Union,
since they lack the mature institutions of a market economy and
the managerial class that were firmly in place in Western Europe
after World War II.
Indeed, it is important to keep in mind that reform cannot
be imposed from the top down, but must take root and grow from
the bottom up. Market economies cannot be purchased and
delivered intact by the West, but must be nurtured and fought for
by the East. No one ever learned anything by having someone else
do their homework for them. The best form of technical
assistance we can provide these countries is to get people with
the experience, training and insights of free enterprise systems
on the ground, and let the people of Eastern Europe draw on their
acumen.
The Bush Administration has followed this philosophy by
focusing U.S. economic assistance efforts on private sector
development, management training, and private sector cooperation.
For example, we established enterprise funds in Poland, Hungary,
Bulgaria, and Czechoslovakia to stimulate private sector growth.
These enterprise funds make loans and equity investments in
private sector businesses, and have awarded technical assistance
grants for everything from banker and small business training in
Poland to MBA Enterprise Corps activities in Czechoslovakia to a
visitors center at the Budapest Stock Exchange.
The Treasury Department has played an important role in the
government's overall assistance efforts, administering a multi
million dollar financial sector technical assistance program that
focuses on three areas: Financial advisors, tax assistance, and
banker training. We have provided experienced, long-term
3
advisors in economic policy, government finance, and banking
regulation, and have shared the kind of expertise that will
strengthen these fledgling market economies.
The private sector has joined in the fight for economic
reforms in Eastern Europe. The Kellogg School of Management has
been particularly helpful in establishing and augmenting training
institutes of banking and finance. The comprehensive curricula
financial training developed by Kellogg address the varying
needs of local bankers, provide them with a firm foundation of
basic business skills, and will allow them to build on this
foundation through practical, hands-on application of the lessons
learned.
One thing to bear in mind when developing these management
training activities is that a rigid, one—size-fits-all master
is unlikely to work. The delivery of business skills
in Eastern Europe will be a hit-and-miss operation.
There will be some successes, and surely some failures. And we
must be ready to change and adapt our programs to fit different
environments, and to tailor our training to different needs.
. Kellogg•s program appears to do this by developing different
skills that bankers need in different stages of their careers —
credit analysis, asset/liability management, operations and
automation, and human resources development. The curricula will
also offer senior management courses on topics such as banking
supervision, international_banking, and financial planning.
These courses can go a long way toward establishing the
managerial skills and business know-how so critical to a
successful, market-oriented economy, and I congratulate all of
you involved in the program on your work thus far.
? 4-i ^°Vld llk<f to make another point on technical assistance,
and that is the importance of long-term commitments. Drop-in
technical assistance and management training will not cut it. We
e
this for the long haul, and leave footprints for
0t^ rS.t0.f0ll0W by helPin<? to train the trainers of the future - the Eastern Europeans themselves. it is my hope and desire to
see ongoing training programs being administered by Eastern
European management experts long after active U.S. presence is
gone and Western teachers have ridden off into the sunset.
Ê K E Ê Ê Ê Ë m
thf considerable efforts of the U.S. government and
Bpfp p p
advance the economic reforms in Eastern Europe,
and despite the improved conditions in some countries much
th?ninL t0 be doi?e * And M
opinion, the single mo4t important
thing we can do is to continue to help these countries rapidly
expand their entrepreneurial private sectors.
M
4
Creating a viable private commercial sector in these former
communist economies is a daunting task. State-owned enterprises
provide substantial portions of the population not only with
jobs, but also with housing, education, health care, recreation
and other activities. They often provide ultimate examples of
the "company town," and their removal through obsolescence or
privatization will create definite hardships for many people.
Now, I will tell you honestly that this former businessman
doubts that the vast majority of these large, state-owned
dinosaurs will ever convert successfully to private sector firms.
Which is not to say that privatization should not be encouraged
wherever it has the opportunity to succeed. It must be. In
fact, small-scale privatization has had success in some parts of
Eastern Europe, particularly with entrepreneurs in service,
retail and distribution enterprises like car-rental agencies and
music stores. This bottom-up approach should be applauded and
encouraged, for we need look no further than our own economy —
where small businesses generate two out of every three new jobs - to understand the importance of small businesses to the private
sector.
One way the countries of Eastern Europe can encourage the
development of small and large businesses is by creating an
attractive environment for foreign investment. Private investors
have made cautious inroads into Eastern Europe, but there are
certain things needed to turn these inroads into freeways —
among them: political stability; a predictable tax environment;
a stable currency; a transparent and reliable legal system;
flexibility for management to cut down on costs; and a
willingness by governments to allow the repatriation of earnings.
The companion to foreign investment is expanded trade for
the countries of Eastern Europe, which will need access to the
large markets of the West. And we should make a point of
introducing our business communities to the trade opportunities
in the reforming economies.
But the success of increased trade and investment — indeed,
the success of private sector growth — depends to a great extent
on financial sector reform. Unfortunately, the countries of
Eastern Europe are characterized by obsolete financial systems.
Structural and institutional changes have not kept pace with the
progress made on currency stabilization, price reform and trade
liberalization. Current banking systems are characterized by
large portfolios of non-performing loans to state-owned
enterprises, by little expertise in credit assessment, and by
ineffective supervision.
But that is not all. Uncertainties over property rights are
a continuing problem. Credible bankruptcy procedures are
lacking. And effective legal and court systems exist only in
5
embryonic form. These are just some of the many obstacles that
will need to be overcome to ensure the successful economic
transformation of these countries.
I
realize that the picture I have painted tonight of the
reform process in Eastern Europe has its dark tones. And from
the tenor of my comments, you might think I despair for the
success of free market reforms in the former communist countries.
That is not so. I am not a pessimist — just a realist. And
realistically, I think that these reforming nations can
ultimately make the transition to a free market, or something
like it. They have intelligent, literate populations and people
with considerable technical and scientific skills. Some of these
countries have rich natural resources, and many have strong
industrial or mercantile traditions. Finally, all will be freed
from the burden of defense spending and the threat of nuclear war
which has sapped the energies and productive capacities of these
countries for so long.
How, then, should American business assess the opportunities
in the former communist economies? My advice is carefully, but
with a positive and open mind. By and large, you will not find
the opportunities in these markets to be tidy or traditional.
And you will discover plenty of flaws in the systems over there
that you can use as excuses not to trade or invest.
But look closer and get over there and talk to people. My
impression is that, while commerce does not always function
smoothly in these reforming economies, there is generally a
genuine commitment to free market reform, and plenty of natives
with entrepreneurial genes. And, believe me, if you get over
there and look around, you will run into an army of Germans,
and other European business people who are not waiting for
the choppy seas to calm before they get their boats in the water.
The United States can be proud of the stand-up-and-becounted leadership role it has played in assisting political and
economic reforms in the former Iron Curtain nations. We played
the key role in pulling together a $24 billion Western assistance
package for the republics of the former Soviet Union. Our
government organized the billion dollar currency stabilization
fund for Poland. And we negotiated Polish debt reduction with
its Western creditors.
. The United States has provided substantial humanitarian aid
primarily food and medicine, to the Eastern European countries '
We have offered substantial technical assistance ranging from
advice on the democratic legislative process and creating free
trade union and a free press, to expertise and resources in the
environmental, energy, agricultural and economic fields
And in
a number of important ways, the American private sector has
contributed to the assistance process.
6
This country has pulled her oar.
But we must recognize the limits of our own assistance. We
must realize where Western knowledge and know-how can help these
countries — in business management and banking, trade,
stabilization and humanitarian aid. But more importantly, we
must realize that the countries of Eastern Europe have to help
themselves. We cannot do it for them. And I think it would be
pure folly to get into a bidding war with the other nations of
the world where we measure our commitment to reform by how many
dollars we spend.
Since its earliest days, the United States has stood as a
symbol of political and economic freedom for the entire world.
We have carried the torch in peace and in war, and through the
greatest changes in recorded history. At no other time in
history has that torch of freedom burned brighter, or shone on
more people, than in the last 12 years. I am proud of this
record, and will take my leave of public service knowing that we
have set a high standard for those who will follow.
President Bush said to the people of Eastern Europe, "As you
undertake political and economic reform, know one thing: America
will not fail you in this decisive moment. America will stick
with you." The people of Eastern Europe and the former Soviet
Union have spoken in favor of political and economic reform. And
I, for one, believe we should help them give full voice to their
hopes for the future.
Thank you.
# # #
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public DeW5 $> Washington, DC 20239
th
FOR IMMEDIATE RELEASE
November 9, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 3-YEAR NOTES
Tenders for $15,557 million of 3-year notes, Series R-1995,
to be issued November 16, 1992 and to mature November 15, 1995
were accepted today (CUSIP: 912827H54).
The interest rate on the notes will be 5 1/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
5.16%
5.18%
5.17%
Price
99.904
99.849
99.877
$10,000 was accepted at lower yields.
Tenders at the high yield were allotted 90%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
12,495
33,761,275
7,905
157,015
130,600
37,945
1,337,070
28,145
5,255
38,045
4,600
522,800
75.305
$36,118,455
Accented
12,495
14,879,775
7,905
127,015
119,600
37,445
191,170
28,145
5,250
38,045
4,600
30,800
75.190
$15,557,435
The $15,557 million of accepted tenders includes $530
million of noncompetitive tenders and $15,027 million of
competitive tenders from the public.
In addition, $701 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $2,895 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-2058
PUBLIC DEBT NEWS
----------------------------------------Li&fiA-ftXT^nT----------------------------------------Department of the Treasury • Bureau of tne PiHjifc4^ebO • Washington, DC 20239
FOR IMMEDIATE RELEASE W
November 9, 1992
I 3 & Q Q j o CONTACT: Office of Financing
Ob f
202-219-3350
RESULTS OF TREASURE'S AUCTION OF 13-WEEK BILLS
Tenders for $11,812 million of 13-week bills to be issued
November 12, 1992 and to mature February 11, 1993 were
accepted today (CUSIP: 912794A61).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.08%
3.10%
3.10%
Investment
Rate_____Price
3.15%
99.221
3.17%
99.216
3.17%
99.216
Tenders at the high discount rate were allotted 73%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,665
31,160,495
12,940
43,665
25,715
30,490
1,804,895
13,180
17,320
26,585
27,670
872,160
968.210
$35,035,990
Accented
32,665
10,270,545
12,940
43,665
25,715
30,220
271,195
13,180
17,320
26,310
27,670
72,160
968.210
$11,811,795
Type
Competitive
Noncompet it ive
Subtotal, Public
$30,128,655
1.586.725
$31,715,380
$6,904,460
1.586.725
$8,491,185
2,820,610
2,820.610
500.000
$35,035,990
500.000
$11,811,795
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2059
/i n *■
UBLIC
1532
Department of the Treasury • Bureau of
FOR IMMEDIATE RELEASE
November 9, 1992
NEWS
jbejjy' Tj Washington, DC 20239
THE
*
Tc rCOflJffipT: Office of Financing
*n tA $URY
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,823 million of 26-week bills to be issued
November 12, 1992 and to mature May 13, 1993 were
accepted today (CUSIP: 912794C77).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.30%
3.32%
3.31%
Investment
Rate
3.40%
3.42%
3.41%
Price
98.332
98.322
98.327
$3,010,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 1%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
20,815
38,704,990
7,375
28,940
23,490
28,915
1,972,070
10,760
7,670
29,460
14,665
908,915
607.580
$42,365,645
Accepted
20,815
10,521,495
7,375
28,940
23,490
28,915
250,320
10,760
7,670
29,460
14,665
271,815
607.580
$11,823,300
Type
Competitive
Noncompetitive
Subtotal, Public
$37,948,705
979.640
$38,928,345
$7,406,360
979.640
$8,386,000
2,800,000
2.800.000
637.300
$42,365,645
637.300
$11,823,300
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -2060
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
7,732
29,590,874
9,347
43,977
35,856
9,876
991,194
15,188
3,238
15,866
3,227
309,253
20.907
$31,056,535
Accented
7,732
11,007,114
9,347
22,477
35,856
9,668
129,249
15,188
3,238
15,866
3,227
20,543
20.907
$11,300,412
The $11,300 million of accepted tenders includes $393
million of noncompetitive tenders and $10,907 million of
competitive tenders from the public.
In addition, $800 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
Also, accrued interest of $16.11073 per $1,000 of par must
be paid for the period August 15, 1992 to November 16, 1992.
The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.
NB-2061
FOR RELEASE AT 2:30 P.M.
November 10,
1992
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $ 2 3 , 6 0 0 million, to be issued November 1 9 , 1992.
This
offering will result in a paydown for the Treasury of about $ 350
million, as the maturing bills are outstanding in the amount of
$ 23,959 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, November 16, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91 -day bills (to maturity date) for approximately
11,800 million, representing an additional amount of bills
dated August 20, 1992
and to mature February 18, 1993
(CUSIP No. 912794 A8 7)/ currently outstanding in the amount
of $11,74.3 million, the additional and original bills to be
$
freely interchangeable.
182-day bills for approximately $ 11,800 million, to be
dated November 19, 1992
and to mature May 20, 1993
(CUSIP
No. 912794 C8 5).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest* _JBoth series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
November 19, 1992. In addition to the
maturing 13-week and 26-week bills, there are $12,276 million of
maturing 52-week bills. The disposition of this latter amount was
announced last week. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international monetary
authorities will be accepted at the weighted average bank discount
rates of accepted competitive tenders. Additional amounts of the
bills may be issued to Federal Reserve Banks, as agents for foreign
and international monetary authorities, to the extent that the
aggregate amount of tenders for such accounts exceeds the aggre
gate amount of maturing bills held by them. For purposes of deter
mining such additional amounts, foreign and international monetary
authorities are considered to hold $ 1,750 million of the original
13-week and 26-week issues. Federal Reserve Banks currently hold
$ 2,180 million as agents for foreign and international monetary
authorities, and $ 8,592 million for their own account. These
amounts represent the combined holdings of such accounts for the
three issues of maturing bills. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 5176-1 (for 13-week series) or Form
PD 5176-2 (for 26-week series).
N B -2 0 6 2
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive b i d s . Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive b i d s . The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date.
Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered.
Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
w
jS§j PUBLIC
■MM
DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 12, 1992
to /3 07 n n 1 ■
bOOTAfC® :I Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 3OrYEAR BONDS
Tenders for $10,298 million of 30-year bonds to be issued
November 16, 1992 and to mature November 15, 2022 were
accepted today (CUSIP: 912810EN4).
The interest rate on the bonds will be 7 5/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
7.65%
7.66%
7.66%
Price
99.707
99.590
99.590
Tenders at the high yield were allotted 66%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
5,083
24,708,467
2,607
5,941
32,908
7,937
568,404
6,112
4,330
10,435
4,928
251,641
6.453
$25,615,246
Accepted
5,053
10,156,167
2,607
5,941
32,898
7,917
43,316
6,112
4,330
10,435
4,928
11,641
6.453
$10,297,798
The $10,298 million of accepted 1tenders includes
million of noncompetitive| tenders and $9,976 million
competitive tenders from the public.
In addition, $400 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.
Also, accrued interest of $0.21064 per $1,000 of par must
be paid for the period November 15, 1992 to November 16, 1992.
NB-2063
FOR IMMEDIATE RELEASE
November 13, 1992
Contact:
Anne Kelly Williams
(202) 622-2960
Statement by John E. Robson
Deputy Secretary of the Treasury
We read with interest the remarks Governor Clinton made on the
cost of the savings and loan cleanup and his suggestion that the
Administration's estimates were higher after the election than
before. He has been poorly briefed.
If his briefers would look at the facts, they would find that
over the past two and one-half years, the Administration has been
in the public record with estimates of the savings and loan cleanup
and has not increased those estimates. We still believe the total
cost of the cleanup will not exceed those estimates, and because of
the recent improvement in the thrift industry, may even turn out to
be lower, contingent, of course, on Congress voting for the funds
to complete the job.
#
NB-2064
#
#
REASURY NEWS
Department of the Treasury
EMBARGOED UNTIL 1:15 PM
PREPARED FOR DELIVERY
November 16, 1992
Washington, D.C.
Ö
Telephone 2 0 2 -6 2 2 -2 9 6 0
Contact:
Rich Myers
202-622-2930
REMARKS BY
DEPUTY SECRETARY OF THE TREASURY JOHN E. ROBSON
FINANCIAL EXECUTIVES INSTITUTE
NEW YORK, NEW YORK
NOVEMBER 16, 1992
Ladies and gentlemen of the Financial Executives Institute,
thank you for inviting me to speak to you today. I have come
here to ask that you join me in declaring and waging war on the
destructive forces of excessive government regulation — forces
that threaten the competitiveness of American business, weaken
our native entrepreneurism, and diminish the nation's economic
growth and job creation.
This is an urgent call to bear arms against the marauding
bands of "Regu-gnomes." This is a campaign in which we must
enlist millions of employers, workers and just plain citizens.
Why do we need to mount this Jihad — this holy war —
against overregulation? To begin with, economists estimate the
annual cost of all regulation at somewhere between $300 and $500
billion, much more than we spend on national defense. That is
staggering, and amounts to a hidden regulatory tax of $4,000 to
$5,000 a year for every American family.
And the costs of excessive regulation are not remote. On
the contrary, they show up in daily life — in the employer's
cost of doing business and competitiveness and, therefore, on how
many people he employs and how well he can pay them — on the
price we pay for every product and service we buy, whether in the
grocery store or the doctor's office — on the cost of a home or
an education — on the rate of inflation — on interest rates and
the availability of credit — and on America's future place in a
profoundly changed and fiercely competitive global marketplace.
In the observations and proposals I plan to share with you
today, I have tried to bring perspectives drawn from my personal
involvement with the regulatory process ■— as a federal economic
and safety regulator at three different agencies, as the
initiator of airline deregulation at the Civil Aeronautics Board,
and as the former CEO of a heavily regulated business.
NB-2065
2
And I hope you financial executives will contemplate our
discussion from your perspectives as both victims and
perpetrators of regulation. For I believe you can be found in
both roles. And certainly financial reporting has proven itself
a fertile field for overregulation.
For a minute now, let's take a sampling of some regulatory
overkill, just to get a sense of the immense and needless burden
imposed on economic growth and entrepreneurial freedom.
Surely among the most egregious examples of regulatory
excess are the requirements Congress has just imposed on banks.
Mind you, these new regulations are on top of existing regulatory
burdens that the banking industry estimates costs around $10
billion a year — a sum equal to nearly 60 percent of the entire
industry's profit in 1991. These new Congressional mandates
authorize regulators to set salaries for every bank employee from
CEOs to tellers, dictate back office operations, and prescribe
duplicative annual federal examinations even if a bank has
already been through a state regulatory examination.
Another target of overregulation is executive compensation.
There are wholly objectionable proposals to cap executive pay or
limit its tax deductibility. And the accounting treatment for
stock options — that is whether or not to reflect some
compensation cost for stock options in a company's earnings
statement — has become a hotly contested issue. To me, the
answer on stock options is simple. If you make employers run the
"cost” of stock options through their earnings statements, you
will greatly deter the use of an extremely valuable
entrepreneurial incentive, particularly for start-up firms and in
the high technology industries. And it is not only the top
executives who will go without. Many companies grant options
broadly at lower levels. Since the law has long required
detailed public disclosure of stock option information, this is
not a case of deception. Rather, it is whether the regulatory
theology of technically perfect accounting is to prevail over
considerations of economic growth and job creation.
Switching fields, I'm certain that everyone in this room has
themselves or had a family member contract an illness that
required pharmaceutical treatment. Sometimes the prescription
drug works wonders. Sometimes it doesn't. But what you may not
realize is that often when the drug doesn't do what you and the
physician hope, there is a pharmaceutical product that could work
already in use for patients in Canada and Europe. But that drug
is not available in the United States because of the Food and
Drug Administration's timid, and outrageously slow drug approval
process.
These examples are but a tiny fragment of those we might
select from the wax museum of regulatory horrors. But they help
3
illustrate the range, depth, and costs associated with excessive
regulation. And can you just imagine if all the time, energy,
cost, lawsuits and paperwork consumed by overregulation were
devoted to creating economic growth? What an even more powerful
job machine this country would be!
As it turns out, America is not the only nation with selfinflicted wounds of overregulation. Indeed, one can trace the
pernicious contribution of excessive regulation to the decline of
a number of once-great civilizations: Egypt; Greece; Rome; the
Islamic empire of Moorish times; and Columbus' Spain, to name but
a few. One text describes regulation in Pharonic Egypt as
follows: "Control took on frightening proportions. There was a
whole army of inspectors. There were nothing but inventories,
censuses of men and animals, land surveys, [and] estimations of
harvests to come."
In fact, the perils of government regulation were foreseen
by the Founding Fathers of this Republic. Listen to James
Madison in the Federalist Papers: "What prudent merchant will
hazard his fortunes in any new branch of commerce when he knows
not but that his plans may be rendered unlawful before they can
be executed?"
But if the lessons of history teach us that excessive
regulation is economically life-threatening, and if the very
architects of the American political and economic systems warned
against it, how and why have we come to be mired in the current
debilitating degree of overregulation? And how have these swarms
of regulations and regulators arisen, locust-like, to devour the
crops of productivity and economic growth.
Perhaps we can start to find some answers by identifying
some of the principal reasons for the prolific growth of
regulation. These include:
o
The fact that regulation, by and large, has
its inspiration in laudable motives and so
acquires a certain popular political force
and immunity from attack;
o
A Congress dominated during the last halfcentury by majorities committed to a "biggovernment-can-fix-it" philosophy and the
creation of a risk-free world;
o
The near total absence of any significant
business experience on the part of regulatory
bureaucrats, Members of Congress, regulatory
activists, and the regulation-infatuated
media;
4
o
The influence of lawyers, accountants and
other professional technicians who feast at
the table of regulatory growth and
complexity;
o
The stealthy nature of regulatory growth,
which tends to occur non-violently, one new
regulatory requirement at a time, until the
accumulated regulatory burdens become
suffocating; and
o
The American compulsion to rush in and
correct every problem — and its companion —
the notion that for every problem there is a
neat and tidy man-made solution.
We must also understand the dynamics of the regulatory
process. Regulatory behavior is strongly driven by what the
regulators perceive to be politically correct, and by an
overwhelming desire to protect their own backsides from criticism
by the politicians in power, the media, or the regu-loving
activists. Believe me, regulators don't ignore what happens on
C-SPAN. For example, while a number of factors contributed to
the recent credit crunch in bank lending, one definite cause is
the overzealousness of bank examiners, cowed by the S&L
experience and fearful of being summoned to a Congressional
hearing to be flogged for their alleged regulatory lapses.
These same behavior dynamics drive the regulators to take a
no risk approach that stops decisions and actions from occurring,
or slows them down, if they present any risk, even if significant
benefits are also present (for example, the approval of a new
life-saving drug). They also induce regulators to take the most
stringent positions in implementing statutorily mandated
regulation, even where there is latitude to adopt a more balanced
approach. It is only the mistakes of under-regulation that are
counted politically. A regulator would rather have a loan denied
than to see one made that might later go sour. Loans denied
aren't counted. Neither are lives not saved by drugs trapped in
the FDA approval process, nor jobs lost by the imposition of
various regulatory burdens.
So, while there may be some natural-born tyrants who find
being a regulator a good opportunity to throw their weight
around, the force that most drives regulators to excess is the
fear of being caught on the wrong side of the risk line — the
instinct for self preservation, not oppression.
But it is simply not acceptable to stand by and permit
excessive regulation to continue to expand its smothering sprawl.
And I am not just talking about Federal regulation. Excessive
regulation is occurring at state and local government levels as
5
well.
And, while I believe that the lion's share of the blame for
overregulation rests with the regu-centrics in Congress and other
legislatures, I cannot absolve the Executive Branch from a share
of the responsibility. That is why the Bush Administration took
a stand and has had some successes under the President's
regulatory moratorium and from the work of the Vice President's
Council on Competitiveness. For example, the Treasury Department
alone found opportunities for regulatory relief that will save
nearly a billion dollars annually. But let me tell you, there's
plenty more gold in them 'thar regulatory hills.
So what can we do about it?
Well, I have some suggestions.
The first and essential task is to organize a national
Coalition for Common Sense Regulation, a diverse and powerful
political action and public information group concerned about
economic growth and dedicated to stamping out excessive
regulation. If powerful coalitions can be mobilized on issues
such as drunken driving, Aids, muscular dystrophy, smoking, the
environment, and animal rights, it surely must be possible to
combat overregulation. A companion task, of course, is to find
some political champions for this cause — senators, congressmen,
state legislators, governors and mayors — so that the battle is
fought across a broad political front that reaches the breeding
grounds of overregulation.
Then this new coalition and its political champions and
media allies must embark on a massive public and political
education campaign directed at three central issues.
First, we must educate people about the real costs and
effects of excessive regulation in their daily lives, as I have
described before.
Second, we must dissipate the misleading and polarizing
notion, so successfully propagandized by the Regu-gnomes, that
the population divides neatly into two groups, one of "consumers”
(whose interests are, not surprisingly, protected by regulatory
activists), and another group whose aim (it is alleged) is to
exploit and to harm "consumers." This is, of course,
preposterous. We are all consumers. And nearly every one of us
is also a producer, a job holder, a user of nature's resources,
and a potential prey to disease. This multitude of roles that
every one of us plays, and the range of sometimes conflicting
interests that require balancing and trade-off needs to be
clearly grasped and felt by the public. If the regulatory
activists continue to be allowed to scissor the universe into
"consumers" and the "enemies of consumers," they will make it
very difficult for the foes of excessive regulation to regain the
moral and political high ground.
6
Third, we must give perspective to the idea that the people
are "entitled” to — and government must use its powers to
provide — a risk-free world. That is a powerful tool in the
hands of the regu-centrics. No one argues, of course, that we
ought not take reasonable precautions or that we should allow
excessive, preventable risk. But there is a place between
excessive risk and excessive regulation. And it is essential
that a balanced regulation of risks that measures costs and
benefits, be portrayed, perceived, and politically accepted, not
as inhuman or antisocial conduct, but as virtuous behavior.
After all, a world free of risk is also a world free of progress.
Now, having formed our national coalition and mounted an
attack on some of the thematic underpinnings of excessive
regulation, we need some concrete, systemic antidotes to
overregulation. This is not a problem that should be addressed
by tinkering with one bad regulation at a time. You must attack
the system. So here are some ideas for what we might call a
Regulatory Bill of Rights.
First, make it more difficult for legislators to impose
regulatory requirements. For example, a super-majority could be
required for any new regulatory legislation. And suppose, before
Congress acts on regulatory legislation, the Joint Economic
Committee must publish an analysis showing whether the annual
benefits of the new regulation exceed its costs. We might also
require calculation of the overall cost of regulation already
existing in the area where the new regulatory legislation is
proposed to show the marginal impact of the new burden.
Now we should also hold each member of Congress, and other
legislators, accountable by requiring their regulatory votes to
be on the record. This information could then be used in a
public rating system for legislators, governors, cabinet officers
and other regulatory officials, just as the Americans for
Democratic Action, the AFL-CIO and the National Rifle Association
do for their agendas.
Next, suppose we require every Federal regulatory agency to
establish a minimum risk threshold below which it will not impose
regulation. For example, the Environmental Protection Agency
might not regulate an activity below the point of reducing the
risk of cancer to the risk of a person being struck by lightning.
Regulatory agencies could also be required to publish a
cost-benefit analysis with every proposed regulation and solicit
comment on that analysis as well as other aspects of the
proposal. Agencies should also adopt an overall cost of
regulation budget. The agency could not impose any regulation
that resulted in costs exceeding the budget unless they offset
the increased cost by reducing regulation in other areas.
7
Now, what about a whistle-blower act that invites people who
feel aggrieved by regulatory actions to appeal those actions to
the head of the agency in an informal way, and obliges the senior
regulatory bureaucrats to promptly investigate and respond to the
alleged regulatory excess. You might need to protect the
complainers by creating severe punishments for any regulator who
was found to have sought retribution against those who
complained.
Finally, we need to get the legal system reformed to deter
the welter of senseless and costly lawsuits. And we need to pay
more attention to the regulatory philosophy of men and women
considered for judicial appointments. Certainly we do not want
on the bench judges who are creating new opportunities for
regulatory mischief by expansive interpretations of the laws.
Ladies and gentlemen, there is no reason why this country
should continue to damage itself by excessive regulation. We can
arrest this trend if we muster the political will and take
resolute action.
I
have offered some ideas today. They may or may not be the
best ones. And I am sure that there are many others who can
contribute their ideas and energies to mounting an aggressive and
comprehensive campaign against excessive regulation. We must do
this.
I
ask you not to leave this room today without a commitment
to help mobilize against the cancer of overregulation that is
gnawing at America's economic entrails.
This is a battle we can win.
And I ask you to join me in
it.
Thank you.
# # #
UBLIC DEBT NEWS
Department of the Treasury **' ‘ Biiréati öCtfife ^tiblk Debt • Washington, DC 20239
FOR IMMEDIATE K e A
November 16, 1992
e
|ß
CONTACT: Office of Financing
202-219-3350
4u u IO 8 7
Q
RESULTS Q£ TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,848 million of 13-week bills to be issued
November 19, 1992 and to mature February 18, 1993 were
accepted today (CUSIP: 912794A87).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.12%
3.14%
3.13%
Investment
Rate
3.19%
3.21%
3.20%
Price
99.211
99.206
99.209
Tenders at the high discount rate were allotted 61%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
28,165
28,884,650
9,840
32,355
392,360
42,950
1,794,560
14,035
4,875
25,505
14,230
937,140
878.420
$33,059,085
Accented
28,165
10,262,650
9,840
32,355
221,460
33,200
236,060
14,035
4,875
25,505
14,230
87,010
878.420
$11,847,805
Type
Competitive
Noncompetitive
Subtotal, Public
$28,695,445
1.416.455
$30,111,900
$7,484,165
1.416.455
$8,900,620
2,692,185
2,692,185
255.000
$33,059,085
255.000
$11,847,805
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2066
UBLIC DEBT NEWS
Department of the Treasury • Bureàù ottime Public, Debt • Washington, DC 20239
5 $ 24.f i,/
FOR IMMEDIATE RELEASE
November 16, 1992
I {J I f (
U
CONTACT: Office of Financing
202-219-3350
u 1 8 3
I
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
1 the trearh ®
Tenders for $11,919 million o^'26-week bills to be issued
November 19, 1992 and to mature May 20, 1993 were
accepted today (CUSIP: 912794C85).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.36%
3.37%
3.37%
Investment
Rate____
3.47%
3.48%
3.48%
Price
98.301
98.296
98.296
Tenders at the high discount rate were allotted 29%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
21,145
35,557,190
8,260
22,385
25,720
44,495
1,450,400
14,025
4,830
28,060
12,475
961,860
573.740
$38,724,585
Accented
21,145
10,774,925
8,260
22,385
25,720
26,035
140,690
14,025
4,830
28,060
12,475
266,610
573.740
$11,918,900
Type
Competitive
Noncompetitive
Subtotal, Public
$34,377,425
952.860
$35,330,285
$7,571,740
952.860
$8,524,600
2,700,000
2,700,000
694.300
$38,724,585
694.300
$11,918,900
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2067
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
§1
^
U (J Q 7 j j o
CONTACT. Orfcice of Financing
nr_.
202-219-3350
h
y
FOR IMMEDIATE RELEASE
November 17, 1992
RESULTS OF TREASURY'S AUCTION d#'/^ % E E K BILLS
Tenders for $14,255 million of 52-week bills to be issued
November 19, 1992 and to mature November 18, 1993 were
accepted today (CUSIP: 912794E59).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.60%
3.61%
3.61%
Investment
Rate____
3.75%
3.76%
3.76%
Price
96.360
96.350
96.350
$60,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 86%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
11,155
31,693,595
6,735
10,700
9,750
17,020
1,764,685
8,630
3,575
10,525
5,055
672,030
196.190
$34,409,645
Accented
11,155
13,679,935
6,735
10,700
9,750
10,020
152,775
7,930
3,575
10,525
5,055
150,330
196.190
$14,254,675
Type
Competitive
Noncompetitive
Subtotal, Public
$30,452,560
367.085
$30,819,645
$10,297,590
367.085
$10,664,675
3,200,000
3,200,000
390.000
$34,409,645
390.000
$14,254,675
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2068
FOR IMMEDIATE RELEASE
November 17, 1992
Contact: Keith Carroll
(202) 622-2930
TREASURY ANNOUNCES PENALTY AGAINST JACK'S QUICK CASH, INC.
The Department of the Treasury announced today that Jack's Quick
Cash, Inc., a check cashing service in Orlando, Florida, has
agreed to pay a civil money penalty of $18,000 in settlement of
allegations that it failed to report to the Internal Revenue
Service (IRS) currency transactions as required by the Bank
Secrecy Act (BSA). The violations involved the cashing of a
check in an amount in excess of $10,000, by one person, at one
time, in a single day.
Peter K. Nunez, Assistant Secretary for Enforcement, who
announced the penalty said, "The penalty represents a complete
settlement of Jack's Quick Cash's BSA civil liability for these
violations and should encourage all financial institutions to
implement effective Bank Secrecy Act compliance programs." This
case was developed through a BSA compliance examination conducted
by the Internal Revenue Service.
In recognition of the importance of complying with the Act, and
before being advised of the existence of previous problems,
Jack's installed a computer system which captures information on
transactions reportable under the BSA. Subsequent IRS
examinations of Jack's have indicated dramatic improvement in BSA
compliance. The Treasury has no evidence that Jack's or any of
its employees or officers engaged in any BSA criminal activity in
connection with these reporting violations, nor was it under
criminal investigation for these violations.
The collection of a civil money penalty from Jack's Quick Cash,
Inc. for BSA violations reflects Treasury's continuing and
enhanced effort to enforce BSA compliance by nonbank financial
institutions such as check cashers, currency dealers and
exchangers, issuers and redeemers of money orders and traveler's
checks, and transmitters of funds.
The BSA requires banks and other nonbank financial institutions
to keep certain records, to file currency transaction reports
with the Treasury un all cash transactions by or through the
financial institution in excess of $10,000, and, under some
circumstances, to file reports on the international
transportation of currency, traveler's checks, and other monetary
instruments in bearer form. The purpose of the reports and
records required under the BSA is to assist the government's
efforts in criminal, tax and regulatory investigations and
proceedings.
OoO
k B -2 0 6 9
FOR RELEASE AT 2:30 P .
November 17, 1992
OF ?H£ TR£§§$f^CT2
Office of Financing
202-219-3350
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 23,600 million, to be issued November 27, 1992.
This offering will provide about $ 300 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 23,297 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, November 23, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern • Standard
time, for competitive tenders. The two
series offered are as follows:
90 -day bills (to maturity date) for approximately
$ 11,800 million, representing an additional amount of bills
dated
August 27, 1992
and to mature* February 25, 1993
(CUSIP No. 912794 A9 5), currently outstanding in the amount
of $ 1 1 , 6 6 2 million, the additional and original bills to be
freely interchangeable.
181: -day bills for approximately $ 1 1 , 8 0 0 million, to be
dated November 2 7 , 1 9 9 2 and to mature Ma y 2 7 , 1 9 9 3
(CUSIP
No. 912794 C9 3 ) .
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
♦Treasury bills maturing
November 27, 1992. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1,827 million as agents for foreign and international
monetary *authorities, and $ 5,788 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-2070
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued1' trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
»
Hi
For Immediate Release
r- Ti*r
TRE â SUH^
\ H t »*'u
r-Af
rI
*
November 18, 1992
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of October 1992.
As indicated in this table, U.S. reserve assets amounted to
74,207 million at the end of October 1992, down from 78,527 million
in September 1992.
U.S. Reserve Assets
(in millions of dollars)
End
of
Month
Total
Reserve
Assets
Gold
Stock 1/
Special
Drawing
Rights 2/3/
Foreign
Currencies 4/
Reserve
Position
in IMF 2/
1992
September
78,527
11,059
12,111
45,579
9,778
October
74,207
11,060
11,561
42,325
9,261
1/
Valued at $42.2222 per fine troy ounce.
2/
Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on weighted average of exchange rates for the
currencies of selected member countries. The U.S. SDR holdings
and reserve position in the IMF also are valued on this basis
beginning July 1974.
3/
Includes allocations of SDRs by the IMF plus transactions in SDRs
4/
Valued at current market exchange rates.
NB-2071
UEO
Oü à I 4 2
FOR RELEASE AT 2:30 P.M
November 18, 1992
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $25,750 MILLION
The Treasury will auction $15,000 million of 2-year notes
and $10,750 million of 5-year notes to refund $13,332 million
of securities maturing November 30, 1992, and to raise about
$12,425 million new cash. The $13,332 million of maturing
securities are those held by the public; including $1,496
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
Both the 2-year and 5-year note auctions will be conducted
in the single-price auction format. All competitive and non
competitive awards will be at the highest yield of accepted
competitive tenders.
The $25,750 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $520 million of the maturing secu
rities that may be refunded by issuing additional amounts of
the new securities.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offer
ing circulars.
oOo
Attachment
NB-2.072
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED NOVEMBER 30, 1992
November 18, 1992
Amount Offered to the Public ... $15,000 million
$10,750 million
Description of Security:
Term and type of security ...... 2-year notes
Series and CUSIP designation .'.. Series AG-1994
(CUSIP No. 912827 H7 0)
Maturity date ................. November 30, 1994
Interest rate ................. To be determined based on
the highest accepted bid
Investment yield .............. To be determined at auction
Premium or discount........... To be determined after auction
Interest payment dates ......... May 31 and November 30
Minimum denomination available . $5,000
5-year notes
Series T-1997
(CUSIP No. 912827 H8 8)
November 30, 1997
To be determined based on
the highest accepted bid
To be determined at auction
To be determined after auction
May 31 and November 30
Terms of Sale:
Method of sale ............ .... Yield auction
Competitive t enders...... ..... Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ........ Accepted in full
up to $5,000,000
Accrued interest payable
by investor................ .. . None
Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full
up to $5,000,000
Key Dates:
Receipt of tenders .......
a) noncompetitive.............
b) competitive ................
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury ...
b) readily-collectible check ...
$
1,000
None
Monday, November 23, 1992
prior to 11:00 a.m., EST
prior to 12:00 noon, EST
Tuesday, November 24, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Monday, November 30, 1992
Wednesday, November 25, 1992
Monday, November 30, 1992
Wednesday, November 25, 1992
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Pubiifc Debtr ¡*5 W^ifoington, DC 20239
FOR IMMEDIATE RELEASE
November 23, 1992
mi l J
U
sCONTACTty Office of Financing
202-219-3350
üö L 0 0 /
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $15,010 million of 2-year notes, Series AG-1994,
to be issued November 30, 1992 and to mature November 30, 1994
were accepted today (CUSIP: 912827H70).
The interest rate on the notes will be 4-5/8%. All competitive
tenders at yields lower than 4.72% were accepted in full. Tenders at
4.72% were allotted 35%. All noncompetitive and successful competi
tive bidders were allotted securities at the yield of 4.72%, with an
equivalent price of 99.821. The median yield was 4.70%; that is, 50%
of the amount of accepted competitive bids were tendered at or below
that yield. The low yield was 4.68%; that is, 5% of the amount of
accepted competitive bids were tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
15,525
41,388,890
21,315
26,500
193,800
55,615
1,823,755
39,215
18,020
54,285
5,870
744,980
233.940
$44,621,710
Accented
15,525
14,039,640
19,305
26,500
96,800
25,615
307,205
39,215
17,370
53,285
5,870
129,875
233.940
$15,010,145
The $15,010 million of accepted tenders includes $652
million of noncompetitive tenders and $14,358 million of
competitive tenders from the public.
In addition, $498 million of tenders was awarded at the
high yield
to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $370 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-2073
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public De£>t • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 23, 1992
ÉV
Office of Financing
202-219-3350
¿ S H I
RESULTS OF TREASURY'S AUCTION; OF 13-WEEK BILLS
Tenders for $11,893 million of 13-week bills to be issued
November 27, 1992 and to mature February 25, 1993 were
accepted today (CUSIP: 912794A95).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.26%
3.27%
3.27%
Investment
Rate____
3.33%
3.34%
3.34%
Price
99.185
99.183
99.183
Tenders at the high discount rate were allotted 76%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
29,880
30,828,615
8,330
38,440
83,665
73,395
1,929,810
14,420
8,345
29,835
18,660
1,169,740
876.930
$35,110,065
Accented
29,880
10,091,750
8,330
38,440
33,665
41,155
256,810
14,420
8,345
29,835
18,660
444,540
876.930
$11,892,760
Type
Competitive
Noncompetitive
Subtotal, Public
$30,358,035
1.419.330
$31,777,365
$7,140,730
1.419.330
$8,560,060
2,888,400
2,888,400
444.300
$35,110,065
444.300
$11,892,760
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2074
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debtr • ,Washipgton, DC 20239
I
ikP'{ fCOOM o 5 ro
FOR IMMEDIATE RELEASE
November 23, 1992
CONTACT: Office of Financing
5 SI 0 U 2 6 I 3
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
« r pT n e TI!E TREASURY
Tenders for $11,827 millionuo f ’26-ifeek bills to be issued
November 27, 1992 and to mature May 27, 1993 were
accepted today (CUSIP: 912794C93).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.44%
3.45%
3.45%
Investment
Rate
3.55%
3.56%
3.56%
Price
98.270
98.265
98.265
Tenders at the high discount rate were allotted 83%.
The investment rate is the equivalent coupon-issue yield
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
18,375
30,513,340
6,185
109,565
22,505
48,750
1,725,625
8,370
7,665
23,565
11,980
579,755
473.880
$33,549,560
Accepted
18,375
10,746,880
6,185
96,815
22,505
44,330
129,205
8,370
7,665
23,565
11,980
236,915
473.880
$11,826,670
Type
Competitive
Noncompetitive
Subtotal, Public
$28,679,275
814.285
$29,493,560
$6,956,385
814.285
$7,770,670
2,900,000
2,900,000
1.156.000
$33,549,560
1.156.000
$11,826,670
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -2075
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
November 24, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $10,753 million of 5-year notes, Series T-1997,
to be issued November 30, 1992 and to mature November 30, 1997
were accepted today (CUSIP: 912827H88).
The interest rate on the notes will be 6%. All
competitive tenders at yields lower than 6.07% were accepted in
full. Tenders at 6.07% were allotted 34%. All noncompetitive and
sucessful competitive bidders were allotted securities at the yield
of 6.07%, with an equivalent price of 99.702. The median yield
was 6.02%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 5.95%;.
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
26,132
25,107,469
12,263
120,736
82,342
36,741
1,082,476
27,415
11,666
30,417
10,281
531,320
53.757
$27,133,015
Accented
26,132
10,089,109
12,263
120,736
82,342
36,731
154,376
27,415
11,666
30,417
10,281
98,320
53.707
$10,753,495
The $10,753 million of accepted tenders includes $601
million of noncompetitive tenders and $10,152 million of
competitive tenders from the public.
In addition, $598 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $150 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-2076
REASURY NEWS
trtment of the Treasury
FOR RELEASE AT 2:30 P.M.
November 24,
Telephone 2 0 2 - 6 2 2 -2 9 6 0
Washington, D.C
1992
CONTACT:
Office' of Financing
2 0 2 - 2 1 9 - J-ibU
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately S 23,600 million, to be issued December 3, 1992.
This offering will provide about $ 300 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 23 290 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, November 30, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91 -day bills (to maturity date) for approximately
§ -]-| 300 million, representing an additional amount of bills
dated September 3, 1992
and to mature March 4, 1993
(CUSIP No. 912794 B2 9), currently outstanding in the amount
o f
$ -|-| 5*15 million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$ 11 800 million, representing an additional amount of bills
dated June 4, 1992
and to mature June 3, 1993
(CUSIP No. 912794 D2 7 ), currently outstanding in the amount
of $ 14 296 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi3i^d noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 3, 1992.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1 373 million as agents for foreign and international
monetary’authorities, and $5,314 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-2077
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government seotiri t b r o k e r / d e a l e r ,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for hhe account of
foreign andt international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive b id Idy c* sinçlG b iddsr in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if,the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers; depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, th e eusLoiutii liaL muai: provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders tTho meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement*will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rats bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, Lhe appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction, must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are net overdue as
rfift general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted m exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of theae Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, o t from the Bureau of the Public Debt.
4/17/92
FOR IMMEDIATE RELEASE
November 25, 1992
CONTACT:
DESIREE TUCKER-SORINI
(202) 622-2920
Statement by Treasury Secretary Nicholas F. Brady
The 3.9 percent third-quarter increase in GDP announced
today, and other recent economic indicators, are welcome news for
the American economy.
We have now had six straight quarters of economic growth.
In 1992 alone, the average growth rate is 2.8 percent, higher
than the average growth rate of 2.5 percent for the past 25
years.
Through prudent management, President Bush has guided the
American economy through a global recession and economic
restructuring.
###
NB-2078
Press 202-622-2960
For Immediate Release
November 27, 1992
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of October 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $159.9 billion on October 31,
1992, posting a decrease of $4,523.4 million from the level on
September 30, 1992. This net change was the result of decreases
in holdings of agency debt of $4,449.2 million, in holdings of
agency assets of $0.1 million, and in holdings of agencyguaranteed loans of $74.1 million. FFB made 42 disbursements in
October.
Attached to this release are tables presenting FFB October
loan activity and FFB holdings as of October 31, 1992.
NB-2079
Page 2 of
4
FEDERAL FINANCING BANK
OCTOBER 1992 ACTIVITY
BORROWER
AMOUNT
FINAL INTEREST
OF ADVANCE MATURITY
RATE
DATE
(seraiannual)
INTEREST
RATE
(not semi
annual)
AGENCY DEBT
FEDERAL DEPOSIT INSURANCE CORPORATION
Note No. 0007
Advance #1
10 /I
$10,160,000,000.00
1/4/93 2.881%
44,979,021,805.50
2,000,000,000.00
1/4/93 2.881%
1/4/93 2.820%
RESOLUTION TRUST CORPORATION
Note No. 0016
Advance #1
Advance #2
10/1
10/5
GOVERNMENT-GUARANTEED LOANS
RHODE ISLAND DEPOSITORS ECONOMIC PROTECTION CORPORATION
*DEPC0
10/1
103,968,797.90
1/4/93 2.881%
GENERAL SERVICES ADMINISTRATION
Foley Square Courthouse
Memphis IRS Service Center
Miami Law Enforcement
Foley Office Building
ICTC Building
GSA Refinancing Loan #1
GSA Refinancing Loan #2
GSA Refinancing Loan #3
GSA Refinancing Loan #4
GSA Refinancing Loan #5
10/23
10/23
10/28
10/30
10/30
10/30
10/30
10/30
10/30
10/30
5,734,790.00 12/11/95 5.112%’
371,876.21
1/3/95 4.528%
1,013,413.00
7/1/93 3.479%
5,420,349.00 12/11/95 5.107%
5,054,064.30 11/16/92 3.138%
33,995,000.00
5/1/00 5.852%
25,785,000.00
5/1/00 5.869%
12,860,000.00 11/1/00 5.885%
10,980,000.00 11/1/00 5.879%
17,720,000.00 11/1/00 5.884%
RURAL ELECTRIFICATION ADMINISTRATION
Oglethorpe Electric #335
10/1
Southern Mississippi #090A 10/9
Southern Maryland #352
10/13
§Tri-State #250
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
0Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
0Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
@Tri-State #365
10/19
♦maturity extension
^interest rate buydown
26,386, 0 0 0 . 0 0
4,038, 0 0 0 . 0 0
1,810, 0 0 0 . 0 0
5,000, 0 0 0 . 0 0
7,659, 855.53
310, 511.06
2,902, 755.53
2,124, 733.41
1 033 395.68
1,241, 351.68
198, 055.55
27, 658.00
14,571, 123.66
1/847, 170.24
6,613, 765.92
1,540, 641.70
913, 232.44
997, 234.08
1,061, 433.20
573, 081.10
1,004, 444.46
484, 444.34
, ,
1/2/24
1/3/95
12/31/25
1/3/23
12/31/13
12/31/13
12/31/13
12/31/13
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
.145% 7.082%
.055% 4.035%
.338% 7.272%
.274% 7.209%
.886% 6.828%
.886% 6.828%
6..886% 6.828%
6..886% 6.828%
6..977% 6.917%
6..977% 6.917%
6..977% 6.917%
6..977% 6.917%
6..977% 6.917%
7..0 2 1 % 6.960%
7..0 2 1 % 6.960%
7..0 2 1 % 6.960%
7..0 2 1 % 6.960%
7. 0 2 1 % 6.960%
7. 0 2 1 % 6.960%
7. 0 2 1 % 6.960%
7. 0 2 1 % 6.960%
7. 0 2 1 % 6.960%
Page 3 of 4
FEDERAL FINANCING BANK
OCTOBER 19 92 ACTIVITY
BORROWER
AMOUNT
FINAL INTEREST
OF ADVANCE MATURITY
RATE
DATE
INTEREST
RATE
(semi(not semi
annua 1) annua1)
RURAL ELECTRIFICATION ADMINISTRATION (CONTINUED!
§Tri-State
§Tri-State
§Tri-State
§Tri-State
§Tri-State
#365
#365
#365
#365
#365
10/19
10/19
10/19
10/19
10/19
$
1,333,333.28
1,539,878.14
9,010,741.56
3,251,151.30
4,374,146.32
1/3/17
1/2/18
1/2/18
1/2/18
1/2/18
7.021%
7.065%
7.065%
7.065%
7.065%
184,942,247.51 1/29/93
3.132%
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
Note A-93-1
§interest rate buydown
10/30
6.960%
7.004%
7.004%
7.004%
7.004%
qtr.
qtr.
qtr.
qtr.
qtr.
Page 4 o
FEDERAL FINANCING BANK
(in millions)
Proaram
Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
IJ-S- Postal Service
sub-total*
October 31. 1992 SeDtember 30. 1992
$
7,692.5
10,160.0
0.0
42,086.7
7,175.0
9.903.4
77,017.6
1 $
7,692.5
10,160.0
0.0
46,535.9
7,175.0
9.903,4
81,466.8
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*
42,979.0
55.2
64.3
4,598.9
4 ,Q
47,701.4
42,979.0
55.2
64.3
4,598.9
4,1
47,701.5
Government-Guaranteed Loans :
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DEPCO-Rhode Island
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOIMfirgin Islands
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
4,337.9
4,790.0
104.0
170.2
1,853.2
895.8
27.0
23.7
1,576.2
18,171.9
134.4
629.3
2,269.9
19.1
177,0
35,179.6
4,344.3
4,820.0
125.0
174.4
1,853.2
776.9
27.0
23.7
1,576.2
18,143.0
143.4
633.7
2,416.8
19.1
177.0
35,253.6
$ 159,898.5
$ 164,421.9
grand-total*
*figures may not total due to rounding
+does not include capitalized interest
Net Change
10/1/92-10/31/92
$
$
0.0
0.0
0.0
-4,449.2
0.0
0,0
-4,449.2
FY '93 Net Change
10/1/92-10/31/92
$
0.0
0.0
0.0
-4,449.2
0.0
0.0
-4,449.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
-0.1
-o.i
-0.1
-6.3
-30.0
-21.0
-4.2
-6.3
-30.0
-21.0
-4.2
0.0
0.0
118.9
118.9
0.0
0.0
0.0
0.0
0.0
0.0
28.9
-9.0
-4.4
-146.9
28.9
-9.0
-4.4
-146.9
0.0
0.0
0.0
-74.1
0.0
-74.1
-4,523.4
$
-4,523.4
FOR RELEASE AT 12:00 NOON
November 27, 1992
CONTACT:
Office of Financing
202/219-3350
TREASURY OFFERS $16,000 MILLION
OF 49-DAY CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $16,000 million of 49-day
Treasury bills to be issued December 3, 1992, representing an
additional amount of bills dated July 23, 1992, maturing
January 21, 1993 (CUSIP No. 912794 A3 8).
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 1:00 p.m., Eastern time, Tuesday,
December 1, 1992. Each bid for the issue must be for a minimum
amount of $1,000,000. Bids over $1,000,000 must be in multiples
of $1/000,000. Bids must show the rate desired, expressed on
a bank discount rate basis with two decimals, e.g., 7.10%.
Fractions must not be used.
Noncompetitive.bids will not be accepted. Tenders will not
be received at the Department of the Treasury, Washington, D. C.
The bills will be issued on a discount basis under competi
tive bidding, and at maturity their par amount will be payable
without interest. The bills will be issued entirely in book-entry
form in a minimum amount of $10,000 and in any higher $5,000 mul
tiple, on the records of the Federal Reserve Banks and Branches.
tional amounts of the bills may be issued to Federal Reserve
Banks as agents for foreign and international monetary authorities
at the average price of accepted competitive tenders.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A))*
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account. An institution submitting
a bid for customers must submit with the tender a customer list
that includes, for each customer, the name of the customer and the
amount bid at each rate. Customer bids may not be aggregated by
rate on the customer list. All bids submitted on behalf of trust
estates must provide, for each trust estate, the name or title of
the trustee(s), a reference to the document creating the trust with
the date of execution, and the employer identification number of
the trust.
NB-2080
2
A single bidder must report its net long position if the total
of all its bids for the security being offered and its position in
the security equals or exceeds $2 billion, with the position to be
determined as of one half-hour prior to the closing time for the
receipt of competitive tenders. A net long position includes posi
tions, in the security being auctioned, in "when issued" trading,
and in futures and forward contracts, as well as holdings of out
standing bills with the same maturity date and CUSIP number as the
new offering. Bidders who meet this reporting requirement and are
customers of a depository institution or a government securities
broker/dealer must report their positions through the institution
submitting the bid on their behalf. A submitter, when submitting
a competitive bid for a customer, must report the customer's net
long position in the security being offered when the total of all
the customer's bids for that security, including bids not placed
through the submitter, and the customer's net long position in the
security equals or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others.
Public announcement will be made by the Department of the
Treasury of the amount and range of accepted bids. Competitive
bids will then be accepted, from those at the lowest discount
rates through successively higher discount rates, up to the amount
required to meet the public offering. Bids at the highest accepted
discount rate will be prorated if necessary. Each successful com
petitive bidder will pay the price equivalent to the discount rate
bid.^ The calculation of purchase prices for accepted bids will be
carried to three decimal places on the basis of price per hundred,
e.g., 99.923. Those submitting tenders will be advised of the
acceptance or rejection of their bids. The Secretary of the
Treasury expressly reserves the right to accept or reject any or
all bids, in whole or in part, and the Secretary's action shall
be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
IV
Notice of awards will be provided by a Federal Reserve Bank
or Branch to bidders who have accepted bids, whether for their own
account or for the account of customers. No later than 12:00 noon
local time on the day following the auction, the appropriate Fed
eral Reserve Bank will notify each depository institution that has
entered into an autocharge agreement with a bidder as to the amount
3
to be charged to the institution's funds account at the Federal
Reserve Bank on the issue date. Any customer that is awarded $500
million or more of securities must furnish, no later than 10:00 a.m.
local time on the day following the auction, written confirmation
of its bid to the Federal Reserve Bank or Branch where the bid
was submitted. A depository institution or government securities
broker/dealer submitting a bid for a customer is responsible for
notifying its customer of this requirement if the customer is
awarded $500 million or more as a result of bids submitted by
the depository institution or the broker/dealer.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Adjustments will be made for differences between the par
value of the maturing definitive securities accepted in exchange
and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's Single Bidder Guidelines, and
this notice prescribe the terms of these Treasury bills and gov
ern the conditions of their issue. Copies may be obtained from
any Federal Reserve Bank or Branch.
oOo
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
November 30, 1992
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,851 million of 13-week bills to be issued
December 3, 1992 and to mature March 4, 1993 were
accepted today (CUSIP: 912794B29).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.27%
3.31%
3.31%
Investment
Rate
3.34%
3.39%
3.39%
Price
99.173
99.163
99.163
Tenders at the high discount rate were allotted 54%.
The investment rate is the equivalent coupon-issue yield
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
24,090
31,654,465
14,400
33,020
82,865
54,760
1,556,145
10,415
7,180
28,405
19,350
651,445
816.150
$34,952,690
Accented
24,090
10,619,565
14,400
33,020
57,565
54,760
87,445
10,415
7,180
28,405
19,350
78,445
816.150
$11,850,790
Type
Competitive
Noncompetitive
Subtotal, Public
$30,713,095
1.315.965
$32,029,060
$7,611,195
1.315.965
$8,927,160
2,513,630
2,513,630
410.000
$34,952,690
410.000
$11,850,790
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2081
UBLIC DEBT NEWS
Department of the Treasury
Bureau of the BuBfic Debt • Washington, DC 20239
FOR IMMEDIATE RELEASg^
November 30, 1992
j % 0 0 3 3 5 ö CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,802 million of 26-week bills to be issued
December 3, 1992 and to mature June 3, 1993 were
accepted today (CUSIP: 912794D27).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.44%
3.47%
3.46%
Investment
Rate____
3.55%
3.58%
3.57%
Price
98.261
98.246
98.251
Tenders at the high discount rate were allotted 55%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
17,580
26,405,555
5,865
28,465
23,140
52,745
1,468,640
12,940
6,865
28,155
13,810
610,960
528.735
$29,203,455
Accented
17,580
10,673,055
5,865
28,465
23,140
52,745
272,390
12,940
6,865
28,155
13,810
138,460
528.735
$11,802,205
Type
Competitive
Noncompetitive
Subtotal, Public
$24,991,215
842.440
$25,833,655
$7,589,965
842.440
$8,432,405
2,800,000
2,800,000
569.800
$29,203,455
569.800
$11,802,205
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2082
REASURY NEWS
department of the Treasury
FOR IMMEDIATE RELEASE
December 1, 1992
Washington,
D.C
Telephone 2 0 2 - 6 2 2 -2 9 6 0
CONTACT: Scott Dykema
(202) 622-2960
TREASURY REPORT SAYS CHINA, TAIWAN
MANIPULATE CURRENCY RATES AGAINST U.S. DOLLAR
The Treasury Department, in a new report to Congress,
concludes that both China and Taiwan continue to manipulate their
foreign exchange rate systems to prevent effective balance of
payments adjustment and to gain an unfair competitive edge.
Treasury's annual International Economic and Exchange Rate
Policy report to Congress also reviews the outlook for the world
economy and the U.S. current account position as well as recent
developments in foreign exchange markets.
The annual International Economic and Exchange Rate Policy
report is required by the 1988 Omnibus Trade and Competitiveness
Act. Section 3004 of that law requires the Treasury Secretary to
consider whether countries manipulate their currencies against
the dollar for the purpose of preventing effective balance of
payments adjustment or gaining unfair competitive advantage in
international trade.
Treasury has concluded that China, which has a rapidly
growing trade surplus with the United States, is manipulating its
currency. "Chinese authorities continue to frustrate effective
balance of payments adjustment by tightly regulating exchange
markets. Given China's large external surpluses, such regulation
is unwarranted," said Olin L. Wethington, Treasury assistant
secretary for international affairs.
Taiwan also was cited in the report for manipulating its
currency. Wethington said market forces in Taiwan don't play
enough of a role in determining Taiwan's exchange rate against
the U.S. dollar. "With continued large external surpluses, close
to $90 billion in foreign exchange reserves, and a high growth
rate, this economy doesn't need rigid, state-imposed foreign
exchange restrictions."
In addition to assessing the exchange rate policies of major
U.S. trading partners, the report reviews global economic
developments. The United States remains concerned over sluggish
global economic growth. While signs of recovery are evident in
NB-2083
2
the United States, the report notes economic performance remains
weak in Japan and Europe. As a result, the U.S. trade and
current account deficits are expected to increase.
Although the report did not conclude that Korea is
manipulating its exchange rate, Treasury remains concerned that
pervasive foreign exchange and capital controls constrain market
forces and provide the potential for manipulation. Therefore,
Treasury is continuing to press for liberalization of financial,
capital, and foreign exchange controls in Korea.
-
0 -
DEPARTMENT OF THE TREASURY
REPORT TO THE CONGRESS
ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY
DECEMBER 1992
DEPARTMENT OF THE TREASURY
REPORT TO THE CONGRESS
ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY
DECEMBER 1992
TABLE OF CONTENTS
PAGE
Part I
Introduction
1
Part II
Economie Policy Coordination and the Economie
Situation in the Industrial Countries
2
Part III Developments in Foreign Exchange Markets
8
Part IV
U.S. Balance of Payments and Associated Issues
11
Part V
Asian Newly Industrialized Economies (NIEs) and
China
17
Part VI
Korea
Taiwan
China
Conclusion
Appendix: Tables and Charts
19
24
30
36
41
PART I :
INTRODUCTION
Section 3005 of the Omnibus Trade and Competitiveness Act of
1988 (Pub. L. 100-418) requires the Secretary of the Treasury to
submit to the Committee on Banking, Housing, and Urban Affairs of
the Senate and Committee on Banking, Finance and Urban Affairs of
the House of Representatives an annual report each October 15 on
international economic policy, including exchange rate policy.
In addition, Section 3005 requires the Secretary to provide a
written update of developments six months after the initial
report. This is the fifth annual report submitted to Congress.
Part II of this report reviews the economic situation in the
industrial countries and efforts by major countries to coordinate
economic policies. Part III analyzes developments in the foreign
exchange markets, including the dollar's movement relative to the
currencies of major trading partners and U.S. foreign exchange
market intervention. Part IV examines the U.S. balance of
payments situation and assesses issues related to the U.S.
economic and balance of payments situation. Part V, prepared
pursuant to Section 3004 of the Omnibus Trade and Competitiveness
Act of 1988, considers whether countries manipulate the rate of
exchange between their currencies and the U.S. dollar within the
meaning of the legislation. In this connection, a status report
on developments in Taiwan, Korea, and China is provided. The
final part provides conclusions on the principal issues discussed
in the report.
PART II: ECONOMIC POLICY COORDINATION
AND THE ECONOMIC SITUATION IN THE INDUSTRIAL COUNTRIES
The increased integration of the world economy has
significantly reduced the economic independence of even the largest
economies and reaffirmed the importance of a strong economic policy
coordination process. A sound world economy requires that the
major countries work closely to formulate compatible policies
necessary for sustained growth with low inflation, sustainable
external imbalances, and greater stability of exchange markets.
The coordination process was intensified in the mid-1980s in
response to divergent economic performances among the major
economies which had resulted in growing external imbalances,
substantial dislocations in the U.S. manufacturing sector, and
rising protectionist pressures. Beginning with the 1985 Plaza
Agreement, the major countries agreed on policy actions to address
these problems and to facilitate balance of payments adjustment and
economic growth.
.The broad agreement on policy directions achieved by the G-7
countries through the late 1980s contributed to the longest
peacetime expansion in the post-war period, reductions in external
imbalances, and increased stability in exchange markets.
In the 1990s, however, divergent economic conditions have
emerged and the historic changes in East Europe, the former Soviet
Union, and elsewhere resulted in a loss of consensus on economic
policy priorities. In the United States, declining price pressures
and concern over rising unemployment led authorities to ease
monetary policy and lower interest rates. At the same time,
Germany's mounting unification costs coupled with the Bundesbank's
adherence to price stability goals led to a tight monetary policy
and higher interest rates. Under the fixed exchange rates of the
European Monetary System (EMS), high German interest rates were
transmitted throughout Europe — at a time of slowing growth.
The resulting disparity in interest rates in Europe and the
United States contributed to strong exchange rate pressures. These
pressures were especially acute in Europe where authorities
struggled to maintain fixed exchange rates despite divergent
economic conditions.
Thus, the challenges confronting G-7 policymakers have been to
1) achieve a new policy consensus oriented toward growth and 2)
strengthen the coordination process to respond to changes in the
international economy. Below is a description of the current
economic situation and prospects in the major countries and the
G-7's response.
3
Growth
The G-7 economies are still experiencing slow aggregate
growth, but considerable disparities in economic performance
remain. In the aggregate, real GDP/GNP is expected by the IMF in
its October forecasts to increase about 1.7 percent in 1992 on a
year-over-year basis. This would be an improvement over last
year's performance — when real growth was only 0.6 percent — but
is, nonetheless, substandard compared with the long expansion
following the 1982 recession.
(See Table 1 for detailed IMF
projections.)
Recent slow growth appears to be related to imbalances which
arose during the economic expansion of the 1980s. During this
period, asset prices in some countries escalated to inappropriate
levels; corporate and household debt rose to uncomfortable heights;
and stocks of some real assets increased beyond current need. The
adjustment process necessary to reduce these imbalances has slowed
recovery from recession in the United States, Canada, and the
United Kingdom. In Japan and Germany, where growth had not
initially faltered, weakness is now clearly evident. In addition,
developments in European currency markets and questions surrounding
the Maastricht Treaty have increased economic uncertainties in
Europe and may have contributed to weaker growth.
For 1993, the IMF has projected 3.0 percent aggregate G-7
growth. However, this forecast is subject to considerable
uncertainty, and substantial downside risk exists. Latest data
suggest, for example, that consumer confidence remains weak,
industrial output is below earlier peaks, and business investment
is sluggish. Consequently, a number of forecasters, including the
international financial institutions, have been revising downward
their projections for next year.
Growth in 1992 is projected by the Fund to be strongest in
France, Canada, Japan, and the United States. France has been able
to maintain modest growth in 1992 (projected at 2.2 percent),
reflecting exports to other EC countries, despite high interest
rates; Canada's economy is projected to achieve nearly comparable
results (2.1 percent growth) by a recovery in interest sensitive
construction and by exporting to the growing U.S. economy.
Growth in Japan is likely to be very disappointing by
historical standards (around 2.0 percent in 1992 according to the
IMF) because domestic demand has been restrained by the adverse
effects on consumption and investment of falling real estate and
equity prices, by previous very high levels of private investment,
and by contractionary fiscal policies. Mitigating the effect of
these policies is Japan's success in exporting to rapidly growing
Asian markets. The recently announced fiscal stimulus program
should help to strengthen the economy, although the effects of the
program may not be visible until next year. Given the hindrances
4
to strong growth, the IMF's October projection of 3.8 percent
growth for 1993 appears quite optimistic.
The greatest uncertainties are in Europe. Germany's economy
faltered in the second quarter after an aberrantly strong first
quarter. While consumption may respond positively to the removal
of the income tax surcharge last July, and some types of investment
— especially in eastern Germany — should show moderate growth,
growth in 1992 is projected by the IMF to reach 1.8 percent for
Germany as a whole. The Fund's forecast of 2.6 percent growth for
1993 assumes that current obstacles to strong recovery —
particularly high real interest rates — will be overcome.
The United Kingdom apparently remains in recession; lower
interest rates and the September devaluation may not have much
impact until next year, and growth for 1992 is expected to be
negative (-0.8 percent). France should experience modest growth in
1993, but this economy will have to overcome the improved
competitiveness of goods produced in the U.K., Italian, and Spanish
economies, as well as the adverse effect of high domestic interest
rates.
Price Trends
Inflation has been declining in most G-7 countries, and should
continue to slow next year. The IMF projects a decline in
aggregate G-7 consumer price inflation from 4.3 percent in 1991 to
3.1 percent in 1992 and 3.2 percent in 1993. These will be the
best aggregate inflation rates since the late 1960s (excluding the
1986-88 period following the collapse of world petroleum prices),
and indicate a major improvement in economic performance after the
high inflation of the 1970s. Last year, France registered the
lowest inflation rate, with an increase of just 3.1 percent in
consumer prices. This year, Canada is likely to be most successful
in approaching practical price stability by limiting inflation to a
rate of only 1.6 percent.
The IMF projects consumer price inflation in the United States
of 3.1 percent in both 1992 and 1993, about the same as the MidSession Budget Review estimates. Among other factors, availability
of manufacturing capacity, reasonably good productivity growth, and
low raw material prices have allowed output to grow while price
performance improves. Alone among the G-7 countries, Germany will
record higher year-over-year inflation in 1992 than in 1991, mainly
because of the impact of consumption tax increases that went into
effect in July 1991. Once the influence of these measures had been
eliminated from the CPI (in July 1992), inflation fell. Favorable
influences on Germany's medium-term outlook include the downward
impact on import prices of recent DM appreciation and a more
moderate pattern of wage settlements.
5
The United Kingdom and Italy have both been successful in
reducing inflation thus far in 1992 compared with 1991. Inflation
in the United Kingdom is expected to fall on a year-over-year basis
from 5.9 percent in 1991 to 3.8 percent in 1992. Similarly,
inflation in Italy is expected to fall from 6.3 percent in 1991 to
5.6 percent in 1992. The IMF expects further small improvements in
1993, but the recent depreciation of the pound and lira against the
DM may increase import prices and limit further progress on the
inflation front. Inflation in Japan is expected to be a bit more
than a 2 percent rate in 1992 and 1993. Wages have been rising
slowly and land prices have been falling. Appreciation of the yen
has also had the effect of reducing the prices of imported goods.
External Account Developments
The most important recent development in the external accounts
of G-7 countries is the continuing sharp rise in Japan's trade and
current account surpluses (to a current account surplus of $110
billion for 1992 according to IMF projections). In the United
States there has been some leveling off in the reduction of the
current account deficit. For other G-7 countries, nothing dramatic
is anticipated. Germany's deficit should rise somewhat to about
$22 billion in 1992 and then fall by a substantial amount to about
$9 billion in 1993. The United Kingdom's deficit is expected to
deteriorate from $11 billion in 1991 to $19 billion in both 1992
and 1993, while the IMF forecast shows deterioration in Italy's
current account deficit to $25 billion in 1992 and $33 billion in
1993. However, the recent depreciations of the pound and lira visa-vis the DM could alter these projections.
In 1991, the U.S. current account showed a deficit of $3.7
billion, down $87 billion from the 1990 result. Only about $45
billion of the decline reflected ordinary economic factors; the
remainder (about $42 billion) reflected Desert Storm-related
transfers. Without the transfers, the 1991 deficit would have been
about $46 billion. The merchandise trade and current account
deficits are likely to deteriorate this year, as higher growth
leads to a pickup in imports, and disappointing growth in Europe
and Japan limits export expansion.
Japan's current account surplus declined during the late
1980s, but this trend stopped in 1990, and the Japanese current
account surplus rose once again to nearly $73 billion in 1991.
The IMF projects that the surplus will reach about $110 billion in
1992. About 80 percent of the projected increase is due to a
growing trade surplus. Imports have not changed much in yen terms
since 1989, while exports, particularly to countries in Asia, have
grown rapidly. Total Japanese exports are expected to increase
nearly $25 billion in 1992. The surplus is not expected to change
much in 1993.
6
Between 1990 and 1991, there was strong shift in Germany's
external accounts from a current account surplus of $47 billion to
a deficit of $20 billion. This shift reflected the impact of
unification between an advanced industrial area in the west and a
much less advanced developing region (the former GDR) in the east.
The balance of payments consequences occurred in two phases.
Initially, exports of both east and west Germany fell, and imports
of both areas rose. The main factors were a diversion to the
eastern area of west German goods that might have been exported;
the collapse of east German exports to COMECON; and the substantial
transfers by west Germany that allowed east Germans to finance a
consumption boom. This situation persisted until the second
quarter of 1991, when policy changes were made that cut the growth
of imports and mildly stimulated exports. These policies are still
largely in place, and should produce a current account deficit of
about $22 billion in 1992 and a deficit of $9 billion in 1993.
The G-7 Response
Since 1991, the overriding U.S. priority in the G-7 has been
to build a consensus around a growth-oriented strategy designed to
assure a strong recovery, create jobs, and provide a supportive
global economic environment for the reforming countries of East
Europe, the former Soviet Union, and elsewhere.
U.S. efforts have been complicated, however, by divergent
economic conditions among the major economies. When the economic
slowdown took hold in the U.S., Canada, and the U.K. in the second
half of 1990, strong growth rates prevailed in Germany and Japan.
Cyclical differences in economic performance gave way to broader
policy divergences as high German budget deficits associated with
unification costs and the Bundesbank's tight monetary policies
resulted in steadily rising German interest rates. The commitment
of other EC countries to the EMS required them to pursue high
interest rates in order to maintain fixed exchange rates — despite
weakening economic conditions.
G-7 countries began to coalesce around the U.S. growth
strategy, however, as the downturn in economic growth persisted and
prospects for a strong recovery appeared increasingly uncertain.
At the Munich Summit, a new consensus on the priority of growth was
endorsed by Heads of State, who expressed particular concern over
the hardship created by unemployment and pledged to adopt policies
aimed at creating jobs and growth.
The new G-7 consensus was reflected in Munich Summit
guidelines committing countries to pursue sound fiscal and monetary
policies in order to create the scope for lower interest rates and
support for the upturn without rekindling inflation.
There was also agreement to reduce structural rigidities that
posed obstacles to private initiative and employment creation. In
7
this regard, Summit
early conclusion to
reinforce growth in
reforming countries
participants agreed on the importance of an
a successful Uruguay Round in order to
the major economies as well as to support
elsewhere in the world.
Actions have been taken to implement the new G-7 consensus and
strengthen the economic recovery. Japan has announced the largest
fiscal stimulus package in its history and Germany has cut interest
rates for the first time in five years. Reduced price pressures
and lower interest rates in a number of countries have established
the basis for a pick-up in investment and growth.
G-7 measures to increase growth occurred amid turmoil in
European exchange markets and disruptions in the EMS (see Part
III). At their September meeting, G-7 Ministers and Governors
expressed concern over the volatility in exchange markets and
agreed that recent measures to increase growth would foster greater
stability in exchange markets.
Recent events have demonstrated anew the consequences of
incompatible and inconsistent policies in an integrated world
economy with global financial markets. The fundamental premise of
the G-7 process has been reaffirmed, but there must be a continued
willingness to consider measures to improve economic policy
coordination in order to respond to the significant changes in the
world economy.
Global capital markets have undergone particularly significant
change. The speed and size of international capital flows have
grown enormously and the channels for their transmission have
increased in complexity with the development of new instruments and
technologies. As a result, foreign exchange transactions have
increased substantially — to nearly $1 trillion daily according to
some estimates.
At the U.S. initiative, the Group of 10 is now considering the
implications of developments in international capital markets for
the exchange rate system and economic policy coordination. This
analysis will assist G-7 Finance Ministers leading up to the Tokyo
Summit as they examine methods of cooperation that will permit the
international monetary system to adapt to changing circumstances
while ensuring internationally responsible policies.
8
PART III; DEVELOPMENTS IN FOREIGN EXCHANGE MARKETS
Overview
Over the past year (ending mid-October), the dollar
depreciated by 7 percent against the Japanese yen and 14 percent
against the German mark. On a trade weighted basis, however, the
dollar*s decline was only about 2-1/2 percent, reflecting an
appreciation of more than 10 percent against Canada, our largest
trading partner.
The main factors behind the exchange rate movements were
changes in interest rates in the United States and abroad which
reflected differences in economic conditions, particularly growth,
and resulted in large interest differentials unfavorable to dollar
assets. Towards the end of the period, serious strains developed
among European currencies, which triggered large short-term capital
flows. On balance, however, these flows did not appear to have a
significant lasting effect on the dollar*s exchange value.
The dollar reached record lows of DM 1.3865 and ¥ 118.60 in
September 1992 but was recovering toward the end of the reporting
period as the U.S. economy showing increased signs of recovery
while growth in Europe and Japan slowed.
Dollar
The dollar trended downward against most other major
currencies through much of the year, apart from a brief period in
early 1992 when the U.S. economic recovery briefly seemed to pick
up speed. As noted above, the decline primarily reflected a
further widening of large differentials between European and U.S.
interest rates. Subsequently, declining consumer and business
confidence and weakening employment in the United States
discouraged any expectation that the differentials would narrow
significantly over the near term. Also, the U.S. monetary
authorities were perceived as unconcerned about dollar depreciation
so long as it was orderly.
Yen
The yen appreciated modestly against the dollar, but declined
against European currencies. This mixed picture reflected several
factors, including a decline in Japanese interest rates as the
authorities responded to growing signs of an economic slowdown and
increased strains in domestic financial markets. As a result,
interest differentials on dollar/yen narrowed somewhat but widened
on yen/DM. Moreover, Japanese capital flows reversed from recent
years as financial institutions reduced their foreign exposure at a
time of increased strain in domestic financial markets. The sharp
9
rise in Japan's external surplus may also have provided underlying
support for the yen. Finally, the announcement of a fiscal
stimulus package and measures to prop up financial markets eased
pressure on the yen and contributed to some appreciation toward the
close of the reporting period.
European Currencies
European currencies appreciated steadily against the dollar
for most of the year. U.S. monetary easing to stimulate the
economy produced the lowest interest rates in more than 25 years.
In contrast, German interest rates rose to historically high levels
as the rising cost of German unification was financed primarily
through borrowing and monetary policy was tightened to deal with
the inflationary effects of increased public and private
expenditures. As a result, short-term dollar/DM interest rate
differentials widened to an unprecedented 6 3/4 percent. A similar
increase in interest differentials occurred with other European
currencies as they followed German monetary policies through most
of the period, despite weaker economic situations, in order to
maintain exchange rates under the EMS.
Initially, the exchange rate pressures within Europe were
contained as market participants believed that economic policies
and performance would converge under the requirements of the
Maastricht Treaty for economic and monetary unification. However,
the Danish vote rejecting Maastricht weakened this market view and
focused attention on the ability of governments to maintain EMS
exchange rates in the face of disparate economic conditions. As
uncertainties regarding the future of European unification
increased in the period leading up to the French referendum on the
treaty, speculative pressures intensified.
The authorities sought to combat these pressures through a
combination of large scale intervention, increases in interest
rates by countries whose currencies were under downward pressure,
and statements reaffirming the commitment to Maastricht, including
maintenance of the exchange rate arrangements. On September 14,
however, the Italian lira's bilateral central rate was devalued by
7 percent. At the same time, Germany reduced the Lombard rate by
1/4 percent.
Nevertheless, the markets considered these actions
insufficient; massive speculative capital flows out of the lira and
into German marks continued and heavy selling pressures also
developed against the sterling. Despite very heavy intervention
and sharp interest rate rises, the U.K. authorities were forced to
suspend sterling from the EMS, and it subsequently depreciated by
more than 15 percent. The Italian lira was also suspended from the
EMS, and it depreciated by about 15 percent, while the Spanish
peseta's bilateral central rate was devalued by 5 percent but
remained in the EMS. In addition, Spain, Ireland, and Portugal
introduced temporary measures to restrict capital flows.
10
Following the French referendum on September 20 approving the
Maastricht Treaty by a narrow margin, pressures in the EMS shifted
largely to the French franc. However, the French authorities were
successful in defusing the situation through increases in domestic
interest rates and large scale joint French-German intervention.
The relatively strong performance of the French economy in recent
years also contributed to the credibility of the authorities'
efforts to convince the markets that the current exchange rate was
sustainable. French market interest rates eased, and the French
were able to recover DM reserves spent defending the franc, in
subsequent weeks.
Subsequent to the September events, interest rates in Europe
declined somewhat as German and other European authorities
responded to growing evidence of the economic slowdown and as
exchange market pressures eased. The dollar has recovered some of
its earlier declines and, by the end of the reporting period, had
moved into a DM 1.45-1.50 range.
11
PART IV: U.S. BALANCE OF PAYMENTS
Medium-Term Overview
The U.S. trade and current accounts have experienced very wide
swings since the early 1980s. From a modest deficit on trade ($25
billion) and near balance on the current account in 1980, both
balances had moved into deep deficits (in the $160 billion range)
by 1987. Subsequently, both deficits turned course and have been
on a declining path, at least until quite recently.
The major factors in both episodes were relative growth in the
U.S. and major markets, and the exchange rate. During the 1980-87
period of increasing external deficits, U.S. growth outpaced that
of our major trading partners and the dollar appreciated
substantially. U.S. exports stagnated, while import growth was
robust. Since 1988, U.S. growth has slowed substantially while
Europe and Japan — until recently — experienced strong,
investment-led growth as did the Asian newly industrialized
economies. At the same time, the dollar depreciated, returning to
roughly its 1980 level on a trade-weighted basis. Export growth
rebounded dramatically, while import growth moderated.
Recent developments, and the outlook for the trade and current
accounts, will continue to depend heavily on these factors. In
particular, the recent weakness in demand growth in Europe and
Japan has begun to be reflected in weaker U.S. export performance.
(In addition to the exchange rate, price competitiveness of U.S.
exports will depend on the relative inflation performance of the
United States and the ability of U.S. firms to continue to enhance
competitiveness in terms of both price and quality.)
Developments in 1992
Trade balance: The U.S. trade deficit in the first half of
1992 (balance of payments basis, seasonally adjusted) was $83.3
billion at an annual rate, up from $77.4 billion in the second half
of last year and $73.4 billion for the year as a whole. This
modest deterioration, which apparently began during the course of
1991, represents a reversal of the downward trend which began in
1987 and lasted for roughly four years.
First half 1992 exports (unless otherwise indicated, all data
are seasonally adjusted on a balance of payments basis) reached
$431 billion at an annual rate, up about $15 billion or 3.6% from
the full year 1991. However, the year-over-year increase reflects
growth early in 1991 — exports have been "stuck” at just under
$108 billion for three quarters, and this apparent flattening-out
is confirmed by the most recent monthly data.
Strong export
growth, which averaged roughly 13-1/2% per year in value terms
12
between 1987 and 1991, was the major factor in the decline in the
trade deficit during that period.
While exports have stagnated so far in 1992, imports — which
actually declined in 1991, due to lower oil prices in the wake of
the Gulf War -- have showed signs of renewed growth despite the
very modest pace of recovery in the domestic U.S. economy. Imports
(both total and non-oil) rose during the first half to $514.3
billion at an annual rate, up $25 billion or 5.1% compared with
full-year 1991. Most of the increase came in the second quarter,
and was sustained in the third quarter.
On an area basis, the 1992 trade balance has deteriorated
(larger deficit or smaller surplus) vis-a-vis most of the
industrial countries, but improved (smaller deficit/larger surplus)
vis-a-vis Latin America, OPEC, and the Asian NIEs. Export growth
has been particularly weak with respect to the other industrial
countries, especially Europe, reflecting the very weak demand
growth in their economies. This coincidence of weak export growth
and trade balance deterioration mirrors the pattern in the overall
balance.
Current account balance: The current account for the first
half of 1992 was in deficit at an annual rate of $48 billion,
roughly the same as 1991's $46 billion if the one-time receipts of
Desert Storm support are disregarded. The current account
typically reflects swings in the trade balance, since trade is
still the largest single component — though the importance of
services has increased substantially in recent years.
However, there was a sharp increase in the current account
deficit in the second quarter — to $17.8 billion, from $5.9
billion in the first quarter — only part of which represented a
rising trade deficit. In addition, there was a sharp drop — over
$3 billion — in net investment income receipts. Foreign direct
investments in the U.S., which had been registering losses, shifted
to small profits in the second quarter. Like the second quarter
pick-up in merchandise imports, this development may reflect the
gradual U.S. recovery and thus could represent initial signs of a
cyclical deterioration in the current account in coming quarters.
Capital account; In principle, the capital account balance
constitutes the mirror-image of the current account balance, and
the net capital flow should equal the opposing current account flow
(i.e., a current account deficit would have as its counterpart a
net capital inflow). However, measurement problems mean that the
two balances can be quite different.
So far in 1992, the recorded net capital inflow is over twice
as large as the current account deficit — 1 that is, there is a
"statistical discrepancy" of $28 billion, compared with the $23.7
Million current account deficit. U.S. investors have continued to
13
acquire substantial amounts of foreign assets in 1992, in the form
of both portfolio and direct investments. Capital outflows in
these two categories totalled $86 billion at an annual rate during
the first half of 1992, compared with $72 billion for 1991.
There was a strong recovery of foreign private investment in
the U.S. in the second quarter of this year, particularly purchases
of U.S. securities. Foreign direct investment inflows, which
showed a mixed pattern in 1991, also picked up somewhat in the
second quarter but remain well below the very high annual levels of
1987-90. There were very substantial (over $21 billion per
quarter) inflows of official capital in the first half of 1992.
Prospects for Full-Year 1992 and 1993
Trade balance; The trade deficit for full-year 1992 is
expected to reflect the modest trend of deterioration noted above,
beginning in mid-1991. Imports should continue to show modest
growth, while exports are likely to remain weak. The net result is
expected to be an increase in the trade deficit on the order of $20
billion, to the $95 billion range.
This contrasts with the projection in the previous Report of a
modest further decline in the deficit. The principal difference is
a less buoyant outlook for exports — despite a continued strong
U.S. competitive position — in light of weaker demand than
previously foreseen in Europe and Japan.
(The lower dollar, if
sustained, would have significant effects on exports only in the
latter part of 1993, due to lags in the responses of prices and
volumes.)
Expected weak demand in foreign markets coincides with
a revival, albeit gradual, in U.S. import demand.
Current account balance: The 1992 current account deficit
will show a substantial increase from the recorded 1991 figure of
$4 billion, which included $42 billion in one-time transfers from
foreign governments in support of Desert Storm. There should also
be some deterioration in the 1992 current account deficit, compared
with the 1991 figure of $46 billion excluding Desert Storm — a
more appropriate basis for comparison. The deteriorating trade
balance will be only partially offset by the strong positive trend
of recent years in services receipts, where the U.S. is a
competitive supplier of a range of activities such as tourism,
financial services, and advanced education.
Investment income may show a modest decline from 1991, since
the favorable effects of the U.S.-foreign interest rate
differential (lower U.S. rates mean smaller payments on foreign
assets in the U.S., and vice versa) may be offset by the cyclical
effects on direct investment income.
(The income of foreign
investors in the U.S. tends to rise with domestic business profits.
Hence a U.S. economic recovery is likely to increase investment
14
income payments to foreigners, while sluggish activity abroad will
act as a drag on earnings of foreign investments of U.S. firms.)
For 1993, the cyclical factors influencing the trade deficit
will continue to generate a modest negative trend, with imports
responding to a continued U.S. expansion while foreign demand
growth remains subdued. As a result, the trade deficit could
exceed $100 billion in 1993 unless exports pick up more strongly
than now foreseen.
This further increase in the trade deficit will be only
partially offset by the growing surplus on services transactions.
In addition, the underlying trend in net investment income is
negative due to the growing net U.S. indebtedness resulting from
sustained current account deficits. While a higher rate of return
on U.S. foreign direct investment may continue for a time, foreign
investments in the U.S. should close the gap as they mature.
At the same time, the U.S.-foreign interest differential,
presently favoring the U.S. (i.e., interest rates earned on foreign
assets in the U.S. are low, while those paid on foreign holdings of
U.S. investors are high), should narrow. Thus the medium-term
outlook is for further declines in net investment income, as rates
of return on foreign investments in the U.S. increase relative to
those we earn on our investments abroad. The net effect for 1993
is expected to be a further increase in the current account
deficit, to the $70 billion range.
Analysis of the U.S. External Deficit
U.S. external competitiveness remains fundamentally sound
despite the slowdown in overseas markets and the resulting dip in
U.S. export performance. In contrast to the first half of the
1980s, when U.S. exports were declining as the dollar steadily
appreciated against other major currencies, the modest
deterioration expected in U.S. current account balances over the
next year is likely to be attributed almost entirely to a rise in
imports. Export performance is expected to flatten out, but a
variety of factors point to the sector's overall resilience.
First, the U.S. competitive position as indicated by a variety
of measures (e.g., U.S. relative unit labor costs, the relative
unit price of exports, and real effective exchange rates) has
improved substantially since the mid-1980s. These factors and
possibly others, such as changes in relative capital costs, will
continue to benefit U.S. exporters. In addition, U.S. performance
on services continues to demonstrate considerable long-run
strength.
Second, the new G-7 consensus on growth-oriented policies and
the implementation of measures in that direction auger well for
further progress in reducing external imbalances. Japan's fiscal
15
stimulus, for example, should help shift the engine for growth in
that country from rising exports to increased internal demand.
Third, G-7 measures to increase growth are expected to
contribute to greater exchange rate stability. In this context,
the dollar*s value has been reasonably stable in recent years and
broadly consistent with a competitive U.S. position.
To be sure, the dampening of export growth rates achieved in
recent years will be felt. Between 1987 and 1991, the increase in
net exports of goods and services accounted for 40 percent of U.S.
GDP growth and played a critical role in U.S. job creation. For
these reasons, the U.S. assigns critical importance to ensuring
that G-7 efforts to strengthen the global economic recovery take
hold. At the same time, the United States must take actions
domestically to remove impediments to growth and to support
continued progress in reducing external imbalances.
Issues Regarding Medium-Term U.S. Balance of Payments Performance
The U.S. current account mirrors the continued imbalance
between U.S. national savings and investment. This internal
imbalance and U.S. economic performance more broadly give rise to a
number of issues, including the sustainability of the U.S. external
position and measures to improve national savings.
The decline in the U.S. current account deficit in 1991
(abstracting out Desert Storm inflows) was associated with a sharp
drop in private investment (equal to 1-3/4 percent of GDP). At the
same time, the modest increase in personal savings was more than
offset by the increase in federal government dissavings. Over the
medium term, the IMF projects U.S. current account deficits
widening somewhat to 1-1/2 percent of GDP, but stresses that
policies to improve national savings would contribute to a
reduction in the current account deficit.
U.S. economic policies and their implications are reviewed
annually in Article IV consultations by the International Monetary
Fund. During the most recent review, the IMF noted the likelihood
of a strengthening U.S. recovery, but emphasized that medium-term
prospects depended importantly on improvements in national savings
performance — particularly regarding the U.S. budget deficit. The
Fund believes that the deterioration in the U.S. fiscal position
along with forecasts of high budget deficits over the medium-term
have major implications for the health and durability of the
economic recovery, domestic investment, and the U.S. current
account.
The IMF*s heavy emphasis on restoring U.S. fiscal balances in
the short-term has led it to prescribe a number of revenue and
spending measures to close the budget gap. On the revenue side
these include energy taxes, value added taxes, and the elimination
16
of the deductibility of mortgage interest. Spending cuts proposed
by the IMF include: reduced farm price supports, cutbacks in
Medicare and Medicaid, and further reductions in defense
expenditures.
The United States shares the objective of reducing the budget
deficit but believes the Fund's proposed remedies, which seek a
correction in the fiscal balance of five percent of GDP by 1997,
would exert strong downward pressure on the U.S. economy at a time
of already sluggish growth. Job creation would suffer and output
would remain subdued over an extended "adjustment” period.
In contrast, the United States has stressed the overriding
importance of strengthening the recovery and establishing
sustainable growth with low inflation. There is broad agreement on
the need to address the major structural aspects of the current
fiscal imbalance, particularly the rapid increase in outlays for
various mandatory programs. However, the more measured approach
advocated by the United States envisages a balanced set of policies
designed to ensure a more robust upturn in growth in the near term
while offering credible prospects for a substantial reduction in
the budget deficit over the medium-term.
Such an approach is also consistent with ensuring the U.S.
external position remains "sustainable" and does not risk an
excessive accumulation of external indebtedness.
Although
"sustainability" encompasses a variety of factors and market
perceptions that cannot be quantified in any meaningful way, the
U.S. external position does benefit from a number of strengths and
positive trends.
U.S. export competitiveness has increased dramatically in
recent years, as was discussed previously. The growth in services
exports is expected to continue despite the slowdown in some major
overseas markets. Due to the sustained improvement in U.S.
competitiveness across a broad range of sectors, U.S. authorities
expect a more modest deterioration in the U.S. current account
deficit than does the IMF over the medium term, particularly as
cyclical factors converge among the major economies.
Further contributing to the stability of the U.S. external
position are the size and openness of the U.S. economy and the size
and liquidity of U.S. capital markets. These attributes will
continue to attract foreign investment to the United States in the
foreseeable future. The United States is committed to an open and
growing multilateral trade and payments system to facilitate the
continued expansion of trade and investment flows. Recent
successes in confirming the new consensus on growth among the G-7
countries as well as ongoing efforts to strengthen the economic
policy coordination process should contribute further to the smooth
functioning of the international economic system.
17
PART V:
ASIAN NEWLY INDUSTRIALIZED COUNTRIES
AND CHINA
Background
Under Section 3004 of the Omnibus Trade and Competitiveness
Act of 1988, the Secretary of the Treasury is required to
"...consider whether countries manipulate the rate of exchange
between their currency and the United States dollar for purposes of
preventing effective balance of payments adjustment or gaining
unfair competitive advantage in international trade. If the
Secretary considers that such manipulation is occurring with
respect to countries that (1) have material global current account
surpluses and (2) have significant bilateral trade surpluses with
the United States, the Secretary of the Treasury shall take action
to initiate negotiations...on an expedited basis...for the purpose
of ensuring that such countries regularly and promptly adjust the
rate of exchange between their currencies and the United States
dollar to permit effective balance of payments adjustments and to
eliminate the unfair advantage."
It was concluded in the October 1988 exchange rate report that
Taiwan and Korea "manipulated" their exchange rates, within the
meaning of the legislation. Pursuant to Section 3004, Treasury
initiated bilateral negotiations with Taiwan and Korea for the
purpose of ensuring that these two economies regularly and promptly
adjust the rate of exchange between their currencies and the U.S.
dollar to permit effective balance of payments adjustment and to
eliminate unfair competitive advantage.
Treasury concluded that Taiwan in fall 1989 and Korea in
spring 1990 were no longer directly "manipulating" their currencies
within the meaning of the legislation. These findings were
reaffirmed in fall 1990, spring 1991, and fall 1991. However, it
was noted that Taiwan's external surpluses remained large and that,
in both Taiwan and Korea, exchange rate policy would continue to
have an important role to play in promoting economic adjustment.
In addition, the reports concluded that, in Korea,
liberalization of remaining exchange and capital controls was
required to improve the functioning of the exchange markets and
assure the full operation of market forces in exchange rate
determination. In Taiwan, foreign exchange and capital controls
were cited as impediments to the operation of market forces in
exchange rate determination.
China's large external surpluses, including its growing
bilateral surplus with the United States, depreciation of the
renminbi, and administrative controls over foreign exchange
allocation and trade have led the Treasury Department to consider
the applicability of Section 3004 to China. The three reports from
fall 1990 to fall 1991 concluded that China's trade surplus with
18
the United States was primarily due to causes other than exchange
rate manipulation. However, the reports noted that China*s foreign
exchange controls were of serious concern. The Treasury Department
began discussions with the Chinese authorities on liberalizing
these controls.
In the spring 1992 report, the Treasury Department again found
no basis for concluding that Korea was manipulating its exchange
rate within the meaning of the legislation. But the Department did
find that pervasive Korean exchange and capital controls
significantly constrain market forces in the currency market. The
report concluded that liberalization of these controls, the subject
of ongoing bilateral Financial Policy Talks, is imperative to
achieve truly market-oriented exchange rates and trade and
investment flows.
In the case of Taiwan, the spring 1992 report noted the 1991
rise in the overall current account surplus, the slow pace of
adjustment of the bilateral trade surplus with the United States,
and the country*s extremely large foreign exchange reserves. The
Treasury Department also noted Central Bank intervention to
moderate upward pressure on the New Taiwan dollar and continued
restrictions on capital flows. In this context, the Department
concluded that Taiwan was manipulating its exchange rate within the
meaning of the legislation. Treasury stated its intention to
negotiate specific measures to help achieve a more marketdetermined exchange rate and substantial adjustment in Taiwan's
external imbalances.
For China, the spring 1992 report found a large overall
current account surplus for 1991, very substantial foreign exchange
reserves, and a sharp 1991 increase in the country's bilateral
trade surplus with the United States. The Department determined
that a principal cause of China's large external surpluses was its
network of pervasive administrative controls over external trade
which severely inhibit China's imports. But, in addition, Treasury
found that China was manipulating its exchange rate to help attain
its balance of payments objectives. The basis for this judgment
was the continued devaluation of the administered exchange rate,
despite growing external surpluses, and the significant control
exercised by the authorities over foreign exchange swap center
rates which had also depreciated since the emergence of the large
surpluses. The Treasury Department stated its intention to
negotiate with the Chinese authorities on reforms to bring about a
market-oriented system of exchange rate determination and foreign
exchange allocation in order to help permit substantial balance of
payments adjustment.
The remainder of this chapter provides an update of balance of
payments and exchange rate developments in Korea, Taiwan, and
China, and the Treasury Department's current assessment of the
applicability of Section 3004 to these economies.
(See Table 5.)
19
KOREA
The Korean won has depreciated slightly against the U.S.
dollar since the spring 1992 report. The nominal depreciation
reflects in part the continued adjustment in Korea*s external
accounts, as well as higher Korean inflation. However, the
exchange rate continues to be influenced by pervasive foreign
exchange and capital controls in Korea. These controls constrain
the forces of supply and demand in the exchange market, distort
trade and investment flows, and continue to position the
authorities to manipulate the exchange rate through indirect means.
The Korean government is currently formulating a comprehensive
blueprint for financial sector liberalization, expected to be
completed by the end of 1992.
Trade and Economic Developments
The Korean economy is stabilizing in 1992 in line with
government objectives. Real GNP growth is expected to be held by
the government to 6.6 percent this year, compared to 8.4 percent in
1991. Private consumption and exports are leading growth.
Inflation, which reached 9.3 percent at end-1991, is improving in
1992 — consumer prices rose 3.8 percent in the first half of 1992,
compared to 6.2 percent during the same period last year. The
central bank projects end-1992 inflation to reach 6.5 percent.
Unemployment remains low at just over 2 percent of the labor force.
Korea*s external accounts have undergone substantial
adjustment since 1989. This adjustment — which moved the current
account from a surplus of 2.4 percent of GNP in 1989 to a deficit
of 3.1 percent of GNP in 1991 — has resulted largely from an
increase in imports caused by strong growth of the domestic
economy; rising wage demands and other factors adversely affecting
Korea's export competitiveness; and rising oil import prices and
the longer term impact of the Persian Gulf crisis.
A current account deficit of $2.1 billion emerged in 1990, and
grew to a record $8.7 billion in 1991. Korean authorities project
the current account deficit will fall to roughly $5 billion in
1992. Korea's trade deficit, which reached $7 billion on a balance
of payments basis (2.5 percent of GNP) at the end of 1991, is
expected to shrink to $2.5 billion in 1992. Notably, first half
exports outpaced imports for the first time in four years. Korea's
external deficits do not appear to be structural in nature;
authorities anticipate external surpluses by mid-decade.
According to U.S. data, the U.S. bilateral trade deficit with
Korea in 1991 fell to $1.5 billion, down 63 percent from 1990. In
the first eight months of 1992, U.S. data showed a trade deficit
with Korea of $1.0 billion, compared to a deficit of $869 million
during the same period in 1991.
20
Reflecting the rise in the external deficits, Korea's gross
and net debt figures rose in 1991. After declining steadily since
1985, Korea's gross external debt rose to $39.3 billion at the end
of 1991 (14 percent of GNP), from $31.7 billion at the end of 1990.
Net external debt reached $12.5 billion at the end of 1991, up from
$4.9 billion in 1990. However, the debt service ratio has fallen
significantly over the last 5 years, registering roughly 6 percent
in 1991, and is expected to decline further to 5 percent in 1992.
Reflecting the recent improvement in Korea's external
accounts, Korea's foreign exchange reserves have shown an upward
trend in recent months, rising from $13.7 billion at end-1991 to
$15.2 billion at end-July 1992, representing 2.5 months of import
cover.
Exchange Market Developments
Under the "market average rate" (MAR) system of exchange
determination, introduced on March 2, 1990, the won/dollar exchange
rate at the beginning of each business day is equal to the weighted
average of transactions in the inter-bank market on the preceding
business day. Inter-bank and customer rates are allowed to float
freely within specified margins, which were expanded in September
1991 and in July 1992. Exchange rates between the won and third
currencies are set in accordance with dollar rates in international
currency markets. Foreign banks have accounted for a large share
of transactions in the inter-bank markets, generally between 40-60
percent of the total. Reportedly, the Bank of Korea has intervened
only occasionally in the market, and other government-owned banks
have accounted for only a small share of inter-bank activity.
Since the inception of the MAR system (through October 16,
1992), the won depreciated 12.8 percent in nominal terms against
the U.S. dollar. Most of the depreciation occurred over the second
half of 1991 and the first half of 1992, with the currency falling
only .8 percent against the dollar on a nominal basis since the
spring 1992 report. In the last four months the won has
appreciated slightly vis-a-vis the dollar due to improvements in
the current account, issuance of overseas bonds, and increased
capital inflows following the partial opening of the stock market
to foreign participation in early 1992.
Foreign Exchange and Capital Controls
The Korean authorities maintain a comprehensive array of
controls on foreign exchange and capital flows. These controls
prevent market forces of supply and demand from playing a fully
effective role in exchange rate determination, distort trade and
investment flows, and provide the Korean authorities with tools for
indirectly manipulating the exchange rate.
21
One of the most onerous controls is the requirement that
foreign exchange banks obtain and review, prior to entering into
most foreign exchange transactions, original documentation of an
underlying commercial transaction. This "real demand” rule
seriously hampers the development of Korea's foreign exchange
market, reflects the government's continued controlling hand in the
foreign exchange market, and its unwillingness to let market forces
fully play their role in the economy. Such restrictions are
inappropriate for a country at Korea's stage of development.
Other exchange and capital controls severely impede the use of
short-term trade finance, such as stringent terms for deferred
payments for imports. Direct portfolio investment in Korea was
opened to foreigners for the first time in January 1992, but a
number of restrictions — including a 10 percent limit on total
foreign investment in most Korean stocks and a 3 percent limit on
investment by individual foreigners — continue to act as
disincentives to foreign investment in the market.
The Korean government revised the Foreign Exchange Control Act
(FECA) — renamed the Foreign Exchange Management Act (FEMA) — in
the fall of 1991 to adopt a "negative list” approach to the
regulation of foreign exchange transactions. According to the
negative list approach, all foreign exchange transactions are to be
permitted in principle, with exceptional restrictions explicitly
listed in the regulations.
The revised regulations under the new FEMA went into effect
September 1, 1992. Treasury's preliminary analysis of the
regulations indicates that the list of restricted foreign exchange
transactions remains extensive, with little or no relaxation in key
areas such as underlying documentation requirements and deferred
payments for imports. In some areas, restrictions may have been
tightened.
Financial Policy Talks
Capital and exchange controls and other financial policy
issues are the subject of the ongoing Financial Policy Talks
between the Treasury Department and the Korean Ministry of Finance.
The purpose of the talks is to provide a mechanism for addressing
specific market access problems that U.S. banks and securities
firms face in doing business in Korea, and for encouraging broader
liberalization of Korea's financial, capital, and exchange markets.
The importance of financial issues to the U.S.-Korean economic
relationship was reflected by President Bush's and President Roh's
agreement in January 1992 to resolve differences in this area.
In recent sessions with senior Ministry of Finance officials,
they have presented an inter-agency workplan for developing a
three-staged blueprint for comprehensive liberalization of the
22
financial sector. Treasury welcomed the commitment to formulate
such a blueprint as a positive step.
However, concerns remain about the approach of the initial
workplan. In particular, the pace of implementation of later
stages is determined by macroeconomic preconditions, including a
balance or surplus in the current account, lower inflation, and a
narrowing of domestic and international interest rate
differentials. Treasury has pointed out to the Korean government
that financial sector liberalization will be required to reduce
interest rates and domestic costs in order to attain the macro
preconditions laid out in the plan. Expedited action by the Korean
authorities in modifying these policies will be necessary for the
Korean economy to remain competitive internationally.
Stages I and II of the blueprint have been completed and
implementation of some initial measures has begun. Although the
short and medium term measures already announced address to some
extent a few of the individual issues facing U.S. and other foreign
financial institutions operating in Korea, they do not constitute
significant liberalization of the market. The fundamental areas
needing attention (and that have impeded market forces in the
foreign exchange market), such as lifting pervasive foreign
exchange and capital controls, accelerating interest rate
liberalization, and developing capital and money markets, are being
addressed in the third and final stage of the blueprint, currently
scheduled for implementation in 1997 and beyond.
Stage III is now under preparation and is expected to be
completed by the end of 1992. The Korean government is consulting
with experts from the International Monetary Fund, the
International Bank for Reconstruction and Development, and various
research institutes as it formulates Stage III. These institutions
can provide detailed advice on formulating a tightly integrated
blueprint with more timely implementation of the entire range of
needed liberalization measures.
Through the Financial Policy
dialogue with the Korean Ministry
finalized. These issues are also
services negotiations underway in
talks.
Talks, Treasury will continue the
of Finance as the blueprint is
addressed in the financial
the Uruguay Round of world trade
Assessment
There is no basis at this time for the Treasury Department to
conclude under Section 3004 that Korea is manipulating its exchange
rate for purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in
international trade. This assessment is based on the following
factors: the continuance of significant global trade and current
account deficits, the lack of evidence that the Bank of Korea is
-
23
-
intervening directly in the exchange market, and the modest role of
other government-owned foreign exchange banks in the market.
Nonetheless, although the exchange rate determination system
in place in Korea is an improvement over the previous regime, it is
far from a truly market-determined one. In particular, Treasury
remains seriously concerned that pervasive foreign exchange and
capital controls significantly constrain supply and demand in the
currency market and provide the potential for manipulation.
Liberalization of these controls — especially the "real demand”
rule for foreign exchange transactions — is imperative to
strengthen the role of market forces in exchange rate determination
and in Korea's trade and investment flows. In this regard, the
extensive list of restricted foreign exchange transactions embodied
in the regulations implementing the revised FEMA is disappointing.
Therefore, in the period ahead, the Treasury Department will
continue to monitor developments in Korea's external accounts and
the operation of the MAR exchange rate system. The Department will
also continue to press for liberalization of Korea's financial,
capital, and exchange markets, as well as to seek improved
treatment for U.S. financial institutions in Korea.
24
TAIWAN
The Treasury Department continues to be seriously concerned
about the lack of appreciable adjustment in Taiwan*s continued
large bilateral trade surplus with the United States. While
Taiwan*s overall trade and current account imbalances have declined
during 1992, its bilateral trade surplus with the United States has
increased. Many factors of course contribute to the persistent
surplus that Taiwan has run with the United States during the past
several years. Similarly, as trade barriers in Taiwan have been
modified, it would be expected that market forces would play a
significant role in correcting the bilateral trade imbalance,
including appropriate movement in the exchange rate. However, the
exchange rate has regrettably played only a limited role in the
external adjustment process. The exchange rate does not fully
reflect forces of supply and demand, as appreciation clearly seems
to be impeded by limitations on capital flows and on foreign
exchange transactions.
In the Treasury Department's judgement, intermittent central
bank intervention in the exchange market to dampen the rate of
appreciation and smooth out exchange rate movements have served to
further constrain demand for the New Taiwan (NT) dollar. This
combination of official practices and restrictions contributes
directly to Taiwan's efforts to generate the trade surpluses it
views as essential for reserve accumulation and impedes adjustment
of the bilateral trade imbalance.
Trade and Economic Developments
After declining in 1990, Taiwan's overall external surpluses
rose in 1991. According to its data, Taiwan's overall trade
surplus for 1991 increased to $13.3 billion, a 6.4 percent increase
over 1990. Taiwan's global current account surplus increased by
11.6 percent in 1991 to $12.0 billion, and remained at 6.7 percent
of GNP. Taiwan's bilateral trade balance with the United States
declined at a modest pace in 1991. According to U.S. statistics,
the U.S. trade deficit with Taiwan in 1991 was, at $9.8 billion,
11.9 percent lower than in 1990.
Taiwan's trade surplus with the United States has increased in
1992, as foreseen in the spring 1992 report. U.S. data indicate
that the bilateral trade surplus increased 12.0 percent to $6.7
billion in the first 8 months of 1992, compared to $6.0 billion in
the corresponding period in 1991. This has occurred despite slow
growth in the U.S. economy, the ongoing relocation of Taiwan's
labor-intensive export industries overseas, and rising wages and
production costs and continued inflationary pressures in Taiwan.
Taiwan's official foreign exchange reserves, already the
world's largest, increased significantly over the last year to
reach $89.5 billion at the end of September 1992 (sufficient to
25
cover 18 months of imports), compared to $83 billion at the time of
the spring 1992 report. For purposes of comparison, the industrial
countries on average hold non-gold reserves equivalent to 2-3
months of import cover.
Based on data for the first half of 1992, which show a decline
of 27 percent, Taiwan*s current account surplus is likely to
decrease in 1992 due to a reduction in the overall merchandise
trade surplus and an increase in the services deficit. The economy
should continue to grow rapidly; real GDP is expected to expand by
roughly 7 percent in 1992, following 7.3 percent growth in 1991.
Inflation averaged 3.5 percent in 1991 and increased to an average
of 4.9 percent over the first three quarters of 1992.
Exchange Rate Developments
The NT dollar has depreciated by 0.7 percent since the last
report; the exchange rate stood at NT$25.27/US$1 on October 16.
The cumulative appreciation of the NT dollar since the end of 1991
is 1.9 percent.
Since the last report, the Central Bank reportedly continued
to intervene directly and indirectly in the exchange market. In
addition, market pressures for appreciation have been resisted
through continuing controls over capital flows, tight ceilings on
the foreign exchange liabilities of all banks, and limitations on
the scope of the forward foreign exchange market. The dampening
role these measures play in the exchange market are in the
judgement of the Treasury Department significant and serve as
continued evidence of the unwillingness of the Taiwan authorities
to rely on a market-determined exchange rate.
Given the strength of Taiwan's economic fundamentals — strong
economic growth, continued large trade and current account
surpluses, large and growing foreign exchange reserves, and a
stable political environment — the depreciation of the NT dollar
since mid-July cannot be fully explained by the decline in Taiwan's
overall trade and current account imbalances during 1992.
In this regard, the monetary authorities have been forced to
formulate exchange rate and monetary policies against the
background of political pressure from powerful exporters
complaining of declining competitiveness. However, the evidence
does not seem to support fears that the nominal appreciation of the
NT dollar has seriously damaged the competitiveness of Taiwan's
economy. Though the NT dollar appreciated more than 16 percent
between September 1987 and September 1992, the real exchange rate
has depreciated over the same period, indicating that Taiwan has
become slightly more competitive in global markets. In 1992,
Taiwan's global exports through September have increased by 7.5
percent over the comparable period in 1991. According to U.S. data
through August, Taiwan's exports to the U.S. market have increased
26
by 11 percent, outpacing overall U.S. import growth, which is up
8.3 percent. As economic growth improves in the United States and
Europe in coming months, Taiwan's exports should continue to
perform well.
Nor has appreciation of the NT dollar led to a loss of jobs in
the domestic economy. With an unemployment rate under 2 percent,
the labor market remains tight, leading the authorities to permit
an increase in the number of foreign workers in Taiwan. Wages, on
average, are increasing by more than 10 percent annually. Taiwan's
continued competitiveness provides the monetary authorities with
sufficient scope to permit needed exchange rate adjustments without
spurring a decline in exports.
Exchange Rate System
Taiwan has instituted a number of measures over the past
several years to liberalize the exchange rate system and reduce
capital controls. Nevertheless, the system still does not allow
the full effect of market forces to be reflected in the exchange
rate. Although the rate for foreign exchange transactions is
freely determined between buyers and sellers, an array of official
practices and restrictions remains which serves to resist pressures
for appreciation generated by underlying economic fundamentals.
The Central Bank continues to resist pressure for appreciation by
intervening in exchange markets directly and indirectly, setting
ceilings on the foreign exchange liabilities of foreign banks,
limiting the operation of the forward foreign exchange market, and
regulating capital flows. With economic fundamentals enhancing the
stability of Taiwan's markets, the utility of these various
controls and restrictions appears questionable.
The Central Bank needs to increase the transparency of its
operations if it wishes to disprove the widespread view that it
intervenes in the market directly and through proxies (such as
local banks), or that it has on occasion attempted to control the
timing of large-scale NT dollar purchases by local market
participants in order to dampen pressures for appreciation. In
this regard, it appears that the monetary authorities continued to
limit appreciation of the NT dollar on a number of occasions
between the spring 1992 report and mid-July.
As noted earlier, a number of restrictions severely constrain
forward foreign exchange trading and the scope of the forward
foreign exchange market, and thus serve to limit the role of market
forces in exchange rate determination. Most importantly, foreign
exchange liabilities ceilings, which vary from bank to bank, still
affect forward trading, and constrain the ability of foreign
branches to offer foreign currency loans in Taiwan and to use swap
funding for local currency lending. In place of the quantitative
limits imposed by these ceilings, prudential concerns in this area
could be addressed through other means, such as through risk-based
27
capital requirements that apply to the financial institution as a
whole.
The scope of the forward foreign exchange market is further
restricted by a number of rules that prohibit transactions for nontrade-related purposes, limit trading to authorized banks, impose a
sizeable deposit guarantee, and limit the maximum forward period to
180 days. These restrictions have a particularly adverse effect on
foreign banks and securities firms both in and outside of Taiwan,
as they are prevented from hedging capital in the onshore market.
Until October 1992, Taiwan restricted annual non-trade-related
capital inflows and outflows to $3 million per firm or individual
(capital flows for trade purposes are unlimited). On October 9,
the limit was raised to $5 million, a welcome but marginal
improvement. Taiwan also limits the amount of cash an individual
can carry in and out of Taiwan (NT$40,000 or about $1,600).
Restrictions imposed by the Central Bank have hindered the
ability of foreign institutional investors to make investments in
Taiwan.
(In recognition of the strong long-term prospects of
Taiwan*s economy, foreign institutional investors wish to make
long-term and large-scale investments in NT dollar-denominated
financial instruments.)
Assessment
It is Treasury's judgment that Taiwan is manipulating its
exchange rate within the meaning of Section 3004. In the context
of Taiwan's continued large overall trade and current account
surpluses, a large and increasing bilateral trade surplus with the
United States, and excessive foreign exchange reserves, continued
official action that directly interferes with the role of market
forces in exchange rate determination, such as direct and indirect
intervention in the foreign exchange market, must be viewed as an
effort by the authorities to inhibit effective balance of payments
adjustment.
Subsequent to issuance of the spring 1992 report, the Treasury
Department has held two sessions of negotiations with the Taiwan
authorities to seek an end to practices that inhibit the operation
of market forces in exchange rate determination, capital flows, and
foreign exchange transactions, as well as substantial appreciation
of the NT dollar. During these negotiations, the Taiwan
authorities provided indications that they would review their
practices and restrictions to assess changes that might be
necessary. However, Taiwan has not yet committed to specific
measures that would address fully the concerns raised in the spring
1992 report.
Some adjustment in Taiwan's overall trade and current account
imbalances appears likely this year. However, Taiwan's bilateral
28
trade surplus with the United States has increased in 1992,
reversing the reductions achieved in 1990 and again in 1991.
Taiwan's immense and growing foreign exchange reserves are
excessive, especially given the investment needs of the economy.
The existence of continued large external surpluses indicates a
continued need for substantial adjustment, and for significant
appreciation of the NT dollar to bring this adjustment about.
In the present context, the continuation of official actions
and controls that impede market adjustment of the exchange rate are
factors which are considered in the Treasury Department's
assessment of the adjustment process. In addition to official
action, the array of limitations on foreign exchange transactions
and capital flows is far too restrictive and impedes the full
operation of market forces in exchange rate determination. Given
the advanced state of economic development on Taiwan, and the oftstated desire of the authorities to develop Taipei as a regional
financial center, such limitations should be completely lifted.
As noted in Treasury's spring 1992 report, to encourage a
continued decline in Taiwan's overall surpluses and promptly effect
an appropriate adjustment in its bilateral trade surplus with the
United States, the authorities should take steps that would allow
the exchange rate to reflect fully market forces. Specifically,
they should cease direct and indirect intervention in the exchange
market for the purposes of dampening pressures for appreciation,
eliminate foreign exchange liabilities ceilings for foreign banks,
remove other limitations that restrict the scope of the forward
foreign exchange market, and reduce controls on capital inflows and
outflows, while making a commitment to phase out the controls
completely.
Financial Policy Talks
Taiwan's exchange rate policies are just one source of the
discriminatory treatment faced by foreign banks and securities
firms. The exchange rate negotiations with the authorities
initiated as a result of the spring 1992 report supplement ongoing
financial policy talks between the Treasury Department and Taiwan's
authorities under the auspices of the American Institute in Taiwan
and the Coordinating Council on North American Affairs. These
talks provide a forum for addressing specific market access
problems encountered by U.S. banks and securities firms in Taiwan,
and for encouraging Taiwan's authorities to undertake further
liberalization of its financial and exchange markets, and of
restrictions on capital flows.
Since the spring 1992 report, and following a round of
discussions in Taipei earlier in the year, Taiwan moved to allow
all banks, including foreign banks, to process credit card
transactions and to deal in short-term money market instruments.
These measures directly address concerns raised by the Treasury
- 29 -
Department, and will expand the scope of opportunities available to
foreign banks in Taiwan. Nevertheless, U.S. financial services
firms continue to face significant denials of national treatment in
addition to the constraints imposed by Taiwan's controls on foreign
exchange transactions and capital flows. From a broader
perspective, Taiwan has approved several other measures that will
further modernize the financial sector. Foreign exchange licenses
are now available to a wider range of domestic banks, legislation
to establish a futures market has been approved by the Legislative
Yuan, and gold trading has been deregulated.
30
CHINA
China's substantial external surpluses remain a source of
serious concern. These surpluses result in large part from
pervasive administrative controls maintained by the Chinese
authorities on imports and on foreign exchange allocation. In
addition, balance of payments adjustment in China has been hindered
by an exchange rate system which encompasses a governmentdetermined official exchange rate and an exchange rate determined
in the nation's foreign exchange swap centers, where both the
supply of, and the demand for, foreign exchange are substantially
controlled by the government.
Since the spring 1992 report, the Treasury Department has
negotiated with the Chinese authorities on China's system for
determining foreign exchange rates and foreign exchange allocation.
The goal has been to seek a more market-oriented system and
exchange rate, and to promote significant adjustment in China's
overall external surplus and its bilateral trade surplus with the
United States.
Trade and Economic Developments
China's global trade and current account surpluses remain
large but have fallen from their record levels in 1990 and 1991.
According to Chinese data (which are not consistent with U.S. trade
data — see below), the merchandise trade surplus in the first 9
months of 1992 fell to an estimated $5.4 billion from $6.1 billion
in the same period of last year. Imports increased 21 percent in
the January-September period, supported by higher economic growth
in China, while exports have also remained strong, rising some 17
percent. China's overall trade surplus for 1992 is expected to be
around $7 billion, compared to $8.7 billion in 1991.
China's current account surplus will likely remain large in
1992, although, in line with the smaller trade surplus, it is
expected to decline from its 1991 level of $13.8 billion. The
continuing surpluses have contributed to a build-up of China's
official reserves, which totaled about $47 billion, or about 8
months' import cover, in July of this year. China's large current
account surpluses have allowed China to meet its debt service
obligations. While debt service as a percentage of export earnings
has increased slightly in recent years, the ratio still remained a
modest 8.7 percent in 1991.
In contrast to the narrowing of the global trade gap, China's
bilateral trade surplus with the United States continues to grow at
a rapid pace. According to U.S. data, China's bilateral surplus in
the first 8 months of 1992 totaled $11.2 billion, an increase of 56
percent over the same period of 1991. A 41 percent surge in U.S.
imports from China, despite relatively slow U.S. growth, combined
with a slowdown to 15 percent in U.S. export growth to China,
31
explains the widening of the bilateral trade gap. Toys, sporting
goods, clothing, and footwear led the rapid growth in U.S. imports
from China. If these rates of growth were to continue throughout
1992, the bilateral gap would approach $17 billion by the end of
the year, compared to $12.7 billion in 1991.
The pattern of China's trade with other major trading partners
differed substantially. In the first 5 months of 1992, China's
trade surplus with the EC grew by 8 percent, after surging 78
percent in 1991. China's surplus with Japan fell 21 percent in
January-May 1992, while its surplus with Hong Kong rose 4 percent.
Thus, the expansion in the U.S. trade imbalance with China was very
large compared to the changes in China's trade balances with other
partners. The growth in Chinese exports to the U.S. was much
faster than export growth to other destinations, and the growth of
China's imports from the U.S. was slower than import growth from
other sources.
It is important to note that there are large discrepancies
between Chinese and U.S. trade data, including differences in
treatment of re-exports through Hong Kong and other countries.
(The United States counts Chinese exports through Hong Kong as
products of China if they are not substantially transformed in Hong
Kong or elsewhere, while China apparently does not include some
portion of these products in its export figures.) China itself
continues to claim a small trade deficit with the United States
through the first half of 1992. However, Chinese statistics reveal
trends in bilateral trade flows similar to those of U.S. data:
according to Chinese figures, exports to the United States rose 32
percent in the first half, while imports grew 21 percent.
In other economic developments, boosted by a renewed reform
drive beginning early in the year, China's real GNP grew at an
estimated annual rate of nearly 12 percent in the first half of
1992. Growth is likely to top 10 percent for all of 1992, greatly
exceeding the original target of 6 percent in the current Five-Year
Plan. Accelerated growth has raised concerns about renewed
inflation, although the rise in the retail price index (a weighted
average of administered, guided, and market prices) in the first
half of 1992 was running at only a 5 percent annual rate.
Exchange Rate System
China's administered exchange rate, set daily by the central
exchange authorities, generally applies to trade transactions under
the State Plan. There is also a second rate determined in foreign
exchange adjustment ("swap") centers, where joint ventures and
other enterprises with foreign participation, domestic entities
that are allowed to retain rights to their foreign exchange
earnings, and certain individuals may buy and sell foreign exchange
or foreign exchange quotas at rates established through a regulated
auction system. Outside the official dual rate system, there is a
32
black market for foreign exchange, which is apparently diminishing
in significance but is still sizable.
The authorities use a variety of means to control the
allocation of foreign exchange under the dual rate system. Foreign
exchange earned by a state enterprise must initially be surrendered
to the Bank of China in exchange for local currency at the
administered rate. After each sale, the government gives the
enterprise a foreign exchange quota according to a retention ratio
determined by the government. Retention ratios vary greatly among
regions, firms, and products. Domestic firms are permitted to
trade only retention quotas among themselves rather than foreign
exchange itself.
The authorities also restrict access to the nation's swap
centers for prospective buyers and sellers of foreign exchange.
Foreign exchange may be purchased in the swap centers only for the
importation of goods deemed by the state to be "necessary” for
China's development. Swap center purchases of foreign exchange for
non-trade-related foreign exchange transactions are restricted.
And foreign exchange flows among swap centers in different parts of
the country are limited.
These controls on the demand for, and supply of, foreign
exchange in the swap centers clearly affect the swap rate itself,
which therefore cannot be called a market-determined exchange rate.
Moreover, the authorities are positioned to influence the swap rate
more directly by intervening in the market or shutting down trading
if fluctuations in the rate extend beyond set bands.
For a more detailed description of China's dual exchange rate
system, see Treasury's fall 1991 exchange rate report.
Exchange Rate Developments
Administered Rates On October 16, 1992, the official rate of
the renminbi stood at 5.55 yuan to the U.S. dollar. This
represents a nominal depreciation against the dollar of roughly 5
percent since the adoption of the "managed float" system in April
1991. However, since the start of this year, the Chinese
authorities have held the official rate within a relatively narrow
range, generally between 5.45 and 5.55 yuan per dollar.
Swap Rates: For the week ending October 17, 1992, the average
swap center rate stood at 6.91 yuan per U.S. dollar. This
represents a depreciation of some 20 percent since the start of the
year. Swap rates began to depreciate briskly in the spring, as
demand for foreign exchange — boosted by the domestic expansion
and resulting growth in imports — greatly outstripped supply. The
depreciation slowed somewhat in September as state enterprises
began to supply more foreign exchange to the swap centers and as
demand for imports eased slightly.
33
Having narrowed to less than 10 percent by the beginning of
1992, the spread between the official and swap rates has again
widened to about 25 percent.
Controls on Foreign Exchange Allocation and External Trade
China's foreign exchange regime must be viewed in conjunction
with its direct controls over imports. The two sets of controls
are often overlapping and redundant.
For example, an importer wishing to obtain foreign exchange
for non-priority imports must obtain not only approval from the
exchange authorities but also an import license from the trade
ministry and explicit approval from the ministry responsible for
enterprises producing domestic substitutes. The various approval
processes do not necessarily operate consistently. Possession of
an import license does not guarantee that an importer will be
allocated foreign exchange, nor does approval of foreign exchange
use automatically entitle the importer to a license.
In practice,
it appears that the strict import licensing system is often the
most significant obstacle to the importer's ability to obtain
foreign exchange. Thus an effort to remove foreign exchange
controls without a complementary effort to address direct trade
restrictions is unlikely to result in a significant adjustment in
China's trade flows.
Assessment
China's large trade and current account surpluses,
particularly its rapidly growing bilateral trade surplus with the
United States, remain developments of major concern. Surpluses of
this magnitude create serious trade tensions and must be reduced.
A principal cause of China's surpluses is the network of
pervasive administrative controls over external trade, which
severely inhibit China's imports, including those from the United
States. On October 10, 1992, under authority provided by Section
301 of the Trade Act of 1988, the United States and China signed a
Memorandum of Understanding (MOU) which commits China to remove a
substantial number of China's external trade barriers. The MOU
calls for China to: progressively remove the majority of its
nontariff trade barriers such as quotas, import licensing
requirements, and other restrictions on imports; enhance the
transparency of its trade regime by publishing all trade laws,
regulations, and policies; reduce tariffs on a range of products
exported by U.S. firms; and eliminate standards and testing
requirements as barriers to trade. When fully implemented, the MOU
will have achieved a major step toward eliminating China's direct
trade controls and should contribute to external surplus reduction.
34
In Treasury*s view, the Chinese authorities also employ
exchange rate and foreign exchange policies to attain their balance
of payments objectives.
Despite continued large external surpluses which first emerged
in 1990, the administered rate of the renminbi remains
significantly devalued below its level at end-1989 when it stood at
4.72 yuan per dollar. However, the administered rate has changed
very little since the time of the spring 1992 exchange rate report.
(The rate was 5.48 yuan per dollar in mid-April 1992.) That report
recommended that "China should suspend further devaluation of the
administered rate until far-reaching reform of China’s trade,
exchange, and domestic price regimes has been undertaken...." In
this regard, Treasury recognizes and welcomes the fact that there
has been no further devaluation. Until far-reaching reform of
China's trade and domestic price regimes has been implemented,
Treasury continues to find that no further devaluation of the
administered rate is warranted.
The Chinese authorities also influence the exchange rate in
the nation's swap centers by controlling both the demand for, and
supply of, foreign exchange. The average swap center rate has not
appreciated over the past two years, notwithstanding the large
current account surpluses and resulting build-up of foreign
exchange reserves. The limited response of exchange rates to
market forces impedes China's balance of payments adjustment.
In the spring 1992 report, the Treasury Department recommended
that the Chinese authorities take a number of concrete measures to
permit the exchange rate in swap centers to reflect market forces
more fully. These included: eliminating the foreign exchange
quota system and moving to a complete foreign exchange cash
retention system; removing restrictions on access to the foreign
exchange swap centers and on use of foreign exchange for specific
trade and other purposes; eliminating restrictions on foreign
exchange flows among swap centers around the country; and
publishing all laws and regulations pertaining to foreign exchange,
as well as making any proposed changes available to the public in
advance for review.
Chinese officials have expressed support for general reform
objectives: a phasing-out of the administered exchange rate,
unification of the dual exchange rate system, liberalization of
access to the swap centers, and making foreign exchange regulations
more transparent. However, the Chinese authorities have not yet
indicated the specific nature and scope of the measures they are
contemplating to achieve these objectives, or the timing of such
measures. Therefore, Treasury has insufficient basis to change its
previous determination.
It is Treasury's judgment that China is manipulating its
exchange rate within the meaning of Sections 3004. Given the size
- 35 of China's external payments
exchange reserves, continued
and of regulated swap center
the authorities to frustrate
adjustment.
surpluses and the level of its foreign
use of the administered exchange rate
rates must be viewed as an effort by
effective balance of payments
Subsequent to the issuance of the spring 1992 report, the
Treasury Department has held two sessions of negotiations with the
Chinese authorities to seek substantial progress toward a more
market-oriented system of exchange rate determination and foreign
exchange allocation, which will contribute to a reduction in large
Chinese external imbalances. •
The Treasury will continue to engage the Chinese authorities
in negotiations aimed at implementation of specific actions to
achieve these objectives in the near future.
36
PART VI: CONCLUSIONS
Over the past year, the United States has successfully
achieved a global consensus to strengthen the world economy.
Significant measures are now being implemented to ensure the
economic recovery underway gathers strength. At the same time, the
U.S. is initiating a review of developments in international
capital markets with a view toward considering ways to improve
economic policy coordination.
A number of positive developments have begun to emerge in the
major economies. In the United States, which has experienced six
successive quarters of expansion, inflation and short-term interest
rates are at their lowest levels in 25 years, providing a solid
foundation for a pick-up in investment and growth. Interest rates
have been reduced in other major countries, and the scope for
further reductions appears to exist. Recent cuts in German
interest rates represent a significant shift in direction that
could lead to lower rates throughout Europe, stimulating economic
activity in major U.S. export markets.
Japan*s announcement of a large fiscal stimulus is a welcomed
step toward reinvigorating growth in that country while providing a
basis for a reduction in its external surplus.
These efforts are steps in the right direction, but more must
be done to assure the recovery gathers strength. A sound and
growing world economy is necessary to create new jobs and economic
opportunity in the major economies and to support the historic
movement to free markets and democracy taking place around the
world. Recent events highlighting the interdependent and rapidly
changing nature of the world economy confirm the need to strengthen
economic policy coordination.
The G-7 process has achieved some considerable successes. In
the latter part of the 1980s, it played a central role in reducing
divergences in policy and performances among the major economies.
As a result, economic expansion was sustained over an extended
period, external imbalances were reduced, price stability was
restored, and exchange markets became more stable.
More recently, the G-7 has achieved a new consensus on
reducing policy differences that have inhibited growth. Solid
measures are being implemented to fulfill the commitment of the
Munich Summit to higher growth and job creation.
Changes in the world economy will require further con
sideration of ways to ensure strong economic policy coordination in
response to evolving developments and new challenges. As recent
events have made clear, global capital markets have grown
increasingly large, complex, and integrated. New instruments and
channels for capital flows have greatly expanded the scope and
37
speed of market movements. A better understanding of these changes
and their implications is needed to provide policymakers a sound
basis for developing policies compatible with sustained global
growth.
At Secretary Brady's initiative, the G-10 will undertake a
study of global capital flows and their implications over the next
few months. This analysis will assist G-7 Finance Ministers
leading up to the Tokyo Summit to consider ways in which
cooperation might be intensified and obstacles to growth removed.
In addition to the major industrial countries, major trading
countries like Korea, Taiwan, and China have an important role to
play in promoting a healthy, open global economy and adjustment in
external imbalances. In this report, Treasury has reviewed the
foreign exchange and exchange rate policies of these countries and
has assessed whether they are manipulating their exchange rates,
within the meaning of Section 3004 of the Omnibus Trade and
Competitiveness Act of 1988, to prevent effective balance of
payments adjustment or gain unfair competitive advantage in
international trade.
Korea's current account has undergone substantial adjustment
since 1989, shifting from a surplus of 2.4 percent of GNP in 1989
to a deficit of 3.1 percent of GNP in 1991. Korea's trade deficit,
which reached $7 billion on a balance of payments basis (2.5
percent of GNP) at the end of 1991, is expected to shrink to $2.5
billion in 1992. Notably, first half export growth outpaced import
growth for the first time in four years. Korean authorities
anticipate external surpluses by mid-decade.
According to U.S. data, the U.S. bilateral trade deficit with
Korea in 1991 fell to $1.5 billion, down 63 percent from 1990. In
the first eight months of 1992, U.S. data showed a trade deficit
with Korea of $1.0 billion, compared to a deficit of $869 million
during the same period in 1991.
There is no basis at this time for the Treasury Department to
conclude under Section 3004 that Korea is manipulating its exchange
rate for purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in
international trade. This assessment is based on the following
factors: the continuance of significant global trade and current
deficits, the lack of evidence that the Bank of Korea is
intervening directly in the exchange market, and the modest role of
other government-owned foreign exchange banks in the market.
Nonetheless, although the exchange rate determination system
in place in Korea is an improvement over the previous regime, it is
far from a truly market-determined one. In particular, Treasury
remains seriously concerned that pervasive foreign exchange and
capital controls significantly constrain supply and demand in the
currency market and provide the potential for manipulation.
\
-
38 -
Liberalization of these controls — especially the "real demand”
rule for foreign exchange transactions — is imperative to
strengthen the role of market forces in exchange rate determination
and in Korea's trade and investment flows. In this regard, the
extensive list of restricted foreign exchange transactions embodied
in the regulations implementing the revised FEMA is disappointing.
Therefore, in the period ahead, the Treasury Department will
continue to monitor developments in Korea's external accounts and
the operation of the MAR exchange rate system. We will also
continue to press for liberalization of Korea's financial, capital,
and exchange markets, as well as to seek improved treatment for
U.S. financial institutions in Korea.
Some adjustment in Taiwan's overall trade and current account
imbalances appears likely this year. Data for the first half of
1992 show a decline of 27 percent in Taiwan's current account
surplus. However, Taiwan's bilateral trade surplus with the U.S.,
$9.8 billion in 1991, has increased in 1992, reversing the
reductions achieved in 1990 and again in 1991. Taiwan's immense
and growing foreign exchange reserves are excessive, especially
given the investment needs of the economy. The existence of
continued large external surpluses indicates a continued need for
substantial adjustment, and for significant appreciation of the NT
dollar to help achieve this adjustment.
It is Treasury's judgment that Taiwan is manipulating its
exchange rate within the meaning of Section 3004. In the context
of Taiwan's continued large overall trade and current account
surpluses, a large and increasing bilateral trade surplus with the
United States, and excessive foreign exchange reserves, continued
official action that directly interferes with the role of market
forces in exchange rate determination, such as direct and indirect
intervention in the foreign exchange market, must be viewed as an
effort by the authorities to inhibit effective balance of payments
adjustment.
Subsequent to the issuance of the spring 1992 report, the
Treasury Department has held two sessions of negotiations with the
Taiwan authorities to seek an end to practices that inhibit the
operation of market forces in exchange rate determination, capital
flows, and foreign exchange transactions, and that prevent
substantial appreciation of the NT dollar.
During these negotiations, the Taiwan authorities indicated
that they would review their practices and restrictions to assess
changes that might be necessary. However, Taiwan has not yet
committed to specific measures that would address fully the
concerns raised in the spring 1992 report.
As noted in Treasury's spring 1992 report, to encourage a
continued decline in Taiwan's overall surpluses and promptly effect
an appropriate adjustment in its bilateral trade surplus with the
39
United States, the authorities should take steps that would allow
the exchange rate to reflect market forces fully. In addition to
intervention in exchange markets, the limitations on foreign
exchange transactions and capital flows are far too restrictive and
impede the full operation of market forces in exchange rate
determination. Specifically, the authorities should cease direct
and indirect intervention in the exchange market for the purpose of
dampening pressures for appreciation, eliminate foreign exchange
liabilities ceilings for foreign banks, remove other limitations
that restrict the scope of the forward foreign exchange market, and
reduce controls on capital inflows and outflows, while making a
commitment to phase out the controls completely. The Treasury
Department will continue to engage the Taiwan authorities in
negotiations aimed at implementation of these reforms.
China's large trade and current account surpluses,
particularly its rapidly growing bilateral trade surplus with the
United States, remain developments of major concern. China's
surplus with the United States reached $11.2 billion in the first
eight months of 1992, an increase of 56 percent over January-August
1991. Surpluses of this magnitude create serious trade tensions
and must be reduced. A principal cause of China's surpluses is the
network of pervasive administrative controls over external trade,
which severely inhibit China's imports, including those from the
United States. In Treasury's view, the Chinese authorities also
employ exchange rate and foreign exchange policies to attain their
balance of payments objectives.
Despite continued large external surpluses which first emerged
in 1990, the administered rate of the renminbi, 5.55 yuan per
dollar in mid-October, remains significantly devalued below its
level at end-1989 when it stood at 4.72 yuan per dollar. However,
the administered rate has changed very little since the time of the
spring 1992 exchange rate report. That report recommended that
"China should suspend further devaluation of the administered rate
until far-reaching reform of China's trade, exchange, and domestic
price regimes has been undertaken...." In this regard, Treasury
recognizes and welcomes the fact that there has been no further
devaluation. Until far-reaching reform of China's trade and
domestic price regimes has been implemented, Treasury continues to
find that no further devaluation of the administered rate is
warranted.
The Chinese authorities also influence the exchange rate in
the nation's swap centers by controlling both the demand for, and
supply of, foreign exchange. The average swap center rate has not
appreciated over the past two years, notwithstanding the large
current account surpluses and resulting build-up of foreign
exchange reserves. The limited response of exchange rates to
market forces impedes China's balance of payments adjustment.
In the spring 1992 report, the Treasury Department recommended
that the Chinese authorities take a number of concrete measures to
40
permit the exchange rate in swap centers to reflect market forces
more fully. These include: eliminating the foreign exchange quota
system and moving to a complete foreign exchange cash retention
system; removing restrictions on access to the foreign exchange
swap centers and on use of foreign exchange for specific trade and
other purposes; eliminating restrictions on foreign exchange flows
among swap centers around the country; and publishing all laws and
regulations pertaining to foreign exchange, as well as making any
proposed changes available to the public in advance for review.
Chinese officials have expressed support for general reform
objectives, but have not yet indicated the specific nature and
scope of the measures they are contemplating to achieve these
objectives, or the timing of such measures. Therefore, Treasury
has insufficient basis to change its previous determination.
It is Treasury's judgment that China is manipulating its
exchange rate within the meaning of Section 3004. Given the size
of China's external payments surpluses and the level of its foreign
exchange reserves, continued use of the administered exchange rate
and of regulated swap center rates must be viewed as an effort by
the authorities to frustrate effective balance of payments
adjustment.
Subsequent to the issuance of the spring 1992 report, the
Treasury Department has held two sessions of negotiations with the
Chinese authorities to seek substantial progress toward a more
market-oriented system of exchange rate determination and foreign
exchange allocation, which will contribute to a reduction in large
Chinese external imbalances.
The Treasury will continue to engage the Chinese authorities
in negotiations aimed at implementation of specific actions to
achieve these objectives in the near future.
41
APPENDIX
TABLES AND CHART
1.
Economic Performance of Key Industrial Countries
2.
Measurements of Dollar Movements Versus G-7 Countries
3.
Summary of U.S. Current Account
4.
Summary of U.S. Capital Account Flows
5.
Asian NIEs and China:
6.
Chart: Real Trade-Weighted Exchange Rate Indices for the
Dollar, Yen, and DM
Trade and Currency Changes
Table 1
ECONOMIC PERFORMANCE
OF MAJOR INDUSTRIAL COUNTRIES
I.
Real GNP/GDP (percent change; annual average)
United States
Japan
Germany*
France
United Kingdom
Italy
Canada
VO
•
III
o
Total G-7
1991
-1.2
4.4
0.9
1.2
-2.2
1.4
-1.7
1992
1.9
2.0
1.8
2.2
-0.8
1.3
2.1
1993
3.1
3.8
2.6
2.7
2.1
1.5
4.4
1.7
3.0
Consumer Prices foercent chancre; annual average)
United States
Japan
Germany*
France
United Kingdom
Italy
Canada
4.3
3.3
4.5
3.1
5.9
6.3
5.6
3.1
2.2
4.9
2.9
3.8
5.6
1.6
3.1
2.4
4.2
2.8
3.0
5.1
2.0
Total G-7
4.3
3.3
3.2
III.
Current Account ($ billions and percent of GDP)
United States
Japan
Germany*
France
United Kingdom
Italy
Canada
SOURCE:
-41
(0.1)
73
(2.2)
-20
(1.2)
-6
(0.5)
-11
(1.1)
-21
(1.8)
-26
(4.3)
-35
(0.6)
110
(3.0)
-22
(1.1)
-1
(0.1)
-19
(1.7)
-25
(1.9)
-20
(3.4)
-55
(0.9)
101
(2.6)
-9
(0.4)
-0
(0.0)
-19
(1.6)
-33
(2.4)
-21
(3.3)
IMF World Economie Outlook. Comparable Administration
forecasts for 1992 U.S. growth and inflation are 2.0% and 3.0%
respectively, and for 1993, 3.0% and 3.2% respectively.
*
All of Germany
t
Reflects extraordinary Desert Storm receipts of $42 billion.
Table 2
Dollar Exchange Rates
vs. G -7 Currencies
At Key Dates
(units per dollar)
Value of the
Dollar in
Terms of:
Japanese yen
German mark
British pound
French franc
Italian lira
Canadian dollar
Dollar
Peak
2/26/85
Plaza
Accord
9/20/85
Louvre
Accord
2/20/87
Year
Since
10/18/91
Previous
Report
4/17/92
Dollar
Lows
9/2/92
Current
Report
10/15/92
261.55
3.4730
0.9606
10.6100
2169.50
1.4043
241.00
2.8575
0.7326
8.7150
1924.00
1.3763
153.60
1.8272
0.6542
6.0860
1299.00
1.3282
130.02
1.6928
0.5813
5.7668
1265.55
1.1286
133.88
1.6682
0.5726
5.6400
1254.50
1.1818
122.20
1.3865
0.4980
4.7380
1063.00
1.1952
120.60
1.4505
0.5882
4.9455
1287.50
1.2488
Since
Previous
Report
4/17/92
Since
Dollar
Low
9/2/92
Measurements of Dollar Movements
Vs. G -7 Currencies
Percent Appreciation (+) or Depreciation (-)
(through 10/15/92)
Value of the
Dollar in
Terms of:
Since
Dollar
Peak
2/26/85
Since
Plaza
Accord
9/20/85
Since
Over
Year
Louvre
Since
Accord
2/20/87 10/18/91
Japanese yen
-53.9%
-50.0%
-21.5%
-7.2%
-9.9%
-1.3%
German mark
-58.2%
-49.2%
-20.6%
-14.3%
-13.0%
4.6%
British pound
-38.8%
-19.7%
- 10 .1%
1.2%
2.7%
18.1%
French franc
-53.4%
-43.3%
-18.7%
-14.2%
-12.3%
4.4%
Italian lira
-40.7%
-33.1%
-0.9%
1.7%
2.6%
21.1%
Canadian dollar
-11.1%
-9.3%
-6.0%
10.7%
5.7%
4.5%
Source: New York 9:00 a.m. exchange rates
Table 3
30-Oct-92
SUMMARY OF U.S. CURRENT ACCOUNT
(MILLIONS OF DOLLARS, S.A.)
Quarters
Annual
90:3
90:4
91 :1
91:2
91:3
91:4
92 :1
92:2
1989
1990
1991
96544
100526
100636
103324
104151
107851
107946
107580
361698
388705
415963
9853
9468
9801
9366
10170
10791
10823
10500
42185
40187
40127
86691
91058
90836
93959
93981
97061
97123
97080
319513
348518
375836
Total Importa
125434
128303
118962
119721
124325
126390
125168
131998
477365
497557
489398
Petroleum
15461
18217
12924
12937
13122
12195
10368
12965
50920
62298
51178
109973
110086
106038
106784
111203
114195
114800
119033
426445
435259
438220
TRADE BALANCE
-28890
-27777
-18326
-16397
-20174
-18539
-17222
-24418
-115667
-108852
-73435
Partial Bal (Excl.
Ag Exps t Pet imps
-23282
-19028
-15202
-12826
-17222
-17134
-17677
-21953
-106932
-86741
-62384
12113
16811
16320
14713
15100
15595
18317
14349
40134
51339
61728
Invest.« Income
4224
7532
6965
3931
3076
2458
4474
1377
14367
19284
16430
Other Services
7889
9279
9355
10782
12024
13137
13843
12972
25767
32055
45298
-7201
-11778
14199
4115
-6012
-4273
-6999
-7719
-25608
-32918
8029
Remits t Pensions
-4095
-3678
-3982
-4099
-4026
-4351
-4379
-4708
-14834
-15322
-16458
Govt Grants
-3106
-8100
18181
8214
-1986
78
-2620
-3011
-10774
-17596
24487
4912
5033
30519
18828
9088
11322
11318
6630
14526
18421
69757
-11086
-7217
-5904
-17788
-101141
-90431
-3678
4604
3500
11
n .a .
4260
42395
Total Exporta
Agricultural
NonAgricultural
Non-Petroleum
Net Services
Total Transfers
NET INVISIBLES
-23978
-22744
12193
2431
Desert shield support incl. in
n .a .
in transfers
4260
22674
11617
CURRENT ACCOUNT
n .a .
Table 4
30-Oct-92
SUMMARY OF U.S. CAPITAL ACCOUNT FLOWS
(MILLIONS OF DOLLARS, S.A.
Annual
Quarters
90:3
90:4
91 :1
91:2
91 :3
91 :4
92:1
92:2
1989
1990
1991
1739
-1091
-353
1014
3877
1225
-1057
1464
-25293
-2158
5763
-337
4179
1073
-420
3180
-437
-38
-209
1270
2305
3396
Foreign Official Assets
Industrial
OPEC
Other
14097
13231
-1699
2565
20127
12840
575
6712
5650
-8682
660
13672
-4178
-3309
-2699
1830
4115
158
-4288
8245
12819
3204
1023
8592
21192
6072
2459
12661
21071
13253
-2205
10023
8489
-238
10738
-2011
33908
25547
2163
6198
18406
-8629
-5304
32339
Banks, net:
Claims
Liabilities
17648
-9772
27420
-4424
-22976
18552
-331
17909
-18240
-29257
-1846
-27411
10911
2403
8508
246
-23219
23465
11385
15859
-4474
7459
12592
-5133
12127
-51255
63382
23839
7469
16370
-18431
-4753
-13678
Securities, net
Foreign Securities
U.S. Treasury Securities
Other U.S. Securities
-3367
-1037
544
-2874
-10114
-8111
-3044
1041
-1814
-9526
2850
4862
16718
-11783
13289
15212
-3697
-12403
-1306
10012
-5065
-11305
1408
4832
-4980
-8703
-828
4551
12587
-8573
10288
10872
46315
-22070
29618
38767
-29707
-28765
-2534
1592
6142
-45017
16241
34918
U.S. Direct Invest, abroad
Reinvested Earnings
Equity & Inter-co. Debt
-16777
-4719
-12058
-3674
-5909
2235
-11994
-6000
-5994
3681
-3993
7674
-7128
-3217
-3911
-11692
-4675
-7017
15075
-3657
11418
-11006
-4246
-6760
-28998
-14780
-14218
-32694
-19469
-13225
-27133
-17885
-9248
7471
-3325
10796
13093
-6619
19712
-1532
-5256
3724
7322
-5122
12444
29
-4270
4299
5680
-5398
11078
-3820
-4459
639
5989
-2570
8559
67872
-8530
76402
45140
-16284
61424
11499
-20046
31545
... -52
-4780
4728
-6803
-5142
-1661
621
2251
-1430
1029
2304
-1275
1277
-298
1575
1994
1269
725
6706
4764
1942
n .a .
n .a .
n .a .
16963
11398
5565
2429
-2477
4906
5121
5526
-405
20422
11293
-8480
-4091
12564
4770
14313
37355
98745
43062
4763
3556
11452
-3713
1660
-1478
2447
-8410
-19567
2397
47371
-1084
23978
22745
-12193
-2431
11086
7217
5903
17788
101142
90433
3679
US Reserve Assets
(Incr(-)Deer(+))
Other Govt Assets
For. Direct Invest, in U.S.
Reinvested Earnings
Equity t Inter-co. Debt
Other U.S.-Corp., net
Claims
Liabilities
NET CAPITAL FLOWS
Statistical Disc.
TOTAL *
Table 5
ASIAN NIES AND CHINA: TRADE AND CURRENCY CHANGES
Cumulative Change against US$ as of October 16, 1992 [1 ]
Since:
HKS
Won
SingaporeS
NTS
Yen
DM
Yuan
(Plaza)
9/20/85
end- 8 6
end-8 7
(Report)
10/14/88
end-89
end-9 0
end-91
1.1%
13.8%
36.9%
60.3%
102.0%
95.3%
-46.6%
0.8%
9.6%
34.9%
40.5%
33.2%
31.3%
-33.0%
0.4%
0.8%
24.0%
13.0%
3.1%
8.1%
-33.0%
1.1%
-9.6%
25.7%
14.4%
5.5%
22.1%
-33.0%
1.0%
-13.6%
18.1%
3.5%
19.9%
14.5%
-14.8%
0.9%
-8.8%
8.1%
7.3%
13.2%
1.2%
-6.0%
0.6%
-2.6%
0.8%
1.9%
4.2%
2.9%
-1.9%
Rate on 10/16/92
HK$
W
S$
NTS
Y
DM
Yuan
7.73
785.90
1.61
25.27
119.85
1.48
5.55
1. [ - ] signifies depreciation against the U.S. dollar.
U.S. Trade Balance with Asian NIEs and China [2 ]
(U.S. $ billions)
1985
1986
1987
1988
1989
1990
1991
1-8/91
1-8/92
Hong Kong
Korea
Singapore
Taiwan
-5 .6
-4.1
-0 .8
-11.7
-5 .9
-6 .4
-1 .3
-14.3
-5 .9
-8 .9
-2.1
-17.2
-4 .6
-8 .9
-2 .2
-12.6
-3 .4
-6 .3
-1 .6
-13.0
-2 .8
-4.1
-1 .8
-11.2
-1 .1
-1 .5
-1 .2
-9 .8
-0 .4
-0 .9
-0 .2
-6 .0
-0 .4
TOTAL NIEs
-22.1
-27.8
-34.1
-28.2
-24.3
-19.8
-13.7
-7 .5
-9 .1
0
-1 .7
-2 .8
-3 .5
-6 .2
-10.4
-12.7
-7 .2
-11.2
- 132.1
-152.7
-152.1
-118.5
-108.6
-101.7
-66.2
-39.2
-48.3
NIEs as % of total U.S.
17%
Trade Bal.
18%
22%
24%
22%
20%
21%
19%
19%
China + NIEs as
% of Total U.S.
Trade Bal.
19%
24%
27%
28%
30%
40%
37%
42%
China
Total U.S.
Trade Bal.
17%
2. U.S. customs value data, not seasonally adjusted.
Totals may not equal sum of components due to rounding.
-
1.0
-0 .9
-6 .7
Real Trade-weighted Exchange Rate Indices
140
Index: 1980-1982 = 100
130
120
110
100
90
80
80/1 81/1 82/1 83/1 84/1 85/1 85/1 87/1 88/1 89/1 90/1 91/1 92/1 92/10
Note: A rise in the index = appreciation/decline in competitiveness;
a fall in the index = depreciatiorVincrease in competitiveness.
•Source: JP Morgan; 1980 trade weights (18 industrial and 22 developing
countries; 1980 - 82 100. Data are thru October 15,1992).
W
Tr««ury/GAsiA
J Ì2 91QQQ'98
EM B A R G O ED F O R R E L E A S E
2:00 P.M.
CONTACT: SC O TT D Y K EM A
(202) 622-2960
REMARKS BY
OLIN L. WETHINGTON
ASSISTANT SECRETARY FO R INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
AT THE MIAMI CONFERENCE ON THE CARIBBEAN
SPONSORED BY CARIBBEAN/LATIN AMERICAN ACTION
MIAMI, FLORIDA
December 1,1992
It is a pleasure to join you in Miami today for this conference. Today I would
like to share with you my thoughts at this time of transition — a transition in the U.S.
political system and, for the Caribbean Basin, a transition in relationships and opportunities.
A revolution has taken place in the hemisphere, one characterized by nations living largely
in peace, benefitting from democracy, and undergoing an economic transformation based
solidly on market forces. In the past year that revolution has moved forward. While the
decade of debt and stagnation in Latin America continues to fade into the past, the future - a future of new opportunities -- is challenging the leadership in the region. I would like
to talk today about that future and about some of the challenges and opportunities I see
facing the Caribbean Basin.
During the past year reform has continued to accelerate throughout the
hemisphere. The self-generated commitment to market-oriented policies by the leaders of
Latin America continues to bear fruit in the form of strengthened .economies, new
competitive opportunities, a more solid foundation for future growth, and stronger, more
productive economic and financial relations internationally.
In early 1990, the United States decided that it was time for a new approach
to our relationships in the hemisphere. From this recognition came the Enterprise for the
Americas Initiative, announced by President Bush in June of 1990. The Initiative, based on
a vision of free trade, open investment and growth, has helped serve as a catalyst for results
that have exceeded many expectations. Capital inflows into Latin America and the
Caribbean, which had more than tripled to $14 billion from 1989 to 1990, roughly tripled
again in 1991 to some $42 billion. This unprecedented increase, led by a few countries such
as Mexico, Venezuela, and Chile, has now been joined by major flows to countries like
Argentina, Colombia, and even Brazil, where high inflation continues to seriously challenge
the skills of the economic leadership.
NB-2084
-
2
-
The Enterprise for the Americas Initiative is tangible evidence of our
commitment to partnership with the region. Its proposals for action in trade, investment,
and debt have been embraced throughout the region and have marked a change in the way
the United States and the countries of Latin America and the Caribbean relate to one
another.
Historically, United States attention to Latin America and the Caribbean was
shaped in large part as a response to perceived threats to its national security - threats to
U.S. trading and investment interests, concerns over the advance of communism and
terrorism, concern for the implications of unrestricted pressures on immigration to the
United States and of course concerns over the spread of narcotics production and trafficking
and other, more direct challenges to the rule of law and democracy. Such threats, together
with more altruistic concerns for the quality of life, had prompted the United States to
sponsor a variety of new programs to promote economic development in the region since
World War II. Even into the 1980s, much of U.S. bilateral assistance to the region was
directed to meeting immediate threats to peace and stability in countries like E l Salvador
and Honduras or keyed to counter narcotics production and trafficking in the region.
Together, we have broken out of this historical pattern with the introduction
of Enterprise for the Americas Initiative. We are now actively engaged in economic
diplomacy based on partnership and equality rather than on unilateral concessions and
dependency -- themes that have all too often characterized policy approaches to the region
in the past.
The theme of partnership has been uniformly welcomed in the region as the
only credible basis for building strong and resilient economies for the long term. However,
some of its consequences and implications have also generated anxiety and concern. In the
Caribbean Basin, such concerns have become particularly evident in the area of U.S. trade
policy and the implications of NAFTA for other countries.
NAFTA
The trade component of the Enterprise for the Americas Initiative envisions
an open borderless trading system in the Western Hemisphere, one free of barriers and free
of costly disincentives to fair competition. Trade has already helped build momentum for
reform throughout Latin America and the Caribbean. Framework agreements on trade and
investment have now been signed with nearly every country in the hemisphere, including
CARICOM and each of the Central American countries. The Trade and Investment
Councils established by these agreements have provided useful venues for discussion of trade
and investment issues and have helped us work more closely together.
A number of countries, particularly in the Caribbean Basin, are concerned that
ratification of NAFTA will signal the beginning of the end for their ability to compete for
investment and export markets in the region. Ultimately they fear for their ability to
maintain their standards of living. These are concerns we take seriously.
-3The NAFTA mirrors the new dynamic relationship between the United States,
Mexico, Canada and our neighbors. It is not, however, an immediate panacea or
transformation but a road map for a process of ordered economic cooperation and
integration. Across-the-board duty-free treatment will not take effect overnight, but will be
gradually implemented over a 15-year period. It will take that long to phase out tariffs and
create an integrated regional trading bloc of 370 million people producing $6 trillion worth
of goods and services each year. Nonetheless, NAFTA has already unleashed a surge of
trading and investment activity with Mexico, already our third largest trading partner and
our fastest growing export market.
Ratification of the North America Free Trade Agreement with Canada and
Mexico will mark a major turning point in this process, moving the trade agenda from the
theoretical to real world. At that point we will begin to fully reap the benefits of enhanced
competition, less burdensome regulation and, importantly, improved employment
opportunities.
Agreement on NAFTA was only made possible by a combination of sustained
effort and the success of Mexico’s impressive strides in creating an attractive and
competitive environment for investors. Mexico’s extensive trade liberalization measures and
deregulation have revitalized industry and attracted new foreign participation. These
reforms have taken determined efforts and courage by Mexico’s leadership over an extended
period of time.
For the countries of the Caribbean Basin, the NAFTA presents a formidable
challenge. This challenge cannot be met by inaction or rigidity on the part of the region’s
economic and political leadership. It is a time for opportunity, courage, and action.
NAFTA can lead to a major acceleration of trade and investment for the
entire hemisphere. The schedule of phased-in tariff elimination implies a timetable for
action by other Latin American and Caribbean nations.
This timetable requires
advancement of national economic reform efforts and a more competitive position in
international markets. It adds urgency to the process of integrating national economies
while moving ahead to the broader benefits of regional economic integration and growth.
The time for planning, consultation, and action within the region is now.
The Meaning of Partnership - A View to the Future
Responses to the challenges embodied in NAFTA will have to take place in
a changed world; one in which the relationship between the United States and the region
has evolved and matured.
Some observers have expressed a quiet but smug complacency with respect to
NAFTA. While they complain of the potential increase in competition from Mexico, they
resist any suggestions for needed adjustment or change. I can only conclude that they
harbor a conviction that the United States will somehow make it all come out right, either
by granting N AFTA trade benefits on a preferential basis or by earmarking additional
resources for programs to offset any adverse impact.
-4Also encountered are officials who express a certain fatalism concerning
NAFTA, depicting the region as powerless to do anything to mitigate potential diversion of
investment and market shares to Mexico. These observers also plead for special and
differentiated treatment, including calls for accession to NAFTA without fully meeting the
obligations entailed in that accord.
The first view ignores the reality of the present situation. The second view
assumes that national leaders are incapable of developing a political consensus to take
needed reforms and to make their economies efficient and competitive.
There is long history of special support and assistance provided by the United
States to the region, primarily in the form of unilateral concessions and financial support.
While direct bilateral assistance ("foreign aid") has clearly diminished in the past decade,
a wide range of other programs still provide extensive benefits to the region. These include
such programs as the section 936 provisions for use of tax free Puerto Rican corporate
earnings for reinvestment in qualified projects in C BI countries. Other programs, notably
those giving preferential tariff treatment on goods assembled in the Caribbean and GSP
have also extensively benefitted a number of countries in their efforts to broaden their
economic base and improve their competitive access to the U.S. market.
These programs are unlikely to disappear. However, taken together they do
not, in my judgment, point us in the direction which I believe our relationship is now moving
-- toward a partnership of shared advantages, open trade and mutual responsibilities. There
is little question that the relative value of many of these programs will erode as Mexico
gains improved access to U.S. markets under NAFTA. Although negotiation of other Free
Trade Agreements with the United States have yet to get underway, the trend works against
these types of programs. While Caribbean and Central American countries currently benefit
from preferential access to developed country markets through the Caribbean Basin
Initiative and the Lome Convention, the degree of preference will narrow over time as we
move to more open markets throughout the hemisphere.
The time for energetic leadership and decisive action is now. Leadership in
the Caribbean Basin must move quickly to position national economies to benefit from a
more open trade and investment climate. These leaders must be willing to deal with the
need to advance structural reforms to assure strong, market-based economic systems. They
must assure that their countries are able to compete for investment and are able to produce
exports competitive on world markets. Countries that do not move ahead will be left
behind. But I trust that the leaders in the region will not let this happen.
The Role of Integration
There is another policy perspective in the region; one shared by a number of
dynamic and forward looking leaders who have seen the Enterprise for the Americas
Initiative and the NAFTA as unprecedented opportunities. These leaders are at the
forefront in the movement towards a new economic integration of the Western Hemisphere.
They have looked upon the breaking down of barriers to trade and investment as a
-5challenge. An opportunity to reach out and expand cooperation with other countries and
to advance toward a broader vision of a hemisphere wide free trade zone. This leadership
has produced tangible gains clearly reflected in a number of recent developments.
o
Chile, in addition to seeking a bilateral Free Trade Agreement with the
United States, has completed separate trade agreements with Venezuela and
Mexico.
o
Venezuela, in turn has entered into Free Trade pacts with both Mexico and
Colombia.
o
In Central America, El Salvador, Guatemala, and Honduras have moved
rapidly to integrate their markets and replace protective tariffs and import
quota regimes with a simplified structure of low rates.
o
Despite the difficulties involved, both Brazil and Argentina remain committed
to M ERC O SU R, as does Paraguay and Uruguay.
In a number of cases these agreements go well beyond a simple pact to reduce
bilateral trade barriers and tariffs. There also has been major progress in deregulation and
advancing the development and integration of regional capital markets and reducing barriers
to the free flow of investment -- both physical and financial. For example, the agreements
between Colombia and Venezuela also call for the integration of the stock and bond
markets of the two countries, an idea that is truly visionary in scope. Similar cooperation,
coordination, and mutual access is being discussed by a number of other countries in South
America and directly complement the more obvious efforts in trade. These efforts, which
blend deregulation and a broadening in the ownership of national wealth will help spread
the benefits of growth and adjustment to all level of society. This is absolutely crucial to
ensuring a firm foundation for both democracy and the market.
The rapid growth of bilateral agreements and the ensuing web of interlocking
trade and investment liberalization pacts are much more than simple reactions to the threat
of competition from NAFTA. A broader and more positive agenda appears to be at play - one in which countries can build on recent reforms to facilitate intra-regional trade,
investment, and growth.
o
The bilateral Framework Agreements on Trade and Investment adopted by
nearly every country in the hemisphere with the United States have provided
an opportunity to build a consensus among countries in the region. This
consensus supports the fundamental principles of free and fair trade and, in
turn, has facilitated trade and investment throughout the hemisphere.
o
Just as sound macroeconomic policies and improved investment regimes have
improved the competitive position and attractiveness of individual countries,
it has also tended to highlight the need to reach beyond limited domestic
markets.
-
6
-
o
Similarly, increased economic stability and more closely harmonized national
economic policies have highlighted the advantages of economies of scale in
production, and this is now developing in M ER C O SU R and between
Colombia and Venezuela.
o
The existence of more uniform rules and standards across countries has made
these countries more attractive to the international financial community. The
end result is more efficient and competitive capital markets.
The integration process in Latin America and the Caribbean has not been
without difficulty. Reduced barriers to trade and investment and the move to free markets
have increased cross-border sensitivity to divergent macroeconomic policies and strategies.
It is difficult, for example to promote integration beyond a very basic level if two countries
have widely divergent inflation rates and differing exchange rate and interest rate strategies.
However, integration is not working in every case. In some individual
countries restrictive, inward-looking protectionist trade and investment regimes are not being
dismantled with sufficient speed. Such policies hinder sub-regional integration.
In many respects the Andean Pact has dissolved into a series of bilateral agreements, largely
due to a lack of political commitment and a history of widely divergent macro-economic
policies. Elsewhere, the Central American Common Market remains a largely theoretical
construct, with the exception of the progress being made in the northern tier countries in
the trilateral accord. That agreement is leading the way to sub-regional integration in
Central America.
Sub-Regional Integration
For the Caribbean and Central America, successful integration must rest upon
a commitment to an outward-looking program, keyed to a goal of low external tariffs and
elimination of non-tariff barriers coupled with reduced barriers to the free flow of capital
in an environment conducive to investment -- both national and foreign.
The focus of Caribbean integration, however, has been largely inward-looking
with a continued adherence to an import-substitution growth model. This policy pattern
risks stagnation and isolation. Although the Organization of Eastern Caribbean States
(O EC S) is unique within Latin America and the Caribbean in its achievement of a monetary
union, progress towards broader integration has been slow. Mobility of capital and labor
are either tightly controlled or non-existent. Efforts geared to fostering a region-wide
market served by regional firms have been halting. This sub-region is particularly
challenged by broader movement to hemispheric integration due to the very small size of
some national markets and their high standards of living, reflected in some of the highest
per capita incomes in the hemisphere.
For the OECS, effective integration into the hemisphere will become
increasingly urgent and critical to maintaining existing standards of living. Creative energy
needs to be applied immediately by leadership in this region to position national economies
on a more competitive basis. Failure to do so will see incomes erode and frustration grow.
-7Until recently, movement to integration in CARICOM has been hampered by
a common external tariff (C E T) of 40% . Although we welcome the agreement by
CARICOM leaders to a phased reduction of the C E T to 5-20 percent by January 1998, non
tariff barriers remain pervasive.
In Central America, I have already noted the progress being registered in the
joint efforts of E l Salvador, Guatemala, and Honduras. Although other countries in the
region may be able to join this group with time, several remain far from willing to open
their financial systems or economies to the rigors of competition.
The Role of External Support
The Enterprise for the Americas Initiative remains the defining framework for
our economic and financial cooperation, support, and partnership with the countries of the
Latin America and the Caribbean. The United States continues to stand ready to enter into
bilateral official debt reduction agreements under the provisions of the EA I and, I am
pleased to note, a number of additional countries are expected to become eligible for such
benefits before year-end. On the trade front, we remain committed to the a hemisphere
free trade zone, beginning with NAFTA.
The United States believes firmly that economic stabilization and regional
integration needs to be actively supported by the multilateral institutions, specifically the
International Monetary Fund, World Bank, and Inter-American Development Bank.
We have looked to the Inter-American Development Bank - an institution
controlled by the countries of Latin America and the Caribbean — to play a major role in
the Enterprise for the Americas Initiative. That institution is central to the region’s
economic recovery. It is playing a key role in the investment reform process through
Investment Sector Loans and will soon be providing additional funds through the
Multilateral Investment Fund. The M IF will have three separate facilities:
o
a technical assistance facility to identify and implement policy changes
needed to transform recipient economies;
o
a human resources facility to train workers involved in the transition
to more open investment regimes; and
o
an enterprise development facility to invest in small business.
The M IF, which is now near its $ 1.5 billion funding target, has been structured
so that non-member countries in the Caribbean can access its resources through the
Caribbean Development Bank.
The United States believes the ID B ’s long-term role in the region needs to be
enhanced. This belief was the basis for the U.S. proposal in September 1992 for the 8th
Replenishment of the ID B, which called for a healthy increase in the resources available to
-
8
-
the Bank. In that proposal we asked that fully 50% of the ID B ’s future lending be used to
support economic opportunity, social sector development and governance objectives in all
borrowing countries.
Conclusion
The economic progress of Latin America and the Caribbean continues to
advance. It is attracting record levels of capital inflows, investor interest and renewed
attention in voluntary capital markets. This progress has been underscored and reinforced
by a new hemispheric partnership, a partnership characterized by new links joining and
strengthening the economic and financial systems in the hemisphere.
At a meeting of eleven Latin American Finance Ministers with Treasury
Secretary Brady last June, this new partnership was reconfirmed. In their joint statement,
the Ministers emphasized the importance of our mutual interests in achieving stronger
economies and stable democracies. They noted the importance of sustained economic
recovery and adjustment and the need to broaden the benefits of growth to all levels of
society. They also noted the crucial role played by open trade and investment regimes.
Nearly every country in the hemisphere is now engaged in a process of selfexamination, restructuring and adjustment to meet the economic, social and political
opportunities unfolding in the region. While the details and timing vary from country to
country, the direction is clear.
In the case of the Caribbean Basin, national leaders face a rapidly changing
trade and investment environment. The immediate need for reform and integration of
markets implied by NAFTA demands sound economic management, increased reliance on
market mechanisms, improved efficiency, a more hospitable climate for investment and
greater regional cooperation and integration. Effective regional integration is particularly
important if the countries in the region are to be competitive in the years ahead.
N AFTA is not the only challenge facing the Caribbean. One day Cuba will
no longer be a dictatorship. I believe that it will one day be a democracy eager to rejoin
the community of nations as a market economy. When this occurs ~ and it most surely will
-- the Caribbean will face new competition for private capital, development assistance,
tourism, and export markets.
The potential for expanding markets and growth in the region is enough to
sustain the region’s economies in the face of NAFTA, a free Cuba, and a more open and
competitive trading environment. But this growth cannot occur unless complacency and
dependency is replaced by energetic leadership looking to the future.
Our mutual efforts to transform the hemisphere quickly and to secure greater
benefits through cooperation and open markets is an unprecedented opportunity. We must
have the courage to seize that opportunity now.
FOR RELEASE AT 2: 30rRpM-of THE TREASIJCONTACT:
December 1 , 1992
Office of Financing
202—219—3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 24->400 million, to be issued December 10, 1992.
This offering will provide about $ ^ »275 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 23,115 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, December 7, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$ 12,200 million, representing' an additional amount of bills
dated March 12, 1992
and to mature March 11, 1993
(CUSIP No. 912794 B3 7), currently outstanding in the amount
of $ 25,193 million, the additional and original bills to be
freely interchangeable.
182 -day bills for approximately $ 12,200 million, to be
dated December 10, 1992 and to mature June 10, 1993
(CUSIP
No. 912794 D4 3).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 10, 1992.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts ’exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1 105 million-as agents for foreign and international
monetary*authorities, and $ 5,151 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000, Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced’to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must' be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s ), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
Tenders for $16,008 million of 49-day bills to be issued
December 3, 1992 and to mature January 21, 1993 were
accepted today (CUSIP: 912794A38).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.27%
3.32%
3.29%
Investment
Rate____
3.33%
3.38%
3.35%
Price
99.555
99.548
99.552
Tenders at the high discount rate were allotted 46%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Accepted
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
0
33,704,000
0
0
0
25,000
1,175,000
0
0
0
0
834,000
__________0
$35,738,000
0
15,254,500
0
0
0
25,000
394.000
0
0
0
0
334.000
__________0
$16,007,500
Type
Competitive
Noncompetitive
Subtotal, Public
$35,738,000
__________0
$35,738,000
$16,007,500
__________0
$16,007,500
0
0
0
$35,738,000
__________0
$16,007,500
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $200,000 thousand of bills will be
issued to foreign official institutions for new cash.
NB-2086
I 'gngp
ÉÉÊÉ^É
TREASURY NEWS
•artment of the Treasury
Washington, D.C.
Telephone 2 0 2 - 6 2 2 -2 9 6 0
James H. Fall, in
Deputy Assistant Secretary (Developing Nations)
U.S. Department of the Treasury
0
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■
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ii
<T5
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Remarks for the Banking and FinanceSession v*
Joint Conference of the USA-ROC and ROC-USA Economic Councils
1• f«s3
—1
<
Taipei, Taiwan
December 3, X992
Et
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It is a pleasure to have the opportunity again to speak to the Banking and
Finance Session. This group has provided an excellent forum to discuss financial
developments in'Taiwan and, importantly, to improve international understanding
of the process of financial market liberalization in this growing economy.
This is my sixth trip to Asia this year. Over the past year, the Treasury has
devoted considerable attention to an intensified dialogue on financial Issues with
an expanded group of high-growth Asian economies. We also have made this
effort to better understand how developments in Taiwan and other Asian financial
markets reflect and relate to global financial trends.
In my remarks today I would like to discuss certain elements which we believe
define the process of financial liberalization in markets around the world, and our
assessment of their relevance to Taiwan.
THE INTENSE GLOBAL COMPETITION FOR CAPITAL
The global competition for capital, as we all recognize, has intensified in the past
several years and there is no basis to believe this competitive environment will
become anything but more intense in the future. Clearly, the competition
between regions and between countries within regions will grow. Policy changes
to improve the ability of capital to flow more freely have increased. The challenge
for all economies is to construct a policy environment which encourages private
investment, domestic and foreign alike, and permits the free movement of capital.
Strong and confident leadership for further financial liberalization in all markets
must be an integral element of this effort. We believe the importance of this
process has not been lost on Taiwan's authorities as they look to the future and
particularly to the implementation of the Six Year National Development Plan and
in fulfilling the objective of becoming a regional financial center.
The judgements of market participants are more critical than ever to the success
of any financial market. For all markets, these important judgments are made
thousands of times every day by domestic and international investors. Their
concerns are on several planes. Taken together, they encompass assessments on
economic growth and stability, the "effectiveness" of political leadership,
prospects for profits, and the comparative attractiveness of other markets. In
their analysis, the scope and speed of past economic and financial reforms is a
guide to future policies.
NB-2087
-
2
-
In the competition between markets, it is clear that countries that decisively
liberalize their trade, investment, and financial regimes benefit greatly as
investment flows increase and financial markets become more robust.
The impressive growth in Mexico's economy and its financial markets in recent
years are a testament to the benefits of rapid reform. In Asia, some believe Hong
Kong sets a standard for the region. Others point to the success of economic and
financial sector reforms in countries such as Indonesia and Thailand that have led
to significant inflows of foreign investment which in turn has fostered new
technology, contributed to industrial expansion, and boosted exports. We are
witnessing a dynamism in various markets — •a lively interplay between the
markets themselves and policy officials to assure a responsive, healthy,
competitive, stable, sound and confidence-building economic environment.
In markets where change is taking place at a more cautious pace, policymakers
often will, with apparent pride, reel off a litany of changes that have taken place
in the financial sector. They can outline plans for future liberalization dependent
on various, and sometimes rigid, macroeconomic preconditions. But great care
must be taken lest this overly cautious approach provide policymakers with a
false sense of security, and induce complacency and perhaps a certain blindness
to what is occurring elsewhere. A keen appreciation of the competition emerging
in other markets is vital to policymakers in all economies. This is particularly
true in the Asian region where there Is significant financial market change and
active competition between markets.
STRONG AND VIBRANT COMPETITION IS EMERGING IN ASIA
Our discussions in the region over the past year have highlighted the rapid
changes underway in almost every market. The process of financial liberalization
in Asia and is destined to foster both a diversification in opportunities for
profitable investment and enhanced economic growth in the region as a whole. In
virtually every market, liberalization is producing results.
It may be instructive to cite some recent developments:
o
A number of equities markets have boomed over the last year. As of midNovember, Hong Kong's Hang Seng Index has increased 50 percent. In
Bangkok, the SET is up 33 percent. Manila is up 20 percent. Malaysia's
market has increased some 17 percent. Only in Japan has the market fallen
further than it has in Taiwan. Other markets are emerging as well — for
instance, the interest in exchanges in Shenzen and Shanghai has been
widely publicized.
V
o
As an initial step in its quest to establish Bangkok as the regional financial
center for Indochina, Thailand has just established an offshore banking
center, the Bangkok International Banking Facility (BIBF).
o
Australia's parliament has just passed legislation that will improve the
ability of foreign banks to enter, increasing the attractiveness of
Australia’s financial markets.
o
Indonesia's wide-ranging financial sector reform effort continues.
Foreigners soon will be able to purchase shares in domestic banks and
measures to liberalize foreign exchange trading have been implemented.
- 3-
o
Korea has recognized that further financial liberalization is necessary. it
is moving to complete its ’‘Blueprint for Comprehensive Financial
Liberalization.” To enhance the credibility of the “Blueprint", it has
sought advice from the IMF and World Bank.
o
Malaysia has established the Kuala Lumpur Options and Finance Futures
Exchange (KLOFFE). Unlike Taiwan’s proposed market, the KLOFFE will
offer domestic as well as foreign financial futures.
TAIWAN SEEKS TO MEET NEW COMPETITION
Taiwan's aspiration of developing a regional financial center is well-known. To
this end. it has undertaken a number of steps that will help it meet the emerging
competition. By and large, financial uneraiizattun 1» uieoriy underway, though
with an excessive measure of caution.
A number of steps taken by the Ministry of Finance and the SEC over the past
year are'commendable, and indicate an appreciation of the benefits that further
financial liberalization will bring to Taiwan. To cite some examples: the addition
of new private banks has helped increase competition, improving service and
lowering spreads between deposits and loans. Banks can engage in most
transactions involving short-term money market Instruments, which should help
lower intermediation costs. Domestic firms are now allowed to issue Global
Depository Receipts on international capital markets, which should aid the effort
to privatize government enterprises. Gold trading is now permitted, and foreign
futures trading will soon be allowed. The credit card monopoly has been
abolished, which should help improve the quality and lower the cost of the credit
card services enjoyed by the people on Taiwan.
Nonetheless, if Taiwan hopes to keep pace with developments elsewhere and attain
the objective of becoming a financial center in the region, much remains to be
done to bring the financial system in line with the practices and standards of
sophisticated markets.
ARE THERE UNFULFILLED EXPECTATIONS?
In our judgement and from what we hear from a wide spectrum of market
participants in and outside of Taiwan, there are still unfulfilled expectations. On
a number of issues, Taiwan may be out of step with developments in other markets
in the region and with international trends. A range of policy changes in the
financial sector would help to facilitate capital inflows, and enhance Taiwan as a
place where foreign investment and capital are Indeed welcome.
The activities of foreign financial firms are still restricted in a variety of ways.
This will invite investors to look carefully at other markets as alternatives.
Expanded foreign participation is necessary to develop the financial sector,
reduce discriminatory treatment, and provide foreign firms with the same rights
that Taiwan’s financial firms enjoy in the U.S. and other major markets* In the
banking sector, foreign banks account for less than 3 percent of assets. In
comparison, the foreign bank share, while still low, is roughly twice as high in
Thailand, Korea, Indonesia and the Philippines. It is ten times as high in
Malaysia, and twenty times as high in Singapore. In Taiwan's stock market,
foreign institutional investment totals only $1.7 billion to date, out of a total
market capitalization of more than $135 billion.
-4-
Controls on capital flows, ceilings on foreign exchange liabilities and restrictions
on forward foreign exchange transactions all diminish the efficiency of Taiwan's
capital markets and reduce the impact of market forces in exchange rate
determination, constraining pressures for appreciation of the NT dollar. These
restrictions are out of place in a fast-growing, modem, and stable economy like
Taiwan. To the international financial community, the arguments set forward in
defense of Taiwan’s continued controls seem weak. Even the Philippines has
moved boldly to abolish foreign exchange and capital controls, despite recent
poor economic growth and a series of devastating and costly natural disasters.
In the context of Taiwan's large and continued external imbalances, the
influential role of the central bank in the exchange market, in combination with
the controls cited above, contributes to a situation that, in the judgement of the
U.S. government, constitutes unfair manipulation of the exchange rate. Removal
of the remaining capital controls and restrictions on foreign exchange
transactions would help generate the appreciation of the NT dollar that will be
necessary in the near term if Taiwan is to achieve an appreciable reduction in its
bilateral trade imbalance with the United States.
i
These unfair practices are not in Taiwan's long-term interest. They induce and
perpetuate macroeconomic distortions, and cast a shadow on Taiwan's reputation
in the international financial community. Taiwan's own efforts to create a
regional financial center are materially undermined by these distortions. Finally,
these practices can fuel perceptions elsewhere that with regard to some of these
practices, Taiwan is not fully in step with the rules and commitments that govern
international trade among members of organizations such as the GATT.
Taiwan increasingly stands to gain from a domestic and global policy framework
that permits and encourages capital to move freely. Though Taiwan is a net
exporter of capital, like other sophisticated economies its economic success
depends on both capital inflows and outflows.
To this end, policy changes in Taiwan's financial sector could facilitate domestic
and foreign capital mobilization, which would help to alleviate concern over the
large decline in foreign investment, provide additional financing for the National
Development Plan, and enhance prospects for developing a regional financial
center.
The potential benefits to the domestic economy of financial liberalization are well
known. However, a few benefits are worthy of special note. Increased foreign
capital inflows could have a beneficial effect in the securities market. Despite
Taiwan'e attractive economic fundamentals, Taiwan securities market has been
lackluster at best, and limitations on foreign investment have played a role. By
comparison, equities markets have strengthened in Latin American countries that
have recently moved to free their markets from capital and exchange controls and
facilitate foreign investment. Obviously, in Latin America deregulation,
privatization, and other measures to unburden economies from years of
strangulation by the heavy hand of statism also have played a major role in the
surge in foreign capital inflows and capital repatriation.
The role of financial sector liberalization in attracting foreign investment
therefore cannot be underestimated. U.S. and other foreign companies routinely
cite unhampered access to their traditional suppliers of financial services and
modern financial infrastructure as important incentives to invest abroad.
-5Increased foreign investment could also help restrain the size of external
imbalances by expanding trade flows in both directions.
TAIWAN’S INTERNATIONAL OBLIGATIONS AND RESPONSIBILITIES
In all markets, financial liberalization must proceed with international obligations
and responsibilities in mind. For Taiwan, further liberalization will help
highlight its economic and financial Importance.
First, financial liberalization will be critical to Taiwan’s efforts to integrate itself
more fully into the global economic and trading system. Taiwan has a
responsibility to implement policies that will permit the free flow of capital, just as
it benefits from such policies elsewhere. As a large exporter of capital, Taiwan is
increasingly the beneficiary of reduced capital, exchange, and investment
controls in other markets.
Secpnd, market forces must be allowed to play their full role in the external
adjustment prodess, and particularly in the process of exchange rate
determination.
,
Third, Taiwan must open its market further to foreign financial firms and provide
them with the same opportunities to compete as domestic investors. In the United
States, banks from Taiwan reap the benefits of an open financial market, where
the right of establishment and national treatment are provided. Similar treatment
should be extended to foreign financial firms in Taiwan.
Finally, for Taiwan, financial liberalization, or course, should proceed with
GATT accession in mind. GATT obligations require that foreign exchange
measures not frustrate the intent of other GATT obligations, that is, foreign
exchange measures must not be used to restrain trade. Commitments by other
GATT members to keep their trade regimes open can only go hand-in-hand with
the full adoption by Taiwan of a market-based foreign exchange regime.
Moreover, the Uruguay Round services agreement calls for commitments to market
access and national treatment of financial services. Liberalization of financial
services is one of the most important aspects of the Uruguay Round for the United
States. The Administration and Congress will undoubtedly be looking closely at
the equality of commitments in this area when considering the overall Uruguay
Round package. The situation in Taiwan is sure to come under scrutiny as
Taiwan moves towards accession.
CONCLUSION
An era of intense change, competition, and integration among global c a p it a l
markets is likely to be an era of opportunity for those players that can move
decisively and adapt quickly. Rather than permit developments elsewhere to
erode the progress that has been made thus far, Taiwan’s policymakers should
move boldly to advance the process of financial liberalization. Bold moves would
send an important signal around the world that Taiwan intends to compete
actively in the regional financial market and bolster its position in the global
economy and in the international financial community •
CONTACT: Rich Myers
(202) 622-2930
FOR IMMEDIATE RELEASE
Friday, December 4, 1992
TAX INFORMATION EXCHANGE AGREEMENT BETWEEN
UNITED STATES AND GUYANA ENTERS INTO FORCE
The Treasury Department announced today that the United States
and Guyana have exchanged diplomatic notes that activate an
agreement to exchange tax information.
With the Agreement in effect, Guyana qualifies as a
jurisdiction in which Puerto Rican financial institutions may make
certain investments of funds derived from U.S. tax code section 936
companies.
Such funds may be used to finance investments in
qualifying development projects in Guyana.
Another benefit of the Agreement is that Guyana will now be
considered part of the "North American Area” for purposes of
determining whether U.S. taxpayers may deduct expenses incurred in
attending conventions, business meetings, and seminars. Therefore,
convention expenses incurred by U.S. taxpayers for meetings in
Guyana that are otherwise deductible as ordinary and necessary
business expenses will be allowed without regard to the additional
limitations applicable to foreign convention deductions.
Finally, Guyana will now qualify as a foreign country in which
a foreign sales corporation may incorporate and maintain an office
as provided in the foreign sales corporation provisions of the Tax
Reform Act of 1984.
The Agreement satisfies the criteria set forth in the
Caribbean Basin Economic Recovery Act of 1983. The Agreement was
signed in Georgetown on and is effective on that date.
The United States also has Tax Information Exchange Agreements
in effect with Barbados, Costa Rica, Dominica, the Dominican
Republic, Grenada, Honduras, Jamaica, St. Lucia, Trinidad and
Tobago, Marshall Islands, Mexico and Bermuda. All but the final
three are Caribbean Basin Initiative countries.
A limited number of copies of the Agreement are available from
the Treasury Public Affairs Office, Treasury Department, Room 2315,
Washington, D.C. 20220, phone: 202/622-2960.
oOo
NB-2088
FOR RELEASE AT 2:30 P.M.
December 4, 1992
CONTACT :
Office of Financing
202-219-3350
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $ 14,750 million of 364-day
Treasury bills to be dated
December 17, 1992 and to mature
December 16, 1993
(CUSIP No. 912794 E6 7). This issue will
provide about $ 1/400 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$13,354 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Thursday, December 10, 1992
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 1.7, 1992. In addition to the
maturing 52-week bills, there are $ 22,464 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks currently hold $ 6,581 million as
agents for foreign and international monetary authorities, and
$ 8,764 million for their own account. These amounts represent
the combined holdings of such accounts for the three issues of
maturing bills. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international mone
tary authorities will be accepted at the weighted average bank
discount rate of accepted competitive tenders. Additional
amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held
by them. For purposes of determining such additional amounts,
foreign and International monetary authorities are considered to
hold $ 1/250 million of the original 52-week issue. Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-2089
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit, Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
Contact: Keith Carroll
(202) 622-2930
FOR IMMEDIATE RELEASE
December 4, 1992
TREASURY ANNOUNCES PENALTY AGAINST CALIBER BANK
The Department of the Treasury announced today that it has
assessed a civil penalty of $65,000 against Caliber Bank,
Phoenix, Arizona, for failing to file Currency Transaction
Reports (CTRs) as required by the Bank Secrecy Act (BSA). The
violations which occurred from November 1989 to February 1992
stemmed from a lack of internal controls to identify and report
transactions subject to the BSA under the bank's previous
management.
Assistant Secretary Peter K. Nunez, who announced the
penalty, said, "The bank's new management conducted a complete
internal investigation of its BSA compliance, promptly and
independently brought this matter to the attention of the
Department of the Treasury, and cooperated with Treasury in
developing the scope of its deficiencies."
In determining the amount of the penalty, Treasury
considered the voluntary disclosure of the violations by Caliber
Bank and the corrective action and improvements to the BSA
compliance program subsequently implemented by the bank's new
management.
The penalty assessed by Treasury was based on the bank's
failure to comply with the requirements of the BSA. The Treasury
has no evidence that the bank or any of its employees or officers
engaged in any criminal activities in connection with these
reporting violations, nor was the Bank, or its officers or
employees under criminal investigation for failures to file CTRs.
The Bank Secrecy Act requires banks and other financial
institutions to keep certain records, file CTRs with Treasury on
cash transactions in excess of $10,000 and file reports on the
international transportation of currency, travelers checks and
other monetary instruments in bearer form. The purpose of these
records and reports is to assist the government's efforts in
combatting money laundering as well as for use in civil, tax,
regulatory and other criminal investigations.
oOo
NB-2090
Department of the Treasury • Bureau of the Public Debt • Wasniftgton, DC 20239
Contact: Peter Hollenbach
(202) 219-3302
FOR RELEASE AT 3:00 PM
December 4, 1992
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR NOVEMBER 1992
Treasury's Bureau of the Public Debt announced activity figures for
the month of November 1992, of securities within the Separate
Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$658,315,727
Held in Unstripped Form
$498,829,907
Held in Stripped Form
$159,485,820
$8,780,140
Reconstituted in November
The accompanying table gives a breakdown of STRIPS activity by
individual loan description. The balances in this table are
subject to audit and. subsequent revision. These monthly figures
are included in Table VI of the Monthly Statement of the Public
Debt, entitled "Holdings of Treasury Securities in Stripped Form."
These can also be obtained through a recorded message on
(202) 874-4023.
oOo
PA-112
TABLE VI— HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, NOVEMBER 30, 1992
27
(In thousands)
Principal A rra u * Outstandng
Loen Description
Portion Held in'
Unstopped Form
Maturity Date
Total
\
Reconstituted
This Month1
Portion Held i r
Stopped Form
11-5/8% Note C-1994 ...................................
11/15/94 ....................
$6,658,554
$4,808,954
$1,849,600
$65,600
11-1/4% Note A-1995 ...................................
2/15/95 .....................
6.933.861
5.512,101
1,421,760
93.600
11-1/4% Note B-1995 ...................................
5/15/95 ......................
7,127.086
4.777,326
2.349.760
-0-
8/15/95 .....................
7,955.901
5.984.301
1.971.600
215.600
10-1/2% Note C-1995 ...................................
9-1/2% Note 0-1995 .....................................
11/15/95 ....................
7.318.550
4.508.150
2.810.400
104.000
8-7/8% Note A-1996 .....................................
2/15/96 ......................
8,415.159
7.842,359
572.800
142,400
7-3/8% Note C-1996 .....................................
5/15/96 ......................
20.085.643
19.482.443'
603.200
-0-
7-1/4% Note D-1996 .....................................
11/15/96 ....................
20.258.810
18.689.210
1.569.600
48.000
8-1/2% Note A-1997 .....................................
5/15/97 .....................
9,921.237
8.694.837
1.226.400
-0-
8-5«% Note B-1997
8/15/97 ......................
9.362.836
8.498.836
864.000
-0-
.....................................
8-7/8% Note C-1997 .....................................
11/15/97*....................
9.806.329
7.845,129
1.963.200
35,200
8-1/8% Note A-1998
.....................................
2/15/96 .....................
9.159.068
8.857.628
301.440
49.600
9% Note 8-1998 ...........................................
5/15/98 .....................
9.165.387
8.226.387
939.000
8.400
9-1/4% Note C-1998 .....................................
8/15/98 ......................
11.342.646
10.863.446
479.200
-0-
8-7/8% Note 0-1998 .....................................
11/15/96 ....................
9.902.875
8.870.875
1.032.000
-0-
8-7/8% Note A-1999 .....................................
2/15/99 .....................
9.719.623
9.278.023
441.600
O-
9-1/8% Note B-1999 .....................................
5/15/99 ......................
10.047.103
8.626.303
1.420.800
33.600
8% Note C-1999 ...........................................
8/15/99 .....................
10.163.644
9.913,119
250.525
O-
7-7/8% Note 0-1999 .....................................
11/15/99 ....................
10.773.960
10.305.160
468.800
O-
8-1/2% Note A-2000 .....................................
2/15/00 .....................
10.673.033
10.615.833
57.200
0-
8-7/8% Note B-2000
.....................................
5/15/00 .....................
10.496.230
9.789.030
707.200
O16,000
8-3/4% Note C-2000 .....................................
8/15/00 ......................
11.080.646
10.920.806
159.840
8-1/2% Note D-2000 .....................................
11/15/00 ....................
11.519.682
11.343.682
176.000
-0-
7-3/4% Note A-2001
2/15/01 ......................
11.312.802
11.246.402
66.400
-0-
5/15/01 .....................
12.396.063
12.085.083
313.000
-0-
8/154)1
......................
12.339.185
12.182.385
156.800
264.000
8% Note B-2001
.....................................
...........................................
7-7/8% Note C-2001
.....................................
7-1/2% Note 0-2001
4
-
-0-
.....................................
11/15/01 ....................
24.226.102
24.226.102
7-1/2% Note A-2002 .....................................
5/15/02 ......................
11,714.397
11,461.037
6-3/8% Note B-2002 .....................................
8/15/02 ......................
23.859.015
23.822.215
36.800
O-
11-5/8% Bond 2004 ......................................
11/154)4 ............... ..
8.301.806
5.445.806
2.856.000
2.248.000
253.360
-0-
12% Bond 2005 ...........................................
5/154» ......................
4.260.758
3.048.008
1.212.750
4.900
10-3/4% Bond 2005 ......................................
8/154» ......................
9.269.713
8.781.713
488.000
226.400
9-3/8% Bond 2006 ........................................
2/154» .....................
4.755.916
4.755.916
-0-
O-
11-3/4% Bond 2009-14
................................
11/15/14 ....................
6.005.584
2,402.384
3.603.200
968.800
11-1/4% Bond 2 0 1 5 ......................................
2/15/15 ......................
12,667,799
2,841,719
9.826.080
1.345.760
10-5«% Bond 2015 ......................................
8/15/15 ......................
7,149.916
1.836.636
5.313.280
340.800
9-7«% Bond 2015 ........................................
11/15/15 ....................
6.899.859
1.967.059
4.932.800
190.400
9-1/4% Bond 2016 ........................................
2/15/16 ......................
7.266.854
6.023.654
1.243.200
466.600
7-1/4% Bond 2016 ........................................
5/15/16 ......................
18.823.551
18.150.751
672.800
10.400
17,492.368
1.372.080
96.800
7-1/2% Bond 2016 ........................................
11/15/16 ....................
18.864.448
8 -3/4% Bond 2017 ............... ......................
5/15/17 ......................
18.194.169
5.409.849
12.784.320
174.400
8-7«% Bond 2017 ........................................
8/15/17 ......................
14.016.858
7.808.858
6.208.000
113.600
9-1/8% Bond 2018 ........................................
5/15/18 ......................
8.706.639
2.209.439
6.499.200
169.600
1.406,270
7.626.600
42.800
.............................................
11/15/18 ....................
9.032.870
8-7/8% Bond 2019 ........................................
2/15/19 ......................
19.250.798
5.769.198
13.481.600
4.800
8-1/8% Bond 2019 ........................................
8/15/19 ......................
20.213.832
12.913.672
7.300.160
369.920
8-1/2% Bond 2020 ........................................
2/15/20 ......................
10.228.866
4.700.868
5.528.000
24.000
8-3/4% Bond 2020 ........................................
5/15/20 ......................
10.158.883
2.145.443
8.013.440
61.280
8-3/4% Bond 2020 ........................................
8/15/20 ......................
21.418.606
4.444.206
16.974.400
36.000
9% Bond 2018
7-7«% Bond 2021 ........................................
2/15/21 ......................
11.113.373
10.070.173
1,043.200
48.000
8-1«% Bond 2021 ........................................
5/15/21 .................
11.958.888
5.429.928
6.528.960
402.880
8-1/8% Bond 2021 ........................................
8/15/21 ......................
12.163.482
10.412.442
1.751.040
75.200
8% Bond 2021
.............................................
11/15/21 ....................
32.798.394
23.133.969
9.664,425
283.800
7-1/4% Bond 2022 ........................................
8/15/22 ......................
10.352.790
10.292,790
60.000
O-
7-5«% Bond 2022 ........................................
11/15/22 ....................
10.699.626
10.659.626
40.000
O-
658.315.727
498.829.907
159.485.820
8.780.140
Total
...............................................................
'Effective May 1. 1967. securities held in stripped form were etigMe for reconstitution to their unslnpped form.
Note: On the 4th workday of each month a recording of T a M VI wd be avatiabie after 1:00 pm The telephone number is (202) 874-4023. The balances n this table are subject to audit and siAsaquent
adjustments.
department of the Treasury
Washington, D.C
Telephone 2 0 2 - 6 2 2 -2 9 6 0
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:30 A.M. EST
STATEMENT BY OLIN L. WETHINGTON
GOVERNOR FOR THE UNITED STATES OF AMERICA
IDB BOARD OF GOVERNORS
DECEMBER 7, 1992
I am extremely pleased to be here today to continue our
discussion on increasing the resources of the IDB. In September,
at the first Board of Governors meeting on the Eighth General
Capital Increase, we carefully laid out, both programmatically
and financially, our vision for the future of the IDB.
We have been encouraged by the positive response to our proposal.
Our plan envisions a dramatic shift in the focus of the IDB to
allow it a stronger role in advancing broad based social and
economic advancement in the region. Such a shift would require
the IDB to restructure its operations. We have therefore
proposed the following:
oo
50 percent of Bank lending to support economic
opportunity, social sector development, and governance
objectives in all borrowing countries,
oo
30 percent of lending to support traditional
infrastructure projects, with emphasis on the poorer
countries of the Latin American and Caribbean region,
oo
15 percent for policy based lending in support of
further economic adjustment and debt agreements,
particularly in the smaller countries, with social
sector reforms and governance-oriented policy based
lending to help all countries enact regulatory and
administrative reforms,
oo
Consolidation of private sector activities of the Bank
Group, merging the IIC and the IDB into a single
management team to achieve greater operational and
financial impact and efficiency,
oo
Managing the Bank on the basis of a sustainable lending
level (SLL) approach and providing concessional
resources for the poorest countries through an FSO II
account to enable interest support on OC loans and
technical assistance.
In our view, the basic challenge for the Bank continues to be
mobilizing support for a market oriented economic approach with a
NB-2091
-
2-
strong private sector. This can help reduce poverty and ensure
broad based social and economic participation.
I want to take this opportunity to note once again that
exceptional efforts at economic reform undertaken by borrowing
Governments over the past years are bearing fruit: the region as
a whole is growing at rates not seen for a decade; flight capital
is returning and state-owned enterprises are moving into the
private sector, helping to promote fiscal equilibrium and free
market growth.
Lending to Promote Economic Opportunity and Social Equity
Events in Latin America and other regions of the world continue
to underscore the need to ensure that economic growth is broadly
shared by all strata of society. A dynamic program of Bank
support for economic opportunity, social sector development and
governance objectives in all borrowing member countries can play
a pivotal role in solidifying the advances of democracy and
social equity.
We continue to believe that lending to reduce poverty must be
part of a comprehensive Country Strategy. Projects should be
financially sustainable, with a clear means of non-Bank financing
when Bank support ends.
Most importantly, countries must demonstrate their own commitment
to poverty reduction. It is essential that the Bank and member
countries work closely with affected populations in the
selection, design, execution and evaluation of programs. The
Bank's field offices in borrowing countries can play an important
role in working with local groups and affected populations on
project identification, execution and evaluation. We also
believe the Bank and borrowers could benefit by ensuring close
cooperation with other donors, including the World Bank, in
poverty efforts in the region.
Traditional Infrastructure Projects
While economies in the region are showing signs of renewed
economic vitality, in many areas weakness in basic infrastructure
continues to inhibit growth. Investment in infrastructure is
needed, especially in the poorest countries, to relieve
constraints to economic development which perpetuate conditions
of poverty in large segments of the population.
Transportation, communication and energy should be priorities for
the Bank. We believe the Bank can play a well defined role in
these key sectors in poorer borrowing countries which do not have
access to other sources of capital. We propose that
approximately 30 percent of Bank lending be allocated for basic
infrastructure activities during the eighth replenishment.
-3Non-Proiect Lending
Non-Project and sector lending was introduced as a part of the
seventh replenishment to help modernize the economies of the
region and reduce debt burdens. The Bank has made an important
contribution in helping to restructure external debt and
invigorate economies in the region through the Investment Sector
Loan Program (ISLP) and sector loans. With much of the initial
adjustment now underway, we believe the Bank can turn its
attention increasingly to supporting productive investments in
borrowing countries.
However, it is likely that some smaller economies may still need
the support of Bank lending for adjustment and debt agreements.
In addition, there should be a role for sector lending to help
countries enact regulatory and administrative reforms, such as
land titling measures, judicial reforms and social sector
reforms. During the eighth replenishment, we suggest that up to
15 percent of Bank lending be allocated to non-project lending to
carry forward this work.
Integration of Private Sector Support
In our previous discussion, we also outlined a plan for the
integration of the Bank's private sector activities. Within the
Bank Group, numerous programs exist which support private sector
development. These include the IDB's regular OC programs,
principally small projects and global credit loans, the
activities of the Inter American Investment Corporation and soon,
aspects of the Multilateral Investment Fund (MIF)•
The private sector activities of IDB, IIC and the MIF should be
executed through an integrated management team located in the
IDB. The management structures of the Bank and IIC should be
united into a single Department under the supervision of a single
Manager. This would help ensure that the Bank's private sector
activities have access to the appropriate mix of expertise and
funds for a full range of activities from small and micro
entrepreneurs up through privatizing state owned industries.
Private sector activities and plans also should be integrated
into Country Programming Strategies and should operate on an
interactive basis with other Bank activities.
In achieving the merger, we believe the separate legal and
accounting status of the IDB and IIC balance sheets can and
should be maintained. This would allow for separate cost and
income centers and provisioning for higher risk activities where
appropriate. IIC resources could continue to be used for loan
transactions but our goal would be to increase the percentage of
transactions that involve equity.
-4-
Future capital contributions for the IIC can be provided through
contributions from the net income of the Bank itself in addition
to the Bank acting as financial market intermediary for IIC
operations. The Boards of the two institutions could continue to
operate on a legally distinct basis. We believe, however, that
the Boards should meet in joint session, as is the case with the
IFC, IBRD and IDA boards. We recognize that our proposed changes
might cause us to revisit the Charters of the institutions.
Multilateral Investment Fund
Let me add a note on the operations of the MIF in those countries
which meet eligibility requirements. As we indicated at our
previous session, the activities of the MIF, should support the
investment activities of the Bank Group in a tightly integrated
manner. MIF support for policy reforms, worker training, and the
development of small scale entrepreneurs should complement rather
than substitute for Bank activities. Grants and concessional
loans provided by the MIF can be used selectively to augment IDB
and IIC activities, but only in cases where added concessionality
is clearly warranted. Because MIF funds are scarce, they should
be used to address clearly identified constraints in the
investment climate and where there is a high probability for
successful resolution of the problem. It is appropriate that the
MIF resources be allocated in conjunction with the programming
and policy reform processes.
All expenditures, including any administrative expenses, should
be approved directly by the Donors Committee. We consider this
necessary to ensure that a consensus and political support are
maintained for MIF activities and future funding.
Lending to Privatized SOEs
At our last meeting, I indicated, that if other Governors thought
it might be useful, we would be willing to study the possibility
of the Bank setting up a limited program to assist further in
privatization efforts. As you know, some have been concerned
that an absence of credit history or relationship with private
lenders can be a disincentive to a state owned company's taking
the final step to becoming private. To address this point, some
had suggested that the Bank might follow state owned companies
into the private sector for a limited time period, until they
were able to establish relations with private lenders.
If others think such a program would have merit, we would
advocate that it be tightly defined from the outset. To be
eligible, companies should be able to operate independent of
government control and subsidy and be structured to operate on a
fully competitive basis in a modern business environment. We
would envision that eligibility for any such borrowing should be
limited to a two to three year period and that the program should
-5constitute a very small percentage of the IDB's annual lending
and total country exposure. If the Bank did support such a
program, consideration might also be given to requiring the
presence of private cofinancing to ensure that the Bank is
advancing the goal of reliance on private capital.
cofinancina With Private Capital
The Bank must continue to work with countries to attract private
commercial lenders. Encouraging the adoption of policies which
attract capital flows to the region, including foreign direct and
portfolio investment, trade receipts and the return of flight
capital must continue to be a central focus. The Bank can also
continue to work to attract parallel and independent private
financing to Bank operations in ways that do not share the Bank's
preferred creditor status with commercial lenders.
The Need for Concessional Resources —
FSO II
The need for concessional resources is an important aspect of our
discussions. Although many countries have made exceptional
economic strides in recent years, a number of countries in the
region are not yet in a position to accept financing on ordinary
capital terms. Therefore, to support needed macroeconomic
reforms and make the necessary investments in health, education,
and infrastructure, we recognize that the Bank will have to
continue providing lending on concessional terms to the poorest
borrowers.
In its paper assessing the need for concessional resources,
Management suggests a level of $3.1 billion in traditional FSO
lending for 1994 through 1997. For the same period, Management
also has suggested an IFF-assisted lending program for the upper
income D category countries of $1.75 billion.
Our calculations indicate that the proposed level of FSO activity
would require an eleven—fold increase in donor contributions to
the FSO beyond the level provided for the seventh replenishment
period. I think it is fair to say that this simply is not a
realistic proposition, especially given existing global financial
constraints. Therefore, we must continue to look for other new
and creative ways to meet the financial needs of the poorer
countries of the region.
We have proposed a program of leveraging funds collected through
a number of sources. We propose to convert the existing FSO from
a fund which provides direct loans into an FSO—II which provides
interest support on OC loans. As you know, this parallels the
current activities of the Bank's Intermediate Financing Facility
(IFF). Some level of technical assistance could also be funded
through the FSO-II on a grant or loan basis, as appropriate.
-
6-
The FSO-II would be funded by donor contributions, OC net income
transfers, FSO income transfers, FSO loan cancellations and FSO
capital reflows as they become available.
Our assumptions
include a four year pay-in period for donor contributions and a
maximum buy down of five percentage points.
Every $1 dollar of
FSO II support would buy down $4 dollars of OC lending at normal
maturities.
However, we would expect the level of FSO II subsidy
to be scaled back as appropriate to reflect individual country
circumstances.
Our preliminary analysis indicates that we can fund an FSO II
lending program at least as large as the existing FSO lending
program, with room for upward adjustment depending on the level
of income transfers, donor contributions and redeployment of
existing FSO assets.
Clearly, this is an area for further
analysis, and we await the Banks calculations on this issue.
We recognize that by itself, the FSO II would not be able to
offer the length of maturities which the existing FSO offers.
We
also note that some have suggested that ordinary OC maturities
might be extended for social lending.
We agree that it would be
desirable to explore ways of going beyond normal OC maturities
for FSO II supported loans.
However, we believe it would be wise
to extend the maturities for loans on the basis of country need
as opposed to the nature of a project.
In discussing the levels of concessionality associated with Bank
loans, we continue to believe strongly that the management must
exercise flexibility in tailoring loan conditions appropriate to
the income level of borrowing countries.
As many of you know, we
have raised questions about IFF concessionality associated with
recent loans.
The Future Financial Structure of the Bank
Over the past four years bank lending has expanded rapidly —
from a level of under $2 billion in 1988 to the $7 billion dollar
range next year.
This trend in lending growth cannot be
sustained.
In addressing the programs and organization of the
IDB, we see a need for the eighth capital increase to equip the
Bank with capital and financial policies which can serve the
needs of its borrowers for a period of time well into the future.
We also believe that improved procedures of Bank administration
and rules for decision-making by the Board of Directors should
remain in place.
Management's paper on the capital increase analyzes two different
approaches to OC lending under the eighth replenishment: the
traditional approach of front-loaded lending whereby, without a
subsequent capital increase, lending would drop off sharply in
1998.
Under this approach, according to Management estimates,
-
7
-
1ending would rise from a base of $7.1 billion in 1994 bo at
least $8 billion in 1997 and drop back to $3.5 billion in 1998.
The alternative is to manage the Bank on a the basis of a
sustainable lending level (SLL) approach.
Under an^SLL^approach/
the Bank's annual lending levels must on average maintain a basic
equilibrium with the sustainable lending level.
In any given
year, lending may exceed or fall below the sustainable lending
level.
We think it is time to recognize the IDB as a mature
institution which should join the ranks of those operating on the
basis of an SLL.
We are pleased to note that M a n a g e m e n t s
analysis indicates that an SLL approach is workable. In our view,
this is the best way to ensure a predictable flow of development
finance.
We note the various lending and capital requirement scenarios
presented by Management.
We suggest that capital subscriptions
for the eighth increase should be paid in over five years.
The
Bank's analysis indicates that the timing of subscriptions has
little impact on the level of the SLL. We'also recognize the
need to structure a capital increase of sufficient size to allow
the Bank to act as a market intermediary for the IIC.
At an appropriate time, we will be prepared to discuss the
capital requirements of the Bank and its lending program.
Our
conclusions obviously will be driven by a range of variables,
including the lending program envisioned, administrative reforms
and procedures to ensure sound means of project identification,
execution and evaluation.
Allocation of Bank Lending
Clearly, our mutual long term objective is to advance the
economic growth of borrowing countries and improve the living
conditions of their populations to a point where the role of
official lenders is marginal or no longer relevant.
Such a
development has always been this institutions goal.
While full
reliance on private capital is not yet feasible, we must
acknowledge that more of the Banks resources should go to those
countries which do not have access to alternative sources of
capital.
As I mentioned earlier, lending terms, including the
use of MIF money, interest subsidies and FSO II lending must be
tailored with great care to reflect individual country
circumstances.
Lending targets and country lending allocations
are simply not an appropriate basis on which to plan the lending
activities of a modern Bank Group.
In this regard, to ensure that the loan portfolio of the Bank is
adequately protected, we must also move decisively to establish a
system of evaluating country risk and exposure.
This need not
require an extensive system of analysis or staff resources since
much of the necessary information is readily available.
However,
-
8-
the institution of such a system could be extremely valuable in
determining a prudent limit on IDB lending for each country.
Procurement Guidelines
With respect to procurement guidelines, an important element in
our ability to sustain political and financial support for
international institutions is an expectation of fair and
competitive commercial opportunity.
Based on recent experience,
we think it necessary that the Bank redouble its efforts to
ensure that open and transparent procurement rules apply for all
Bank lending.
We recognize that the Bank has made progress but
believe further reforms are needed to ensure fair opportunity for
goods, civil works and consultants for all Bank lending,
regardless of the currency composition of the loans.
Project Evaluation
Accurate evaluation of the effectiveness of Bank projects is now
more critical than ever.
We support the efforts of the Board of
Directors and Management to enhance its evaluation capacity by
integrating two separate evaluation departments into one
comprehensive unit.
We must, build on these efforts to ensure
that the Bank not only evaluates a project in execution but has
mechanisms in place to judge its effectiveness after the project
is completed.
Environmental Programs of the Bank
Protection of the environment is paramount to creating
sustainable development.
The Bank must lead in adapting
development lending to ensure that economic growth can be
sustained over the longer term.
Effective policies are needed to
protect forests, encourage energy efficiency and promote
conservation.
The Bank must also take the lead in the promotion
of renewables and the development of integrated water resource
policies.
CONCLUSION
In conclusion, I welcome this opportunity to review the direction
that the Bank should take as we head into the next century.
We
have laid out an approach for restructuring the Bank's financial
position and are confident that this can be successfully
deployed.
As we indicated in earlier statements, if the
appropriate institutional and policy conditions are in place, the
United States would be prepared explore a healthy increase in
funding for the Bank and FSO II in which we would expect to
maintain our current shares.
Before proceeding further on consideration of funding levels, we
consider it necessary to turn attention to the programmatic
aspects of future Bank lending.
We suggest that the Bank analyze
the successes, failures and lessons learned from its own
experience and that of others as it embarks on new challenges.
We believe Governors should consider a detailed lending strategy
and the technical approach that the Bank would follow in areas
such as poverty reduction and private sector development.
We
must also ensure that country lending programs are based on
broader macroeconomic and structural programs.
In addition, we
suggest that Governors take a careful look at the administrative
practices and expenses of the bank, with a view toward reducing
overhead, increasing efficiency and ensuring that staffing
practices provide the necessary skill mix to achieve our
objectives.
Governors might concentrate on these programmatic issues in the
next and following sessions.
After development priorities have
been determined and Governors are confident that appropriate
administrative and management procedures are in place to ensure
efficient use of funds, as a final step, discussion could return
to the question of funding levels.
The ultimate conclusions on
the size of an OC capital increase and funding for FSO II should
be based on the conclusions regarding these technical and
programmatic issues.
We look forward a full discussion of these issues.
Thank you.
Ja PUBLIC DEBT NEWS
r.G XV
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
December 7, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $12,216 million of 13-week bills to be issued
December 10, 1992 and to mature March 11, 1993 were
accepted today (CUSIP: 912794B37).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.26%
3.29%
3.29%
Investment
Rate_____ Price
3.33%
99.176
3.37%
99.168
3.37%
99.168
$560,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 61%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
30,780
32,832,935
8,295
45,980
42,200
78,210
1,818,600
12,295
9,640
31,485
19,260
778,015
872.935
$36,580,630
Accepted
30,780
10,372,450
8,295
45,980
41,200
42,680
350,900
12,295
9,640
31,485
19,260
377,735
872.935
$12,215,635
Type
Competitive
Noncompetitive
Subtotal, Public
$32,286,085
1.494.990
$33,781,075
$7,921,090
1.494.990
$9,416,080
2,465,655
2,465,655
333.900
$36,580,630
333.900
$12,215,635
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2092
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt, /
FOR IMMEDIATE RELEASE
December 7, 1992
Washington, DC 20239
CONTACT: Office of Financing
DEPT. OF THE TREASURY
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,277 million of 26-week bills to be issued
December 10, 1992 and to mature June 10, 1993 were
accepted today (CUSIP: 912794D43).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.36%
3.38%
3.37%
Investment
Rate_____Price
3.47%
98.301
3.49%
98.291
3.48%
98.296
Tenders at the high discount rate were allotted 13%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
22,450
43,941,795
9,190
27,350
23,635
64,775
1,719,965
15,805
12,565
25,930
13,120
820,035
541.040
$47,237,655
AcceDted
22,450
11,434,390
9,190
27,350
23,635
17,785
51,595
15,705
12,565
25,930
13,120
82,295
541.040
$12,277,050
Type
Competitive
Noncompetitive
Subtotal, Public
$43,108,015
917.840
$44,025,855
$8,147,410
917.840
$9,065,250
2,700,000
2,700,000
511.800
$47,237,655
511.800
$12,277,050
Federal Reserve
Foreign Official
Institutions
TOTALS
N B-2093
FO R IM M EDIATE R EL EA SE
December 7, 1992
Contact:
Claire Buchan
(202) 622-2910
SECRETARY BRADY APPLAUDS ARGENTINE DEBT ACCORD
Treasury Secretary Nicholas F. Brady today applauded the signing of the
comprehensive debt and debt-service reduction agreement reached between Argentina
and its commercial bank creditors.
"The agreement signed yesterday in Buenos Aires between Argentina and
its commercial bank creditors is a major achievement in President Menem’s revitalization
of that nation's economy and underscores the success of President Bush’s program to
reduce third world debt," Brady said.
Argentina’s debt accord addresses nearly $29 billion in commercial bank
debt and overdue payments. It offers banks choices for debt and debt-service reduction,
as envisioned under the strengthened international debt strategy proposed by Secretary
Brady in March 1989. The Government of Argentina estimates effective reduction in
Argentina’s debt of $10 billion. Financial enhancements to support the agreement will
be provided by the International Monetary Fund, the World Bank, the Inter-American
Development Bank, Argentina itself, and Japan.
Argentina has made impressive progress in economic management under
President Menem and Minister Cavallo. This progress has generated renewed capital
inflows, including a return of funds held abroad by Argentina’s own citizens.
Yesterday’s signing of the bank agreement is further evidence of the
strength of the international debt strategy’s case-by-case approach in dealing with the
unique problems of individual countries and their commercial bank creditors.
NB - 2094
FOR RELEASE AT 2:30 P.M.
December 8, 1992
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFÉRING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $24,400 million, to be issued December 17, 1992. This
offering will result in a paydown for the Treasury of about
$13,100 million, as the maturing bills are outstanding in the
amount of $37,506 million (including the 41-day cash management
bills issued November 6, 1992, in the amount of $15,042 million).
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Monday, December 14, 1992, prior to 12:00 noon for noncompetitive
tenders and prior to 1:00 p.m., Eastern Standard time, for
competitive tenders. The two series offered are as follows:
91-day bills (to maturity date) for approximately $12,200
million, representing an additional amount of bills dated
September 17, 1992, and to mature March 18, 1993 (CUSIP No. 912794
B5 2), currently outstanding in the amount of $11,086 million, the
additional and original bills to be freely interchangeable.
182-day bills for approximately $12,200 million, to be dated
December 17, 1992, and to mature June 17, 1993, (CUSIP No. 912794
D5 0) .
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 17, 1992. In addition to the
maturing 13-week, 26-week, and 41-day bills, there are $13,354
million of maturing 52-week bills. The disposition of this latter
amount was announced last week. Tenders from Federal Reserve
Banks for their own account and as agents for foreign and inter
national monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents for foreign and international monetary authori
ties, to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held by
them. For purposes of determining such additional amounts,
foreign and international monetary authorities are considered to
hold $6,962 million of the original 13-week and 26-week issues.
Federal Reserve Banks currently hold $8,212 million as agents for
foreign and international monetary authorities, and $8,778 million
for their own account. These amounts represent the combined hold
ings of such accounts for the four issues of maturing bills. Ten
ders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 5176-1
(for 13-week series) or Form PD 5176-2 (for 26-week series).
NB-2095
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000.
Bids over $10,000 must be in mul
tiples of $5,000.
A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%.
Fractions may not
be used.
A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering.
A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit.
The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate.
A
single bidder should not submit a noncompetitive bid for more than
$1,000,000.
A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount.
A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts.
A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers:
depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934.
Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer.
A separate tender and customer list should be submitted
for each competitive discount rate.
Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids.
The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right*to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date.
Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to' a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities.
Also, maturing securities held on the book-entry records
^^e Department of the Treasury may be reinvested as payment for
new securities that are being offered.
Adjustments will be made
dif^srences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
CONTACT:
RICH MYERS
(202) 622-2930
FOR IMMEDIATE RELEASE
Wednesday, December 9, 1992
TREASURY RELEASES SMALL BUSINESS TAX INITIATIVES
The Treasury Department today released details of a small
business tax reform initiative that would significantly simplify
tax compliance for America's small businesses.
Treasury Secretary Nicholas F. Brady presented the
initiatives to representatives of major small business advocacy
groups during a meeting today.
President Bush first outlined the initiatives on
September 23.
Secretary Brady has long promoted the importance
of small business in job creation and long-term economic growth,
and the Treasury Department has been committed to developing the
new initiatives, which include statutory language, related
explanations and revenue estimates.
The initiatives include six basic provisions:
•
Expensing of $2,500 of start-up expenditures.
•
Expand expensing of equipment costs to $25,000.
•
Alternative minimum tax relief.
The proposal would
virtually exempt small businesses from the application
of the AMT.
Most importantly, AMT depreciation
adjustment and the ACE adjustment are eliminated.
•
Relief from "capitalization" rules.
These complex
rules apply egually to small businesses and Fortune 500
companies.
The proposal frees small businesses from
the requirement to capitalize into inventory indirect
and direct costs of production and eliminates the
requirement to capitalize certain other indirect costs.
•
Inflation adjusted inventory FIFO accounting.
This
proposal provides small businesses with inflation
protection already available to large businesses.
•
Relief from long-term contract accounting rules.
Further details of the initiatives are attached.
NB-2096
####
T H E S E C R E T A R Y OF T H E T R E A S U R Y
W A S H IN G T O N
December 9, 1992
Dear Small Business Advocate:
Because of our mutual interest in issues important to
small businesses, I wanted to share with you details of a small
business tax reform initiative we have recently completed.
I
remain convinced that compliance costs and other
regulatory burdens undermine the efficiency and growth of
America*s small businesses. I believe strongly that a
comprehensive small business tax reform plan would foster job
creation and long-term economic growth, and represent tremendous
progress in simplifying and revitalizing the nation's tax system.
The initiatives were first outlined by President Bush
on September 23. We have remained committed to developing the
initiatives, including the statutory language, related
explanations and revenue estimates.
The initiatives focus on radically simplifying tax
compliance for small businesses. Taken together, the initiatives
eliminate over 160 million hours of annual recordkeeping and
return preparation time by small businesses across the country.
As a result, the initiatives would meaningfully reduce capital
costs and increase economic return for small businesses.
The initiatives include six basic provisions:
•
Expensing of $2,500 of start-up expenditures.
•
Expand expensing of equipment costs from $10,000
to $25,000.
•
Alternative minimum tax relief. The proposal
would virtually exempt small businesses from the
application of the AMT. Most importantly, AMT
depreciation adjustment and the ACE adjustment are
eliminated.
•
Inflation adjusted inventory FIFO accounting.
This proposal provides small businesses with
inflation protection already available to large
businesses.
•
Relief from "capitalization" rules.
2
+
Relief from complex long-term contract accounting
rules.
Despite the modest dollar thresholds for application of
the .initiatives (generally either $1 million or $10 million),
their scope is staggering. Of the nearly 15 million sole
proprietorships, 99.6 percent have annual total receipts of $1
million or less. In fact, over 96 percent of all business
enterprises (including corporations and partnerships) have annual
total receipts of $1 million or less.
In addition to the initiatives presented, a number of
other proposals complete the Bush administration's comprehensive
package of small business tax reforms. They include extension
of the self-employed insurance deduction, the tax credit for
family leave, pension simplification for small businesses, a
reduction of the.tax rate for small corporations, and a broadbased capital gains exclusion for investments in small
businesses. In addition, the Treasury Department recently issued
new regulations for greatly simplified federal payroll tax
deposits.
I hope you find the small business tax reform
initiatives helpful. Best wishes in your continued work to
promote and strengthen America's small businesses.
Sincerely,
Nicholas F. Brady
Enclosures
Scope of Simplification
Initiatives for Small Business
ProDosal
Number of Small
Businesses
Benef itted
Section 179 increase
4.8 million
Start-up costs expensing
950 thousand
AMT exemption
160 thousand
Inflation-adjusted FIFO
5 million
Section 263A and 460
capitalization exemptions
2 million
Reducing Capital Costs and
Complexity for Smali Business
Increase Section 179 amount to $25,000.
•
Present law permits small businesses to expense up to $10,000 of machinery and
equipment purchases per year.
•
Proposal would allow expensing up to $25,000 per year.
•
Available for all small businesses not placing more than $200,000 of equipment in
service in a year. Phase-out of benefit by $1 for every $1 of additions above
$200,000. Total phase-out if small business places $225,000 of additions in service
in a year.
Permit expensing of $2,500 of start-up expenditures.
AMT relief for small businesses.
•
Provides relief from business-related AMT preferences and adjustments for qualifying
small corporations and unincorporated small businesses.
•
Several adjustments are eliminated, including the depreciation, depletion, and "ACE"
adjustments.
•
An activity is a small business activity if the business (considering related party
aggregation rules) has never experienced a 3-year period in which average annual
gross receipts exceeded $1,000,000.
Inflation-adjusted FIFO inventories computation for small businesses.
•
The proposal would permit taxpayers to elect the FIFO (or first-in first-out) method,
and would increase each year’s cost of goods sold deductions by an inflation
adjustment ("inflation adjusted FIFO ").
•
Large businesses currently have protection from inventory inflation through use of the
LIFO method (not easily applied by small business).
•
Proposal would apply to taxpayers with not more than $10,000,000 of average gross
receipts in three preceding years.
Repeal "uniform capitalization rules" for small businesses.
•
Present law imposes uniform set of cost capitalization rules across substantially all
business production activities.
Rules require small businesses engaged in production activities to examine all
materials, labor, and overhead costs incurred and to allocate (and capitalize) a
portion of these costs to ending inventories each year.
•
Proposal would exempt all small businesses with not more than $10,000,000 of
average gross receipts in prior three years from requirement to capitalize overhead
costs under the uniform capitalization rules. These businesses would be able to
capitalize overhead costs under more liberal capitalization rules generally mirroring
GAAP requirements.
Provide additional cost capitalization simplification for small businesses.
•
Present law subjects businesses with not more than $1,000,000 of average gross
receipts in three preceding years to the same "uniform capitalization rules" that apply
to Fortune 500.
•
Préposai would exempt these very small ("mom and pop" type) producers (including
lor term contractors) from any requirement to capitalize indirect overhead costs.
Repeal "percentage of completion method" ar
long-term contractors.
•
"uniform capitalization rules" for small
Prior law (pre-1986 Act) generally allowed use of completed contract method.
Under this method, all revenues and costs associated with long-term contract
are deferred and recognized only upon completion of contract.
All costs not allocable to long-term contract are currently deductible, rather
than capitalized to contract and deferred.
•
Present law generally requires long-term contractors to use percentage o f completion
method (PCM).
Under PCM, all costs (i.e .. capitalized costs) associated with a contract are
deductible in year in which incurred, and a percentage of estimated contract
revenues are included in income as well.
•
Present law requires application of uniform capitalization rules (described above) to
small long-term contractors.
•
Proposal would exempt all contracts of small long-term contractors (with not more
than $10,000,000 of average gross receipts in prior three years) from overhead cost
capitalization under the uniform capitalization rules and from PCM requirements.
INCREASE CURRENT DEDUCTION FOR CERTAIN INVESTMENTS
FROM $10,000 TO $25,000
Current Lav
The cost of business or income producing property that is
used for more than one taxable year generally must be deducted
over the useful life or recovery period for the property in
determining taxable income.
Under section 179, however, a
taxpayer may elect to treat as an expense and deduct, in the year
that eligible property is placed in service, a limited amount of
the cost of the property.
Eligible property generally includes
tangible personal property and certain other property, and
generally excludes buildings and structural components.
The total cost that may be deducted currently under section
179 is subject to two limitations, the investment limit and the
taxable income limit.
These limitations apply both to
partnerships and each partner and to S corporations and each
shareholder.
Any cost not deducted under section 179 may be
depreciated.
The amount deducted under Section 179 is subtracted
from the basis of the qualifying property.
This adjusted basis
is used to determine depreciation deductions.
Reasons for Change
An increase in the section 179 deduction is necessary to
encourage purchases of new machinery and equipment, and thereby
promote capital investment, modernization and a more rapid
economic recovery.
The current limit on the section 179
deduction creates complexity by requiring business with
qualifying investments to depreciate the cost of the investment
in excess of the investment limit.
Proposal
The maximum allowable deduction under section 179 would be
increased from $10,000 to $25,000.
For each dollar of cost of
section 179 property in excess of $200,000 in a taxable year, the
$25,000 maximum would be reduced by one dollar.
Thus, no section
179 expense deduction is allowed when the cost of the eligible
property exceeds $225,000.
Effects of Proposal
The proposal would reduce the cost of capital and increase
cash flow, thereby providing an incentive to increase investment.
It also would simplify tax reporting for certain small businesses
that invest no more than $25,000 in eligible property for the
taxable year.
The limit on eligible investment ensures that the
proposal primarily benefits smaller businesses.
Revenue Estimate
1993
Increase section
179 deduction
Fiscal Years
1994 1995
1996
1997
(Millions of Dollars)
-1,600 -2,600 -1,800 -1,400 -1,000
2
1993-97
-8,400
ALLOW IMMEDIATE EXPENSING OF NEW BUSINESS START-UP COSTS
Current Lav
Under current law allowable business start-up expenditures
must be capitalized over at least 60 months (five years). Start-up
expenditures include amounts paid or incurred with the acquisition
or creation of a trade or business which precede the day the
business becomes active.
Excluded from the capitalization rule
under current
law are interest,
taxes,
and research and
experimentation expenditures.
Reasons for Change
The requirement to capitalize business start-up costs creates
a disincentive to invest or engage in small business activities.
Direct expensing of a portion of the costs connected with a new
business will lower the cost of capital associated with a start-up
business and encourage job creation.
Proposal
Effective for expenditures made after December 31, 19.92, the
immediate write-off of up to $2,500 would be permitted to a
qualified taxpayer for front-end costs of organizing a new small
business that would otherwise be subject to capitalization.
A
qualified taxpayer would expect or know that the new small business
would have gross receipts of less than $500,000 in its first full
year of operation.
Effects of Proposal
The proposal would encourage start-up activities by lowering
the after tax cost of starting up a small business.
Revenue Estimate
Fiscal Years
1993 1994 1995 1996 1997 1993-97
(Millions of Dollars)
Allow $2,500 expensing for
new business start-up costs
-94
3
-138 -106
-72
-37
-448
EXEMPT SMALL BUSINESSES FROM ALTERNATIVE MINIMUM TAX
current Law
Under current law, a corporation is subject to an alternative
minimum tax
(AMT) which is payable to the extent that the
corporation's tentative minimum tax exceeds its regular income tax
liability.
The tentative minimum tax generally equals 20 percent
of
the
corporation's
alternative
minimum
taxable
income.
Alternative minimum taxable income is the corporation's taxable
income increased by its tax preferences and modified for certain
adjustments that redetermine the tax treatment of certain items to
eliminate the deferral of income resulting from the regular tax
treatment of those items. A corporation is entitled to reduce its
regular income tax liability by a credit (the minimum tax credit)
which is generally based on AMT paid in preceding years.
Unincorporated businesses and S corporations are not subject
to AMT, but the individual alternative minimum tax may apply to
their owners on preferences and adjustments deriving from the
business.
The tax rate on an individual's alternative minimum
taxable income is 24 percent.
Reasons for Change
There is concern that the complexity of the corporate and
individual AMTs impose a significant burden on small businesses.
Small businesses are less likely to have the sophisticated
accounting systems and expertise that are important in complying
with the AMT.
In addition, because of their size and limited access to
equity and debt financing, small businesses are likely to face
higher costs of capital than larger firms.
The individual and
corporate minimum taxes, which raise the cost of capital, may
discourage new investments by small businesses.
Proposal
For any taxable year during which a taxpayer is a "qualified
small business taxpayer," certain business-related adjustments and
preferences with respect to any "qualified small business activity"
would not be taken into account for any purposes in computing
alternative minimum taxable income.
A qualified small business
taxpayer is any taxpayer engaged in a qualified small buv.ness
activity.
A qualified small business activity with respect to a
taxpayer includes any trade or business activity conducted by an
individual, sole proprietorship, partnership, or corporation for
which a $1,000,000 gross receipts test is satisfied in all prior
taxable years beginning after December 31, 1992.
4
A person or entity meets the $1,000,000 gross receipts test
for a prior taxable year if the average annual gross receipts of
such person or entity for the 3 taxable-year period ending with
such prior taxable year does not exceed $1,000,000.
Aggregation
and related party rules similar to those in section 448(c) would
apply in making the average annual gross receipts determination.
Business-related adjustments and preferences that would not
taken into account with respect to a qualified small business
activity include: (1) the adjustments for depreciation, mining
exploration and development costs, long-term contracts, pollution
control facilities,
installment sales on certain property,
circulation and R&E expenditures, and adjusted current earnings
(ACE); and (2) the preferences for depletion, intangible drilling
costs, bad debts, and accelerated depreciation. Other preferences
and adjustments, including those viewed as personal or investmentrelated, would still be taken into account under the proposal.
Effects of Proposal
The proposal
would
simplify
tax accounting
for
both
incorporated and unincorporated small businesses and their owners.
It would also reduce the cost of capital for small business.
Revenue Estimate
Exempt small
businesses from
alternative
minimum tax
1993
1994
-202
-303
Fiscal Years
1995 1996 1997 1993-97
(Millions of Dollars)
-316
5
-364
-433
-1,617
ALLOW SMALL BUSINESS TO ELECT
INFLATION-ADJUSTED FIFO INVENTORY RULES
current Law
The two inventory cost flow assumptions generally used by
taxpayers in determining their cost of goods sold and taxable
income are the FIFO and the LIFO methods.
Under the FIFO (or
"first-in first-out") method, it is assumed that inventories are
disposed of in the order in which they are produced or acquired by
the taxpayer.
Taxpayers are also permitted to use the LIFO (or "last-in
first-out") method, under which it is assumed that the last goods
produced or acquired by the taxpayer are the first goods sold by
the taxpayer in any taxable year. Thus, LIFO reflects income from
inventory sales more accurately during periods of inflation than
FIFO, thus resulting in a better matching of current costs of goods
sold with revenues. The LIFO method does not, however, permanently
eliminate the effects of inflation, but only defers those effects
generally until such time as the taxpayer reduces or liquidates its
inventories.
Reasons for Change
In periods of inflation, the FIFO method may result in charges
to cost of goods sold that are not reflective of the actual
economic costs that the taxpayer had to incur to acquire or produce
the goods in the current year.
Because of the complexity of LIFO
accounting, and because section 472 of the Code requires that a
taxpayer using LIFO for tax purposes must also use LIFO for
financial accounting purposes, many smaller taxpayers hesitate to
use the LIFO method.
Additionally, the LIFO method has been the
source of much conflict between taxpayers and the IRS, given the
wide divergence of specific LIFO inventory practices.
Proposal
The proposal would permit taxpayers with gross receipts under
$10 million to elect to use an inflation-adjusted FIFO method.
Taxpayers making this election would continue to use the FIFO
method as permitted under present law, but inventories would be
indexed (and cost of goods sold would be increased) using inflation
adjustment factors based on the Consumer Price Index.
Effects of Proposal
The adoption of this proposal would provide a much-needed
alternative to the LIFO method for small taxpayers who are unable
to understand the LIFO computations, unwilling to use the LIFO
method for GAAP purposes, or unwilling to subject themselves to
potential disputes with the IRS over the use of the LIFO method.
6
The inflation-adjusted FIFO method would result in a permanent
increase in the cost of goods sold (and accordingly a permanent
decrease in taxable income) for small businesses with inventories.
The resulting taxable income measure would more closely reflect
real economic income.
Revenue Estimate
Allow small
business to elect
inflation-adjusted
FIFO inventory rules
1993
Fiscal Years
1994 1995 1996 1997
(Millions of Dollars)
1993-97
-267
-543
-2,558
7
-563
-582
-603
EXEMPT SMALL BUSINESS FROM THE UNIFORM CAPITALIZATION RULES
Current Lav
Producers of property generally may not deduct currently the
costs incurred in producing property.
In order that income be
measured accurately, such costs must be capitalized and recovered
through an offset to sales receipts (if the property is produced
for sale) or through depreciation deductions (if the property is
produced for the taxpayer's own use in a business or investment
activity).
Section 263A of the Code generally provides a uniform set of
rules that governs the capitalization of costs associated with
either the purchase and resale of inventories, or the production of
real or tangible personal property (whether produced for sale or
for use in the taxpayer's business).
Section 263A requires the
capitalization of both direct and indirect costs associated with
these resale and production activities.
Capitalizable direct costs include direct material costs and
direct labor costs.
Indirect costs that must be capitalized
generally include amounts incurred for such items as maintenance
and repair, utilities, equipment rentals, tools and equipment not
capitalized, supervisory labor, pension and other employee benefit
expenses relating to both current and past service, indirect
materials, quality control, non-income taxes, depreciation (to the
extent allowed under the Code), depletion (whether or not it is in
excess of cost), rework labor,
scrap and spoilage,
bidding
activity,
engineering and design activity,
production—period
interest, and other general and administrative activities to the
extent such costs are properly allocable to particular activities.
The regulations provide guidance regarding acceptable methods by
which specified capitalizable costs may be allocated to specific
production or resale activities.
Costs that are not required to be capitalized with respect to
production
or resale activities
include marketing,
selling,
advertising, and distribution costs, bidding expenses on contracts
not awarded to the taxpayer, research and experimental expenses,
losses deductible under section 165 of the Code, depreciation on
temporarily idle equipment, income taxes, strike costs, repair
expenses that do not relate to the manufacture or production of
property, and general expenses that are not incurred by reason of
a particular production activity (e.g., those costs associated with
general business planning, general financial accounting, internal
audit, tax return preparation, shareholder and public relations,
and general economic analysis and forecasting).
8
Section 263A does not apply to inventories acquired for resale
by small businesses with gross receipts of $10 million or less
(computed as a three year moving average).
Reasons for Change
Generally accepted accounting principles (GAAP) used for
financial reporting purposes require less extensive capitalization
of.indirect costs than do the section 263A rules. Because of the
disparity between GAAP and tax treatment, several costly and
burdensome cost allocations are required solely for the purpose of
computing tax liability.
This accounting burden could be
eliminated for those least able to deal with the compliance burden
by expanding the current section 263A exemption for small business
resellers to all small business producers.
Proposal
The proposal generally would provide that the uniform
capitalization rules do not apply to any taxpayer with gross
receipts of $10 million or less.
In addition, smaller taxpayers
with gross receipts of $1 million or less generally would be
required to capitalize only direct costs attributable to production
or resale activities.
Effects of Proposal
An exemption from the section 263A uniform capitalization
rules for small producers would allow these taxpayers to capitalize
costs under the more liberal set of capitalization rules in
existence prior to the enactment in 1986 of section 263A, and would
reduce the disparity in the tax treatment between small business
resellers and other small businesses.
Small producers generally
would be subject to the full absorption method regulations
contained in section 1.471-11.
Those regulations do not require
the allocation and capitalization of several cost categories for
which cost capitalization is required under section 263A.
Revenue Estimate
1993
Exempt small
business from the
uniform capitali
zation rules
Fiscal Years
1994 1995 1996 1997
(Millions of Dollars)
-18
-46
9
-51
-54
-55
1993-97
-224
EXEMPT SMALL BUSINESS FROM THE LONG-TERM CONTRACT RULES
current Lav
Section 460 generally governs the tax accounting treatment
cf long-term contracts. Under current law, taxable income from
such contracts is generally determined under the percentage of
completion method (PCM) of accounting. Under this method, the
contractor is entitled to deduct all costs allocated to the
contract in the year in which they are incurred, but must
recognize income based on an estimate of the revenues to be
realized on the contract attributable to the year's activities.
This estimate is generally determined by multiplying the expected
contract price by the ratio of actual costs incurred during the
year to the total expected costs of the contract.
Taxpayers must generally perform a recomputation at the end
of the contract, based on actual contract price and actual
contract cost data, of the income that would have been recognized
in each taxable year of the contract if actual rather than
estimated data were used in such years. This recomputation,
known as the look-back method, results in either an interest
charge to the taxpayer or an interest payment to the taxpayer
based on the underpayment or overpayment of taxes in prior years.
All costs which directly benefit or are incurred by reason
of the long-term contract activities of the taxpayer are
allocated to those contracts. These costs are identified in
regulation section 1.451-3 and are similar to those costs
required to be capitalized under the uniform capitalization rules
of section 263A of the Code.
Statutory exemptions from section 460 exist for certain
construction contracts. Some of these provisions allow the
exempted taxpayer to use the completed contract method (CCM) of
accounting, while others require a combination of CCM and PCM.
For example, a construction contract which is estimated to be
completed within a two-year period is entirely exempt from the
PCM requirement, provided that the contractor has average annual
gross receipts of $10 million or less (as computed over the prior
three year period).
Under CCM, all revenues and costs allocated to the long-term
contract are deferred, and are recognized only upon completion of
the contract. The costs allocated to a long-term contract are
determined under rules that require both direct and indirect
costs of the long-term contract to be capitalized to the contract
and deferred.
10
Reasons for Change
Accounting for long-term contracts under the section 460
percentage of completion (PCM) method results in a number of
complexities for small contractors.
Proposal
The proposal would expand the current exemption from section
460 requirements to any long-term contract being performed by a
contractor with average gross receipts under $10 million. In
addition, contractors with gross receipts under $1 million would
only be required to allocate and capitalize direct contract costs
under the completed contract method (or under an inventory method
of accounting).
Effects of Proposal
An exemption from the section 460 rules would allow small
contractors to use the completed contract method (CCM) for
computing taxable income and generally would not require the
allocation of costs to contracts under the uniform capitalization
rules.
The proposal would lessen the accounting burden on small
business contractors. Eliminating this burden for small business
could benefit emerging high-technology companies doing long-term
contract work and encourage the production of new technologies by
such small businesses.
Revenue Estimate
1993
Exempt small
business from the
long-term contract
rules
Fiscal Years
1994 1995 1996 1997
(Millions of Dollars)
-8
-12
11
-11
-9
-4
1993-97
-44
*•' U U j J 0D
EMBARGOED UNTIL DELIVERY
Expected at 12:00 Noon
AS PREPARED FOR DELIVERY
DECEMBER 10, 1992
Contact: Rich Myers
(202) 622-2930
REMARKS BY
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COLUMBIA UNIVERSITY SCHOOL OF BUSINESS
DECEMBER 10, 1992
Thank you, Glenn [Hubbard], and thank you all for coming
today.
I
would like to share some thoughts with you about
transition — but not the transition that is capturing headlines
nationally.
The political transition that we read about every
day is very important.
But we should not lose sight of the
profound and permanent transition to a global economy that we are
undergoing.
It is totally reconfiguring our world.
To be sure, these twin transitions are not entirely
distinct.
The political transition will almost certainly have
significant implications for the economy.
But while the global
economic transition has come to pass with little fanfare, it will
inexorably shape the future of our economic and political life.
Simply stated, we live in a world in which time has
collapsed and national boundaries have less meaning.
Modern
technology gives the private sector — businesses and individuals
-- remarkable freedom to react to the policy decisions of
individual governments.
Investors are able to move hundreds of
billions of dollars, deutsche marks or yen around the world at
the touch of a button — literally, in seconds — to wherever
they are safest and will earn the highest return.
Businesses
both large and small can put productive capacity on line in
whatever part of the globe is most competitive.
Old
relationships have changed; the Taiwanese now invest in China,
while Americans invest in Russia.
And what is more, to resist
this change by erecting barriers or penalties is to define the
limits of a country’s future competitiveness and standard of
living.
NB-2097
This new world in which we operate affects not only our
private lives, but also public policy.
The new Administration
will face the paradox that the American Government not only
governs — but in a larger context, it is itself governed.
Almost two-thirds of global equity market capitalization now lies
outside of the United States.
The architects of our public
policy must be responsive to the needs of a national economy that
is bound by a complex web of relationships to a global market —
a market that passes final judgment on each and every major
policy decision.
The Bush Administration found many serious obstacles in the
path to national competitiveness.
We faced these problems
squarely — and we fixed many of them — even though the
President clearly knew that some of the necessary solutions would
cause short-term economic and political pain.
Our objective was
to create conditions that would permit the private American
economy to respond best to the new global reality —— and we made
substantial progress.
The country will benefit from the
Administration's efforts.
For example:
o
Many of the deep, economically and politically painful
defense cuts permitted by the end of the Cold War and
resulting massive demobilization have been taken.
o
Unprecedented free trade agreements with Canada and
Mexico have been put in place, creating an
extraordinary engine for future economic growth.
o
The savings and loan mess has been cleaned up, the
decade-old Third World debt crisis is over, and U.S.
banks are now more profitable, competitive, and better
positioned to support economic growth.
o
The 1990 budget agreement — although politically
controversial and ultimately compromised — did slow
the growth of the federal budget deficit.
The next Administration can build upon the foundation we
laid.
The economy grew at an annual rate of 3.9 percent during
the quarter that ended on September 30 of this year, capping six
consecutive quarters of growth.
During the first nine months of
this year, our economy grew at an average rate of 2.8 percent —
which is higher than the Nation's average economic growth rate
for the past 25 years.
And the list goes on.
Durable goods orders jumped by 3.9
percent in October, while the index of leading economic
indicators posted a broad-based increase in the same month.
Last
month the National Association of Purchasing Management index
shot up by 4.4 percent.
And just last Friday we learned that the
civilian unemployment rate fell to 7.2 percent in November — the
fifth consecutive monthly decline — and the number of nonfarm
payroll jobs rose by 105,000 in November — the third consecutive
2
monthly increase.
A foundation for future growth is certainly in place.
But
while building upon it, the next Administration must recognize —
as we did — the basic reality of modern politics: which is that
even the most powerful Government in the world must respect the
practical constraints imposed by the new global economy.
The
market will not yield to misguided governmental directives and
stimuli, whatever label they may carry.
It will run roughshod
over them.
As we have seen in the case of long-term interest
rates — they simply will not come to heel without federal
deficit reduction.
A powerful central bank can spend $25 billion
in one afternoon to save its currency from market discipline, and
still fail to preserve its status in the European Monetary
System's Exchange Rate Mechanism.
This reality will shape any future economic program.
If the
Government chooses to stimulate the economy by increasing federal
spending and widening the deficit, it will aggravate inflationary
expectations and threaten the long-term fundamental health of the
economy.
Interest rates, foreign exchange rates and other market
forces ultimately will demand either closure of the budget gap,
or the payment of a high economic price.
One does not have to peer far back into history for
verification of this.
It is no coincidence that in the fall of
1987 — only days after Congress and the Administration postponed
Gramm-Rudman discipline in the midst of a budget stalemate — the
stock market fell 508 points in a single day, destroying over 22
percent of that national storehouse of value.
To restore
stability, a budget deficit reduction agreement was salvaged a
few weeks later, and the market eventually recovered.
To be
sure, other factors may have contributed to the market break.
But one lesson is clear: the markets will always be there to
remind policy makers that current consumption — in the form of
government deficit spending, by whatever name — comes at the
expense of future private savings, investment, competitiveness
and economic growth.
And do not think that the Government can plug the budget
hole with burdensome tax increases that reduce returns on
investment in America.
In our interconnected global economy,
investors will vote with their feet, quite simply, by redirecting
capital to a more hospitable place.
In the end, jobs will be
lost, productivity will decline, and the Nation's competitive
position will erode.
Moreover, the American people should not be forced to choose
between larger deficits and oppressive taxes — particularly when
there is a third way.
In the end, our leaders will not escape
the politically difficult course dictated by the new freedom
granted to markets: that is, to achieve economic growth we must
3
fix the federal budget deficit by controlling spending.
are no real alternatives.
There
The genie of the global marketplace is out, and there is no
way to force it back into the bottle.
The Government no longer
has the luxury of making mistakes and fixing them at its leisure.
Today's markets — which are sharper technologically than ever
before — move too guickly.
Attitudes must change.
I remember
about two years ago a powerful Congressional committee chairman
said to me that we did not need the spending discipline of GrammRudman — that if the markets broke, we could fix it later.
But
the recent events in the European Exchange Rate Mechanism
demonstrate the costliness of this attitude.
Financial markets
can overwhelm even the most determined government — even, as I
mentioned earlier, a government willing to spend $25 billion in
an afternoon to pump up its currency.
We must recognize the
constraints — and opportunities — presented by the new economic
world.
In my view, the most important, specific challenges that the
next Administration will face are ensuring: free trade, economic
coordination, regulatory relief, fiscal responsibility and tax
reform.
Let me comment on each of these.
Free Trade
We must continue the spectacular success the Bush
Administration has had over the last four years in opening free
trade and growing markets for our exports.
U.S. merchandise
exports have increased by about $195 billion over the last five
years.
Exports now support one in six American jobs — up from
one in eight only five years ago.
^This trend will continue in the new global economy.
Statistics show that we are winning the competition for exports:
since 1986, the value of U.S. merchandise exports has risen over
three times as fast as Germany's and nearly five times the rate
of Japan's.
At the same time, like a rising tide that lifts all ships,
free trade raises the living standards of people in other
countries, creating new markets for our domestic goods and
services.
Protectionism — as it has in the past — can only
backfire, leading to retaliation, loss of American jobs and
global economic decline.
Managed trade is also a form of
protectionism for those industries on which the Government
decides to bestow its largesse — usually, incidentally, at the
consumers' expense.
And those decisions will inevitably be wrong
because the Government — unlike the market — allocates
resources on the basis of politics, not economic merit.
4
We need simply to ensure that private enterprise has room to
flourish. For example, The North American Free Trade Agreement
— NAFTA — is an unprecedented opportunity to link our economy
to a single market of over 360 million people with a total output
of $6-1/2 trillion. President Bush, Prime Minister Mulroney and
President Salinas will sign NAFTA in just seven days — and that
agreement should be implemented promptly and without regressive
modifications.
Global Economic Coordination
Economic policy must be coordinated, but not as a separate
"domestic” matter. There must be a procedure for assimilating
the "domestic” and "foreign" elements of economic policy making - and recognition that there is no concrete distinction between
the two realms.
In a global marketplace — in which the effects of each
country*s policies ripple throughout the international system —
the contribution of the Treasury Secretary in shaping worldwide
macroeconomic policy through the G-7 coordination process is an
important component of domestic well-being. Consistent with the
importance of G-7 coordination, I believe that world economic
summits should be returned to their original purpose — to
coordinate economic policy. The summits should be freed from the
carnival atmosphere and array of unrelated social, diplomatic and
political issues that now dominate them. While these other
issues are important, there are ample opportunities to discuss
them elsewhere.
Ideally, G-7 Finance Ministers should manage the
international economic coordination process and settle most
outstanding issues on an ongoing basis. The Heads of State of
the G-7 nations should then meet annually at an economic summit
to resolve those economic issues that only they can settle. This
more limited format would make the economic summits significantly
more effective.
Regulatory Relief
Efforts to achieve global economic coordination will be
wasted if our Nation's businesses are left struggling through a
morass of counterproductive regulations. We must remember that
in a world-wide marketplace, businesses and investors are subject
to far fewer constraints than in the past when deciding where to
locate new jobs. Superfluous regulation saps our competitive
position, and must be resisted.
Excessive regulation is particularly menacing in the
financial sector, because banks and other intermediaries are
critical to the funding of economic growth. Simply stated, the
Congress has been unwilling to restore a sense of balance to
5
banking regulation. A climate of fear among examiners and
bankers has placed a regulatory straitjacket on the industry that
inhibits prudent lending.
Moreover, because of the multiplicity of banking
regulators — at least four agencies — there is no way to affix
responsibility and accountability. Our regulatory structure was
designed for a time long since past. No other major
industrialized country surrenders and disperses authority over
its banking system in this manner, so that responsibility is
obfuscated and no one is in charge. The next Treasury Secretary
should be given enhanced authority over the regulatory system to
establish the kind of banking system that will reduce the cost of
credit and benefit the entire economy.
Fiscal Responsibility
As you all know, the productive capacity of a nation
determines the standard of living of its people — and America
has the most productive labor force and economy in the world.
You heard me correctly: despite waves of rhetoric to the
contrary, studies show that America in the last four years has
increased its productivity edge over its trading partners,
including Germany and Japan.
But we live in a competitive world, and in order to maintain
a rising living standard the task for America is to continue to
increase its productivity more rapidly than its trading partners.
And since productivity is measured by output per worker, the best
way to increase productivity is to increase investment in human
and physical capital — to give our workers the tools and skills
they need to compete. Consequently, to maintain a rising
standard of living we must reduce short-term consumption and
increase long-term private investment.
Now, when the Federal Government taxes in order to spend, it
feeds current consumption at the expense of private savings and
investment. Worthy as individual programs may be, the fact is
that the vast bulk of federal spending is pure consumption. And
even when the Government "invests” — in, for example,
infrastructure — it seldom does so as efficiently as the private
sector. No number of intellectuals dancing on the head of a
five-year industrial plan can hope to do better. Other countries
ran that experiment for us, and it failed. Countries in Latin
America and Eastern Europe are increasing freedom and opportunity
by heading in precisely the opposite direction. They proved that
governments don't create lasting jobs — they don't know how.
Individual entrepreneurs and businesses create jobs.
6
Consequently, federal deficit reduction is needed in order
to raise private investment, economic productivity and living
standards. Federal spending must not only be controlled — but
reduced.
The question really is whether a Democratic Congress has the
courage to give a Democratic President what the American people
want and the country so desperately needs: an effective line item
veto that would enable the Executive Branch to curb excessive
spending by the Legislative Branch. It is simple: a line item
veto would make the President-elect — and all future
Presidents — more effective Chief Executives.
In addition, a cap on the exponential growth of mandatory
spending is absolutely essential. This portion of the budget —
which is the largest by a substantial margin — is where the bulk
of spending growth continues unabated. So make no mistake: you
cannot attack the real roots of our deficit problem without
taking on mandatory spending.
Tax Reform
One thing is certain: the answer to our deficit problem does
not lie in raising tax burdens on investment. Our current system
of taxation is already seriously biased against saving and
investment and in favor of consumption. Savers have little
incentive? they are taxed when they earn money and taxed again if
they choose to invest for the future. Corporate profits are
taxed twice — once to the corporation and once to shareholders
when distributed as dividends. Capital gains — even inflationrelated gains — are taxed as heavily as ordinary income. Debt
is encouraged. Finally, the needless complexity of the tax code
imposes a tremendous cost on businesses and individuals.
There are substantial steps we could take to improve the
current system. But if we truly want to encourage savings and
investment, we need to practice realism — not demagoguery. It
makes no sense — out of a pretended sense of "fairness” — to
target IRAs solely to people who can afford to save very little.
The meaningful distinction in the tax policy debate is between
savers and non-savers. When considered from this perspective,
measures like broadly available IRAs, reduced capital gains taxes
and the Treasury’s recommendations to eliminate the double
taxation of corporate profits are clearly the most sensible ways
to increase private saving and investment, and hence ensure
prosperity for all Americans.
These steps to improve the current tax system would be
enormously beneficial. But in my view, more should be done. The
plain fact is that in a global marketplace in which investors are
free to choose where to put their money, our tax system
fundamentally discourages investment in the future. Rather than
7
continuing to rearrange the deck chairs on a sinking ship, the
keel of our tax system should be raised and completely
overhauled. We should encourage saving and investment rather
than consumption, and reward long-term rather than short-term
thinking.
At this time of political change, we are provided with an
opportunity for dramatic tax reform — but reform could threaten
American pocketbooks. Certain principles should be perfectly
clear before we proceed.
o
Most important is the principle that tax reform must
not be used as a Trojan Horse for imposing a greater
tax burden on businesses and individuals. The only
legitimate tax reform is one that creates prudent
incentives and reduces the compliance burdens of
taxation without diverting more money from the private
economy to Government coffers.
o
Before embarking on the potentially dangerous course of
tax reform, the public must be protected. As a
prerequisite to the reform process, a two-thirds
majority vote by Congress should be required in order
to impose any net tax increase.
With these principles as a back-drop, it is appropriate to
begin exploring options for reform. Many groups have started
this process. These efforts are bipartisan; the issues are too
difficult — and far too important — to become lost in the midst
of political struggles.
For our part, we believe that the place to begin is by
asking the right question: Is there an alternative to the
current federal tax system that is both revenue- and
distributionally-neutral, and that would:
o
generate a substantial increase in private sector
saving and investment,
o
materially advance our competitive position in the
world economy, and
o
dramatically reduce taxpayer burden and administrative
costs?
The answer is: "Yes." The Treasury Department is releasing
today a White Paper describing "An Option for Fundamental Reform"
which meets all of these criteria. Under this option, more than
50 percent of all individual taxpayers would no longer be subject
to the income tax. In addition, the rules for business taxpayers
would be radically simplified.
8
At the same time, to maintain revenue, the tax system would
be restructured to reduce distortions of private saving and
investment decisions by:
o
eliminating the double taxation of corporate profits,
o
repealing the corporate alternative minimum tax, and
o
reforming the rules for taxing multinational business
activities.
This option would achieve a substantial reduction in the
Governments reliance on income tax revenues through the
enactment of a border-adjusted business transfer tax, with
exemptions for small business. The base of this business
transfer tax is sales less purchases from other firms. This
system would finance fundamental reform of the income tax without
distorting financial and investment decisions. A greatly
expanded tax credit would also be included to ensure that the
reform option would be at least as progressive as our tax system
today.
More important than the details of the option we have
developed is the point that it demonstrates: which is that the
possibility for fundamental reform is very real. Of course,
other approaches may well be preferred? other approaches are —
and should — emerge from the political process. Our hope is
that we have made a contribution to the effort to stop tinkering
at the margin, and to confront the need for fundamental reform in
meeting the challenges we face as a Nation as we enter the 21st
Century.
In closing, I recognize that transitions always create
uncertainty — but they also create hope for the future.
Political leaders change from time to time, and the competitive
landscape is perpetually shifting. But one thing is constant:
the American people are still the most creative, entrepreneurial
and optimistic people in the world. Give them free rein and ho
unfair burdens and they will meet every new challenge the global
economy has in store. It is my hope — and belief — that the
next American Century will be as bright and brilliant as the
last.
9
LIBRARY ROOM 5310
■JoL 1333 0 0 I 9 6 3
R E S T R U C T U R IN G T H E U .S . T A X S Y S T E M
F O R T H E 21st C E N T U R Y
AN O P T IO N F O R F U N D A M E N T A L R E F O R M
U.S. Department of the Treasury
Office of Tax Policy
December 10, 1992
m
I.
Introduction
This paper outlines an option for discussion for fundamental reform of the Federal tax system.
At the request of Secretary Brady, the Office of Tax Policy addressed the following question:
Is there a revenue- and distributionally-neutral alternative to the current Federal tax
system that would generate a substantial increase in private-sector saving and
investment; materially enhance our competitive position in the world economy; and
dramatically reduce taxpayer burden and administrative costs?
What follows is a description of a system that would satisfy all of the constraints and objectives
identified. Its primary features are: (1) a very substantial increase in the standard deduction
(more than half of all taxpayers would no longer be subject to the income tax); (2) integration
of the corporate and individual income tax systems; (3) repeal of the corporate alternative
minimum tax (AMT), and elimination of business-related preferences from the individual AMT;
(4) radical simplification and reform of our rules for taxing multinational business activities; and
(5) a business transfer tax which would be border-adjustable, include a low- and middle-income
refundable tax credit, and exempt small businesses.
The paper describes an option - not a proposal - for transforming the tax system. Other tax
and fiscal policy issues deserve more immediate attention; the short-term national agenda is
driving the tax law in a very different direction; and other fundamental reform options should
be considered. Secretary Brady believes that this option or other options should only be
considered if coupled with constraints on spending and limitations on the ability to raise taxes.
II.
Overview
1.
A Time to Reassess. At Secretary Brady’s request, the Office of Tax Policy has been
exploring options for fundamental reform of the Federal tax system. In large measure, our
inquiry has been motivated by a sense that the tax system is ill-suited to the dramatic challenges
our country will face in the years ahead. In particular, there is a widespread belief that the
system is far too costly and burdensome, discourages savings and investment, and undermines
our ability to compete.
While perhaps coincidental, this effort is also timely by reference to a number of historic
anniversaries:
The 16th Amendment to the Constitution was ratified on February 25, 1913. The
Federal income tax was enacted as part of The Revenue Act of 1913. While the
system has served the country well, its 80th anniversary is an appropriate time to
reconsider our substantial reliance on the income tax for financing the Federal
Government.
Prior to World War II, only a small fraction of all citizens and businesses were
subject to the income tax. In 1943, in order to finance the military effort, Congress
instituted wage withholding and increased dramatically the number of individuals
-2
-
subject to tax (the percentage of the population covered by income tax increased
from 45% in 1941 to more than 80% in 1944). Once again, while that system has
served the country well, the 50th anniversary o f a "universal" income tax is an
appropriate time for reevaluation.
Finally, with the end o f the Cold War phase o f a conflict that has enveloped the
world for more than 50 years, and with the transformation of the world’s economy
in ways that may be as profound as the industrial revolution, now is an appropriate
time to reassess whether our tax system is best suited to address the country’s needs
as we enter the 21st Century.
2.
The Issue.
following question:
With these concerns in mind, the Office o f Tax Policy addressed the
Is there an alternative to the current Federal tax system that wouldfu lfill the follow ing objectives
subject to the follow ing constraints?:
Objective 1 (Taxpayer Burden Reduction)
The alternative should dramatically reduce the administrative and transaction costs
that the tax system imposes on individual and business taxpayers, while holding
constant or reducing administrative costs to the Government. Our citizens spend
hundreds o f billions of dollars and hours each year in maintaining records, filing
returns, and dealing with the 1RS. This represents a terrible waste of resources, a
drag on economic growth, and one cause of the public’s disaffection with Govern
ment.
Objective 2 (Saving Rate)
The alternative should encourage saving and investment. Our saving rate in recent
years has fallen by as much as a third, relative to historic U .S. norms. Moreover,
the U .S. saving rate during the past decade (5.4% ) is well below the saving rates
prevalent among our primary international competitors ( e .g . , 16.0 percent in Japan
and 12.4 percent in Germany).
Objective 3 (Compete in World Markets)
The alternative should enhance the ability of U .S. firms to compete against their
foreign counterparts. The end of the Cold War highlights - and will accelerate —
a global economic revolution that has been under way for several decades. By all
measures, we remain the most productive and competitive country in the world.
However, our relative strength has declined, and our continued ability to compete
- 3 successfully in the global markets of the 21st Century will be critical to our well
being as a nation.
Constraint 1 (Revenue Neutrality)
The alternative must be revenue-neutral relative to the current system. This
constraint was imposed to permit comparison of the two regimes. Either system
could be modified to increase or decrease tax revenues.
Constraint 2 (Distributional Neutrality)
Under worst-case assumptions, the alternative must maintain, or enhance, the degree
of progressivity embodied in the current system. Again, this constraint was imposed
to permit comparison of the two regimes. Either system could be modified to
increase or decrease the relative tax burden on various groups of taxpayers.
3.
An Option fo r Reform. The Office o f Tax Policy has concluded that the current system
could be transformed in a manner that would satisfy all of these conditions and objectives. In
particular, the reform option discussed in this paper would be revenue-neutral; it would (at a
minimum) be somewhat more progressive (even on a current annual income basis); it would
result in a dramatic reduction in taxpayer burden and administrative costs; it would generate a
substantial increase in savings and investment; and it would enhance our competitive position
in the world economy.
A^achment 1 is a chart summarizing an "Option for Reform," and Attachment 2 is an outline
summary of that Option. In brief, the primary elements are:
• More than half of all individual taxpayers would no longer be subject to the Federal
income tax. This would be achieved through a very substantial increase in the
standard deduction.
• The tax law bias in favor of debt financing and the cost of corporate equity capital
would be reduced, and incentives for private saving would be increased, by
integrating the corporate and individual income tax systems. This would be
accomplished by exempting dividends received from tax at the shareholder level, and
a step-up in basis of corporate stock to reflect retained earnings.
• Investment incentives would be increased, and market distortions and complexity
would be reduced, by repealing the corporate alternative minimum tax (AMT) and
elimination of business-related preferences from the individual AMT.
- 4 « Our rules for taxing multinational business activities would be radically simplified
and reformed to promote efficiency and our ability to compete in world markets.
Options range from current taxation of foreign income and an unlimited foreign tax
credit, to complete exemption of active foreign income from US tax.
• A business transfer tax (BTT) -- a tax on firms’ sales less purchases from other
firms - would be enacted to finance these reforms, enhance the ability of U .S. firms
to compete with foreign firms, and provide additional incentives for savings and
long-term investment. The BTT would be border-adjustable, include a refundable
tax credit for low- and middle-income taxpayers, and exempt small businesses.
III.
Qualifications and a Cautionary Note
1. Many Roads to the Same Destination. In many respects, the underlying concepts are
far more significant than the specific elements of the Option for Reform. The critical notions
are: (1) we should start with the compelling need to reform the income tax, with a focus on
burden reduction, saving rates, and competitiveness; and (2) then move on to the notion that a
broad-based business transfer tax could be coupled with a refundable tax credit to finance those
reforms while maintaining (or enhancing) the progressive nature of our tax system.
In terms of specific components of the package, there are numerous, equally viable, alternatives.
Following are a few examples:
• For example, the elements of the BTT and corporate integration proposals could be
combined in a comprehensive business income tax or cash flow tax. Others argue
that a broad-based energy tax would be preferable to a BTT because it would
promote conservation and environmental policies.
• Reform of the income tax could be coupled with various base broadening measures
and/or an increase in the BTT rate to finance one or more of the following reforms:
(a) significant reductions in corporate and individual tax rates (with some form of
surtax on very high-income individuals to maintain progressivity); (b) a further
increase in the standard deduction and/or the personal exemption to take additional
taxpayers off the tax roles; or (c) a reduction in payroll tax rates.
The important point to emphasize is that these alternatives (and many others) are all compatible
with the two constraints and three objectives described above.
2. Setting Priorities. Other tax and fiscal policy issues deserve more immediate attention.
The highest priority should be placed on putting our fiscal house in order. No other steps we
could take will matter in the long run if we fail to reduce the drain on national saving reflected
in the Federal budget deficit.
-5 With respect to the deficit, the initial and primary focus should be to limit government spending.
It is also the area requiring the most difficult political choices. Above all, it would be a terrible
mistake to enact any new source of Federal revenue in the absence of effective, long-term
controls over government outlays. It would fail to address the fundamental problems the
government faces, and would be little more than a license to steal from the American people.
In addition to the priority of fiscal discipline, there are also practical constraints. It seems likely
that short-run priorities will move the tax law in the direction of higher rates and "targeted"
incentives. The system has been down this road before. Many believe this road is a dead end
if the purpose of the journey is to improve efficiency and productivity, and enhance the welfare
of the nation.
Nonetheless, there are indications that the quest for fundamental reform is under way. For
example, it is evident in recent studies and proposals by the Committee for Economic
Development ("The United States in the New Global Economy: A Rallier of Nations"), Alice
Rivlin (Reviving the American Dream) and The Strengthening of America Commission ("First
Report"), chaired by Senators Nunn and Domenici); and in ongoing work related to budget
reform by the Concord Coalition (whose members include Senator Rudman and former Senator
Tsongas); and the broad-based consumption tax working group organized by Senators Boren and
Danforth.
Over the longer term, forces beyond the government’s control —ranging from global competition
and the mobility of capital and intellectual property, to the continued erosion of voluntary
compliance and taxpayer revolt against escalating compliance and transaction costs —will compel
consideration of changes along the lines we have described.
ATTACHMENT 1
AN OPTION FOR FUNDAMENTAL REFORM
Is there an alternative to the current tax system that would achieve the following objectives,
subject to the following constraints:
Objective 1:
Achieve dramatic reductions in taxpayer burden (transaction and
compliance costs), while holding constant or reducing the government’s
cost to administer the system.
Objective 2:
Generate a substantial increase in private-sector saving and investment.
Objective 3:’
Enhance materially our competitive position in the world economy.
Constraint 1:
The new system must be revenue-neutral, relative to current law.
Constraint 2:
Under worst-case assumptions, the new system must be
distributionally-neutral (or somewhat more progressive), relative to
current law.
Following is a summary, in chart form, of a system which would fulfill all three objectives,
while satisfying both constraints:
Proposal
Substantial increase in the individual
income tax standard deduction
Impact
• Dramatic reduction in taxpayer burden
and administrative cost savings:
Moro than one-half of all individual tax
payers (including more than 45 % of all
sole proprietors and more than 50% of all
those operating family farms) no longer
subject to the income tax
1
JIntegration of the corporate and individual
tax systems through a dividend exclusion
regime
• Reduce tax law bias in favor of debt
financing, unincorporated firms, and re
tained earnings
• Reduce cost o f corporate equity capital
• Increase incentives for saving
• Align our tax system more closely with
those of our primary foreign competitors
Repeal corporate alternative minimum tax
(AMT) and eliminate business-related
preferences from the individual AMT
• Reduce taxpayer burden and administra
tive costs
• Reduce the cost of capital and provide
greater certainty regarding after-tax re
turns, increasing capital investment incen
tives
• Reduce tax law bias that exacerbates
cutbacks in business investment during
downturns
Simplification and reform of rules for
taxing multinational business activities
• Reduce taxpayer burden and administra
tive costs
• Enhance ability of U .S. firms to com
pete against foreign counterparts in world
wide markets
• Reduce the cost of capital, increasing
incentives for saving and investment
-4Enact a business transfer tax (BTT), with
the following features:
• Finance other reforms
• Border adjustable
• Provide additional incentives for saving
and long-term investment
• Low- and middle-income refundable tax
credit
• Enhance the ability of U .S. firms to
compete with foreign imports
• Exemption for small businesses
• Refundable credit assures that tax sys
tem, taking all reforms into account, is
more progressive than current law
• Use of BTT, and exemption for small
businesses, assures that increased taxpayer
burden and administrative costs are mini
mal
• Align our tax system more closely with
those of other nations
Jul IS S3 0 0 I 3 6 4
A TTA CH M EN T 2
R E S T R U C T U R IN G T H E U .S . T A X S Y S T E M
F O R T H E 2 1 st C E N T U R Y
AN O P T IO N F O R F U N D A M E N T A L R E F O R M
U.S. Department of the Treasury
Office of Tax Policy
December 10, 1992
O V E R V IE W
Objectives o f Exercise
• To show how the federal tax system could be significantly restruc
tured in a revenue-neutral and distributionally-neutral manner that
would dramatically reduce taxpayer burden and promote greater
efficiency, competitiveness, and economic growth.
• This option would make economic sense and bring the U .S. tax
system more in line with those of our competitors.
• This is not a blueprint for immediate action—other options should
be considered, and priority should be given to the more urgent task
of reducing the deficit through limits on government spending.
Basic Elements o f Option fo r Reform
• A very significant increase in the individual income tax standard
deduction.
• Exemption of dividends received, and a step-up in basis of
corporate stock to reflect retained earnings.
• Repeal of the corporate alternative minimum tax (AMT) and
elimination of business-related preferences for the individual AM T.
• Modification of the U .S . international tax system, with options
ranging from current taxation of foreign income and an unlimited
foreign tax credit, to complete exemption of active foreign income.
• Introduction of a business transfer tax with border adjustments and
a low-income refundable tax credit.
R E S T R U C T U R IN G T H E U .S . T A X S Y S T E M
F O R T H E 21st C E N T U R Y
The U .S . economy stands at the crossroads.
o The United States is the most productive nation in the
world, but economic growth is sluggish.
o More funds are needed to support capital formation, to
raise productivity and long-term economic growth.
o Private saving must increase, and government dissaving
must decrease.
The government must get its fiscal house in order.
o The structural imbalance between Federal spending and
Federal receipts must be addressed.
o The growth rate of mandatory spending must be restrained,
and the tax code should encourage saving and investment.
Like the economy, the tax system stands at the crossroads.
o One option is to raise marginal rates and create incentives
for government-favored activities.
o A second option is to reduce the economic distortions and
administrative complexities of the income tax, and offset
the revenue loss through another broad-based tax.
R E F O R M IN G T H E IL S . T A X S Y S T E M
Important revenue-neutral and distributionally-neutral changes can be
made to the structure of the tax system.
o These changes will make the system less burdensome,
improve compliance, and promote economic efficiency and
competitiveness.
o Reducing current distortions and minimizing taxpayer
compliance burdens can contribute toward greater econom
ic growth and lower structural deficits—without the disin
centives caused by higher marginal tax rates.
The option for reform put forth here increases economic efficiency
by: (1) removing large numbers of families and small businesses
from the income tax system; (2) integrating the corporate and
individual income tax systems; (3) eliminating the alternative
minimum tax; (4) simplifying international tax rules; and (5)
substituting revenue from a business transfer tax for some of the
revenue currently collected under the individual income tax.
o These changes confer major benefits in terms of efficiency
and competitiveness.
o Simplification benefits are also large. The changes offer
a much more rational balance between the compliance
burden imposed on taxpayers and their tax liabilities.
O U T L IN IN G T H E B E N E F IT S O F R E F O R M
• The revenue-generating role of the individual income tax would be
greatly reduced:
o Individual income tax revenue would be reduced by about 35
percent. Income tax cuts would extend to over 88 million tax
returns, more than 95 percent o f all returns that are taxable under
current law.
o More than half of current taxpayers would be removed from
Federal income tax rolls. (However, some of these taxpayers
would still file abbreviated returns to claim refundable tax
credits.)
o Nearly all small business taxpayers would receive an income tax
cut, and a majority would be removed from the income tax rolls
altogether.
o The proposal would reduce the number of itemizers by nearly 95
percent.
o Compliance and administrative costs associated with the individual
income tax would be reduced correspondingly.
• The tax burden on capital income would be reduced, encouraging
saving and investment.
o Many Americans, once removed from the income tax rolls, would
face no tax on their income from saving.
o Corporate tax integration eliminates one level of tax on dividends
and retained earnings on corporate equity.
o Elimination of the corporate AMT and business-related preferenc
es for the individual AMT reduces the cost of capital and
compliance burdens.
o Simplification and reform of international tax rules reduce
compliance costs and enhance the competitive position of U .S.
R E D U C IN G R E L I A N C E ON T H E IN D IV ID U A L IN C O M E T A X
• The low level o f the current-law tax-filing thresholds require millions
of low- and moderate-income taxpayers to incur the substantial costs
of filing Federal income tax returns and dealing with the IRS.
o For many of these taxpayers, filing burdens may be very
high relative to their tax liabilities. The IRS also must
devote resources to processing and verifying these returns.
o The high compliance and administrative costs imposed by
the current income tax cannot be justified by other tax
policy goals.
• Option fo r Reform: The tax-filing thresholds would be substantially
raised by increasing the standard deduction (see the attached table).
• Effects
o These changes are significant: For example, a family of
four with an income of $43,200 would pay no individual
income tax; and an elderly couple with an income of
$38,500 would pay no individual income tax.
o Simplification benefits and burden reduction would be
substantial {see the attached table).
Income Tax Thresholds in 1993 Under Current Law and Under Tax Restructuring Package 1/
Current Law
With
W ithout
EITC
21
EITC
Tax
Restructuring
Package
300% of
Poverty
Level
Filing Status
Number
of
Dependents
Single
Joint
Head of household
1
2
2
$6,050
10,900
10,150
$6,050
10,900
16,896
$22,000
38,500
33,350
$7,525
9,733
9,733
$22,574
29,198
29,198
Joint
I lead of household
4
4
15,600
14,850
19,652
19,310
43,200
38,050
14,786
14,786
44,359
44,359
Single, over 65
Joint, both over 65
1
2
6,950
12,300
6,950
12,300
22,000
38,500
6,937
8,751
20,810
26,254
Poverty
Level
1/ Standard deduction is increased to $19,650 for single filers, $28,650 for heads of households,
and $33,800 for married couples filing joint returns. Under current law, the standard deduction
in 1993 is: $3,700 for single filers, $5,450 for heads of households, and $6,200 for married couples
filing joint returns. The exemption am ount in 1993 is unchanged from its current law level: $2,350.
The package also repeals the additional standard deduction for age or blindness ($700 for married filers
and $900 for unm arried filers).
2/ Assumes fully im plem ented EITC (that is, 1994 rates).
NOTE: These calculations are based on the following assumptions: (1) poverty thresholds are based on
1991 Census data adjusted for inflation; (2) families with dependents are eligible for the earned income
tax credit; (3) all taxpayers are under age 65 unless otherwise indicated; and (4) income consists of
m oney wages and salaries.
Impact of the Reform Option
on Returns Filed by Individuals
Number of
returns with:
Current
Law
Reform
Option
Change
Millions of taxpayers
With positive
tax liability
89
43
-46
(-52% )
With refundable
tax credit
11
47
+ 36
(+ 3 2 7 % )
Itemized
deductions
31
2
-29
(-94% )
IN T E G R A T IN G T H E C O R P O R A T E AND IN D IV ID U A L
TA X SYSTEM S
• Two levels of income tax are generally imposed on earnings from
investments in corporate equity.
• The disparities between the taxation of income from corporate
equity investments and other types of investments cause three
serious inefficiencies:
o A tax disincentive to incorporate, which causes many
businesses to forego the nontax benefits of operating a
business in corporate form, and penalizes business activi
ties requiring corporate form.
o A tax-motivated preference to use debt rather than equity
capital, increasing the likelihood of financial distress.
o A tax-driven preference to retain earnings rather than pay
dividends to shareholders.
• Option fo r Reform : Corporate income will be taxed no more than
once through a dividend-exclusion model.
o Corporations will pay tax on their income at the corporate
level.
o Shareholders will exclude dividends paid out of
permanently excluded income and income that has been
previously taxed to the corporation; distributions of other
income will be treated as a return of capital.
°
There will be no capital gains tax due on reinvested
retained earnings.
Effects : By reducing tax-driven distortions of organizational and
financial decisions, the cost of capital will fall, and corporate
financial policy will reflect fundamental economic considerations.
E L IM IN A T IN G T H E C O R P O R A T E A M T AND
B U S IN E S S P R E F E R E N C E S F R O M T H E IN D IV ID U A L A M T
• The alternative minimum tax (AMT) operates as a parallel tax system
with its own rules for determining income and deductions, generally
by way o f limiting taxpayers’ use of various exclusions, deductions,
and credits.
• Although enactment of the AMT was motivated by a desire to foster
the perception of equity, it is difficult to support on those grounds.
o It has perverse effects on investment incentives.
o It complicates and distorts business investment decisions by
creating uncertainty about firms’ future tax status.
o Since firms are more likely to pay the AMT during
economic downturns, the increased tax payments under the
AMT contribute to overall weakness in the economy.
°
It is complex and creates significant compliance burdens
for taxpayers.
• Option fo r Reform : Repeal the corporate A M T, and remove
business preferences from the individual AMT.
• Effects : AM T repeal will reduce firms’ cost of capital and compli
ance burdens.
R E F O R M IN G C O R P O R A T E IN T E R N A T IO N A L T A X R U L E S
• Much concern has been expressed about the rules governing the
taxation of transnational economic activity.
o The transformation of the global economy makes it
essential that our tax laws promote efficiency and our
ability to compete in world markets, and minimize trans
action and compliance costs to taxpayers. There is a
general consensus that our current rules violate these
norms in many respects.
o The Office of Tax Policy has undertaken a review, which
will result in specific suggestions for reform of our
international tax system.
• There is a spectrum of options for reform.
o Option ffl: Adopt a modified exemption system (i.e . , a
system which does not impose U .S. tax on active foreignsource income).
o Option it2: Adopt a regime of current taxation of foreignsource income.
o Option #3:
ways.
Modify the current system in less radical
o Under each of these options, the basic regimes governing
the taxation of multinational business activities would be
dramatically simplified.
IN T R O D U C IN G A B U S IN E S S T R A N S F E R T A X (B T T )
• Unlike any o f our major trading partners, the United States does not
impose a broad-based consumption tax.
o The over-reliance of the current Federal tax system on
income taxes causes a bias against saving and investment.
o Under international trading rules, no border tax adjustment
can be made for income taxes, while properly structured
broad-based consumption taxes can be border-adjusted,
promoting competitiveness of U .S. firms.
• Option fo r Reform : The Federal government would impose a broadbased consumption tax at a single rate, with the tax administered as
a Business Transfer Tax (BTT).
o The B T T base would be all domestic sales by businesses,
less purchases from other businesses.
o The B T T would be fully border-adjustable, with the full
tax imposed on imports and all tax removed from exports.
o Small businesses would not be required to be in the B T T
system.
o A refundable B T T credit would be provided to low-income
families to offset the effect of the B T T .
Effects
o Substituting the B T T for portions of the income tax will
encourage saving and investment.
o Unlike some other consumption-tax proposals, the B T T —
when included in the overall package of reforms—maintains
tax fairness.
- The introduction of the B T T , combined with income
tax reductions and a refundable tax credit, would
result in small net tax reductions for low- and middleincome families, and small tax increases for upperincome families.
- This distributional analysis is based on "worst case"
assumptions—/, e . , that the entire burden of the B T T is
borne by consumers and that all of the benefits of
integration, AM T repeal, and international reform
flow through to the owners of capital. To the extent
some portion of the B T T is borne by the owners of
capital, and/or some portion of the capital and busi
ness tax reductions benefit consumers, the tax system
would be that much more progressive.
o Unlike a European-style value added tax, the B T T could be
implemented promptly, at relatively modest cost to the
private sector and the government.
o While the B T T , along with the other reforms, will increase
savings rates and reduce the percentage of national income
going to current consumption, the absolute level of con
sumption spending will increase over the long term as a
result of increased economic growth.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
December 10, 1992
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $14,775 million of 52-week bills to be issued
December 17, 1992 and to mature December 16, 1993 were
accepted today (CUSIP: 912794E67).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.56%
3.57%
3.57%
Investment
Rate____ Price
3.71%
96.400
3.72%
96.390
3.72%
96.390
Tenders at the high discount rate were allotted 93%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
9,910
32,697,535
3,315
114,245
28,615
13,765
1,211,540
5,235
1,330
14,935
3,265
868,065
164.740
$35,136,495
AcceDted
9,910
14,133,485
3,315
112,495
27,215
13,555
220,755
5,235
1,330
14,935
3,265
64,565
164.740
$14,774,800
Type
Competitive
Noncompetitive
Subtotal, Public
$30,970,400
326.395
$31,296,795
$10,608,705
326.395
$10,935,100
3,400,000
3,400,000
439.700
$35,136,495
439.700
$14,774,800
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2098
A Recommendation for Integration
of
The Individual and Corporate
Tax Systems
Department of the Treasury
December 1992
TH E S E C R E TA R Y OF T H E T R E A S U R Y
W ASHINGTON
DscHTber 11, 1992
The Honorable Dan Rostenkowski
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Enclosed is a description of our recommended approach
to integrating the corporate and individual income tax systems.
This material is a follow-up to the R e p o r t o f t h e T r e a s u r y o n
In t e g r a t io n
o f
th e
In d iv id u a l
an d
C o rp o ra te
In c o m e
T a x
(released in January 1992,
hereafter the T r e a s u r y I n t e g r a t i o n R e p o r t ) . The Treasury
Integration Report identified the distortions caused by our
current system for taxing corporate profits and the substantial
benefits to the economy that would result from integration, and
described four alternative integration prototypes. At that time,
we committed to recommending a specific integration system in
late 1992.
S y ste m s—T a x in g
B u s in e s s
In c o m e
O nce
1. Recommended prototype.
Although each of the
prototypes described in the T r e a s u r y I n t e g r a t i o n R e p o r t has
merit, we are recommending a system similar to the d i v i d e n d
e x c lu s io n
p ro t o ty p e
for the following reasons:
•
Relative to the shareholder allocation and
imputation credit prototypes of relieving the
double taxation of corporate equity income, the
dividend exclusion approach is the most straight
forward and easily administered.
•
While there are strong arguments that some version
of the Comprehensive Business Income Tax (CBIT)
prototype may be preferable from a long-term
policy and administrative perspective, the
dividend exclusion approach can be implemented
much more rapidly, with far less potential for
disruption of financial markets and many fewer
transition issues.
•
The dividend exclusion approach is preferable to
the shareholder allocation and imputation credit
prototypes because it is consistent with our
policy view that, over the long-term, it may be
-
2-
desirable to move the tax system in the direction
of a schedular tax on enterprise activity (e.g.,
the CBIT prototype or some version of a business
cash flow tax or business transfer tax).
The dividend exclusion model we recommend is simple and
will generally tax corporate income once. A corporation will
compute its taxable income and pay tax as under current law. Any
distribution out of the corporation's income that remains after
paying tax and after making certain limited adjustments to
taxable income (adjusted taxable income or ATI) is treated as a
dividend and is excludable from gross income when received by
shareholders. Distributions in excess of ATI are treated as a
return of capital to the shareholders (or capital gain to the
extent the distribution is in excess of basis).
ATI is defined as corporate taxable income reduced by
U.S. federal income taxes and creditable foreign taxes paid or
accrued and increased by excludable dividends received and by
items that are permanently excluded from income (e.g., tax-exempt
interest and percentage depletion in excess of basis). Because
distributions in excess of ATI will be treated as a return of
capital, no distributions are ever treated as taxable dividends.
Thus, under the proposal, earnings and profits (E&P) accounts
will no longer be relevant for determining the character of
distributions from U.S. corporations. Similarly, the dividends
received deduction will no longer be necessary because dividends
will be excludable.
While the capital gains tax on the sale of stock will
be retained, the proposal allows corporations to adopt Dividend
Reinvestment Plans (DRIPs). Through the DRIP, a corporation will
deem that a cash dividend was paid to its shareholders out of its
ATI and immediately reinvested by the shareholders. The
shareholders will pay no tax on the deemed dividend (because
dividends are excludable), but will increase their bases in their
shares by the amount of the deemed dividend. The effect will be
to reduce the capital gains (or increase the capital losses)
realized when shareholders sell their stock by an amount equal to
the corporation's retained previously-taxed earnings.
2.
Modifications to Treasury Integration Report
Version of Dividend Exclusion Prototype.
The principal
differences between our current recommendation and the prototype
described in the T r e a s u r y I n t e g r a t i o n R e p o r t are:
(aj we treat
all distributions in excess of ATI as returns of capital (even if
the corporation has E&P); (b) we extend integration to foreign
source income (by "flowing-through” creditable foreign taxes);
and (c) we recommend an immediate effective date (with limited,
elective transition relief for corporate shareholders). We have
made these modifications for the following five reasons:
-3(1)
They are more consistent with our stated policy
goals.
(2)
They create fewer character of income and timing
distortions, result in a system that is more
easily administered, and permit other significant
simplifying changes in the tax law.
(3)
We believe that any objection to existing tax law
preferences should be addressed directly, rather
than through continued reliance on an E&P-based
measure of dividends.
(4)
We believe that revenue concerns are more properly
addressed in a policy-neutral manner (e.g., by
scaling back underlying preferences; raising
revenue elsewhere in the system; or, if necessary,
by scaling back the dividend exclusion).
(5)
While extending the benefits of integration to
creditable foreign taxes is clearly justified on
policy grounds, it also is based on the assumption
that reciprocal treatment will be provided by our
major trading partners. This recommendation
should be reconsidered, and alternatives should be
explored, in the absence of reciprocity.
3.
Interaction with Other Tax Policy Issues.
In
developing our recommendations, it has become increasingly clear
that an integration regime should not be developed in isolation
(or under the assumption that other structures in the tax law
will remain unchanged). Rather, the design of an integration
system should be considered in the context of— and be addressed
in a manner consistent with— long-term policy goals relating to
the compelling case for international reform, the AMT and
corporate preferences, the accumulation and investment of capital
by tax-exempt entities (including non-U.S. and taxpayers and
companies with substantial net operating losses), and the
overriding need for tax simplification and the reduction of
taxpayer burden.
4.
Setting priorities.
We recognize that other fiscal
and tax policy issues may be given higher priority in the near
term, that many of the specific technical issues arising under
any integration proposal are yet to be resolved, and that any
specific legislation would require off-setting tax law changes to
deal with revenue and distributional concerns.
Nonetheless, we remain convinced that integration
should be a high-priority, tax policy objective. Current tax law
distortions— which encourage debt financing by the corporate
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sector, penalize businesses conducted in corporate form,
discourage dividend distributions, and leave us out of step with
our primary international trading partners— impose very real
costs on the economy. We believe that these costs are likely to
increase in the years ahead and that the case for some form of
corporate integration will be all the more compelling.
I
urge you to give the recommendation careful
consideration in your deliberations on reform of the U.S. tax
system. I am sending similar letters to Senator Lloyd Bentsen,
Chairman of the Senate Committee on Finance; Senator Bob
Packwood; Representative Bill Archer; and Representative Charles
Rangel, Chairman of the Subcommittee on Select Revenue Measures.
Sincerely,
Nicholas F. Brady
Enclosure
A Recommendation for Integration
of the Individual and Corporate Tax Systems
C U RREN T LAW
Two levels of income tax are generally imposed on earnings from investments in
corporate equity. First, tax is imposed on the corporation’s taxable income. Second, if the
corporation distributes earnings to shareholders, the earnings are taxed at the shareholder level,
either as ordinary income in the case of dividend distributions, or as capital gain in the case of
non-dividend distributions in excess of the shareholders’ stock bases. Retained earnings are taxed
at the shareholder level through the capital gains tax on stock sales.
By contrast, the income on debt investments in corporations is taxed only once because
interest expense is generally deductible by the corporation and includable in income by the
creditor. In addition, the income on equity investments in unincorporated businesses (such as
proprietorships and partnerships), qualifying small business corporations (i.e ., S corporations),
and certain types of investment corporations (such as regulated investment companies) is
generally taxed only once, at the investor level. Distributions from those types of businesses are
generally tax-free to the extent they represent earnings that were previously taxed to the
investors or are treated as a return of capital to the extent of any excess over previously taxed
earnings.
REA SO N S F O R CHANGE
The disparities between the taxation of income from corporate equity investments and
income from other types of investments cause three serious inefficiencies:
•
A tax disincentive to incorporate, which causes many businesses to forego the
non-tax benefits of operating a business in the corporate form, and a penalty on
businesses that must operate in corporate form.
•
A tax-motivated preference to use debt rather than equity capital, which
encourages corporations to operate with higher debt-equity ratios than they
otherwise would choose for non-tax reasons.
•
A tax-motivated preference to retain rather than distribute corporate earnings to
shareholders.
As discussed in Chapter 13 of the Report o f the Treasury on Integration o f the Individual
and Corporate Tax Systems — Taxing Business Income Once (January 1992) (the Treasury
Integration Report), these biases reduce corporate investment, encourage artificially high debtequity ratios, and discourage dividend payments, all of which lead to significant inefficiencies
and competitive disadvantages to the U .S. economy. An integrated tax system, in which
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corporate earnings generally are taxed only once, will reduce these distortions and thus provide
significant economic benefits. It also will bring our tax system more in line with those of our
major trading partners, many of whom have adopted some form o f integration of their individual
and corporate tax systems.
RECOMMENDATION
Overview
We recommend a corporate/shareholder tax integration scheme that will generally tax
corporate income once. Under our recommendation, a corporation computes its taxable income
and pays tax as under current law. Any distribution out of the corporation s income that remains
after paying tax and after making certain limited adjustments (adjusted taxable income or ATI)
is treated as a dividend and is excludable from gross income when received by shareholders.
Distributions in excess o f ATI are treated as returns of capital to the shareholders (or as capital
gain to the extent the distribution exceeds their basis).
ATI is defined as corporate taxable income reduced by U .S. federal income taxes and
creditable foreign taxes paid or accrued and increased by excludable dividends received and by
items that are permanently excluded from income (e.g., tax-exempt interest and percentage
depletion in excess of basis). Because distributions in excess of ATI will be treated as returns
of capital, no distributions are ever treated as taxable dividends. Thus, under our recommended
approach, earnings and profits (E&P) accounts will no longer be relevant for determining the
character of distributions from U .S. corporations. Similarly, the dividends received deduction
will no longer be necessary because dividends will be excludable.
The capital gains tax on the sale of stock will be retained. Standing alone, the
combination of a dividend exclusion regime and a capital gains tax on stock sales would create
artificial incentives to distribute previously taxed income (because dividends would be excludable
but increases in stock value that represent retained earnings would be taxed to the selling
shareholders) and would comparatively disadvantage corporations that retain earnings for further
investment by raising their cost of capital. To minimize this distortion, corporations will be
allowed to adopt Dividend Reinvestment Plans (DRIPs). Through the DRIP, a corporation will
deem that a cash dividend was paid to its shareholders out of its ATI and immediately reinvested
by the shareholders. The shareholders will pay no tax on the deemed dividend (because
dividends are excludable), but will increase their bases in their shares by the amount o f the
deemed dividend. The effect will be to reduce the capital gains (or increase the capital losses)
realized when shareholders sell their stock by an amount equal to the corporation s retained
previously-taxed earnings. DRIP dividends may be declared at any time during the year.
The ATI system will be fully effective for each corporation in its first taxable year
beginning after the date of enactment. A special rule will allow corporations to continue to claim
the dividends received deduction for five years.
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Discussion
Our major goal in devising a system of integration is to reduce the distortions caused by
the current two-level tax system while avoiding a system that was difficult to administer or
overly complex. While the ATI system does not eliminate all the distortions under current law,
we believe it significantly reduces many of them. The ATI approach treats corporations more
like other forms of business and thus reduces the tax disincentive to incorporate. It treats equity
more favorably than does current law, reducing the disparity between debt and equity. Finally,
it reduces the tax incentive to retain earnings, because dividend distributions will be excludable
by shareholders.
In addition, the ATI system is both administrable and understandable. By drawing heavily
from existing rules, the ATI system reduces the need to implement new sets o f rules where
existing law is well established. The recommended changes to current law should simplify the
corporate tax system (e.g ., ATI is easier to compute than E& P, the concept it largely replaces).
All distributions are either dividends (and therefore excludable) or returns of capital, simplifying
shareholder level treatment as well. The DRIP provisions add some complexity because the
DRIP allows upward adjustments of shareholder basis, but the DRIP rules are necessary to avoid
creating tax incentives to distribute income. Finally, a number of existing tax rules will be
repealed as unnecessary, further simplifying the tax laws. Thus, we believe that the ATI system
reduces current law distortions within the context of an administrable system.
Although each of the prototypes described in the Treasury Integration Report has its
merits, the system we recommend is similar to the dividend exclusion prototype described in
Chapter 2 o f the Treasury Integration Report. Relative to the shareholder allocation and
imputation credit prototypes, the dividend exclusion system is the most easily administered
approach to relieving the double taxation of equity earnings. While there are strong arguments
that the Comprehensive Business Income Tax (CBIT) prototype may be preferable from a long
term policy (and administrative) perspective, the dividend exclusion approach can be
implemented much more rapidly, with far less potential for disruption of financial markets and
many fewer transition issues. In addition, the dividend exclusion system is preferable to the
shareholder allocation and imputation credit prototypes because it is consistent with our policy
view that, over the long term, it may be desirable to move the tax system in the direction of a
schedular tax on enterprise activity (e.g., the CBIT approach or some version o f a business
transfer tax).
There are two principal differences between the system we now recommend and the
dividend exclusion system described in the Treasury Integration Report. First, our recommended
system treats all distributions in excess of previously taxed income as returns o f capital (even
if the corporation has E& P). Second, our recommended system extends integration to foreign
source income by flowing through creditable foreign taxes although this extension of integration
benefits to foreign taxes is predicated on the assumption that our major trading partners will,
over time, provide reciprocal treatment.
- 4 -
The dividend exclusion system in the Treasury Integration Report would have treated
distributions in excess of previously taxed income (up to the amount of available E&P) as
taxable dividends. Two basic considerations were implicit in that decision. First, to the extent
that E& P is viewed as reflecting economic income, the Treasury Integration Report reasoned that
the distribution of that income from corporate solution should trigger a tax at the investor level
if a domestic corporate level tax had not already been imposed. Second, the Treasury Integration
Report gave significant weight to the revenue cost of repealing the E&P-based measure of
dividends.
Although these concerns remain valid, we are now placing greater emphasis on simplicity
and economic efficiency, and therefore have concluded that the E&P-based measure o f dividends
should be eliminated and replaced with the ATI approach. Compared to the E& P approach, the
ATI system (i) more closely parallels a schedular tax on enterprise activity, (ii) reduces taxbased distortions among different forms of business enterprise, and (iii) reduces artificial
incentives to retain earnings. In addition, the ATI approach creates fewer character and timing
distortions, is more easily administered, and permits other significant simplifying changes in the
tax law. We also believe that any objection to existing tax preferences should be addressed
directly, rather than through reliance on E&P. Finally, we recommend addressing revenue
concerns in a policy-neutral manner (e.g., by scaling back the underlying preferences, raising
revenue elsewhere in the system, or, if necessary, by allowing only a partial exclusion of
dividends), rather than by retaining the E&P regime.1
Thus, we recommend a dividend exclusion system based on ATI rather than E & P .2
Under this system, preference income will receive one of two possible treatments depending on
whether the preference is a timing preference or a permanent exclusion. Corporate distributions
attributable to a timing preference, such as accelerated depreciation, will reduce shareholder
basis. If the shareholder holds the stock until the timing preference reverses, basis can be
restored through a DRIP dividend when the corporation recognizes the deferred income. I f the
shareholder sells the stock before the timing preference reverses, the preference will be
recaptured through a capital gains tax on the stock sale, approximating the result that would have
1 A partial dividend exclusion system would treat distributions out of ATI as part excludable and part returns
of capital to shareholders. If the revenue cost of such a partial dividend exclusion system is still too high, an
alternative partial exclusion would treat distributions out of ATI as partially excludable and partially taxable to
shareholders. If the revenue cost needs to be reduced even further, we would recommend an E&P-based system
modeled after the dividend exclusion prototype in the T reasuiy Integration R eport.
2
We also considered a regime that retained the E&P measure of dividends, but provided that all distributions
from E&P would be excluded from income at the shareholder level. We rejected this alternative for some of the
same reasons that we decided not to retain E&P as a measure of taxable dividend distributions (e.g., retention of
the same tax base for all purposes; minimization of timing and character distortions; and ease of administration).
Moreover, we were concerned that the E&P approach would further exacerbate the distinctions between inside and
outside basis. The basis reduction approach we have adopted is admittedly rough justice, and will result in
distortions in a number of real-world cases. While an exclusion based on E&P would mitigate some of these
concerns, it would create other more troublesome distortions (e.g., a significant shifting in the nominal incidence
of taxation on disposition of shares following distributions from E&P in excess of ATI).
- 5 -
followed if the corporation had sold a portion of the asset that created the preference. When the
corporation eventually pays the deferred tax, the new shareholders will receive an offsetting
basis adjustment. Distributions attributable to permanent exclusions will not reduce shareholder
basis, because reducing basis would result in a recapture of preferences that were meant to be
permanent. Thus, these preferences are made excludable by including them in ATI.
The Treasury Integration Report also recommended against extending the benefit of
integration to creditable foreign taxes. While we are continuing to study this issue as part o f our
International Tax Study, we believe that passing through foreign tax credits is consistent with
the fundamental goals of integration. It also furthers the goal of capital export neutrality, because
equivalent integration treatment applies to corporations earning foreign source income and
corporations earning U .S. source income. We therefore recommend extending integration to
creditable foreign taxes, provided that our major trading partners grant reciprocal treatment. At
present, other countries with integrated tax systems generally do not pass through foreign tax
credits.3 If this continues to be the case, we will reconsider our recommendation.4 An alter
native would be to pass through foreign tax credits by treaty in cases where the treaty partner
grants reciprocal benefits, although this could entail a significant level of complexity. The ATI
system can be modified so that it does not extend integration to foreign taxes by providing for
either a basis adjustment or shareholder-level income inclusion upon the distribution o f income
sheltered by foreign tax credits.
TEC H N IC A L EXPLA N A TIO N
Recommendation m Retention of Current Law
(a)
Corporations will continue to calculate their income under current law rules and
will pay tax according to the existing graduated rate schedule. Credits, including
foreign tax credits, will offset corporate tax as under current law.
(b)
Distributions in excess of basis will continue to be taxed as gains from the sale
or exchange o f property. The distinction under section 302 between redemptions
that are treated as section 301 distributions (i.e., generally as dividends) and
redemptions that are treated as in exchange for stock (i.e., generally as capital
transactions) will remain. The rules governing corporate transactions, such as
acquisitive and divisive reorganizations, liquidations, and taxable acquisitions will
3
The Ruding Committee, however, has recommended that countries within the European Community with
integrated tax systems extend integration benefits to foreign taxes levied by other members of the European
Community. See Commission of the European Communities, R eport o f the Com m ittee o f In depend en t Expei'ts on
Com pany Taxation (1992).
4
Excluding the pass-through of creditable foreign taxes from our integration recommendation could also be
justified on revenue grounds. On balance, however, we recommend addressing revenue concerns in other ways.
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generally be the same as under current law. Corporations will continue to be eli
gible to file consolidated returns as under current law, although the consolidated
return regulations will be amended to conform to the integrated corporate tax.
Discussion: The desire to retain current law was a major reason for choosing a dividend
exclusion system. Retaining current law significantly simplifies the transition to integration by
relying on established principles and rules. To the extent current law is modified, the changes
generally result in simplification or repeal of existing rules and a reduction in taxpayer burdens.
Recommendation 1 summarizes the major components of corporate tax law that are retained.
Recommendation 2: Definition of Adjusted Taxable Income
(a)
In General: Each year, corporations will compute their addition to ATI. The
addition to ATI is equal to taxable income (calculated after the application of any
loss carryforward), reduced by (i) the regular U .S. federal income tax liability
before the application of any minimum tax credits and (ii) creditable foreign taxes
paid, deemed paid or accrued during the taxable year, and increased by (i)
excludable dividends received and (ii) items that are permanently excluded from
income. Permanent exclusions include tax-exempt interest under section 103 and
percentage depletion in excess of basis.
(b)
Special Rule for the Alternative Minimum Tax: Corporations paying alternative
minimum tax (AMT) increase ATI by the amount of their AMT liability, grossedup by a factor of 66/34, and decrease ATI by an amount equal to 20 percent of
the amount by which they increased ATI for permanent exclusions, grossed-up
by a factor o f 66/34. In addition, corporations must decrease ATI by minimum
tax credits used during the taxable year, grossed-up by a factor of 66/34.
Discussion: By starting with taxable income, ATI does not initially include any preference
income. ATI is then adjusted downward by U .S. federal income taxes paid after the application
of credits other than the minimum tax credit. Creditable foreign taxes reduce the amount of
after-tax income available for distribution, so ATI is reduced by all creditable foreign taxes,
including foreign taxes in excess of the amount that can be used to reduce U .S. tax liability for
the taxable year. ATI is then adjusted upward by certain permanent exclusions. In general, the
practical effect o f this definition is that preference income other than income sheltered by credits
and by permanent exclusions will not be included in ATI. By including permanent exclusions
and credits in ATI, Recommendation 2 allows shareholders to exclude distributions attributable
to those items without a reduction in basis. This treatment is appropriate because basis reduction
for permanent preferences would make the preferences temporary.5
5
We realize that ATI may not accurately reflect all of the current rules that govern income and basis (e.g.,
sections 108 and 167(e)(3)). Nevertheless, to keep the system simple, we did not adjust ATI for these items. If
significant distortions result, the ATI rules can be amended.
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The calculation of ATI begins with taxable income (which cannot be less than zero) and
adds permanent exclusions. Thus, if the corporation has an overall loss for the year but has
permanently excluded earnings, the corporation may still distribute excludable dividends during
the year. For example, a corporation with a loss of $100 and tax-exempt interest o f $10 has $10
of ATI and can distribute $10 of excludable dividends. The net operating loss o f $100 can be
carried forward against other years’ taxable income.
As previously announced, we are studying the effects o f the corporate AMT. While our
study is not complete, it is clear that the AMT creates economic distortions, and that substantial
reform or outright repeal of the AMT may be warranted. The AMT also complicates the
calculation o f ATI because the AMT operates on a separate, parallel tax base (alternative
minimum taxable income). We considered using alternative minimum taxable income for
determining ATI for AMT taxpayers, but this would add complexity, allow AMT taxpayers to
pass through timing preferences without a basis reduction, and cause discontinuities whereby a
modest change in items of income or deduction could cause an extraordinary fluctuation in ATI.
We also considered ignoring the AMT and the minimum tax credit for purposes o f computing
ATI, both for reasons of simplicity and on the theory that the AMT is essentially a prepayment
of regular tax. We rejected this approach because some taxpayers are subject to the AMT for
many years. For these taxpayers, the AMT becomes their corporate-level tax regime. Ignoring
AMT paid would inappropriately deny these taxpayers the benefits of integration.
We opted for an approach whereby AMT paid is grossed-up and added to A TI.6 The
amount o f permanent exclusions added to ATI is reduced for corporations that pay AMT, so that
permanent exclusions are not double counted in computing ATI. The 66/34 gross-up factor
insures that dividends will be paid only out of fully taxed income. The alternative was to gross
up AMT at the AMT rate (i.e., by a factor of 80/20). An 80/20 gross-up, however, allows the
corporation to distribute preference income without a shareholder basis reduction. For example,
suppose a corporation has no regular taxable income and $100 of alternative minimum taxable
income due to timing preferences. The corporation pays no regular tax and $20 o f AM T. I f the
gross-up were 80/20, the corporation would generate $80 o f ATI and could pay $80 of
excludable dividends to its shareholders. The earnings would not be taxed at a 34 percent rate
until the preferences reversed and the corporation were subject to the regular tax, regardless of
whether the shareholders sold their stock. With a 66/34 gross-up, the $20 o f AMT will generate
$38.82 o f ATI. If the corporation makes an $80 distribution, the remaining $41.18 will reduce
the shareholders’ bases. If the shareholders are taxable at a 34 percent rate, the difference
between the 20 percent rate imposed through the AMT and the 34 percent rate of the regular tax
will be recaptured if the shareholders sell their stock before the preferences reverse (34 percent
6
Minimum tax credits are grossed up and subtracted from ATI in the year they are applied to reduce regular
tax liability. We considered not reducing ATI by minimum tax credits that were earned before the effective date
of the integration system. This would recjuire all corporations to maintain a pre-enactment minimum tax credit
account and apply a stacking rule (e.g., FIFO) to determine when the pre-enactment credits were used and would
result in significant complexity. Our recommendation of an immediate effective date necessarily creates detriments
to some taxpayers and windfalls for other taxpayers, and we are not generally recommending any correction for
those losses or gains.
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of $41.18 is $14). This treatment is consistent with our general rule that distributions from
earnings that have not been fully taxed reduce basis.
Recommendation 3: Dividends
(a)
Distributions will be classified as dividends to the extent they are paid (or deemed
paid) out o f current or accumulated ATI. E&P no longer controls the treatment
o f distributions from U .S. corporations and all distributions not out o f ATI are
treated as returns o f capital. If distributions in a given year exceed available ATI,
ATI will be allocated first by the priority of the classes of stock on which
distributions were paid during the taxable year. For classes of equal priority, or
for multiple distributions paid within a single class of stock, ATI will be allocated
under a "first-in-time" rule.
(b)
Shareholders will exclude all dividends from gross income. As under current law,
shareholders will not reduce their share bases when dividends are received.
(c)
Distributions in excess of ATI will not be classified as dividends, and will instead be
treated as returns of capital.
Discussion: The highest priority, first-in-time allocation o f ATI to distributions reduces
potential uncertainty about the amount of a distribution that is treated as a dividend. Moreover,
the allocation rule is consistent with non-tax rules governing priorities and claims, and as a
practical matter allows preferred stock generally to continue paying non-taxable dividends.
The disadvantage of the highest priority, first-in-time rule is that it may allow a
corporation to "stream" its dividends by creating multiple classes of stock, some o f which
receive dividends (and are held by taxable shareholders) and some of which receive non-dividend
distributions (and are held by tax-exempt shareholders). While the same issue arises under
current law, its practical significance would increase substantially under the integration regime
we are recommending because the dividend base will be reduced (ATI will often be less than
E&P on a year-to-year basis and, as noted below, the "nimble dividend rule" will be eliminated).
In theory, this concern could be addressed by allocating ATI pro rata among all
distributions made during the taxable year. A pro rata approach would reduce the possibility of
streaming in the case of routine distributions with respect to multiple classes o f stock, but would
create other problems. The amount of any given distribution that is a dividend would depend on
the amount o f distributions made later in the year. This would raise uncertainty and would make
declaring DRIP dividends difficult, except where there is a sufficiently large amount of ATI. On
balance, we chose to use a highest priority, first-in-time rule and to address streaming concerns
with other rules (many o f which are in place under existing law) and a general anti-abuse rule.
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We chose to allow dividends out of estimated ATI for the current year. Any other rule
would require dividends to be paid out of ATI one year in arrears, a requirement inconsistent
with the goals of our recommended approach.
We did not adopt the nimble dividend rule of current law (which allows dividends out
of current E&P notwithstanding a deficit of accumulated E& P). We recognize that eliminating
the nimble dividend rule may mean that corporations with large net operating loss carryforwards
will be unable to pay dividends until the losses are used up because taxable income, the starting
point for ATI, is calculated after the application of loss carryforwards. Nevertheless, where the
estimated current year’s taxable income, after the application of any loss carryforwards, is zero,
the corporation has not produced any taxable income for distribution as a dividend. Consequent
ly, a distribution under those circumstances is more properly treated as a return o f capital.
We considered imposing a surrogate tax in cases where a corporation informs
shareholders that a dividend is excludable but later finds that it has insufficient ATI to support
the dividend. The tax would have been refundable when the corporation produced ATI and
would have offset ATI (when refunded) by a grossed-up amount. The effect would have been
an interest charge on the reduced tax that shareholders would have paid it they had sold during
the period between the erroneous dividend and the refund o f the surrogate tax. We opted not to
impose a surrogate tax because of the problems with determining the appropriate blended rate
for the tax. Instead, the Commissioner will have the authority to impose a surrogate tax at the
maximum shareholder tax rate (currently the 34 percent corporate tax rate) where ATI has not
been reported in good faith (e.g., where ATI is not reported consistently with estimated tax
payments).
Although the amount of a distribution that is considered a dividend is determined by a
corporation’s ATI, not its E& P, we do not recommend eliminating E&P for all purposes. In
particular, E&P will be retained for various computations relating to foreign corporations. We
are studying ways in which E&P computations under these other provisions can be simplified
or eliminated.
Recommendation 4: Treatment of Redemptions
(a)
In General: The distinction between a redemption that qualifies as a payment in
exchange for stock under section 302(b) and a redemption that is treated as a
section 301 distribution will remain as under current law. Redemptions that
qualify under section 302(b) will generally not reduce ATI even though such
redemptions reduce a pro rata portion of E&P under current law.
(b)
Significant Redemptions: Section 302(b) redemptions o f stock from significant
shareholders, defined as those shareholders holding at least five percent of a
corporation’s equity (with attribution rules), will reduce ATI pro rata and give
rise to a corresponding increase in the basis of the redeemed shares. In addition,
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a corporation that redeems more than five percent of its stock (by vote or value)
from any group of shareholders in section 302(b) redemptions will be subject to
the same pro rata ATI reduction, basis increase rules. All redemptions that take
place within a one-year period will be aggregated for purposes of this rule.
(c)
Special Rule: Corporations will be allowed to assume that there are no section
318 relationships (which might cause redemptions that would otherwise qualify
under section 302(b) not to qualify) among small shareholders (defined as those
that hold less than one percent of the corporate equity). In addition, corporations
will be allowed to assume that small shareholders are not purchasing stock at the
time o f a redemption in a manner that could cause a redemption to fail to qualify
under section 302(b).
(d)
Treatment of Shareholders: Shareholders will treat redemptions that qualify under
section 302(b) as a sale or exchange of their stock. Shareholders will receive a
statement from the corporation if they are entitled to a basis increase in
connection with such sale or exchange (whether by reason of the significant
redemptions rule described above, or because the corporation has declared one
or more DRIP dividends prior to the redemption).
Discussion: We chose generally to treat section 302(b) redemptions of stock like sales of stock
and to retain the existing rules of section 302(b) for distinguishing a true redemption from a
corporate distribution.7 A selling shareholder in a widely-held corporation generally will not
distinguish between selling shares to a third party and selling shares to the corporation. Given
this fact and our preference for retaining current law, we believe that sales of stock to the
corporation that qualify under section 302(b) should generally be treated the same as sales to
third parties.
Nevertheless, some section 302(b) redemptions should be treated as a pro rata distribution
of ATI plus a return of capital to the redeemed shareholders. This rule is needed to prevent
corporations from streaming through a combination of redemptions of tax-exempt shareholders
and dividend payments to taxable shareholders.8 Thus, in redemptions of large shareholders and
7
We recognize that the rules of section 302 reflect a bias towards treating redemptions as dividend
distributions, a result that has historically been unfavorable to individual shareholders, but favorable to corporate
shareholders. Under our recommended system, all taxable shareholders will prefer dividend treatment, a result not
contemplated by the drafters of section 302. Nevertheless, the section 302 rules generally should produce the correct
result under our recommended system.
8
For example, consider a corporation with two shareholders, one taxable and one tax-exempt, each
contributing $500 to the corporation. If the corporation earns $100 of after-tax profits (and therefore has $100 of
ATI), it can redeem the tax-exempt shareholder for $550. This will leave the taxable shareholder with $500 of basis
in a corporation with a value of $550 and ATI of $100. The corporation can pay a $100 dividend and the taxable
shareholder can sell its stock for a $50 loss.
(continued...)
- 11
-
in large redemptions, a corporation’s ATI is reduced and the selling shareholders’ stock bases
are correspondingly increased. For example, if a corporation redeems two percent of its stock
from a five percent shareholder, the corporation will reduce its ATI by two percent and the
shareholder will correspondingly reduce its amount realized. Similarly, a successful public selftender for seven percent of a corporation’s stock will reduce the corporation’s ATI by seven
percent and the shareholders will correspondingly reduce their amounts realized.
This treatment of significant redemptions may appear to be more favorable than the
treatment of small redemptions of small shareholders. A corporation can equalize the treatment
of redemptions, however, by declaring a DRIP dividend before purchasing its own stock.
Moreover, because ATI is not reduced in small redemptions of small shareholders, ATI is
retained in the corporation to support excludable dividends to all other shareholders.
We recommend special rules allowing a corporation to assume that there are no section
318 relationships among small shareholders because of the new corporate level distinction
between redemptions that qualify under section 302(b) and those that do not (i.e ., the former
generally will not reduce ATI while the latter will).
Recommendation 5: Sections 305 and 306
(a)
Section 305: Distributions of stock of the corporation to existing shareholders
generally will not affect ATI. Nevertheless, the rules under section 305 for
classifying certain stock distributions as distributions of property under section
301 will remain. To the extent that, under section 305, stock dividends are
characterized as distributions to which section 301 applies, shareholders receiving
stock will be treated accordingly and the corporation will make appropriate
adjustments to ATI.
(b)
Section 306 will be repealed.
Discussion: We chose to retain section 305 to prevent streaming by paying excludable dividends
on one class of stock (held by taxable investors) and stock distributions on another class (held
by tax-exempt investors). In such a transaction, the distribution of stock would dilute the class
receiving cash, creating a loss on that class when sold. The loss is theoretically offset by gain
on the sale of the distributed stock, but if that stock is held by tax-exempts, the gain will
never be taxed. Section 305 reduces this possibility by treating certain stock distributions as
distributions of property under section 301.
8(... continued)
The pro rata ATI reduction rule will not allow corporations to stream through the opposite transaction of
redeeming taxable shareholders and reducing ATI in the redemption. In the above example, if the corporation
redeems its taxable shareholder, ATI will be reduced by $50 and the shareholder will recognize no gain or loss on
the redemption. The tax-exempt shareholder will be left with $500 of basis in a corporation with a value of $550
and ATI of $50.
-
12
-
Section 306 will be repealed because preferred stock bailouts will not offer the same
benefits under the ATI system as when dividends were taxable as ordinary income.
Recommendation 6: Adjustments to Tax and Refunds
(a)
Adjustments to a corporation’s taxable income for a prior year will be reflected
as adjustments to the corporation’s ATI in the current year. An increase in a prior
year’s taxable income, therefore, will increase the ATI (by an amount net o f the
increased taxes paid) in the year the adjustment is made and the additional tax is
paid.
(b)
ATI may not be reduced below zero. To the extent that ATI would be reduced
below zero by a downward adjustment to taxable income that would give rise to
a refund, the refund will not be paid to the corporation. Instead, adjustments to
the corporation’s taxable income in excess o f the amount necessary to reduce ATI
to zero will be carried forward to reduce future taxable income.
Discussion: Adjustments to a corporation’s tax liability for a prior year must be reflected in
ATI in the year the adjustment is made because of the practical problems with recharacterizing
distributions made in prior years. If, for example, when a corporation agreed in 1998 to report
additional net taxable income for 1993, the corporation’s ATI were increased for 1993, actual
1993 distributions that were reported as returns of capital to shareholders would become
excludable dividends. The corporation’s shareholders might have to amend their returns for 1993
(or for subsequent years prior to 1998, if they disposed of their shares during that period). The
obvious problems with this approach led to the rule requiring ATI to be adjusted in the year the
additional taxes are paid or refunded.
ATI cannot be reduced below zero by losses or downward adjustments to taxable income.
Allowing ATI to be reduced below zero would be the equivalent o f a loan from the Treasury
to the shareholders who had received excludable dividends. The loan would be repaid by the
corporation only if and when it had paid sufficient corporate taxes to increase its ATI to zero.
I f the corporation ceased doing business, the loan might never be repaid. W e considered
allowing corporations to receive tax refunds in excess of ATI at the cost of reducing current
shareholders’ stock bases. We rejected this approach because of problems where the stock has
changed hands between the initial distribution of ATI and the subsequent refund of tax. We
therefore recommend requiring corporations to use the net operating loss or downward
adjustment to taxable income against future taxable income.
Recommendation 7: Dividend Reinvestment Plans
(a)
In General: If a corporation has an ATI account with a balance greater than zero,
the corporation may declare a DRIP dividend. The corporation will be deemed
to have paid a cash dividend and the shareholders will be deemed to have
- 13 -
received the cash and recontributed it to the corporation. Because a corporation
may only declare DRIP dividends to the extent of ATI, DRIP dividends are
always excludable by the shareholders. The only effects of a DRIP dividend are
to increase the shareholders’ share bases by the amount of the DRIP dividend and
to reduce the corporation’s ATI by an identical amount.
(b)
Method of Declaring a DRIP Dividend:
Corporations will declare DRIP
dividends in the same manner that they declare actual dividends, including the
amount o f any such DRIP dividend and the class or classes o f stock on which the
DRIP dividend will be deemed paid. Allocations of ATI to DRIP dividends are
the same as allocations of ATI to cash dividends.
Discussion: We considered a number of ways to equalize the treatment of those corporations
that choose to retain earnings and those that choose to distribute earnings. As noted in Chapter
8 of the Treasury Integration Report, reducing or eliminating the tax on capital gains when stock
is sold introduces other problems into the system. We therefore chose to allow corporations to
declare DRIP dividends. While the DRIP mechanism adds complexity to our recommendation,
it is needed for two reasons. First, it prevents a tax law bias favoring the current payout of
dividends. Second, it equalizes the treatment of widely- and closely-held corporations (because
the latter could replicate the DRIP result using actual dividend, recontribution transactions).9
We chose to allow corporations the same flexibility in declaring DRIP dividends that they
possess in declaring actual dividends. Although it may increase opportunities for streaming, this
flexibility is consistent with the corporation’s ability to determine its own dividend policy under
current law, and is necessary to permit corporations to implement cost-efficient capital
structures.
We considered requiring corporations to declare DRIP dividends with respect to
otherwise undistributed ATI, at the latest, during the year following the year in which the ATI
was generated (a mandatory DRIP). The practical effect o f this rule would have been to limit
ATI accumulations to not more than the amount produced in the last two years. A mandatory
DRIP would prevent large accumulated ATI accounts in most cases, and thus would reduce
corporations’ interest in and opportunity for dividend stripping, streaming, "trafficking" in ATI,
and other similar transactions.
We concluded that a mandatory DRIP would not eliminate the need for anti-abuse rules,
and that it might interfere with the attempts of corporations in cyclical businesses to maintain
level dividend payment policies. As a result of the mandatory DRIP, shareholders during upturns
9
Unlike DRIP dividends, which increase the basis of shares pro rata, actual cash dividends followed by a
purchase of new shares concentrate basis in the recently-purchased shares. This is similar to the result under
dividend reinvestment plans that some corporations have in place under current law. We considered allowing
corporations to declare pro rata stock dividends instead of DRIP dividends, and thereby concentrate basis in the
distributed shares. We rejected this approach because of mechanical complexities and because corporations can
achieve similar results under section 305.
- 14 -
could receive both cash dividends and DRIP dividends resulting in basis increases, while
shareholders during downturns could receive return of capital distributions.
A second concern about mandatory DRIPs relates to the broader issue o f net operating
losses (N O Ls).10 The practical effect o f a mandatory DRIP, coupled with the rule limiting tax
refunds attributable to adjustments and tax losses to available ATI, would be to eliminate the
3-year NOL carryback period. While the same result would follow if the corporation voluntarily
declared sufficient actual or deemed dividends, there is a difference between voluntary and
mandatory imposition o f this regime.
On balance, we believe that the benefits of a mandatory DRIP (particularly in reducing
the potential for streaming or other tax-motivated transactions) are outweighed by its detriments.
We chose to address concerns about streaming and other tax-motivated transactions through a
combination of existing law and a new general anti-abuse rule (see Recommendation 19).
Recommendation 8: Corporate Transactions
(a)
Distributions o f Appreciated Property: Current law rules o f section 311(b),
requiring recognition of gain on corporate distributions of appreciated property,
will continue to apply.
(b)
Liquidations: Liquidations will be taxed to the corporation as under current law.
Upon a section 331 liquidation, the corporation may declare actual or DRIP divi
dends and thereby allocate its ATI among its classes of stock. Liquidations that
qualify under section 332 will continue to be tax-free, with appropriate
adjustments to ATI for minority shareholders.
(c)
Taxable Acquisitions: Taxable acquisitions will be treated as under current law
and section 338(h)(10) will remain available. As a result, a stock acquisition will
not affect the target corporation’s ATI.
(d)
Acquisitive Reorganizations: Current law rules that treat a qualifying corporate
reorganization as tax-free at the corporate level and at the shareholder level will
remain available. Section 381, providing for the carryover of certain corporate
attributes, will be extended to provide for the carryover o f the target’s ATI
balance.
(e)
Divisive Reorganizations:
Current law rules governing tax-free divisive
reorganizations will remain, except that the device restriction o f section 355 will
be repealed. Under current law, E&P of the distributing corporation in a division
10
As discussed above, distributions from corporations with NOL carryforwards will generally represent
returns of capital.
- 15 -
that qualifies as a reorganization under section 368(a)(1)(D) are divided between
the distributing corporation and the controlled corporation based on the relative
fair market values of their assets. Rules for the division of ATI will follow these
rules.
Discussion: We chose to continue to impose a corporate level tax on distributions o f appreciated
property. The alternative was allowing a carryover or substituted basis for distributions of
appreciated property, as under the partnership rules. Following the partnership rules would defer
the tax and collect the tax at the shareholder rate. Collecting the tax at the corporate level rather
than the shareholder level, however, is consistent with the policy o f collecting a single level of
tax at the corporate rate. While a comprehensive carryover basis regime governing the transfer
o f assets can be justified on policy grounds, it would be inappropriate (and unadministrable) to
take a limited step in that direction solely in the context of corporate distributions to
shareholders.
Liquidations are treated as under current law, except that the corporation may allocate
all o f its ATI to shareholders during the liquidation. The ability of corporations to allocate ATI
upon a liquidation may present opportunities for streaming, but these opportunities should be no
worse upon liquidation than for ongoing corporations. Moreover, the general anti-abuse rule will
discourage tax-motivated allocations in liquidation.
Under a dividend exclusion system, existing section 338(a) is of minimal use because it
imposes a tax on the buyer, not the seller. A rule modeled after section 338(h)(10) would be
more effective, because the ATI produced by the deemed asset sale could be used immediately
by the selling shareholders. We considered extending section 338(h)(10) to all targets (instead
of just targets in consolidated groups) and all buyers (instead o f just corporate buyers). For now,
we recommend retaining the existing limits on section 338(h)(10) because of the complexity of
extending section 338(h)(10) to all targets and all buyers. We are studying ways to broaden
section 338(h)(10).
We recommend repealing the device restriction of section 355, because it is no longer
necessary where dividends are not taxed. We retained the rest o f section 355 because of the
important distinction between divisive reorganizations and section 311 distributions.
Recommendation 9: Consolidated Returns
Affiliated groups of corporations will continue to be allowed to file consolidated
returns. ATI, like E&P under current law, will be calculated separately for each
member of a consolidated group. As under the current consolidated return
regulations governing E& P, ATI will flow up to the common parent. Special
rules will apply to ensure that ATI is not duplicated when a member leaves the
consolidated group.
- 16 -
Discussion: We continue to believe that affiliated groups of corporations should be permitted
to file consolidated returns to reduce any remaining distortions between operating as separate
divisions and operating as separate corporations. We are continuing to study what adjustments
to the consolidated return regulations would be necessary under the ATI system. This review is
taking place in the context of our ongoing, broad-based reconsideration o f the consolidated return
regulations, as reflected in the recently proposed investment adjustment regulations, the
forthcoming deferred intercompany transaction regulations, and our overall movement in the
direction of a single entity approach for affiliated groups, as evidenced by the loss disallowance
regulations.
Recommendation 10: Pass-through Entities
The current treatment of S corporations, partnerships, and other pass-through
entities, such as regulated investment companies, real estate investment trusts and
real estate mortgage investment conduits, will be retained.
Discussion: We recognize that retaining current law treatment of S corporations, partnerships,
and other pass-through entities is somewhat inconsistent with our long-term policy preference
for a schedular tax on enterprise activity and our goal o f tax simplification. Nonetheless, we
believe that these alternative regimes should be retained at present. As a practical matter, they
are so deeply embedded in the system that any effort to require uniformity o f business forms
would be exceedingly disruptive and require elaborate transition rules. In addition, certain o f the
passive conduit regimes (RICs, REITs, and REMICs) are mechanical devices for permitting risk
pooling and portfolio diversification. As such they should be retained as part o f any system.
Finally, to the extent partnerships are viewed as permitting parties to tailor their economic
arrangements, with the tax consequences merely reflecting those arrangements, their continued
availability (at least in certain circumstances) is warranted.
Recommendation 11: Stock Sales
Shareholders will be taxed on sales of their stock, as under current law.
Discussion: By increasing share basis, DRIP dividends prevent tax on that portion o f the
appreciation in stock value attributable to previously taxed income that the corporation has
chosen to retain rather than distribute. The capital loss limitation will remain as under current
law.11
11
Some commentators have suggested that a rule disallowing losses to the extent of basis attributable to DRIP
dividends may be necessary to prevent certain abuses. We have rejected this approach in favor of the more general
anti-abuse rule described below as Recommendation 19.
- 17 -
Recommendation 12: Corporate Shareholders
Corporate shareholders will no longer be entitled to a deduction for dividends
received. Excludable dividends received by a corporation will increase the
recipient corporation’s ATI and will, therefore, remain excludable when
distributed by the recipient corporation.
Discussion: We recommend eliminating the dividends received deduction, because it is no
longer needed to reduce the multiple levels o f corporate tax that can be imposed under current
law. To the extent that earnings have been taxed to a corporation, there will be ATI to support
dividends paid to corporate shareholders. The corporate shareholders will exclude the dividends
from their income and will increase their own ATI by the amount of excludable dividends
received. To the extent that the distribution is in excess o f ATI, the corporate shareholders will
reduce their bases, which is consistent with the general treatment of preferences under the ATI
system.
Recommendation 13: Shareholder AMT
The alternative minimum tax will be retained, but excludable dividends are not
an AMT adjustment or preference.
Recommendation 14: Accumulated Earnings Tax
The accumulated earnings tax will be repealed, because it is of diminished
importance in a system that does not tax dividends.
Recommendation 15: Personal Holding Companies
The personal holding company rules will be retained.
Discussion: While in general corporate tax rates are higher than individual tax rates and,
therefore, there is no tax benefit to incorporation, graduated rates remain available to
corporations. To the extent that the graduated rates are lower than the individual rates applicable
to a specific taxpayer, an integrated tax system still presents the opportunity to use the corporate
form to shelter personal income. Indeed, repeal of what amounts to a toll charge on distributions
o f that income may exacerbate the problem. Thus, the personal holding company rules will be
retained.12
12
Because the determination of whether a corporation is a personal holding company is based on the
corporation’s gross income, dividends received under our recommendation will not affect whether a corporation is
considered a personal holding company.
- 18 -
Recommendation 16: Shareholder Level Debt
Section 246A will not be extended to cover excludable dividends and is therefore
repealed, and section 265 will not be extended to the purchase o f corporate stock.
Section 163(d) will continue to apply to individual shareholders.
Discussion: The decision not to extend sections 246A and 265 is consistent with our decision
not to recommend modifications to the rules governing debt, and our policy bias against rules
that are complex and difficult to administer.
Section 163(d) limits individual interest deductions to net investment income. Because
dividends are excludable, dividends will never result in investment income, so interest on debt
used to purchase stock will be deductible only to the extent of other investment income. This
is consistent with the purpose of section 163(d), to preclude the use of interest deductions to
shelter personal expenses.
Recommendation 17: Limitations on Dividend Exclusion
Rules similar to those in section 246(c) will apply to all shareholders that receive
dividends (including DRIP dividends). Section 1059 will be repealed.
Discussion: We recommend a section 246(c)-type rule to prevent dividend stripping. Without
such a rule, tax-exempt shareholders could sell their stock to taxable shareholders immediately
before a dividend is paid. The taxable shareholders would receive the excludable dividend and
immediately sell the stock for a loss. This is the same problem faced under current law with the
dividends received deduction, except that many more shareholders could take advantage of
dividend stripping under the ATI system. If the shareholder does not meet the holding period
requirements, the shareholder also will be denied an increase in basis if a DRIP dividend is
declared. Section 246(c) must be extended to DRIP dividends to prevent tax arbitrage through
the combination of a DRIP dividend (causing a basis step-up), an actual cash distribution in
excess o f ATI (reducing basis by the amount of the step-up), and a sale o f the stock at a loss.
Retaining section 1059 would prevent payment o f excludable dividends o f pre-acquisition
earnings followed by sale o f the stock for a loss. We recommend repealing section 1059,
however, because section 246(c), other elements of current law, and our general anti-abuse rule
should adequately police this problem.
If the current rules prove inadequate to prevent dividend stripping in particular cases
(e.g., where the selling shareholder is a foreign person seeking to avoid U .S. withholding tax
or where the corporation is privately held) and those cases cause significant distortions, we will
consider additional rules.
- 19 -
Recommendation 18: Section 1014
Section 1014 generally will continue to apply to stock held at death. Nevertheless,
for decedents who owned at least five percent o f the corporation’s equity on the
date o f death, the amount of the section 1014 basis step-up is reduced (but not
below zero) by the decedent’s pro rata share o f any increase in the corporation’s
undistributed ATI while the decedent owned the stock (as determined on the close
of the taxable years that include the date of acquisition and the date of death).
Discussion: This recommendation prevents heirs from receiving the double benefit o f a basis
step up and excludable dividends, which would result in a capital loss (or reduced capital gain)
when the heirs sell the stock. The capital loss would effectively offset corporate tax paid prior
to death, which would be an unwarranted extension of section 1014. We considered prohibiting
heirs from claiming capital losses on inherited stock for several years after the date o f death, but
that alternative would deny heirs any tax benefit for post-death economic losses. We also
considered treating dividends received by heirs as returns of capital for several years after the
date of death, but that alternative was similarly arbitrary. Our recommendation requires
significant shareholders to ascertain the corporation’s ATI in the year they acquired a five
percent interest in the corporation and forces the estate to ascertain the corporation’s ATI in the
year o f death, but it retains the benefit of section 1014. If the heirs desire a full basis step-up,
the corporation can declare a DRIP.
Recommendation 19: General Anti-abuse Rule
I f a corporation creates multiple classes of stock or engages in a transaction (or
series of transactions), a principal purpose or effect of which is to allocate
dividend distributions to taxable shareholders and parallel return of capital
distributions to tax-exempt shareholders (including foreign shareholders and share
holders with substantial NOLs), the Commissioner may treat all such distributions
as having been made pro rata out of the corporation’s ATI and, to the extent such
distributions exceed ATI, as returns of capital. The Commissioner may impose
a surrogate tax at the maximum shareholder rate (currently 34 percent) on the
corporation or its successors, or, in the absence of sufficient corporate assets, on
significant shareholders as transferees.
Discussion: Neither the section 246(c)-type rules described above nor other specific rules may
be sufficient to address the potential for tax-motivated transactions. Our general anti-abuse rule
effectively codifies application of the step transaction and substance-over-form doctrines to
streaming transactions and provides additional protection. By providing for collection at the
corporate level of a surrogate tax at the maximum shareholder tax rate, the rule deters schemes
that purport to generate a significant portion of their return by manipulating the integration rules.
The surrogate tax applies to the incremental return o f capital distribution that the Commissioner
allocates to taxable shareholders.
-
20
-
Because corporations may seek to engage in tax-mòtivated transactions as part of a
liquidation, the rule assigns transferee liability for the surrogate tax to successors and significant
shareholders (i.e ., those that hold at least five percent of the corporation’s equity at the time of
the abusive transaction), including tax-exempt shareholders.
Recommendation 20: "Trafficking" in ATI
Section 382-type rules will not apply to limit the use o f ATI following an
ownership change.
Discussion: To the extent that section 269 prevents tax-motivated acquisitions, it will continue
to apply. Should ATI-motivated acquisitions become a problem, a section 382-type rule can be
added at that time.
Recommendation 21: Foreign Shareholders
(a)
Integration benefits will not extend to foreign shareholders by statute. Thus,
nonresident aliens and foreign corporations will continue to be subject to
withholding tax on dividends. In addition, foreign corporations will continue to
be subject to the branch profits tax. Integration benefits may, however, be granted
to foreign shareholders by treaty.
(b)
DRIP dividends will generally have no tax consequences to foreign shareholders.
A DRIP dividend will not increase the bases o f foreign shareholders’ stock, but
will reduce the corporation’s ATI.
(c)
Corporations will maintain an account of DRIP dividends paid (the deemed
dividend account). Distributions in excess of ATI will be considered made out of
this account. To the extent distributions are out of the deemed dividend account,
they will be considered dividends for withholding tax purposes (regardless of
whether the foreign shareholder receiving the distributions was a shareholder at
the time the DRIP dividend was declared). Distributions to foreign shareholders
out of the deemed dividend account will not reduce stock basis for foreign
shareholders.
(d)
A distribution to a foreign shareholder will reduce corporate ATI. Distributions
(to any shareholder) in excess of ATI will reduce the deemed dividend account.
Discussion: We would like to extend integration benefits to foreign shareholders on a reciprocal
basis with other nations. Nevertheless, in contrast to our recommendation on foreign taxes, we
recommend that integration treatment be provided to foreign shareholders only by treaty, for two
principal reasons. First, unilaterally extending the benefits of integration to foreign shareholders
-
21
-
by statute may not achieve the intended purpose, because the tax policies of a shareholder’s
country of residence will ultimately determine the shareholder’s total tax burden. Second,
addressing the tax treatment of nonresidents through the treaty process is generally consistent
with international norms concerning source-country taxing rights. Other countries, in certain
cases, have extended integration benefits to nonresidents through bilateral income tax treaties.
We are continuing to study foreign tax issues relating to integration as part of our International
Tax Study.
Under the recommended system, DRIP dividends will not be treated as dividends to
foreign shareholders, because it would be administratively difficult and arguably unfair to impose
withholding tax where no cash or other property is actually distributed to shareholders. We
considered but rejected other methods of addressing this problem. One alternative (modeled after
the taxation o f original issue discount accruing to foreign persons under section 871(a)(1)(C))
would be to permit a basis increase for stock held by foreign shareholders and to collect a
deferred withholding tax at the time the foreign shareholder either sells his stock or receives
distributions from the corporation. We rejected this alternative in part because o f potential
administrative difficulties in collecting withholding tax at the time of sale and because imposing
that tax arguably would contravene the general U .S. policy of exempting foreign shareholders
from tax on capital gains.
A foreign shareholder will be eligible for the benefits o f DRIP dividends if the
shareholder qualifies for integration benefits by treaty. Additional rules will be necessary to
implement the general exclusion of foreign shareholders from DRIPs, such as rules governing
basis adjustments in connection with the transfer of stock by a foreign person to a U .S. person
in a nonrecognition exchange.
Recommendation 22: Compliance and Administration
(a)
Corporations will be required to keep ATI accounts and deemed dividend
accounts and will report the balance of those accounts to the 1RS annually on their
income tax returns. All information necessary to keep the accounts should be
available to corporations in the ordinary course of preparing their income tax
returns. Corporations also will be required to include additional information on
Forms 1099. Revised Forms 1099 will indicate the amounts by which actual or
deemed distributions are excludable, reduce basis, or increase basis.
(b)
Shareholders will keep track of increases in basis as well as decreases in basis.
Each shareholder will receive a revised Form 1099 to assist with this record
keeping burden.
Discussion: Minimizing recordkeeping was a significant goal in designing our integration
system. Although shareholders will now have to track basis increases as well as basis reductions,
this additional recordkeeping requirement should not be overly burdensome because it is
-
22
-
augmented by information reporting. Recordkeeping at the corporate level should not be
significantly increased.
Recommendation 23: Transition Rules
(a)
In General: The ATI system will be effective for a corporation in its first taxable
year beginning after the year of enactment.
(b)
Dividend Received Deduction: During their first five taxable years beginning
after the date of enactment, corporations may elect to continue reporting their
E& P to their shareholders. Corporate shareholders may elect, for each class of
stock in a corporation that reports E& P, to treat all distributions out of E& P as
taxable dividends and claim a dividends received deduction, as under current law.
The ATI regime would continue to apply for all other purposes to electing
corporations and their non-electing shareholders. Neither pre-enactment nor post
enactment E&P will affect the treatment of distributions by corporations that do
not elect to report E&P.
Discussion: The Treasury Integration Report recommended a phase-in period for its prototypes.
For several reasons, we are now recommending an immediate effective date. First, the
substantial benefits that will flow from integration can be realized more quickly through an
immediate effective date. We believe that these benefits outweigh the potential adverse impact
of short-term disruptions in the market. Second, an immediate effective date minimizes
distortions in taxpayer behavior that might otherwise occur during a five year transition period.
Finally, we believe that an immediate effective date minimizes complexity and taxpayer burdens.
Retention o f taxable dividends during a phase-in period would require a complex set o f interim
rules, in effect requiring a complete and separate integration system during the phase-in. Based
on these reasons, we believe that an immediate effective date is warranted.
We recognize that the value o f certain stocks may be dependent on the dividends received
deduction. We therefore recommend a special rule to phase out the dividends received deduction
in a manner intended to reduce the volatility in the value o f stock held by corporations.
REVENUE COST
Cost (billions o f dollars)
1993
17
Fiscal Years
1994
1995
31
33
1996
34
1997
35
1993-97
150
UBLIC DEBT NEWS
Department of the Treasury • BuiWui^ritö Public Debt • Washington, DC 20239
JU
/ D ^
c
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
December 14, 1992
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $12,275 million of 13-week bills to be issued
December 17, 1992 and to mature March 18, 1993 were
accepted today (CUSIP: 912794B52).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.26%
3.27%
3.26%
Investment
Rate____
3.33%
3.34%
3.33%
Price
99.176
99.173
99.176
$3,535,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 21%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
28,050
42,348,385
12,710
43,195
38,155
19,900
1,249,440
16,320
13,390
31,320
17,585
1,092,080
671.845
$45,582,375
Accepted
28,050
11,049,605
12,710
43,195
38,155
18,110
70,900
16,320
10,385
31,320
17,585
267,130
671.845
$12,275,310
Type
Competitive
Noncompetitive
Subtotal, Public
$40,535,140
1.271.555
$41,806,695
$7,228,075
1.271.555
$8,499,630
2,578,080
2,578,080
1.197,600
$45,582,375
1.197.600
$12,275,310
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-2099
Department of the Treasury • Bureau of the Public Debt" •¿^^hington, DC 20239
OcC/ C f‘7
FOR IMMEDIATE RELEASE
December 14, 1992
^
*
U
^QNTACT: Office of Financing
^ /
202-219-3350
Tfip ^
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,231 million of 26-week bills to be issued
December 17, 1992 and to mature June 17, 1993 were
accepted today (CUSIP: 912794D50).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.41%
3.43%
3.43%
Investment
Rate
3.52%
3.54%
3.54%
Price
98.276
98.266
98.266
Tenders at the high discount rate were allotted 63%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,535
31,420,095
8,310
27,450
39,335
29,665
1,448,970
11,740
8,625
26,595
14,685
993,345
459.335
$34,513,685
Accented
25,535
11,020,595
8,310
27,450
33,785
29,295
168,495
11,740
8,625
26,595
14,685
396,995
459.335
$12,231,440
Type
Competitive
Noncompetitive
Subtotal, Public
$29,744,140
825.545
$30,569,685
$7,461,895
825.545
$8,287,440
2,800,000
2.800.000
1.144.000
$34,513,685
1.144.000
$12,231,440
Federal Reserve
Foreign Official
Institutions
TOTALS
n
FOR IMMEDIATE RELEASE
December 15, 1992
;;CONTACT :
Scott Dykema
202-622-2960
ENTERPRISE FOR THE AMERICAS INITIATIVE
DEBT REDUCTION AGREEMENTS SIGNED
The United States, in another move to implement the
Enterprise for the Americas Initiative (EAI), signed agreements
today with Chile, Colombia, El Salvador, and Uruguay to reduce
bilateral debt owed under food and foreign assistance lending
programs.
Treasury Secretary Nicholas F. Brady said: "These agreements
mark an important step forward in U.S. relations with Latin
America and the Caribbean. They demonstrate the U.S. commitment
to strengthening ties through economic growth in the region as
well as here at home."
The debt reduction element of the EAI is intended to support
efforts by Latin American and Caribbean countries to undertake
broad macroeconomic and structural reforms, liberalize their
investment regimes, and reach agreements with their commercial
banks where appropriate. Each of the countries with which
agreements were concluded today met eligibility criteria designed
to ensure strong commitments to such economic reform.
The action taken today had the following affects on the debt
owed to the United States by these four countries.
♦
Chile's foreign assistance debt to the United States was
reduced by 10% from approximately $147 million to
approximately $132 million.
♦
Colombia's foreign assistance debt to the United States was
reduced by 10% from approximately $310.2 million to
approximately $279.2 million.
♦
El Salvador's food assistance debt was reduced by 80% from
$335.5 million to $67.1 million, and foreign assistance debt
was reduced by 70% from approximately $279.3 million to
approximately $83.8 million.
♦
Uruguay's food assistance debt was reduced by 40% from
$996,000 to $598,000, and foreign assistance debt was
reduced by 10% from approximately $33.4 million to
approximately $30.1 million.
NB-2101
2
In addition to reducing the stock of debt, the United States
expects to enter into Americas Framework Agreements with each
government. Such agreements would allow interest payments on the
remaining debt to be paid in local currency to support child
development and/or environmental projects in each country.
Provided the United States enters into such agreements:
approximately $17.25 million in local currency would be generated
in Chile; approximately $41.6 million in local currency would be
generated in Colombia; the local currency equivalent of
approximately $41.2 million would be generated in El Salvador;
and approximately $6.2 million would be generated in local
currency in Uruguay.
Debt reduction is an important tool for encouraging
countries in Latin America and the Caribbean to sustain efforts
to reform their economies. By easing the burden of debt in
return for sound economic management, the United States can help
countries attract new investment capital and make the rewards of
reform more immediate.
These agreements were authorized by Congress in Title VI of
the Agricultural Trade Development and Assistance Act of 1954, as
amended, and Part IV of the Foreign Assistance Act of 1961, as
amended. Funding was provided in the foreign operations
appropriations act for fiscal year 1993 ($50 million for AID debt
reduction) and the agricultural appropriations act for fiscal
year 1993 ($40 million for P.L. 480 debt reduction) to offset the
cost of reducing debt.
-0-
FOR RELEASE AT 2:30 P.M.
December 15, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
r|
v
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $24,800 million, to be issued December 24, 1992.
This offering will provide about $2,900 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $21,906 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, December 21, 1992.
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$12,400 million, representing an additional amount of bills
dated September 24, 19 92 and to mature
March 25, 19 93
(CUSIP No. 912794 B6 0), currently outstanding in the amount
of $10,276 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $12,400 million, to be
dated December 24, 199 2
and to mature June 24, 1993
(CUSIP
No. 912794 D6 8 ).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest.
Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
December 24, 1992. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders.
Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them.
Federal Reserve Banks currently
hold $1,253 million as agents for foreign and international
monetary authorities, and $4,500 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
N B-2102
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000.
Bids over $10,000 must be in mul
tiples of $5,000.
A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%.
Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering.
A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit.
The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000.
A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount.
A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued” trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers:
depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer.
A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender.
For other than mailed tenders, the customer list should
accompany the tender.
If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered.
Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf.
A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit.
Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury.
An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
B a nker Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
FOR RELEASE AT 2:30 P.M.
December 16, 1992
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $26,750 MILLION
The Treasury will auction $15,500 million of 2-year notes
and $11,250 million of 5-year notes to refund $20,954 million
of securities maturing December 31, 1992, and to raise about
$5,800 million new cash. The $20,954 million of maturing
securities are those held by the public, including $1,331
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
Both the 2-year and 5-year note auctions will be conducted
in the single-price auction format. All competitive and non
competitive awards will be at the highest yield of accepted
competitive tenders.
The $26,750 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $1,570 million of the maturing
securities that may be refunded by issuing additional amounts
of the new securities.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offer
ing circulars.
oOo
Attachment
N B -2 1 0 3
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED DECEMBER 31, 1992
December 16, 1992
Amount Offered to the Public ... $15,500 million
$11,250 million
Description of Security:
Term and type of security ..... 2-year notes
Series and CUSIP designation ... Series AH-1994
(CUSIP No. 912827 H9 6)
Maturity date ............. . ... December 31, 1994
Interest rate ................. To be determined based on
the highest accepted bid
To be determined at auction
Investment yield ............
Premium or discount ........... To be determined after auction
Interest payment dates ........ June 30 and December 31
Minimum denomination available . $ 5,000
5-year notes
Series U-1997
(CUSIP No. 912827 J2 9)
December 31, 1997
To be determined based on
the highest accepted bid
To be determined at auction
To be determined after auction
June 30 and December 31
Terms of Sale:
Method of sale ................ Yield auction
Competitive tenders ........... Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ........ Accepted in full
up to $5,000,000
Accrued interest payable
by investor...... ............ None
Kev Dates:
Receipt of tenders ............
a) noncompetitive .............
b) competitive ........... . ....
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury ...
b) readily-collectible check ...
$ 1,000
Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full
up to $5,000,000
None
Tuesday, December 22, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Wednesday, December 23, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Thursday, December 31, 1992
Tuesday, December 29, 1992
Thursday, December 31, 1992
Tuesday, December 29, 1992
EMBARGOED UNTIL DELIVERY
TEXT PREPARED FOR DELIVERY
December 17, 1992
Contact: Rich Myers
(202) 622-2930
SECRETARY NICHOLAS F. BRADY
KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY
THURSDAY, DECEMBER 17, 1992
BOSTON, MASSACHUSETTS
Thank you, Dean Carnesale. It is a great pleasure to be
here at the Kennedy School today. The topic for discussion —
reform of the financial system in the wake of the historic market
meltdown in October 1987 — is one on which Bob Glauber, David
Mullins and I have worked closely together for almost 5 years,
starting with the Presidential Task Force on Market Mechanisms.
In the months following the *87 Crash, the Task Force
proposed a series of specific steps to prevent similar calamities
in the future. Now, with the passage of the CFTC Reauthorization
Act in October, 1992, each of these steps has largely been
enacted. So today I want to take a few minutes to describe what
I believe are some of the most important lessons we have learned
in the five years since Black Monday. I would also like to
highlight a few areas that deserve additional work in the future.
Perhaps the single most important lesson to be learned from
the Crash of '87 is that the crazy quilt of exchanges, trading
systems, and exotic instruments that make up the modern financial
system is in reality "one market." This lesson is reinforced
almost daily, as new instruments and trading strategies broaden
and tighten the complex web of market linkages. But it was the
failure of the markets for stocks, stock options, and stock index
futures to perform as "one market" that contributed to the
violence of the '87 Crash, and brought the financial system near
to a breakdown.
Of course, the '87 Crash was triggered by a number of
specific events. Some of these events were external to the
market, such as the Federal Government’s decision to abandon
Gramm-Rudman discipline in the midst of a budget stalemate. And
once the Crash was ignited, there were several factors that
compounded its severity. These include: the market's
overvaluation, the "herd mentality" of institutional investors,
and the inadequacy of clearance and settlement systems. And
perhaps most important, technology allowed transaction volume to
outdistance the processing capacity of back-office systems and
human minds.
NB-2104
2
But, as Bob Glauber suggested this morning, what made the
Crash truly remarkable was the stripping of the gears in the
mechanisms linking the equity and futures markets. This being
the case, the goal for policymakers both then and now is clear*.
Rather than seek artificially to restrict one or another area of
what is "one market," we need to create a regulatory and
technical environment that keeps the gears meshing so the system
doesn't spin out of control.
Although it was greeted with deep skepticism just five years
ago, the revelation that there is "one market" has now become so
widely accepted as to seem almost a cliche. Still, however, the
revolutionary implications of the "one market" concept are being
resisted by many policymakers and market participants alike. For
as technology continues to drive markets together, today's
petting zoo of different financial institutions — each hobbled
and blinkered in its separate cage — will make less and less
sense. Institutions participating in a single market should all
be free to compete with each other on a level field across the
entire market. Looked at in this way, the "one market" lesson of
the '87 Crash is simply the logical beginning of the Treasury
Department's long effort to end the legally mandated
fragmentation of the financial system. It is high time to remove
artificial regulatory barriers, such as those separating banking,
securities and insurance.
Having said all this, it is probably worth pointing out that
some observers of the *87 Crash have placed the blame on
financial futures and program trading. Whatever the arguments
maybe, the volume of trading in financial futures and other
derivatives has grown rapidly, and the instruments and strategies
have become still more complex. However, I would not dispute for
a moment that this growth trend has contributed significantly to
market liquidity in general, and has provided valuable
opportunities to hedge underlying risks. Any attempt to outlaw
such instruments or to regulate them to a point where they cease
to serve a practical economic purpose would be a grave mistake.
But the world cannot be hedged. Our financial system has
not eliminated risk. That is to say, futures and other
derivatives may bring clear benefits, but they also introduce
complex forms of risk to the system that may not be fully
understood and accounted for. The '87 Crash provided a clear
example of the illusion of liquidity. It goes without saying
that this illusion could reassert itself — perhaps with greater
consequences — | in today's larger and more complex markets.
Instead of trying to limit the use of financial futures, we
need to find better ways to integrate them so that they do not
tail-wag or destabilize the system. One way to do that, of
course, is to unite the regulators of both the equity and the
derivative markets into a single financial supervisor with
3
responsibility for the entire market in financial risk.
We
proposed exactly that in 1988, and while Congress only saw fit to
take partial steps in this direction, unified regulation must
remain the goal. It is simple common sense that where there is
Mone market" there should be one regulator. The turf fights of
the SEC and CFTC will not end until the overlapping
responsibilities of the two agencies are combined in one form or
another.
This is not to say that the regulatory agencies are acting
entirely on their own. The plain fact is that struggles to
preserve and expand regulatory influence are an extension of
disputes within Congress. The structure of Congressional
committee jurisdiction over financial issues is artificial and
outdated. And it bears disproportionate responsibility for
creating an environment in which turf has as much weight as truth
in the evolution of the laws that govern our markets.
And as for program trading, markets are quick learners.
Market participants were at one time secure in their belief that
portfolio insurance gave them the ability at any time to shed
risk. But after Black Monday, the lesson that liquidity may
become limited has now been learned by heart. While it may be
possible to get one camel through the eye of a needle, a herd of
camels simply won't fit.
As a result, in the years since 1987 portfolio insurance has
withered on the vine. This has come to pass without intervention
by the ham hand of government, as firms recognized that this
much-ballyhooed product simply does not provide bulletproof
protection. By allowing the market to formulate its own
solution, we avoided the uncertain application of new regulatory
restrictions that could simply drive business abroad, directly
reducing the competitiveness of the United States.
Having talked briefly about some of the lessons of '87, I
want to discuss what we have done about what we've learned. The
five key recommendations of the Presidential Task Force on Market
Mechanisms have now largely become a reality. These
recommendations were: coordinated circuit breakers; harmonized
margin requirements; linked clearance and settlement systems;
large trader reporting; and progress toward unified regulation of
intermarket mechanisms.
Taken together, these important reforms recognize the "one
market" reality and will help protect the financial system
against the recurrence of major disruptions like October '87.
But they are not an exhaustive list of improvements. The last
five years have witnessed a wide range of advances. These
include: increased trading capacity; cross-margining; and
enhanced capital requirements for specialists. Moreover, the
domestic and international regulators and- exchanges have improved
4
lines of communication and coordination among themselves. It is
particularly satisfying that many of these reforms are examples
of the private sector responding to problems by taking corrective
action itself. This is clearly the best approach.
Now, let me turn to three areas that I believe need to be
explored more closely in the future. These areas are: first, the
dramatic change that technology is bringing to the domestic and
global markets; second, the need to unify and coordinate our
domestic and international regulatory framework; and third, the
need to ensure that the over-the-counter derivatives markets are
appropriately managed.
Technology and Transformation
First, expanding market integration will bring continuing
and radical change to the financial exchanges, both at home and
abroad. Technology is already making the bricks and mortar of
the organized exchanges less and less important. Institutional
demand for cheaper and more efficient ways to transact business
is making screen-based trading an increasingly powerful
alternative to more traditional methods. In the not too distant
future, I expect that many financial instruments will be traded
on a much smaller number of larger, diversified exchanges.
Trading will to a much larger extent take place electronically.
Today*s pits and trading floors may seem as quaint and dated as
the slide rule.
At the same time, leadership in communication and
information technologies is the key to U.S. competitiveness in
international finance. While the U.S. market continues to be the
envy of the world in efficiency, liquidity and fairness, new
technologies are rapidly redefining the competitive landscape.
The futures exchanges have developed the Globex, Access, and
Project A trading systems. The securities exchanges are making
progress on 24-hour trading. The NASD has the PORTAL system, and
has proposed an early trading session.
These steps all exemplify the capacity of U.S. markets to
stay ahead of the global curve through innovation and technology.
The strengths of the open outcry and auction market systems will
continue to help preserve U.S. leadership. But we can never
afford to become complacent about the tried and true in the face
of new challenges and opportunities.
At the same time, we cannot build the Taj Mahal of trading
systems on a weak foundation. The capacity of our clearance and
settlement systems to transfer funds safely and accurately across
markets must match trading speed and volume. After all, this was
the single most vulnerable point in the system in 1987, and it
brought us to the brink of collapse. Although much has been
5
accomplished since then, the job is far from complete. An
effective clearance and settlement system is absolutely essential
to the long-term stability and efficiency of U.S. and
international financial markets.
We expect that the 1990 Market Reform Act will speed
improvements in this area. The Act calls for the establishment
of coordinated clearance and settlement facilities for
transactions in securities, securities options, futures, and
commodity options. To this end, the SEC has created a Market
Transactions Advisory Committee to advise on what legal steps
should be taken to enhance clearance and settlement. The
Committee has made substantial progress, and we anticipate that
its final report will be a valuable resource.
Unified and Coordinated Regulation
Second, I continue to believe that the single most important
step Congress can take to reduce both the likelihood and severity
of major market disruptions is to unify regulation of equityrelated products. Congress took a major step forward in
providing unified margin authority to the Federal Reserve in the
recent CFTC reauthorization bill. We understand that the Fed
intends to conduct an intensive study of the issues raised by
this new authority, and we are confident that the Fed will not
delegate responsibility until this study is complete.
But this unified margin authority is only a first step.
Every other country with major trading in stocks and stock index
futures has a single regulator to make sure its financial system
as a whole is protected. Japan, the United Kingdom, and France
— together with the United States — account for 90 percent of
global futures trading. But each of these other countries
recognizes the "one market" reality, and assures that regulation
of stocks, options, and futures is coordinated by a single
regulator. These countries have faced the music — but we have
not. Here in the United States, by reason of history and
inertia, regulation is divided.
In 1990, the Treasury Department proposed one way to unify
regulation. That proposal was rejected because of agency and
committee turf fights that impeded serious discussion. Like
feudal barons of another era, Congressional leaders continue to
joust over the boundaries of their political fiefdoms —
seemingly unaware that the world has changed around them.
But consolidation of legislative jurisdiction is as
important as consolidation of regulatory jurisdiction. Perhaps
the answer is to form a joint committee in Congress to handle
these issues in the future. If Congress is serious about
institutional reform, this idea should be at the very top of its
6
list. That way, a regulatory reform proposal may be developed
that is less threatening to vested interests, and may have a
better chance of passage.
In making this proposal, believe me when I say that I am
painfully aware of how difficult it would be to implement such a
plan. We struggled to achieve regulatory consolidation in 1990,
and we tried to restructure banking regulation in 1991. Both of
these efforts died in Congress. But we simply cannot afford
continued parochialism and paralysis when it comes to financial
reform. And I would note that just this week, the Chairman of
the Chicago Merc repeated his call for the creation of a single
"superagency” to regulate all financial markets. This is a
powerful call to action, coming from an industry that heretofore
thought otherwise.
But even as we strive to unify our domestic regulation, we
also need to devote serious efforts to harmonizing regulation of
global securities markets. After all, almost two-thirds of
global equity market capitalization now lies outside of the
United States. International competition requires that we view
interrelated domestic markets in a global context, and speak with
a more unified voice to our foreign counterparts.
Over-the-Counter Derivatives
Finally, the markets for over-the-counter derivatives —
such as interest rate swaps, currency swaps, and related
instruments — have grown exponentially. For example, the
notional principal amount of outstanding interest rate swaps has
grown from about $3 billion a decade ago to over $3 trillion
today. This rapid rate of growth — and the relative complexity
of the instruments — has created wide knowledge gaps between
regulators and the regulated, and even between senior management
and traders.
In my judgment there is work to do, but a balanced approach
is required. On the one hand, there is a danger that regulators
will overreact. The governments initial role should be limited
to ensuring that the derivatives industry has its own house in
order. Regulators should understand how these new products and
markets work, and confirm that systems are in place to protect
the integrity of the financial system.
On the other hand, the over-the-counter derivatives markets
do present real and substantial risks. Derivative instruments
have made it possible for market participants to take positions
that create linkages between different market segments. At the
same time, there has been a clear trend toward concentration of
7
credit risk in a few highly rated firms. Both of these
developments raise concerns about the liquidity of the over-thecounter markets in times of greatest need.
We saw the possibilities in September when the European
currency crisis unfolded. The G-10, at my request, and the Fed
are conducting studies of this event. While their analyses are
not complete, some anecdotal evidence suggests that market risk
management programs at times proved inadequate as rates varied
widely from historic norms. And liquidity tightened in some
markets. If this sounds familiar — it should. Similar problems
arose in 1987. I recognize that settlement problems in the overthe-counter derivatives markets have been rare so far. But we
should maintain a watchful eye.
Let me summarize by emphasizing that we need to adapt our
laws and regulations to today's realities in the marketplace —
to changes that have already occurred. From the U.S. point of
view, our laws must operate in harmony with the markets as they
have become or we will not maintain our preeminent position in an
increasingly competitive world. And the financial industry is
one where things change so quickly that, should we fall behind,
it will be very,* very difficult to catch up.
The good news is that we live in a dynamic, democratic
society. In the end, the markets, regulators, and Congress
responded in a remarkably balanced fashion to the Crash of '87.
It is my strong conviction now that we must move boldly if we are
to meet the new challenges our financial markets face as we enter
the next century.
Thank you.
# # #
FOR IMMEDIATE RELEASE
December 18, 1992
B t f 'T Q f T u g
CONTACT:
Robin Benty
202-622-2930
UNITED STATES AND THE NETHERLANDS SIGN INCOME TAX TREATY
The Treasury Department announced today that a new income
tax Convention with the Netherlands was signed in Washington on
December 18, 1992. The Convention was signed for the United
States by Assistant Secretary of State Eugene McAllister, and for
the Netherlands by Ambassador Hans Meesman. Notes also were
exchanged, which, among other things, gave effect to a memorandum
of understanding interpreting a number of provisions of the new
Convention. The new Convention will replace the existing Conven
tion between the United States and the Netherlands, which was
signed in 1948 and last amended in 1965. The new Convention will
enter into force after ratification by both countries.
The new Convention generally follows the pattern of the U.S.
and OECD Model Conventions, and of recent U.S. treaties with
other developed countries. The withholding rates on investment
income in the proposed Convention are generally the same as those
in the present U.S.- Netherlands treaty. Anti-abuse rules,
however, are provided for certain classes of investment income,
including dividends paid by non-taxable conduit entities, such as
U.S. RICs and REITs and their Dutch equivalents. The taxation of
capital gains under the proposed Convention also is essentially
the same as under the present Convention. The proposed Conven
tion preserves the U.S. right to impose its branch tax on U.S.
branches of Netherlands corporations, which is not preserved
under the present treaty. Special rules are provided for the
taxation of income from offshore mineral exploration activities.
In other respects, the taxation of business income and various
forms of personal services income under the proposed Convention
substantially follows the pattern of the U.S. and OECD Models.
Like other recently concluded U.S. treaties, the new Conven
tion contains limitation on benefits rules intended to prevent
third-country residents from benefitting inappropriately from the
Convention. The present Convention contains no such limitation
on benefits rules, and has been subject to abuse. A major objec
tive of the United States in negotiating the new Convention was
to curtail such misuse of the present Convention. These rules in
the proposed Convention are significant because they are consid
erably more detailed than those of any other U.S. treaty. These
-
2-
rules should provide clear guidelines and greater certainty to
persons wishing to claim the benefits of the Convention. The new
Convention is also significant because it recognizes the position
of the Netherlands as a member of the European communities in
determining when treaty benefits should be allowed.
The new Convention also addresses an abuse relating to the
granting of U.S. treaty benefits to low-taxed third-country
permanent establishments of Netherlands corporations that are
exempt from tax in the Netherlands by operation of Dutch law.
The Convention provides that if this issue has not been satisfac
torily resolved under Dutch law by the time of Senate Foreign
Relations Committee hearings on the Convention, a rule to do so
will be promptly agreed between the United States and the Nether
lands and will be incorporated into the Convention by means of a
Protocol.
In addition to the standard rules for mutual agreement and
exchange of information, the new Convention provides for the use
of arbitration for the resolution of certain types of tax dis
putes. However, arbitration will not be used under the Convention
until both Contracting States feel that the experience with
arbitration in tax disputes under other agreements has been
satisfactory, and agree, through the exchange of diplomatic
notes, to institute the arbitration program.
The new Convention will be sent to the Senate for its advice
and consent to ratify. The new Convention will enter into force
thirty days after each State has notified the other that it has
completed all of its ratification procedures, and will have
effect with respect to taxes payable at source for payments made
or credited on or after the first day of January following entry
into force. In other cases it will take effect with respect to
taxable years beginning on or after that date. Where the present
Convention affords a more favorable result for a taxpayer than
the new Convention, the taxpayer may elect to continue to apply
the provisions of the present Convention, in its entirety, for
one additional year.
Copies of the new Convention, along with the notes and
Memorandum of Understanding, are available from the Office of
Public Affairs, Treasury Department, Room 2315, Washington, D.C.
20220.
oOo
TREASURY NEWS
Department of the Treasury
Washington, D.C.
r
For Immediate Release
Telephone 2 0 2 - 6 2 2 -2 9 6 0
December 21, 1992
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of November 1992.
As indicated in this table, U.S. reserve assets amounted to
72,231 million at the end of November 1992, down from 74,207 million
in October 1992.
U.S. Reserve Assets
(in millions of dollars)
End
of
Month
Total
Reserve
Assets
Gold
Stock 1/
Special
Drawing
Rights 2/3/
Foreign
Currencies 4/
Reserve
Position
in IMF 2/
19$2
October
74,207
11,060
11,561
42,325
9,261
November
72,231
11,059
11,495
40,896
8,781
1/
Valued at $42.2222 per fine troy ounce.
2/
Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on weighted average of exchange rates for the
currencies of selected member countries. The U.S. SDR holdings
and reserve position in the IMF also are valued on this basis
beginning July 1974.
3/
Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/
Valued at current market exchange rates.
N B -2 1 0 6
{ HOON
SUBSIDIARY REQUIREMENT
STUDY
DEPARTMENT
OF THE
TREASURY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
SECTION 215 SUBSIDIARY REQUIREMENT STUDY
EXECUTIVE SUMMARY
Pursuant to section 215 of the Foreign Bank Supervision
Enhancement Act ("FBSEA"), the Secretary of the Treasury and the
Board of Governors of the Federal Reserve System, in consultation
with the Comptroller of the Currency, the Federal Deposit
Insurance Corporation and the Attorney General, have conducted a
study of "whether foreign banks should be required to conduct
banking operations in the United States through subsidiaries
rather than branches," taking into account a number of factors
specified by the legislation.
The conclusions of the study are
summarized briefly below.
A subsidiary requirement applied to all foreign banking
operations either across-the-board or for purposes of expanded
powers would impose substantial economic and financial costs on
the U.S. operations of foreign banks.
In fact, a branch of a
foreign bank is able to operate more efficiently than a separate
subsidiary of a foreign bank, due to a number of factors:
ability to deploy capital flexibly;
(1) the
(2) a lower cost of funding;
(3) the ability to compete based on access to the worldwide
capital base of its parent;
(4) ability to engage in transactions
with the home office without significant operational restrictions;
and (5) lower transactions costs.
2
As of June 1992, 82 percent of all U.S. assets held by
foreign banks are maintained in branches and agencies.1
If the
United States were to require that foreign banks conduct their
U.S. operations in subsidiaries, the availability of credit in the
United States market could be reduced, perhaps substantially.
For
example, the participation of foreign banks in lending syndicates,
trade finance, and transactions in foreign exchange, swaps and
other products would be restricted by the increase in costs and by
their inability to access their worldwide capital base.
Foreign
countries might also retaliate against U.S. bank branches, perhaps
by requiring that they establish a subsidiary or by otherwise
restricting their activities.
One possible justification for an across-the-board
subsidiary requirement is- the belief that it safeguards financial
stability.
However, more appropriate and effective measures are
available for purposes of protecting safety and soundness.
These
include the promotion of adequate supervisory standards worldwide
and the right to prohibit access to the U.S. market by banks that
are not adequately supervised.
The FBSEA, as well as the minimum
standards for consolidated supervision established by the Basle
Committee on Banking Supervision, represent important steps in
this direction.
Importantly, both measures implicitly endorse
foreign bank branches.
1
Foreign branches of U.S. banks also hold a majority (64
percent) of all foreign assets held by U.S. banks abroad.
3
For purposes of protecting safety and soundness,
measures other than a subsidiary requirement also may be applied
to branches of’ foreign banks experiencing financial difficulties.
These include asset maintenance requirements and restrictions on
transactions between a branch and the foreign bank's other offices
that "wall-off" or "ring-fence" the activities of the branch from
those of the troubled foreign bank without imposing the
unnecessary costs and inefficiencies associated with a broader
subsidiary requirement.
In the past, these measures have
successfully addressed problems arising in relation to branches of
foreign banks experiencing financial difficulty without penalizing
the activities of branches of healthy foreign banks.
Another possible justification for a subsidiary
requirement was the belief that differences in capital and
regulatory standards might place U.S. banks at a competitive
disadvantage in their own market.
In this regard, the guidelines
established pursuant to section 214(b) of the FBSEA in the Report
on Capital Equivalency provide assurances that foreign banks
operating in the United States are subject to capital requirements
equivalent to those imposed upon U.S. banking organizations such
that U.S. banks are not placed at a competitive disadvantage in
their own market with regard to capital standards.
The joint
annual updates on capital equivalency also provide the Federal
Reserve Board and Treasury opportunity to ascertain that foreign
banks are meeting capital and accounting standards equivalent to
those required of U.S. banking organizations.
4
With regard to the other factors specified in
section 215 of the FBSEA, which include considerations relating to
deposit insurance, money laundering, tax, bankruptcy, and
international trade, the agencies agree that none of these factors
provides support for a subsidiary requirement.
After carefully examining all of the factors contained
in the legislation, the Treasury and the Board would oppose a
subsidiary requirement that would be applied to all foreign bank
operations either across-the-board or for purposes of expanded
powers.
The Treasury and the Federal Reserve Board consistently
have opposed a subsidiary requirement that would be applied to all
foreign banking operations in the United States.
The inter-agency
review of regulatory developments reveals several significant
changes since the introduction of the 1991 Administration
proposal.
The agencies, therefore, agree that the various factors
to be considered do not justify a "roll-up" of foreign bank
branches should expanded powers be permitted to U.S. banks.
Instead, subject to prudential considerations, the
guiding policy for foreign bank operations should be the principle
of investor choice.
The right of a foreign bank to determine
whether to establish a branch or a subsidiary is consistent with
competitive equity, national treatment and equality of competitive
opportunity.
Foreign countries with banks that are provided
national treatment and equality of competitive opportunity in the
U.S. market should offer U.S. banks national treatment and
competitive equity in their markets.
5
In the Uruguay Round negotiations, NAFTA discussions,
and bilateral negotiations, U.S. officials have impressed upon
other countries the importance of providing equality of
competitive opportunity to U.S. banks and they will continue to do
so.
The Treasury and the Board recognize that it is important to
assure that U.S. negotiators have the necessary tools to advance
U.S. interests abroad.
However, the agencies agree that a
subsidiary requirement applied to all foreign banking operations
either across-the-board or for purposes of expanded powers is not
desirable even in this context.
6
I.
INTRODUCTION
Operations of foreign banks have expanded in the U.S.
market in recent years.
Their share of U.S. banking assets has
nearly doubled from 12 percent in December 1980 to 23 percent in
June 1992.2
The growth in foreign bank activities in the United
States has added to the liquidity of the U.S. market while
deepening the availability of credit to borrowers.
For example,
foreign bank operations have grown partially in response to the
growth in foreign investment in and trade with the United States.
Foreign banks have been especially active in wholesale activities,
which include trade finance, commercial loan syndications, swaps
and foreign exchange activities.
In the light of the expanding operations of foreign
banks in the United States and the difficulties experienced with
criminal activity and unsound practices at a small number of
foreign banks over the past several years, a need was identified
for legislation that would fill gaps in the supervisory and
regulatory framework governing foreign bank operations in this
country.
To this end, the Foreign Bank Supervision Enhancement
Act (FBSEA) was passed by Congress and signed into law by the
* President, as Title II of the Federal Deposit Insurance
Corporation Improvement Act of 1991.
The FBSEA “established
uniform federal standards for entry and expansion of foreign banks
2
.
,
Appendix A contains tables and charts, as well as a brief
narrative, describing the growth in foreign bank operations in the
United States.
7
in the United States, which broadly parallel the regulatory regime
and standards applicable to U.S. banks.
In light of the growth in U.S. operations of foreign
banks and in order to assure that U.S. and foreign banks are
treated on an equivalent basis in the U.S. market, the FBSEA also
mandated that the Department of the Treasury (Treasury) and the
Board of Governors of the Federal Reserve System (Board) should
conduct two studies.
The first of these studies, the Report on
Capital Equivalency, which was required by section 214(b) of the
FBSEA, was submitted to Congress by the Treasury and the Board in
June 1992.
This study, the Subsidiary Requirement Study, is
required by section 215 of the FBSEA.
Section 215 requires that
the Secretary of the Treasury, jointly with the Board (hereafter
collectively referred to as "the agencies") and in consultation
with the Comptroller of the Currency (OCC), the Federal Deposit
Insurance Corporation (FDIC), and the Attorney General conduct a
study of "whether foreign banks should be required to conduct
banking operations in the United States through subsidiaries
•rather than branches."
In conducting the study, the legislation
requires that the Secretary take into account the following
factors:
(1)
differences in accounting and regulatory practices
abroad and the difficulty of assuring that the foreign
bank meets United States capital and management
standards and is adequately supervised;
(2)
implications for the deposit insurance system;
(3)
competitive equity considerations;
8
(4)
national treatment of foreign financial institutions;
(5)
the need to prohibit money laundering and illegal
payments ;
(6)
safety and soundness considerations;
(7)
implications for international negotiations for
liberalized trade in financial services;
(8)
the tax liability of foreign banks;
(9)
whether the establishment of subsidiaries by foreign
banks to operate in the United States should be required
only if United States banks are authorized to engage in
securities activities and interstate banking and
branching; and
(10) differences in treatment of United States creditors
under the bankruptcy and receivership laws.
The legislation also requires that by December 19, 1992,
the Secretary transmit to the Committee on Banking, Housing and
Urban Affairs of the Senate and the Committee on Banking, Finance
and Urban Affairs of the House of Representatives a report on the
results of the study.
Any additional or dissenting views of
participating agencies shall be included in the report.
The full text of section 215 of the FBSEA is attached as
Appendix B.
II.
ASSESSMENT OF THE FACTORS TO BE CONSIDERED
Working groups comprised of staff from the agencies were
formed to consider the factors identified in section 215 of the
FBSEA and papers addressing these factors were drafted.^
The
The factors relating to competitive equity, national
treatment and new powers are addressed in one paper, as are the
factors regarding accounting, regulatory and management practices
and safety and soundness considerations.
9
factor papers, which address the following subjects, are attached
as Appendices C, D and E.
A P P E N D IX
C
REG U LATO RY
A C C O U N T IN G
IM P L IC A T IO N S
SA FE T Y
AND
D E P O S IT
A P P E N D IX
D
N A T IO N A L
,
M ANAG EM ENT
REG U LATO RY
SO U N D N ESS
IN S U R A N C E
C O M P E T IT IV E
AND
P R A C T IC E S
SY ST EM
E Q U IT Y
TREATM ENT/
N A T IO N A L
TREATM EN T
F IN A N C IA L
S E R V IC E S
NEW
PO W ERS
IM P L IC A T IO N S
IN T E R N A T IO N A L
A
p p e n d ix
e
O TH ER
M O NEY
IM P O R T A N T
N E G O T IA T IO N S
L A U N D E R IN G
AND
IL L E G A L
PAYM ENTS
IM P L IC A T IO N S
TAX
IM P L IC A T IO N S
BAN KRU PTCY
AND
R E C E IV E R S H IP
The findings and conclusions of the papers prepared by the inter
agency working groups are summarized below.
A.
Regulatory Implications
This section summarizes the conclusions reached in the
factor papers regarding the advantages and disadvantages of a
subsidiary requirement when considered in the light of regulatory
practices, safety and soundness considerations and implications
regarding the deposit insurance fund.
text of the relevant factor papers.
See Appendix C for the full
10
1.
Regulatory Practices and Safety and Soundness
Cons iderat ions
a.
Regulatory Practices
Regulatory practices in this context were considered to
encompass considerations such as differences in accounting and
regulatory practices abroad as well as assuring that the foreign
bank meets United States capital and management standards and is
adequately supervised.
Regardless of whether an application has
been filed for the establishment of a branch, agency or
subsidiary, in evaluating applications, regulators consider, among
other factors, capital, profitability, concentration of risk,
liquidity and asset quality.
Differing regulatory and accounting
practices also are taken into account by federal banking
supervisors and must be explained by the applicant.
In this
regard, all U.S. operations of foreign banks must maintain records
and conduct operations in accordance with U.S. practices.
Home
country authorities are contacted routinely to obtain information
that bears on the management, reputation and standing of a foreign
bank filing an application to open a branch, agency or subsidiary.
Although differences remain among supervisory practices, efforts
to harmonize regulatory practices continue.
The agencies do not believe differences in regulatory
practices warrant a subsidiary requirement, especially given
significant regulatory developments in the United States and
abroad.
The FBSEA requires that foreign banks be subject to
comprehensive supervision on a consolidated basis to be permitted
entry into the U.S. market through a branch, agency or subsidiary
11
bank.
The statute and the implementing regulations adopted by the
Board should provide ample supervisory authority with respect to
direct U.S. offices of foreign banks.
In addition, under
section 214(b) of the FBSEA, foreign banks with U.S. branches are
expected to meet capital standards "equivalent" to those required
of U.S. banks.
The establishment of minimum standards for
consolidated supervision of international banking groups and their
cross-border establishments by the Basle Committee on Banking
Supervision ("Basle Committee") also represents an important step
towards harmonization of regulatory standards.
b.
Safety and Soundness Considerations
A subsidiary requirement for all foreign bank operations
would require that the foreign bank conduct its U.S. operations in
a separate legal entity.
The actions of the subsidiary bank would
not be attributed to the parent, which would be required neither
to support the operations nor to meet the obligations of its
subsidiary.
The subsidiary's capital base would be segregated
from that of its parent, and the ability of the subsidiary to
transact business with its parent would be closely controlled.
The subsidiary bank also would be subject to assessments for the
deposit insurance fund.
Finally, a subsidiary would be denied the
benefits of being an integral part of a larger more diversified
organization.
A parent could choose (in extremis) to allow its
subsidiary to fail, although this could affect adversely the
parent bank's reputation and its ability to obtain funding. •
^
12
Conversely, a failure of the parent bank could cause difficulties
for a subsidiary, including liquidity problems, to the extent that
there is a market identification of the subsidiary with the parent
bank.
The strength of the parent, therefore, is a highly relevant
consideration for supervisors in assessing the safety and
soundness of a separately capitalized subsidiary.
The safety and soundness of a branch of a foreign bank
is closely linked with that of its parent.
However, bank
supervisory authorities in some countries have taken steps to make
foreign bank branches behave more like subsidiaries.
These
restrictions can have the effect of insulating the financial
condition of the branch or agency from that of the rest of the
organization in much the same manner as the incorporation of a
separate subsidiary.
Such restrictions have been applied by U.S.
supervisors to address particular prudential concerns in problem
cases.
However, general application of such restrictions would
have the effect of denying the foreign bank the economic benefits
that accrue to the branch form of operation.
We do not believe that a subsidiary requirement is
necessary to assure that foreign banks' direct banking operations
in the United States are conducted in a safe and sound manner.
Experience to date demonstrates that the U.S. banking operations
of a foreign bank can function safely under either the branch or
the subsidiary form of organization.
The advantages or
disadvantages of a branch or subsidiary primarily relate to
operational differences and do not support a conclusion that one
13
form is inherently more safe and sound than the other.
Continuing
convergence of supervisory standards, including the comprehensive
supervision of banking organizations operating internationally,
should enhance the ability of supervisors to monitor and enforce
safety and soundness.
2.
Deposit Insurance Considerations
U.S. bank subsidiaries of foreign banks must obtain FDIC
insurance on the same basis as other U.S. banks.
Section 214(a)
of the FBSEA (as amended) prohibits foreign banks from
establishing new insured ("retail deposit-taking") branches in the
United States.4
If foreign banks wish to engage in retail
deposit-taking activities, they must establish a subsidiary and
obtain FDIC insurance.
With the exception of a limited number of grandfathered
branches, foreign bank branches and agencies do not accept insured
deposits and, therefore, neither contribute to nor draw from the
deposit insurance fund.
Accordingly, the imposition of a
subsidiary requirement would increase the assessment base, the
contingent liabilities, and the potential exposure of the FDIC.
The increased risk exposure of the FDIC could be heightened as a
result of the enhanced ability of a. foreign bank parent to
withhold support from a separately incorporated subsidiary.
A subsidiary requirement would prompt many foreign banks
to undertake actions that would permit them to avoid paying
4
A total of 52 branches of "insured" foreign banks with $4.7
billion in non-IBF deposits were grandfathered from this provision.
14
deposit insurance assessments.
For example, these actions might
include moving U.S. business offshore, booking deposits in an
International Banking Facility (IBF), or converting deposits into
other instruments that would not be subject to deposit insurance.
These actions could temper the size of the increase in the
assessment base.
B.
National Treatment/Financial Services Implication
This section summarizes the national treatment and
competitive equity implications of a subsidiary requirement,
applied either across-the-board or in connection with the
liberalization of banking powers.
This section also examines the
impact of a subsidiary requirement on international negotiations
for liberalized trade in financial services.
See Appendix D for
the full text of the working group papers addressing these issues.
1.
Competitive Equity and National Treatment
Considerations
Bank branches enjoy certain economic and financial
benefits that are not available to subsidiaries, which include:
(1) the ability to deploy capital flexibly; (2) a lower cost of
funding;
(3) the ability to compete based on access to the
worldwide capital base of its parent; (4) freedom to engage in
transactions with the parent without significant restriction; and
(5) lower transactions costs.
As of June 1992, branches and
agencies of foreign banks together held slightly more than fourfifths (82 percent) of all assets held by foreign banks in the
United States, while foreign branches of U.S. banks held 64
percent of all assets held abroad by U.S. banks.
These figures
15
demonstrate a general preference for the use of branches in
comparison with subsidiaries.^
In short, branch operations of
foreign banks provide numerous economic and financial advantages
to consumers and financial institutions in the United States and
abroad.
Imposition of an "across-the-board" (unqualified)
subsidiary requirement would necessitate a major restructuring of
foreign banks' operations in the United States, which would reduce
the depth, efficiency and competitiveness of the U.S. banking
market.
It could prompt foreign countries to retaliate, making it
more difficult for U.S. banks to branch abroad.
These countries
might introduce a subsidiary requirement or review whether to
permit U.S. banks to engage in activities that are prohibited in
the U.S. market.
Finally, countries that might otherwise consider
dropping their own subsidiary requirement (e.g., Canada or Mexico)
might reconsider if the United States were to adopt such a
requirement.
An across-the-board subsidiary requirement would also be
unnecessary under the minimum standards for consolidated
supervision adopted by the Basle Committee, which has sought to
strengthen supervision by stressing the primary responsibilities
of the home country with respect to its foreign bank branches.
Neither the Treasury nor the Board believes that such an
unqualified subsidiary requirement is warranted.
5
See Appendix A for further detail regarding the extent and
form of foreign banks' operations in the United States and of U.S.
banks' operations abroad.
16
The agencies also examined whether a subsidiary
requirement should be imposed for banking operations of foreign
banks in the United States if U.S. banking organizations are
permitted to engage through separately incorporated subsidiaries
in securities activities or interstate banking and branching.
Under this type of approach, only those foreign banks that wished
to avail themselves of the expanded powers would be required to
restructure their branch operations into subsidiary form.
The Administration's 1991 financial modernization
proposal, which ultimately was not adopted, was broadly along
these lines.
Under this proposal, new powers would have been
authorized to those U.S. financial services holding companies with
"well-capitalized" banks.
Foreign banks that wished to obtain
expanded powers (which under the proposal included securities and
insurance activities) would have been required to "roll-up" all
existing branch and agency operations into one or more
well-capitalized U.S. bank subsidiaries of a financial services
holding company.
Significant banking developments have transpired since
the Administration introduced its 1991 proposal.
Several
developments have strengthened the ability of regulators to
-
supervise the direct offices of foreign banks in the United
States.
The adoption of the FBSEA has strengthened the
regulators' authority to assure that untoward actions do not
c
,
,
The Financial Institutions Safety and Consumers Act of
1991 (FISCCA).
17
•
•
jeopardize the safety and soundness of the financial system.
7
The establishment of the minimum standards for consolidated
supervision by the Basle Committee on Banking Supervision also
represents an important step towards harmonization of supervisory
efforts with regard to foreign bank branches.
In addition, the Report on Capital Equivalency, mandated
by Congress in section 214(b) of the FBSEA, establishes guidelines
that help assure that U.S. banks will not be placed at a
competitive disadvantage in their own market.
As a result,
"roll-up” is no longer necessary on competitive equity grounds.
The joint annual updates on capital equivalency also provide the
Board and the Treasury opportunity to ascertain that foreign banks
are meeting capital and accounting standards equivalent to those
required of U.S. banks.
The United States has generally followed the principle
of national treatment with respect to financial services.
National treatment is based on the principle of nondiscrimination
between domestic and foreign firms, or treatment that is "no less
favorable than that accorded in like circumstances to domestic
enterprises."
The United States endorsed a de facto national
treatment standard and "equality of competitive opportunity" in
7 FBSEA requires that the Board in consultation with Treasury,
establish criteria for banks from countries that do not provide
comprehensive supervision on a consolidated basis.
18
the International Banking Act of 1978.8
This principle is
embodied in the OECD Codes of Liberalization, the North American
Free Trade Agreement (NAFTA), and current policies adopted in
connection with the Uruguay Round of the GATT negotiations.
Consistent with this principle, the United States
believes that, subject to any relevant prudential considerations,
the guiding policy for foreign bank operations should be the
principle of investor choice.
The right of a foreign bank to
determine whether to establish a branch or a subsidiary is
consistent with competitive equity, national treatment and
equality of competitive opportunity.
The U.S. Government has
pursued this policy in a wide range of fora, including the Uruguay
Round, NAFTA, and bilateral negotiations.
Nevertheless, some
countries have continued to restrict the right of U.S. banks to
branch in their markets.
Some have suggested that, following the adoption of
reciprocal national treatment authority by many major U.S. trading
partners, the U.S. Government also should be granted authority to
apply a reciprocal national treatment standard..
With regard to
8
For a discussion of equality of competitive opportunity and
the distinctions between de facto and de jure national treatment,
see the 1979 Report to Congress on Foreign Government Treatment of
U.S. Commercial Banking Organizations, pages 1-3 and 15-18.
A country that provides reciprocal national treatment
grants national treatment to banks from another country contingent
upon that country providing national treatment to its banks. By
January, 1993, when the EC Second Banking Directive is due to be
implemented by member states, at least 18 of the 24 OECD countries
(including the 12 EC member states) will possess some type of
reciprocity powers.
19
establishment, this could mean that a subsidiary requirement could
be imposed upon banks from countries that do not permit:
banks to branch;
(1) U.S.
(2) U.S. bank branches the full benefits granted
their own bank branches; and/or (3) national treatment and
equality of competitive opportunity to U.S. banks and bank holding
companies.
This action could cause the affected country to
provide national treatment and equality of competitive
opportunity; alternatively, it could cause the country to
retaliate and restrict further access by U.S. banks.
2.
Financial Services Negotiations
A subsidiary requirement for all foreign banking
operations in the United States could raise questions of
interpretation with regard to Friendship, Commerce and Navigation
(FCNS) Treaties and Bilateral Investment Treaties (BITs), the OECD
Codes, and the U.S.-Canada Free Trade Agreement.
However, under
the NAFTA, a subsidiary requirement that applied to all other
countries, while permissible, could impair the prospect for U.S.
banks to achieve branching rights into Mexico and Canada at a
future date.
This could occur despite the arrangement for
additional liberalization agreed in the NAFTA with respect to
foreign bank branching.
Under a proposed Uruguay Round Services Agreement, a
subsidiary requirement under U.S. law could require reservations
to market access commitments of the United States and would be
inconsistent with U.S. objectives in the Round.
It also would be
likely to affect adversely on-going negotiations with developed
20
countries to lock-in existing branching rights of U.S. banks
abroad.
With respect to markets that do not permit branching, a
targeted subsidiary requirement could tend to discourage further
efforts to liberalize in these markets.
It is also possible that
the threat of a subsidiary requirement might serve as leverage for
further liberalization.
C.
Other Important Implications
This section addresses the implications of a subsidiary
requirement when considered in the light of the need to prevent
money laundering and illegal payments and considerations relating
to tax and bankruptcy.
See Appendix E for the full text of the
papers addressing these issues.
1.
Money Laundering Considerations
All foreign banks doing business in the United States,
regardless of whether they are operating a branch or a subsidiary,
are subject to the Bank Secrecy Act (BSA) .
The BSA sets forth the
currency reporting and recordkeeping requirements for banks and
other financial institutions.
It has evolved into the major
anti-money laundering legislation aimed at the activities of
banks.
The ability of regulatory and law enforcement officials to
assess and ensure compliance with the BSA and to detect and
prosecute money laundering is not affected materially by whether a
foreign bank chooses to conduct business as a branch or a
subsidiary in the United States.
2.
Tax Considerations
The effect of a subsidiary requirement on the tax
21
liability of a foreign bank would vary for banks from different
countries, due to:
(1) differences in home country tax laws;
(2)
the existence of U.S. income tax treaties with some, but not all,
home countries; and (3) differences between the provisions of
existing U.S. income tax treaties with different countries.
Some
preliminary conclusions can be drawn, however, as to whether
particular tax-related consequences of a subsidiary requirement
would tend to have a neutral or non-neutral effect on a foreign
bank's tax liability and whether this effect would depend upon tax
treaties or home country law.
The conversion of a branch into a subsidiary would
generally be a tax-free transaction for purposes of U.S. taxation,
but the home country tax consequences of the conversion would
vary.
However, the subsidiary would not be permitted to carry
over (following conversion) any net operating losses that had been
accumulated by the former U.S. branch.
With that one important
exception, the tax treatment of a subsidiary is generally
equivalent to that of a branch.
However, differences between the
taxation of a branch and a subsidiary may be affected
significantly by U.S. income tax treaties.
It is conceivable that a subsidiary requirement could
induce a foreign bank to shift U.S. loans to foreign offices, as a
result of limits that would apply to the subsidiary regarding
amounts that may be lent to single borrowers.
Interest paid by
U.S. borrowers to foreign banking offices would be subject to
gross basis U.S. withholding tax.
Although a number of U.S.
22
income tax treaties would eliminate this withholding tax, there
are countries for which either no U.S. income tax treaty exists or
the applicable treaty retains a positive withholding rate for
interest.
In these cases, the U.S. withholding tax on interest
could eliminate a foreign bank's net profit on a U.S. loan made
from the home office.
This could result in a reduction in lending
in the U.S. market by the affected foreign banks.
3.
Bankruptcy Considerations
Under U.S. law, a creditor of an insolvent U.S. branch
of a foreign bank would be treated in much the same manner as a
creditor of an insolvent domestic bank subsidiary of a foreign
bank parent.
Each would have access to assets of the branch or
subsidiary under the jurisdiction of the U.S. liquidator.
Potentially, a creditor of a branch would have access to
the worldwide assets of the foreign bank.
A creditor of a
subsidiary would not have any legal claim to the assets of the
parent bank, assuming that no legal or factual basis exists for
piercing the.corporate veil.
A subsidiary requirement, therefore,
would potentially limit the assets available to creditors in the
event of liquidation.
III. CONCLUSIONS
A subsidiary requirement applied either across-the-board
or for purposes of expanded powers ("roll-up") would impose
substantial economic and financial costs on the U.S. operations of
foreign banks.
By not permitting foreign banks the option of
conducting U.S. operations in branches, the availability of credit
23
in the U.S. market could be reduced, perhaps substantially.
For
example, the participation of foreign banks in lending syndicates,
trade finance, and swaps and other products would be greatly
restricted by the increase in costs and their inability to access
their worldwide capital base.
Imposition of such a subsidiary
requirement would likely prompt foreign countries to retaliate
against U.S. bank branches, perhaps by requiring that they
establish a subsidiary or by restricting their activities.
Although some might argue that an unqualified subsidiary
requirement would safeguard financial stability, more appropriate
and effective measures are available for purposes of protecting
safety and soundness.
These include the promotion of adequate
supervisory standards worldwide and the right to prohibit access
to the U.S. market by banks that are not adequately supervised.
The FBSEA, as well as the minimum standards for consolidated
supervision established by the Basle Committee, represent
important steps in this direction.
Significantly, both measures
implicitly endorse foreign bank branches.
In addition, U.S. bank regulators may impose specific
measures upon troubled banks, including asset maintenance
requirements and restrictions on transactions between a branch and
its parent, that "wall-off" or "ring-fence" the activities of a*
branch from those of its troubled parent without the unnecessary
costs and inefficiencies associated with a subsidiary requirement.
In the past, these measures have successfully addressed problems
24
arising at branches of troubled foreign banks without penalizing
the activities of branches of healthy foreign banks.
The earlier case for roll-up was based upon the belief
that differences in capital and regulatory standards might place
U.S. banks at a competitive disadvantage in their own market.
In
this regard, the guidelines established in the Report on Capital
Equivalency provide assurance that U.S. banks will not be placed at
a competitive disadvantage in their own market.
The joint
annual updates on capital equivalency also provide the Board and the
Treasury opportunity to ascertain that foreign banks are meeting
capital and accounting standards equivalent to those required of
U.S. banks.
Based upon an examination of all ten factors included in
the legislation, the agencies oppose a subsidiary requirement that
would be applied either across-the-board or for purposes of expanded
powers ("roll-up").
The Treasury and the Board consistently have
opposed a subsidiary requirement
that would be applied to all
foreign banking operations in the United States.
review
of
regulatory
developments
reveals
The interagency
several
significant
changes since the introduction of the 1991 Administration proposal.
The agencies, therefore, agree that neither competitive equity nor
prudential
considerations
justify
a
"roll-up"
of
foreign
bank
branches should expanded powers be permitted to U.S. banks.
The United States believes that the guiding policy for
foreign bank operations should be the principle of investor choice.
The right of a foreign bank to determine whether to establish a
25
branch
or a subsidiary
competitive
equity,
national treatment and equality of competitive opportunity.
Foreign
countries
with banks
is
that
consistent
with
are provided national
treatment
and
equality of competitive opportunity in the U.S. market should offer
U.S.
banks
national
treatment
and
competitive
equity
in their
market.
In the Uruguay Round negotiations, NAFTA discussions, and
bilateral negotiations, U.S. officials have impressed upon other
countries
the
importance
of
providing
equality
of
competitive
opportunity to U.S. banks and they will continue to do so.
agencies
recognize
that
it
is
important
to
assure
negotiators have the necessary tools to advance U.S.
abroad.
that
The
U.S.
interests
However, the agencies agree that a subsidiary requirement
applied to all foreign banking operations either across-the-board or
for purposes of expanded powers
context.
is not desirable even in this
APPENDIX A
As shown in Chart 1, foreign banks have been expanding
their activities at their U.S. offices, both in absolute amounts
and as a share of banking activity in the United States.
Between
year-end 1980 and June 1992, assets of U.S. offices of foreign
banks increased more than three-fold to $860 billion, and their
share in the United States market nearly doubled from 12 percent
to 23 percent.
Chart 2 provides data on the types of offices at which
foreign banks conduct their U.S. activities.
At mid-year 1992,
branches and agencies accounted for over four-fifths of the
assets of all foreign banks.
Commercial bank subsidiaries
accounted for almost one-fourth of foreign bank activity at yearend 1980; by June 1992, commercial bank subsidiaries constituted
less than one-fifth of the total U.S. office assets of foreign
banks.
Chart 3 provides data on the nationality of foreign
banks conducting business in the United States.
The Japanese
banks have been heavily represented in U.S. markets, having by
far the largest national share.
The Japanese banks' share of
total foreign bank activity in the United States peaked in
December 1989 at 57 percent, and has declined steadily since then
as Japanese banks have retrenched generally in international
markets.
Canadian, French and Italian bank shares of foreign
bank assets have generally been in the 5-10 percent range during
this period.
British banks' share of foreign bank activity in
2
U.S. markets has declined by more than one-half during this
period largely because.of the sale of two large California banks.
The Swiss banks' share of foreign bank activity has also declined
since 1980.
The German banks' share has been between 2 and 3
percent throughout the period.
Chart 4 provides data on the growth of foreign bank
lending to businesses at their U.S. offices.
This lending
roughly paralleled the growth of their total assets, increasing
more than three-fold during the period to stand at about $210
billion as of June 1992.
The foreign banks' share of the market
also doubled from 18 to 36 percent.
The higher share in business
lending by foreign banks reflects the concentration by branches
and agencies of foreign banks in wholesale corporate lending
rather than other types of lending.
For purposes of comparison, Chart 5 provides historical
data on the types of overseas offices of U.S. banks.
Similar to
foreign banks in the United States, U.S. banks prefer branches to
subsidiaries.
In recent years, foreign subsidiaries have
increased to about one-third of the total assets held by foreign
offices of U.S. banks.
This share increase reflects several
trends, including expansion of retail-based subsidiaries in
several countries, the use of subsidiaries by some U.S. banking
companies to conduct a broader range of non-banking financial
activities overseas, and the reduction in branch activity in
overseas interbank eurodollar markets.
Chart 1
December 3, 1992
FOREIGN BANK ASSETS IN THE UNITED STATES 1/
Amount
Foreign Bank Share 21
* . ....
$ billions
Percent
100
90
80
—
70
60
50
—
40
30
20
10
1/ Data for 1992 as of June.
2/ As share of assets of ail banking offices in the United States
Chart 2
$201 Billion
1980
(1) Data for 1992 as of June
Source: Federal Reserve
$861 Billion
1992(1)
••
Share of U.S. Assets Held by Foreign Banks
By Type of Office
Chart 3
Share of U .S. Assets Held by Foreign Banks:
By Home Country
23%
Canada
r > ____K M .
r
L j -, — 1 T* - - ______
1980
1985
1990
1992 (1)
France
(1) Data for 1992 as of June
20%
Japan
United Kingdom
Other
Italy
Switzerland
Germany
Chart 4
December 3, 1992
FOREIGN BANK BUSINESS LOANS AT U.S. OFFICES 1/
Amount
$ billions
500
500
| Domestically owned banks
450
m
450
U.S. offices of foreign banks
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
1980
1985
0
1990
1992
Foreign Bank Share 2/
Percent
100
90
80
70
60
50
40
30
20
10
0
1/ Data for.1992 as of June.
21 As share of business loans at all banking offices in the United Staton.
Chart S
December 3, 1992
OVERSEAS OFFICE ASSETS OF U.S. BANKS: BY TYPE OF OFFICE
Am ount
$ billions
400
Branches
350
300
250
200
150
Subsidiaries
100
50
0
Distribution by Type of Office
7
7r
_
Percent
100
90
Branches
80
70
60
50
40
30 —
Subsidiaries
30
20
10
0
APPENDIX B
SECTION 215. STUDY AND REPORT
ON SUBSIDIARY REQUIREMENTS FOR
FOREIGN BANKS
(a) IN GENERAL. - The Secretary of the Treasury (hereafter
referred to as the "Secretary”)/ jointly with the Board of
Governors of the Federal Reserve System and in consultation with
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, and the Attorney General, shall conduct a study of
whether foreign banks should be required to conduct banking
operations in the United States through subsidiaries rather than
branches.
In conducting the study, the Secretary shall take into
account (1)
differences in accounting and regulatory practices
abroad and the difficulty of assuring that the foreign
bank meets United States capital and management
standards and is adequately supervised;
(2)
implications for the deposit insurance system;
(3)
competitive equity considerations;
(4)
national treatment of foreign financial
institutions;
(5)
the need to prohibit money laundering and illegal
payments;
(6)
safety and soundness considerations;
(7)
implications for international negotiations for
liberalized trade in financial services;
(8)
the tax liability of foreign banks;
2
(9)
whether the establishment of subsidiaries by
foreign banks to operate in the United States should be
required only if United States Banks are authorized to
engage in securities activities and interstate banking
and branching; and
(10)
differences in treatment of United States
creditors under the bankruptcy and receivership laws.
(b)
REPORT REQUIRED. - Not later than 1 year after the date
of enactment of this Act, the Secretary shall transmit to the
Committee on Banking, Housing, and Urban Affairs of the Senate
and the Committee on Banking, Finance and Urban Affairs of the
House of Representatives a report on the results of the study
under subsection (a). Any additional or dissenting views of
participating agencies shall be included in the report.
REGULATORY PRACTICES AND
SAFETY AND SOUNDNESS
CONSIDERATIONS
(FACTORS 1 AND 6)
APPENDIX C
REGULATORY PRACTICES AND SAFETY AND SOUNDNESS
CONSIDERATIONS (FACTORS 1 AND 6)
I.
SUBSIDIARY VS. BRANCH: REGULATORY PRACTICES
Pursuant to federal banking laws1, the Board of
Governors of the Federal Reserve System ("the Board") and the
Office of the Comptroller of the Currency ("the OCC") are
required to evaluate, among other things, the financial and
managerial resources of foreign banking organizations that apply
to acquire a subsidiary bank or establish a branch or agency.
Whether the application relates to the acquisition or
establishment of a bank or the establishment of a branch or
agency, the Board and the OCC evaluate applications by foreign
banking organizations under the same set of general criteria
relating to financial and managerial strength.
The application
process is designed to screen foreign banks in terms of their
ability to participate in the U.S. banking market under
applicable statutory and prudential standards.
In evaluating the managerial resources of foreign banks
applying to acquire a subsidiary bank or establish a branch or
agency, the supervisory authorities in the home country are
1
International Banking Act of 1978, as amended; Bank
Holding Company Act of 1956, as amended. Prior to passage of the
Foreign Bank Supervision Enhancement Act of 1991, which amended
the International Banking Act of 1978, the Federal Reserve had no
formal role in the licensing of branches and agencies of foreign
banks by either the Office of the Comptroller of the Currency or
any state.
2
routinely contacted in order to obtain information which bears on
the management resources, reputation and standing of the foreign
bank.
In addition, a general review is conducted of the
experience and expertise of the proposed U.S. management and
background checks are made.
In evaluating the financial condition of a foreign
banking organization, sufficient information is required from the
applicant in order to permit an assessment of the financial
strength and operating performance of the foreign organization.
Factors taken into account include capital, profitability,
concentrations of risk, liquidity and asset quality.
Differences
in accounting and regulatory practices are also generally taken
into account.
In this regard, information submitted will consist
of reports prepared in accordance with local practices together
with an explanation and reconciliation of major differences
between local accounting standards and U.S. generally accepted
accounting procedures.
The"issue of capital equivalency was recently examined
in a report to the House and Senate Banking Committees that was
prepared jointly by the Board and Treasury.
Equivalency Report, June 17, 1992.)
(See, Capital
The detailed findings of
that report need not be reiterated here; broadly, however, the
report concluded that the minimum capital standard established by
the Basie Accord provides a common basis for evaluating the
general equivalency of capital among banks from various
countries.
3
Although differences in regulatory practices among
supervisors continue to exist, efforts are under way to reduce
these differences, to the extent possible.
Discussions are
currently taking place among various supervisors relating to the
convergence of regulatory practices.
A recent example of the
efforts undertaken by banking supervisors is the minimum
standards for the supervision of international banking groups and
their cross-border establishments proposed by the Basle Committee
on Banking Supervision.
In acting on applications by foreign banks, the Board
or OCC, in any event, is required to ascertain that the foreign
bank is subject to comprehensive supervision on a consolidated
basis by the home country supervisor.
This requirement applies
whether the foreign bank is seeking to acquire or establish a
banking subsidiary or establish a branch or agency in the United
States.
Once a foreign bank establishes a U.S. banking
presence, that banking operation, whether an agency, branch or
subsidiary bank, is supervised and regulated under U.S. rules.
Such an operation, whether branch or subsidiary, is expected to
maintain records and conduct operations in accordance with U.S.
banking and regulatory practices.
For example, regardless of the accounting practices of
the foreign banking organization's home country, operations of
foreign banks in the United States, whether conducted through a
subsidiary bank or a branch or agency, are subject to U.S.
4
regulatory accounting standards.
Individual branches and
agencies must also follow U.S. regulatory standards in the
preparation of their quarterly reports provided to the federal
banking regulators (Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks - FFIEC 002).
Similarly,
branches and agencies are expected to have internal controls and
operating procedures that meet U.S. standards.
These procedures
are subject to examination and, where necessary, U.S. banking
authorities can and have used their supervisory powers to force
remedial action.
The basic standards applied to branches and the
range of regulatory powers available to assure compliance with
U.S. rules broadly compare to those applicable to subsidiary
banks.
H.
SUBSIDIARY V S. BRANCH: SA FETY AND SOUNDNESS CONSIDERATIONS
Safety and soundness can be defined essentially as the
extent to which depositors and creditors can be assured that a
bank is being operated in a manner that does not expose them to
undue risk of loss.
Safety and soundness also encompasses a
consideration of the risk of loss to the federal deposit
insurance fund in the event that the FDIC has to 'reimburse
insured depositors.
For a bank with a large volume of insured
deposits, substantial.risk is borne by the insurance fund.
On
the other hand, for an institution that accepts primarily
uninsured deposits, to the extent that losses exceed capital,
losses would be absorbed by depositors and other creditors.
5
In addition to the concern that banking institutions be
operated in such a way as to prevent losses to depositors or to
the insurance fund, there is also the potential that an
institution could operate outside the bounds of the law, such as
by engaging in money laundering or other illicit activities.
Thus, safety and soundness further encompasses the principle that
an institution operates in compliance with the law.
Considerations related to legal compliance are discussed fully in
the paper on Factor 5 regarding the need to prohibit money
laundering and other illegal payments.
Generally, this review
found that there are no significant differences between the
branch and subsidiary form of organizational structure with
respect to compliance with the law.
Both types of operation are
examined and are subject to enforcement actions and penalties for
violations of the law.
There are a number of theoretical advantages and
disadvantages, from a safety and soundness standpoint, associated
with the two basic forms of organization for U.S. operations of
foreign banks.
These advantages and disadvantages are embodied
in the legal and regulatory differences between branches and
subsidiaries, which affect the way they operate.
A discussion of
the characteristics of each form of organization is provided
below.
For purposes of this discussion, it is assumed that
6
branches of foreign banks do not accept retail deposits and,
thus, do not have deposit insurance.2
Comparison of Branches and Subsidiaries
A subsidiary of an organization is a legal entity
separate from its parent.
Generally, the actions of a subsidiary
are not attributed to its parent.
As a result, the parent is not
legally required to support the subsidiary's operations or to
meet its obligations.
There is, however, no legal distinction
between a branch of an organization and the organization as a
whole.
Generally, obligations of a branch are obligations of the
organization.
In considering the implications for bank safety and
soundness of the subsidiary form of organization, one view is
that a subsidiary is more insulated, at least in terms of
corporate form, from the rest of the parent organization than a
branch and has its own capital base to absorb losses.
The extent
to which a subsidiary bank may engage in transactions with the
parent bank is more closely controlled than are branch relations
with the bank, thereby reducing potential concentrations of
exposure to the parent and related entities.
Also, a subsidiary
bank's single borrower lending limit is based on the subsidiary
2 Insured branches of foreign banks in the United States
currently represent a very small sub-set of the total U.S.
branches and agencies of foreign banks. Due to recent
legislative changes, while existing insured branches have been
grandfathered, generally no new insured branches may be
established. For this reason, this paper will focus upon
uninsured branches of foreign banks.
7
bank's own level of capitalization and is often quite small in
relation to the total resources of the parent.
However,
subsidiary banks must obtain deposit insurance, which may have
the effect of reducing market discipline.
(See separate paper
addressing considerations related to deposit insurance.)
A subsidiary, by virtue of its separate corporate
existence, however, is denied the benefit of being an integral
part of a larger, more diversified banking institution.
Although
theoretically a local bank subsidiary of a foreign parent bank
can operate profitably as a stand-alone entity without the
benefit of direct access to its ,parent's funding, support and
name, this access in reality is often critical to the
subsidiary's survival of a downturn in its market.
A parent
institution could, under the law, allow a subsidiary to fail
without providing additional support.
In practice, it is likely
that only in extremis would a banking institution with
international operations allow a subsidiary to fail, in view of
the potentially harmful effect this would have on the parent
bank's market reputation and its ability to obtain funding in
other markets.
On the other hand, collapse of the parent bank can
cause serious difficulties for a subsidiary, including liquidity
problems, to the extent that there is market identification of
the subsidiary with the parent bank.
The strength of its parent,
therefore, continues to be a highly relevant consideration for
8
supervisors in assessing the safety and soundness of even a
separately capitalized subsidiary bank.
Under the branch form of organization, the U.S. office
functions not as an independent entity but rather as an integral
part of the parent organization, which serves as a direct source
of funding and support for the U.S. office.
While not
necessarily diversified themselves, branches also benefit from
the overall diversification of the consolidated organization.
Using this form of organization, a bank may enhance its overall
profitability through the use of branches that carry out
particular functions within the organization or serve specific
markets.
For example, since transactions with the parent are not
restricted, those business functions that require significant
volumes of intercompany transactions, such as dollar clearing and
global trading functions, are often carried out through branches.
The lack of restrictions on transactions with the foreign parent
also facilitates the transfer of funds within the organization,
both to provide support when needed and to take advantage of
opportunities to maximize overall profits.
Finally, a branch's
lending limit is based on the consolidated capital of the foreign
bank parent.
A branch's safety and soundness, however, is directly
linked to that of its parent.
A branch cannot survive as an
independent operating entity if its parent bank fails.
In
addition, deposits placed with a branch are ultimately deposits
with the foreign parent and are subject in large part to the
9
country risk of the parent bank.
Branches normally fund their
operations by accessing the wholesale markets and depositors
operating in these markets are expected to recognize these risks
and make investment decisions accordingly, which imposes market
discipline upon branches seeking such funding.
While there are these general distinctions between
branches and subsidiaries, bank supervisory authorities in some
countries have taken steps to make foreign bank branch and
subsidiary operations more alike.
For example, German
supervisory authorities have established "dotation" capital
requirements for branches of foreign banks, under which branches
are required to maintain a "capital" position.
Credit extended
and participations held by the branch are limited to a specified
amount of this "capital."
Some-state supervisors in the United States have
employed a different approach by imposing "asset maintenance"
requirements upon certain individual banks that are experiencing
financial weakness or are from countries whose currencies or
economies are considered to be unstable.
Under asset maintenance
requirements, a branch or agency is required to maintain assets
that exceed third-party liabilities by a certain stated
percentage.
Federal branches and agencies of foreign banks are
required to maintain a "capital equivalency deposit" (CED) with a
Federal Reserve member bank in the amount of five percent of the
branch's (or agency's) third party liabilities.
U.S. federal
10
bank regulatory authorities also have the authority under
existing law to restrict branch operations in appropriate cases
in such a way as to provide additional protection to local
depositors and creditors by, for example, introducing asset
maintenance requirements.
Another possible way to make a foreign bank's branch
operations more similar to subsidiary operations is to place
limits on transactions with the foreign parent, such as by
subjecting the branch operations to limitations on transactions
with affiliates similar to those contained in section 23A of the
Federal Reserve Act.
In the United States, however, such
prudential requirements have not had the effect of requiring the
branch to operate as a subsidiary in the conduct of its business
operations; •
Asset maintenance requirements, restrictions such as
those required under Section 23A of the Federal Reserve Act, and
other supervisory actions can and have been used by U.S.
regulators to impose restrictions in particular cases, when
believed to be necessary to deal with specific problems for
safety and soundness purposes.
These restrictions have the
effect of insulating the financial condition of the branch or
agency from that of the rest of the organization in much the same
manner as the incorporation of a separate subsidiary.
However, while useful in dealing with specific
problems, imposition of prudential requirements across the board
in ways that would limit business operations would effectively
11
prevent branches from functioning as intended within the
operating plans of the respective foreign banking organizations
and would risk the relocation of their business outside the
United States.
Such an approach could also have further negative
repercussions in that bank regulators abroad could subject U.S.
banks' overseas operations to similar requirements.
In any event, there have been very few instances where
foreign banks with U.S. operations have failed or where the U.S.
operations of a foreign bank have required rescue.
Those
instances that have occurred in recent years have resulted in no
losses to either depositors or creditors of the U.S. operation,
whether in a branch or subsidiary form.
(For further discussion
of these matters, see separate paper on bankruptcy.)
Conclusion
Our experience to date has shown that the U.S.
operations of foreign banks can be operated safely under either
the branch or the subsidiary form of organization.
Instances of
failure, with respect to either the parent or the U.S. operation,
have been very few and, where they have occurred, have been
resolved without loss to either insured or uninsured depositors
or to the deposit insurance fund.
This has been the result wi,th
respect to both the branch and subsidiary form of organization.
The issues raised in the Report to the Senate Committee
on Foreign Relations from Senators Kerry and Brown, dated
September 30, 1992, regarding a subsidiary requirement were
considered at length during the course of this study.
Although
12
there are theoretical advantages and disadvantages with respect
to safety and soundness considerations under the two forms of
organization, these distinctions are primarily associated with
differences in the way the two forms of organization operate and
do not support a conclusion that one form is inherently more safe
and sound than the other.
The ongoing convergence of supervisory
standards, including those relating to the comprehensive
supervision of banking organizations operating internationally,
should enhance the ability of supervisors to monitor and enforce
principles of safe and sound operation for all types of U.S.
operations of foreign banks.
IMPLICATIONS FOR THE DEPOSIT
INSURANCE SYSTEM
(FACTOR 2)
APPENDIX C
IMPLICATIONS FOR THE DEPOSIT INSURANCE SYSTEM
I.
SUMMARY AND CONCLUSIONS
The direct, short-term implications for the U.S. deposit
insurance system of requiring foreign banks to conduct banking
operations in the United States through subsidiaries, and not
branches, are:
(1) the deposit insurance assessment base and,
consequently, the assessment income of the Federal Deposit
Insurance Corporation ("FDIC") are likely to increase;
(2) the
amount of deposits covered by the FDIC and, therefore, the
contingent liabilities of the FDIC are likely to increase; and
(3) the risk exposure of the FDIC is likely to increase in
response to changes in the structure of the U.S. banking system
and the enhanced ability of a foreign bank parent to restrict or
withhold support from a separate subsidiary.
It is not possible to quantify the impact of these changes
on the deposit insurance system because the subsidiary
requirement could create an incentive for foreign banks to move
their current operations outside of the United States.
As a
result of the requirement, foreign banks would be likely to
restructure their balance sheets, probably by reducing their
assets and liabilities in the United States, to lessen insurance
costs (and other costs of operating a subsidiary).
The longer
term implications of the subsidiary requirement depend on whether
the requirement strengthens or weakens the structure and
condition of the U.S. banking system as any changes in the
2
banking system may affect the risk exposure of.the deposit
insurance fund.
H.
ANALYSIS
This analysis is divided into three sections:
Background,
(A)
(B) Current Law, and (C) Implications of. Change.
A. Background
As of June 1992, foreign banks operated 382 branches in the
United States.
These branches held aggregate liabilities of $598
billion, or 18.7 percent of the total liabilities held by FDICinsured commercial banks.
As of the same date, 52 branches had
FDIC insurance and held $10.1 billion in assets and $4.1 billion
in deposits (excluding international banking facility ("IBF")
deposits).1
U.S. branches of foreign banks generally focus on wholesale
banking activities more so than most U.S. banks.
As a result,
these branches rely more heavily on borrowed funds and on other
funds that are not subject to FDIC insurance assessments than
U.S. banks do generally.
For example, as of June 1992, deposits
accounted for 54% of liabilities of U.S. branches of foreign
1
In addition, 220 agencies of foreign banks held total
liabilities of $101.2 billion on that date. The main difference
between branches and agencies is that agencies may only accept
"credit balances" received in connection with the customer's
other business with the agency, and not deposits, from U.S.
citizens or residents.
3
banks, as compared with 83% of the liabilities of FDIC-insured
U .S . commercial banks.2
U.S. branches of foreign banks also make extensive use of
international banking facilities (IBFs)3.
IBFs were first
authorized for use by all banks in 1981 to attract Eurocurrency
business, which is a wholesale banking activity, by allowing
banks to conduct a deposit and loan business with foreign
residents free from reserve requirements and FDIC insurance
assessments.
Only time deposits that originate from foreign
sources, other IBFs or sister offices, and generally that have a
minimum transaction size of $100,000, may be placed in IBFs.
As
of June 1992, U.S. branches of foreign banks held more than half
(56 percent) of their deposits in IBFs.
B. Current Law
The Federal Deposit Insurance Act ("FDI Act") requires the
federal deposit insurance system, administered by the FDIC, to
insure up to $100,000 of the deposits held by each depositor at
an insured depository institution.
12 U.S.C. § 1821(a)(1).
Insurance coverage of a U.S. bank extends both to retail and
2 This relatively low percentage of deposits to total
liabilities may even understate the wholesale orientation of
foreign bank branches. A large proportion of foreign branch
deposits are in fact funds due to banks and, in response to a
subsidiary requirement, could be converted to term federal funds
or to borrowings to avoid FDIC assessments.
3 Both U.S. banks and U.S. offices of foreign banks are
permitted to establish IBFs, which consist of asset and liability
accounts segregated on the books of the bank that has established
the IBF. An IBF is not a separate entity from the bank.
4
wholesale deposits once an institution is insured; deposits held
in an insured branch of a foreign bank receive insurance
protection only if received from a U.S. citizen or resident
unless the FDIC determines otherwise.
12 U.S.C. 1813(m) (2).
Insured institutions must pay semi-annual assessments to the
FDIC for deposit insurance.4 Under the current insurance system,
an institution's assessment equals one-half of the "assessment
rate" multiplied by the institution's "average assessment base".
The FDIC recently increased the assessment rate from $0.23 per
$100 of deposits to an average of $0,254 per $100 of deposits.
The assessment base for insured branches of foreign banks is
essentially the same as for an insured U.S. bank, i.e., domestic
deposits reduced for float.5 The assessment base includes
neither deposits held in IBFs nor deposits held by U.S. offices
of Edge and agreement corporations, as these are not domestic
deposits.
An institution's average assessment base equals the
average of an institution's assessment base on the two semi
annual dates that call reports (FFIEC 031) are submitted.
U.S. branches of foreign banks were not eligible for federal
deposit insurance until the enactment of the International
Banking Act of 1978 ("IBA").
The IBA originally required any
branch of a foreign bank that accepted deposits of less than
4 Section 7 of the FDI Act governs the current deposit
insurance assessment system, and includes details on the
computation procedures. 12 U.S.C. § 1817.
5 Domestic deposits are demand deposit liabilities and time
and savings deposit liabilities held in domestic offices of banks
in the United States, its territories, and its possessions.
5
$100,000 that are domestic retail deposits as determined by the
FDIC, or by the Office of the Comptroller of the Currency in the
case of federal branches, to obtain deposit insurance. 12 U.S.C.
§ 3104(a), (b).
The Foreign Bank Supervision Enhancement Act of
1991 ("FBSEA") extended this restriction by requiring foreign
banks to conduct domestic retail deposit taking activities
requiring deposit insurance protection only through an insured
bank subsidiary.
12 U.S.C. § 3104(c).
As a result, foreign
banks cannot generally establish new insured branches to conduct
such activities.
Existing insured branches are grandfathered.6
C. Implications of Imposing a Subsidiary Requirement
Requiring branches of foreign banks to roll-up their
operations into subsidiaries will affect the assessment base,
assessment income, liabilities, and risks of the deposit
insurance system.
Assuming U.S. branches of foreign banks
converted to subsidiaries without changing their liability
structure, the assessment base of the FDIC would increase by the
amount of non-IBF deposits then held in all uninsured foreign
bank branches.
As of June 1992, these deposits amounted to
$129.3 billion, or about 5.5 percent of the $2,353 billion in
assessable deposits in all FDIC-insured commercial banks.
At the
new annual average"assessment rate of $0,254 per $100 of
6
The FBSEA originally raised an issue as to whether a
foreign bank must form an insured subsidiary to accept any type
of deposit that is less than $100,000, rather than just domestic
retail deposits. Congress clarified in legislation enacted on
October 28, 1992 that a subsidiary is only required for domestic
retail deposit-taking activities.
6
deposits, the assessment income of the FDIC would increase by
$341 million, or 6.0 percent of the 1991 assessment income of
$5.2 billion.7
It is unlikely, however, that the assessable deposits or
income of the FDIC would actually increase by these amounts.
Increases in the assessment base and income of the FDIC would
depend on the willingness of foreign banks (or their depositors
if increased costs are passed on by the foreign banks) to pay the
FDIC assessments.
Foreign banks have several permissible options
for restructuring their operations to avoid incurring the
additional costs of deposit insurance premiums.
Foreign banks
could simply close their U.S. branches and move some or all of
their U.S. operations offshore.
Any business that foreign banks
could not move offshore might shift to U.S. banks.8 The foreign
banks that form U.S. subsidiaries might restructure their funding
requirements to types of liabilities, such as borrowings, that
are not subject to FDIC premiums.
used by U.S. banks.
The latter practice is often
Either of these restructuring measures would
be relatively easy to implement because a large portion of the
current deposits of foreign bank branches are from other banks or
are foreign in origin.
7 The 1991 assessment income was based on an assessment rate
of $0.23.
8 The U.S. business of branches of foreign banks that
shifted to U.S. banks might, in turn, be transferred to the off
shore branches of these banks, thus remaining outside the FDIC's
assessment base.
7
The sensitivity of the funding decisions of banks with
wholesale operations -- including U.S. branches of foreign banks
-- to small changes in relative costs has been clearly
demonstrated on numerous occasions.
The most recent example
occurred in late 1990 with the reduction in reserve requirements.
Prior to this reduction, reserve requirements created an
incentive for U.S. branches and agencies to obtain funds in the
Eurodollar market at 0.05 to 0.10 of a percent less than the cost
of booking large time deposits in the United States.9 When the
reserve requirements were reduced, this small yield-spread
vanished and large time deposits at U.S. branches and agencies of
foreign banks more than doubled, from $60 billion to $130
billion, in the first half of 1991.
The assessment of an insurance premium resulting from the
subsidiary requirement would also add to the cost of booking
deposits in the United States.
This assessment, which would be
similar to a reserve requirement of approximately 0.254 percent,
would be roughly three times the size of the previous reserve
requirement.
The insurance premium would almost certainly cause
U.S. branches of foreign banks to curtail or even to cease their
acceptance of deposits in the United States.
The subsidiary requirement would also affect the costs and
risks of the deposit insurance system.
A risk-based assessment
9
Reserve requirements specify the fraction of various
categories of U.S. deposits banks must hold in vault cash or in
non-interest bearing accounts with the Federal Reserve. Interest
foregone on such reserves has been compared to a tax on banks.
8
system would appear to be easier to implement for subsidiaries
than for branches, at least in principle.
The information
available on a subsidiary would seem to be more meaningful for
evaluating risk than that available on a branch, since a
subsidiary is a separate legal entity, while a branch is an
integral part of its parent.
In practice, however, a subsidiary
requirement would not simplify implementation of the risk-based
assessment system in this manner.
As discussed in the Safety and
Soundness portion of this study, the financial strength and risks
of the parent are relevant to the risks of a subsidiary, as well
as a branch, and require evaluation in both circumstances.
A subsidiary requirement could reduce the risk exposure of
the deposit insurance system if it simplified supervision and, in
the event of failure, liquidation.
With respect to supervision,
U.S. regulators may seem to have more control over a U.S.
incorporated subsidiary bank (at least over those activities that
are not moved offshore) than over a U.S. branch of a foreign
bank.
However, under the FBSEA, supervisors were granted similar
statutory powers with regard to U.S. branches and agencies of
foreign banks as U.S. banks.
See also "Safety and Soundness,"
Factor 6.
With respect to liquidation, while receivership might appear
easier to administer for a subsidiary than for a branch of a
foreign bank, there might equally be advantages to liquidating a
branch rather than a subsidiary.
Requiring a foreign bank to
operate only through a subsidiary places a legal shield between
9
the parent foreign bank and its U.S. operations.
Although a
foreign bank is already liable for the operations of its
branches, a foreign bank's liability for its subsidiary is
limited by law to the capital invested and to any guarantees of
the subsidiary's liabilities.
Thus, in a liquidation, a foreign
bank could withdraw support more easily from a subsidiary.
This
potential may increase risks to the deposit insurance system.
The FDIC has no experience in liquidating an insured branch
of a foreign bank.
Its only experience in closing an office of a
foreign bank consists of the liquidation of an insured subsidiary
of a foreign bank.
In this case, in contravention of U.S. law,
the U.S. subsidiary transferred assets to its parent.
The FDIC
eventually recovered the assets, but only after a protracted
struggle.
Only a few branches and agencies of foreign banks have been
liquidated by other U.S. bank regulators since foreign banks
began operating directly in the United States in 1945.
In these
few liquidations, all U.S. creditors, including depositors, were
paid in full.
APPENDIX D
NATIONAL TREATMENT/
FINANCIAL SERVICES
IMPLICATIONS
NATIONAL TREATMENT/
COMPETITIVE EQUITY
CONSIDERATIONS
(FACTORS 3, 4 AND 9)
APPENDIX D
NATIONAL TREATMENT/COMPETITIVE EQUITY
CONSIDERATIONS (FACTORS 3, 4 AND 9)
I
MEANING OF "NATIONAL TREATMENT" AND "COMPETITIVE EQUITY"
"National treatment" is based on the principle of
nondiscrimination between domestic and foreign firms.
This
policy has generally been followed by the United States with
respect to many sectors and has been subscribed to through
different mechanisms.
The Friendship, Commerce and Navigation
Treaties of the United States and the OECD National Treatment
Instrument define national treatment as treatment under hostcountry laws, regulations and administrative practices "no less
favorable than that accorded in like situations to domestic
enterprises."
The expression "no less favorable" is meant to
allow for the possibility that exact national treatment cannot
always be achieved.
Although not established by statute,
national treatment has been the U.S. attitude toward foreign
direct investment' since World War II.
The International Banking
Act of 1978 (IBA) applied this policy to the treatment of foreign
banks in the United States.
Both in applying the concept of national treatment to
foreign banks in the United States and in evaluating the
treatment of U.S. banks abroad, the United States has attempted
to ensure that national treatment means de facto not just de jure
national treatment.
Thus, the U.S. position has been that
national treatment must be interpreted in a meaningful, common-
2
sense way, as opposed to a rigid, mechanical application of hostcountry rules.
Consistent with this approach, over the years the U.S.
Government has used several additional terms to elaborate upon
the concept of national treatment.
These include "competitive
equity," "equality of competitive opportunity" and "same
competitive opportunities."
These terms have been helpful
elaborations for financial policy-makers in consideration of the
U.S. policy of national treatment, especially in light of an •
alternative interpretation that views identical treatment, as
consistent with national treatment, even though identical
treatment might nonetheless impose real competitive disadvantages
to foreign firms.1
For this reason, in the Uruguay Round negotiations on
trade in services, it has been acknowledged that national
treatment may involve either identical or different treatment of
foreign and domestic firms.
The treatment would be considered
"less favorable" if it modified the "conditions of competition"
in favor of domestic over foreign firms.
For purposes of this study, the implications of
imposing a subsidiary requirement upon foreign banks will be
considered in terms of the standard of de facto national
treatment, that is, treatment of foreign banks that could be
1
For a discussion of equality of competitive opportunity
and the distinctions between de facto and de jure national
treatment, see the 1979 Report to Congress on Foreign Government
Treatment of U.S. Commercial Banking Organizations, pages 1-3 and
15-18.
3
identical to or different from the treatment of domestic banks
but is no less favorable when all circumstances are taken into
account.
In this section, unless indicated otherwise, the term
"national treatment" will be used to refer to both establishment
and operations of foreign banks.2
J
EL
RECIPROCAL NATIONAL TREATMENT
The Treasury Department believes it is important to
note that, in recent years, a number of countries have adopted
legislation that incorporates a reciprocal national treatment
standard.
Pursuant to such legislation, foreign firms could be
denied national treatment if the home market of the foreign firm
does not offer national treatment to firms of the country
concerned.
In 1984, 11 OECD members had reciprocity powers
available to them.
By January 1993, at least 18 of the 24 OECD
members will have some form of reciprocity powers available,
including Japan, the United Kingdom, and Germany.
The movement towards reciprocity or reciprocal national
treatment in many other industrial countries and the slow
progress in achieving national treatment and equality of
competitive opportunity in some foreign markets have raised the
question of whether the United States should change its
2
The term "national treatment" refers to the operations of
financial institutions but, in specific cases, may not refer to
the rights of establishment. For example, the OECD "National
Treatment Instrument" does not refer to establishment, which is
covered under the OECD Codes of Liberalization.
4
fundamental policy of national treatment to one of reciprocal
national treatment.
For example, the United States could
consider imposing a subsidiary requirement on banks from
countries that do not permit the establishment of branches by
U.S. banks.
This would affect only a limited number of
countries, including Canada, Mexico, Norway, South Africa, and
several other Latin American and Asian countries.
The threat that the United States might enforce such a
sanction could be sufficient to cause the affected countries to
permit entry by branches of U.S. banks.
Alternatively, it might
compel the country concerned to restrict further access' by U.S.
banks.
The EC Second Banking Directive also established an ECwide policy of reciprocal national treatment, which authorizes
negotiations with countries that do not provide effective market
access comparable to that granted by the Community to credit
institutions from a third country.
In addition, sanctions are
allowed to be imposed upon countries that do not grant national
treatment.
The Second Banking Directive required member states
that did not have reciprocity provisions to adopt them.
EC
officials indicated that they may eventually seek negotiations
with the United States because of disparities in the structure of
4k
our respective financial systems and perceived unequal
opportunities for EC firms in U.S. financial markets.
5
HI.
REVIEW OF THE TREATMENT ACCORDED FOREIGN BANKS IN THE
Ü.S. MARKET AND U.S. BANKS ABROAD
A.
Foreign Banks in the U.S. Market
As of June 30, 1992, 309 foreign banks from 62
countries had 733 U.S. offices with assets totalling $861
billion, which constitute approximately 23 percent of all banking
assets in the U.S. market.
More than four-fifths of these assets
are held in branches of foreign banks.
The IBA adopted the policy of national treatment,
described as parity of treatment between foreign and domestic
banks in like circumstances.
adhered to such a policy.
The United States generally has
Exceptions are discussed in Chapter 1
of the 1990 National Treatment Study. Most notably, a minority
of states still do not provide national treatment to foreign
banks.3 The 1990 Study acknowledges that denial of equality of
competitive opportunity by states "undermines the International
Banking Act's (ÏBA) policy of national treatment."4
The United States also has provided better than
national treatment in specific cases to foreign banks.
Although
the IBA extended to branches and agencies of foreign banks
restrictions similar to those applied to U.S. banks, the
legislation also grandfathered existing U.S. activities of
3 Department of Treasury, 1990 National Treatment Study,
pages 34-35.
4 Another exception is the Primary Dealers Act of 1988,
which established a limited policy of reciprocal national
treatment for the granting of primary dealer status to foreign
firms operating in the U.S. government securities market.
6
foreign banks.5 Thus, seventeen foreign banks were permitted to
retain ownership of their securities affiliates following passage
of the IBA.
B.
U.S. Banks in Foreign Markets
U.S. banks are active in a variety of international
banking markets.
In June 1992, 1,411 U.S. bank offices held
$522.1 billion in foreign assets, of which 64 percent are held in
foreign branches of U.S. banks.
The 1990 National Treatment Study, which was submitted
to Congress by the Department of Treasury, provides detailed
information regarding the treatment accorded U.S. banks in
twenty-one foreign banking markets, including some in which
"significant" denials of national treatment to U.S. banks remain.
Most industrialized countries at present permit establishment of
branch operations by foreign banks.
U.S. banks are also
permitted by foreign authorities to engage and compete in various
activities abroad, even though they are not permitted to engage
in such activities in the United States.
IV.
ADVANTAGES AND DISADVANTAGES OF OPERATING THROUGH
BRANCHES VERSUS SUBSIDIARIES IN THE UNITED STATES
This section reviews the various advantages and
disadvantages of operating in the United States through a branch
as compared to a subsidiary from the perspective of a parent
foreign bank.
As discussed below, the branch or subsidiary form
5
See the 1990 National Treatment Report-r pages 34-37 for
additional explanation.
7
of organization has implications for the amount and distribution
of the capital of the bank, the management of its liquidity and
funding, regulatory and administrative costs, and other factors,
such as lending limits, that affect its competitive opportunities
in certain markets.
Some of the costs associated with
organizational form are relatively fixed; others may vary with
the size of the operation.
The impact of lending limits and
other constraints also depends upon the size of the U.S.
operation relative to that of the parent foreign bank.
This analysis indicates there can be significant cost
savings derived from the branch form of organization.
A branch,
as compared to a subsidiary, of a foreign bank would also appear
to have greater opportunities in highly credit-sensitive
wholesale markets.
It should be emphasized, however, that
additional factors also enter into a bank's decision on whether
to pursue the branch or subsidiary form of organization.
These
factors generally involve the foreign bank's overall strategy and
business plan.
For example, the subsidiary form is usually
chosen if the emphasis is on retail banking, which usually
requires a number of offices.
In this case, the foreign bank
might choose to acquire an existing U.S. bank.
The branch form
of organization is often chosen if the foreign bank's focus is on
wholesale banking, as is typically the focus of foreign banks in
the United States.
The analysis set forth here would also apply to foreign
banks should they be required to conduct banking operations in
8
the United States through a subsidiary in order to engage in
securities activities or interstate banking and branching.
A.
Capital
1.
Amount and Distribution of Capital
The branch versus subsidiary form of operation can
affect the efficiency with which the capital of the banking
organization is used.
The branch form of operation enables the
parent bank to deploy its capital flexibly to take advantage of
changing profit opportunities in different markets.
When
competitive opportunities lead to an expansion of activities in
the United States, say, the foreign parent can allocate
additional capital internally to support this expansion.
Should
activities of the U.S. branch contract, the parent bank can
reallocate this capital to support growth elsewhere in the parent
bank organization.6
Under a subsidiary structure, capital resources cannot
easily be redeployed to respond to changing market opportunities.
A subsidiary will need to maintain total capital (tier 1 plus
tier 2) equal to at least 8 percent of the subsidiary's risk-
6
In the United States federal or, in some cases, state
authorities require asset pledges, a form of minimum capital
requirement, from U.S. branches of foreign banks. For federally
licensed branches, the Comptroller of the Currency requires a
capital equivalency deposit to be maintained in a Federal Reserve
member bank in the amount of 5 percent of the branch's third
party liabilities. State banking authorities may call for asset
maintenance requirements, which are satisfied with eligible
assets on the books of the branch. Asset maintenance
requirements are discussed in the section on Safety and
Soundness.
9
weighted assets, at least half of which must be in the form of
tier 1 capital.
Tier 1 capital consists mainly of shareholder's equity
and retained earnings.
Tier
2'
capital may consist of perpetual
preferred stock, hybrid capital instruments, subordinated debt
(limited to 50 percent of the U.S. subsidiary's tier 1 capital),
and loan loss reserves (limited after 1992 to 1.25 percent of the
subsidiary's risk-weighted assets).7
In practice, therefore,
the tier 2 capital requirement generally involves the issuance of
some capital instruments in addition to the parent's straight
equity.
If these are purchased by the parent, the effect on the
parent's cash position is the same as a straight equity
injection.
The need for cash from the parent would be reduced to
the extent the U.S. subsidiary could sell some of its
subordinated debt in the market.
A public sale of the
subsidiary's debt, however, would usually be undertaken only with
the guarantee of the foreign parent (which would reduce the
parent organization's total borrowing capacity) in order to avoid
paying a premium over the parent's cost of funds.
In most cases,
the parent would not wish to diminish its ownership interest in
the U.S. subsidiary through the public sale of the subsidiary's
equity or preferred stock.
7
Parent banks in countries that permit undisclosed
reserves, revaluation reserves, and latent revaluation reserves
to count as tier 2 capital could not transfer portions of these
reserves to the United States to satisfy tier 2 capital
requirements of U.S. subsidiaries.
10
The required minimum capital for a subsidiary would
also be expected to include an amount to accommodate future
growth.
The injection of new capital into a subsidiary involves
satisfying legal and regulatory requirements in both the home and
host country and often entails material tax and administrative
costs.
2.
Home Country Capital Requirements
A subsidiary form of operation may result in a higher
overall regulatory capital requirement for the foreign banking
organization as a whole.
The host country may require the
subsidiary to hold additional capital if the subsidiary, due to
its small size, is unable to build up a fully diversified
portfolio of risk.
The home supervisor could also decide to
disallow from consolidated capital any portion of the U.S.
subsidiary's capital that is not subordinated to the depositors
and general creditors of the parent bank.
A number of supervisors, including U.S. supervisors,
assess capital adequacy on an unconsolidated (solo), as well as a
consolidated, basis; i.e., the capital in a U.S. subsidiary would
not qualify as capital of the parent for certain supervisory
purposes.
A low level of capital as measured on an
unconsolidated basis could trigger a supervisory response.
B.
Liquidity and Funding
For the reasons given below, a subsidiary form of
organization is likely to increase the cost of wholesale funding,
reduce the availability of interbank credit lines, and decrease
11
flexibility in the management of liquidity.
However, the
subsidiary structure may increase access to core retail deposits.
1.
Wholesale Funding
A bank's ability to sell large denomination CDs depends
crucially on its credit standing, which depends, in turn, on its
size and financial strength, including capital.
Because a branch
is an integral part of the parent, a branch's access to these
markets is virtually the same as that of the parent bank.
A
subsidiary is a separate legal entity and has to operate in the
market on its own strength, unless it is supported by a formal
guarantee from the parent.
In most cases, a subsidiary's credit
standing is inferior to that of its parent, which diminishes its
access to wholesale funding sources or increases the cost of such
funds.8 This differential for a subsidiary as compared with a
branch is often accentuated during periods of market unrest or
illiquidity.
2.
Interbank Credit Lines
Similarly, the cost of and access to interbank credit
lines also depend crucially on the credit standing of a bank.
For the reasons given above, a branch's access to interbank lines
on the strength of its parent is usually greater than is
available to a subsidiary of the bank.
A subsidiary must
generally pay more than the parent bank or its direct branches
8
A subsidiary would also have to pay insurance premiums on
assessable deposits, which would erode its competitiveness in
raising funds in the U.S. market for large denomination CDs. See
separate paper on deposit insurance implications.)
12
for interbank credit and the subsidiary's lines are not as large.
A subsidiary's funding possibilities compared to those of a
branch may also tend to narrow further during periods of market
uncertainty or illiquidity.
Liquidity support may also be
provided to branches, subsidiaries, or the parent bank through
possible access to central bank discount window credit in either
the home or host country.
3.
Funding Flexibility and Liquidity Management
Under a branch form of operation, the parent bank can
pursue a centralized approach to liquidity management.
An
important consideration for some parent banks is the extent to
which its U.S. operations can be used to meet its overall dollar
funding needs.
A U.S. branch can either be heavily supported by
funds from the parent bank (a "net due to" parent position) or,
alternatively, the U.S. branch can be a funding source for the
parent (a "net due from" parent position).
Under a subsidiary structure, funding must be conducted
for the primary benefit of the subsidiary and not of the parent.
A subsidiary will be expected to establish its own liquidity
management guidelines and meet its own liquidity needs, both
under normal and adverse conditions.
This could increase funding
costs and would reduce funding flexibility for the parent bank.
Banking supervisors in the United States (as well as in
most other countries) impose restrictions on the advancement of
funds by a subsidiary to its parent or other affiliates
(discussed below under C.3.).
As a consequence, in operating
13
through subsidiaries the parent bank loses flexibility in the
management of liquidity, especially dollar liquidity, for the
organization as a whole.
4.
Retail Deposits
With the passage of FDICIA, foreign banks desiring to
raise retail deposits in the U.S. must do so as an insured
subsidiary, although previously existing FDIC-insured branches
are grandfathered.
The importance of core retail deposits to the
overall liquidity management and profile of a parent bank will
varY/ depending on such factors as the bank's strategy and
position in other markets.
C.
Activities in the U.S.
1.
Limits on Loans to a Single Borrower
A subsidiary's legal lending limit would be based on
its capital and surplus, rather than that of its parent foreign
bank as would be the case for a branch.
For a national bank,
this lending limit is 15 percent of the bank's unimpaired capital
and surplus for loans that are not fully secured, with another 10
percent permitted if secured by readily marketable collateral.
State banks are also subject to legal lending limits based on
capital, which vary by state but are generally similar to those
that apply to national banks.
The capital of subsidiaries is usually small compared
to the capital of the parent-, and the capital-related limit on
loans to one borrower would likely prevent the U.S. subsidiaries
of foreign banks from competing for large loans in the U.S.
14
corporate sector.
The subsidiaries could transfer loans to their
parents but often at increased cost or with possible adverse tax
consequences (see separate paper on tax implications).
2.
Trading and Risk-Management Activities
U.S. branches of foreign banks engage in foreign
exchange, credit enhancement, and over-the-counter derivative
products, such as swaps, forwards, and options, largely on the
strength of their parent organizations.
Of the "large”
banking
participants in the U..S. foreign exchange market, as indicated on
the monthly consolidated foreign currency report of banks in the
United States, 87 are foreign banks, of which 85 conduct these
operations through a branch or agency and only two through a U.S.
subsidiary bank.9 The counterparties in these transactions,
which are generally other major international banks, are highly
credit sensitive and know the branch's commitment is backed by
its parent institution.
A U.S. subsidiary would generally not be
able to participate in these markets as extensively as a branch
unless the foreign parent formally guaranteed its activities.
Parent guarantees have cost consequences, however, such as
raising the parent's required capital or reducing its overall
borrowing power.
9
The FFIEC 035 foreign currency report is required from
U.S. chartered banks, bank holding companies, Edge corporations,
and U.S. branches and agencies that report more than $1 billion
in commitments to purchase foreign exchange. There are 122
respondents to the 035 Report, of which 35 are U.S. owned banks
and 87 are foreign owned or controlled.
15
3.
Restrictions on Transactions With Affiliates
Since a U.S. subsidiary bank of a foreign bank is a
separately chartered bank, transactions between the subsidiary
and the parent bank must be carried out on an "arm's length"
basis, which means that such transactions must be treated as if
the parent and the subsidiary were not under common ownership.
As a result, such transactions may have tax consequences and
other costs that would not arise in the case of internal
transactions between a parent and a branch.
Section 23A of the Federal Reserve Act, which limits
quantitatively the financial transactions between insured banks ..vjj
and their affiliates and requires that such transactions be
collateralized, would apply to the U.S. subsidiary of a foreign
bank.
For example, credit extensions, advances, purchases of
assets, or investments in a single affiliate of an insured bank
are limited to 10 percent of the bank's equity capital.
Other
transactions included in the limit are guarantees issued on
behalf of an affiliate and the acceptance of an affiliate's
securities as collateral for any loan.
The total of such credit
extensions, investments, and other transactions involving all
affiliates is limited to 20 percent of equity capital.
The 23A restrictions on extensions of credit to
affiliates, including any intra-day and overnight extensions of
credit (even if fully collateralized), would severely hamper a
U.S. subsidiary bank of a foreign bank in serving as a funding
center for its parent or in providing clearing services for the
16
parent and other affiliates.
Such activities are currently
important functions of U.S. branches of foreign banks.
In some cases, exceptions to the 23(a) restrictions
have been made to accommodate extensions of credit incidental to
clearing services, as in the case of domestic Section 20
subsidiaries.10 The cost of collateralizing such credit
extensions, however, would erode the competitiveness of a U.S.
subsidiary bank of a foreign bank in this area of activity.
D.
Regulatory and Legal Costs
The establishment of a subsidiary usually entails
greater costs than that generally associated with the
establishment of a branch because a subsidiary requires a
separate board of directors and management structure, its own
system of credit administration and internal controls, and
additional legal documentation. i
1.
Board of Directors and Management Structure
A U.S. branch needs an approved branch manager and
other staff as appropriate.
A U.S. subsidiary, however, is
required to be "self-contained," that is a complete stand-alone
entity, and generally must have a complete management staff.
There is no separate board of directors for a branch, but a
number of requirements apply to directors of national banks.
Similar requirements generally apply to state chartered banks.
10
See paragraph 21(b) of the 28 firewall conditions (Board
Order dated January 18, 1989).
17
National bank directors normally need to be U.S. citizens, though
the Comptroller of the Currency may waive this requirement for
not more than a minority of the total number of directors in the
case of foreign bank subsidiaries.
At least two-thirds of the
directors are also subject to other residency requirements.
These requirements increase the costs of a subsidiary, whereas
for a branch the foreign bank's head office may undertake many
functions on its behalf, including planning and logistical
support.
2.
Credit Administration and Internal Controls
A U.S. branch needs to maintain adequate credit files-,
have adequate internal controls (which may be largely provided by
head office), and maintain its records in English.
In addition to the requirements for a branch, a U.S.
subsidiary will often have its own, separate credit
administration and support and control systems, which will also
add to its costs.
3.
Legal Documentation
For U.S. branches, legal documentation is limited to
that necessary to gain approval for establishment of the branch
in the United States.
Minimal legal documentation is required
for most transactions between the branch and its parent (or other
affiliates). A subsidiary, however, is separately incorporated
and must obtain a national or state banking charter.
In
addition, the subsidiary is likely to be subject to ongoing legal
documentation requirements with regard to transactions with its
. 18
affiliates, which would not arise in the case of transactions
«
between a branch and the parent or other branches of the parent.
V.
INTERNATIONAL IMPLICATIONS OF A SUBSIDIARY REQUIREMENT
This subsection examines the international implications
of a U.S. requirement that foreign banks roll-up their banking
operations in the United States into separate subsidiaries, if
such requirements were applied:
(1) across-the-board to all
foreign banking operations in the United States; or (2) only to
those foreign banks that wished to avail themselves of new
banking powers in the event that new powers are granted to U.S.
banks.
A.
Subsidiary Requirement Imposed upon all Foreign Banking Operations
Introduction of a subsidiary requirement by the United
States for all foreign banking operations would necessitate a
major restructuring of such operations in view of the preference
exhibited to date by foreign banks for the branch form of
organization for their U.S. operations.
As discussed above, U.S.
branches of foreign banks account for more than four-fifths of
all U.S. assets held by foreign banks.
Adoption of a subsidiary requirement for all commercial
bank activities would reduce the efficiency and competitiveness
of international banking markets and thereby decrease the welfare
of consumers.
Beyond achieving equality of competitive
opportunity for foreign and' domestic banks, a fundamental purpose
of a policy of national treatment is to provide consumers of
financial services in a host country with access to as deep,
19
varied, competitive and efficient a banking market as possible.
In other words, a policy of national treatment for foreign
banking institutions helps to assure that a host country market
is one in which individuals, businesses, and also public sector
entities can satisfy their financial needs on the best possible
terms.
Introduction of an unqualified subsidiary requirement
by foreign countries could also have a substantial adverse impact
on U.S. banks, which rely heavily on the branch form of
organization for their activities abroad.
As discussed above,
foreign branches of U.S. banks account for two-thirds of all
foreign assets held by U.S. banks.
Indeed, branches are by far
the preferred form of organization for the conduct of U.S.
banking operations abroad.
A subsidiary requirement could
jeopardize U.S. banks' existing foreign branches by establishing
a model to be followed by foreign governments in their own
markets, and similarly frustrate future efforts by U.S. banks to
establish operations abroad in new markets that could be
important to the banks' longer-term competitive position.
This
possibility is particularly acute in those countries that have a
reciprocal national treatment standard.
(For further discussion
of these issues, see separate paper on Factor 7 -- Implications
for International Negotiations for Liberalized Trade in Financial
Services.)
In addition, at present, U.S. banks are permitted by
foreign authorities to engage and compete in various activities
20
abroad, even though they are not permitted to engage in such
activities in the United States.
Foreign authorities could also
choose to reconsider such favorable treatment in the light of the
imposition of a subsidiary requirement.
Such a wide-ranging subsidiary requirement would also
undermine longstanding U.S. efforts to encourage countries such
as Canada to drop their own subsidiary requirements.
In
addition, it might encourage other countries to introduce such
requirements.
At present, most industrialized countries do not
have requirements prohibiting the establishment of branch
operations by foreign banks.
The motivation for an across-the-board subsidiary
requirement would also be inconsistent with the framework adopted
by the Basle Committee of Banking Supervisors, which recognizes
that banks operate internationally through branches and which
consequently has sought to strengthen the supervision exercised
over branches of foreign banks by stressing the primary role and
responsibilities of the home country (i.e., the country of
incorporation of the foreign bank) supervisor, as well as host
country responsibilities.
Neither Treasury nor the Federal
Reserve Board believe that such an unqualified subsidiary
requirement is warranted.
B.
Subsidiary Requirement Imposed in Connection with
New Powers
The question has also been raised as to whether a
subsidiary requirement should be imposed with regard to the
21
banking operations of foreign banks in the United States if U.S.
banking organizations are granted new powers to engage through
separately incorporated subsidiaries in securities activities or
interstate banking and branching.11 Under this type of approach,
only those foreign banks that wished to avail themselves of the
expanded powers would be required to restructure their branch
operations into subsidiary form.
The Administration's 1991 financial modernization
proposal,12 which ultimately was not enacted, was broadly along
these lines.
Under this proposal, new powers would have been
authorized to those U.S. financial services holding companies
with "well-capitalized" banks.
Foreign banks that wished to
obtain expanded powers (which under the 1991 proposal included
securities and insurance activities) were required to "roll-up"
all existing branch and agency operations into one or more wellcapitalized U.S. bank subsidiaries of a financial services
holding company.
Supporters of this proposal believed that the "roll-up"
requirement assured that domestic banks would not be placed at a
competitive disadvantage in their own market.
They maintained
that the proposal would have assured that the same capital,
accounting, regulatory and supervisory requirements (as well as
11 Neither the Treasury nor the Board believe a subsidiary
requirement should be imposed in connection with expanded powers
with regard to interstate activities.
12 The Financial Institutions Safety and Consumer Act of
1991 (FISCCA) .
22
domestic firewalls) would be imposed on foreign and domestic
banking organizations that wished to engage in expanded powers.
No foreign bank would have been required to "roll-up"; each
foreign bank could make a decision based on its own corporate
strategy and preference.
Foreign banks that did not desire
expanded powers in the United States could continue to conduct
their banking operations in branches.
Opponents of the 1991 roll-up proposal believed that
existing regulatory authority was sufficient to assure that
foreign banks seeking to establish operations in the United
States would have to meet the same general standards of financial
strength, including capital, experience and reputation as
required for domestic institutions.
The mandatory roll-up of
branches of foreign banks seeking expanded powers was considered
to be an unnecessary requirement, which would have had
undesirable consequences.
First, the proposed roll-up
requirement would have jeopardized the continued willingness of
foreign banks to maintain a U.S. banking presence, thereby
potentially removing an important source of credit for U.S.
borrowers.
Second, the roll-up of branches of foreign banks in
this country could have led to similar requirements for U.S.
banks abroad.
This was not considered to be in the long-term
interest of U.S. bank competitiveness, in view of the reliance
placed by U.S. banks upon the branch form of organization in
their operations abroad.
23
It is agreed that, under a limited subsidiaryrequirement, foreign banks that did not wish to take advantage of
the expanded powers could have continued to operate in the United
States through branches.
However, those foreign banks that did
wish to engage in the expanded activities would have been denied
the advantages associated with branch operations, including
access to their worldwide capital, which are discussed in
section IV. above.
Since the 1991 financial reform proposals were
introduced, adoption of the Foreign Bank Supervision Enhancement
Act ("FBSEA") has strengthened the regulators' authority to
assure that untoward actions do not jeopardize the safety and
soundness of the financial system.
In addition, application of
the guidelines established in the Report on Capital Equivalency,
which reinforced existing regulatory practice, helps assure that
U.S. banks will not be placed at a competitive disadvantage in
their own market.
The findings of the joint annual updates on
capital.equivalency required by Section 214(b) of FBSEA also
provide an opportunity for continuous review of this objective.
Finally, FBSEA requires that the Board in consultation with
Treasury, establish criteria for banks from countries that do not
provide comprehensive supervision on a consolidated basis.
The EC's Second Banking Directive (the "Directive”)/
which must be implemented by member states by no later than
January 1993, has been put forward as one example of treatment of
U.S. banks abroad that might serve as a precedent for imposing a
24
subsidiary requirement on the U.S. banking operations of foreign
banks in connection with the availability of new powers.
The
Directive allows banks incorporated in the Community, including
bank subsidiaries of foreign banks, to establish branches or
provide services throughout the Community, based upon the
authorization and supervision by its home, rather than the host,
country.
It has been suggested that the Directive parallels a
U.S. subsidiary requirement imposed in connection with the grant
of new powers because it requires establishment of a subsidiary
to take advantage of the single banking license.
Some have
complained that the program of liberalization under the Directive
does not apply to EC branches of U.S. banks.
A brief description
of the Directive and the operation and effect of its provisions
is provided below.
Under the Directive, a host Member State in general
will no longer have a role in the licensing or day-to-day
supervision of branches of banks from other Member States and
will not be able to limit the number of branches that may be
established or to impose endowment capital requirements.
The
Directive also establishes a list of permissible activities that,
if authorized by a bank's home country, may be offered anywhere
in the EC even if the host country does not permit its banks to
carry on such activities.
The EC's reliance upon home-country rules and homecountry administration of those rules in the creation of a single
25
market is predicated on harmonization among Member States of
"essential" national rules pertaining, inter alia, to banking and
financial services.
In two major respects, this harmonization
‘ exercise goes far beyond what the major industrial countries have
accomplished through any forum for cooperation, including the
Basle Committee on Banking Supervision and the OECD.
First, the harmonizing measures with regard to
financial services, which are directed to the creation of a
single market, are much broader than the general minimum
standards agreed in Basle and encompass other areas besides
supervisory standards, e.g., matters relating to corporate law,
bank ownership of nonfinancial institutions, initial capital
requirements, provisions relating to major shareholders and
changes in share ownership, bank and branch accounts, and, in
future, deposit insurance and perhaps reorganization and
liquidation.
Second, the EC harmonizing measures are not just
voluntary agreements; instead, they are legally binding as part
of the body of Community law, which is supreme over national laws
and constitutions.
The Second Banking Directive does not directly address
the treatment of branches of banks from the United States and
other non-EC countries.
Because such branches are not
incorporated in an EC Member State, are not subject to the EC's
harmonization of essential rules, and do not have an EC Member
State as a sponsoring home-country authority, foreign banks
operating in a Member State only through branches are not
26
eligible under the Directive to establish branches or provide
services throughout the Community.
That is, to receive the full
benefits associated with the EC passport, a foreign bank will
need to have an EC subsidiary.
The Directive does not prohibit foreign banks from
establishing or maintaining both subsidiaries and direct
branches.
However, foreign bank branches will continue to be
subject to approval by the individual EC Member States in
accordance with the First Banking Directive.
There are, therefore, similarities and differences
between a proposal to impose a subsidiary requirement upon
foreign banks' operations in the United States in connection with
the grant of new powers and the treatment accorded foreign banks
under the Directive.
One similarity is that, albeit in very
different circumstances and for different reasons, under each
program, foreign banks would be required to establish local
subsidiaries to avail themselves of different types of market
liberalization (namely, the removal of national boundaries in
relation to the provision of banking and financial services in
the EC13 and the expansion of permissible activities in United
States).
Local subsidiaries, of course, do not have access to
the worldwide capital of their parents.
The primary difference between the two programs is
that, unlike the Administration's 1991 proposal, the EC Second
13
In contrast, the Administration's 1991 proposal would not
have required establishment of a subsidiary to branch on an
interstate basis.
27
Banking Directive does not require that third country banks
terminate their EC branch activities in order either to benefit
from the passport and liberalization that is provided in the
Directive or to establish nonbanking subsidiaries.14
14
As noted above, each Member State may set its own
policies with regard to branches of foreign banks. As discussed
further above and in the separate paper regarding Factor 6 Safety and Soundness, to the extent that individual Member States
(such as Germany) impose dotation capital requirements (which
require capital to be held in the host country) or other
restrictions upon the operations of branches of foreign banks,
the benefits of branch operations are significantly reduced.
INTERNATIONAL NEGOTIATIONS
FOR LIBERALIZED TRADE
(FACTOR 7)
APPENDIX D
INTERNATIONAL NEGOTIATIONS FOR LIBERALIZED
TRADE (FACTOR 7)
The effect of a subsidiary requirement on international
agreements, international negotiations and-U.S', bank access to
foreign markets is an important factor in analyzing such a
requirement.
This section specifically addresses the
implications a subsidiary requirement would have from two
perspectives:
1) international agreements governing financial
services issues, including those currently under negotiation or
awaiting approval; and 2) bilateral financial market discussions.
Since World War II, the United States has pursued a
strategy aimed at achieving open international markets.
The view
that open markets promote the welfare of all countries has been
the driving force behind multilateral and bilateral negotiations
to achieve freer trade in goods or services and a more liberal
international investment environment.
Over the last fifteen years, negotiations on financial
services issues have become an important part of U.S.
international economic policy.
Treasury Department and other
U.S. officials have sought to open financial markets in treaty
negotiations, bilateral and multilateral trade agreements, and a
variety of other fora.
The goals of the United States in its financial
services negotiations have been national treatment and market
access for U.S. financial firms.
More specifically, the United
2
States has pursued a policy of national treatment that includes
equality of competitive opportunity, the objective of which has
been to ensure that other countries7 laws and practices do not
disadvantage U.S. financial institutions in their ability to
compete.
In return, the United States has adopted a general
policy of national treatment towards foreign financial
institutions.
These goals, where achieved, allow U.S. firms to bring
their comparative advantage in financial services to foreign
markets, thus providing profits and jobs for the U.S. financial
services industry and adding to the country's wealth.
This section first examines the legal rules that have
been agreed or are being negotiated to govern international
banking.
The existing legal agreements analyzed are:
1)
Friendship Commerce and Navigation Treaties and Bilateral
Investment Treaties; 2) the Code of Liberalization of Capital
Movements and the Code of Liberalization of Movements of Current
and Invisible Transactions negotiated under the auspices of the
Organization for Economic Co-operation and Development; and 3)
the Canada -- United States Free Trade Agreement.
Proposed future international agreements such as the
North American Free Trade Agreement and the Uruguay Round
Agreement on Financial Services are also examined, as are
bilateral financial policy discussions between the United States
and other countries.
3
A.
International Agreements Governing Financial Services
1.
Treaties
The United States has negotiated a network of more than
fifty bilateral Friendship, Commerce and Navigation Treaties
(FCNs) and Bilateral Investment Treaties (BITs) with various
trading partners, including France, Germany, Italy, Japan and
Korea.
These treaties generally impose three obligations in the
banking sector:
(1) a country may not impose new limitations on national
treatment of existing operations of foreign banks, with
national treatment defined as treatment in a particular
state that is no less favorable than that provided in that
state to banks located in another state;
(2) foreign banks must be granted "the right to maintain
branches and agencies to perform functions necessary for
essentially international operations in which they are
permitted to engage"1; and
(3) most-favored-nation (MFN) treatment must be accorded in
all respects (e.g., Japanese banks are entitled to no less
favorable treatment by U.S. authorities than German banks).
The first of these obligations permits violations of
national treatment as long as existing firms are not affected.
This obligation would not appear to be violated by a subsidiary
requirement imposed on foreign banks because the FCNs and BITs
adopt a special definition of national treatment that measures
treatment of foreign firms in a particular state with U.S. firms
established in other states.
Because branching across state
lines is generally prohibited in the United States under the
McFadden Act, 12 U.S.C. § 36, and the Federal Reserve Act,
i
This obligation is contained only in FCN-treaties.
4
12 U.S.C. § 321, national treatment defined in this way would not
include the right of a foreign bank to branch under these
treaties.
Based on this rule, it would appear that a subsidiary
requirement imposed on existing or future operations of a foreign
bank branch or agency would not be inconsistent with the
prohibition against new departures from national treatment.
A subsidiary requirement for all foreign banks in the
United States would, however, raise an issue with respect to the
second basic banking obligation in the FCNs (this obligation is
not present in BITs). This obligation requires that foreign
banks be permitted to maintain branches and agencies if a
signatory to an FCN permits foreign banks to engage in
international banking business in its territory.
The term
"international banking business" refers to activities such as
foreign exchange services, lending services,and other banking
services incidental to international business, such as that
permitted to Edge corporations under the Federal Reserve Act, and
limited branches under the International Banking Act.
A
subsidiary requirement for all foreign banking operations in the
United States would appear to be inconsistent with this
requirement.
Finally, a subsidiary requirement imposed under a
reciprocity statute would be inconsistent with the MFN obligation
of the FCNs and BITs.
MFN treatment requires the banks of a
signatory to an FCN or BIT to be treated no less favorably than
any other country's banks.
If use of a reciprocity test resulted
5
in the banks of a signatory to an FCN or BIT being forced to
"roll-up," that country would have a claim under its treaty with
the United States.
A violation of a treaty would permit the country harmed
to proceed in an agreed international forum (e.g., the
International Court of Justice) against the offending country or
take other actions permissible under international law.
Such
actions could include retaliation against the firms of the
country that took the action inconsistent with the treaty.
2.
OECD Codes of Liberalization
The Organization for Economic Co-operation and
Development (OECD) is an organization of 24 industrialized
countries that includes many of the major trading partners of the
United States.
The members of the OECD have entered into two
agreements governing financial services and other business
sectors:
the Code of Liberalization of Capital Movements (the
Capital Code) and the Code of Liberalization of Current Invisible
Operations (the Invisible Code). The Capital Code governs direct
and portfolio investment in financial services.
The Invisible
Code deals with, among other things, treatment of. established
bank branches.
Under the Capital Code, each country is required to
permit "investment for the purpose of establishing lasting
economic relations . . .
by means of . . . creation or extension
of a wholly-owned enterprise, subsidiary or branch . . . ."
Countries cannot apply conditions "that raise special barriers or
6
limitations with respect to non-resident (as compared to
resident) investors, and that have the intent or the effect of
preventing or significantly impeding inward direct investment by
non-residents." OECD Capital Code, art. 2(a) & item I.A.
The OECD Members' interpretation of the Capital Code
indicates that restrictions on the right to invest in branch form
would be inconsistent with the Code.
The interpretation has
developed in the periodic examinations conducted by the OECD of
individual members' markets, and on interpretation by the
Secretariat of the OECD.
Any definitive legal analysis based on
the plain language of the Code would require an analysis of many
of the factors identified in the national treatment/competitive
equity section of this study to determine whether special
barriers are raised to foreign investment through a subsidiary
requirement.
A subsidiary requirement would also appear to be
inconsistent with the Invisible-Code, which requires "equivalent"
treatment of bank branches.
Section 214 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 requires all new
insured deposit-taking activities of foreign banks to occur
through subsidiaries, and not also direct branches as was
previously the case.
The United States lodged a reservation to
the Invisible Code to account for this restriction.
Normally
reservations are limited to existing non-conforming measures, but
the Invisible Code was in the process of amendment at the time
FDICIA was passed and the United States was permitted to take a
7
reservation.
The time for lodging new reservations is now
closed; therefore, further restrictions on foreign bank branches
may be inconsistent with the Invisible Code.
The formal sanction procedure for violations of the
Codes would be referral to the OECD Council -- the political
level decision-making body of the OECD -- for consideration of
appropriate action.
The OECD Council works by consensus;
consequently, it is unlikely sanctions would be authorized.
Indeed, various OECD members have taken action in the past that
is inconsistent with the OECD Codes with no sanctions or
retaliation having been sought.
For example, when the EC adopted
its Second Banking Directive, the reciprocity test contained in
Article VII of the Directive was inconsistent with the commitment
of OECD members not to adopt any new reciprocity statutes in
their financial laws.
Nevertheless, a subsidiary requirement
that is inconsistent with Code obligations would undermine the
integrity of the agreements and damage possibilities for further
liberalization under the Codes.
3.
The Canadian Free Trade Agreement and the North American Free
Trade Agreement
In 1989, the Canada -- United States Free Trade
Agreement (the CFTA) entered into force.
The CFTA contained a
number -of specific commitments on treatment of Canadian bank
subsidiaries in the United States, but only one regarding
Canadian bank branches.
No other protection was afforded
8
Canadian bank branches in the FTA because Canada refused to
provide U.S. banks the right to branch into Canada at all.
The one obligation applicable to foreign bank branches
-- Article 1702(2) -- concerned certain interstate branches of
Canadian banks permitted to operate under section 5 of the
International Banking Act of 1978 (IBA) .
Before the IBA was
passed, foreign banks were permitted to establish full-service
branches in more than one state as long as individual states
permitted such branches.
In other words, interstate branching
restrictions did not apply to direct branches of foreign banks.
After 1978, the interstate branching prohibitions were
applied to all foreign banks.
In order to protect acquired
rights, however, the established branches of foreign banks were
"grandfathered." The CFTA guaranteed these grandfather rights for
Canadian banks permanently under Article 1702(2).
Thus, a
subsidiary requirement imposed on the interstate branch offices
of Canadian banks which existed at the time of the CFTA could
violate the grandfathering provisions of that agreement'.
It should be noted that legal sanctions are not
specifically authorized under the CFTA for a breach of the
financial services obligations.
However, the recently negotiated
Financial Services Chapter of the North American Free Trade
Agreement will incorporate the specific grandfathering provision
of the CFTA.
When this Agreement enters into force, it will
provide a dispute settlement mechanism for breaches of the
grandfathering commitment.
9
In June 1991, the United States began formal
negotiations with Canada and Mexico on a North American Free
Trade Agreement (NAFTA) . The NAFTA provided an opportunity to
expand upon the legal commitments made in the CFTA.
A major
negotiating objective of the United States in the NAFTA
negotiations was obtaining the right to branch into Canada and
Mexico.
This objective was not achieved partly due to the
Canadian and Mexican perception of a lack of equivalent market
access in the U.S. financial services market.
As a result, the
NAFTA provides each country the right to require incorporation of
financial institutions under its laws, that is, the right to
require operation through a subsidiary.
At present, Canada prohibits direct branches of foreign
banks into its territory and is permitted to continue to do so
under the terms of the NAFTA.
Mexico presently permits Citibank
to operate in branch form, but has not authorized any other
foreign bank to enter Mexico in this form.
Mexico has indicated
it will permit U.S. banks to enter only in subsidiary form under
the liberalization negotiated under the NAFTA.
The Parties to the NAFTA have also agreed, however,
that when the United States permits interstate bank branching in
its market, the NAFTA Parties will negotiate with a view toward
permitting NAFTA-wide branching by NAFTA banks.
The imposition
of a subsidiary requirement in the United States prior to such
negotiations would have a negative impact on such future
10
negotiations and almost certainly result in Mexico and Canada
refusing to allow direct branching in the future.
4.
Uruguay Round ("UR") Services Agreement
A requirement that all foreign banks conduct banking
operations in the United States through subsidiaries could
require reservations to the market access commitments of the
United States under the Services Agreement and would be
inconsistent with U.S. objectives in the Uruguay Round,
a.
U.S. Objectives in the Round
A major objective of the United States in the UR has
been to obtain commitments that insure U.S. banks can establish
and operate effectively in foreign countries.
As part of this
effort, U.S. officials have sought guarantees that U.S. banks
will have the option of entering and operating either as branches
or subsidiaries.
This objective has already been hampered by
recent U.S. legislation requiring that new insured deposit-taking
operations take place through subsidiaries.
Enactment of a subsidiary requirement with wider effect
would further erode, if not eliminate entirely, the ability of
U.S. negotiators to support U.S. banks in their desire to operate
as branches abroad.
United States negotiators would not be able
to argue credibly that other countries should commit to allow
entry in branch form if the United States did not.
The use or threat of a subsidiary requirement might be
argued to enhance U.S. leverage in financial services talks by
being "traded off" to obtain commitments to remove similar
11
measures in other countries.
Such a strategy, however, would
risk causing the major trading partners of the United States to
propose subsidiary requirements or take other adverse actions
against U.S. banks abroad in the context of the negotiation.
In
this regard, the members of the European Community and most other
developed countries already permit foreign banks to operate as
branches in their territory.
As of October 1992, they were
prepared to legally guarantee continuation of this practice in
the UR.
As noted above, the United States has been seeking in
the UR negotiations the elimination of existing prohibitions on
branch banking.
The extent to which this effort will be
successful is unclear.
On a more fundamental plane, it is also
unclear whether the Round negotiations will produce sufficient
liberalization in the financial services area to enable a U.S.
commitment to legally guarantee continuation of the present
liberal treatment of financial institutions from countries which
refuse to liberalize.
The United States has indicated, that if adequate
commitments by other countries in the financial services sector
were not forthcoming, the United States would be unable to agree
to most-favored-nation (MFN) treatment in this sector.
Such an
MFN exemption would enable the U.S. to exercise selective
leverage to achieve liberalization in future bilateral or
multilateral negotiations.
Such leverage could include a
12
subsidiary requirement where U.S. banks do not receive reciprocal
treatment.
b.
Provisions of the Agreement
Article XVI ("Market Access") of the Services Agreement
provides that any Party undertaking commitments in service
sectors shall not maintain restrictions on the specific types of
legal entities or joint ventures through which a service supplier
provides a service, unless such restrictions are reserved.
Where
no restrictions are inscribed in a Party's schedule of
commitments, a Party would be obligated to permit a foreign bank,
which otherwise met its prudential requirements, to create or
maintain a commercial presence as a branch.
Countries can choose to undertake commitments in
financial services with reference to the "Understanding on
Commitments in Financial Services" (the "Understanding").
This
document is composed of a series of commitments that form an
integral part of the draft Services Agreement, although the
relationship to Article XVI remains to be determined.
(In many
areas, the Understanding provides greater or more detailed
obligations.) With respect to the "commercial presence" aspect of
its market access provisions, the Understanding provides that
each Party shall grant financial service providers the right to
establish or expand a commercial presence, including branches.
In its most recent proposed offer, the United States scheduled
its commitments to market access with respect to the
. 13
Understanding's market access provisions rather than those of
Article XVI.
Under either Article XVI or the Understanding, the U.S.
would have certain obligations, subject to reservations, to
permit other Parties to operate through branches.
Measures may
be reserved under both Article XVI and the Understanding,
although the latter permits reservations only of existing nonconforming measures.
As a practical matter, reservations taken
by a country entail a cost, in the form of other countries either
taking reservations or refusing to remove restrictions which the
U.S. has sought.
B.
Bilateral Financial Market Negotiations
Bilateral financial services negotiations have been
conducted by the United States for several years with Japan,
Korea and Taiwan.
The issue of subsidiaries versus branches has
not arisen in these negotiations, since in all cases U.S. banks
are able to establish in their preferred form as branches.
However, other kinds of restrictions on U.S. banks do exist in
these markets, including the inability to establish as
subsidiaries in two countries and restrictions on the type and
scope of operations in all three.
The impact on these negotiations of imposition by the
U.S. of a subsidiary requirement on the banks of these countries
is an open question.
It could be that the possibility of doing
so on a selective basis would serve as a lever in obtaining
concessions on behalf of U.S. banks.
Since currently the banks
14
of these countries enjoy greater access in most respects in the
United States than U.S. banks enjoy in the respective countries,
the potential imposition of a U.S. subsidiary requirement might
provide an element of leverage in the negotiations.
However, it
is likely that the imposition of an across-the-board subsidiary
requirement for all foreign banks would be met with greater
reluctance to liberalize or even with retaliatory restrictions.
C.
Summary
A subsidiary requirement imposed on all foreign banks
would raise legal issues under the OECD Codes for all branches,
and the CFTA with respect to operations of the Canadian IBAgrandfathered interstate branches that existed in 1987.
In
addition, a subsidiary requirement would appear to be
inconsistent with the OECD Codes and the FCNS where imposed on
all operations of foreign banks in the United States.
Under the NAFTA a subsidiary requirement would be
permissible but would significantly reduce the possibility that
U.S. banks could achieve branching rights into Mexico and Canada
at a future date despite the further arrangement for future
liberalization in the NAFTA with respect to branching.
Under the Uruguay Round a subsidiary requirement could
necessitate reservations by the United States and would likely
adversely affect negotiations with developed countries to
guarantee branching rights of U.S. banks abroad that already
exist.
A subsidiary requirement would only be useful as a
15
selective measure to deal with countries that did not make
sufficient commitments in the Round.
In other bilateral negotiations, the effect of a
subsidiary requirement appears to be an open question.
While
such a requirement could tend to discourage further efforts to
liberalize in these markets, it is also possible that the
selective imposition of a subsidiary requirement might serve as
leverage for further liberalization.
APPENDIX E
OTHER IMPORTANT
IMPLICATIONS
THE NEED TO PROHIBIT
MONEY LAUNDERING AND
ILLEG AL PAYMENTS
(FACTOR 5)
APPENDIX E
THE NEED TO PROHIBIT MONEY LAUNDERING AND
ILLEGAL PAYMENTS (FACTOR 5)
L
SUMMARY AND CONCLUSIONS
All foreign banks doing business in the United States,
regardless of form, are subject to the Bank Secrecy Act ("BSA").1
The ability of regulatory and law enforcement officials to assess
and ensure compliance with the BSA and to detect and prosecute
money laundering is not affected materially by the form in which
a foreign bank has chosen to do business in the United States.
H.
ANALYSIS
Money laundering is defined as "the process whereby one
conceals the existence, illegal source, or illegal application of
income, and then disguises that income to make it appear
legitimate."2 Activities that would generate such income include
drug trafficking, the criminal attempt to avoid paying taxes or a
combination of both.
Money laundering may be accomplished
1
The two titles of Pub. L. 91-508, 84 Stat. 1114 (Oct. 26,
1970), are commonly known as the Bank Secrecy Act. Title I, the
Currency and Foreign Transactions Reporting Act, as amended, has
been codified at 31 U.S.C. §§5311-26. Title II is codified at 12
U.S.C. §§1829b and 1951-59. The BSA sets forth the currency
reporting and recordkeeping requirements for banks and other
financial institutions. It has evolved into the major anti-money
laundering legislation aimed at the activities of banks.
2
President's Commission on Organized Crime, Interim Report
to the President and the Attorney General, The Cash Connection:
Organized Crime. Financial Institutions, and Money Laundering 7
(1984).
2
through financial institutions using transactions that are no
different from transactions normally associated with legitimate
commercial or personal financial activities.
Whether money
laundering occurs through the U.S. branch of a foreign bank or
through a subsidiary bank incorporated in the United States, the
techniques are the same.
These techniques can be very simple,
such as exchanging cash for a cashier's check, or very complex,
such as schemes involving one or more shell corporations,
accounts in offshore banking centers and multiple wire transfers.
The BSA was enacted in 1970 and subsequently amended in
an attempt to prevent financial institutions from being used in
the money laundering process.
The BSA requires all domestic
financial institutions, including U.S. offices of foreign banks,3
to maintain records of transactions and accounts of their
customers and to report to the government certain types of
transactions that are of particular interest to regulatory and
law enforcement agencies.
The BSA covers four
major areas of financial activity requiring reporting or
recordkeeping:
•
maintenance of records concerning customers and
transactions, including retention of signature cards and
checks, and maintenance of ledgers and transaction records;
3 12 U.S.C. §§1829b, 1953; 31 U.S.C. §§5313, 5316,
5318(a)(2).
3
•
reporting of all currency transactions involving cash in
amounts exceeding $10,000 (or deliberately structured in
smaller dollar amounts to evade the $10,000 threshold)
(on a
form known as a "CTR");
• reporting by any person who transports or causes another
to transport monetary instruments (defined as cash or bearer
negotiable instruments) exceeding $10,000 or who receives
such instruments in the same amount in the United States
from abroad (on a form known as a "CMIR"); and
•
annual reporting by a person over whom the United States
has jurisdiction of any interests in foreign accounts valued
in excess of $10,000 (on a form known as an "FBAR").
The BSA currently does not require reporting with respect to
funds transfers and there are no plans to impose such
requirements.4
BSA enforcement resides in the first instance with the
Secretary of the Treasury.
The Secretary has delegated authority
4
A funds transfer involves the movement of debits or
credits from one financial institution to another. Funds
transfers may be made between domestic banks, including U.S.
branches of foreign banks, by means of clearing houses
established by banks within one locale, by Fedwire (the funds
transfer system operated by the Federal Reserve System), or by
transfers among correspondent banks by Fedwire or other means
such as internal bank communications systems. International
funds transfers generally are communicated through SWIFT (Society
of Worldwide Interbank Financial Telecommunication, a Belgian
based association of banks that provides the communication
network for a large number of international funds transfers) and
are settled in the United States through CHIPS (Clearing House
Interbank Payments System, the funds settlement system operated
by the New York Clearing House) and the Federal Reserve System or
by book entries.
4
to monitor BSA compliance by banks to the federal banking
agencies.
Both civil and criminal penalties may be imposed for
violations of the BSA.
In addition, each of the federal banking
agencies may take administrative action against banks under its
supervision for failure to put into place adequate policies and
procedures designed to insure BSA compliance.
The issues raised in the Report to the Senate Committee
on Foreign Relations from Senators Kerry and Brown, dated
September 30, 1992, regarding a subsidiary requirement were
considered at length during the course of this study.
Each of
the three federal banking agencies responsible for supervision of
foreign bank offices in the United States ensures that the
domestic operations of such offices for which it is responsible
(state licensed branches and agencies of foreign banks5 in the
case of the Federal Reserve, federally licensed branches and
agencies of foreign banks in the case of the OCC, and insured
branches (whether state or federally licensed) in the case of the
FDIC) are examined for BSA compliance.
This BSA compliance
review is equivalent in relevant respects to the compliance
review performed in the case of domestic institutions.
Where the
initial review reveals irregularities, additional verification
procedures are employed.6
5 The large majority of foreign bank branches (80%) and
agencies (99%) are state licensed.
6 In recent years there has been a great deal of
harmonization in international standards related to money
laundering. Examples include recommendations made by the
(continued...)
5
Heretofore, because it was not the licensing agency for
the foreign bank offices it regulates, the Federal Reserve could
not revoke the authority of state licensed offices to operate in
the event it became aware of violations of the BSA or other
federal laws.
The Federal Reserve now has that authority where
it can demonstrate that there is "reasonable cause" to believe
that a foreign bank has committed a violation of law, including a
violation of the BSA or the substantive criminal money laundering
statute.7 The Federal Reserve received this new authority at its
request in the Federal Deposit Insurance Corporation Improvements
Act ("FDICIA") .8 This authority has been implemented in recent
revisions to Regulation K.9
FDICIA also gives the Board the
authority to recommend to the OCC that it terminate the license
of a federal branch or agency for violations of law.
The OCC has
independent authority to terminate the license of a foreign bank
office it supervises for violations of law.
The federal bank regulatory agencies may impose the
same range of penalties administratively (e.g., termination of
the license, cease and desist orders and civil money penalties)
6(...continued)
Financial Action Task Force headquartered at the OECD, the model
regulations published by the Organization of American States and
the EC directive on money laundering. This harmonization means
that foreign banks operating in the U.S. market are likely to be
subject to money laundering restrictions in their home markets.
7 Money Laundering Control Act of 1986, as amended, 18
U.S.C. §§1956-1957.
8 P.L. No. 102-242 (Dec. 19, 1991.)
9 12 C.F.R. §211.26 (1992).
6
for violations of law and regulations on a branch of a foreign
bank and its personnel that these agencies may impose on a
financial institution incorporated in the United States and its
personnel.
The agencies also may file civil and/or criminal
referrals when they have uncovered significant violations.
The
civil and criminal penalties that may be imposed by federal
courts for violations of specific money laundering statutes
(which include both fines and imprisonment) apply equally to
branches of foreign banks, on the one hand, and banks
incorporated in the United States, on the other.
TAX LIABILITY OF FOREIGN
BANKS
(FACTOR 8)
APPENDIX E
TAX LIABILITY OF FOREIGN BANKS (FACTOR 8)
I.
SUMMARY AND CONCLUSIONS
A.
Taxation of U.S. Branches and Subsidiaries
In general, a U.S. subsidiary of a foreign corporation
is taxed in the same manner (i.e., on a net basis with respect to
all income, wherever earned) and at the same rate as any other
U.S. corporation.
Interest and dividends paid by the subsidiary
to the foreign parent are subject to gross basis tax at a 30
percent rate (or lower treaty rate).
A U.S. branch of a foreign corporation, however, is
subject to U.S. tax only with respect to income that is
"effectively connected" with a U.S. trade or business conducted
by the branch.
Effectively connected income of a U.S. branch is
subject to tax on a net basis under rules that generally parallel
those applicable to U.S. corporations.
is the regular U.S. corporate rate.
The applicable tax rate
The "dividend equivalent
amount" is subject to a branch profits tax, and interest
allocable to effectively connected income is treated as paid by a
U.S. corporation and, therefore, is subject to gross basis tax at
a 30 percent rate (or lower treaty rate).
These taxes are
intended to substitute for the withholding taxes imposed on
dividends and interest paid by a U.S. subsidiary to its foreign
parent.
2
Income derived by a foreign corporation from U.S.
sources that is not effectively connected with a U.S. trade or
business is generally subject to U.S. withholding tax imposed on
the gross amount of such income.
The statutory withholding rate
is 30 percent, but this rate is often reduced under U.S. income
tax treaties.
Income derived by a foreign corporation from
foreign sources that is not effectively connected with a U.S.
trade or business is not subject to U.S. tax.
B.
Effects of a Subsidiary Requirement
The effect of a subsidiary requirement on the tax
liability of a foreign bank would vary for banks from different
countries, due to (1) differences in home country tax laws,
(2)
the existence of U.S. income tax treaties with some, but not all,
home countries and (3) differences between the provisions of
existing U.S. income tax treaties with different countries.
As
an initial matter, therefore, it is not possible to draw a
general conclusion as to the overall effect of a subsidiary
requirement on the tax liability of foreign banks as a group.
Some preliminary conclusions can be drawn, however, as to whether
particular tax-related consequences of a subsidiary requirement
would tend to have a neutral or non-neutral effect on a foreign
bank's tax liability and whether this effect would depend upon
tax treaties or home country law.
1.
Conversion from Branch to Subsidiary Form
The conversion of a U.S. branch of a foreign bank to a
U.S. subsidiary would generally be a tax-free transaction under
3
the Internal Revenue Code (the "Code")# but the home country tax
consequences of the conversion would vary among countries.
In
addition, the Code would not permit a new U.S. subsidiary to
utilize net operating losses (if any) accumulated by a former
U.S. branch.
2.
Post-Conversion Operations
The Code generally seeks to equalize the tax treatment
of U.S. branches and U.S. subsidiaries of foreign corporations in
order not to create incentives for foreign businesses to choose
one form of U.S. operation over the other.
This theme of branch-
subsidiary equivalence is evident in the rules governing
determination of the U.S. taxable income of branches and
subsidiaries of foreign corporations, the information reporting
requirements that apply to each, and the treatment of home office
lending to U.S. operations.
A subsidiary requirement would tend
to have a neutral effect in these areas.
In some cases, however, application of the Code
provisions governing branch and subsidiary operations is affected
significantly by U.S. income tax treaties.
For example, the
effect of a subsidiary requirement on the taxation of repatriated
profits would depend on the existence of an applicable U.S.
income tax treaty and on whether the provisions of that treaty
currently permit imposition of the branch profits tax.
Similarly, the effect of a subsidiary requirement on
the tax cost of lending to U.S. customers would vary, depending
upon the existence of an applicable U.S. income tax treaty and
4
the withholding rate provided in that treaty with respect to
interest payments.
It is conceivable that the capital
requirements that would apply to a new U.S. subsidiary would
cause a foreign bank to prefer to make large U.S. loans from its
home office, rather than from the subsidiary.
Interest paid on
home office loans would be subject, however, to gross basis U.S.
withholding tax.
Although many U.S. income tax treaties would
eliminate this withholding tax, there are significant cases in
which either no U.S. income tax treaty exists or the applicable
treaty retains a positive withholding rate for interest.
In
these cases, the U.S. withholding tax on interest could eliminate
a foreign bank's net profit on a U.S. loan made from the home
office.
The combined effect, therefore, of increased capital
requirements for loans made by a U.S. subsidiary and withholding
tax on interest paid on home office loans (where applicable)
could be a reduction in lending to U.S. customers by foreign
-banks based in affected countries.
H.
ANALYSIS
A.
Tax Consequences of Conversion from Branch to Subsidiary
1.
Conversion Transaction
Under Code section 351, a foreign bank's transfer of
U.S. branch assets to a new U.S. subsidiary in exchange for stock
of the new subsidiary would generally be a tax-free
5
nonrecognition transaction.1 A foreign bank's home country,
however, could impose a tax on built-in gain inherent in
appreciated assets of a U.S. branch when those assets were
transferred to a U.S. corporation.2 In this case, the foreign
bank could incur a home country tax liability upon conversion of
its U.S. branch to a U.S. subsidiary, notwithstanding the taxfree nature of the transaction under U.S. law.3
2.
Post-Conversion Use of Branch Net Operating Losses
A U.S. branch of a foreign corporation is permitted to
use U.S. net operating losses generated in one taxable year to
reduce its U.S. taxable income in a prior or subsequent year.
Under Code section 172, net operating losses may be carried back
three years or forward fifteen years.
This carryover rule
1 If the foreign bank receives property other than stock of
the new subsidiary (e.g., debt securities), gain recognition will
be required. In addition, the tax consequences of the conversion
transaction could differ if the U.S. branch assets are held through
a special purpose foreign subsidiary of the foreign bank and that
foreign subsidiary is converted into a U.S. corporation by means of
a reorganization described in Code section 368(a)(1).
2 Code section 367(a) imposes such a tax on the transfer of
certain types of appreciated assets from a U.S. corporation to a
foreign corporation.
3 The incorporation of a U.S. branch would not trigger the
branch profits tax (discussed below) if, under Treas. Reg. §1.8842T(d), the U.S. branch elected to transfer its accumulated earnings
and profits to the new U.S. subsidiary. In addition, the foreign
parent corporation would have to agree to recognize gain (subject
to certain limitations) upon a subsequent transfer of the stock of
the new U.S. subsidiary.
The transferred earnings and profits
would then be taxed upon subsequent distribution (as a dividend) to
the foreign parent corporation.
If an election to transfer the
accumulated earnings and profits were not made, the accumulated
earnings .and profits would be subject to taxation upon termination
of the branch,.
6
reduces the disparity between the taxation of businesses that
have stable income and the taxation of businesses that experience
income fluctuations.
Code section 172 generally requires,
however, that net operating losses be used by the same legal
entity that incurred the losses.4 Thus a foreign bank required
to convert its U.S. branch to a U.S. subsidiary would generally
lose the ability to carry its branch net operating losses forward
into future years.
The effect of this rule on any particular
foreign bank would depend upon whether its U.S. branch had
accumulated net operating losses prior to conversion and, if so,
the extent of those losses.
B.
Subsidiary Operations: Areas Where Tax Treaties Have
Minimal Effect
As noted above, the Code generally seeks to achieve
equivalent tax treatment of the operations of U.S. branches and
U.S. subsidiaries of foreign corporations in order to avoid the
creation of incentives for operation in one form or the other.
The effect of a conversion of a U.S. branch to a U.S. subsidiary
would thus tend to have a relatively neutral effect on a foreign
bank's U.S. operations in situations where the application of
relevant Code provisions is not significantly affected by U.S.
tax treaties.
4
Although Code section 381 permits transfer of net operating
losses to a different legal entity in some circumstances, these
exceptions would not generally apply to a conversion of a U.S.
branch to a U.S. subsidiary.
7
1.
Determination of Taxable Income
Assuming that there is no significant change in the
U.S. business of a foreign bank when it converts from branch to
subsidiary form, there should not be a significant change in the
amount of its U.S. taxable income.
a.
U.S. Branch
Under Code section 882, the U.S. branch of a foreign
corporation is subject to net basis taxation with respect to
income that is "effectively connected" with its U.S. trade or
business ("ECI").
ECI is taxed at the same rate that applies to
a U.S. corporation and may be subject to the alternative minimum
tax imposed by Code section 55.
A foreign corporation may not
include a U.S. branch in a consolidated federal income tax return
filed for any U.S. subsidiaries.
Interest income from a banking, financing or similar
business activity is treated as ECI if the loans on which the
interest is received are attributable to the U.S. branch.
Under
Treas. Reg. §1.864-4(c) (5) (iii), a loan is treated as
attributable to a U.S. branch if that branch "actively and
materially participated in soliciting, negotiating, or performing
other activities required to arrange the acquisition of" the
loan.5 Similar rules apply with respect to income from
5
The fact that a foreign bank books a loan made to a U.S.
customer in a foreign office (e.g., an office located in a low-tax
jurisdiction) is not determinative as to whether interest income
associated with that loan is taxable in the U.S. as ECI of a U.S.
branch. If personnel employed in a U.S. branch of a foreign bank
(continued...)
8
securities held in connection with a banking, financing or
similar business.
Income from services is generally considered
ECI if the services were performed in the U.S.
Transactions
between a U.S; branch and its home office (or other non-U.S.
branches of the same foreign corporation) are generally
disregarded for purposes of determining ECI.
In computing taxable ECI, foreign corporations are
allowed the same deductions allowed to U.S. corporations, to the
extent that those deductions are connected with ECI.
The most
significant deduction allowable to a U.S. branch of a foreign
bank is the interest deduction, determined under Treas. Reg.
§1.882-5.
The underlying objective of Treas. Reg. §1.882-5 is to
determine the approximate amount of interest expense that would
have been deductible by a U.S. branch if the branch were a
subsidiary.
The regulation permits a U.S. branch to deduct
interest expense associated with its "U.S.-connected
liabilities."
To compute the amount of U.S.-connected
liabilities, the regulation assumes that the liability-to-asset
ratio of the U.S. branch is the same as that of the foreign bank
as a whole.
This ratio is multiplied by the value of the assets
held by the U.S. branch to determine the amount of U.S.-connected
liabilities.
If the amount of. U.S.-connected liabilities does
not exceed the amount of liabilities actually booked in the U.S.
5(...continued)
actively and materially participated in activities associated with
the making of a loan booked outside the U.S., interest income
derived from the loan will be treated as taxable ECI of the U.S.
branch.
9
branch, the interest deduction is computed by multiplying the
amount of U.S.-connected liabilities by the average interest rate
paid by the U.S. branch for the year.
If the amount of U.S.-
connected liabilities does exceed the amount of liabilities
actually booked in the U.S. branch, the foreign bank's home
office is treated as having borrowed the excess amount on behalf
of the U.S. branch and reloaned it to the U.S. branch.
The
interest deduction of the U.S. branch in this case is the sum of
(1) the amount of booked liabilities multiplied by the average
branch interest rate for the year and (2) the amount of the
excess U.S.-connected liabilities multiplied by a worldwide
dollar interest rate.
b.
U.S. Subsidiary
A U.S. subsidiary of a foreign corporation is taxed in
the same manner as a U.S.-owned corporation.
Thus a U.S.
subsidiary of a foreign bank would be subject to net basis
taxation on its worldwide income at a maximum rate of 34 percent
and could be subject to the alternative minimum tax.
A U.S.
subsidiary owned by a U.S. holding company would be eligible to
file a consolidated federal income tax return with the holding
company.
Income reported by a U.S. subsidiary with respect to
transactions with its foreign parent corporation or any other
related person may be subject to adjustment under Code section
482 where necessary to clearly reflect the income of the U.S.
subsidiary.
Code section 482 and the regulations thereunder
10
generally apply an arms' léngth standard for review of related
person transactions.
Assuming that the business of a new U.S. subsidiary
were essentially the same as the business conducted by a former
U.S. branch, the worldwide income of the subsidiary should
roughly correspond to the ECI of the former U.S. branch.
In
addition, the amount of the interest deduction allowed to a new
U.S. subsidiary should be roughly comparable to the amount of the
interest deduction allowed to the former U.S. branch.
As noted
above, the general objective of Treas. Reg. §1.882-5 is to
compute an interest deduction for a U.S. branch that is
comparable to the interest deduction which would have been
allowed if the branch were a U.S. subsidiary.
2.
Information Reporting and Record Maintenance
The U.S. tax information reporting and record
*
maintenance requirements that apply to U.S. branches and U.S.
subsidiaries of foreign corporations are designed to be
comparable.
Differences that do exist are generally limited to
those necessitated by the difference in the form of the entity.
Thus a foreign bank,should not experience a substantial change in
its information reporting and record maintenance requirements
upon conversion of a U.S. branch to a subsidiary.
a.
U.S. Subsidiary: Code section 6038A
Under Code section 6038A and the Treasury regulations
thereunder, a foreign-controlled U.S. corporation engaged in a
U.S. business must file an information return (on IRS Form 5472)
11
describing "reportable transactions"6 with related persons
(including a parent corporation, brother-sister corporations, and
U.S. or foreign subsidiaries) and must maintain certain records
relevant to these transactions in the United States.
Substantial
monetary penalties apply in the event of a failure to satisfy
these requirements.
A foreign-controlled U.S. corporation to which Code
section 6038A applies is a U.S. corporation that is 25 percent
foreign-owned, i.e., 25 percent or more of the total voting power
or value of its stock is owned by at least one foreign person at
any time during the taxable year.
A separate 1RS Form 5472 must
be filed by the foreign-controlled U.S. corporation with respect
to each related party with which the foreign-controlled U.S.
corporation had a reportable transaction.
The aggregate dollar
amount for all reportable transactions must be provided on each
Form 5472, as well as the separate dollar amount for each
category of reportable transactions.
A foreign-controlled U.S. corporation must maintain
records (or cause another person to maintain records) sufficient
to establish the correctness of the corporation's federal income
Reportable transactions include sales and purchases of
inventory; sales and purchases of other tangible personal property;
sales, purchases, and amounts paid and received as consideration
for the use of intangible property; other rents and royalties
received;
consideration paid
and
received
for
technical,
managerial, engineering, construction, scientific or similar
services; commissions paid and received; amounts loaned and
borrowed (other than trade receivables paid or collected in full in
the ordinary course of business).; interest paid or received; and
premiums paid and received for insurance or reinsurance.
12
tax return and the correct treatment of all reportable
transactions with related persons.
Records must be maintained in
the United States, unless a special election is made under which
the foreign-controlled U.S. corporation agrees to produce
foreign-held records for the 1RS.
Under a "safe harbor" rule,
reporting corporations that maintain records in certain specified
categories are deemed to satisfy the record maintenance
requirement.
Any foreign person related to a foreign-controlled
U.S. corporation must authorize the foreign-controlled U.S.
corporation to act as its agent for purposes of 1RS examination
of its books and records and for the service and enforcement of a
summons relating to any reportable transaction with the foreigncontrolled U.S. corporation.7
b.
U.S. Branch: Code section 6038C
Code section 6038C requires that a foreign corporation
engaged in a U.S. trade or business file an information return
(on 1RS Form 5472) that identifies all foreign shareholders
owning 25 percent or more of their stock and describes reportable
transactions between the foreign corporation and related persons
(including its significant foreign shareholders).
Substantial
monetary penalties apply in the event of a failure to file the
requisite information return or to maintain adequate supportive
records.
Foreign-controlled U.S. corporations with less than
$10,000,000 in gross receipts are exmept from this requirement, as
well as the record maintenance requirements discussed above.
13
Although Treasury regulations have not yet been issued
under section 6038C# that section incorporates by cross-reference
the information reporting and record maintenance requirements of
Code section 6038A (applicable to foreign-controlled U.S.
corporations).
It is thus expected that the transactions
identified as "reportable" in forthcoming Treasury regulations
under section 6038C will be comparable to those identified in the
existing Treasury regulations under section 6038A, and that the
record maintenance requirements imposed by the section 6038C
regulations will be similar to those of the section 6038A
regulations.
In addition, the House Ways and Means Committee
Report on the Revenue Reconciliation Act of 1990 indicates that a
foreign corporation may be required to provide information and
maintain records relevant to the allocation and apportionment of
deductible expenses (including deductible interest expense) to
effectively connected U.S. branch income and the allocation of
income and deduction amounts between the U.S. and foreign
countries.
See House Ways and Means Comm. Rpt. on H.R. 5835 at
p. 72-3.
3.
Home Office Lending to U.S. Operations
Under Code section 884(f), interest deemed paid by a
U.S. branch to a foreign home office is subject to an excess
interest tax designed to correspond to the withholding tax that
applies to interest payments by a U.S. corporation to a foreign
lender.
Interest expense that is deductible under Treas. Reg.
§1.882-5 (discussed above) is treated as "excess interest" to the
14
extent that it exceeds the interest expense actually paid by the
U.S. branch.
The amount of "excess interest" effectively equals
the amount of interest expense associated with the excess of
U.S.-connected liabilities over booked liabilities (as determined
under Treas. Reg. §1.882-5).
As noted above, this excess amount
of liabilities is treated as having been incurred by the foreign
corporation's home office on behalf of the U.S. branch and re
loaned to the branch.
The rate of the excess interest tax is 30
percent, the same as the statutory withholding rate for interest
payments.
For corporations which are "qualified residents" of a
treaty country, the excess interest tax is imposed at the reduced
treaty rate provided for interest withholding.
The conversion of
a U.S. branch to a U.S. subsidiary should thus tend to have a
relatively neutral effect on inter-office lending practices of a
foreign bank.
C.
Subsidiary Operations: Areas Where Tax Treaties Have
Significant Effect
Although the Code generally seeks to achieve equivalent
tax treatment of the operations of U.S. branches and U.S.
subsidiaries of foreign corporations, some Code provisions
governing operation in branch or subsidiary form are
significantly affected by applicable U.S. income tax treaties.
In these areas, a foreign bank's conversion of its U.S.
operations from branch to subsidiary form may have a non-neutral
effect.
15
1.
Repatriation of Profits
A number of U.S. income tax treaties prevent imposition
of the branch profits tax (designed to correspond to the dividend
withholding tax).
For foreign banks from these countries, the
withholding tax applicable to dividends paid by a new U.S.
subsidiary would represent an additional cost of repatriating
U.S. profits.
a.
U.S. Branch: Branch Profits Tax
No U.S. withholding tax is imposed on profits
repatriated from a U.S. branch to the home office of a foreign
corporation.
Instead, Code section 884 imposes a "branch profits
tax" on an amount of profits deemed to have been remitted by a
U.S. branch (the "dividend equivalent amount").
The dividend
equivalent amount for a taxable year is generally equal to the
amount of branch profits for the year, reduced by increases in
U.S. investment and increased by reductions in U.S. investment
during the year.
The branch profits tax is intended to
correspond to the shareholder-level withholding tax imposed on
dividends paid by a U.S. subsidiary to a foreign parent.
The tax
is a second-level tax imposed in addition to the regular tax
imposed on U.S. branch ECI.
The statutory rate of the branch
profits tax is 30 percent (the same as the dividend withholding
tax rate).
For corporations which are "qualified residents" of a
treaty country, the branch profits tax is imposed at the reduced
treaty rate provided for withholding on dividends paid to a 100
16
percent shareholder.
The branch profits tax is considered
discriminatory, however, under a number of significant U.S. tax
treaties and is not imposed on U.S. branches of corporations
resident in the affected countries.8
b.
U.S. Subsidiary: Dividend Withholding Tax
Under Code section 881, dividends paid by a U.S.
subsidiary to a foreign parent corporation are subject to U.S.
withholding tax at a statutory rate of 30 percent.
This rate is
reduced by U.S. income tax treaties -- often to 5 percent for
dividends paid to a direct investor (i.e., a corporate investor
owning at least 10 percent of the stock of the dividend-paying
corporation).
As noted above, the branch profits tax is designed to
correspond to the dividend withholding tax.
Thus, in many cases,
a foreign bank switching from the branch profits tax to dividend
withholding (upon conversion of its U.S. operations to subsidiary
form) should not face a substantial change in U.S. tax liability
on repatriated profits.
For a foreign bank resident in a country
whose income tax treaty with the U.S. does not permit imposition
of the branch profits tax, however, dividend withholding would
8
U.S. income tax treaties that do not permit imposition of
the branch *prof its tax are those with Aruba, Austria, Belgium,
China, Cyprus, Denmark, Egypt, Finland, Greece, Hungary, Iceland,
Ireland, Italy, Jamaica, Japan, Korea, Luxembourg, Malta, Morocco,
Netherlands, Norway, Pakistan, Philippines, Sweden, Switzerland,
United Kingdom. Countries whose income tax treaties with the U.S.
do permit imposition of the branch profits tax include Australia,
Barbados, Canada, France, Germany, India, New Zealand, Poland,
Romania, Spain, Trinidad & Tobago, and the countries of the former
U.S.S.R.
17
increase the U.S. tax cost of repatriating profits to the home
office.
However, it should also be noted that dividend
withholding would eliminate a competitive advantage which banks
from those countries currently enjoy over banks from countries
whose treaties permit imposition of the branch profits tax or
from countries with no U.S. tax treaty.
2.
Interest Paid by U.S. Customers
It is possible that the capital requirements applicable
to a U.S. subsidiary of a foreign bank would cause a foreign bank
to restrict the lending activities of the U.S. subsidiary (after
enactment of a subsidiary requirement).
In this situation, the
potential application of withholding tax to interest paid by U.S.
customers to the foreign bank's home office could (where not
eliminated by treaty) preclude a compensating increase in U.S.
lending activity by the home office.
The result could be an
overall restriction in lending to U.S. customers by foreign banks
in affected countries.
a.
Interest Paid to U.S. Branch or U.S. Subsidiary
Interest paid by a U.S. customer to a U.S. branch of a
foreign bank is not subject to U.S. withholding tax if the
interest income represents ECI of the branch (which is subject to
net basis U.S. income taxation).
Interest that is not ECI is
subject to U.S. withholding tax at a statutory rate of 30 percent
or a reduced treaty rate.9 Interest paid by a U.S. customer to
9
As a practical matter, virtually all interest paid by U.S.
customers to U.S. branches of foreign banks is ECI.
18
a U.S. subsidiary of a foreign bank is treated in the same manner
as interest paid to any other U.S. person, i.e., it is exempt
from U.S. withholding tax.
b.
Interest Paid by U.S. Customer to Home Office
A foreign bank that made large U.S. loans through a new
U.S. subsidiary would be required to maintain substantial capital
in the U.S. subsidiary.
A foreign bank might thus prefer to make
large loans to U.S. customers from its home office, e.g., by
participating in a syndication arranged by a U.S. bank.
Interest
paid by a U.S. customer to the home office of a foreign bank is
subject, however, to U.S. withholding tax at a statutory rate of
30 percent.10 Interest withholding is eliminated under many
U.S. tax treaties, but remains at a positive rate under some
significant treaties, e.g., Canada (15 percent), Japan (10
percent) and Switzerland (5 percent).
In addition, many foreign
banks with U.S. operations are based in countries which do not
have income tax treaties with the U.S., e.g., Hong Kong, the
Middle East and Latin America.
Even at a reduced treaty rate, a gross basis U.S.
withholding tax on interest paid by a U.S. customer to a foreign
10
Statutory exceptions from U.S. withholding tax include: (a)
interest on bank deposits, under Code sections 881(d) and 871(i);
(b) portfolio interest, which specifically does not include
interest received by a bank on an extension of credit made pursuant
to a loan agreement entered into in the ordinary course of its
trade or business, under Code section 881(c); and (c) interest on
certain short-term discount obligations with a maturity of 183 days
or less, under Code section 871(g)(1)(B). None of these exceptions
would be useful to a foreign bank making loans to U.S. customers in
the ordinary course of its business.
19
bank's home office could eliminate the small profit margin
typical of the lending business.
In contrast, interest paid to a
U.S. branch is subject to net basis U.S. tax that is usually less
than 2 percent of the gross amount of interest received.
In
addition, a net basis U.S. tax is usually fully creditable
against net basis home country tax, whereas a gross basis U.S.
withholding tax would usually exceed the net basis home country
tax, resulting in excess foreign tax credits.
Although the
potential for elimination of profit on U.S. loans could encourage
foreign banks to make U.S. loans through a new U.S. subsidiary,
it seems more likely that the combined effect of the U.S. capital
requirements applicable to a U.S. subsidiary and the withholding
tax implications of home office lending would be a reduction in
lending to U.S. customers by foreign banks not eligible for a
treaty exemption from withholding tax.
The imposition of U.S. withholding tax on interest paid
to the home offices of banks located in these countries would
presumably give these countries a new incentive to agree to a
treaty exemption for bank loan interest.
The U.S. Model Income
Tax Treaty provides an exemption from withholding for interest
income.
Some countries have historically been unwilling,
however, to agree to an exemption for bank loan interest in order
to protect their domestic banking industries, i.e., because a
withholding exemption would permit U.S. banks to compete with
domestic banks for the business of domestic customers.
To the
extent that treaties could be renegotiated to provide an
20
exemption for bank loan interest, the potential effect of the
withholding tax would be mitigated.
If this does not occur,
however, the potential for reduced lending to U.S. customers may
be the most significant tax-related consequence of a subsidiary
requirement for foreign banks.
DIFFERENCES IN TREATMENT
OF UNITED STATES CREDITORS
UNDER BANKRUPTCY AND
RECEIVERSHIP LAWS
(FACTOR 10)
APPENDIX E
DIFFERENCES IN TREATMENT OF UNITED STATES
CREDITORS UNDER BANKRUPTCY AND
RECEIVERSHIP LAWS (FACTOR 10)
I.
SUMMARY AND CONCLUSIONS
Under U.S. law and procedure, a creditor of an
insolvent U.S. branch of a foreign bank would be treated in much
the same way as a creditor of an insolvent domestic bank
subsidiary of a foreign bank parent.
Each creditor would have a
U.S. forum -- either a state or federal liquidation proceeding
in which to pursue its claim.
Each would have access, by virtue
of that proceeding, to assets of the branch or subsidiary under
the jurisdiction of the U.S. liquidator.
In addition, however,
the branch creditor potentially would have access, in a foreign
forum or forums, to the worldwide assets of the foreign bank.
The subsidiary creditor would not have any legal claim to such
additional assets, assuming no legal or factual basis exists for
piercing the corporate veil.
n.
ANALYSIS
A.
Background
Tremendous diversity exists in the ways in which
countries deal with insolvent banks.
U.S. bank insolvencies are
outside the scope of general bankruptcy legislation and instead
are treated under state and federal banking laws administered by
bank regulatory authorities, while bank insolvencies in many
other countries are handled pursuant to general insolvency laws.
2
Some countries, including the United States, liquidate foreign
bank branches as separate entities; others either attempt to
liquidate the entire foreign bank or simply collect assets and
transfer them to the home country liquidator for disposition in
the liquidation proceeding pending there.
This diversity has
hindered the development of common approaches to multinational
insolvencies even among countries actively promoting cooperation
on other economic issues.1 It is unlikely that multinational
bank insolvency will be the subject of multilateral treaty or
agreement in the near term.
One internationally recognized principle of bankruptcy
law is that similarly situated creditors should share equally in
the assets of the debtor's estate.
In practice, however, local
law and policy frequently dictate that equal treatment means all
creditors of a local debtor, whether such creditors are
themselves local or not, should be treated in accordance with
local law.
Thus, the principle of equal treatment accommodates
two competing theories of bankruptcy administration:
universality
-- where deference generally is given to the legal
proceedings in the country in which the insolvent entity is
organized and the worldwide creditors and assets of a debtor are
treated in accordance with the laws of that country
territoriality
-- and
-- where no such deference is given and any
1
See R. Gitlin & E. Flaschen, "The International Void in
the Law of Multinational Bankruptcies," 42 Bus. Law. 307, 311-13
(1987) (discussing history of EC's efforts to negotiate a
bankruptcy convention).
3
country may administer its own bankruptcy proceedings without
regard for foreign proceedings or judgments.
B.
Applicable Federal and State Law
State and federal bank insolvency rules, as well as the
federal bankruptcy code, generally reflect a territorial
approach.2 The same basic rules currently apply to insolvencies
of U.S. branches of foreign banks and to insolvencies of banks
organized under the laws of the United States that are owned or
controlled by foreign banks or foreign bank holding companies.
This parity of treatment is accomplished in the case of branches
by treating an insolvent branch as an entity separate and apart
from the rest of the foreign bank for purposes of actual
liquidation.3
1.
Branch Liquidation for Insolvency
Under federal law, the Office of the Comptroller of the
Currency ("OCC") is authorized to appoint a receiver to liquidate
a federal branch of a foreign bank.
In the case of an insured
branch, the receiver would be the Federal Deposit Insurance
2 Section 304 of the federal bankruptcy code, 11 U.S.C.
§304, which reflects a more universalist approach, is discussed
infra at page 9.
3 See e.g., 12 U.S.C. §3102 (j) (2) (provision of the
International Banking Act governing claims that may be made in
liquidations of federal branches); N.Y. Banking Law §606-4
(McKinney 1971) (permits N.Y. Superintendent to take possession
of all property of a foreign bank in the state in connection with
liquidation of a foreign bank office licensed by the state).
4
Corporation ("FDIC").4 The OCC may appoint a receiver for
certain violations of law; where a conservator has been appointed
for the foreign bank in the bank's home country; when the bank
does not pay a judgment obtained by a creditor against it,
arising out of a transaction with its branch; or if the OCC
determines that the foreign bank is insolvent.5 The receiver has
a broad mandate; he or she may take possession of all of the
foreign bank's agencies and branches (including state-licensed
offices), and any additional property or asset of the foreign
bank located in the United States.6 The applicable law creates a
preference for claims of third party depositors and other
creditors against a foreign bank arising out of transactions with
any branch or agency of the foreign bank in the United States.
The receiver is prohibited from paying any claims that would not
represent an enforceable legal obligation against the branch if
it were a separate legal entity (e.g., a subsidiary).7
These
preferences and prohibitions define the assets of the branch
broadly -- to include all of the foreign bank's U.S. assets and
not simply the assets of the branch itself -- and the claims
against the branch narrowly, thereby benefiting local creditors.
4 At present, most branches of foreign banks are not FDIC
insured.
5 12 U.S.C. §3102(j). The OCC also may appoint a receiver
if it determines that an insured branch is critically
undercapitalized. 12 U.S.C. §1831o(h)(3).
6 12 U.S.C. §3102 (j) (1).
7 12 U.S.C. §3102 (j) (2) .
5
After all valid claims are paid, the receiver is authorized to
turn over any excess assets of the branch to the head office of
the foreign bank or to a duly appointed local liquidator of such
foreign bank.
State-licensed branches of foreign banks are subject,
in the first instance, to the liquidation laws of the licensing
state.
In practice, a state-licensed insured branch would be
liquidated by the FDIC.
State-licensed branches that are not
insured would be wholly subject to state bank liquidation law.
The states with a substantial foreign bank presence follow a
separate entity approach which is comparable to that followed by
the OCC as liquidator of federal branches.8
This approach has the advantage of affording U.S.
creditors of a branch a U.S. forum, as they would have if the
branch had been a subsidiary, but not denying them access, albeit
perhaps in other forums, to the bank's worldwide capital and
assets.
Creditors of a subsidiary, unlike creditors of a branch,
generally have no rights to the assets of the corporate parent.
Access to worldwide assets was recognized as a crucial factor
favoring the branch form in the report of the Superintendent's
Advisory Committee on Transnational Banking Institutions recently
published by the New York State Banking Department.
Of course,
8
See e.g., Cal. Fin. Code §§1781, 1785 (West) (foreign
bank office to be liquidated in accordance with law applicable to
state bank); Fla. Stat. Ch. 663.02 (same); 111. Rev. Stat. Ch.
17, paras. 2701, 2719, 2725 (1991) (same); N.Y. Banking Law §6064 (McKinney 1971) (same).
6
access to worldwide capital and assets has important implications
for the other factors addressed in this study.
2. Subsidiary Liquidation for Insolvency
A U.S. bank subsidiary of a foreign bank would be
liquidated in the same manner as a U.S. bank subsidiary of a U.S.
bank holding company.
If the U.S. subsidiary were a national
bank, the national bank liquidation procedures would apply.
If
the U.S. subsidiary were a state chartered bank, the liquidation
procedures of the chartering state would apply.
Generally
speaking, the chartering entity would close the institution and
the FDIC would act as receiver.
The assets available to the
receiver would be those of the subsidiary and would not include
assets of the parent, assuming no legal or factual basis exists
for piercing the corporate veil.
Unlike the case of a branch or agency, where the
insolvency of the foreign bank itself would necessarily trigger a
liquidation of the branch, the insolvency of a foreign bank
parent of a U.S. subsidiary would not necessarily require the
liquidation of the U.S. subsidiary.9 In general, however, when a
9
Canadian Commercial Bank ("CCB"), a mid-sized Canadian
bank based in Edmonton, Alberta, failed in 1985. CCB was
liquidated pursuant to Canadian law by Price Waterhouse, Ltd., a
court appointed liquidator. At the time of the failure, CCB had
both an indirect state chartered bank subsidiary, Commercial
Center Bank ("Commercial Center") in Santa Ana, California, and a
state-licensed Los Angeles agency. The agency was closed in
September 1985 and liquidated as a separate entity by the
California authorities. All permitted claims were paid in full
and the excess assets were transferred to the Canada Deposit
Insurance Corporation ("CDIC"), the entity that held the assets
(continued...)
7
parent fails an otherwise sound subsidiary also suffers because
of the effects on market confidence.10
C. Case Studies
Recent experience with liquidations of U.S. branches of
foreign banks is consistent with these conclusions.11 There have
been very few involuntary liquidations of U.S. branches of
foreign banks since 1945.
All have involved uninsured state-
licensed branches; neither the OCC nor the FDIC has been required
to liquidate a branch under its supervision for reasons of
9(...continued)
of CCB in liquidation. Commercial Center was not closed at the
time of the CCB liquidation. The CDIC has continued to support
the bank by funding it and putting in place a management team. In
the absence of such foreign government support -- which could not
be expected to occur in all cases -- U.S. regulators might have
been required to liquidate Commercial Center, which could have
resulted in losses to either the insurance fund or depositors.
10 See e.g., Treasury and Civil Service Comm., Fourth Report
-- Banking Supervision and BCCI: International and National
Regulation, Bank of England Response (July 1992) Annex 2
(I)(a)(11). The problems experienced by the First American banks
in the aftermath of the closing of BCCI are consistent with this
general trend.
11
In an effort to obtain comparative data on this issue,
the Justice Department surveyed banking requirements in a
selected sample of jurisdictions. These jurisdictions were
chosen because they were representative of the types of
jurisdictions in the U.S. foreign bank community (United Kingdom,
Italy, Japan, India, Qatar and Argentina). None of the
jurisdictions surveyed require that foreign banks conducting
regular banking operations in their territory do so through
domestically incorporated subsidiaries. Where banks have the
option, as they do in the United States, of conducting operations
directly through branches or indirectly through subsidiaries,
they generally choose the branch form of organization. Thus,
there is an absence of comparative data to support a judgment
that the use of one form of bank organization is superior to the
other in protecting domestic depositors in the event of
insolvency.
8
insolvency.
In these liquidations, the insolvency of the branch
was part of the insolvency of the entire institution and
contemporaneous liquidation proceedings were underway in the home
country.' In each case, all valid claims were paid in full.
•• In the late 1960s, the New York State Superintendent of
Banks liquidated the New York branch of Intra Bank, S.A., a
Lebanese bank. The estate was large enough to pay all
validated claims. The surplus went to the U.S. government
in compromise of a claim of the Commodity Credit Corporation
that initially had been rejected by the Superintendent.12
•• In early 1980, the New York Superintendent liquidated
the New York branch of Banco de Intercambio Regional, S.A.,
an Argentine bank. The estate was large enough to pay all
claims of branch creditors. The surplus was turned over to
the Argentine liquidator.13
•• In the ongoing liquidations of the New York and
California depository agencies of the Bank of Commerce
and Credit International, S.A. ("BCCI"), each of the
New York and California Superintendents expects there
to be a surplus after the payment of valid claims.
The liquidations of BCCI#s New York and California
agencies, though not directly relevant to this study because they
involved agencies as opposed to branches, are nonetheless
instructive as contemporary examples of a complex, multinational
bank failure involving simultaneous liquidations of the foreign
bank itself in the home country and multiple liquidations of
subsidiaries and unincorporated offices around the world.
The
state liquidations were complicated by the early filing in U.S.
bankruptcy court of petitions, under section 304 of the federal
12 In Re Willie. 61 Misc. 2d 992, 30 N.Y.S.2d 520, 543 (Sup.
Ct. 1968).
13 In Re Seibert. 135 Misc. 2d 1093, 517 N.Y.S.2d 358 (Sup.
Ct. 1987).
9
bankruptcy code, by the foreign liquidators of BCCI and the
pendency of a criminal case which resulted in the forfeiture by
BCCI of certain U.S. assets.
The major section 304 proceeding was filed by BCCI
liquidators appointed by the courts of Luxembourg, where BCCI was
organized, the United Kingdom, where BCCI was headquartered, and
Grand Cayman, where BCCI Overseas, a sister company, was
organized.
The petition and accompanying motion sought a
temporary restraining order which, if granted, could have
prevented the Superintendents in New York and California from
proceeding with the liquidations of the BCCI agencies in those
states.
Section 304 permits a foreign representative of a
foreign debtor to petition to enjoin the commencement or
continuation of any proceedings against the debtor with respect
to property involved in a foreign proceeding and to order the
turnover of the U.S. assets of the debtor for administration by
the foreign representative.14 U.S. bank regulators took the
position in court that section 304 should not be used to enjoin
or otherwise interfere with a bank insolvency proceeding.15 The
judge did not enjoin the continuation of either the California or
the New York liquidation nor did he reach the merits of the
regulators' argument that section 304 should not apply to state
or federal bank liquidation proceedings.
Instead, California and
14 11 U.S.C. §304.
15 In Re Smouha. Case No. 91-B-13569 (JLG) , U.S. Bankr. Ct.,
S.D.N.Y.
10
New York negotiated a settlement with the foreign liquidators
which permitted the liquidations to go forward unimpeded.
The
foreign liquidators agreed not to make any claims against BCCI
assets until after the state liquidations were concluded.
The BCCI liquidations are not yet complete.
Nonetheless, a few important conclusions can be drawn from them.
First, in spite of the complications created by the section 304
proceeding, the state-appointed liquidators in both New York and
California have been able to conduct their liquidations in
accordance with the rules and principles outlined above.
Second,
the liquidators have at least as many assets under their
jurisdiction that they would have had if the agencies had been
separately incorporated subsidiary banks of BCCI.
Finally, the
outcome of the BCCI liquidations in all likelihood will be
consistent with prior cases; that is, the liquidator will be left
with excess assets after all valid claims of the agencies'
creditors are paid.
TH E S E C R E T A R Y OF TH E T R E A S U R Y
i l i 1 3 S3 0 Û I 9 6 8
WASHI NGTON
Eecmfoer: 18, 1992
The Honorable Donald W. Riegle, Jr.
Chairman
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
I am pleased to submit this report on the study by the
Treasury Department and the Federal Reserve Board on whether
foreign banks should be required to conduct banking operations in
the United States through subsidiaries rather than branches. The
report and study were prepared pursuant to Section 215 of the
Foreign Bank Supervision Enhancement Act (FBSEA), and in
consultation with the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Attorney General.
The Treasury and Board have considered carefully the
factors specified in the legislation and concluded that a
requirement that all foreign banks operate in this country in the
form of subsidiaries, either across-the-board or for purposes of
expanded powers, is neither necessary nor desirable. The
Treasury and Federal Reserve Board believe that the longstanding
U.S. support for the principle that banks should be permitted to
choose the form of establishment as either branches or
subsidiaries should be maintained.
Recent legislative actions and international measures
provide additional safeguards. In particular, the study notes
that the adoption of the Foreign Bank Supervision Enhancement Act
strengthens significantly the ability to protect the safety and
soundness of the U.S. banking system by more effective regulation
of foreign banks operating in this country, particularly in those
areas where uniform standards previously did not exist for
foreign banking operations. Furthermore, the Federal Reserve
guidelines on capital equivalency established pursuant to Section
214(b) of the FBSEA and the minimum standards on supervision of
banks operating internationally adopted by the Basle Committee
address concerns relating to competitive equity and national
treatment.
The United States has pursued the principle of investor
choice in a wide range of international fora t o provide increased
r\
2
access to foreign markets for U.S. financial institutions,
including the Uruguay Round, NAFTA, and bilateral negotiations.
Treasury and the Board recognize that it is important to assure
that U.S. negotiators have the necessary tools to advance U.S.
interests abroad. However, they agree that a subsidiary
requirement applied to all foreign banking operations either
across-the-board or for purposes of expanded powers is not
desirable and could be counterproductive to this effort.
The enclosed study and its appendices provide
considerable background on each of the factors specified in the
legislation. I hope that you find this report and study useful
as the Congress considers future reform of the U.S. financial
system.
Sincerely,
Nicholas F. Brady
Enclosure
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
December 21, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $12,415 million of 13-week bills to be issued
December 24, 1992 and to mature March 25, 1993 were
accepted today (CUSIP: 912794B60).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.13%
3.18%
3.16%
Investment
Rate____
3.20%
3.25%
3.23%
Price
99.209
99.196
99.201
Tenders at the high discount rate were allotted 41%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
23,320
28,510,125
11,615
44,075
34,200
39,440
1,335,010
14,480
8,640
27,995
20,885
635,700
741.730
$31,447,215
Accented
23,320
11,016,125
11,615
44,075
34,200
39,440
296,510
14,480
8,640
27,995
20,885
135,700
741.730
$12,414,715
Type
Competitive
Noncompetitive
Subtotal, Public
$27,636,820
1.321.195
$28,958,015
$8,604,320
1.321.195
$9,925,515
2,125,210
2,125,210
363.990
$31,447,215
363.990
$12,414,715
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $131,110 thousand of bills will be
issued to foreign official institutions for new cash.
NB-2107
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
December 21, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,410 million of 26-week bills to be issued
December 24, 1992 and to mature June 24, 1993 were
accepted today (CUSIP: 912794D68).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.30%
3.32%
3.32%
Investment
Rate
3.40%
3.42%
3.42%
Price
98.332
98.322
98.322
Tenders at the high discount rate were allotted 77%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
20,055
31,995,405
6,030
32,590
22,340
41,635
1,261,325
10,145
7,415
24,475
9,610
528,400
448.595
$34,408,020
Accepted
20,055
11,607,825
6,030
32,590
22,340
41,405
72,295
10,145
7,415
24,475
9,610
107,470
448.595
$12,410,250
Type
Competitive
Noncompetitive
Subtotal, Pubiic
$30,289,190
819.520
$31,108,710
$8,291,420
819.520
$9,110,940
2,450,000
2,450.000
849.310
$34,408,020
849.310
$12,410,250
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $285,890 thousand of bills will be
issued to foreign official institutions for new cash.
NB-2108
CONTACT: RICH MYERS
(202) 622-2930
FOR IMMEDIATE RELEASE
December 22, 1992
ASSISTANT SECRETARY FRED GOLDBERG LEAVES TREASURY
Secretary Nicholas F. Brady announced today that Fred
Goldberg, Assistant Secretary for Tax Policy, has left the
Treasury Department to return to the private sector.
In announcing Mr. Goldberg's
said, "Fred Goldberg's tenure was
creativity and always putting the
first. I have relied on Fred for
our nation's tax system is fairer
fine work he has done."
departure, Secretary Brady
marked by professionalism,
best interests of the taxpayer
his expertise and judgment and
and stronger because of the
Mr. Goldberg will be returning to the private sector as a
partner in the Washington D.C., office of the law firm Skadden,
Arps, Slate, Meagher and Flom.
Mr. Goldberg has been Assistant Secretary for Tax Policy
since February 3, 1992. In that position, he served as chief
advisor to the secretary in the formulation and execution of
international and domestic tax policies and programs. Among his
accomplishments, Mr. Goldberg played a significant role in
promoting the Administration's economic growth proposals,
developing and implementing the Treasury/IRS Business Plan,
promoting and implementing tax simplification, and initiating and
pursuing a number of long-term tax policy studies.
From 1989 until his appointment as Assistant Secretary, Mr.
Goldberg was Commissioner of the Internal Revenue Service. At
the IRS, he was in charge of over 116,000 employees and
responsible for an operating budget of over $6 billion, and total
tax collection in 1991 exceeding $1 trillion. As commissioner,
Mr. Goldberg directed the tax modernization program to update and
improve IRS' computer information systems, and a program to
reduce taxpayer burden and improve voluntary compliance.
From 1986 until 1989, Mr. Goldberg was a partner in the law
firm of Skadden, Arps, Slate, Meagher & Flom. From 1984 to 1986,
he served as Chief Counsel for the IRS.
Mr. Goldberg received a B.A. in economics (1969), and a J.D.
(1973) from Yale University. A native of St. Louis, Mr. Goldberg
and his wife, the former Wendy Meyer, have five children.
Secretary Brady said that Alan J. Wilensky, Deputy Assistant
Secretary for Tax Policy, is now Acting Assistant Secretary.
NB-2109
#####
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
December 22, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $15,501 million of 2-year notes, Series AH-1994,
to be issued December 31, 1992 and to mature December 31, 1994
were accepted today (CUSIP: 912827H96).
The interest rate on the notes will be 4 5/8%. All
competitive tenders at yields lower than 4.71% were accepted in
full. Tenders at 4.71% were allotted 27%. All noncompetitive and
sucessful competitive bidders were allotted securities at the yield
of 4.71%, with an equivalent price of 99.840. The median yield
was 4.68%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 4.65%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
36,340
36,360,495
28,410
110,605
106,650
39,140
1,379,210
60,405
20,095
78,295
18,185
495,275
305.490
$39,038,595
Accepted
36,340
14,400,395
28,410
110,605
106,650
35,390
236,010
60,405
20,095
78,295
18,185
65,225
305.490
$15,501,495
The $15,501 million of accepted tenders includes $1,045
million of noncompetitive tenders and $14,456 million of
competitive tenders from the public.
In addition, $503 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,100 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB- 2 1 10
TREASURY NEWS
Department of the Treasury
Washington,
FOR RELEASE AT 2:30 P.M.
December 22, 1992
D.C
CONTACT:
Telephone 2 0 2 - 6 2 2 -2 9 6 0
Office of Financing
202-219-3350
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $24,800 million, to be issued December 31 , 1992.
This offering will provide about $ 2,825 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $21,987 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, December 28, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91 -day bills (to maturity date) for approximately
$ 12,400 million, representing an additional amount of bills
dated October 1, 1992
and to mature April 1, 1993
(CUSIP No. 912794 B7 8), currently outstanding in the amount
of $10,285 million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$ 12,400 million, representing an additional amount of bills
dated July 2, 1992
and to mature July 1, 1993
(CUSIP No. 912794 D7 6 ), currently outstanding in the amount
of $ 14,992 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi
tive add noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 31, 1992. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 2,345 million as agents for foreign and international
monetary authorities, and $ 5,729 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing*
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and 'Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, ÄND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive tenders.
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
RESULTS OF TREASURES.^U<?T
l QN OF 5-YEAR NOTES
D T i. wi
Iriu I I\ A
l
l
o u i u
Tenders for $11,260 million of 5-year notes, Series U-1997,
to be issued December 31, 1992 and to mature December 31, 1997
were accepted today (CUSIP: 912827J29).
The interest rate on the notes will be 6%. All
competitive tenders at yields lower than 6.03% were accepted in
full. Tenders at 6.03% were allotted 62%. All noncompetitive and
sucessful competitive bidders were allotted securities at the yield
of 6.03%, with an equivalent price of 99.872. The median yield
was 5.97%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 5.90-s;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
33,173
22,314,577
19,820
44,012
72,275
30,667
1,155,329
31,701
15,054
50,014
16,769
551,609
124.208
$24,459,208
Accepted
33,173
10,544,577
19,820
44,012
72,275
30,667
225,829
31,701
15,054
50,014
16,769
51,569
124.208
$11,259,668
The $11,260 million of accepted tenders includes
million of noncompetitive: tenders and $10,390 million
competitive tenders from the public.
In addition, $398 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $470 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
N B - 2 1 12
.
Tenders for $12,401 million of 13-week bills to be issued
December 31, 1992 and to mature April 1, 1993 were
accepted today (CUSIP: 912794B78).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3. 18%
3. 24%
3. 22%
Investment
Rate
3.25%
3.31%
3.29%
Price
99.196
99.181
99.186
Tenders at the high discount rate were allotted 63
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
22,775
27,906,830
6,900
25,710
31,015
29,085
1,136,065
13,615 •
7,090
24,580
22,210
354,415
822.215
$30,402,505
Type
Competitive
Noncompetitive
Subtotal, Public
$25,438,900
1.302.170
$26,741,070
Federal Reserve
Foreign Official
Institutions
TOTALS
NB- 2113
Accepted
22,775
10,838,080
6,900
25,710
31,015
29,085
339,815
13,615
7,090
24,580
22,210
217,415
822.215
$12,400,505
$7,436,900,
1.302.170
$8,739,070
2,829,035
2,829,035
832.400
$30,402,505
832.400
$12,400,505
es
^PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
December 28, 1992
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $12,422 million of 26-week bills to be issued
December 31, 1992 and to mature July 1, 1993 were
accepted today (CUSIP: 912794D76).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.34%
3.40%
3.38%
Investment
Rate____
3.45%
3.51%
3.49%
Price
98.311
98.281
98.291
Tenders at the high discount rate were allotted 36%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago .
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
20,795
29,532,135
2,695
26,720
34,360
21,220
965,555
10,005
7,185
20,790
8,890
324,570
524.130
$31,499,050
Accented
20,795
11,567,460
2,695
26,720
34,360
21,220
117,555
10,005
7,185
20,790
8,890
60,570
524.130
$12,422,375
Type
Competitive
Noncompetitive
Subtotal, Public
$27,109,920
818.630
$27,928,550
$8,033,245
818.630
$8,851,875
2,900,000
2,900,000
670.500
$31,499,050
670.500
$12,422,375
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -2 1 14
FOR RELEASE AT 2:30 P.M.
December 29, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 24,800 million, to be issued January 7, 1993.
This offering will provide about $ 2,525 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 22,267 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, January 4, 1993,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$ 12,400 million, representing an additional amount of bills
dated April 9, 1992
and to mature April 8, 1993
(CUSIP No. 912794 B8 6 ), currently outstanding in the amount
of $ 24,468 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $12,400 million, to be
dated January 7, 1993
and to mature July 8, 1993
(CUSIP
No. 912794 E7 5).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing January 7, 1993.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at
the weighted average bank discount rates of accepted competi
tive tenders. Additional amounts of the bills may be issued to
Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
maturing bills held by them. Federal Reserve Banks currently
hold $ 1,353 million as agents for foreign and international
monetary authorities, and $ 5,276 million for their own account.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-2115
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid foi more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive M H H e r may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned^ nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(l) of the|
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
T R E A S U R Y 'S 13-,
26-, AN D 52-WEEK B I L L OFFERINGS,
Page 3
tender.
For other than mailed tenders, the customer list should
accompany the tender.
If the customer list is not submitted with
the tender, information for the list must be oonvplete and avail
able for review by the deadline for submission of noncompetitive
tenders.
The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of executiori, and the employer identification number
of the trust.
t report its net Ion o po s ition in
he total o f al 1 its h ids fo r tha t
bill and its net long positionn in the bil 1 equ a Is n r e Xc ed s $ 2
billion, with the position to be de te rmin ed as o t one 1 a 1 f- hon r
the rec eipt o f comp n 1:ih iV (3 te nde r s
A net long position include
po s ih io ns , in the b iIl b o in g auc tioned, in when-issued tradingg and in fut ur es and for W a td co ti
outsta ndin g bil Is w itill th q s a me
tracts, as well as holdings off out
CUSIP number as the bill being
offered,
g o f fere d. Bi dde rs ’•’ho me e t th is
c us tome rs o f a depo s i to rY i ns tit u reporting requirement and e
es broke r/de al er mus t re P o rt tX e.ir
tion or a government securi
positions through the institution submitting the bid on their
behalf.
A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit.
Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury.
An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount- rate from, ar.y or.c bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4 / 17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
the Secretary's action shall be final.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after Lhe aucLiuu, Lite appropriate
Federal Reserve Bank will nocity each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date. Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500.million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are net overdue as
defined in the general regulations governing United States secu
rities . Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
IN ADVANCE OF PRINTED COPY
Filing date:
12/24/92
Publication date:
12/30/92JuL i 3li3 0 0
l 967
4810-25-M
DEPARTMENT OF THE TREASURY prsT nFT
Office of Foreign Assets Control
31 CFR Part 500
Foreign Assets Control Regulations
Hi
AGENCY:
Office of Foreign Assets Control, Treasury.
ACTION:
Final Rule.
SUMMARY:
As a further step in the process of normalization of
relations between the United States and Vietnam, the Office of
Foreign Assets Control ("FAC”) is amending its regulations to
authorize persons subject to U.S. jurisdiction to enter into
contracts with Vietnam or Vietnamese nationals, or contracts in
which Vietnam or Vietnamese nationals have an interest, the
performance of which is contingent upon the lifting of the
embargo on Vietnam, and to enter into commercial and financial
transactions in connection with obtaining or preparing to perform
such contracts.
EFFECTIVE DATE:
December 14, 1992.
FOR FURTHER INFORMATION:^°NSteven I. Pinter, Chief of Licensing
(tel.: 202/622-2480), Dennis P. Wood, Chief of Compliance
Programs (tel.: 202/622-2490), or William B. Hoffman, Chief
2
Counsel (tel.: 202/622-2410), Office of Foreign Assets Control,
Department of the Treasury, Washington, D.C. 20220.
SUPPLEMENTARY INFORMATION:
In implementation of the President’s
announcement on December 14, 1992, FAC is amending the Foreign
Assets Control Regulations, 31 C.F.R. Part 500 (the "FACR"), to
add § 500.574, authorizing persons subject to U.S. jurisdiction
to enter into executory contracts with Vietnam or Vietnamese
nationals, or executory contracts in which Vietnam or a
Vietnamese national has an interest, the performance of which
cannot begin until the Vietnam embargo is lifted or modified to
permit performance.
The signing of each executory contract must
be reported to FAC within 10 days.
Financial transactions
incident to the signature of these contracts, however, must be
specifically licensed on a case-by-case basis.
Commercial and financial transactions necessary to obtaining
and preparing to perform such executory contracts will be
licensed on a case-by-case basis.
Activities eligible for
specific licensing include opening offices in Vietnam, hiring
staff, writing and designing plans, carrying out preliminary
feasibility studies and engineering and technical surveys, and
import, export, and service transactions incident to the
foregoing.
Specific licenses issued pursuant to this section
3
require reporting to FAC on commercial and financial
transactions entered into by the licensee.
Exports or reexports to Vietnam of goods and technical data
or of the direct products of technical data (regardless of U.S.
content), in connection with activities licensed by FAC may
require authorization from the U.S. Department of Commerce
pursuant to the Export Administration Regulations, 15 CFR Parts
768-799.
Because the FACR involve a foreign affairs function,
Executive Order 12291 and the provisions of the Administrative
Procedure Act, 5 U.S.C. 553, requiring notice of proposed
rulemaking, opportunity for public participation, and delay in
effective date, are inapplicable.
Because no notice of proposed
rulemaking is required for this rule, the Regulatory Flexibility
Act, 5 U.S.C. 601 et sea.. does not apply.
This rule is being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act.
For this
reason, the collection of information contained in FACR § 500.574
has been reviewed and, pending receipt and evaluation of public
comments, approved by the Office of Management and Budget under
control number 1505—0096.
Comments concerning the average annual
burden and suggestions for reducing this burden should be
4
directed to the Office of Management and Budget, Paperwork
Reduction Project, Washington, D.C. 20503, with copies to the
Office of Foreign Assets Control, U.S. Department of the
Treasury, 1500 Pennsylvania Avenue, N.W.— Annex, Washington, D.C.
20220.
Any such comments should be submitted not later than 60
days from publication.
The collections of information in this rule are contained in
FACR § 500.574(a).
This information is required by the FAC for
compliance, civil penalty, and enforcement purposes.
This
information will be used to facilitate U.S. financial and export
transactions licensed pursuant to this final rule, to determine
whether persons subject to the requirements of the FACR are in
compliance with applicable requirements, and to determine whether
and to what extent civil penalty or other enforcement action is
appropriate.
The likely respondents are business organizations.
Estimated total annual reporting and or recordkeeping
burden:
200 hours.
The estimated annual burden per respondent/recordkeeper is
expected to be one hour.
The estimated number of respondents and/or recordkeepers.
200.
Estimated annual frequency of responses:
on occasion.
5
List of Subjects in 31 CFR Part 500:
Administrative practice and procedure, Banking, Exports,
Foreign trade, Reporting and recordkeeping requirements,
Services, Vietnam.
For the reasons set forth in the preamble, 31 CFR Part 500
is amended as follows:
PART 500— FOREIGN ASSETS CONTROL REGULATIONS
1.
The authority citation for Part 500 continues to read as
follows:
Authority:
50 U.S.C. App. 5, as amended; E.O. 9193, 7 FR
5205, 3 CFR 1938-1943 Cum. Supp., p. 1174; E.O. 9989, 13 FR 4891,
3 CFR 1943-1948 Comp., p. 748.
Subpart E— Licenses, Authorizations and Statements of Licensing
Policy
2.
Section 500.574 is added to subpart E to read as follows:
6
§ 500.574
Executory contracts and related transactions
authorized.
(a)
E x e c u to ry
C o n t r a c t s.
(1) Persons subject to U.S.
jurisdiction are authorized to enter into executory
contracts with Vietnam or Vietnamese nationals, or executory
contracts in which Vietnam or a Vietnamese national has an
interest, the performance of which is contingent upon the
lifting or modification of the embargo on Vietnam to permit
such performance.
(2) Within 10 business days of signing an executory
contract authorized pursuant to paragraph (a) of this
section, the person subject to U.S. jurisdiction must file a
copy of the contract with the Office of Foreign Assets
Control, Compliance Programs Division, 1500 Pennsylvania
Avenue, N.W.— Annex 2131, Washington, D.C. 20220,
referencing the fact that the contract was entered into
pursuant to 31 CFR 500.574(a).
(3) Specific licenses will be issued on a case-by-case
basis to authorize financial transactions such as the
payment of deposits, earnest money, signing bonuses, and
administrative and registration fees incident to the
signature of specific executory contracts authorized
7
pursuant to paragraph (a)(l) of this section.
The number of
the pertinent license must be referenced in all funds
transfers and other banking transactions through banks
subject to U.S. jurisdiction made in connection with the
contract.
(b)
P r e p a r a t o r y
T r a n s a c t io n s .
(1) Specific licenses
will be issued authorizing commercial and financial
transactions necessary to obtaining and preparing to perform
executory contracts authorized pursuant to paragraph (a)(1)
of this section.
These commercial and financial
transactions include:
(i) Opening offices in Vietnam;
(ii) Hiring staff;
(iii) Writing and designing plans;
(iv) Carrying out preliminary feasibility studies and
engineering and technical surveys; and
(v) Import, export, and service transactions incident to the
foregoing.
(2)
Specific licenses issued pursuant to paragraph
(b)(1) of this section will, to the extent feasible,
encompass commercial and financial transactions incident to
the licensed commercial purpose or activity.
8
NO TE:
Exports or reexports to Vietnam of goods and technical
data, or of the direct products of technical data
(regardless of U.S. content), in connection with activities
licensed by FAC may require authorization from the U.S.
Department of Commerce pursuant to the Export Administration
Regulations, 15 CFR Parts 768-799.
(3)
The number of the pertinent license must be
referenced in all funds transfers and other banking
transactions through banks subject to U.S. jurisdiction in
connection with preparatory transactions under paragraphs
(b) (1) and (2) of this-section.
all Richard Newcomb
Director
Office of Foreign Assets Control
Approved:
ter ~"K.— Nunc? ,
(Enforcement).
CONTACT: Scott Dykema
(202) 622-2960
FOR IMMEDIATE RELEASE
December 30, 1992
U.S. COMMITS $200 MILLION TO POLISH BANK PRIVATIZATION FUND
The United States has agreed to transfer nearly $200 million
into a new multilateral fund designed to help Poland privatize
its banking system. The funds come from the multilateral Polish
currency stabilization fund established in 1989.
"This new fund will allow Poland to reform and privatize its
banking sector, which should significantly contribute to the
country's economic growth," said Deputy Treasury Secretary John
E. Robson, who signed an agreement committing the funds in a
ceremony with Polish Ambassador Kazimierz Dziewanowski.
The bilateral agreement just signed commits $199.14 million
in previously appropriated U.S. funds to the Polish Bank
Privatization Fund (PBPF) . The PBPF is a multilateral fund that
will help the Polish government dramatically reform its banking *
sector. The current total of pledges to the fund, including the
money from the United States, is about $480 million.
Earlier this year, a number of major contributors to the
Polish Stabilization Fund (PSF) agreed to channel their
contributions in the PSF to a new purpose: to assist the
recapitalization and privatization of Poland's state-owned
commercial banks. The PSF, which is scheduled to terminate on
January 4, 1993, was established in 1989 to support the
convertibility and stabilization of the Polish zloty.
The PBPF will be used to pay interest and principal on
Polish government-issued bonds held by the newly-privatized
banks. The conditions for use of PBPF resources are contained in
a Memorandum of Understanding between Poland and PBPF
contributors. These conditions include privatization of the
state-owned banks holding the bonds.
####
NB—2116
Press 202-622-2960
For Immediate Release
December 31, 1992
FEDERAL FINANCING BANK
Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of November 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $156.6 billion on November 30,
1992, posting a decrease of $3,320.0 million from the level on
October 31, 1992. This net change was the result of decreases in
holdings of agency debt of $3,251.7 million, in holdings of
agency assets of $0.1 million, and in holdings of agencyguaranteed loans of $68.2 million. FFB made 41 disbursements in
November.
Attached to this release are tables presenting FFB November
loan activity and FFB holdings as of November 30, 1992.
NB-2117
Page 2 of 4
FEDERAL FINANCING BANK
NOVEMBER X992 ACTIVITY
BORROWER
DATE
AMOUNT
FINAL INTEREST
OF ADVANCE MATURITY
RATE
(semiannual)
INTEREST
RATE
(not semi
annual)
AGENCY DEBT
UNITED STATES POSTAL SERVICE
USPS
USPS
USPS
USPS
11/12 $1,000,000,000.00 10/31/94 4.676%
11/12 1,500,000,000.00 10/31/97 6.307%
11/12 1,500,000,000.00 8/15/02 7.367%
11/12 1,000,000,000.00 11/30/07 7.615%
#42
#43
#44
#45
GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Chicago Office Building
ICTC Building
Foley Courthouse Building
ICTC Building
ICTC Building
Memphis 1RS Service Center
Miami Law Enforcement
ICTC Building
RURAL ELECTRIFICATION
169,800.00
341,341.42
6,309,667.00
82,651,954.98
169,960.00
438,067.51
1,902,791.00
4,062,010.17
6/28/21
11/15/93
12/11/95
11/15/93
11/15/93
1/3/95
7/1/93
11/15/93
7.424%
3.751%
5.300%
3.807%
3.885%
4.906%
3.731%
3.810%
1,963,000.00
3,121,542.82
2,307,541.36
1,103,287.79
1,885,859.53
1,241,058.83
2,114,253.03
79,117,952.50
5,350,462.12
7,474,104.37
9,342,426.50
18,890,340.04
11,353,148.50
9,460,957.24
16,882,246.33
7,539,062.44
5,345,044.35
1,421,381.62
3,029,244.97
648,055.02
12/31/26
12/31/12
12/31/12
12/31/13
12/31/13
12/31/13
12/31/13
4/2/01
12/31/12
12/31/12
12/31/12
12/31/13
12/31/13
12/31/13
12/31/13
12/31/09
1/3/12
12/31/12
12/31/13
12/31/13
7.526%
7.088%
7.088%
7.130%
7.130%
7.130%
7.130%
6 .121%
7.088%
7.088%
7.088%
7.130%
7.130%
7.130%
7.130%
6.948%
7.043%
7.088%
7.130%
7.130%
ADMINISTRATION
Brunswick Electric #370
^Pacific Northwest #118
§Pacific Northwest 1118
^Pacific Northwest #118
^Pacific Northwest #118
§Pacific Northwest 1118
§Pacific Northwest #118
§San Miguel
Electric #110
§San Miguel
Electric #110
§San Miguel
Electric #110
§San Miguel
Electric #110
OSan Miguel
Electric #110
§San Miguel
Electric #110
§San Miguel
Electric #110
§San Miguel
Electric #110
§W.
Farmer Electric #022
§W.
Farmer Electric #064
@W.
Farmer Electric #064
§W.
Farmer Electric #064
@W.
Farmer Electric #064
§interest rate buydown
11/5
11/12
11/16
11/16
11/23
11/24
11/24
11/25
11/2
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
11/6
7.457%
7.026%
7.026%
7.068%
7.068%
7.068%
7.068%
6.075%
7.026%
7.026%
7.026%
7.068%
7.068%
7.068%
7.068%
6.889%
6.982%
7.026%
7.068%
7.068%
qtr,
qtr,
qtr
qtr,
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
Page 3 of 4
FEDERAL FINANCING BANK
NOVEMBER 1992 ACTIVITY
BORROWER
AMOUNT
FINAL INTEREST
OF ADVANCE MATURITY
RATE
DATE
(semiannual)
INTEREST
RATE
(not semiannual)
RURAL ELECTRIFICATION ADMINISTRATION fCONTINUED)
§W. Farmer Electric #126
§W. Farmer Electric #126
§W. Farmer Electric #133
§W. Farmer Electric #133
§San Miguel Electric #110
Southern Mississippi #090A
United Power Assoc. #129A
Oconto Electric #369
11/6
11/6
11/6
11/6
11/12
11/24
11/24
11/27
$
181,122.19
960,081.61
21,458,141.25
13,561,153.95
9,463,408.19
3,229,000.00
1,450,000.00
500,000.00
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/12
1/3/22
12/31/25
7.130%
7.130%
7.130%
7.130%
7.192%
7.056%
7.176%
7.442%
TENNESSEE VALIEV AUTHORITY
Seven States Energy Corporation
Note A-93-2
9 interest rate buydown
11/30
473,283,047.13 2/26/93
3.440%
7.068%
7.068%
7.068%
7.068%
7.128%
6.995%
7.113%
7.374%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 4 of 4
FEDERAL FINANCING BANK
(in millions)
Proqram
Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sub-total*
November 30. 1992
$
7,692.5
10,160.0
October 31. 1992
$
7,692.5
10,160.0
Net Change
11/1/92-11/30/92
FY '93 Net Change
10/1/92-11/30/92
$
$
0.0
0.0
0 .0
0.0
0.0
0.0
38,498.5
6,975.0
10.439.9
73,765.9
42,086.7
7,175.0
9.903.4
77,017.6
-3,588.2
-200.0
536.5
-3,251.7
-8,037.4
-200.0
536.5
-7,700.9
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*
42,979.0
55.2
64.3
4,598.9
3.9
47,701.3
42,979.0
55.2
64.3
4,598.9
4.0
47,701.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
-0.1
-0.2
-0.2
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DEPCO-Rhode Island
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
4,317.6
4,790.0
104.0
169.2
1,801.0
907.7
27.0
23.7
1,576.2
18,172.5
126.0
625.6
2,275.2
18.7
177.0
35,111.4
4,337.9
4,790.0
104.0
170.2
1,853.2
895.8
27.0
23.7
1,576.2
18,171.9
134.4
629.3
2,269.9
19.1
___177.0
35,179.6
-20.3
-1.0
-52.3
11.9
-26.6
-30.0
-21.0
-5.2
-52.3
130.9
0.0
0.0
0.0
0.0
0.0
0.0
0 .6
29.5
-17.4'
-8.1
-141.5
-0.4
8
BSS SSSSSS
grand-total*
♦figures may not total due to rounding
♦does not include capitalized interest
$156,578.5
EBSSCSSSS
$159,898.5
0.0
0.0
0.0
0.0
-8.4
-3.7
5.4
-0.4
0 .0
0.0
-68.2
========
$-3,320.0
-142.3
========
$-7,843.4
Department of the Treasury
Washington, D.C
FOR RELEASE AT 12:.00 NOON
December 31, 1992
CONTACT:
Telephone 2 0 2 - 6 2 2 -2 9 6 0
Office of Financing
202-219-3350
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $14,750 million of 364 -day
Treasury bills to be dated January 14, 1993
and to mature
January 13, 1994
(CUSIP No. 912794 H4 9). j This issue wil'l
provide about $ 1,900 million of new cash for the Treasury,
as the .maturing 52-week bill is outstanding in the amount of
$12,840 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Thursday, January 7, 1993,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Standard
time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
January 14, 1993. In addition to the
maturing 52-week bills, there are $ 23,042 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks currently hold $2,026 million as
agents for foreign and international monetary authorities, and
$ 8,189 million for their own account. These amounts represent
the combined holdings of such accounts for the three issues of
maturing bills. Tenders from Federal Reserve Banks for their
own account and as agents for foreign and international mone
tary authorities will be accepted at the weighted average bank
discount rate of accepted competitive tenders. Additional
amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held
by them. For purposes of determining such additional amounts,
foreign and international monetary authorities are considered to
hold $ 430
million of the original 52-week issue. Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-2118
TREASURY'S 13-, 26-, AND 52-WEEK BIIX OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $ 1 0 , 0 0 0 .
Bids over $ 1 0 , 0 0 0 must be in mul
tiples of $5,000.
A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%.
Fractions may not
b$ used.
A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering.
A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit.
The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bi l l s .
Noncompetitive bids do not specify a discount rate.
A
single bidder should not submit a noncompetitive bid for more than
$1,000,000.
A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount.
A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive b i d s .
The following institutions may submit tenders for accounts
of customers:
depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A));
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934.
Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer.
A separate tender and customer list should be submitted
for each competitive discount rate.
Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender.
If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill equals or exceeds $2
billion, with the position to be determined as of one half-hour
prior to the closing time for the receipt of competitive ten d e r s .
A net long position includes positions, in the bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered.
Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf.
A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit.
Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury.
An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
w ill be prorated if necessary.
Each successful competitive bidder
4/17/92
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids.
The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
The Secretary of the Treasury expressly reserves the right to
accept or reject any *or all tenders, in whole or in part, and
the Secretary's action shall be final.
..»..No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after the auction, the appropriate
Federal Reserve Bank will notify each depository institution that
has entered into an autocharge agreement with a bidder as to the
amount to be charged to the institution's funds account at the
Federal Reserve Bank on the issue date.
Any customer that is
awarded $500 million or more of securities in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States secu
rities.
Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered.
Adjustments will be made
for differences between the par value of the maturing definitive
securities accepted in exchange and the issue price of the new
bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.
4/17/92
@FedFRASER