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FOR RELEASE UPON PRESENTATION

re

PR-56-77 (7—19—77)J)

o
Statement on
7325, 95th Congress, a B ill "To provide fo r
Federal regulation o f p a rticip a tion by foreign banks
in domestic and fin an cial markets."

H. R.

Presented to
Subcommittee on Financial In stitu tion s
Supervision, Regulation and Insurance^
Committee on Banking, Finance and Urban A ffa ir s ..,
House o f Representatives

by
O

George A. LeMaistre
Chairman, Federal Deposit Insurance Corporation

July 19, 1977,

FEDERAL DEPOSIT INSURANCE CORPORATION, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429



•

202-389-4221

M r. Chairm an, I w elcom e the opportunity to testify on issu es
raised in H. R. 7 325, the International Banking A ct o f 1977.
The efforts o f the House Banking, C urrency and Housing
Com m ittee and this Subcom m ittee in this area have been tim ely and
appropriate in light o f the rapidly growing p re se n ce o f the operations
o f foreig n banks in the United States. A ccord in g to statistics provided
by the F ed era l R e s e rv e , fr o m N ovem ber 1972 to the end o f 1976,

the

num ber o f U. S. banking institutions owned by fo re ig n banks in crea sed
fr o m 104 to 202 and their total U. S. assets m o re than tripled fr o m
$24 billion to $76 b illion . Since 1965, there has been alm ost a tenfold
in cre a s e in their a sse ts.
F oreign banks presently operate in the United States through
agen cies, d ire ct bran ch es, su bsidiaries and c o m m e r cia l lending c o m ­
panies.

C urrently, these foreig n banking organizations are located

in eight states plus P uerto R ico and the V irgin Islands.

H ow ever, 92

percen t o f all foreig n banking o ffic e s in the U, S. are concentrated in
New Y ork, C alifornia and Illin ois.
In term s of both num ber o f o ffic e s and amount o f a sse ts,
agencies a re the dominant fo rm o f fo re ig n banking in the U. S.
o f D ecem b er

As

1976, 91 agencies with approxim ately $30 billion in

assets w ere operating in New Y ork, C alifornia, G eorgia and Hawaii.
A gen cies operate under state lice n se s and are not perm itted to hold
deposits but th eir cu stom ers m ay maintain cre d it balances which are
tech nically due to the account o f the hom e o ffic e .




D irect branches are the m ost rapidly growing fo r m o f fore ig n
banking in the United States.

T here w ere 70 branches with assets totalling

$28 b illion in New Y ork, Illin ois, Washington, O regon, M assachusetts,
P uerto R ico and the V irgin Islands.

B ranches are lice n se d under state

law and are perm itted to hold both fo re ig n and dom estic d ep osits. These
deposits a re cu rren tly not eligible fo r F ed era l deposit in su ran ce.
F oreig n banks owned 36 sta te -ch a rte re d su bsidiaries in New Y ork,
C alifornia, Illin ois and P uerto R ico, with assets o f $16 billion .
sid ia ries m ay b ecom e m em b ers o f the F ed era l R e se rv e System .
ch osen to do so.

Such sub­
F ive have

A ls o , fo re ig n banks m ay apply for national charters for

bank su b sid ia ries; how ever, the requirem ent that all national bank d irectors
be U .S . citizen s has m ade this unattractive.

Bank subsidiaries of foreign

banks are subject to the Bank Holding Company A ct of 1956, and must maintain
FDIC in surance cov era g e .
F ive co m m e r cia l lending corp ora tion s with $1 .9 b illio n in assets
w ere lice n se d to operate in New Y ork.

In addition to having a wide

range o f conventional banking p ow ers, these entities m ay engage in som e
investm ent banking.
F inally, a total o f 21 se cu ritie s affiliates w ere lice n se d to operate
in the U. S. as o f 1975,

T hese fir m s are engaged in underwriting and

d ire c t sale o f s e cu ritie s, a ctivities that are prohibited fo r d om estic
banks by the G la ss-S teaga ll A ct.
in New Y ork State.




M ost o f these affiliates are located

- 3 -

If a fo re ig n bank ch o o se s to operate in this country through a
d om estica lly in corp ora ted banking subsidiary, its operations h ere are
gen era lly su bject to the sam e rules under the Bank Holding Company
A ct that govern the U. S. a ctivities o f d om estic bank holding com p an ies,
with lim ited exceptions involving nonbanking activities perm itted by
F ed era l R eserv e regulations issu ed under Section 4 (c)(9) o f that A ct.
H ow ever, to the extent that a fo re ig n bank operates d om estica lly through
bran ch es, a g en cies, o r c o m m e r c ia l lending com p an ies, it is not subject
to certa in re strictio n s and requirem ents applicable to dom estic banking
organ izations - - p rin cip a lly those which fo rb id operating deposit-taking
o ffice s in m o r e than one state and operating affiliated com panies engaged
in a se cu ritie s b u sin ess.
The stated goals o f this leg isla tio n are tw ofold:

The fir s t is

to provid e a system o f fe d e r a l regulation o f the d om estic activities o f
fo reig n banks b eca u se o f the ro le these institutions play in d om estic
financial m ark ets, their im pact on the d om estic and fo re ig n co m m e r ce
o f the United States and beca u se m o st fo re ig n banks operate in m ore
than one state.

The second goal is national treatm ent o f fo re ig n banks.

In other w ord s, to the extent p o s s ib le o r ap propriate, fo re ig n and
dom estic banks operating within the United States should be treated
equally.
It seem s to m e that as a gen eral p rin cip le , the goal o f "national
treatm ent" o r "n on d iscrim in a tion " in the regulation o f fo re ig n e n terp rises







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operating in the United States is highly d e sira b le and should be pursued
provid ed that its im plem entation is fe a sib le and adherence to it would
not in te rfe re with som e other im portant public p o licy o b je ctiv e .

Although

som e have ob jected to the national treatm ent approach on the grounds that
it w ill prom pt fo re ig n cou n tries to retaliate, I am persuaded by G overnor
G ard n er's view , ex p re sse d when he was Deputy S ecreta ry of the Treasury,
that retaliation by fo re ig n governm ents is not

. . supported by the practical

rea lities o f the m ark etp la ce. "
S im ilarly, I am in com p lete agreem ent with the notion that, consist­
ent with ou r fra m ew ork o f bank su p ervision , U. S. operation s o f fo re ig n
banks should be subject to fe d e ra l regulation and su p ervision .

In addition

to argum ents based on fa irn e s s to d om estic co m p e tito rs, a strong ca se
can be m ade f o r the p rop osition that the sp ecial c h a r a c te ristic s o f foreign
bran ch es and agen cies give r is e to a set o f co n ce rn s which is p ecu liarly
fed era l in nature and p a rticu la rly the p ro v in ce o f the F ed era l R e se rv e
System .
F o r these rea so n s, I support the essen tial thrust o f the le g is la ­
tion b e fo re the C om m ittee and, indeed, strongly en d orse m any o f its
p ro v is io n s .

A t the sam e tim e, I would be le s s than candid if I did not

e x p ress reserv a tion s about certa in asp ects o f the b ill as drafted and
state m y own view s as to p re fe ra b le p o licy c h o ic e s .

In som e re sp e cts,

it seem s to m e that the b ill its e lf deviates fr o m the p o licy o f n on dis­
crim in ation without an overrid in g reason fo r doing so.

In the discu ssion

|

- 5 -

which fo llo w s , I shall outline the F D IC 's view s with re sp e ct to six of
the m a jo r fa cets o f this legislation .

P ro v is io n o f a F ed era l C hartering Option

Section 4 o f the b ill would p rovid e a fe d e ra l option f o r dom estic
branches and agencies o f fo re ig n banks by authorizing the C om p troller
to approve their establishm ent in states w here the fo re ig n bank does
not already operate a branch o r agency under state law and where state
law does not proh ibit the establishm ent o f a fo re ig n branch o r agency.
These bran ch es and agencies w ill be regulated and su p ervised like
national banks to the extent appropriate.

In addition, Section 2 o f the

b ill would significantly lib e r a liz e requirem ents in the National Bank
A ct and the Edge A c t restrictin g National Bank and E dge A ct c o r p o r a ­
tion d ire c to rs to U. S. citizen s.

C onsistent with the p rin cip le o f

nondiscrim ination, these p rov ision s would afford fo re ig n institutions
the ben efits o f ch o ice im p licit in ou r dual system .

I h eartily endorse

these changes.

P roh ibition on Interstate Banking O perations by F oreig n Banks

S ection 5(a) of the b ill prohibits in terstate branching by fo re ig n
banks unless national banks are a cco rd e d the sam e p riv ile g e .

This sub­

section fu rth er p rovid es that establishm ent o f agency o r co m m e r cia l
lending com pany operation s outside the hom e state selected by a fo re ig n
bank requ ires the approval o f a state in which it d e s ir e s to op erate.




-

6

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Thus, w hile in terstate operation s are perm itted to agen cies and c o m ­
m e r c ia l lending com p an ies, the p ra ctica l e ffe ct o f the p ro v isio n is to
r e s tr ic t d om estic su b sid ia ries and d ire c t branches o f fo re ig n banks to
only its "hom e state. n
The thrust o f these p ro v isio n s is , o f c o u rs e , to apply the p rin ­
cip le o f national treatm ent, as em bodied in the M cFadden A ct, to the
U .S. bran ch es o f fo re ig n banks.

It is argued, and there is perhaps som e

validity to the argum ent, that fo re ig n banks enjoy a com p etitive advantage
in that they can conduct m u lti-sta te dep osit banking operation s. C ertainly,
w hatever the im pa ct on the ability o f a fo re ig n bank to com p ete, it should
be acknowledged that fo re ig n banks do enjoy a p riv ile g e that many U. S.
banks co v e t d ea rly.
H ow ever, it should a lso be noted that fo re ig n banks cu rren tly
op erate banking-type operation s in only eleven U. S. states and t e r r i­
to rie s w hile in terstate operation s o f our la rg e bank holding com panies
extend into alm ost every state.

T hese in terstate activities include

con su m er and sales finan ce, c o m m e r cia l lending, m ortgage banking,
selling and reinsuring c re d it related in su ran ce, lea sin g, com puter
s e rv ic e s and providing venture capital to b u sin ess.

U .S. banks m ay

a lso establish Edge A ct co rp o ra tio n s, loan production o ffic e s and
represen tative o ffic e s in states other than th eir hom e state.
A bsent som e overrid in g public in terest, notions o f equity and
sym m etry would lead one to adopt the co u rs e p rop osed in the b ill.

How­

ev er, in m y judgm ent there is an o v errid in g public in te re st which leads




- 7 -

m e to strenuously opp ose application o f the p rin cip le o f national treatm ent
in this context.
Notwithstanding the p rov ision s under Sections 2 and 4 which p erm it
foreig n banks to apply fo r a federal ch a rter in any state which does not
prohibit fo re ig n banking under state statute, it is unlikely that a fo re ig n
bank w ill want to m ake its in itial entry and single location o f operations
in the United States outside New Y ork, C alifornia o r Illin ois.

As a

p ra ctica l m atter, if interstate banking opportunities are fo r e c lo s e d fo r
foreig n banks, oth er states would find it difficu lt to attract fo re ig n banks
and, hence, would not reap ben efits stem m ing fr o m the activities o f these
banks - - benefits that m ay w ell a ccru e to the lo c a l econom y.
One should not m in im ize the value o f fo re ig n banking growth to the
banking com m unity as a w hole.

In an in terview published in the June 1977

issu e o f E uro m on ey, Paul V olck er, P resid en t o f the F ed era l R e se rv e Bank
o f New Y ork, stated that
Bankers in gen eral - those o f the New Y ork m entality anyway hold that additional com petition generates additional bu sin ess.
To the extent that it supports the growth o f New Y ork as an
international banking cen tre it 's going to be good fo r everybody.
M ore o f the w o r ld 's bu siness w ill be focu sed h e re , and the m ore
effective and efficien t this m arket is , w e 'll all be able to make
som e m oney out o f it. B etter h ere than elsew h ere.
I see no reasons why other c itie s in other states should not enjoy the sam e
potential benefits o f expanded fo re ig n banking activity.

I fe e l strongly that

a state should be perm itted to invite a branch o f a fo re ig n bank into its
banking com m unities if this is the only re a listic way in which fo re ig n bank
entry is lik ely to take place.




-

8

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R ecent patterns o f fo re ig n banking expansion in the U. S. support
the contention that regional financial cen ters m ay be hurt by the b ill.

Of

the 202 fo re ig n a g en cies, bran ch es, su b sid ia ries, and co m m e rcia l lending
com panies operating in the U. S. as o f D ecem b er

1976, only 16, o r 8 percent,

w ere located outside the m oney m arket cen ters o f New Y ork, C hicago, L os
A ngeles and San F ra n c is c o .

These 16 o ffic e s are located in M assachusetts,

the V irgin Islands, P uerto R ico , G eorgia, T exas, Hawaii, O regon and
Washington.

Thirteen o f the sixteen o ffic e s located outside the fou r p rin ­

cipal m oney m arket cen ters are d ire c t branches o f fo re ig n banks.

This

suggests that branches are the m a jo r hope fo r in cre a se d fo re ig n banking
involvem ent outside these ce n te rs.

M o re o v e r, as indicated in the table,

d ire c t branches are the fa ste st growing organizational fo rm s of fo re ig n
banking in the United States, both in num ber and total a sse ts.
TABLE
Growth in Number o f O ffices and Size o f F oreign Banking
O perations in the United States
D ecem b er 1976

N ovem ber 1972

Total
A ssets
(billion s)

Number

$ 7 5 .8

202

$ 2 4 .3

104

A gen cies

30 .5

91

13.6

50

B ranches

27.7

70

5.3

26

S ubsidiaries

15.7

36

4.1

25

1.9

5

1 .3

3

A ll fo re ig n institutions

C om m ercia l lending
com panies




Total
A sse ts
(billion s)

Number

- 9 -

Nine o f the ten fo re ig n banking organ izations that do operate out­
side m oney m arket cen ters a re part o f fo re ig n banking " fa m ilie s " that
a lso have fo re ig n banking o ffic e s in the States o f New Y ork, C alifornia
and Illin ois.

This im p lie s that the tendency is to geograp h ically d iv e rs ify

fo re ig n banking operation s on ce banking operation s have already been
established in the p rin cip a l ce n te rs.

While this m u lti-sta te d iv e r s ific a ­

tion is grandfathered under the p rop osed b ill, the p rov ision s o f Section
5(a) that requ ire a fo re ig n bank to se le ct a hom e o ffic e state would d is ­
cou rage s im ila r d iv e rsifica tio n in the future.

Nonbanking A ctiv itie s o f F oreig n Banks

Section 8 o f H. R. 7325 subjects fo re ig n banks' d om estic a g en cies,
bran ch es, c o m m e r cia l lending com panies and their affiliates to the p r o v i­
sions o f the Bank Holding Company A c t o f 1956 as amended in 1970.
G enerally, nonbanking a ctivities which w ere com m en ced o r acqu ired p r io r
to D ecem b er 3, 1974 a re grandfathered indefinitely.

Those acqu ired after

that date and which are prohibited fo r d om estic-ow n ed bank holding c o m ­
panies m ust be divested by D ecem b er 31, 1985.

D ifferent rules apply,

how ever, fo r the s ecu rities a ctivities o f fo re ig n banks.

Section 8 o f the

b ill would requ ire divestitu re by D ecem b er 31, 1985 o f all secu ritie s
activities whether com m en ced after the grandfather date o r not.

It would,

h ow ever, p erm it fo re ig n banks' s e cu ritie s affiliates to continue to engage
in secu rities transactions fo r individuals and organ izations outside U. S.
ju risd iction .




-

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When the b ill was con sid ered by the C om m ittee la st y e a r, it was
argued that the p rov ision s applying to s e cu ritie s activities are both d is ­
crim in a tory and anticom petitive.

It was fe lt that this p ro v isio n is unfair

to fo re ig n banks, sin ce la rg e U. S. banks engage in substantial secu rities
activities abroad.

M o reov e r, it was fe a re d that this legisla tion would

prom pt retaliation against those U. S. banks which do engage in extensive
fo re ig n s ecu rities op eration s.

A ls o , it was argued that by lessening

com petition in the U. S . , the c o s t o f underwriting m ight be in crea sed
and the issuing o f new secu ritie s m ade m o re d ifficu lt.

Regional stock

exchanges fe lt that they would su ffer substantial revenue lo s s e s .
Although I understand fu lly the rationale o f the b ill as drafted,
I b eliev e that it would be fa ir e r and le s s disruptive to grandfather all
existing s ecu rities operation s o f fo re ig n banks.

To do so would m in im ize

any likelih ood o f retaliation and would elim inate the hardship o f winding
down operation s on those institutions which have played by the rules o f
the gam e to date.

Although this approach would be at odds with the co n ­

cept o f national treatm ent, the p ra ctica l effect would be m inim al given
the lim ited scop e of existing fo re ig n bank secu ritie s operation s.
A ccord in g ly , I would fa v o r perm anent grandfathering o f all
existing secu rities activities o f fo re ig n banks.

D eposit Insurance C overage

As m y p r e d e c e s s o r s Frank W ille and R obert Barnett have in d i­
cated in previou s statem ents, the FDIC has had seriou s reserva tion s




11

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about the n e ce ssity and d esira b ility o f making deposit insurance cov era g e
available fo r d om estic branches o f fo re ig n banks.

These reservation s

a ro s e fr o m con cern that in sufficient lega l and regulatory co n tro ls could
be placed on operation s which w ere not leg a lly separate fr o m their
parent.

At lea st fiv e p rob lem s w ere noted:
1.

D ire cto rs o f the fo re ig n bank are not usually subject to
U. S. ju risd iction , and d om estic branch personn el essential
to explain certain transactions can be tra n sfe rre d beyond
the reach o f U. S. au thorities.

A ls o , essential re co rd s

m ay be d ifficu lt to reach if they are kept at the head o ffic e
o r at branches in other cou n tries.
2.

The dom estic branch m ay be subjected to requirem ents
under foreig n law o r to p olitica l and econ om ic d ecision s
o f a fo re ig n governm ent which co n flict with dom estic bank
regulatory p o lic ie s .

3.

A dm inistrative enforcem ent proceedin gs initiated by
dom estic regulatory authorities against dom estic branch
person n el m ay be fru stra ted o r nullified as a resu lt o f
lack o f ju risd iction o v e r the fo re ig n bank's head o ffic e
and head o ffic e person n el.

4.




Many foreig n banks are perm itted under the law o f their
headqu arter's country to engage in bu siness activities
abroad which would not be perm itted to banks chartered
in this country.

Such fo re ig n activities could give ris e

-

12

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to antitrust, co n flict o f in terest, and other lega l problem s
under U. S. law.
5.

In the event o f in solven cy o f a fo re ig n bank, it is p ossib le
that:
assets could be easily and quickly shifted fr o m the
U. S. branch and out o f U. S. ju risd ictio n , while
deposits could be shifted to the U. S. branch ;
lega l o b sta cle s and transactions involving other
o ffic e s o f the fo re ig n bank m ight prevent FDIC fr o m
obtaining the usual subrogation o f cla im s it norm ally
gets fr o m d ep ositors in fa iled U. S. banks b e fo re
making payment.

Even if adequately subrogated,

F D IC 's aggregate cla im in the fa iled bank’ s r e c e iv e r ­
ship estate m ight be jeop a rd ized by fo re ig n laws and
p roced u res ;
c re d ito rs with cla im s against other o ffic e s o f the
fa iled bank - - e sp e cia lly banks holding deposits o f
the U. S. branch - - could attempt o ffse ts against
assets in the U. S. o r seek p re fe re n ce based on
foreig n law.
In addition to such co n ce rn s, it was stated that deposit insurance
protection is la rg e ly u n n ecessary, in sofa r as fo re ig n banks' dom estic
branches engage in "w h o le sa le ” international banking a ctiv itie s.

M o re -

o v e r , if foreig n banks wish to expand their operation s in this country




- 13 -

into the ’’r e ta il" banking bu sin ess with the benefit o f F ed eral deposit
insurance, they presently have an option to do so under existing law
through a d om estica lly in corp orated banking subsidiary in those states
in which state law p erm its.

Of co u r s e , in that event m ost o f the

p rob lem s outlined above are le s s im portant.
Notwithstanding these view s, a num ber o f in terested p a rties,
including the F ed eral R eserv e System , have strongly argued that som e
fo r m o f deposit in surance co v e ra g e should be available to the U. S.
bran ch es o f foreig n banks.

The surety bond o r pledge o f assets m ethod

o f providing p rotection sim ila r to deposit insurance co v e ra g e in Section
6(a) of H. R. 7325 attempts to respond to these view s. In ou r opinion
this solution is le s s than sa tisfa ctory fo r a num ber o f reason s.
We could m itigate som e o f the risk s listed above by im posing
variou s conditions and restrictio n s upon the fo re ig n bank under FDIC
regulations issu ed pursuant to the surety bond and pledge o f assets p r o ­
vision o f the b ill.

The value o f such requirem ents, o f c o u r s e , depends

ultim ately upon the ability to p h ysically en force such requirem ents by
ex ercisin g quasi in rem ju risd ictio n o v e r the fo re ig n bank’ s d om estic
assets a n d /o r o b lig o r s .

Short o f a d o lla r -fo r -d o lla r pledge o f assets

with the FDIC to back up 100 p ercen t o f the b ra n ch 's dom estic "in su re d ”
dep osits, efforts to im p ose requirem ents designed to in sure the p re se n ce
in the United States o f adequate a ssets o f the fo re ig n bank to c o v e r its
d om estic lia b ilities could turn out to be o f little real value.




- 14 -

Requiring the d om estic branch to m aintain a substantial portion
o f its assets in the custody o f a third party and in the fo r m o f o b lig a ­
tions o f dom estic o b lig o rs o r requiring a surety bond to guarantee the
p re se n ce in the U. S. o f a stipulated amount o f the fo re ig n bank’ s assets
could p rov e so onerous o r co stly f o r the fo re ig n bank to com p ly with as
to m ake such re strictio n s tantamount to a b a r against the fo re ig n bank's
accepting d om estic deposits through a U. S. branch.

To the extent that

nonmoney m arket c itie s have found fo re ig n branches to be the m a jo r
v eh icle o f fo re ig n banking entry, the ability o f these citie s to attract
fo re ig n banks into th eir banking com m unities in the future could be
stifled.
We b e lie v e that Section 6 o f the b ill as drafted is both onerous
and im p ra ctica l.

H ow ever, in resp on se to the strongly held views

o f others that som e fo r m o f deposit in surance co v e ra g e is n e ce s s a ry ,
the C orporation recom m en ds that a m od ified v e rsio n o f the surety bond
and pledge o f assets approach p resen tly contained in Section 6 o f the
b ill be com bined with regu lar deposit in surance fo r such branches and
be m ade available on an optional b a sis along the follow ing lin e s :




SEC. 6. (a) Any branch m ay b e co m e an insured bank under
the F ed era l D eposit Insurance A ct (12 U. S„ C. 1811-31b) with
resp ect to its d om estic d ep osits, as defined by regulation by
the B oard o f D ir e c to r s o f the F ed eral D eposit Insurance C o r ­
poration, as if such branch w ere a State nonm em ber bank.
Upon so becom in g an in sured bank, a F ed era l branch shall
th ereafter be treated as if it w ere a national m em b er bank,
and any other branch shall th ereafter be treated as if it w ere
a State m em b er bank, fo r pu rposes of applying the F ed eral
D eposit Insurance A ct to such bra n ch ’ s dom estic a ctivities
(except that any such branch shall continue to be treated as

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a State nonm em ber bank fo r purposes o f the fir s t sentence
of Section 8(a) of that A ct providing fo r voluntary term ination
of in sured bank status). Any branch which b e co m e s an insured
bank shall maintain with the F ed era l D eposit Insurance C o rp o ­
ration, o r as the C orporation m ay otherw ise d ire ct, a surety
bond o r a pledge o f assets in such amount and subject to such
conditions and rules as the C orporation m ay p r e s c r ib e fo r the
pu rpose o f providing som e additional p rotection to the deposit
insurance fund against the additional risks entailed in insuring
the d om estic deposits o f a fo re ig n bank w hose a ctiv itie s, assets
and person n el are in la rg e part outside the ju risd ictio n o f the
the United States. In p re scrib in g such ru les, how ever, the
C orporation shall, to the m axim um extent it co n sid e rs ap p ro­
priate, endeavor to avoid im posing requirem ents on such
branches which would p lace them at an undue com petitive
disadvantage v is - a - v i s d om e stica lly in corp orated banks with
which they com pete.
(b) P aragraph (a) o f this section shall take effect 180 days
after enactm ent h ere o f. Within 90 days after enactm ent and
as m ay be appropriate th ereafter, the C orporation shall submit
to the C on gress its recom m endations fo r amending the F ed eral
D eposit Insurance A ct so as to enable the C orporation to im p le ­
m ent the p rov ision s o f this section in a m anner fu lly consistent
with the p u rp oses o f that A ct.

If fo re ig n banks’ d om estic branches ch oose deposit insurance
co v e ra g e under such a rev ise d Section 6, they would b e co m e subject to
a m uch le s s on erou s fo r m o f surety bond and pledge o f assets re q u ire ­
m ent which would be designed not to provid e each b ra n ch ’ s dom estic
d ep ositors 100 percen t p rotection on a d o lla r -fo r -d o lla r b a s is , but
rather m e re ly to give the F ed eral deposit insurance fund a m ea su re o f
protection to com pensate fo r the additional risks to which it would be
subjected, as d e scrib e d above, by virtue o f insuring the dom estic
deposits o f an entity operating fo r the m ost part outside o f U. S. ju r is ­
diction ,




D om estic d ep ositors would be fully p rotected up to $40, 000

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ju st as are d ep ositors in d om estic insured banks.

We b e lie v e that this

approach o f com bining regu lar deposit in surance co v e ra g e with a
m odified fo r m o f the surety bond and pledge o f a ssets requirem ent
would be an acceptable co m p ro m is e fr o m the C o rp o ra tio n 's standpoint
which would put fo re ig n banks on as nearly an equal b a sis as p o ssib le
with dom estic banks while at the sam e tim e affording appropriate
supplem ental p rotection to the dep osit insurance fund roughly c o m ­
m ensurate with the added d egree o f risk included in insuring fo re ig n
entities.
It w ill be noted that this re v isio n o f Section 6 would give the
FDIC authority to define "d om estic d e p o s its " fo r pu rposes th ereof.
It is contem plated that that term would b e defined to include deposits
o f individuals who a re citizen s o r residents o f the United States and
com panies having an appropriate bu sin ess nexus with this country.
It is lik ely a lso that such "d o m e stic d e p o sits " would be required to
be denom inated ex clu siv e ly in U. S. d olla rs and payable only in the
United States, a lso including perhaps a requirem ent that the deposit
con tra ct provid e that U. S. law govern the d ep ository relationship.
Other c r ite r ia m ight also have to be co n sid e re d fr o m tim e to tim e in
determ ining what would be an appropriate in surable "d om estic deposit. "
We would greatly p r e fe r the m o re fle x ib le approach o f defining this term
by regulation rather than attempting to do so by statute.
If deposit in surance is m ade available to dom estic branches o f
fo re ig n banks on this b a s is , we b e lie v e it is im p erative that the b ill




- 17 -

give the FDIC ex p licit authority to exam ine such bran ch es, whether
licen sed fe d e ra lly o r by the states, when n e c e s s a r y in its judgment
to a s s e s s the potential exposure o f the insurance fund arisin g fr o m
insuring the b ra n ch 's d om estic dep osits o r to ascertain whether the
branch is com plying in all resp e cts with the pledge o f a s s e ts /s u r e ty
bond requirem ents im posed by the b ill.

It is contem plated that because

o f the unique fa c to r s in volved in insuring fo re ig n bank b ran ch es, the
FDIC would find it n e c e s s a r y to e x e r c is e its pow er to exam ine fo re ig n
bank branches fo r the pu rposes indicated.

We have also recom m ended

that such bran ch es be subject to revocation o f their in sured status
under Section 8(a) o f ou r A ct (12 U, S. C. 1818(a)).

Additionally, the

b ill should provid e that the FDIC be appointed r e c e iv e r o f the branch
in the event o f its closin g and that all the F D IC 's financial assistan ce
and liquidation pow ers under the FDI A ct apply to insured dom estic
bran ch es o f fo re ig n banks.
We fe e l that this proposed change in Section 6 would put fo re ig n
banks on as nearly an equal ba sis as p o ssib le with dom estic banks while
at the sam e tim e accord in g appropriate supplem ental p rotection to the
deposit in surance fund roughly com m ensurate with the added d egree o f
risk a ssocia ted with fo re ig n entities.

Our staff w ill be happy to w ork

with you r C om m ittee staff in drafting the appropriate language fo r
amending Section 6 along the lines that we have prop osed .




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Im position o f R e s e rv e R equirem ents and Interest Rate C on trols

S ection 7(a) o f H. R. 7325 su b jects all bra n ch es, a g en cies and
c o m m e r c ia l lending com p an ies co n tro lle d by fo r e ig n banks w h ose w o r ld ­
w ide a ssets ex ceed one b illio n d o lla rs to the r e s e r v e requirem ents and
dep osit in terest rate co n tro ls im p o se d b y the F e d e ra l R e s e rv e on m em b er
banks.

Section 7(b) p erm its the F e d e ra l R e s e rv e B oard to p r e s c r ib e

rules and regulations governing the a c c e s s o f fo re ig n b ra n ch e s, agen cies
and c o m m e r c ia l lending com p an ies to the cle a rin g , discoun t and advance
fa c ilitie s o f the F e d e ra l R e s e rv e System .
W hile the b ill does not req u ire fo r e ig n institutions to b e c o m e
m em b ers o f the F ed era l R e s e rv e System , th ese two p ro v isio n s o f Section
7, along with the rem aining p ro v is io n s in the Section, im p o se upon fo re ig n
b ran ch es, agen cies and c o m m e r c ia l lending com p an ies the obligation s and
ben efits o f F ed era l R e s e rv e m e m b e rsh ip .

F o r a ll p r a c tic a l p u rp oses,

this b ill, in e ffe ct, req u ires F e d e ra l R e se rv e m em b ersh ip , even though
it is not stated as such.
In m y June 20, 1977 testim on y b e fo r e the Subcom m ittee on
F inancial Institutions o f the C om m ittee on Banking, Housing and Urban
A ffa ir s o f the Senate, I indicated that, although I have an open m ind with
re sp e ct to the question o f u n iversa l r e s e r v e requ irem en ts, I do not
b e lie v e that the is s u e o f r e s e r v e requ irem en ts fo r n on m em ber institu­
tions should b e dealt with on a p ie ce m e a l b a s is .

R ather, it seem s to

m e that the relationship to the F e d e ra l R e s e rv e System o f a ll banking




- 19 -

institutions which ch oose not to jo in the F ed eral R e se rv e System should
be studied in a system atic and unified fash ion .

Such a study is , it seem s

to m e, the m ost effectiv e way to respond to the F ed era l R e s e r v e 's c o n ­
ce rn with m em bersh ip attrition.

Applying this to the re s e r v e requirem ent

p rop osa ls contained in H. R. 7325 would dictate that the relationship o f
fo re ig n banks, which ch oose to operate in the United States in one fo rm
o r another, to the F ed era l R e se rv e System should be dealt with in the
context of a b roa d er solution to the question o f m em bersh ip.
This approach is , o f c o u r s e , con sisten t with the p rin cip le o f
national treatm ent o r "nond iscrim in ation . " And, co n v e rs e ly , to requ ire,
in effect, F ed era l R e se rv e m em bersh ip fo r only those dom estic affiliates
o f fo re ig n banks having total a ssets o f m o re than one b illio n d olla rs would
rep resen t a deviation fr o m that p rin cip le.
Yet, I recog n ize fu ll w ell that the p rin cip le o f national treatm ent
cannot be view ed as an absolute.

A s I indicated at the outset, that

con cept should certa in ly give way b e fo re overrid in g public p o licy c o n ­
siderations which a r is e out o f special circu m sta n ce s.

In this regard,

the F ed era l R e se rv e has argued rather strenuously that the operations
o f relatively la rg e fo re ig n banking institutions pose ju st such a ca se
and this m andates a departure fr o m the p rin cip le of national treatm ent.
The F ed era l R eserv e has pointed out that fr o m a m onetary
con trol standpoint, the operating c h a r a c te ristic s o f branches and
agen cies o f fo re ig n banks are noteworthy becau se these institutions
generate a substantial portion o f their funds fr o m o v e r s e a s s o u rce s,




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p r im a r ily fr o m the parent o r d ire c tly related institutions.

These

funds are not su bject to F e d e ra l R e se rv e R egulations D o r M.

The

F ed era l R eserv e fe a r s that this m ay resu lt in a c o s t advantage fo r
la rg e fo re ig n institutions v is - a - v i s th eir la rg e U. S. com p etitors who
are m em b ers o f the F ed era l R e se rv e System .

M ore im portantly, it

is fea red that la ck o f such d ire c t F ed era l R e se rv e co n tro ls o v e r
r e s e r v e s could im pede the e ffe ctiv e im plem entation o f m onetary p o licy
in the fa c e o f m a ssiv e and p recip itou s tra n sfe rs o f funds.
Although both th ese fa c to r s rep resen t real c o n ce rn s, at least
two fa cto r s suggest that these p ro b le m s are not su fficiently seriou s at
this tim e to o v e r r id e the p rin cip le o f national treatm ent in this area.
It is true that fo r e ig n banking a ctivity in the U. S. has grow n con sid era b ly
in recen t y e a r s ; yet its sca le rem ains rela tiv ely sm all.

The a ssets o f

all fo re ig n banking entities, including state ch a rtered banking subsid­
ia r ie s , is le s s than 7 p e rce n t o f total c o m m e r cia l bank a sse ts.
M o re o v e r, the F e d e ra l R e se rv e has stated in previou s testim ony that
fo re ig n banking institutions in the U. S. gen era lly have com p lied with a
F ed era l R e se rv e B oard request to m aintain r e s e r v e s on in cre a s e s in
net lia b ilities fr o m abroad w hich p a ra lle l requirem ents under R egula­
tions D and M.
F o r m y own part, although I acknow ledge the validity o f the
F ed era l R e s e r v e 's argum ent that op eration s o f fo re ig n banks p ose a
sp ecia l ca se which m ay give ris e to unique p rob lem s fo r the central
banker, I am not yet persuaded by the evidence p resen ted that these



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21

potential p roblem s are y et o f su fficien t magnitude to p ose a real risk
to the stability o f ou r econ om y.

A t the sam e tim e, I recog n ize fu lly

that the question o f whether to depart fr o m the p rin cip le o f "nondiscrim in a tion Mon the m atter o f r e s e r v e requirem ents is a knotty issu e
on which reasonable m en m ay d iffe r.
With re sp e ct to the m atter o f deposit in terest rate co n tro ls, I
fully support the notion that fo re ig n bran ch es, a g en cies, and co m m e rcia l
lending com panies should be subjected to such co n tro ls.

A s drafted the

legislation would, h ow ever, v est all such authority in the hands of the
F ederal R eserv e System .

Such an approach is appropriate if the C on­

g re s s ch o o s e s , in e ffect, to requ ire m andatory m em bership in the
F ederal R eserv e System .

H ow ever, if the C on gress ch o o se s to m ain­

tain the option o f nonm em bership, then adm inistration o f such co n tro ls
v is -a -v is non m em ber fo re ig n banking institutions should be vested in
the FDIC as it is p resen tly with re sp e ct to nonm em ber dom estic
institutions.

Im position o f F ed era l R eporting, Exam ination and S upervisory Standards

In addition to granting the C om p troller o f the C u rren cy regulatory
authority o v e r F ed era l bran ch es, agencies and c o m m e r cia l lending c o m ­
panies, Section 7 o f the leg isla tion would provid e the F ed eral R eserv e
System p a ra llel authority o v e r all the bran ch es, agencies and co m m e rcia l
lending com panies ch a rtered under state law.

I do not o b je ct to the exten­

sion o f F ed era l regulatory authority o v e r these institutions becau se it is




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consistent with the p rin cip les o f a system o f fe d e ra l regulation and
national treatm ent and not becau se o f any d issa tisfa ction with existing
regulation by state authorities.

I am not aware o f any evidence to date

that indicates that state authorities a re not totally capable o f supervising
sta te-ch a rtered fo re ig n banking su b sidia ries and sta te -lice n se d branches
and a g en cies.

A ccord in g to fo r m e r F ed era l R e se rv e B oard V ice Chairman

G eorge M itchell in his testim ony b e fo re the Senate Subcom m ittee on Finan­
cia l Institutions,
There is nothing to indicate that fo re ig n banks are abusing their
pow ers in the sense that they are using the opportunities a v a il­
able to them under the presen t system to engage in any im p ro p e r
o r unsound banking p r a c tic e s . On the con tra ry, it has been the
exp erien ce o f the B oard that fo re ig n banks operating in the United
States have scru pulously com p lied with the existing U. S. laws
and regulations and have been gen erally coop era tiv e in their
dealings with the B oard.
Although I do not o b je c t strenuously to the p rop osed delegation o f this
authority to the F e d e ra l R e se rv e with re sp e ct to sta te-ch a rtered fo re ig n
institutions, I would point out that absent the requirem ent o f m andatory
m em bersh ip, these p rov ision s are in con sisten t with the p rin cip le o f
national treatm ent in that sta te -ch a rte re d nonm em ber institutions are
now supervised by the FDIC.

A s we indicated e a r lie r , it is ou r ju dg­

m ent that the existing pattern o f fe d e ra l regulation should be continued
absent som e indication that it is inadequate.

B ased on ou r experien ce

fr o m examining su b sidia ries o f fo re ig n banks, we fe e l that it is useful
and im portant fo r the FDIC to have its hand in regulation o f foreig n
operations and that we can do this job w ell.




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