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For Release on Deliver

Statement by
George W. Mitchell
Vice Chairman, Board of Governors of the Federal Reserve System
before the
Subcommittee on International Finance
of the
Committee on Banking, Housing and Urban Affairs
United States Senate

January 23, 1974

Foreign Banking In the United States
Mr. Chairman, I appreciate your invitation to appear before
the Subcommittee in its hearings on direct foreign investment in the
United States.

Too often, direct foreign investment is thought of as

involving only industrial and commercial institutions.

The Sub­

committee's recognition that such investment also involves banks and
other financial institutions is certainly appropriate.
The amount of direct investment by foreign banks in U.S.
banking facilities is small— less than $1 billion.

But in the case of

banking, the size of that direct capital investment does not measure
the importance of the activity.

Banks traditionally operate on a

smaller capital base than is typical in industry and commerce.


principal business of banks is to assemble funds from a variety of
sources— deposits or borrowings in domestic or foreign money markets—
and to relend those funds to others.

It is the effects of these

banking transactions— the money flows and the business transactions
they accommodate— that should be used to assess the implications of foreign
investment in U. S. banking offices.

Judged by these activities, and

by their total assets of d o s e to $35 billion, the U. S. banking
offices of foreign banks are still not large compared to insured
U. S. banks, which have $762 billion in total assets and $59 billion
in equity capital and reserves*

But their activities are growing and

becoming increasingly important in certain U. S. financial markets.


example, commercial and industrial loans at these institutions have now
grown to 8 per cent of all such loans in the United States.

-2 -

Sources and uses of funds by forelgn-owned banks
Banks traditionally rely on deposits of their regular customers
for the bulk of their resources.

A second source of funds, and one

that is growing in importance, is the domestic money market, which
includes the market for interbank loans and deposits.

A third source

of funds is the international money market (including borrowing from
affiliates abroad).

Eurodollar borrowings and deposits are the pre­

eminent instruments in this market.

Participants in both the domestic

and international money markets are sophisticated, and funds invested
in these markets are highly interest-sensitive and predominantly very
short in maturity.
Banks engaged in international banking, operating offices in
a foreign country, generally have difficulty in establishing a large
stable deposit base in the currency of the host country.

This is

true both for U. S. batiks operating abroad and for foreign banks
operating in the United States.

Therefore, when operating outside

their home country, banks are inclined to rely in some considerable
measure on funds supplied from their home office.

Frequently, however,

they encounter difficulties in bringing funds from outside the host

Many countries impose limits on such capital inflows through

banks, both for balance of payments reasons and because capital
inflows can have an unwanted effect on domestic credit flows.
Accordingly, banks in foreign countries seek to supplement their
resources from their home country by drawing on various parts of the

money market in the host country.

Usually the most Important source

of money market funds for foreign banks is borrowing from the host
country's domestic banks.

Other money market sources of funds In the

foreign country tend to be very short term and In most countries quite
limited in amount.

The operations of foreign-owned banks in the United States
reflect these general characteristics of international banking.


have to look to foreign sources for about 40 per cent of their resources
of about $35 billion (as seen in the table).

Foreign fund» of about

$14 billion*are drawn primarily from the home offices or other affiliates
of the parent.

Funds obtained in the United States consist mainly of

deposits of nonbank customers, about $5 billion, and borrowings from
nonaffiliated U.S. banks, almost $7 billion.
U. S. offices of foreign-owned banks lend and otherwise
invest about $5 billion more in the United States than they obtain here—
that is, they are channeling that amount of foreign funds into the
U. S. economy.

This figure changes, of course, with shifts in relative

money market conditions here and abroad.
These foreign-owned offices use a large share of their
resources to make commercial and Industrial loans in the United States.
Commercial and industrial loans account for about 40 per cent of their
assets— a substantially higher proportion than is the case for domes­
tically owned banks that are members of the Federal Reserve.


foreign banks' commercial and industrial loans are in good part related

Assets and Liabilities of Foreign-Owned
U. S. Banking Institutions as of October 31, 1973
(billions of dollars)


Deposits and other liabilities

Commercial and industrial credits

To U. S.


From U. S.


To foreign


From foreign

Money market assets
Interbank loans and securities

Bank (non-affiliated)

Loans to U. S. banks—

A /



From U. S.

Loans to foreign banks



From foreign

U. S. Government,
agency securities


Due from parent bank and other
affiliated institutions

Due to parent bank and other affiliated

In U. S.



In U. S.





Clearing balances



Clearing balances

Other assets



Other liabilities



Capital and reserves

a/ Includes loans to security dealers
Detail may not add to total due to rounding.
Source: FR 886a form, ’
Monthly Report of Condition of U, S. Agencies, Branches and Domestic Banking
Subsidiaries of Foreign Banks."

-5to international business and reflect the international orientstion of
these banks.

One-fourth of these loans are to foreign customers.

Types of operations of foreign banking offices
The U. S. activities of foreign-owned banks depend in some
degree on how and where they are established in the United States.
There are also differences reflecting historical or ethnic characteristics
of the country of domicile of the parent bank.
Apart from the representative office, which is essentially
nothing more than a sales or service office and does not perform any
banking functions, there are three corporate alternatives used by foreign
banks conducting a banking business in this country:
rations, branches, and agencies.

subsidiary corpo­

Subsidiaries may be chartered under

laws of some States; three States have in fact issued such charters.
They can also be chartered under Federal law but the requirement that
the directors must be U. S. nationals has limited the use of this

Branches of foreign banks are presently authorized to

conduct a full-scale lending and deposit business in five States.
Agencies of foreign banks are authorized in New York and California.
Agencies and branches are similar to each other in some respects, but
agencies do a wholesale banking business whereas branches engage in
wholesale banking, retail banking, or both.
Agencies account for more than half the assets of all
foreign banking offices.

Because they cannot sell certificates of

deposit, they rely heavily on interbank (Federal funds) borrowing and
borrowings from directly related institutions abroad (Eurodollars).

These sources account for a total of about three-fourths of their funds.
They typically employ their funds In money market loans and commercial
and Industrial loans, frequently related to International transactions.
Branches and subsidiary banks, on the other hand, rely to a
substantial degree on deposits:

for branches deposits account for

about one-half of total liabilities, whereas in the case of subsidiary
banks the share is about three-fourths.

Some of these deposits are

obtained from local business and consumers, while others are obtained
by offering large-denomination certificates of deposit to money market

Branches, like agencies, also obtain funds from directly

related institutions abroad as well as in the interbank market.


sidiary banks (particularly in California) and some branches endeavor
to conduct a retail banking business similar to that of most U. S.
banks; other branches concentrate primarily in wholesale international
There are 60 foreign banks with offices in the United States.
Most of these institutions are very large banks; in the aggregate their
worldwide deposits are over $450 billion.

At recent count, they had 115

offices in the United States— 68 in New York, 39 in California, and 8 in
four other States.

Relative to worldwide deposits, Canadian and Japanese

banks have larger interests in U.S. offices than banks based in Great Britain,
Western Europe, and elsewhere.

In total U.S. assets, Japanese banks ranked

first followed by Western Europe, Canada and Great Britain.
The modes of operations of foreign-owned banking offices in this
country tend to vary according to the country of the parent bank.



Canadian banks operate both agencies and sub­

sidiary banks in California, and agencies in New York.
The Canadian agencies in New York draw the funds they use
to operate in the United States largely from the head offices and
foreign branches of the Canadian chartered banks

although those

funds may originally have been acquired, in part, from U. S. or other
non-Canadian sources.
In recent years, the Canadian agencies have been using those
funds increasingly in commercial loans and in arbitrage between the
Eurodollar market and the domestic market for interbank loans.


commercial loans are largely to U. S. corporations to meet domestic

S<Mne of that loan business has been related to the growth of

direct investment by U. S. corporations in Canada.

Although maintaining

a long-standing role as specialists in lending to U. S. securities
dealers and brokers, these agencies have recently been reducing their
emphasis on this type of activity.

Japan. Japanese banks, like the Canadian banks, operate

agencies and subsidiary banks in California, and agencies in New York.
The Japanese agencies have the same powers as Canadian
agencies, but in their lending operations they have emphasized the
financing of U. S.-Japanese trade, and in some cases also financing
of Latin American exports to Japan.
The agencies obtain funds from their parent banks’head offices
in Japan

and raise funds in the U. S. market by selling their own

acceptances and borrowing from U. S. banks.

8Some of Che Japanese subsidiary banks in California have
been successful in developing a retail banking business.

Europe. European banks have placed greater emphasis

historically on branch operations in New York City.


however, they have established some agencies and subsidiaries in New York,
including a few investment companies chartered under New York State

European banks also have banking subsidiaries in California, the

largest being First Western, which has just been acquired by Lloyd's Bank.
Many European banks, in important but varying degrees, use
their New York branches to channel payments that the parent banks
generate through their worldwide financial operations.

These foreign

banks find it essential to have offices in this country to handle
efficiently transactions that have grown to enormous dollar totals.
Many of the European branches serve their head offices not only for
payments business in the United States but also for administering their
payments activities worldwide.
Handling payments gives rise to other banking business.


huge volume of foreign exchange orders and the sharp swings in trans­
action balances that occur from day to day sometimes place substantial
demands on these U. S. offices for funds and on other days produce
large excess balances.

To dispose of such excess funds the U. S.

offices of European banks lend large amounts of money to U. S. corpo­
rations and also furnish substantial funds to their foreign head offices.
Most of the European banks that have offices in this country
are engaged here principally in wholesale banking activities.


some British banks have been expanding into the retail banking market
as well.

Growth of foreign banks' activities
Growth of foreign banks' activities in the United States
since the mid-1960's has been one aspect of the broad internationali­
zation of banking which has occurred during this period.

This is the

counterpart in the banking area of the flourishing growth of multi­
national business.
Measured from 1965, foreign banks' assets in the United States
have grown by about six-fold.

It should be noted, however, that this

striking tate of increase has been roughly matched by the six-fold
expansion in the foreign assets of a group of seven large U. S. banks
that were already actively engaged in international banking in the

And much the same reasons that account for the expansion

of U. S. banks abroad also account for the growth of foreign banks in
this country.
Foreign banks have followed their own foreign customers who
have come to the United States to set up industrial and commercial

Once here, they have assisted other industrial concerns

in investing in this country.

They have helped to finance the growing

volume of trade and have provided information on economic activity and
trade opportunities both in the United States and abroad.
Foreign banks have found that banking offices in the United
States afforded valuable access to the U. S. money market, and banking
offices in New York ha» strengthened the ability of foreign banks to
handle the daily settlements that arise from their own or their
customers' transactions in dollars.
In sum, for any foreign bank, as for any U. S. bank, an
office in each major international money market is viewed as a key
ingredient in an effective worldwide banking operation.

In addition to these broad financial considerations that have
led to the expansion of international banking generally, the growth of
foreign banks in the United States has reflected changes in legislation
in several States.

The decision of New York State about a dozen years ago

to permit foreign banks to establish branches was one of the principal
legislative changes improving the opportunities for foreign expansion in
the United States.
foreign banks.

A few other States have also liberalized laws regarding

Notably, several months ago Illinois amended its laws to

permit a foreign bank to establish a single branch within the Loop area
of Chicago.

Several foreign banks are in the process of opening such

branches in Illinois.
Nonbanking activities
To this point, I have spoken about banking activities of
foreign-owned institutions in this country.

They also conduct some

other activities on the periphery of banking, but it should be noted
that these are not very large.

Certainly their nonbanking activities

are insignificant compared with domestic bank holding companies.
Several foreign banks have affiliates in the United States
engaged in the securities business--in some cases both as underwriters
for new issues and as brokers and dealers for domestic or foreign issues.
Several of these affiliates have become members of regional stock
exchanges in this country.
The Canadian banks do some financial business in this country
through trust subsidiaries, in addition to their U. S. banking offices.
These trust units act mainly as custodian, paying agent, and transfer

-11agent for Canadian entitles that have Issued securities in the United
British banks have few nonbanking direct investments here.
One of them is continuing its interests in real estate development
projects, and its investment banking interest in some small U. S.
companies, which it held before passage of the Bank Holding Company
Act Amendments of 1970.
Japanese banks have small investments in some Japanese
companies that do business in this country— notably the trading companies.
In Japan, banks traditionally have taken equity interests of less than
10 per cent in nonfinancial firms that are their important customers.
Several foreign banks (Italian, French, and Greek banks)
operating in the United States are owned directly or indirectly by
their respective governments, which also own nonfinancial companies
doing business in the United States.
Concluding remarks
Mr. Chairman, my assignment today has been to provide a
factual presentation on the activities of foreign banks in the United
States, and I welcome the opportunity to assist in this way in your

I should like to conclude my remarks with a general comment

or two.
In my view, the growing and substantial investment and opera­
tional activity of foreign banking interests in this country has
stimulated competition in banking and financial markets here.


addition, the access to U. S. markets that foreign banks have enjoyed
has facilitated the activities of U. S. banks in markets abroad.

-12At the same time, It should be noted that these Institutional
developments have abetted the greater movement of funds internationally
and in so doing have posed some problems in implementing monetary
policy in the United States.

In recent years, the Board has taken

several actions to modify the effect of international monetary flows
on domestic monetary and credit conditions.

However, foreign-owned

banking institutions, which are an important channel for these flows,
are not subject directly to Federal Reserve legislation.

Last June,

therefore, when the Board as part of its anti-inflationary program
introduced a marginal reserve requirement for large certificates of
deposit issued by member banks and asked natunember banks similarly to
hold reserves, it requested foreign-owned banking institutions to
maintain reserve deposits against increases in large CD's
Eurodollar borrowings above base-period levels.

and in net

1 am happy to say

that foreign banks acceded to this request.
Recognizing the growing importance of foreign banking in the
United States, the Board established a Federal Reserve System Steering
Committee a year ago to review the status of international banking
regulations and to consider the public policy issues.

The Committee,

of which I am Chairman, has made good progress and hopes soon to submit
recommendations to the Board.

Mr. Chairman, thank you very much.