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FD1 N E W S RELEASE F E D E R A L D E P O S IT I N S U R A N C E C O R P O R A T I O N FOR RELEASE UPON DELIVERY PR-64-78 (6-21-78) B >\W * .rC c \ ' V \ ^ XV> 0 Statement on H. R. 10899, 95th Congress, the “International Banking Act of 1978." Presented to Subcommittee on Financial Institutions Committee on Banking, Housing and Urban Affairs United States Senate by George A. LeMaistre Chairman, Federal Deposit Insurance Corporation J une 21, 1978 FEDERAL DEPOSIT INSURANCE CORPORATION, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429 202-389-4221 Mr. Chairman, I w e l c o m e the o p p o r t u n i t y to testify on issues raised in H. R. 10899, the I n t e r n a t i o n a l B a n k i n g Act of 1978. The e f f o r t s of the C ongre s s in this a r e a h a v e b e e n timely and a p p r o p r i a t e in l i ght of the ra p i d l y g r o w i n g p r e s e n c e of the operations o f foreign banks in the United States. A c c o r d i n g to statistics p r o v i d e d by the Federal Reserver from N o v e m b e r 1972 to the end of M a r c h 1978 the nu m b e r of U. S. b a n k i n g i n s t i t u t i o n s owned by foreign b a n k s increased from 104 to 268 and their total U. S. assets q u a d r u p l e d from $24 bi l l i o n to $96 billion. Since 1965, there has been m o r e than a t w e l v e f o l d i ncrease in their assets. F o r e i g n b anks p r e s e n t l y o p e r a t e in the United States through agencies, d i r e c t branches, s u b s i diaries, s e curities affiliates and comm e r c i a l lending companies. Currently, these foreign b a n k i n g o r g a n i z a t i o n s are located in ten States plus Puerto R i c o and the V i rgin Islands. However, 91 p e r cent of all foreign b a n k i n g o f f i c e s in the U. S. are c o n c e n t r a t e d in N e w York, California and Illinois. Until q u i t e recen t l y agencies have b e e n the d o m i n a n t f orm of foreign b a n king in the U. S. As of March 31, 1978, 120 agencies with a p p r o x i m a t e l y $30 billion in assets w e r e o p e r a t i n g in N e w York California, G eorgia, Florida, and Hawaii. A g e n c i e s o p e r a t e under State l icenses and are not per m i t t e d to hold d e p o s i t s bu t their c u stomers m a y m a i n t a i n credit b a l a n c e s w h i c h are t e c h n i c a l l y due to the a c c ount of the home office. - 2 - Direct branches are the most raoidly growing form of foreign bankinq in the United States. There were 103 branches with assets totalling $45 billion in N e w York, Illinois, Washington, Oregon, Massachusetts, Puerto Rico and the Virgin Islands on March 31, 1978. Branches are licensed under State law and are permitted to hold both foreiqn and domestic deposits. These deposits are currently not eligible for Federal deposit i n surance. At the end of March 1978, foreign banks owned 38 Statechartered subsidiaries in N e w York, California, Illinois and Puerto Rico, with assets of $19 billion. Such subsidiaries may become members of the Federal Reserve System. to do so. Five have chosen Also, foreign banks may apply for national charters for bank subsidiaries; however, the requirement that all national bank directors be U. S. citizens has made this unattractive. Bank subsidiaries of foreign banks are subject to the Bank Holding Company Act of 1956, and must maintain FDIC insurance coverage. Recently, three foreign banking organizations have begun n e g o t i a tions to acquire all or a substantial portion of the control of three sizeable U. S. banking institutions, the combined assets of which exceed $20 billion. Five commercial lending companies with $2 billion in assets were licensed to operate in Ne w York. In addition to having a wide range of conventional banking powers, engage in some investment banking. these entities may -3Finally, a total of 27 securities affiliates were licensed to operate in the U. S. as of December 31, 1976. These firms are engaged in underwriting and d irect sale of securities, activities that are prohibited for domestic banks by the Glass-Steagall Act. Most of these affiliates are located in New York State. If a foreign bank chooses to operate in this country through a d o m e s t i c a l l y incorporated banking subsidiary, its operations here are generally subject to the same rules under the Bank Holding Company Act that g overn the U. S. activities of domestic bank holding companies, with limited exceptions involving nonbanking activities permitted by Federal Reserve regulations issued under Section 4(c)(9) of that Act. However, to the extent that a foreign bank operates domesti c a l l y through branches, agencies, or commercial lending companies, it is not subject to certain restrictions and requirements applicable to domestic bankinq organizations — p r i n cipally those which forbid operating deposit-tak in g offices in more than one State and operating affiliated companies engaged in a securities business. The stated goals of this legislation are twofold: The first is to provide a system of Federal regulation of the domestic activities of foreign banks because of the role these institutions play in domestic financial markets, their impact on the domestic and foreign commerce of the United States -4and because most foreign banks operate in more than one State. The second goal is national treatment of foreign banks. In other words, to the extent possible or appropriate, foreign and domestic banks operating within the United States should be treated equally. It seems to me that as a general principle, the goal of "national treatment" or "nondiscrimination" in the regulation of foreign enterprises operating in the United States is h ighly desirable and should be pursued provided that its implementation is feasible and adherence to it would not interfere with some other important public p olicy objective. Thus, I am in agreement with the notion that, consistent with our framework of bank s u p e r vision, U. S. operations of foreign banks should be subject to appropriate Federal regulation and supervision. tfhile we support some provisions of the proposed legislation, we have reservations about certain aspects of the bill as drafted and I will set forth our views as to preferable p olicy choices. In some respects, for example, it seems that the bill deviates from the policy of nondiscrimination wi t h o u t an overriding reason for doing so. In the discussion which follows, I shall outline the FDIC's views with respect to five of the major facets of this legislation. Provision of a Federal Chartering Option Section 4 of the bill would authorize the Comptroller to approve the establishment by a foreign bank of its first U. S. -5branch or agency in any State where State law does not prohibit the establishment of a branch or agency by a foreign bank. Subseauent Federal branches or agencies of a foreign bank could be authorized in States where the bank had no State branch or agency if expressly permitted bv State law. These Federal branches and agencies would be regulated and supervised like national banks to the extent appropriate. In addition, Sections 2 and 3 of the bill would significantly liberalize the National Bank Act and Edge Act requirements that National Bank and Edge Act corporation directors be ü. S. citizens and that Edge Corporation stock be owned only by ü. S. nationals. Consistent with the principle of nondiscrimination, these provisions would afford foreign institutions the benefits of choice implicit in our dual system. I heartily endorse these changes. Interstate Banking Operations by Foreign Banks Section 5(a) of the bill permits interstate branching by foreign banks where permitted by State law. This subsection further provides that establishment of agency or commercial lending company operations outside the home State selected by a foreign bank requires the approval of the State in which it desires to operate. The thrust of these provisions is, of course, to maintain the status quo with respect to interstate branching by foreign banks rather than to imoose branching restrictions of the type - applicable to domestic banks. 6 - It has been argued by some that foreign banks enjoy a competitive advantage in that they can conduct m u l t i-state dep osit banking operations. Frankly, I am not aware of any evidence that interstate banking activity of foreign banks has had an adverse c o m p etitive impact on our domestic banks or has impaired their viability. It should also be noted that foreign banks currently operate banking-type operations in o nly twelve U. S. States and territories while interstate operations of our large bank holding companies extend into almost every State. These inter state activities include consumer and sales finance, commercial lending, mortgage banking, selling and reinsuring credit related insurance, leasing, computer services and p r o v i d i n g venture capital to business. U. S. banks may also establish Edge Act corporations, loan produc t i o n offices and representative offices in States other than their home State. Absent some overri d i n g public interest, notions of equity and symmetry w o uld support applying to foreign banks the same branching rules as apply to domestic banks. However, in our judgment there is an overriding p ublic interest whi c h leads us to strenuously oppose application of the pri n c i p l e of national treatment in this context. If interstate banking operations were to be prohibited for foreign banks, it is unlikely that a foreign bank would want to locate anyplace outside N e w York, Calif o r n i a or Illinois. -7As a p r a c t i c a l m a t t er , if i n t e r s t a t e b a n k i n g o p p o r t u n i t i e s w e r e fo re cl os ed for f o r e i g n banks, other S t a t e s w o u l d find it d i f f i c u l t to a t t r a c t f o r e i g n b a n k s and, hence, w o u l d n o t r e ap b e n e f i t s stemming f r o m the a c t i v i t i e s of these b a n k s — b e n e f i t s th at m a v well a c c r u e to the local economy. One s h ou ld not m i n i m i z e the v a l u e of f o r e i g n b a n k i n g q r o w t h to the b a n k i n g c o m m u n i t y as a whole. in the June 1977 In an i n t e r v i e w P u b l i s h e d issue of E u r o m o n e y , Paul Vo lc ke r, the F e d e r a l R e s e r v e B a nk of N e w York, P r e s i d e n t of s t a t e d that — B a n k e r s in q e n e r a l — those of the N e w Yo rk m e n t a l i t y anyway — h o l d that a d d i t i o n a l c o m p e t i t i o n g e n e r a t e s a d d i t i o n a l busine ss . To the e x t e n t that it s u p p o r t s the g r o w t h of N e w Yo rk as an i n t e r n a t i o n a l ba n k i n q c e n t r e i t ’s q o i n q to be qood for ev e r y b o d y . More of the w o r l d ' s b u s i n e s s w i ll be fo c u s e d here, and the m o r e e f f e c t i v e and e f f i c i e n t this m a r k e t is, we'l l all be ab le to m a k e some m o n e y ou t of it. B e tt er he re than el se w h e r e . I see no r e a s o n s w h v othe r c i ti es in othe r S t a t e s should not e n j o v the same p o t e n t i a l b e n e f i t s of e x p a n d e d f o r e i g n b a n k i n g activity. I feel s t r o n g l y th at a S t at e should be p e r m i t t e d to invite a b r an ch of a f o r e i g n b a nk into its b a n k i n g c o m m u n i t i e s realis ti c w a y in w h i c h if this is the onlv f o r e ig n bank e n t r y is l i k e l y to take place. R e c e n t p a t t e r n s of fo r e i g n b a n k i n g e x p a n s i o n in the U. S. support the c o n t e n t i o n that regional fi n a n c i a l c e n t e r s w o u l d be h u rt by a ban on i n t e r s t a t e o p e r a t i o n s by f o r e i g n banks. 268 f o re ig n a g e n ci es , branch es , le nd in g c o m p a n i e s o p e r a t i n g subsidiaries, Of the and c o m m e r c i a l in the U. S. as of Marc h 31, 1978, only 25, or nine pe rc en t, w e r e lo ca te d o u t s i d e the m o n e v m a r k e t 8 - c e n t e r s of N e w York, C h i c a g o , Los A n g e l e s and San Fran ci sc o. T h e s e 25 o f f i c e s are l o c a t e d P u e r t o Rico, - in M a s s a c h u s e t t s , the V i r g i n Is la nd s, F l o r i d a , G e o r g i a , T e xa s, H a w a i i , O r e g o n and 'iashington. S e v e n t e e n of the 25 o f f i c e s lo c a t e d o u t s i d e the four p r i n c i p a l m o n e y m a r k e t c e n t e r s are d i r e c t b r a n c h e s of f o r e i g n b a n k s and six are agencies. T h i s s u g g e s t s that b r a n c h e s and a g e n c i e s are the m a j o r h o o e for increased these centers. Moreover, foreign banking as i n d i c a t e d involvement outside in the table, d i r e c t b r a n c h e s h a v e b e e n the f a s t e s t g r o w i n g o r g a n i z a t i o n a l foreign banking in the U n i t e d St ates, bo th f o r m of in n u m b e r and total assets. TABLE Growth in N u m b e r of O f f i c e s and Si ze of F o r e i g n B a n k i n g O p e r a t i o n s in the U n it ed S t a t e s November M a rc h 1978 Total Number Assets (bill i o n s ) Total Assets (bill i o n s ) 1972 Number $96 268 $24.3 104 A g e n c i e s and a g r e e m e n t corporations 30 122 13.6 50 Branches 45 103 5.3 26 S u b s i d i a r ies 19 38 4.1 25 2 5 1.3 3 All f o r e i g n i n s t i t u t i o n s Commercial lending companies The 25 fo re ig n i n s t i t u t i o n s o u t s i d e the b a n k i n g c e n t e r s are o p e r a t e d b y f o r e i g n b a n k i n g o r g a n i z a t i o n s t h at are o a r t of -9- 14 f o r e i q n b a n k i n g " f a m i l i e s “ th at a l so h a v e f o r e i g n b a n k i n g offices in the S t a t e s of N e w York, C a l i f o r n i a or Illinois. This im pl ie s t h at the t e n d e n c y is to g e o g r a p h i c a l l y d i v e r s i f y foreign b a n k i n g o p e r a t i o n s on ce b a n k i n g o p e r a t i o n s ha v e a l r e a d y been e s t a b l i s h e d in the p r i n c i p a l ce nt er s. le b e l i e v e this m u l t i - s t a t e d i v e r s i f i c a t i o n s h ou ld be p e r m i t t e d to continue. 4e t h e r e f o r e s t r o n g l y s u o n o r t the p r o v i s i o n s of S e c t i o n 5(a) as p a s s e d by the House. N o n b a n k i n g A c t i v i t i e s of F o r e i g n Banks S e c t io n 8 of H. R. 10899 s u b j e c t s f o r e i g n banks' agencies, branches, commercial domestic le n d i n g c o m p a n i e s and their a f f i l i a t e s to the p r o v i s i o n s of the B a n k H o l d i n g C o m p a n y Act of 1956 as a m e n d e d activities in 1970. Ho we ve r, domestic nonbanking (including securities activities) or ac q u i r e d p r io r to M a v 23, 1977 Those a c a u i r e d after which were commenced are g r a n d f a t h e r e d p e r m a n e n t l y . that d a t e and w h i c h are p r o h i b i t e d for d o m e s t i c a l l y — o w ne d bank h o l d i n g c o m p a n i e s m u s t be d i v e s t e d bv December 31, 1985. Under an e a r l i e r v e r s i o n of the bill, d i f f e r e n t rules w o ul d h a v e a p p l i e d to the s e c u r i t i e s a c t i v i t i e s of fo reign banks. D i v e s t i t u r e by D e c e m b e r 31, 1985 wo ul d h a v e be en r e q u i r e d of all s e c u r i t i e s a c t i v i t i e s w h e t h e r c o m m e n c e d af te r the g r a n d father d a te or not, e x c e p t t h a t f o r e i g n banks' a f f i l i a t e s co ul d h a v e c o n t i n u e d to e n g a g e t r a n s a c t i o n s for jur isdiction. securities in s e c u r i t i e s i n d i v i d u a l s and o r g a n i z a t i o n s o u t s i d e U. S. - 10 - D u r i n g the H o u s e c o n s i d e r a t i o n of this bill, a r gu ed that t h e s e e a r l i e r r e s t r i c t i o n s on s e c u r i t i e s a c t i v i t i e s w e r e b o th d i s c r i m i n a t o r y and a n t i c o m p e t i t i v e . they w e r e u n f a i r it was to f o r e i g n banks, It w a s felt that si nc e l a r q e U. S. b a n k s e n q a g e in s u b s t a n t i a l s e c u r i t i e s a c t i v i t i e s abroad. Moreover, it was feared th at su ch r e s t r i c t i o n s w o u l d p r o m p t r e t a l i a t i o n a g a i n s t those U. S. b a n k s w h i c h do e n g a g e op er a t i o n s . Also, in e x t e n s i v e f o r e i g n s e c u r i t i e s it w a s ar gu ed that bv l e s s e n i n g c o m o e t i t i o n in the U. S . , the c o s t of u n d e r w r i t i n g m i g h t be i n c r e a s e d and the issuing of ne w s e c u r i t i e s m a d e m o r e d i f f i c u l t . Regional stock e x c h a n g e s f e lt th at t h ev w o u l d su ff er s u b s t a n t i a l r e v e n u e losses. I be l i e v e it is fairer and less d i s r u o t i v e to g r a n d f a t h e r all e x i s t i n g s e c u r i t i e s o p e r a t i o n s of f o r e i g n b a n k s as the bill p r e s e n t l y does. T h i s m i n i m i z e s any l i k e l i h o o d of r e t a l i a t i o n and e l i m i n a t e s the h a r d s h i p of w i n d i n g d o w n o o e r a t i o n s on those i n s t i t u t i o n s w h i c h h a v e o l a y e d by the rule s of the ga m e to date. A l t h o u g h th is a p o r o a c h m a y be at o d ds w i t h the c o n c e p t of n a t i o n a l t r ea tm en t, the p r a c t i c a l e f f e c t w o u l d be m i n i m a l a i ve n the li mited s c op e of e x i s t i n g f o r e i g n ba n k s e c u r i t i e s oo er a t i o n s . Accordingly, I s t r o n g l y favor the p e r m a n e n t g r a n d f a t h e r i n g of all e x i s t i n g s e c u r i t i e s a c t i v i t i e s of f o r e i g n b a n k s now contained in S e c t i o n 8. D e p o s i t I n s u ra nc e C o v e r a g e As the FD IC h a s i n d i ca te d in p r e v i o u s s t a t e m e n t s , we have had se r i o u s r e s e r v a t i o n s a b ou t the n e c e s s i t y and d e s i r a b i l i t v - 11 - of making de posit insurance coverage available for domestic branches of foreign banks. These reservations arise from a concern that insufficient legal and regulatory controls could be olaced on branch ooerations that are not legally separate from those of the parent bank. 1. At least five problems are involved: Directors of the foreign bank are not usually subject to U. S. jurisdiction, and d omestic branch personnel essential to explain certain transactions can be transferred beyond the reach of U. S. authorities. Also, essential records ma y be d i fficult to reach if they are kept at the head office or at branches in other countries. 2. The domestic branch may be subjected to requirements under foreign law or to political and economic decisions of a foreign government which conflict with domestic bank regulatory policies. 3. A d m i nistrative enforcement p r o c eedings initiated by domestic regulatory authorities against domestic branch personnel may be frustrated or nullified as a result of lack of jurisdiction over the foreign bank's head office and head office personnel. 4. Many foreign banks are permitted under the law of their headquarter's country to engage in business activities abroad which would not be per mitted to banks chartered in this country. - 12 - Such foreiqn activities could give rise to antitrust, conflict of interest, and other legal oroblems under U. S. law. 5. In the event of insolvency of a foreign bank, it is possible that: assets could be easily and quickly shifted from the U. S. branch and out of U. S. jurisdiction, while deposits could be shifted to the U. S. branch; legal obstacles and transactions involving other offices of the foreign bank mig h t prevent FDIC from obtaining the usual subrogation of claims it normally gets from depositors in failed U. S. banks before making payment. Even if adequately subrogated, FDIC's aggregate claim in the failed b a n k ’s receivership estate might be jeopardized by foreign laws and procedures; — creditors with claims against other offices of the failed bank — especially banks holding deposits of the U. S. branch — could attempt offsets against assets in the U. S. or seek preference based on foreign law. In addition, deposit insurance protection is largely unnecessary insofar as foreign banks* d omestic branches engage in '‘wholesale** international banking activities. Moreover, if foreign banks wish to expand their operations in this country -13into the " r e t a i l “ banking business with the benefit of Federal deposit insurance, they presently have an ootion to do so under existing law through a domestically incorporated banking subsidiary in those States in which State law permits. Of course, in that event most of the problems outlined above are less important. Notwithstanding our concerns, a number of interested parties, including the Federal Reserve System, have strongly argued that some form of deposit insurance coverage should be available to the U. S. branches of foreign banks. Accordingly, an earlier version of the bill contained a surety bond or pledge of assets method of providing protection similar to, but in lieu o f , deposit insurance coverage. In our opinion this solution was less than satisfactory for a number of reasons. W h i l e some of the risks listed above could be mitigated by imposing various conditions and restrictions upon the foreign bank, the value of such requirements depends ultimately upon the ability to physically enforce such requirements by exercising quasi in rem jurisdiction over the foreign bank's domestic assets and/or obligors. Short of a dollar-for-dollar pledge of assets to back up 100 percent of the branch's domestic deposits, efforts to impose such requirements as a substitute for deposit insurance could turn out to be of limited value. In response .to the .view that some form of deposit insurance coverage is necessary, the FDIC recommended a modified version of the surety bond and pledge of assets approach which would be coupled with the granting of regular deposit insurance for the -14domestic deposits of ü . S. branches of foreign banks. 4e recommended that such deposit insurance could be made ava i l able on an optional basis along the following lines: SEC. 6(a) Any branch may become an insured bank under the Federal Deposit Insurance Act (12 U.S.C. 1811-31b) with respect to its domestic deposits, as defined by regulation by the Board of Directors of the Federal Deposit Insurance Corporation, as if such branch were a State nonmember bank. Upon so becoming an insured bank, a Federal branch shall thereafter be treated as if it were a national member bank, and any other branch shall thereafter be treated as if it were a State member bank, for purposes of applying the Federal Deposit Insurance Act to such branch's domestic activities (except that any such branch shall continue to be treated as a State nonmember bank for purposes of the first sentence of Section 8(a) of that Act p r o viding for voluntary termination of insured bank status). Any branch which becomes an insured bank shall maintain with the Federal Deposit Insurance Corporation, or as the Corporation may otherwise direct, a surety bond or a pledge of assets in such amount and subject to such conditions and rules as the Corpo r a t i o n may prescribe for the purpose of providing some additional protection to the deposit insurance fund against the additional risks entailed in insuring the domestic deposits of a foreign bank whose activities, assets and personnel are in large part outside the j u r i s d i c t i o n of the United States. In pres c r i b i n g such rules, however, the C o r p oration shall, to the m a x imum extent it considers appropriate, endeavor to avoid imposing requirements on such branches which would place them at an undue c ompetitive disadvantage vis-a-vis d omestic a l l y incorporated banks with which they compete. (b) Paragraph (a) of this section shall take effect 18Ô days after en a c t m e n t hereof. 4 ithin 90 davs after enactment and as may be appropriate thereafter, the C o r p o r a t i o n shall submit to the Congress its recommendations for amending the Federal Deposit Insurance Act so as to enable the Corporation to implement the provisions of this section in a manner fullv consistent with the purposes of that Act. -15If foreign banks' domestic branches chose deposit insurance coverage under such a provision, they would become subject to a much less onerous form of surety bond and pledge of assets requirement, which would be designed not to be a substitute for deposit insurance but rather merely to give the Federal deposit insurance fund a measure of protection to compensate for the a d d i tional risks to which it would be subjected, as described above, by virtue of providing regular deposit insurance for the domestic deposits of an entity operating for the m ost part outside of U. S. jurisdiction. Domestic depositors would be fully protected up to $40,000 just as are depositors in domestic insured banks. This approach of providing regular deposit insurance on an optional basis in conjunction with a modified form of the surety bond and pledge of assets requirement seems preferable from the Corporation's standpoint to the mandatory coverage required in Section 6 of H. R. 10899. It would out foreign banks on as nearly an equal basis as possible with domestic banks while at the same time affording appropriate supplemental protection to the deposit insurance fund roughly commensurate with the added degree of risk included in insuring foreign entities. It will be noted that the provision suggested above would give the FDIC authority to define "domestic deposits" for purposes thereof. It is contemplated that that term would be defined to include deposits of individuals who are citizens or residents of the United States and companies having an - 16 - appropriate business nexus with this country. It is likely also that such “domestic d e p o s i t s “ would be required to be payable only in the United States, and a requirement might be included that the deposit contract provide that U. S. law govern the depository relationship. Other criteria m i g h t also have to be considered from time to time in d etermining w h a t would be an appropriate insurable “domestic deposit." i e w o uld g r e atly prefer the more flexible approach of defining this term by regulation rather than attempting to do so by statute. '4e support optional deposit insurance for foreign banks' U. S. branches because we believe it is prefe r a b l e to accord such branches, insofar as possible, the same options afforded domestic banks under Federal law. Comparable treatment as to deposit insurance would require permitting foreign banks to operate State-licensed branches in the U. S. w i t h o u t obtaining deposit insurance if such is permitted by State law. Also, from the standpoint of State governments, we believe each State should have the option of permitting foreign banks to operate branches in such State without Federal d e p osit insurance, subject to such limitations and requirements as State law may provide. At present, for example, New York is among those States which permit foreign banks to establish d o mestic branches without obtaining Federal deposit insurance, although such branches are subject to various requirements under State law designed to -17protect depositors and creditors of such branches. Indeed, there has been no case to our knowledge where any loss has been suffered by depositors or creditors of a U. S. branch of a foreign bank because of the foreign bank's insolvency. of Intra Bank in October 1966, Even as to the failure it is our understanding that all depositors and creditors of Intra Bank's N e w York branch were paid within three years after the branch was closed. Subsequent to the Intra Bank failure, New York law was amended to give added protection to depositors and creditors of branches of foreign banks operating in New York. While we have no strong objection to requiring Federal deposit insurance for Federal branches of foreign banks licensed by the Comptroller of the Currency in conjunction with a surety bond/pledge of assets requirement of the type contained in Section 6, we believe that Federal law should not mandate deposit insurance for State-licensed branches of foreign banks. Rather, we believe any requirement that State-licensed branches be federally insured should be left to State law. As yo u know, California presently imposes such a requirement if such a branch accepts domestic deposits. One alternative the Congress might want to consider is to require uninsured branches to make that fact known to depositors. This would, of course, be a departure from national treatment since there is no such requirement for domestically chartered banks which do not have deposit insurance. -18Such an approach would nevertheless be a poss i b l e alterhative to m a ndatory depo s i t insurance for foreign banks' U. S. branches. tfhile we w ould prefer to see Section 6(a) and (b) of the bill modified to make deposit insurance available to d o mestic branches of foreign banks on an optional rather than a man d a t o r y basis, we have no objection to the lengthy technical revisions in Section 6(c). fie have reviewed these pr o v i s i o n s at the staff level and worked with House Subcommittee staff in trying to perfect them from the technical standpoint. If your S ubcommittee should not be inclined to take the optional approach to dep o s i t insurance for dome s t i c branches of foreign banks, we would strongly recommend that, at a minimum, language be added to Section 6 which wou l d give the FDIC authority to waive the requirement for FDIC coverage if it determines that the domestic depositors of a foreign bank's U. S. branch would be covered by a foreign deposit insurance or guarantee program, or by an undertaking or agreement of a foreign governmental entity, which in the FDIC's opinion gives p r otection to U. S. depositors of at least similar quality and extent as wou l d FDIC coverage. If your Subcommittee should so desire, we wou l d be happy to work with you in developing statutory language appropriate for this purpose. Imposition of Reserve Requirements and Interest Rate Controls Section 7(a) of H. R. 10899 subjects all branches, agencies and commercial lending companies controlled by foreign banks whose -19w o r l d w i d e a s s e t s e x c e e d one b i l l i o n d o l l a r s ments and d e p o s i t i n t e r e s t rate c o n t r o l s R e se rv e on m e m b e r banks. Board to p r e s c r i b e fo re ig n b r a n c h e s , the cl e a r i n g , Section to the re se rv e re quire imposed by the Fe deral 7(b) D e r m i t s the Federal R e s e rv e rules and r e g u l a t i o n s g o v e r n i n g the ac ce ss of a g e n c i e s and c o m m e r c i a l l e n d i n g c o m p a n i e s to d i s c o u n t and a d v a n c e f a c i l i t i e s of the Fe deral R e s e r v e Sy stem. While the bill does not require foreign institutions to become members of the Federal Reserve System, these two p r o visions of Section 7, along with the remaining provisions in the Section, impose upon foreign branches, agencies and commercial lending companies the obligations and benefits of Federal Reserve membership. this bill, in effect, For all practical purposes, reauires Federal Reserve membership, even though it is not stated as such. In my June 20, 1977 testimony before your Subcommittee, I indicated that, although I have an open mind with respect to the question of universal reserve requirements, I do not believe that the issue of reserve requirements for nonmember institutions should be dealt with on a piecemeal basis. Rather, it seems to me that the relationship to the Federal Reserve System of all banking institutions which choose not to join the Federal Reserve System should be studied in a systematic and unified fashion. Such a study is, it seems to me, the most effective way to respond to the Federal Reserve's concern with - member sh ip attrition. proposals contained 20 - Aoplying this to the reserve requirement in H. R. 10899 would dictate that the relationship of foreign banks, which choose to operate in the United States in one form or another, to the Federal Reserve System should be dealt with in the context of a broader solution to the question of membership. The approach I suggest is, of course, consistent with the principle of national treatment or “nondiscrimination." conversely, to require, And, in effect, Federal Reserve membership for only those domestic affiliates of foreign banks having total assets of more than one billion dollars would represent a d e v i a tion from that principle. Yet, I recognize full well that the priniciple of national treatment cannot be viewed as an absolute. indicated at the outset, As I that concept should certainly give way before overriding public policy considerations which arise out of special circumstances. In this regard, the Federal Reserve has argued rather strenuously that the ope r a tions of relatively large foreign banking institutions pose just such a case and this mandates a departure from the principle of national treatment. The Federal Reserve has pointed out that from a monetary control standpoint, the operating characteristics of branches and agencies of foreign banks are noteworthv because these institutions generate a substantial portion of their funds from - 21 - overseas sources, primarily from the parent or directly related instituti o n s T h e s e funds are not subject to Federal Reserve Regulations D or M. The Federal Reserve fears that this may result in a cost advantage for large foreign institutions vis-a-vis their large U. S. competitors who are members of the Federal Reserve System.’ More importantly, it is feared that lack of such direct Federal Reserve controls over reserves could impede the effective implementation of m o netary policy in the face of massive and precipitous transfers of funds. Although both these factors represent real concerns, at least two factors suggest that these problems are not sufficiently serious at this time to override the principle of national t r e a t ment in this area. It is true that foreign banking activity in the U. S. has grown considerably in recent years; yet its scale remains relatively small. entities, The assets of all foreign banking including State-chartered banking subsidiaries, are less than eight percent of total commercial bank assets as of December 31, 1977. Moreover, the Federal Reserve has stated in previous testimony that foreign banking institutions in the U. S. generally have complied with a Federal Reserve Board request to maintain reserves on increases in net liabilities from abroad which parallel requirements under Regulations D and M. Although the operations of foreign banks could conceivably pose unique problems for the central banker, we do not believe that these potential problems are yet of sufficient magnitude - 22 - to pose a real risk to the stability of our economy. At the same time, I recognize fully that the auestion of whether to depart from the principle of " n o n d i s c r i m i n a t i o n “ on the matter of reserve requirements is a knotty issue on which reasonable men may differ. ith respect to the matter of deposit interest rate controls, we fully support the notion that foreign branches, agencies, and commercial lending companies should be subjected to such controls. As drafted the legislation would, however, vest all such authority in the hands of the Federal Reserve System. Such an approach is appropriate if the Congress chooses, in effect, to reauire mandatory me m b e r s h i p in the Federal Reserve System. However, if the Congress chooses to maintain the ODtion of nonmembership, then administration of such controls vis-a-vis nonmember foreign banking institutions should be vested in the FDIC as it is p r e s ently with respect to nonmember d omestic institutions.
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