Full text of Statements and Speeches of Andrew F. Brimmer : Prospects for Commercial Banks in International Money and Capital Markets: An American Perspective : Paper Presented at the Conference on World Banking Organized by The Financial Times with The Banker, The American Bankers Magazine, The Investors Chronicle and British Airways, Royal Lancaster Hotel, London, England

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For Release on Delivery
Thursday, January 17, 1974
10:00 a.m. G.M.T. (6:00 a.m., E.D.T.)

PROSPECTS FOR COMMERCIAL BANKS IN INTERNATIONAL MONEY AND CAPITAL MARKETS

An American Perspective

Paper by
Andrew F . Brimmer
Member
Board of Governors of the
Federal Reserve System

Presented at the

Conference on World Banking
Organized by
The Financial Times
with
The Banker, The American Bankers Magazine, The Investors Chronicle
and
British Airways

Royal Lancaster Hotel
London, England

January 17, 1974

TABLE OF CONTENTS
Section

Page

Introduction and Summary

II. Volume and Geographic Pattern of Foreign Lending by Banks

III.

in the United States

Expansion of Lending at Foreign Branches of U . S . Banks

IV.
V.

Characteristics of Activities at Foreign Branches of U.S. Banks
Profitability of Foreign Branches
Chart 1—Comparison of Rates of Return, 1972

7
19
25a

VI.

Controls on Foreign Lending

VII.
VIII•

IX.
X.

Banks Reactions to Prospective Elimination of U . S .
Capital Controls

Domestic Refinancing of Euro-dollar Borrowing by U.S.
Bank Customers

Geographic Focus of Foreign Branch Expansion

Concluding Observations
Table 1 - Claims on Foreigners Reported by Banks in
the United States.

Table 2 - Total Resources of Foreign Branches of U.S. Banks,
by Major Geographic Area, 1969, 1971, 1973.
Table 3 - Rates of Return on Domestic and Foreign Activities of
U.S. Commercial Banks, by location of Foreign
Branches, 1969 and 1972.
Table 4 - Foreign Assets of U.S. Commercial Banks Reporting Under
the VFCR Guidelines.
Table 5 - Foreign Assets Held by U.S. Commercial Banks and U.S.
Agencies and Branches of Foreign Banks, November 30,
1971 and June 30, 1973.

Table of Contents- Continued
Table 6 - Foreign Assets of U.S. Agencies and Branches of
Foreign Banks.
Table 7 - Foreign Assets of U.S. Nonbank Financial Institutions
and Nonprofit Organizations.
Table 8 - Banks Reactions to Prospective Elimination of U.S.
Capital Controls: Expected Impact on Foreign Activities.
Table 9 - Interest Rates on Deposits and Loans in New York and
London, January 9 , 1974.
Table 10- Geographic Focus of Overseas Expansion by U.S. Banks,
1974-1979.
Appendix Table I -

Sources and Uses of Funds of Foreign Branches
of U.S. Banks, September 30, 1969.

Appendix Table II - Sources and Uses of Funds of Foreign Branches
of U.S. Banks, September 30, 1971.
Appendix Table III - Sources and Uses of Funds of Foreign Branches
of U.S. Banks, September 30, 1973.

PROSPECTS FOR COMMERCIAL BANKS IN INTERNATIONAL MONEY AND CAPITAL MARKETS
An American Perspective
By
Andrew F . Brimmer*
I.

Introduction and Summary
For my participation in this Conference on World Banking, I

decided to focus primarily on the overseas operations of American banks
after 1974>

I decided on this course for several reasons:

I have

followed the foreign activities of these institutions for a number of
years in my capacity as the Member of the Federal Reserve Board with
delegated authority from the Board to administer the Voluntary Foreign
Credit Restraint Program (VFCR) limiting the ability of commercial banks
to lend U.S.-source funds to their foreign customers.

In addition,

information on the activities of U.S. banks is much more readily available
than it is for foreign banking institutions.

Moreover, in recent years,

U.S. commercial banks have become m a j o r — a n d in some cases d o m i n a n t forces in world money and capital markets, so an assessment of their
^Member, Board of Governors of the Federal Reserve System.
I am grateful to several persons on the Board's staff for
assistance in the preparation of this paper« M r . Fred B . Ruckdeschel
prepared the sources and uses of funds statements for foreign branches
of U.S. banks; Mrs. Martha Terrie did the computer programming for this
part of the project. M r . Michael D . O'Connor and M r s . Ruth Robinson
calculated the rates of return on the banks' foreign and domestic
activity. M r . Ruckdeschel, M s . Ruth Logue and M s . Nancy Farar summarized
data relating to bankers' expectations regarding the effects on their
foreign business of the removal of U.S. capital controls. Messrs. Yves
Maroni and Robert F . Emery provided background information on the climate
for foreign banks in Latin America and East Asia, respectively. M r . Rodney
Mills supplied data on Euro-dollar rates and the costs of reserve requirements,
and M r . Richard Puckett helped with the analysis of the effects of the latter
on the competitive ability of U.S. banks. M r . John Austin contributed to
the project in a number of ways in its final stages.
However, the views presented here are my own and should not be
attributed to the staff. Nor should they be attributed to my colleagues
on the Board.

- 2 prospects may also provide insights into the outlook for banks generally.
I have made such an assessment before, and this conference appeared to
be a good occasion on which to return to the s u b j e c t . ^
Of even more importance, the removal of the U.S. capital controls
programs by the end of 1974—to which the United States Government has
committed i t s e l f — w i l l certainly alter the environment in which American
banks have conducted and developed their international business for the
last decade.

It will be recalled that these controls consist of the

Interest Equalization Tax (administered by the Treasury Department) ; the
regulations on foreign direct investment (administered by the Commerce
Department), and the restraints on foreign lending by banks and nonbank
financial institutions (administered by the Federal Reserve Board).
This prospective development will have a significant impact on foreign
institutions as well—especially on those centered in London.

With

this prospect in mind, late last year, I asked a nunjber of U.S commercial
banks to share with m e , on an informal basis, any thoughts they may have
regarding the probable effects of these anticipated changes on the overseas
business of their own organization.

A summary of their answers is reported

in this paper.
When the results of that inquiry are combined with other information on recent trends in the foreign banking activity of U.S. commercial
17
~

See "American International Banking: Trends and Prospects, presented
before the 51st Annual Meeting of the Bankers Associations for Foreign
Trade, Boca Raton, Florida, April 2, 1973. A version of that paper was
published in Revue de la Banque, Brussels, Belgium, 1973, n° 6.

- 3 banks, the following overview emerges:

--In the years immediately ahead, the volume of foreign
lending by U.S. banks will expand substantially. Most of that
lending will continue along traditional lines. However,
numerous innovations can be expected in types of activities
(e.g., more entry into merchant banking, leasing, underwriting,
data processing, etc.), and much of the expansion will be in
relatively new geographic areas (e.g., Middle East, East
Asia and the Pacific).
— A f t e r the removal of U.S. capital controls, part of the business
which U.S. banks are conducting from their foreign branches will
return to their head offices. This will involve both deposit
and lending activities. Yet, many banks expect the magnitude of
the shift to be less than some observers now seem to anticipate.
In particular, there appears to be little prospect that the
short-term Euro-dollar market centered in London will migrate
to New York. Aside from several natural advantages which London
enjoys, a number of Government regulations affecting the money
market in New York (including Federal Reserve regulations covering
interest rates and reserve requirements) are said by banks to
limit their competitive ability.
--Some U.S. corporations may seek to refinance in the U.S. market
the loans now outstanding in the Euro-currency markets. However,
here also it appears that the volume of such shifting may be
less than some observers seem to expect. Among the reasons for
this are the relatively favorable terms on many of the loans
and the desire to maintain foreign banking connections—especially
in a world of floating exchange rates.
--These conclusions suggest that a sizable part of both the mediumterm and long-term markets in dollars will remain in L o n d o n — n o t
only for European borrowers and lenders but also for a number of
American firms, for Japanese institutions, and for borrowers and
depositors from the Middle East and other developing areas.
--In the meantime, the intensive competition in the international
money and capital markets will continue. This has already led
to a significant erosion of profit margins for lenders—especially
in that part of the market centered in London. For example, the
rate of return on the assets at London branches of U.S. commercial
banks in 1972 was in the neighborhood of .20 per cent; for banks
with a long-established multi-country branch network it was
higher (.63 per cent), while those with more recently built branch
systems had a rate of return of .25 per cent. The average rate
of return on shell branches in Nassau was .64 per cent. For all
of the banks (except those with long-standing broadly-based networks) , the
rate of return on foreign assets was below that on
1
the banks domestic activity. For all Federal Reserve member
banks, the average rate of return was .80 per cent in 1972.

- 4 — O n c e " c a p i t a l controls are removed, a number of American
banks will scale down the volume of business done at
their foreign branches. Yet, none of the large banks
(including those recently arrived on the world financial
scene) would expect to close their full-service branches.
However, a number of smaller institutions operating
shell branches in Nassau or the Cayman Islands would
seriously consider closing such facilities.
- — I n the years ahead, most American banks would expect to
focus the expansion of their overseas branch network in
those geographical areas in which they have traditionally
operated--i.e., London: Continental Europe; and South America
and the Caribbean. (But in the latter areas, bankers anticipate that
the political environment and other factors may become progressively
less hospitable to foreign banks). However, an appreciable
number also anticipate a much greater concentration of effort
in East Asia and the Pacific and in the Middle East--in the
latter case specifically because of the growing volume of
oil revenues available for investment. China, the Soviet
Union, and Eastern Europe may also offer expanding
opportunities to lend but not to locate branches.
These main points are amplified in the remainder of this paper.
In Section II, the volume and geographic distribution of foreign lending
by U.S. banks are traced.

The expansion of lending at foreign branches

of U.S. banks is discussed in Section III.

The pattern of activities

at these branches is sketched in Section IV.

The profitability of

foreign branch operations is estimated in Section V .

Recent developments

with respect to the Voluntary Foreign Credit Restraint Program are
summarized in Section VI.

Banks

reactions to prospective elimination

of U.S. capital controls are summarized in Section VII.
which the banks

The extent to

corporate customers may seek to refinance in the U.S.

the Euro-dollar borrowings they have outstanding is assessed in Section
VIII.

The geographic pattern of foreign branch expansion is outlined

in Section IX.
presented.

Finally in Section X , some concluding

observations are

II.

Volume and Geographic Pattern of Foreign Lending by Banks in the
United States
On September 30, 1973, commercial banks in the United

States reported $24.1 billion of claims on foreigners.
attached).

(See Table 1,

This volume of foreign loans represented an increase of nearly

three-fifths compared with the amount outstanding in September, 1971,
and it was just about double the amount in September, 1969.

Just over

three-quarters ($18.7 billion) of the claims outstanding last September
consisted of short-term claims—about the same proportion recorded two
years earlier and slightly higher than in 1969.
The division of claims among

countries according to the stage

of development has changed little in the last few years. On each of the
dates shown, developed countries had received just over half the credits
to foreign borrowers reported by the banks

head offices.

Among developed

countries, Japan (with one-quarter of the total) was the leading recipientparticular ly of short-term credit.

Borrowers in the United Kingdom had

received about 4 per cent of the total in both 1969 and 1971, but their
share had climbed to 7 per cent by last year.

In the case of less

developed countries, approximately one-third of the total credits had
been extended to borrowers in Latin America m
eased o,ff somewhat

1969; their share had

four years later.

In passing, it should also be observed that U.S. banks added
substantially to the volume of loans outstanding to the U.S.S.R. and
other Eastern European countries (included in "other

areas in Table 1).

However, the total amount of such loans remains fairly small.

- 6 -

III.

Expansion of Lending at Foreign Branches of U.S. Banks
Since 1969, most of the growth in loans to foreigners by American

commercial banks has occurred at their branches abroad and relatively very
little at their head offices.

These trends are dramatized in the following

figures on outstanding claims (billions of dollars):
Sept. 30
1969

Sept. 30
1971

Sept. 30
1973

Head office

12.3

15.3

24.1

Foreign branches

29.9

55.4

109.3

Total

42.4

70.7

133.4

Foreign as per cent of total

70.9

78.2

82.0

Location

Thus, in the last four years, the banks

foreign branches

accounted for well over four-fifths of the expansion in their international
lending.

To some extent, this reflected the impact of U.S. capital controls

on the bank's ability to lend from their head offices.

But--perhaps more

importantly—it also reflects the increased sophistication of American
banks in international finance generally and their greater concentration
on foreign business opportunities.

This is especially true of a number

of the largest banks long-established in the field.
Total resources of foreign branches of U.S. banks, by major
geographic region, on September 30, 1969, 1971, and 1973, are shown in
Table 2.

Several features of the changing configuration of U.S. banking

abroad stand out in these data.
in Europe is plainly evident.

The continued concentration of activity

And within Europe, the continued attraction

of the United Kingdom (which really means London) for American banks

- 7 can also be seen.

At the same time, however, the more rapid growth of

branches in other areas compared with the U.K. is quite noticeable.

For

example, U.K. branches of U.S. banks had two-thirds of the total resources
held by all branches in 1969.

The U.K. share declined to just under

three-fifths in 1971 and to one-half last year.

The share of Europe

as a whole declined from 85 per cent in 1969, to 80 per cent in 1971,
and to 71 per cent in 1973.
The most striking gains were made by branches in Latin America
and the Caribbean—where the fraction of total branch resources held
climbed from 7 per cent in 1969, to 12 per cent in 1971, and to 21 per
cent last year.
called "shell

Virtually all of this gain was accounted for by sobranches in Nassau and the Cayman Islands.— (The origin

and nature of these essentially bookkeeping operations are discussed
further below).
1969.

Nearly all of these branches were established since

By 1971, they had about 11 per cent of all reported branch assets, and

the proportion had risen to 19 per cent by 1973.

Branches in Asia and

the Pacific had command of roughly 7-1/2 per cent of total branch
resources in both 1969 and 1971; this had been expanded slightly to
about 9 per cent by September of last year.
IV.

Characteristics of Activities at Foreign Branches of U.S. Banks
The nature as well as the scope of activities at foreign branches

of U.S. banks has changed substantially over the last several years.

The

changing character of these activities was traced in some detail in the
*/

In the statistics used in this paper, data for Nassau and the Cayman
Islands are sometimes combined in the total for Latin America. From
time to time, the Nassau-Cayman 11Islands branches are distinguished
from "the rest of Latin America.

- 8 2/
paper which I presented last April.-

The framework developed at that

time for the-assessment of those activities can be employed here.

This

approach involves the recasting of the balance sheets of the foreign
branches to permit tracing their sources and uses of funds.

The figures

can also be organized to identify the principal market sectors in which
their activities are concentrated, and their geographic location can be
shown.

The results of rearranging the balance sheet data for the foreign

branches of U.S. banks within this framework are reported in Appendix
Tables I , I I , and III for September 30, 1969, 1971, and 1973, respectively.
It may be recalled that one of the main objectives of many of
1

the foreign branches opened since the mid-1960 s was the provision of funds
to their U . S . parents—especially during episodes of domestic credit restraint
in 1966 and 1969-70.

These branches were also relied on to accumulate funds

which could be rechanneled to other foreign offices in different parts of the
world. Branches in U . K . were especially active along these lines.

Cast in

these roles, the branches were actually contributing to the financing of an
internal commercial banking system of which they are a part.
But the largest proportion of the foreign branches efforts has been
concentrated in the inter-bank market.

This market consists of a network of

foreign commercial banks with reciprocal arrangements for holding deposits and
extending credits.

At some point, of course, the individual banks

participating in the inter-bank market would have to attract resources
from beyond the boundaries of the banking system. Y e t , as a group, their
net positions vis-a-vis each other are reported in the statistics.

Banks

in London lie at the heart of the inter-bank market, but its geographic
2/

See reference in footnote 1, p. 2.

- 9 -

scope is far broader than the United Kingdom.

Entry to the market is

relatively easy, and this had permitted even fairly small banks to launch
foreign branches which can quickly accumulate sizable footings on their
balance sheets.
Some of the foreign branches have been able to conduct a
moderate volume of business with foreign governments and other official
institutions.

Initially, most of this business was probably the result

of contacts developed by the parent banks. However, within the last
year or so, a number of the branches have been venturing out on their
own to arrange Euro-currency loans for foreign official bodies — including
3/
an increasing parade of borrowers from developing countries.-

Some of

them also have been able to attract official deposits.
Basically, the principal motivation behind the opening of foreign
branches by most of the U.S. banks which entered the field in recent years
was to meet the financial needs of their foreign customers—particularly
U.S. multi-national firms.

It will be recalled that regulations were

promulgated in January, 1968, which limited the ability of American
corporations to finance their foreign investment with U.S.-source funds.
These regulations made it increasingly necessary for these corporations
to borrow abroad. Under these circumstances, many U . S . banks essentially
followed customers overseas in an attempt to retain their business.
Thus, the degree to which the foreign branches have been able to play
a meaningful role in this market appears to be a good measuring rod of
1

their overall performance. This segment of the branches business has
3/ I discussed this subject in "International
Capital Markets and the
11
Financing of Economic Development, a paper presented as the
inaugural lecture in the Samuel Z . Westerfield, Jr., Distinguished
Lecture Series, Atlanta University, Atlanta, Georgia, October 25,
1973.

- 10 been defined as participation in the external market.

Here one can

trace changes in their liabilities to private foreign depositors and
in their claims on private foreign borrowers.
Internal Banking System
Last September, the foreign branches of U.S. commercial banks
as a group were raising and using only one-sixth of their total resources
(which amounted to $109.3 billion) within the banking network of which
they were a part.

They had received only 1 per cent of the total from

U.S. parents, and they had advanced 2 per cent to the latter—producing
a small net claim on their U.S. head offices.

On the same date, their

liabilities t o — a n d claims on—sister branches in other countries were
about in balance and represented roughly 14 per cent of total resources.
The intra-system sources and uses of funds in 1973 differed little from
the pattern prevailing in 1971«

However, both of these more recent

patterns were in sharp contrast to that which emerged in 1969.

In that

year, the foreign branches were indebted to their U.S. parents in the
amount of $704 million, while they had claims on the latter equal to
$11.8 billion.

Thus, only 2-1/2 per cent of these branches

total

resources (of $29.9 billion) had originated with their parents, but
roughly two-fifths of the total had been rechanneled to their head
offices.

Meeting part of the domestic needs of their parents (occasioned

by restrictive monetary policy in the U.S.) was the largest single outlet
for the branches

funds.

- 11 The degree to which foreign branches contributed to the financing
of their internal banking systems varied widely--depending on their
geographic location.

In 1969, branches in the United Kingdom (mainly

London) and in Latin America

(principally Nassau) were devoting over

two-fifths of their resources to financing their parents.

Branches in

the rest of Europe were using under one-fifth--and those in Asia onequarter--of their funds for the same purpose.

On the other hand, branches

in both Continental Europe and Asia were indebted to sister foreign branches
for about one-fifth of their resources.
By 1971, as already mentioned, the foreign branches were employing
only a modest proportion of funds (5-1/2 per cent) to finance their
parents; only those branches in Asia (excluding those in Hong Kong and
Singapore) reported a fraction that was somewhat higher (13-1/2 per cent).
However, the expanding volume of activity among the overseas branches
themselves had become increasingly evident by 1971.

For example, inter-

branch transactions represented 14 per cent of total branch resources
in that year.

Roughly the same proportion held for branches in the U.K.

But on the European continent, such transactions accounted for about onequarter of the total.

The branches in Hong Kong and Singapore were even

more heavily engaged in activities internal to their banking systemsobtaining 40 per cent of their funds from other branches and redepositing
with the latter 38 per cent of their total resources.

Branches in the

rest of Asia got one-third of their funds from sister institutions abroad-but

redeposited only 3-1/2 per cent with them.

Essentially the same

- 12 -

relationship held for branches in Latin America
Nassau and the Cayman Islands).

(excluding branches in

Shell branches in the Caribbean received

about 15 per cent of their resources from other branches and rechanneled
about 6 per cent to them.
In general, the pattern of inter-branch transactions in 1973
was similar to that sketched for 1971, but the proportion of total resources
involved in such transactions was typically somewhat smaller.

Nevertheless,

the absolute amount of these reciprocal inter-branch balances outstanding
has expanded greatly--rising from about $3 billion in 1969, to $8 billion
in 1971, and to $15 billion in 1973.

This was in sharp contrast to the

trend of parent-branch reciprocal balances—which declined

from about

$11 billion in 1969, to $3 billion in 1971, to less than $2 billion in
1973.
Activities in the Inter-Bank Market
The inter-bank market has continued to be the main focus of
business activity of foreign branches of U.S. banks with respect to their
sources of funds.

For instance, this market accounted for over half the

total in each of the three years--i.e., 57 per cent in 1969; 52 per cent
in 1971, and 54 per cent in 1973. But much greater variation has occurred
in the proportion of total branch resources lent in the inter-bank market-i.e., 23 per cent in 1969; 40 per cent in 1971, and 45 per cent in 1973.
The principal explanation of the variation in the pace of inter-bank
lending is the changing demand for funds by the banks

U.S. head offices•

- 13 -

Branches located in different geographic areas, however,
have exhibited a substantially different behavior toward the inter-bank
market.

Again the behavior of the London branches can be taken as a

point of departure.

Between 1969 and 1971, the importance of the inter-

bank market as a source of funds for the U.K.-based institutions declined
only slightly (from 62 per cent to 57) and remained fairly constant
between 1971 and 1973.

But the proportion of total funds put to work

in this market rose appreciably—from one-quarter in 1969; to nearly
one-half in 1971, and to almost three-fifths by 1973.

Branches of U.S.

banks on the European continent displayed a more divergent behavior.
With respect to reliance on the inter-bank market as a source of funds,
they became much more like branches in London over the four years under
review.

By 1973, they obtained the same fraction as London branches of

their total resources (58 per cent) from this source.

They behaved quite

differently, however, in relying on the inter-bank market as a means of
employing their funds.

In 1969, less than one-fifth of the total had been

let out in that market, and the proportion was still less than two-fifths
in both 1971 and 1973.

In contrast to the London

branches, U.S. banking

institutions in the rest of Europe had been slightly more successful
in finding outlets in the external market and in channeling funds to
other branches in their internal systems.
Branches of U.S. banks in Asia apparently are becoming more
like those in London in so far as reliance on the inter-bank market for
funds is concerned.

In 1969, the Asian branches got only 6 per cent of

- 14 their total resources from this market.

By 1971, branches in Hong Kong

and Singapore had received one-quarter of their total funds from the interbank market, and the proportion rose further to over two-fifths in 1973•
Branches in the rest of Asia continued to draw only a small fraction of
their resources from this source.

On the other hand, the Asian branches

still do not look to the inter-bank market as a major outlet for their
deposits.
As one would expect, the behavior of the shell branches in
Nassau and the Caymen Islands has paralled that of the branches of U.S.
banks in London.

It will be recalled that, in early 1969, the Federal

Reserve Board began to authorize the creation of shell branches (a policy
which I have personally never supported).

The main objective was to enable

smaller U.S. banks to have access to the Euro-dollar market—initially
to service their foreign customers,

As it developed, however, most of

the Nassau units began to mobilize funds abroad for use by the U.S.
parents during the period of domestic monetary restraint in 1969-70.
Still later, a number of banks (including some of the largest in the country)
opened shell branches mainly with the aim of benefiting from the favorable
income tax laws in the Bahamas.

These considerations had led 97 U.S.

banks to establish shell branches in Nassau by the end of 1973.

recently, however, a number of American banks have found the overall
environment in the Bahamas somewhat less hospitable.

As a result, the

Cayman Islands have become the principal focus of new shell branch
formation, and by the end of last year

20 U.S. banks had opened such

units in the Caymans. Moreover, in 1973, about 7

banks decided to

relocate their shell branches from Nassau to the Cayman Islands.

- 15 As already indicated, the Nassau-Caymans shell branches are
essentially an extension of activities in the London market.

This is

reflected particularly in their behavior with respect to sources of funds.
For example, the inter-bank market supplied 64 per cent of their resources
in 1 9 6 9 p e r

cent in 1971, and 56 per cent in 1973—proportions that

were virtually identical to those reported by the London branches.
shell branches

The

reliance on the inter-bank market as an outlet for funds

has been somewhat less heavy than that of London branches, but it is
significant—i.e., 19 per cent in 1969, 36 per cent in 1971, and 40 per
cent in 1973. Branches*of U 0 S 0 banks in the rest of South America and
the Caribbean have participated very little in the inter-bank market.
However, in the last year or so, branches in Panama and the Netherlands
Antilles have become quite active—especially in the inter-bank market.
To some extent, this development reflects the increased efforts of those
two countries in competition with the Bahamas and the Caymans by
emphasizing the tax advantages which they also offer.
From this review of U.S. branch participation in the interbank market, a conclusion of prime importance emerges:

once a number of

institutions had entered the market, they were open to a sizable inflow
of deposits—despite the sharp decline in demand for such funds by their
own internal banking systems.

To employ such resources, the foreign

branches began to participate progressively in what was basically a
brokerage rather than a traditional banking business.

Banks from other

countries—particularly from Japan—also entered the race, and the competition
*/

In order to maintain confidential data in 1969, both Nassau-Cayman
Islands and Hong Kong-Singapore are not separated from their respective
regions. Thus, comparisons for these locations in 1971 and 1973 are
made to their regions in 1969.

- 16 in international capital markets became even more aggressive•

This

development led to a marked narrowing of lending margins, and this in
turn has had a significantly adverse impact on the profitability of
foreign branches of U.S. banks—particularly in London.

These trends

are discussed more fully below.
Participation in the External Market
Foreign branches of U.S. banks have expanded their holdings
of private deposits, but the latter have represented substantially the
same proportion of their total resources.

In fact, the external market

continues to be relatively insignificant as a source of funds.

In all

three years, the external market provided only one-sixth of the total
resources held by all branches combined.

Essentially this same proportion

also held for branches in the United Kingdom and on the continent of Europe.
With respect to uses of funds, however, the share put to work in the external
market by all branches as a group rose slightly between 1969 and 1971, but
it has remained static since then.

The fraction was 18 per cent in 1969

and about 30 per cent in both 1971 and 1973.

In the case of the United

Kingdom, about 14 per cent of the branches assets represented loans to
the private sector in 1969, and the proportion had climbed to 25 per
cent in both 1971 and 1973.
employing

about one-quarter of their resources in the external market

in all three years.

The U.S. branches in continental Europe were

- 17 The pattern of activities at U.S. branches in the rest of the
world has diverged somewhat from the European experience.

Branches in

Hong Kong and Singapore have raised a slightly higher percentage of
their funds from the private market than branches in the United Kingdom
have raised.

These sources have accounted for between one-fifth and

one-quarter of their total resources.
a

These Asian branches have lent

much higher proportion of their funds to private borrowers than have

their London counterparts.

In each of the three years, loans outstanding

to the private sectors represented roughly two-fifths of their total
assets.

The branches in the rest of Asia have gone further in developing

private sector lending opportunities than they have in generating private
deposits.

Thus, the private market supplied between one-fifth and one-

quarter of their total funds in each of the three years, but the fraction
of their assets reported as loans to the private sector rose from about
two-fifths in 1969 to almost three-fifths in 1973.

Branches in Nassau and

the Cayman Islands—along with those in London--depend relatively little
on attracting private deposits outside of the inter-bank market.
this source of funds eased off slightly between 1971 and 1973.

In fact,
On the other

hand, loans to private borrowers rose appreciably between 1969 and 1971
(21 per cent to 34 per cent)^ and a further slight gain had been recorded
by 1 9 7 3 — t o 36 per cent.

For reporting branches in the rest of Latin

America, deposits from the external market have been of little importance.
Nonreporting branches in Latin America depend highly on local currency
funds and primarily conduct a local lending business.

- 18 This differential pattern of business activity at foreign
branches of U.S. banks should be kept in mind.

As explained more fully

below, it has a direct and significant bearing on the prospects f o r — a n d
future expansion of—branches of American banks in the years ahead.

- 19 V.

Profitability of Foreign Branches
As mentioned above, the increasingly competitive environment

prevailing in the international money and capital markets has led to
an appreciable narrowing of the spreads between lending and borrowing
rates•

For example,in early January of this year, it was reported

that prime borrowers in the Euro-dollar market could obtain loans at
a cost of only 3/8 of 1 per cent over the six-month interbank offering
rate for deposits (LIBO).

A year ago, it was reported that many prime

borrowers could obtain loans at rates in the neighborhood of 5/8 to 2/4
of 1 per cent above the basic cost of money to the lenders.

Moreover,

it is quite evident that borrowers of less-than-prime standing have
also achieved accommodations at interest rates involving margins much
more narrow than what could be gotten in late 1959 and early 1970--when
non-pri'Jie borrowers were typically quoted rates ranging to 2-1/2 per cent
and more above the six-month Eurc-doll^r rate. This situation has changed
radically over the last year.

Toward the close of 1973, numerous

borrowers—many of them from less developed countries previously not
accorded a prime rating—were able to obtain funds on which the rate
spread was set as low as 5/8 of 1 per cent.

In addition, maturities of

the loans have lengthened considerably--from a range of 5-8 years as
recently as 1970 to as long as 15 years being offered in late 1973.

- 20 The broad contours of these developments are widely appreciated.
However, it is very difficult to assess with any precision the
way in which these trends have actually affected the profitability of
U.S. foreign branches.

Nevertheless, just less than a year ago, I did

make very rough calculations showing in broad magnitude the rates
4/
of return on the assets held by branches of U.S. banks in London.""
At that time,I relied on a combination of bank examination reports and
statistical data reported to Federal bank supervisory agencies by 15 U . S .
commercial banks with branches in London.
return were estimated:

Three separate rates of

(1) the rate of return on the banks' total assets,

(2) the rate of return on their London business, and (3) the rate of
return on their business apart from their London activity.

An effort

was also made to estimate separately the profitability of London branches
established before the end of 1964 and those opened in subsequent years.
In addition, three banks combined information for all of their foreign
branches.

Rough calculations of rates of return were made for these

banks as well.

The results of these early calculations can be

summarized as follows:

See "American International Banking: Trends and Prospects,
presented at the 51st Annual Meeting of the Bankers Association
for Foreign Trade, Boca Raton, Florida, April 2, 1973, p p . 34-37.

- 21 -

Class of Bank

Rate of Return:
Total
Assets

15 London Branches

1972
Total
less
London

London
Assets

.54

.12

.61

3 branches established
before December 31, 1964

.53

.10

.61

12 branches established
before December 31, 1964

.55

.14

.61

Total
Assets
3 Banks (all foreign
branches combined)
Memorandum:
Earnings of Federal Reserve
Member Banks:
1968
1969
1970
1971

.44
Total
Assets
.77
.78
.79
.79

Assets of
All Foreign Brs.

Total less
Foreign Brs.

.40

.45

Earning
Assets
.97
1.08
1,08
.98

It will be noted that the profitability of London branches of American
banks appears to be well below that prevailing in the banks

total business.

For banks which reported the income on all of their foreign branches
confined,the rate of return on the foreign portion was not essentially
different from that on their total business.

Finally, the banks that engaged

in international finance on a large scale reported rates of return well
below those for commercial banks in the U.S. taken as a whole.

- 22 For the present paper, another--and much more comprehensive—
effort has been made to estimate the profitability of the foreign branches
of U.S. commercial banks.

For this purpose, information submitted to

Federal bank supervisory agencies on the Call Report and in the statement
of income was employed.

Again, rates of return were calculated for the

banks' domestic and foreign activities separately."^ Complete reports were
available for 64 banks covering the years 1969 and 1972.
classified according to the following criteria:

(1)

The banks were

Multi-country branches—

that is, whether they had branches in two or more foreign countries; these
were divided on the basis of their having achieved this status before or
after 1969.

There were 8 banks in each of these multi-country sub-groups.
6/

(2)

Banks with London branches only.

In this group, there were also 16

banks—with 8 each in the before and after 1969 categories.
branches only.

(3) Nassau

There were 32 banks in this g r o u p — a l l of which opened

branches since 1969.

In addition, statistical information was

obtained for 14 banks (included in categories 1 and 2 above) which show
on a consolidated basis their foreign and domestic activities.
data were also used to estimate rates of return for these banks
business.

These
1

total

Finally, rates of return were calculated for all insured U.S.

commercial banks; for all member banks of the Federal Reserve System and
for member banks with total deposits of $100-$500 million and for those
with deposits of $500 million and over.
5/ Some of the banks were operating abroad through wholly-owned subsidiaries,
and many of them also received income on minority investments in foreign
financial institutions. However, this information was much more fragmentary, and it was not used in the calculations reported here.
j3/ In this classification as well as in the multi-country category were a
few banks which also had Nassau branches.
These Nassau branches were
disregarded in this part of the analysis.

- 23 The results of these calculations are shown in Table 3 .

To facilitate

the discussion, the highlights of the results can be sunmarized as
follows:

Rate of Return (Per Cent)
Foreign
Domestic
1972
1972
1969
1969

Class of Bank

(1) Multi-country branches
Established before 1969
Established after 1969

0.69

0.57
0.49

0.37

0.63
0.25

(2) London branch only
Established before 1969
Established after 1969

0.79

0.73
0.63

0.22

0.18
0.22

(3) Nassau branch only

0.77

0.64

1969

1972

All insured commercial banks

0.88

0.82

All Federal Reserve Member banks
with deposits of $100-500 million
with deposits of $500 million and
over

0.85
0.92

0.77

0.80

0.71

0.63

0.57

Memorandum:

Banks (14) reporting consolidated
foreign and domestic activities

Several impressions stand out in these data.

0.80

It is quite

evident that, as a general rule, the profitability of U.S. banks'
foreign branches is well below that experienced on their domestic business.
The extremely thin rates of return achieved in the London market are even
more striking.

On the other hand, banks with multi-country branch networks

have achieved a degree of profitability on their foreign business
substantially above that achieved by banks that have restricted foreign
activity to the London market.

- 24 -

More specifically, it should be noted that in both 1969 and
1972, banks which had only London branches were earning on the total assets
of those branches a rate of return that was only 1/4 to 1/3 as large as
the rate of return, achieved in their domestic business.

This pattern

prevailed for those banks which established themselves in London before
1969 as well as for those that came in later years.

In contrast, those

banks with a much more broadly based foreign network had a rate of
return on branch assets in 1969 equal to just over half that recorded
on their domestic assets.

By 1972, however, they had substantially

improved the profitability of their foreign branches—on whose assets
the rate of return exceeded that obtained in their home market.

But,

again, the adverse effect of the increasingly competitive international market is evident in the profit experience of those banks which
developed their multi-country networks after 1969.

In this case, the

rate of return at their foreign branches in 1972 was only half that
registered in their domestic business.

In the case of Nassau branches,

the rate of return in 1972 was over four-fifths as high as that achieved
on the banks

domestic business.

Of course, this is not surprising—

since the Nassau shell branches are little more than bookkeeping extensions
of their head offices.
Finally, the profitability of the U.S. banks

foreign activities

can be compared with the profitability of U.S. banks as a whole.

It will

be noted that the yield on the assets of all insured commercial b a n k s — a s

- 25 -

well as the yields on the assets of Federal Reserve member b a n k s — w e r e
well above the rates of return estimated on the assets held by foreign
branches of American banks. Moreover, the banks engaged in international
activity generally reported rates of return below those for the American
banking system as a whole.

This was true even when the comparison was

made with all large banks, represented hereby Federal Reserve member
banks with total deposits of $500 million or over.
A n alternative way of showing the differential experience of
banks with branches in several foreign countries compared to those with
a London branch only is presented in Chart I.
of return for 1972 on the banks
their foreign branches.

This chart compares rates

domestic assets and on the assets at

The data presented in Panel A show the rates

of return for the 8 multi-country banks that established networks
before 1969 as well as for the 8 banks which started their networks
since 1969.

Panel B presents similar data for the batiks with London

branches o n l y — a g a i n classifying them according to whether they
established their London branch before or after 1969.
axis of the chart,

On the horizontal

the rate of return on domestic assets is shown;

the rate of return on foreign branch assets is shown on the vertical
axis.

In both cases,

the rates of return are shown in basis p o i n t s —

that is, hundreths of 1 per cent.

CHART 1

COMPARISON OF RATES OF RETURN, 1972
PANEL A: U.S. BANKS WITH MULTI-COUNTRY BRANCHES

Domestic rate of return (Basis points)

•
*
O

BEFORE 1969
SINCE 1969
AVERAGE FOR EACH C A T E G O R Y

PANEL B: U.S. BANKS WITH LONDON BRANCH ONLY

Domestic rate of reiturn (Basis points)

- 26 The chart can be read as follows:

in Panel A , it will be

noted that one bank which established its network after 1969 had a
domestic rate of return of .26 per cent and a foreign rate of return
of .20 per cent in 1972.

That bank is indicated in the chart at the

point where those two rates of return intersect.

Likewise another

bank had a domestic rate of return of .89 per cent and a rate of
return at foreign branches of .41 per cent.

Again that bank is

plotted at the point of intersection of those two indicated rates of
return.

In general, if a bank's domestic rate of return were equal to

its foreign rate of return, that bank would lie on a diagonal line
originating at the origin of the two scales and rising from the lower
left to the upper right corner of the chart.
With this introduction as to how to read the chart, a number
of significant conclusions can be drawn from the data presented.

First,

in Panel A four of the banks which established their multi-country
branch network before 1969 lie above and to the left of the diagonal.
The average rate of return for all of the banks in this pre-1969
category also lie above the diagonal.

This means that as a group they

were earning more on their foreign assets in 1972 than they were on
their domestic business.

The opposite is true for those banks that

chartered multi-country networks after 1969.

Turning to Panel B , one

can see that all except two of the banks with London branches only were
earning substantially less on their foreign activity than they were on
their domestic operations.
London branch was started.

This was true independently of when the

- 27 From the foregoing review, it is quite evident that the
increased competition in international money and capital markets
has had a significantly adverse impact on the profit margins of American
banks operating foreign branches.

Nevertheless, as discussed more

fully below, most American banks still find their overall experience
in international financial operations sufficiently satisfactory as
to justify remaining in the business—and in fact are looking for ways
to expand their efforts.

- 28 -

VI.

Controls on Foreign Lending
Before turning to the assessment of prospects for U.S. commercial

banks abroad once Government-imposed restraints on foreign lending have
been relaxed, it might be helpful to summarize briefly recent developments
under the Voluntary Foreign Credit Restraint Program (VFCR).

It will

be recalled that this program applies to U.S. commercial banks,

U.S.

agencies and branches of foreign banks, and U.S. nonbank financial
institutions.
Commercial Bank Program
As of November 30, 1973, commercial banks reporting to the
Federal Reserve Board under the VFCR Guidelines had aggregate ceilings
on foreign lending of $10.3 billion (Table 4).
$60

This level was about

million higher than that reported at the end of 1972;

the rise is

traceable mainly to the adoption of Guideline ceilings by banks launching
foreign activities or expanding them beyond some minimum level exempted
under the Guidelines.

Assets held by the banks for their own account

and subject to restraint totaled $9.2 billion at the end of last November.
Thus, the banks had an aggregate net leeway to expand lending under the
Guidelines of $1.1 billion--roughly the same as the leeway available at
the end of 1972.
It should be noted, however, that the banks held tot^l foreign
assets on the books of their head offices equal to $16.2 billion on November 30,
1973.

Over two-fifths of this amount (or $7.0 billion) were exempt from

VFCR restrictions.

These exempted assets consisted of $867 million of

- 29 loans to Canadian borrowers,

$5,860 million of export credits (other

than to residents of Canada), and $261 million of other foreign assets.
Over the last two years, the exempted proportion of commercial banks
foreign assets has risen appreciably.

This was due primarily to the

removal of VFCR ceilings on export credits in November, 1971, as mandated
by the Congress.
export credits.

At that time, the banks were holding $2.8 billion of
On the same date, they held for their own account $11.7

billion of total foreign assets, $8.6 billion of which were covered by
the VFCR.

They also held $218 million of Canadian assets and $104

million of other foreign assets.
credits, the banks

So, with the exemptions of export

foreign assets not covered by the VFCR amounted to

$3.1 billion in November, 1971.
by $3.9 billion to $7.0.

Two years later, this figure had risen

Four-fifths of this gain (or $3.1 billion) was

accounted for by loans to exporters;

one-sixth ($649 million) by Canadian

assets, and the remainder ($157 million) by other foreign assets.
Over the years, commercial banks subject to the foreign lending
restraints have generally operated within the ceilings established under
the VFCR Guidelines.

However, during the first half of 1973, when inter-

national money markets were subjected to extreme pressures, many banks
temporarily exceeded their foreign loan ceilings as they responded to
unanticipated credit demands by their foreign customers.
true during February and May.

This was especially

But in most cases, the banks were able to

correct the ceiling averages quite rapidly--in some cases at considerable
costs, including liquidating assets at a loss or shifting assets to foreign
branches to be financed by high-cost Euro-dollars.

- 30 U.S. Agencies and Branches of Foreign Banks
Foreign-owned commercial banks have been playing an expanding
role in the United States

money and capital markets in recent years.

For a number of reasons (including State regulations as well as private
operating advantages) these institutions have generally been organized
as agencies and branches under State laws (mainly in New York and
California).

Agencies cannot accept deposits (except those related to

international transactions).

They are free, however, to engage in a

variety of domestic and foreign lending activities.

Historically, most

of the agencies were of Canadian origin, but in recent years banks in
Japan, the United Kingdom, and a number of other countries have established
agencies in the United States.

The number of U.S. branches of foreign

banks has also expanded,substantially.

In November, 1971, 49 agencies

and branches of foreign banks were reporting to the Federal Reserve
Board under the VFCR program.
to 71.

By November, 1973, that number had risen

Unlike U.S. banks, these foreign owned institutions can have offices

in several S t a t e s — s o long as they do not have separately incorporated
commercial banks located in more than one state and thus subject to the
prohibitions of the U . S . Bank Holding Company Act.
When the VFCR Guidelines were first issued in early 1965,
agencies and branches of foreign banks were asked to observe the spirit
of the restraints—but they were not subjected to fixed ceilings on
foreign loans as were U.S. commercial banks.
the agencies

Over the next few years,

and branches foreign assets expanded significantly.

This

- 31 was especially true of their loans to Japanese borrowers.

In response

to these developments, in November, 1971 (when a major revision was
made in the Guidelines), these institutions were requested informally
to keep the expansion of their foreign assets roughly in line with the
increase in the funds obtained from their own parent banks and from
other

non-U.S. sources.

The response to this request was positive,

but its intent apparently was not fully understood, and its interpretation
varied somewhat among Federal Reserve Banks.

Moreover, U.S. agencies

and branches of foreign banks contributed substantially to the capital
outflows which occurred during the early months of 1973.

In the light

of these developments, the VFCR Guidelines were amended in July last
year and made to apply formally to them.
The growth of the foreign assets of the U.S. agencies and branches
of foreign hanks in the 1-1/2 years preceding their being subjected to
the VFCR Guidelines is shown in Table 5, along with comparable data for
U.S. commercial banks.

Several points stand out in these figures.

November, 1971, the agencies and branches had about one-fifth of the
total foreign assets held by the two groups combined.

They held nearly

the same proportion of assets of the type subject to the VFCR and of export
credits.

They held about one-quarter of the total assets exempt from

the VFCR and over half of the Canadian assets.

Between November, 1971,

and June, 1973, however, the agencies and branches expanded their foreign
assets much more rapidly than did U.S. commercial banks.

Moreover, the

growth was concentrated in assets of the types that were restricted by
the VFCR Guidelines as far as U.S. commercial banks were concerned.

- 32 For example, agencies and branches accounted for nearly half of the
expansion in total foreign assets held by the two g r o u p s — b u t for almost
three-quarters of the expansion in the assets subject to the VFCR.

contrast, they accounted for roughly one-third of the growth of the
remaining categories of foreign assets.

So, by the end of last June,

they had about one-third of the total foreign assets and of VFCR-covered
assets held by the two groups combined.

They also held just over one-

quarter of all exempt assets and of export credits.
Against the background of these developments, the U.S. agencies
and branches of foreign banks were asked formally on July 19, 1973, to
observe quantitative limits in extending credit to foreign borrowers.
Specifically, the Guidelines as amended permit these institutions to
increase their claims on non-U.S. residents to the extent that they
increase the amount of funds they borrow from their own parent banks
and from non-U.S. sources.

June 30, 1973, was set as the base date for

calculating changes in foreign assets of the types subject to restraint
and changes in offsetting foreign liabilities.

At the time, however,

the amendment did not--and was not intended to--change the degree of
restraint affecting these institutions.
U.S. agencies and branches began in July to report to the
Federal Reserve Board under the amended Guidelines described above.
These statistics are summarized in Table 6.

As of November 3(J, they held

for their own account foreign assets subject to fcestraint in the amount
of $5.1 billion, and their foreign liabilities totaled $10.4 b i l l i o n —
leaving them with a net foreign position of minus (-) $5,280 million.

- 33 This latter figure can be compared with the base net foreign position
(as determined on June 30, 1973) which they required at the end of
November to be in conformity with the VFCR Guidelines,
was minus (-) $4,605 million.

That requirement

Thus, they had an aggregate leeway of

$675 million.
During the first 11 months of 1973, the agencies and branches
increased their holdings of assets of the types subject to restraint
by almost 80 per cent.
was even more rapid:

However, the rise in their foreign liabilities
in the period July-November, the increase in

liabilities outstripped the increase in assets subject to restraint by
$675 million.

This was the leeway mentioned above that was

available to them at the end of November to expand loans to their foreign
customers.

These institutions—as was true of U.S. commercial b a n k s —

expanded substantially their financing of U.S. exports.

In the year

through November, their holdings of export credits increased by 62 per
cent.
Nonbank

Financial Institutions
As of September 30, 1973, U . S . nonbank financial institutions

(including nonprofit organizations) held $17.4 billion of foreign assets
for their own account

(Table 7).

Of this amount, $16.2 billion (or

93 per cent of the total) were exempt from the VFCR Guidelines.

Three-

quarters of the exempted assets (or roughly $12.2 billion) consisted of
investments in Canada, other than export credits.

Direct obligations

of international institutions ($1.2 billion) and long-tern investments

- 34 in developing countries ($1.4 billion) accounted for most of the
remaining
exempt assets.
«

Export credits amounted to only $140 million.

These institutions had aggregate VFCR ceilings of 1,703
million at the end of last September.
to the ceiling of $1,150 million.

They had foreign assets subject

However, they had outstanding

foreign borrowing of $206 million which could be used to offset part of
their foreign claims.

Thus, they had an aggregate leeway of $759 million.

During the course of 1973, their holdings af assets exempt from restraint
were essentially unchanged.
Receftt VFCR Program Changes
On December 26, 1973, the Federal Reserve Board announced
several amendments to the VFCR Guidelines.

As indicated above, the

amendments represented a relaxation in restraint effective January 1, 1974,
The changes were announced simultaneously with the reduction in the rate
of the Interest Equalization Tax and the relaxation of the Foreign Direct
Investment Regulations—administered by the Treasury Department and the
Department of Commerce, respectively.
For the VFCR-participating financial institutions, one element
of relaxation was an increase in the minimum ceiling applicable to
foreign assets of the types subject to restraint.
raised from $500 thousand to $10 million for banks;

These minimums were
from $1 million to

$10 million for U.S. agencies and branches of foreign banks, and from
$500 thousand to $2 million for nonbank financial institutions.

For

institutions with ceilings higher than the new minimum ceilings, the
ceilings were raised by 4 per cent for banks and agencies and branches

- 35 and by 5 per cent for nonbank financial institutions.

For all VFCR-

participating financial institutions, subsidiary restraints relating
to loans to residents of developed countries of continental Western
Europe were abolished.
At this point, we can turn to the discussion of banks

expected response to the prospect that controls on foreign lending
will be removed by the end of this year.
VII.

Banks

Reactions to Prospective Elimination of U.S. Capital Controls

As mentioned above, late last year, I wrote to a number of
banks reporting under the VFCR to ask them how the elimination of U.S.
capital controls by the end of 1974 might affect their foreign business.
The letter was addressed to 60 of the 226 banks reporting under the VFCR
Guidelines last November.

The banks receiving the inquiry were selected

with the aim of obtaining reactions from a broad spectrum of institutions
active in international finance to varying degrees.

The scope of the

coverage was as follows:
Number of Banks
Class of Bank
Contacted
All VFCR Reporting Banks
Banks in survey
Multi-country banks
Major regional banks
Other regional banks

Response

(226)

Foreign Assets Held
($ mill., Nov. 30, 1973
Per Cent
Amount
of Total
(16 ,900)

(100.0)

13 ,604*

80.5

20
20
20

19
18
13

12 ,370
1 ,007
227

73.2
6.0
1.3

- 36 As one can see, the banks holding the great bulk of the
foreign assets were included.

The banks were classified according

to the general character of their business.

All of the multi-national

banks were drawn from the 20 largest banks in the United States.—^
All of them play a substantial role in international finance.

For

instance, each of them had one or more foreign branches and many of them
had extensive foreign branch networks.

Deposits in these branches varied

from 12 per cent to 47 per cent of the combined deposits of domestic
and foreign offices as of June 30, 1972.

Each bank had a relatively large

volume of loans to foreign borrowers on the books of the head office.
Also, when this classification was developed in early 1970, three-quarters
of the banks were obtaining funds by borrowing in the Euro-dollar market
for head office use.
business loan holdings

More than half of the multi-national banks had
equal to 60 per cent or more of their total

loans, and a large number of them were important in the correspondent
banking field.

Finally, a large segment of the multi-national banks are

major borrowers in the Federal funds market.

Using similar criteria—but

stressing sizable domestic activities and the exercise of significant
influence in a principal region of the country—the major regional banks were
classified.

Seven of these banks had branches in London as well as in

Nassau or the Cayman Islands.

The other regional banks play an important—

but somewhat more limited—role in their respective regions in the United
States.

Each of them had only one shell foreign branch.

Fourteen of them

were located in Nassau and the rest in the Cayman Islands.
I have employed this classification of banks on previous occasions.
See, for example, "Multi-National Banks and the Management of Monetary
Policy in the United States," The Journal of Finance, Vol. XXVIII,
No. 2, May, 1973, pp. 439-454.

- 37 The questions raised in my letter were based on the assumption
that the U.S. controls limiting capital outflows will be terminated by
the end of this year.

Each bank was asked:

— T o what extent would the elimination of these controls
result in a shift back to the United States of the foreign
lending and deposit business now done in London and/or
at other overseas branches of the institution?
— T o what extent would the bank's borrowing customers seek
to refinance in the U.S. market the loans now outstanding
in the Euro-currency markets?
— W h a t considerations would the bank take into account in
any scaling down of operations at its foreign offices and
in decisions to shift those operations to domestic offices?
— W o u l d such a shift in business justify the closing of
any of the bank's foreign branches or make it more reticent
about expanding its foreign branch operations?
— I n what way might it influence the bank's decisions about
operating other facilities abroad, including participation
in joint ventures?
Banks with a branch.in Nassau or the Cayman Islands were askech
to indicate what future they see for that facility once the controls
limiting outflows of bank funds from the United States have been eliminated.
Each bank was also asked to look beyond the impact of the
elimination of capital controls and to indicate what it foresees with
respect to the geographic focus of its overseas expansion during the
next five years:
(4) Africa;

(1) London;

(2) Continental Europe;

(5) South America and the Caribbean;

Japan, Hong Kong, and Singapore)
(8) China;
areas.

(9) Soviet Union;

(3) Middle East;

(6) East Asia (especially

and the Pacific;

(10) Eastern Europe;

(7) South Asia;
and (11) other geographic

Finally, the banks were asked to include in their reply any other

comments they wanted to make on the general subject.

- 38 As indicated above, 50 of the 60 banks contacted responded
to the inquiry--including 19 of the multi-national,
regional, and 13 of the other regional banks.

18 of the major

However, eight of the

responses were received too late to be included in the statistical
tabulations.

The information for the 42 banks which did respond in

time to be included is summarized in Table 8.
Shift of Business to the United States
Most of the banks responding (30 out of 42) would expect the
elimination of capital controls to result in a shift of some foreign
branch business back to the United States.

This view was held by a

somewhat larger proportion of the multi-national banks than was true of
the two groups of regional banks.

The main reasons cited by banks

expecting a s h i f t — a s well as by those which did not--are also summarized
i

in Table

As one would expect, a great deal of variation is observable,

but several impressions stand out above all others:

the elimination of

capital controls will induce a number of banks to shift some of their
foreign operations hack to the United States.

On the other hand, a

substantial proportion of the banks (especially the largest ones) view
themselves as truly international in scope and see their future as lying
as much in that arena as in the U.S. domestic market.

A large percentage

of the banks (in each size group) report that Federal Reserve regulations
relating to reserve requirements and setting ceilings on interest rates
payable on deposits severely limit their ability to compete at home for
foreign deposits.

These several factors can be discussed briefly.

- 39 Factors Influencing Decisions to Reduce or Maintain Foreign Operations
Elimination of the 3/FCR ceiling is the primary factor leading
some banks to conclude that their business at foreign branches will be
reduced and transferred to U.S. head offices after all three types of
U.S. capital controls are removed. Prospective elimination of restraints
on foreign direct investment and the Interest Equalization Tax (IET) were
less important factors for most respondent banks, because they believe
effective interest-rate differentials will probably not favor New York
and because a large amount of the lending they do is not subject to the
IET.

For example, one banker stated that removal of the controls should

lead U.S. banks toward a more fully integrated credit and liability
control system centralized in the United States.

Decisions of the responding

banks actually to close a foreign shell branch (none anticipated closing
a full-service branch) would appear to be tempered by apprehension that U.S.
capital controls might be reintroduced at some time in the future--as well as
by the adverse competitive effects of reserve requirements and interest
rate ceilings.
In contrast, a significant number of banks stressed their efforts
to build a broadly-based foreign network on the explicit assumption that
their future performance would rest heavily on their ability to compete
in world money and capital markets.

This competitive necessity will mandate

the retention of their foreign facilities.

Several large banks emphasized

the importance of maintaining "present overseas business relationships
through physical proximity.

A common thread running through the responses

- 40 (including those by some of the regional banks as well as by some of the
multi-national institutions) was the need for proximity to attract local
currency sources of funds. In fact, quite a few of the banks pointed to
a growing necessity to establish retail banking offices (such as the
"money shops" in the United Kingdom) as well as to tailor services to
specific markets.
One major New York bank heavily involved in the Euro-dollar
market emphasized the need to maintain its "expertise and ability to
marshall very large amounts of money for clients in a relatively short
time," an ability it apparently shares with a number of other banks that
responded.

Relatively lower interest rates in the Euro-dollar market a n d —

for some b a n k s — t h e comparatively low cost of operating foreign branches
(particularly outside London) were also explicitly mentioned by some of the
banks.

Several of the multi-national banks spoke of the value of experience

and knowledge developed by personnel at their foreign branches (many of
whom are foreign citizens as well as Americans) whom they want to keep.
With respect to shell branches, a number of banks (including
both large and smaller institutions) were apprehensive that U.S. capital
controls might be reinstated.

Consequently, they wished to avoid the

expense and delay that would be involved in reopening a closed branch.
Reserve Requirements, Interest Rate Ceilings, and the Differential
Cost of Money
As already mentioned, the regime of Federal Reserve regulations
on reserve requirements and interest rates on deposits was identified by
a number of commercial banks as strongly affecting their decisions with
respect to the locations from which they seek to serve their foreign

- 41 customers.

Again this factor was cited more than any other as the reason

not to reduce foreign operations.

Regulations D and M call for reserves

that increase the effective cost of funds to U.S. parent banks,
Regulation Q

and

limits the interest those banks may pay depositors, in

particular prohibiting the payment of interest on deposits of less than
30-day maturity, and thus making it difficult for U.S. parent banks to
bid for very short-term funds.

One smaller regional bank engaged in

import and export financing went so far as to indicate that if the Federal
Reserve allowed its foreign sourcing and lending to be done on a net
basis at its head office (the Federal Reserve allowing it to borrow abroad
free of reserves up to the amount of funds it lent abroad), it would
handle all its foreign business at its head office and it "would not
foresee the need for a foreign office for (its) operation for a long time
to come."
As it may be recalled, the foreign branches of U.S. banks operate
free of these regulations, which impose reserve requirements on both domestic
8/

deposits and Euro-dollar borrowings by banks in the U.S.

More specifically,

these regulations necessitate that Federal Reserve member banks must meet
marginal reserve requirements of 8 per cent on large-denomination time
deposits ($100,000 and above) and related instruments, including Euro-dollars.
(In passing, it should be recalled that a number of large nonmember banks
8/

It is worth noting that the survey reported on here occurred before
the marginal reserve requirement on large denomination time deposits
and related instruments was reduced from 11 to 8 per cent. As a
result, the influence of Federal Reserve regulation in such decisions
now may be somewhat less than it was when the survey was taken in
late November and early December.
One of the regulations applies incidentally to foreign branch loans
to U.S. residents.

- 42 as well as some agencies and branches of foreign banks are also doing
so voluntarily at the request of the Federal Reserve Board).
U.S.

Formerly,

banks faced interest rate ceilings on large-denomination time

deposits, although they are now free to bid for such deposits without
constraints with respect to rates of interest.

(Ceilings on time deposits

less than $100,000, however, still apply.)
Not suprisingly, these regulations affect the cost of funds
to U.S. banks in a significant fashion. As shown in Table 9, the 8 per
cent marginal reserve requirement on large time deposits or Euro-dollar
borrowings(both being major sources of funds to finance loan expansion)
raises the effective cost of funds by an amount on the order of
80 basis points—given the rates prevailing around the beginning of
January.

Thus, banks raising money in domestic markets to lend

internationally might find themselves at a cost disadvantage, induced
by a reserve requirement which many of them describe as a "tax" on their
major "raw material."
Moreover, to compound the problem (and several bankers themselves
cited this factor), borrowers in U.S. markets may be forced to pay a higher
effective rate of interest because of U.S. banking practices requiring
compensating balances.

Thus, as indicated in Table 9, with a 9.75 per

cent commercial bank prime rate in early January, a 20 per cent compensating
balance might add over 240 basis points to the effective rate of interest,
making U.S. loans too expensive for a borrower with opportunities to obtain
credit in London.

Of course, compensating balances may to some extent repre-

sent a firm's normal working balances that would be held in any case, so that the

- 43 balance requirements may appear much more formidable than they actually
are.

Nevertheless, such a practice cannot make the U.S. domestic

banking business more competitive.
Overall, we can see that the competitive edge of banking
institutions doing business in the U.S. may be blunted sosDCwhct by both
regulatory limits and industry practice.

The customs of the banking

industry are a problem that perhaps is best handled by bankers themselves.
However, the regulatory limits on U.S. banks are a matter within the
province of the Federal Reserve Board, and it might be well to review
briefly the reaons why reserve requirements were imposed on some of the
principal money market sources of funds.

These controls were developed

for the purpose of limiting the use of instruments such as large CD's
or Euro-dollar borrowings as a means of evading the impact of domestic
monetary restraint—particularly, as a "loop-hole
banks

employed by the

to meet the credit demands of their large business customers.

For example, the 8 per cent marginal reserve requirements on time deposits
and Euro-dollar borrowings announced on May 16, 1973, were "...designed
to curb the rapid expansion in bank credit and help moderate inflationary
pressures, and at the same time to assure the availability of credit on
a reasonable scale."

So, in the meantime, while I personally can

appreciate the degree to which the regulations adversely affect the
competitive position of U.S. banks when viewed in an international context,
the question of their modification in the future (if that turns out to
be the case) is one on which the Federal Reserve Board as a whole will
have to act.

- 44 VIII.

Domestic Refinancing of Euro-dollar Borrowing by U.S. Bank Customers
The capital controls on U.S. foreign direct investment have

required U.S. corporations to finance much of their overseas investment
by borrowing from foreigners.

As these controls are removed, how much

of the presently outstanding loans by non-Americans to U.S. corporations
will be paid off and replaced by loans from U.S. banks and from other
Americans?

Also, to what extent will the absence of the capital controls

cause future financing for new and ongoing U.S. foreign direct investment
to be made from the domestic offices of U.S. banks rather than from their
foreign branches?
According to the banks that have responded, some outstanding
loans--but by no means a major portion--will be refinanced from the United
States, and an important amount of such new lending will continue to be
handled by their foreign branches in the future.
The amount of debt owed by U.S. direct investors to foreigners
at the end of 1973--the so-called debt overhang under the Department of
Commerce Foreign Direct Investment Program--was as large as or larger than
the approximately $15 billion outstanding at the end of the previous year.
There is also additional interest-bearing debt of U.S. foreign affiliates
that is not covered by the Program and that is predominantly attributable
to their ongoing commercial activities.
about $20 billion.

At the end of 1972, it totaled

- 45 It is particularly important, in estimating possible capital
outflows from the United States represented by refinancing of this $35
billion of combined debts, to have some idea of how much of this debt is
volatile--that is, how much of these debts to foreigners could be paid
off rather quickly and replaced by direct investor borrowings from U.S.
lenders.

This appraisal of volatility must take account of numerous

and difficult-to-judge factors.

The most important of these appear to be:

present and anticipated interest rate differentials between foreign and
U.S. markets; leeway available to U.S. banks and other U.S. financial
institutions under current or future (if any) bank ceilings; the
availability of current and future liquid balances available abroad to
the direct investors; the preferences of direct investors to meet U.S.
Securities and Exchange Commission requirements for public offerings in
the United States over using the less formally controlled foreign financial
markets; a schedule of maturities of outstanding debt; the amounts of
medium- and long-term debt that can be refinanced without substantial
penalties for pre-payment, and knowledge of the significance of
conversion prices for convertible bonds.
Many banks replied that their customers were interest rate
sensitive and would refinance if U.S. rates proved relatively attractive.
For example, one bank noted that some U.S. corporations that were already
liquid and not in need of funds--nevertheless—were forced by the U.S.
regulations to borrow from foreigners.

Without those controls, they

presumably would repay quickly. Most of these banks, however, do believe

- 46 that interest-rate differentials will not favor U.S. sources and that other
factors might provide additional incentives to continue financing in foreign
markets.
One large southwestern bank considered that Euro-dollar financing
terms recently had tended to be more liberal with respect to maturities and
amortization schedules.

Another institution (a medium-sized Eastern bank

heavily engaged in trade financing) believes some of its customers will be
hesitant to abandon offshore financing facilities because of the fear that
U.S. capital controls might be reimposed.

A large New York bank pointed

out that some outstanding loans made abroad to U.S. direct investors were
"purchase and sale of money" transactions the bank regarded as typical of
the Euro-dollar market and did not involve collateral banking relationships
of any importance.

Because of the borrower's inability to comply with the

bank's normal requirements for commercial banking relationships in the
United States, the banks doubted that the business could be transferred to
its New York office.
A sizable portion of the foreign debt of the customers of a large
Mid-Western bank was denominated in foreign currencies or had been issued on
a convertible basis.

The bank believed the customers' interest in protecting

themselves against cross currency risks (especially important under a system
of floating currencies) and the prohibitive cost of refinancing outstanding
convertibles with new convertibles (given present, unappealing U.S. stock
market levels) would make it doubtful that these portions of outstanding debt

- 47 would be refinanced.

The head of a regional bank that is not a prominent

lender to foreign-oriented corporations (but whose bank is heavily
involved with foreign governments) gave a reply based on his reaction as
the director of several well-known, U.S.-based, multinational corporations.
He reported that he has urged those corporations, in their activities
around the world, to develop local currency resources with local banks.
These companies, with excellent credit ratings, have no difficulty in
drawing on Euro-dollars.
local currency sources.

Y e t , they have turned their attention to developing
Frankly f he said, it is "politically important to
11

a multinational company to have relations with local banks —which of
necessity must be in a position to deal with their governments.
Some banks that are heavily engaged in foreign lending are located
in areas of the United States where there are relatively few corporations
that are foreign direct investors.

These banks, of course, would not he

much (if at all) affected by the removal of the Foreign Direct Investment
Program.
As I reflect on these responses by the banks surveyed, I conclude
that some U.S. corporations may decide to refinance in the United States
the loans they have outstanding in the Euro-currency markets.

At the same

time, however, I also get the distinct impression that the volume of such
traffic back to the domestic market may be much lighter than some observers
seem to anticipate.

This conclusion suggests that a sizable part of both

the medium-term and long-term markets in dollars will remain in L o n d o n —

- 48 not only for European borrowers and lenders but also for a number of
American firms, which will continue to have large capital needs.

Moreover,

it also seems clear that both borrowers and depositors from the Middle East
and other developing areas will continue to find the Euro-currency market
an attractive place in which to do business.
IX:

Geographic Focus of Foreign Branch Expansion
In the coming years, most U.S. banks intend to focus the

expansion of their network of overseas offices
regions where they have traditionally operated.

in those geographical
These would include

London, Continental Europe, South America and the Caribbean.

(See Table 10.)

In the case of Continental Europe, however, there is some
concern that the European Economic Community may eventually raise a number of
barriers inhibiting foreign banking activities.

In view of this

possibility, many U.S. banks anticipate t h a t — a s far as Europe is concerned—
they will put substantial emphasis on the expansion of their peripheral
banking activities, such as leasing, underwriting and data processing.
In Latin America and the Caribbean area, the prospects for
expansion are also somewhat clouded.

There is the possibility that

the political environment and other factors will become progressively
less hospitable for foreign banks.

These factors include the risk of

expropriation, restrictions against establishing branches or obtaining
a meaningful participation in existing banks, and the relative
unattractiveness of the area as regards the potential for economic growth.

- 49 Many banks that are already established in Latin America will
probably continue to expand their activities there.

This is particularly

the case with banks (such as several in the Southeastern United
States) that view Latin America as their primary area of overseas activity.
These banks also believe that the removal of capital controls will help
their representative offices in Latin America to develop both new deposit
business and loans.
The most promising areas for further overseas expansion appear
to

be the Middle East, East Asia and the Pacific.

Table 10,

As indicated in

11 of the 42 banks tabulated anticipate that they will expand

their activities in the Middle East and 27 in East Asia and the Pacific.
One of the main focal points in the Middle East is expected to be Beirut,
which is centrally located and has an active foreign exchange market.
Several banks also specifically emphasized that the growing volume of oil
revenues available for investment will make the Middle East an increasingly
interesting place in which to do business.
Many U.S. banks, in discussing areas for future expansion,
mentioned their interest in East Asia and the Pacific, and some viewed this
area as the most promising.

At present, most of the East Asian countries

are open to establishment of either new branch banks or minority joint
venture operations by foreign banking interests.

Virtually all of the

countries are open in some way to investment in other types of financial
or bank-related activities—such as merchant or investment banks, finance
companies, money market intermediaries, or peripheral-type banking
businesses, including leasing and management consulting.

- 50 Some of the responses from the banks on East Asia and Pacific
cited this area as "... primary area of concentration,

"...as the growth

area of the 1970's," and "...as the growth area that they would rank
first."
As indicated in Table 10, only a moderate amount of expansion
is anticipated by U.S. banks in China, the Soviet Union and Eastern
Europe.

Although the American banks do not expect to establish very

many branches in this region, they do expect to increase substantially
their credits to these three areas.
It is likely that, in all of these areas of possible future
expansion, restraint

on deposit-taking activities (or at least competition

for household deposits) will lead the American banks into greater reliance
on the use of joint ventures.

In most areas where the banks are able

to accept domestic deposits, they are likely to be forced to "domesticate"
their activities, i.e., they will have to become much more of an integral
part of the local financial scene—becoming partners with indigenous
businessmen, hiring local employees, and in other ways demonstrating that
they are prepared to make a genuine contribution to the economic
development of the host countries.
In the responses I received from U.S. commercial banks, it is
clear that many of them are anxious to participate in this task.

- 51 X.

Concluding Observations
The main conclusions reached in this paper were summarized at

the outset.

Before closing, however, several observations can be made.

The results from this survey of prospects for banks in international
money and capital markets point to a few consequences of considerable
importance.

In the first place, it seems clear that (once U.S. capital

controls have been eliminated) the American m a r k e t — and particularly
New Y o r k — w i l l regain some of its former position.

This will certainly

be the case as far as the sizable corporate clients of U.S. banks are
concerned.

But it also seems likely that both foreign purchasers of

U.S. securities (as well as those offering equities in firms abroad)
along with foreign borrowers seeking substantial long-term accommodation
(including foreign governments) will turn again to New York.
On the other hand, while some of the international financial
business now conducted in London may migrate to New York, I would
certainly not expect a general dismantling of the facilities built up
over many years.

In particular, there appears to be little prospect

that the short-term Euro-dollar market centered in London will migrate
to the west side of the Atlantic.

London's natural time advantage, its

enormous endowment of capital resources and technical competence—as well
as its tradition of minimum regulation of financial transactions—will
maintain London's role as one of the world's two leading financial markets.
As far as other geographic areas are concerned, I would expect
the financial markets in Continental Europe to register considerable growth
in the years ahead—although the pace of expansion may slacken somewhat

- 52 compared with that achieved in the recent past.

In any case, the outcome

will clearly depend significantly on policies adopted by the EEC.

the meantime, one can certainly hope that these evolving policies
will emphasize openness and equality of treatment—rather than discrimination
against banking institutions headquartered outside its boundaries.
In other parts of the world, I would expect areas such as
Nassau and the Cayman Islands (where so many U.S. banks have opened
bookkeeping facilities mainly because of U.S. capital controls) to lose
some of their existing banking business--and to gain less in coming years.
The rest of South and Central America and the Caribbean will undoubtedly
continue to attract foreign banks--not only those from the United States
but from Europe and Japan as well.

Yet, the overall environment prevailing

in that part of the world may become progressively less hospitable.
In sharp contrast, it appears that East Asia and the Pacific (particularly
Hong Kong and Singapore) will become increasingly attractive areas in
which to offer the kinds of financial services which the major banks
active on the world

scene can provide.

The Middle East (and this appears

to be especially true of Beirut) will also become increasingly attractive^
Finally, it seems evident that Africa, South Asia, and most
other poor regions of the world will offer few opportunities for banks
to offer services.

This poses a classical dilemma:

how can such areas

enhance their prospects for economic development if they cannot induce
the world*s leading private financial institutions to join in the task?

- 53 Yet, how can the latter do so before a stage of development has been
reached that justifies a major commitment?

How American and other

commercial banks respond under these circumstances will provide a
real test of their ability to help those marginal areas where so many
of the world's poor and left-out people are struggling to improve their
lives.

- 0 -

Table 1

Claims On Foreigners Reported By Banks In The United States
(In millions of dollars)
S e p t . 3 0 , 1969
Per cent
Amount
of total

S e p t . 3 0 , 1971
Per cent
Amount
of t o t a l

Sept. 30, 1973
Per cent
Amount
of total

Short-term claims
D e v e l o p e d countries
Wesrtern E u r o p e
United K i n g d o m
Canada
Japan
Australia & So. Africa

5,248
1,347
383
634
3,164
103

58.5
15.0
4.3
7.1
35.3
1.1

7,204
1,786
457
1,092
4,047
279

60.7
15.0
3.9
9.2
34.1
2.4

11,593
3,511
1,304
1,907
5,801
374

61.9
18.8
7.0
10.2
31.0
2.0

L e s s developed countries
Latin America
Asia
Africa
A l l other 1/

3,719
2,716
871
86
46

4105
30.3
9.7
1.0
.5

4,666
3,347
1,108
143
68

39.3
28.2
9.3
1.2
.6

7,127
5,176
1,525
246
180

38.0
27.6
8.1
1.3
1.0

8,967

100.0

11,870

100.0

18,720

100.0

Long-term claims
Developed countries
W e s t e r n Europe
United K i n g d o m
Canada
Japan
Australia & S o . A f r i c a

1,188
469
67
403
93
223

36.2
14.3
2.0
12.3
2.8
6.8

1,386
676
126
264
225
221

40.3
19.7
3.7
7.7
6.5
6.4

1,770
860
131
418
252
240

32.8
15.9
2.4
7.8
4.7
4.5

Less developed countries
Latin A m e r i c a
Asia
Africa
A l l other 1/

2,096
1,334
562
151
49

63.8
40.6
17.1
4.6
1.5

2,054
1,351
536
124
43

59.8
39.3
15.6
3.6
1.3

3.622
1,924
1,192
232
274

67.2
35.7
22.1
4.3
5.1

3,284

100.0

3,440

100.0

5,392

100.0

T o t a l claims
D e v e l o p e d countries
W e s t e r n Europe
United K i n g d o m
Canada
Japan
Australia & So. Africa

6,436
1,816
450
1,037
3,257
326

52.5
14.8
3.7
8.5
26.6
2.7

8,590
2,462
583
1,356
4,272
500

56.1
16.1
3.8
8.9
27.9
3.3

13.363
4,371
1,722
2,325
6,053
614

55.4
18.1
7.1
9.6
25.1
2.5

Less developed countries
L a t i n America
Asia
Africa
All other 1/

5,815
4,050
1,433
237
95

47.5
33.1
11.7
1.9
.8

6,720
4,698
1,644
267
111

43.8
30.7
10.7
1.7
.7

10,749
7,100
2,717
478
454

44.6
29.4
11.3
2.0
1.9

12,251

100.0

15,310

100.0

24,112

100.0

Total

1/ Includes U . S 0 S . R . and other E a s t e r n E u r o p e , N e w Zealand and all other countries; also includes
small amounts for international and r e g i o n a l o r g a n i z a t i o n s .
Source:

Treasury F o r e i g n E x c h a n g e R e p o r t s .

Table 2 .

T o t a l R e s o u r c e s of F o r e i g n Branches o f U . S . B a n k s , b y M a j o r G e o g r a p h i c A r e a , 1 9 6 9 , 1 9 7 1 , 1973

(Amounts in millions of dollars)
Geographic Area

Total:

All Foreign Branches

Europe
United Kingdom
Rest of Europe
Asia and Pacific
Hong Kong and Singapore
Rest of Asia and Pacific
Latin America and Caribbean
Nassau and Cayman Islands
Rest of Latin America
Source:

A p p e n d i x Tables I - I I I .

September 30, 1969

September 3 0 , 1971

100.0

85.6

96.8

265.4

77,313 "

70.7

74.1

73.7

202.5

58.7
21.5

55,686
21,627

50.9
19.8

61.8
119.9

70.9
81.5

176.5
299.1

4,276

7.6

9,670

8.8

90.7

126.1

331.3

694
3,582

1.2
6.4

2,756
6,914

2.5
6.3

297.1
93.0

6,767

12.2

22,345

20.5

6,193
574

11.2
1.0

21,059
1,286

19.3
1.2

29,923

100.0

55,541

100.0

25,556

85.4

44,500

80.2

20,137
5,419

67.3
18.1

32,582
11,918

2,242

7.5

- -

7.1
- -

1969-73

109,330

Amount

2,125

1971-73

Per cent
of total

—

Percentage Change
1969-71

Amount

- -

September 30, 1973

Per cent
of total

218.4

230.2
240.0
124.0

—

905.2
- -

Table 3 .

Rates of Return on Domestic and Foreign Activities of U.S. Commercial Banks, by Location of Foreign Branches, 1969 and 1972
(Amounts in millions of dollars)

Location of Foreign Branch

Average Assets 1/
Domestic
Foreign
1969
1972
1972
1969

Net Income 2/
Foreign
Domestic
1972
1969
1969
1972

Rates of Return (Per cent) '
Foreign
Domestic
1969
1972
1969
1972

Multi-Country Branches 3/
Established before 1969 (8 hanks)

91,186

Established since 1969 (8 banks)
II.

London Branches Only

41,580

628

11,337

55,238

14,866

Established since 1969 (8 banks)

628

261

.69

.57

.37

.63

273

139

116

.63

.22

378

.77

.64

.25

.49

18,888

1,217

3,511

18,374

2,906

118

.79

.73

.22

.18

Nassau Branches Only 5/
49,309

(32 banks)
IV

21,733

Established before 1969 (8 banks)

III.

109,531

2,497

Memorandum
A.

All Insured Commercial Banks7/

All Federal Reserve Member 7/
Banks
Banks with deposits of:
$100-500 million
$500 million & over

516,325

676,7.21

4,566

5,521

.88

.82

429,152

542,469

3,653

4,340

.85

.80

82,155
250,023

100,318
362,829

752
2,009

771
2,590

.92

.77
.71

Average Assets
1969
1972
145,617
220,606

Net Income
1969
1972
923,772
1,256,448

Consolidated Foreign and
Domestic Activity
(14 banks) 6/

U
2/

Average of total assets as reported in the Call Report for December of each year and of preceding year.
Domes Lie net income is atter taxes but before securities gains and losses. Foreign income
is after foreign (but before U.S.) taxes.
Banks with 2 or more foreign branches (except shell branches).
Banks with only a London branch (shell branches are excluded).
Banks with only a Nassau branch (Banks with other branches are excluded.)
Banks whose assets and income from all sources (domestic, foreign branches, and foreign

3/
4/
5/
6/

subsidifciiietO are consolidated.
2/ Asset data aro for end of year only.

.80

Rate of Return
1969
1972"
.63
.57

Table 4 .

Foreign Assets of U.S. Commercial-Banks Reporting Under the VFCR Guidelines
(millions of dollars; data as of end of each month)
1971

Category
Number of reporting banks
Aggregate ceiling
Assets held for own account
subject to restraint
Aggregate net leeway
Assets exempted from VFCR
Canadian assets
Export credits other than to
residents of Canada
Other
TOTAL assets held for own account

Source:

Federal Reserve Board.

1972

1973
June

Sept.

Nov.

223

229

226

10,307

10,295

10,351

10,338

9,189
1,087

9,537
771

9,371
924

9,186
1,164

9,214
1,124

4,898

5,339

5,910

6,962

6,559

6,988

536

666

927

855

807

713

867

2,789
104

3,299
112

4,033
199

4,213
199

4,845
210

5,930
225

5,585
261

5,860
261

11,698

12,902

13,788

14,529

15,447

16,332

15,745

16,201

Nov.

Dec.

Nov.

Dec.

March

184

194

214

222

224

9,876

10,032

10,208

10,276

8,587
1,289

8,955
1,078

8,890
1,318

3,111

3,947

218

Table 5.

Foreign Assets Held by U.S. Commercial Banks and U.S. Agencies and Branches
of Foreign Banks, November 30, 1971 and June 30, 1973
(Millions of dollars)

FRASER