Full text of Statements and Speeches of George A. LeMaistre : Statement on H. R. 7325, 95th Congress, a Bill "To Provide for Federal Regulation of Participation by Foreign Banks in Domestic and Financial Markets," Presented to Subcommittee on Financial Institutions Supervision, Regulation and Insurance, Committee on Banking, Finance and Urban Affairs, House of Representatives
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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 - 4 - 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 - 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 - 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 . - 10 - 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 - 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 - 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 - 15 - 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 - 16 - 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 . - 18 - 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, - 20 - 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 - 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 - 22 - 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. # . # # # #