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ASE ON DELIVERY
TE b a T 10 A.M. (EtTr)
Statement by
Henry C. W allIch
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Commerce, Consumer & Monetary A ff a ir s
Committee on Government Operations
House of R epresentatives
September 30, 1982
Thank you , Mr. Chairman.
Th is is the th ird time I have been p riv ile g e d to appear
before t h is Subcommittee to present the views of the Board of Governors
on the subject of fo re ig n Investment 1n U.S. banks.
On those previous
occasions, 1n 1979 and 1980, some e s p e c ia lly large a c q u isitio n s had
drawn public attention to the growing tid e of foreign In te re st 1n
in ve stin g 1n our banking system.
That In te re s t, as I mentioned then,
reflected the growing in te rn a tio n a liza tio n of banking, which had been
manifested e a r lie r by the movement abroad by U.S. banks.
In the la s t
two ye a rs , foreign Investment has continued at s ig n ific a n t le v e ls ,
though perhaps not so In te n se ly.
By the middle of th is ye a r, there
were 134 banks c o n trolled by foreign banking organizations and other
fo re ig n In ve s to rs , o r about 35 more than when I la s t t e s t if ie d here.
These 134 banks account fo r approxim ately 5-1/2 percent of domestic
banking assets.
The In v ita tio n fo r the Board to be represented at these
hearings asked that the testim ony tre a t several sp e c ific poin ts:
f i r s t , the performance of forelgn-owned banking in s titu tio n s ; second,
Federal Reserve p o lic y on the sup ervision of foreign bank holding
companies; t h ir d , the procedures followed by th e Board 1n processing
ap plications by foreign ers to In ve st 1n U.S. banks; and f i n a l l y , the
Issues that were present 1n recent sp e c ific ap plica tion s.
The performance o f foreign-owned banking In s titu tio n s
In the la s t two ye a rs , there have been fu rth e r foreign
a c q u isition s of large U.S. banking organizations such as Crocker
National C orporation, Financial General Bankshares, and LITCO
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Bancorporation.
I shall re ve rt to these a c q u isitio n s la te r on.
There has also been s ig n ific a n t In te re st In sm aller In s titu tio n s ,
notably In F lo rid a and C a lifo rn ia .
These a cq u isition s and Investments have been ve ry recent
and, Indeed, some are c u rre n tly 1n process.
I t 1s ye t too soon,
th e re fo re , to attempt to draw any firm conclusions about the p e rfo r
mance of these banking organizations under t h e ir new owners.
As.the
Subcomnritte Is aware, the Board and the other bank regula tory agencies
have been m onitoring on a continuous basis the behavior and performance
of forelgn-owned banking organizations.
The most recent o ve ra ll
review by Board s t a ff was completed la s t yea r and I have attached 1t
to th is statement fo r the Subcommittee's Inform ation.
The prin cipa l conclusions of the review may be summarized
as fo llo w s:
(1)
Before t h e ir a c q u isitio n , the banks g e n e ra lly had lower
earnings and lower equ ity ra tio s than other banks 1n
t h e ir peer group.
(2)
Follow ing a c q u isitio n , earnings g en era lly Improved,
though not f u l l y to peer group le v e ls , w hile eq u ity
ra tio s were raised to peer le ve ls as a re s u lt of
Infusions of capital by t h e ir new owners.
(3)
The business o rie n ta tio n of the acquired banks did not
change m a te ria lly.
Somewhat less emphasis on r e ta il
lending as a proportion of the to ta l was evident as a
re s u lt o f greater d iv e rs ific a tio n of the lending
p o r t fo lio .
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(4)
W ithin the to ta l group, the greatest Improvement 1n
earnings and the la rgest Increases 1n capital took
place at banks acquired by foreign In d ivid u a ls ;
however, the earnings base of these banks was low
before a c q u isitio n .
These generalizations are based on a review of banks acquired by
fo re ig n In te re sts and not those established de novo by fo re ig n e rs.
They are also based on inform ation through 1980.
However, p a rtia l
data fo r 1981 are supportive of these fin d in g s.
S upervisory experience forms another aspect of the performance
o f forelgn-owned banking organizations.
As you know, d ire c t sup ervisory
re s p o n s ib ility 1s shared at the Federal le ve l among the O ffic e of the
Com ptroller of the Currency w ith re s p o n s ib ility fo r national banks,
the Federal Reserve with re s p o n s ib ility fo r state member banks and
bank holding companies, and the Federal Deposit Insurance Corporation
w ith re s p o n s ib ility fo r a ll other Insured banks.
There are 12 state
member banks owned by foreigners fo r which the Federal Reserve has
su p e rviso ry re s p o n s ib ility , and 67 forelgn-owned bank holding companies.
We have d ire c t knowledge of and experience w ith only these In s titu tio n s .
However, we do keep 1n close touch w ith the other banking agencies
about t h e ir sup ervisory experience w ith forelgn-owned banks under
th e ir ju ris d ic tio n s .
S p ecific material on the su p e rviso ry experience
has been file d by the three agencies w ith the Subcommittee.
Here, I
should lik e to confine my remarks to some general observations about
th a t experience.
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S upervisory experience may be judged In several ways.
One
way 1s according to the condition of the banking In s titu tio n , since
the ultim ate o b je c tive of bank supervision is the promotion of sound
and healthy banks.
Another way is the record of compliance by the
banking in s t it u t io n w ith the laws and regulations to which i t 1s
subject.
On the f i r s t measure, there 1s the evidence that has already
been cited that the e q u ity ra tio s and earnings of banks acquired by
fo re ig n e rs g en era lly showed Improvement.
Furth er evidence 1s a va ila b le
from the ratings assigned by the su p ervisory agencies on the basis of
examination rep orts.
In response to yo u r request, the three banking
agencies prepared and transm itted to the Subcommittee a summary table
o f the ratings of a sample of banks.
Out of the 52 banks 1n the
sample, 40 had strong composite ratings fo r fin a n c ia l soundness of 1
o r 2.
Only f iv e of them were rated u n satisfactory» and some of these
were weak when acquired by foreign In ve sto rs.
The record of compliance Is more d i f f ic u l t to measure.
There 1s probably not a bank In the United States whose examination
report does not c ite vio la tio n s of law and regula tions.
Most of
these vio la tio n s are technical and most are Immediately corrected,
u su a lly during the examination I t s e lf .
proved no d iffe re n t 1n th is regard.
Forelgn-owned banks have
I t 1s o n ly when serious vio la tio n s
occur or there 1s a recurring pattern of vio la tio n s that a supervisory
problem e x is t s .
Th is may be cause fo r a cease and desist order o r
some other sup ervisory action.
On th is basis, I t has been our
experience — and I b e lie ve th is 1s shared by the other agencies —
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that the compliance record of forelgn-owned banks equals th a t o f
s im ila r dom estically-owned banks.
S upervision o f fo re ig n bank holding companies
Under the law, r e s p o n s ib ility fo r the su p ervision of bank
holding companies has been assigned to the Board.
That re s p o n s ib ility
runs to a ll bank holding companies whether dom estically o r foreign
owned.
Out of the 134 U.S. banks c on trolled by fo re ig n In te re s ts ,
84 are held through corp ora tions.
These corporations are required to
become bank holding companies, and f a ll under the d ire c t su p ervisory
ju ris d ic tio n of the Board.
W ithin t h is group of 84 banks, 60 are
owned by foreign banking organizations and the remainder by Ind ivid u a l
In ve sto rs .
The Board outlined i t s approach to the sup ervision of
fo re ig n bank holding companies In a p o lic y statement Issued 1n February
1979.
The central theme of that statement Is that the Board's primary
concerns are w ith the operations and a c t iv it ie s conducted 1n the
United States and that our su p ervisory e ffo rts would be so directed .
The Board's In te re st In the foreign parent organization or In the
fo re ig n owners lie s p rin c ip a lly 1n t h e ir c a p a b ility to be a continuing
source of strength to the banking operations In the United S tates.
Since that statement appeared three and one-half years ago,
the Board has Implemented i t In several ways.
F ir s t of a l l , before
approving the establishment of a foreign bank holding company, the
Board assures I t s e l f about the fin a n c ia l and managerial resources o f
- 6the foreign org a n iza tio n .
Applicants are required to fu rn ish exten sive
inform ation so as to enable the Board to render a judgment that those
resources are s u ffic ie n t to provide support to the U.S. su b sid ia ry
bank.
The same requirements apply to domestic applicants.
In
a d d itio n , foreign su p ervisory a u th o ritie s are contacted about the
fin a n cia l condition and the reputation of the applicant.
Secondly, the Board has established annual rep ortin g require
ments through which foreign bank holding companies submit Inform ation
perm itting an appraisal of the fin a n c ia l condition of the foreign
organization on a continuing basis.
The requirements also serve fo r
assessing compliance with regulations governing t h e ir U.S. operations.
T h ird , a reporting system has been put 1n place that monitors
transactions between the U.S. bank and the foreign parent organization
on a q u a rte rly basis.
Fourth, foreign bank holding companies are required to
report any nonbank a c t iv it ie s commenced In the United S ta tes, and the
a u th o rity under which they are undertaken.
Committee s ta ff has seen
copies of the reports that have been f i l e d w ith the Board.
A prim ary sup ervisory tool 1n the case of domestic bank
holding companies Is the examination or Inspection process.
I t 1s
also an Important sup ervisory tool in the case of fo re ig n bank holding
companies, although there n e c e ssa rily are some d ifferen ces In the
ways 1t Is employed.
There Is no Inspection of the fo re ig n organization
I t s e l f , since 1t 1s located outside the ju ris d ic tio n of the United
States.
For Inform ation about the fo re ig n org a n iza tio n , relia n ce 1s
placed on the reports ju s t mentioned and on re la tio n sh ip s with foreign
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su p ervisory a u th o ritie s .
N either Is there a system of regula r Inspec
tio n s of nonflnanclal su b sid ia rie s 1n the United States.
As you
know, under the law, foreign banking organizations may have In d ire c t
su b sid ia rie s In the U.S. th a t engage 1n nonflnanclal a c t iv it ie s of
kinds not permitted domestic bank holding companies, provided certa in
conditions are met.
Since the Board 1s not responsible fo r the
condition of the foreign banking organization and It s a c t iv it ie s ,
fin a n cia l and non fln anclal, outside the United S tates, In te re st 1n
any In d ire c t nonflnanclal a c t iv it ie s In the United States 1s lim ite d
to t h e ir compliance w ith regula tion.
Where the U.S. bank 1s held by
an Interm ediate U.S. holding company, that company and it s nonbank
su b sid ia rie s w ill be inspected, as necessary, on the same terms as a
domestic bank holding company.
The su b sid ia ry banks a re , of course,
examined by the relevant bank su p ervisory agency and the Board re lie s
on the examination reports prepared by those agencies to monitor the
condition of those In s titu tio n s .
For the most p a rt, fo re ig n bank holding companies are fo re ig n
banking o rga n iza tion s.
As such, they are u su a lly the major banks In
t h e ir home countries, they are supervised by foreign banking a u th o ritie s ,
and they have a recognized reputation In the in tern a tion a l marketplace.
These banks acknowledge that they are guests in th is country and are
anxious to remain in good standing by adherence to the rules and
regulations to which they are subject.
For these reasons, the Board
has not been confronted w ith serious problems in su p ervisin g the
U.S. a c t iv it ie s of these companies.
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By contra st, where U.S. banks are c o n tro lle d by foreign
in d iv id u a ls , certa in su p ervisory problems do a ris e .
One rela tes to
the in it ia l e n try of the fo re ig n Investors 1n seeking to acquire or
esta b lish a bank.
Another re la te s to the supervlson of the continuing
operations of those banks, once they have been acquired.
I t should
be noted that these problems also e x is t w ith domestic In d ivid u a ls
acquiring banks.
On the question of e n try, the p rin cip a l problem is ascertaining
the fin a n c ia l strength and reputation of the would-be foreign owners.
T h is Is a problem faced by the O ffic e of the Com ptroller of the Currency
when fo re ig n In ve sto rs seek to charter a national bank and by the
va rious state a u th o ritie s when a state banking charter Is sought.
The problem Is also encountered in a ll three Federal banking agencies
under the Change 1n Bank Control Act when a foreign In ve sto r seeks
approval to acquire more than 10 percent of an e x is tin g bank and
becomes the la rg e st sin g le shareholder.
The relevant banking agency
has to determine the In ve sto r's condition and sta tu s.
The a b il it y to
make such a determination 1s necessa rily complicated by distance and
differences in foreign conditions and standards.
On the question of continuing su p e rvisio n , there 1s the
problem of assuring that the bank 1s managed w ell and that 1t Is not
used f o r the b e n e fit of the fo re ig n owners to the detrim ent of the
condition of the bank.
In d ivid u a l in ve s to rs , by comparison w ith
banking organizations, may not have the same In te re st In preserving
t h e ir banking reputations.
The f i r s t lin e of defense on th is point
Is to lim it e n try to persons of undoubted In te g rity and banking
-9experience.
On the whole, as described e a r lie r , the banks owned by
fo re ig n in d ivid u a ls have been managed w ell and have posed few
su p e rviso ry problems.
However, there have been exceptions, one being
the American Bank and Tru s t Company situ a tio n in New York several
years ago where a foreign in ve s to r abused the bank to his own b e n e fit.
The Subcommittee 1s fa m ilia r w ith that unfortunate experience, which
Illu s tr a t e s the need fo r vig ila n c e in the examination process when
dealing w ith banks owned by In d ivid u a ls , domestic or fo re ig n .
Federal Reserve procedures on ap plication a c q u isitio n s
I should now lik e to turn to a descrip tion of how the Board
handles ap plications by foreign ers to acquire U.S. banking org a n iza tio n s.
The Bank Holding Company Act provides several c r it e r ia
which the Board 1s required to consider 1n judging applications to
form bank holding companies.
These are:
(1) the fin a n c ia l and
managerial resources of the acquiring company and the bank to be
acquired; (2) the fu tu re prospects of each; (3) the convenience and
needs of the community to be served; and (4) the e ffe c ts of the
proposal on com petition.
S im ila r c r it e r ia are to be considered by
the banking agencies under the Change 1n Bank Control Act.
These
c r it e r ia apply to both foreign and domestic acqu irers.
When an a p plication 1s received by the Federal Reserve from
fo re ig n banking organizations or foreign in d ivid u a ls to form a bank
holding company, the same general procedures are follow ed and the
same general Inform ation 1s required as 1f domestic organizations or
domestic in d ivid u a ls were in vo lve d .
A ls o , a concerted e ffo rt Is made
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to obtain additional inform ation that w ill enable an evaluation o f
the applying foreign banking organization viewed against the environ
ment in which I t operates 1n It s home country.
In the case of foreign
In d ivid u a ls , they are required to submit fin a n cia l statements and
other inform ation s u ffic ie n t to assess t h e ir a b il it y to manage a
banking organization and to stand behind the acquired bank.
Contact
1s u su a lly made w ith the appropriate foreign su p e rviso ry a u th o rity
about the condition and reputation of the fo re ig n applicant.
When a
foreign banking organization is in vo lve d , th is procedure Is 1n keeping
w ith the broad agreement reached among the central banks and bank
su p ervisory a u th o ritie s of the G-10 countries and Sw itzerland that
fo re ig n banks operating w ith in t h e ir t e r r it o r ie s should be adequately
supervised In s titu tio n s 1n t h e ir home countries and that the home
country supervisors shall supervise the a c t iv it ie s of t h e ir banks on
a consolidated basis.
Some major recent acqu isition s
I propose now to comment on three recent major a cq u isition s
as requested 1n you r le t t e r to t e s t i f y .
The cases are:
f i r s t , the
a c q u isitio n of Crocker National Corporation by Midland Bank Lim ited;
second, the a c q u isitio n of Financial General Bankshares by a group of
Middle Eastern In ve sto rs; and t h ir d , the a c q u isition of LITCO
Bancorporatlon by Banca Commerciale Ita lla n a .
confined to the h ig h lig h ts of each case.
My remarks w ill be
More d e ta ils are contained
in the Board's orders approving the a cq u isition s which I should lik e
to submit fo r inclusion in the record.
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Crocker National Corporation.
In e a rly 1981, Midland Bank
Lim ited, one of the major London clea rin g banks, applied to acquire a
m a jo rity In te re st In Crocker National Corporation, whose prin cip a l
su b sid ia ry bank and p rin cip a l asset 1s Crocker National Bank.
At the
tim e, Midland Bank had to ta l deposits of $55 b illio n and was the
th ird la rg e st bank 1n the United Kingdom.
Crocker National Bank had
to ta l assets of $19 b illio n and was the fou rth la rg e st bank 1n
C a lifo rn ia and the tw e lfth la rgest 1n the United S tates.
Under the proposal, Midland Bank would immediately acquire
51 percent of the stock o f Crocker National Corporation w ith the
In te n tio n of u ltim a te ly acquiring 57 percent.
The end re s u lt of the
a c q u isitio n would be an Infusion of $495 m illio n 1n new capital in to
the Crocker National Corporation.
At the time of the a p p lic a tio n ,
Midland Bank had no operating banking presence In the United S tates.
It s only representation was as a part owner of European American Bank
and T ru s t Company, a consortium bank in New York owned by s ix banks
from d iffe re n t European countries.
Although the a c q u isition of a large U.S. bank was in vo lve d ,
there were v i r t u a ll y no Issues presented by the a p plication under the
c r it e r ia specified 1n the Bank Holding Compariy A ct.
There were no
adverse com petitive fa cto rs in the a p plication since Midland Bank had
no d ire c t banking operations in C a lifo rn ia o r elsewhere 1n the United
States.
Midland Bank was in strong fin a n cia l condition and It s
reputation as an International bank was undoubted.
The proposed
capital Infusion was regarded as a fa c to r weighing 1n fa vo r o f
approval.
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In approving the bank a c q u is itio n , the Board had also to
consider the other a c t iv it ie s of the Midland Bank organization in the
United States and t h e ir consistency with the requirements of the Bank
Holding Company Act.
As a re s u lt, the Board order approving the bank
holding company form ation required that Midland d ive s t it s 20 percent
In te re s t in European American Bank on the grounds that retention
would be Inconsistent w ith the p o lic y underlying Section 3(d) of the
Act.
Under that section, bank holding companies are e ffe c t iv e ly
barred from acquiring more than 5 percent of the shares of a bank 1n
another state.
The Board also denied an exemption from the p ro h ib itio n s
o f Section 4 of the Act fo r the a c t iv it ie s of the U.S. su b sid ia ry of
Thomas Cook Ltd .
That company provides re ta il and wholesale tra ve l
services 1n the United S ta tes, an a c t iv it y which the Board has found
as not c lo s e ly related to banking.
Financial General Bankshares.
Financial General Bankshares
1s a m u lti-sta te bank holding company w ith 12 banks located in the
D is t r ic t of Columbia and the states of Maryland, New York, Tennessee,
and V irg in ia .
In November 1978, the f i r s t ap plications to acquire
t h is holding company were made by C redit and Commerce American Holdings
of the Netherlands A n tille s and C redit and Commerce American Investment
o f the Netherlands.
The two applicant companies were formed by a
group of In d ivid u a l In vestors from several Middle Eastern countries
f o r the purpose of the a c q u isitio n .
A protracted process ensued.
The proposed a c q u isitio n was at f i r s t opposed by e x is tin g management
o f Financial General and it s su b sid ia ry banks.
Moreover, two of the
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state banking supervisors In vo lve d (V irg in ia and Tennessee) recommended
denial on the grounds that the a c q u isitio n would be detrim ental to
the convenience and needs of the communities served.
In a d d itio n ,
the A ttorney General of the State of Maryland Issued an opinion that
Maryland state law precluded a Maryland banking in s t it u t io n from
being subject to an " u n frie n d ly” a f f ilia t io n .
In these circumstances,
the Board dismissed the f i r s t ap plications on the grounds that 1t was
p rohibited from approving a proposal that would v io la te state law.
These com plications were subsequently resolved and a new
ap plica tion was file d in November 1980.
While a number of technical
issues remained, the p rin cip a l Issue fo r the Board then became the
Id e n tity of the purchasers, t h e ir reputation and t h e ir fin a n cia l
stre n g th , and what those a ttrib u te s meant fo r the fu tu re operations
o f the bank holding company.
The Middle Eastern In ve sto r group consisted of 14 In d ivid u a ls
and companies from Saudi Arabia, the United Arab Em irates, and Kuwait.
The group included eight In d iv id u a ls , three personal holding companies,
two government-owned companies, and one p riva te company.
In the
course of processing the a p p lic a tio n , a meeting was held at the
Board's o ffic e s which was attended by representatives of the
in ve s to r group, counsel f o r the applicants, and representatives of
the state banking departments Involved and the Com ptroller of the
Currency.
The Inform ation developed at th is meeting became part of
the record on which the Board based It s decision.
In making that
decision , the Board took special care to review the fin a n c ia l resources
- 14 of a ll the In ve s to rs .
The Inform ation submitted demonstrated that
a ll the Investors possessed s u ffic ie n t fin a n cia l resources to make
the a c q u isitio n and to provide fu tu re support i f needed.
The fin a n c ia l fa ctors re la tin g to the a c q u isitio n of Financial
General were considered to be consistent w ith approval.
So fa r as
management was concerned, the In vestors did not propose to take an
a c tive ro le themselves.
Rather, they proposed to have a ll the d ire c to r
and top management position s f i l l e d by q u a lifie d Americans.
The
Board c a re fu lly reviewed the composition of the proposed board of
d ire c to rs of Financial General and the proposed senior management and
s a tis fie d I t s e l f about t h e ir q u a lific a tio n s .
The Board approved the a c q u isitio n on August 25, 1981.
The
transaction was consummated 1n A p ril 1982 and the name of the organi
za tion was subsequently changed to F ir s t American Bankshares.
LITCO Bancorporation.
In December 1981, Banca Commerciale
Ita lia n a (BCI) applied to the Board to acquire LITCO Bancorporation
of New York, a bank holding company owning a ll of the shares of Long
Island Tru s t Company.
Long Island T ru s t Company had about $1.1
b illio n In assets and Its business o rie n ta tio n was p rim a rily directed
to domestic business in the M etropolitan New York area.
BCI was the
second la rg e st bank 1n It a ly and had consolidated assets of about
$34.5 b illio n .
BCI conducted a wholesale banking business in the
United States through branches 1n New York and Chicago and an agency
1n Los Angeles.
BCI 1s In d ire c tly owned by the Ita lia n Government
through a government holding company, Is t it u t o per la R icostruzion e
In d u stria le ( IR I).
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In th is case, as w ith the Midland/Crocker a c q u is itio n ,
there were few Issues under the sta tu to ry fa ctors prescribed 1n the
Bank Holding Company Act.
The Board found that the a c q u isitio n would
have no s ig n ific a n tly adverse e ffe cts on the concentration of banking
resources or on e x is tin g or potential com petition.
BCI had committed
to in je c t $20 m illio n of foreign capital Into LITCO and to maintain
LITCO among the more s tro n g ly c a p ita lize d in s titu tio n s 1n the United
States.
As f o r BCI I t s e l f , the Board made It s evaluation on the
basis of It s p o lic y statement on supervision of foreign bank holding
companies that takes a number of fa ctors Into account 1n judging the
fin a n c ia l and managerial resources of a foreign banking o rga n iza tion .
In addition to It s fin a n cia l con d ition , these Included the record and
In t e g r it y of management, the bank's standing and ro le 1n It s home
country, and the opinion of the home country re g u la to rs.
Having
considered these fa c to rs , the Board concluded that the fin a n c ia l and
managerial resources of BCI were s a tis fa c to ry.
During the Board's consideration of th is case, several
issues emerged that stemmed from the fact that BCI Is In d ire c tly
owned by the Government of I t a l y .
are na tionalized In s titu tio n s .
The fo u r la rgest banks 1n I t a ly
A ll conduct banking operations 1n
several states in the United S tates.
The Ita lia n Government also
operates a number of na tion a lized Ind u stries and commercial e n te rp rise s,
many of which have su b sid ia rie s In the United States.
The sp e c ific question that arose 1n these circumstances was
how foreign governments o r governmental e n title s should be treated
under the Bank Holding Company Act.
Should they be subject to the
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16
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same p ro visio n s as a p riva te company or is a d iffe re n t treatment
warranted?
The p rin c ip le of national treatment 1s the basic government
p o lic y toward fo re ig n banks and 1s embodied 1n the Internation al
Banking Act of 1978.
The essence of that p rin c ip le 1s that foreign
banking organizations and t h e ir owners be treated the same as t h e ir
domestic counterparts.
The Bank Holding Company A ct, which governs
the a c t iv it ie s of domestic banking o rg a n iza tio n s, has among It s purposes
the prevention of c o n flic ts of In te re s t and undue concentration of
resources.
These o b je c tive s are Intended to help ensure that banks
1n the United States serve as e ffe c tiv e and Im partial c re d it
Interm ed iaries.
To th is end, the Act provides that a p riva te company
cannot own a U.S. bank and also own companies 1n the United States
that engage 1n In d u stria l and commercial a c t iv it ie s .
A lso , a p riva te
company cannot, as a general ru le , own and operate banks In more than
one sta te .
These rules apply to a ll p riva te companies, domestic o r
fo re ig n , although fo r foreign p riva te companies exceptions are allowed
fo r In d ire c t In te re sts 1n the U.S. operations of foreign commercial
and In d u stria l companies.
A pplication of these rules to a foreign
government would mean that I t could not In d ire c tly own banks 1n more
than one state.
S im ila r ly , a fo re ig n government that In d ire c tly
owned a bank 1n the United States would have to conform It s nonbanking
a c t iv it ie s 1n the United States to those perm issible to a p riv a te ly
owned foreign banking o rg a n iza tio n .
F a ilu re to apply these rules to
fo re ig n government-owned banks, I t can be argued, would give those
organizations advantages over t h e ir privately-ow ned counterparts and
- 17 thus would be inconsistent with the p rin c ip le of national treatm ent.
D is tin c tio n s can be drawn between p riva te and government
ownership and they may form a basis fo r d ifferen ces 1n treatm ent.
The Bank Holding Company Act presumes that a ll banks and nonbank
companies under common ownership and control are operated as an
Integrated whole.
That presumption stems from the A ct's o b je c tive s
of avoiding c o n flic ts of in te re s t and undue concentration of resources
when banking and nonbanking a c t iv it ie s are combined under common
control and management.
Th is presumption also re fle c ts experience,
e s p e c ia lly in the United S tates, that p riv a te companies do operate in
th is way.
Foreign countries that have na tion a lized banks and other
e nterprises have done so fo r a v a rie ty of h is to ric a l and p o lic y
reasons.
Some foreign governments do operate, and In fa ct have good
p o lic y reasons fo r so operating, the na tion a lized banks and na tion a lized
businesses as separate e n titie s .
However, conditions va ry from
country to country and may change over time w ith in a country w ith
changes In p o lit ic a l philosophy o r 1n other circumstances.
Th is
d iv e r s it y h ig h lig h ts the d i f f ic u lt y of e sta b lish in g a p o lic y su ita b le
to a ll situ a tio n s that avoids making a rb itra ry d is tin c tio n s among
c o u n trie s.
L i t t l e guidance on these questions 1s provided In the Act.
I t exp re ssly exempts from It s a p plication organizations owned by the
Federal Government or state governments.
the status of foreign governments.
However, i t 1s s ile n t on
-
18-
The question of applying the Act to foreign governments 1s
not concerned w ith the a c t iv it ie s they conduct w ith in t h e ir own
t e r r it o r ie s or outside the United States.
I t 1s s o le ly concerned
w ith those a c t iv it ie s that extend In to the United S tates.
Applying
the Act to fo re ig n governments even 1n that more lim ite d sense has
broad Im plications that extend beyond the p u re ly re g u la to ry Issues.
For example, s t r ic t application of the lim ita tio n on nonbanking
a c t iv it ie s could preclude foreign government owned banks from engaging
1n banking a c t iv it ie s 1n the United States.
Th is could ra ise Important
questions 1n the fie ld s of U.S. foreign re la tio n s and U.S. foreign
Investment and economic p o lic y .
P rio r to the BCI case, the Board had approved a number of
applications to form bank holding companies by foreign banks that
were government owned and where the foreign government In d ire c tly had
commercial and In d u stria l a c t iv it ie s 1n the United States.
In those
cases, the Board did not apply the Act to the applicant's government
owners.
A fte r careful consideration, and pending fu rth e r examination
of the issues outlined here, the Board decided to continue the previous
practice 1n the BCI case.
In approving the a p p lic a tio n , the Board recognized that the
Act Is concerned not o n ly with problems of actual c o n flic ts of In te re st
o r concentration of resources but also w ith the potential fo r those
problems.
For th is reason, the Board In it s order h ig h lig h te d It s
b e lie f that the issues associated w ith foreign government ownership
should be brought to the a tte n tio n of the pu blic fo r fu rth e r discussion
and debate.
Because of the com plexity and fa r-rea ch in g im plications
- 19 of these Issues, some of which I have trie d to convey, the Board
stated 1n It s order that they should be resolved 1n a Congressional
framework where a ll of the releva n t considerations could be examined
and weighed.
In recognition of the potential c o n flic ts In the BCI case,
the Board decided th a t Ita lia n government owned banking and nonbanking
organizations were a f f ilia t e s of LITCO.
As a consequence, the amount
lim ita tio n s and c o lla te ra l requirements o f Section 23A of the Federal
Reserve Act would apply to extensions of c re d it by LITCO to these
a f f ilia t e s .
The Board believed that the application o f Section 23A
to th is situ a tio n would help 11m1t the potential f o r practices
c o n flic tin g with the purposes of the Bank Holding Company A ct.
Conclusion
To sum up, fo re ig n In te re st 1n e sta b lish in g and expanding
banking operations 1n the United States continues unabated.
Most of
those operations w ill continue to be conducted through branches and
agencies, but I t 1s reasonable to expect that foreign ers w ill also
seek to acquire o r esta b lish su b sid ia ry banks.
The involvem ent of
foreign banks In our banking system and foreign Investment in U.S.
banks have benefltted the United States and I b e lie ve that they w ill
continue to do so.
There are problems associated w ith foreign Investments in
U.S. banks, and 1n th is statement I have trie d to Id e n tify them and
to place them in perspective.
On the whole, the performance of
foreign-owned banks has been s a tis fa c to ry and su p e rviso ry problems
- 20 -
have not been se rio u s.
As foreign Involvement 1n the banking system
Increases, new problems and new Issues w ill su re ly emerge.
T h is
c a lls fo r continuous m onitoring o f developments and the adaptation of
su p e rviso ry requirements to them.
In discussing the BCI case, I devoted a large amount of
time to the Isssue of the treatment of foreign governments and foreign
government owned e n titie s under the Bank Holding Company Act.
Th is
issue is extrem ely complex and the questions that a ris e in evaluating
the Issue are themselves ve ry d i f f i c u l t .
The Board I t s e lf has not
reached any firm conclusions on these issues and 1s not prepared to
make le g is la t iv e recommendations at th is tim e.
For t h is reason, the
Board welcomes these hearings as c o n trib u tin g to the pu blic discussion
o f these Issues that i t b elieves desira b le.
We hope that the discussion
w ill evoke thoughtful and c o n stru ctive consideration by the Congress,
other government agencies, fo re ig n banking a u th o ritie s , and the
banking community both here and abroad.
FOREIGN OWNERSHIP OF U.S. BANKS: TRENDS AND EFFECTS*
by James V. Houpt
Foreign ownership of U.S. banks has increased dram atically 1n recent
years and has attracted substantial in te re st from the Congress, the bank regula
to r y agencies, the banking in d u stry, and the general p u blic.
P rio r to the mid-1970s
the pace o f acquisitions was slow, and the owners were u su a lly large banks that
established new banks or acquired banks of small or moderate s iz e .
however, the pattern has changed.
Since then,
Foreign parties have more often bought e xis tin g
banks, rather than establish new ones; in d ivid u a l investors have expanded th e ir ro le
and the s ize o f the acquired banks has increased tremendously.
Since 1978, foreign
banks have acquired the 12th and 13th largest U.S. banks, as well as two others
that rank among the top f i f t y .
Because o f the key ro le banks perform 1n any s o c ie ty, 1t is Important
to examine th is trend.
The Federal Reserve Board s t a ff , the
O ffice o f the
Com ptroller of the Currency, and the General Accounting O ffic e have a ll
addressed the issue to determine what impact these acquisitions may have on
1/
the p u b lic .
No study to date, however, has id e n tifie d any systematic problems
or abuses that can be traced to foreign owners.
In Its report 1n 1980, the General
Accounting O ffic e also conceded that the level o f foreign ownership was not (then)
"too high."
It d id , however, recommend a moratorium on large foreign acqu isitions
u n til the laws p ro h ib itin g domestic in te rsta te banking were f u l l y reviewed.
At present, no moratorium e x is ts .
1_/ “Foreign A cquisitions of United States Banks," Federal Reserve. Board S ta ff,
June 30, 1980; various S ta ff Papers published by the O ffice o f the Com ptroller
o f the Currency, June-September, 1980; "Despite P o s itive E ffe c ts , Further
Foreign Acquisitions of U.S. Banks Should Be Limited Until P olicy C on flicts
are F u lly Addressed," report by the General Accounting O ffic e , August 26, 1980.
The analyses and conclusions set fo rth are those o f the author and do not
n ecessa rily indicate concurrence by the Board of Governors, by the Federal
Reserve Banks, or by the member o f th e ir s ta ffs .
* This study has been accepted fo r publication by the Journal of Bank Research.
-2-
This study updates an e a rlie r empirical study that examined the
effects of foreign ownership on U.S. banks.
1/
When the e a rlie r study was
done, the most recent data availab le were as o f year-end 1978, and there
were r e la t iv e ly few banks w ith an adequate time period under foreign owner*
ship to analyze.
This study uses year-end 1980 data and includes almost
twice as many banks as before.
It also t e lls more about the influence o f
the two types of foreign owners:
large foreign banks and foreign individua l
i nvestors.
Therefore, th is study has important advantages over the previous work:
more recent data, a la rger sample, and a longer time period under foreign owner
ship fo r differences to appear.
It is important to stre s s , however, that neither
of the two largest foreign acquisitions is included.
Hong Kong Shanghai Bank
ing Corporation did not consummate it s purchase of Marine Midland Bank (New York)
u n til mid-1980, and the Federal Reserve Board did not approve the a cq u isition
o f Crocker National Bank (San Francisco) by Midland Bank (United Kingdom)
un til August 1981.
The largest banks that were included were Union Bank,
(Los Angeles) and the National Bank of North America (New York), w ith year-end
1980 consolidated assets o f $7 b illio n and $5.7 b illio n , re s p e c tive ly.
The reader
should also recognize that the findings describe the "typical" (and h is to ric a l)
perfonnance of the banks acquired.
The performance of in d ivid u a l banks may
d if f e r from the general pattern.
The study 1s in three parts.
Part I reviews the s ize and growth trends
of foreign-owned or controlled U.S. banks.
Part I I describes the methodology used
and presents the fin d in gs.. Part I I I presents a summary and some conclusions.
1J Foreign Ownership and the Performance of U.S. Banks, Board S ta ff Study #109,
Ju ly 1980, by James V. Houpt.
-3-
FOREIGN PRESENCE IN U.S. BANKING
During the past decade, foreign banks and foreign investors established
a s ig n ific a n t presence in U.S. banking markets.
At OeGember 1972, foreign-owned
or controlled banking o ffic e s accounted fo r $26.9 b illio n and 3.6 percent o f total
U.S. domestic banking assets (Table 1).
By year-end 1980, these figures had
climbed to $213.4 b illio n and 12.5 percent.
Most o f th is increase was due to the
growth o f U.S. branch and agency o ffic e s o f foreign banks, but the Increase in
foreign-owned U.S. banks was also substantial.
Branch and agency o ffic e s are integral parts o f foreign banks and r e ly
almost e n tire ly on internal growth.
Therefore, w hile th e ir Impact on various
markets might be su b sta n tia l, th e ir de novo expansion has g en era lly been procom petitive and has led to broader and more e ffic ie n t finan cial markets.
Few
commentators have questioned the p riv ile g e o f foreign banks to operate branches
or agencies 1n th is country.
1/
The second method o f expansion, and the focus o f th is study, is
growth by acquiring or merging with established U.S. banks.
The acquired banks,
th e ir shareholders, and the U.S. public in general might b en efit from foreign
a c q u isition s, but the p o sitive .b e n e fits to society are often less clea r than
with de novo growth.
Some c r it ic s have expressed concern that by acquiring
e xistin g banks, foreign owners w ill change the operations o f the banks to the
detriment of the local communities.
Foreign owners might lack the commitment
to the community that a U.S. owner would have; they might introduce c o n flic tin g
2/ This is not to say the lawmakers and banking a u th orities have been d is in te r
ested in the a c t iv it ie s and growth of these o ffic e s.. Indeed, Congress passed
the International Banking Act of 1978 to elim inate inequities in U.S. laws that
favored foreign banks over th e ir domestic competitors. .Among other th in gs, the
IBA prevented fu rth er In tersta te expansion of deposit-taking o ffic e s of foreign
banks, subjected the deposits o f th e ir U.S. branches to federal reserve require
ments, and 1n some cases required the U.S. deposits o f foreign bank branches to
be insured by the FDIC.
Table 1
Total Assets o f Foreign C on trolled U.S. Banking O ffic e s
(Amounts in b illio n $)
O ffic e
1972
Assets Number
1980
Assets Number
Increase
1972-80
Number
Assets
Branches and agencies
$22.2
76
$148.0
322
$125.8
246
Subsidiary U.S. banks
4.7
34
65.4
104
60.7
70
26.9
110
213.4
426
186.5
316
3.6
.8
12.5
2.8
8.9
2.0
Total
Percent of domestic
banking In d u stry J/
V The denominator is to ta l domestic assets o f a ll U.S. insured commercial banks, plus
those of U.S. branches and agencies of foreign banks.
-4-
(foreign) in te re s ts ; and they might be outside the reach of U.S. a u th o ritie s and
domestic c o n tro ls.
Table 2 shows that during the period from year-end 1972-1980, the
number o f foreign-owned U.S. banks t rip le d and th e ir assets increased 1,300 per
cent.
The domestic assets o f Crocker and Financial General Bankshares
(Washington, D.C.) would increase the year-end 1980 fig u re s by 27 percent.
1/
When these acquisitions are consummated, foreign parties w ill control about
5.4 percent of the domestic banking assets o f U.S. banks, compared w ith o n ly
0.6 percent in 1972.
Table 2 also h ig h lig h ts the s h ift from establishin g su b sid ia ry U.S.
banks to acquiring e xis tin g banks.
At year-end 1972, 28 o f the 34 fo re ig n -
owned banks had been established de novo, m ostly by large foreign banks.
During 1976-80, by contra st, over 50 e x is tin g U.S. banks were purchased
by foreign parties w hile o n ly 8 were established new.
Because of mergers
between de novo and p re vio u sly U.S.-owned banks, the precise s p lit between
newly established and acquired foreign-owned banks cannot be known, but the
acquired banks c le a rly dominate both the assets and the number o f U.S. banks
owned by foreign p a rtie s.
Another important trend that sometimes goes unnoticed 1s the
increased Interest of foreign investors other than large banks to acquire
U.S. banks.
P rio r to the mid-1970s, v ir t u a lly a ll foreign owners were, them
se lve s, banks.
While they s t i l l dominate the assets of foreign-owned U.S.
banks, purchases by other parties (mostly individua l investors), have risen
y At the same time the Federal Reserve Board approved Midland Bank's request
to acquire Crocker National Corporation, i t also granted it s consent to a group
o f Middle East investors to acquire Financial General Bankshares, which has
assets exceeding $2 b illio n .
Table 2
Domestic Assets of U.S. Banks Controlled by Foreign P arties, 1972-80
(D ollar amounts in m illions)
Foreign-owned banks
as a percent of a ll
1/
l)e Novo
Domestic Number
assets
of banks
Year
Foreign-owned banks at December 1972 4,364
28
Purchase or merger
Domestic Number
o f banks
assets
290
6
Total
banks
Domestic Number
Domestic
assets
of banks assets
4,654
34
0.62
Number
o f banks
0.23
Annual increases
1973
1974
1975
1976
1977
1978
1979
1980
Foreign-owned banks at December 1980
•••
•••
•••
•••
•••
•••
•••
•••
1
8
0
1
4
3
0
0
3/
y
40
5,450
932
3,300
1,490
1,014
9,889
12,565
3/
Pro forma with Crocker and Financial General
1
4 2/
3“
11
10
14
12
8 5/
3/
2
12 2/
3_
12
14
17
12
8
•••
•••
•••
•••
•••
•••
•••
• ••
65,419
104 4/
4.26
0.71
83,403
118
5.44
0.82
•••
•••
•••
•••
•••
•••
•••
•••
\J For banks merged or acquired, assets shown are as of year-end preceding foreign acqu isition,
a re, by d e fin itio n , newly-formed, they have no assets to show fo r that date.
because de novo banks
ZJ Includes Franklin National Bank ($3.8 b illio n ) .
y Cannot be determined because of mergers of de novo banks with banks previously owned by U.S. p a rtie s.
£/ The number of banks does not equal the sum fo r the individual years because of mergers.
5/ Includes Marine Midland ($11.1 b ill ion--domestic assets o n ly).
•••
•• •
•••
•• •
•••
•••
•••
•••
-5-
sha rp ly.
This second group accounts fo r 38 of the 104 U.S. banks owned by
foreign parties at year-end 1980, or more than one-third of the to ta l.
A ll
but three of these 38 banks have been acquired since 1975.
Most public attention and p o lic y issues have focussed on the
acq u isition o f major U.S. banks by large foreign banks.
Some commentators
point to the lack of re c ip ro c ity of most foreign governments in perm itting
s im ila r-s ize d bank purchases 1n th e ir countries and also question the prudence
o f allow ing major U.S. banks to become foreign-owned.
Large U.S. banks
u su a lly have sizeable shares of local markets, and changes to th e ir lending
p o lic ie s may s ig n ific a n tly affect th e ir communities.
Such concerns do not
genera lly arise w ith banks acquired by foreign individua l investors because
they tend to be sm aller and less v is ib le , with r e la t iv e ly less market impact.
Another d is tin c tio n is that banks acquired by large foreign banks become
part o f an international banking network.
Consequently, foreign banks, might
have d iffe re n t objectives fo r U.S. banks than would individua l investors and
might tend to operate th e ir banks d iffe re n tly .
EMPIRICAL STUDY
The study attempts to answer three questions:
(1) Did the acquired banks d if f e r from th e ir U.S.-owned
peers p rio r to th e ir change in ownership?
(2) What are the present differences between the acquired
banks and th e ir peers?
(3) How have foreign owners influenced the operations of
the acquired banks?
For each question, the study also distinguishes between the p erfor
mance of U.S. banks acquired by large foreign banks and those acquired by other
foreign p a rtie s, v ir t u a lly a ll of whom are individua l In ve sto rs.
-6-
Methodology
The study 1s based on a review o f call report data fo r a ll U.S. banks
known to be owned by foreign parties p rio r to year-end 1979.
This procedure
omits the most re ce n tly acquired banks because of th e ir b r ie f experience under
foreign owners and produced an average period under foreign ownership of over
3.5 ye a rs .
Other banks were excluded from the study because they had merged
into e xis tin g foreign-owned U.S. banks and represented o n ly in s ig n ific a n t parts
o f the re su ltin g in s titu tio n s .
In cases where the merged bank was not in s ig n if i
cant, i t was used in the study by combining it s data w ith that o f the already
foreign-owned bank and creating a "pro-forma" bank fo r the year preceding the
1/
merger.
The banks reviewed were placed Into two categories based on the
type o f foreign owner:
(1) a foreign p riva te in ve sto r or "small" foreign bank
2/
(referred to as "small parents"), and (2) large foreign banks ("large" parents).
Each foreign-owned bank was paired w ith a "peer bank,” which was con
structed as an average o f a ll banks that (1) were domiciled in the same standard
m etropolitan s ta tis tic a l area as the foreign-owned bank; (2) existed both at the
year-end preceding acq u isition of the foreign-owned bank and.at year-end 1980;
] y Only mergers in which the p re vio u sly U.S.-owned bank represented at least 40
percent of the assets o f the "acquiring" foreign-owned bank were used. In most
cases, the percentage was a c tu a lly much la rg e r than th a t.
2/ A large foreign bank is one that (a) has to ta l asset exceeding $5 b illio n , o r
Tb) is among the three largest banks in Its home country and is at least ten
times thé s ize o f it s U.S. bank su b sid ia ry (or su b sid ia rie s). These c rit e ria
ensure that.th e parent is large even by international standards or is at least
ve ry Important in it s home country and c le a rly dominant to the U-.S. bank.
The e a rlie r study (see footnote on p. 1) also checked fo r differences between
acquired and newly established foreign-owned banks. This analysis has been
omitted here. The comparison did reveal s ig n ific a n t differences between these
two bank groups re la tin g m ostly to th e ir customer o rie n ta tio n , funding practices,
and c a p ita liza tio n ra tio s . For a fu ll discussion of these d ifferen ces, see the
e a r lie r study.
-7-
and (3) were in the same s ize class as the foreign-owned bank at the e a r lie r
period.
Financial ra tio s fo r each merged or acquired bank were then compared
1/
w ith the mean of the corresponding ra tio s of Its peer bank.
Comparison of a ra tio fo r each foreign-owned bank w ith the mean ra tio
of it s peers avoids the problems and possible errors inherent in attempting to
select a p a rtic u la r bank as a peer and re lie s on the more numerous "representa
tive " peers to o ffs e t any d is to rtio n caused by an o u t lie r .
While not e xp re ssly
shown in the table below, most acquired banks were compared w ith over 20 "peer"
banks.
This approach may produce findings s lig h t ly d iffe re n t from an approach
based on pairings w ith in d ivid u a l banks.
In a d d ition , using composite data
reduces the variance w ithin the peer group, and consequently is more lik e ly than
the other technique to id e n tify differences between foreign-owned U.S. banks
2/
and th e ir peers.
The s ize classes used in the study are shown below:
y The terms used in th is study are defined as fo llo w s: consumer loans are real
estate loans on one- to fo u r-fa m ily and m ultlfa m ily properties plus loans to In
d ivid u a ls ; purchased funds are time deposits greater than $100,000 plus federal
funds purchases and se c u ritie s repurchase agreements plus other l ia b il it i e s fo r
borrowed money; income is net income before e xtraordinary items; and equ ity is
the tota l equ ity capital account, which excludes subordinated debt and loan-1oss
reserves. Risk assets are tota l assets less cash, claims on domestic o ffic e s of com
mercial banks, and debt of or guaranteeed by the U.S. federal government. Adjusted
e q u ity is equal to tota l eq u ity capital plus the reserve fo r loan losses. Except
fo r ra tio s in vo lvin g equ ity or income fig u re s , a ll amounts re la te to domestic
o ffic e s o n ly.
2/ Comparisons based on paired data are discussed in John E. Freund, Mathematical
“S ta tis tic s (Prentice H a ll, 1971). Certain studies addressing the performances o f
bank holding companies have paired Individual banks to evaluate differences in
performance. See Samuel H. T a lle y , The Effect of Holding Company A cquisitions
on Bank Performance (Board of Governors of the Federal Reserve System, 1972),
and Robert J . Lawrence, The Performance of Bank Holding Companies (Board of
Governors, 1967).
-8-
Total domestic assets
(m illio n s of d o lla rs)
0
60
200
750
1,500
Number o f acquired
banks in study
60
200
750 1/
- 1,500 1 /
- 3,000 T/
Average Number of Peer Banks
"Small" Barents
“Large'1 Parents
24
46
17
10
4
4
3
2
3,000 - 8,000 2/
8
4
37
25
27
16
33
40
28
To address the f i r s t question, on the p re -e xis tin g c h a ra c te ristic s of
the acquired banks, selected financial ra tios fo r a ll foreign-acquired banks
included In the study were compared with those of th e ir peer banks fo r the ye a rend immediately preceding the change 1n ownership.
A sim ila r comparison was made
using year-end 1980 data fo r both groups of banks to address the second question,
about current differen ces.
F in a lly , to evaluate the significance of differences in changes in
c haracteristics between the acquired banks and th e ir peers, the percentage change
in the ra tio s from the e a rlie r period u n til year-end 1980 was calculated fo r each
bank and it s peer.
These percentages were then converted Into annual rates o f
change to fa c ilita te aggregation of banks acquired in d iffe re n t ye a rs.
Tests
were then performed to determine i f the changes in those banks acquired by foreign
parties were s ig n ific a n tly d iffe re n t from the changes fo r th e ir peers.
Measurement of S ta tis tic a l Significance
The standard mean te st was used to answer most of the questions regarding d if f e r
ences between the two groups o f banks.
This te st evaluates the hypothesis that
1/ The peer group fo r banks located in C a lifo rn ia in these size classes includes a ll
banks in the United States in the same size class. This adjustment was necessary
because most ( i f not a ll) of the banks' peers in the SMSA were also foreign-owned.
For example, only fiv e of the eighteen banks located 1n Los Angeles and San Francisc
areas and having year-end 1980 assets between $200 m illio n and $8,000 m illio n were
U.S.-owned banks.
2/ The peer group fo r both banks in th is size class includes a ll U.S. banks in
the same size cla ss.
-9-
the ra tio or rates of change fo r the two groups are the same
(Hq:
against the two-sided a lte rn a tive that they are not equal (H j:
xf=xp)
xf^xp) and
re fle c ts a comparison of t-va lu e using th is formula:
1
t - ( i f - x p v / ^ a r <xf - XP~>
n - 1
•
where
x f = mean of foreign-owned banks
x p = mean o f peer-group banks
X f - Xp ® difference between individua l paired observations
n * number o f paired observations.
This approach produces an unbiased s t a t is t ic and takes into consideration the
covariance between the paired data.
The resu lts of these te sts fo r the acquired
banks and th e ir peers are shown in tables 3-5 fo r the p re-a cq u isition period
and in tables 6-8 fo r year-end 1980.
The nature of the data and the p o s s ib ilit y o f tremendous percentage
changes made the t -te s t im practical when evaluating certain ra tio s .
1/
Consequently, to measure the difference in changes to three ra tio s , the "slgn2/
test" was used.
\] For example, a decrease 1n the ra tio of state and municipal se c u ritie s to
to ta l assets from 0.001 ( v ir t u a lly zero) to zero (a 100 percent drop) would
not present a representative comparison w ith a peer whose ra tio f e l l from 0.11
to 0.05. S im ila rly , many foreign-owned banks had ve ry low or negative earnings
bases on which to show Increases.
2/ In th is study, the sign te st considers whether the percentage change fo r
the foreign-owned banks was greater than the change recorded fo r the bank's
peer group. The number of instances 1n which the change was greater fo r the
foreign-owned bank is shown along with the corresponding lik e lih o o d (when i t
is sig n ific a n t) of getting these results i f indeed foreign-owned banks were
no d iffe re n t from U.S. banks. These calculations are based on the binomial
d is trib u tio n formula, which in th is instance gives the p ro b a b ility th a t, out
of a sample of n banks, x banks w ill exceed the peer group:
P(xfn) = (3) 0X ( l-8 ) n -x
where 0 1s the p ro b a b ility that the foreign bank w ill exceed the peer group
(placed at 50 percent to correspond with the hypothesis that there is no d i f
ference between the two groups).
-10-
Findings
This section presents the answers to the three questions about foreign owned banks and th e ir domestically-owned peers.
Since a cq u isition s by large
foreign banks may be viewed d iffe re n tly than acquisitions by other types of
foreign owners (mostly in d ivid u a ls ), the findings are also shown by type of
owner.
Tables 3 through 11 show the mean of selected finan cial ra tio s fo r both
the foreign-owned and U .S.-peer banks, give the degree of dispersion of the d i f
ferences, and indicate the confidence level fo r the differences that are
s t a t is t ic a lly s ig n ific a n t.
The general c h a ra c te ristic s of the foreign-owned banks p rio r to
t h e ir acqu isitions are discussed next.
Of special note, however, is the
fact that a substantial portion had poor p r o f it a b ilit y .
Indeed, 20 of the
47 acquired banks included in the study reported losses or earnings below
0.2 percent of tota l assets 1n the ye a r p rio r to t h e ir a c q u isitio n .
This
condition probably Influenced the change 1n ownership 1n many cases, as well
as the subsequent performance of the banks.
What were the pre-a cq u isition differences?
Tables 3-5 show the
cha ra cteristics of the banks p rio r to the period of foreign ownership.
of the differences found in the e a rlie r study appeared again.
Most
The acquired
banks held much sm aller amounts of state and municipal se c u ritie s than th e ir
peers, had r e la t iv e ly la rger loan p o rtfo lio s (because o f more commercial and
in d u stria l loans), and had much lower earnings.
Neither th is study nor the e a rlie r one revealed a difference In
equity to asset ra tio s .
Since most of the acquired banks in both studies
had poor or negative pre-acquistion earnings, and poor p ro fits and low equity
are often re la te d , th is lack o f difference seemed s u rp ris in g .
Consequently,
th is study also checked the adjusted equity to risk asset ra tio and did find a
Table 3
Financial data for all U.S. banks acquired by foreign parties
and for their domestically owned peers» for year-end preceding acquisition
Iten
Mean ra t io %
ForeignPeer
owned banks banks
Standard deviation
I t - J . u K . ________
t-va lu e
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government secu rities
27.1
28.4
1.02
-1.27
2/
6.5
10.2
.80
■4.61
.005
Total loans
Consumer
Commercial and In d u stria l
55.4
24.1
20.0
52.0
23.6
16.5
1.31
1.57
1.34
2.59
.32
2.61
.0 2 0
2/
.0 2 0
Total deposits
87.1
86.0
.68
1.61
1/
Savings deposits
22.8
22.6
1.18
.17
2/
Purchased funds
15.1
13.7
1.17
1.20
Equity capital
7.3
7.9
.57
-1.06
2/
.3
.7
.12
-3.43
.005
11.7
14.6
1.12
-2.58
.0 2 0
2.9
9.6
2.61
-2.57
.020
State and municipal se c u ritie s
Income
y
Other ra tio s
Adjusted eq u ity to ris k assets
Income to eq u ity capital
1_/ Foreign-owned value minus peer value.
2/ Not significant at the 0.10 level.
Table 4
Financial data for U.S. banks acquired by "small" foreign parents and for
their domestically owned peers, for year-end preceding acquisition
Item
Mean ra tio %
ForeignPeer
owned banks banks
Standard devia tion
*f - xp 1/________
t-va lu e
Level of
significance
Ratio to tota l assets
Cash and due from banks
plus U.S. government s e c u ritie s
27.6
29.2
1.38
-1.16
y
5.3
9.7
.99
-4.43
.005
Total loans
Consumer
Commercial and in d u s tria l
55.9
27.5
18.2
52.6
24.8
15.9
1.59
1.93
1.45
2.08
1.40
1.59
.050
Total deposits
88.3
88.1
.83
.24
Savings deposits
24.8
24.0
1.54
.52
Purchased funds
12.3
12.5
1.33
-.15
Equity capital
7.7
8.2
.75
-.67
y
y
y
y
.2
.7
.17
-2.77
.010
12.4
15.7
1.51
-2.18
.050
1.1
8.8
3.70
-2.08
.050
State and municipal se c u ritie s
Income
2/
1/
Other ra tio s
Adjusted equ ity to ris k assets
Income to equ ity capital
\J Foreign-owned value minus peer value.
2/ Not significant at the 0.10 level.
Table 5
Financial data for U.S. banks acquired by large foreign banks and for
their domestically owned peers, for year-end preceding acquisition
Item
Mean ra tio %
ForeignPeer
owned banks banks
Standard d evia tion
x f - x D 1/________
t-va lu e
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government securities
25.9
26.5
1.18
-.51
2/
9.2
11.5
1.36
-1.69
2/
Total loans
Consumer
Commercial and in d u stria l
54.2
16.1
24.3
50.7
20.7
17.8
2.03
2.29
2.94
•
Total deposits
84.2
81.1
Savings deposits
18.0
Purchased funds
State and municipal secu rities
Equity capital
Income
1.72
2/
2.01
2.21
.075
.050
1.04
2.97
.020
19.3
1.83
-.71
y
21.8
16.5
2.09
2.54
.020
6.5
7.3
.82
-.97
y
.5
.8
.11
-2.80
.020
10.2
11.9
1.26
-1.35
y
7.5
11.4
1.26
-3.10
.010
Other ra tio s
Adjusted eq u ity to ris k assets
Income to equ ity capital
\J Foreign-owned minus peer value.
2/ Not s ig n ific a n t at the 0.10 le v e l.
-11-
d iffe re n ce ; the mean ra tio fo r the acquired banks was s ig n ific a n tly lower than fo r
the U.S.-owned peer group.
1/
Weak o r troubled banks often reduce th e ir most
liq u id assets as a f i r s t - l i n e defense to combat problems.
Since th is tends to
produce higher concentrations of ris k assets, the equ ity to risk -a sse t ra tio is
u su a lly best fo r measuring "capital adequacy."
While the acquired banks as a group held less state and municipal
government se c u ritie s than th e ir peers, the differen ce was not s t a t is t ic a lly
sig n ific a n t fo r the sub sid ia ries of large foreign banks.
difference occurred o n ly w ith banks having small parents.
The sig n ific a n t
Exactly the reverse
held w ith the commercial and in d u stria l loan r a t io , where o n ly the banks
acquired by the large foreign banks had higher ra tio s than th e ir peers.
Both
sub-groups had low p r o f it a b ilit y , compared w ith th e ir peers.
What were the most recent differences?
As shown in Tables 6-8, most
o f the differences id e n tifie d in the period preceding acqu isition continued to
e x is t at year-end 1980.
Earnings of the acquired banks stayed low (although
the gap narrowed s lig h t ly ) , th e ir loan p o rtfo lio s remained la rg e , and th e ir
holdings of tax-sheltered state and local government se c u ritie s also remained
smal1.
O ve ra ll, the o n ly notable differences from the p re-acqu isition period
related to the equ ity and funding ra tio s .
For the e a rlie r period, the equ ity to
ris k asset ratios of the acquired banks were lower than those of the banks' peers;
by 1980, th is difference had disapeared.
On the other hand, at year-end 1980,
the foreign-acquired banks made greater use of purchased funds than did th e ir
peers, whereas before they had not.
1_/ Risk assets are tota l assets less cash, claims on domestic banks, and U.S.
government guaranteed se c u ritie s . Adjusted e q ity equals tota l eq u ity capital
plus the reserve fo r loan losses.
Table 6
Financial data for all U.S. banks acquired by foreign parties and for
their domestically owned peers, year-end 1980
Item
Hean ra tio %
ForeignPeer
owned banks banks
Standard deviation
X f - xp 1/________
t-va lu e
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government secu rities
26.2
27.9
1.70
-1.00
2/
5.4
11.0
.88
•6.40
.005
Total loans
Consumer
Commercial
54.5
21.4
19.5
51.5
23.3
15.8
1.65
1.73
1.40
1.82
.100
Total deposits«
83.1
83.7
Savings deposits
15.4
Purchased funds
State and municipal se c u ritie s
•
1.10
2.64
y
.070
1.02
-.59
2/
16.8
1.06
-1.32
2/
25.4
9.7
1.87
8.41
.005
8.6
7.9
.74
.94
1/
.8
1.0
.09
-2.29
.050
Adjusted e q u ity to ris k assets
14.2
13.6
1.46
.41
2/
Income to e q u ity capital
10.0
12.7
.87
-3.09
.005
E q u ity capital
Income
Other ra tio s
\ j Foreign-owned value minus peer value
2/ Not significant at the 0.10 level.
Table 7
Financial data for U.S. banks acquired by "small" foreign parents and
for their domestically owned peers, year-end 1980
Item
Mean ra tio %
ForeignPeer
owned banks banks
Standard devia tion
Xf - xp 1/________
t-va lu e
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government se c u ritie s
28.2
28.5
2.14
-.14
2/
5.5
11.1
.99
•5.64
.005
Total loans
Consumer
Commercial and in d u s tria l
52.6
21.5
18.6
51.8
24.2
15.2
2.00
2.06
1.89
.40
-1.31
1.80
U
.100
Total deposits
84.1
85.8
1.27
-1.34
y
Savings deposits
16.2
17.4
1.30
-.92
2/
Purchased funds
21.9
8.8
3.66
3.58
.005
Eq uity capital
9.4
8.4
1.03
.97
2/
.9
1.1
.12
•1.64
y
Adjusted equ ity to ris k assets
16.0
14.8
2.07
.58
y
Income to equ ity capital
10.7
13.4
1.15
•2.35
.025
State and municipal se c u ritie s
Income
2/
Other ra tio s
\J Foreign-owned value minus peer value.
2/ Not significant at the 0.10 level.
Table 8
Financial data for U.S. banks acquired by large foreign banks and
for their domestically owned peers, year-end 1980
Item
Mean ra tio %
ForeignPeer
owned banks banks
Standard deviation
if - xP 1/
t-value
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government secu rities
21.5
26.5
2.11
•2.37
.050
5.3
10.6
1.18
-4.51
.005
Total loans
Consumer
Commercial and in d u stria l
58.9
21.3
50.8
17.3
3.09
.03
2.98
.010
21.6
2.62
3.33
1.44
Total deposits
80.4
78.8
1.60
1.00
Savings deposits
13.6
15.4
1.89
-.95
y
y
Purchased funds
33.5
11.9
3.42
6.31
.005
Eq uity capital
6.8
6.8
.67
.5
.8
.11
-2.81
.020
10.0
10.9
1.05
-.86
y
8.4
11.0
1.49
-1.74
2/
State and municipal se c u ritie s
Income
21.2
0
.020
y
Other ra tio s
Adjusted e q u ity to ris k assets
Income to eq u ity capital
]_/ Foreign-owned value minus peer value.
2/ Not significant at the 0.10 level.
-12-
These o ve ra ll findings generally apply to both subgroups, although
there were some d ifferen ces.
S u rp ris in g ly, at year-end 1980 the p r o f it a b ilit y
of banks acquired by "small" foreign parents was sim ila r to that o f th e ir peers,
while the p r o f it a b ilit y o f banks acquired by large foreign banks remained re la
t i v e l y low.
This difference might be explained by the re la tiv e s ize of the
acquired banks.
It often takes longer to su b sta n tia lly improve a large in s t i
tu tion than a small one, and the large foreign banks genera lly acquire larger
1/
U.S. banks.
An indicator o f liq u id it y — loans to tota l assets— was also d i f
ferent fo r the two subgroups.
Banks w ith "small" foreign parents had ra tio s
sim ila r to those of th e ir peers, w hile the banks that were acquired by large
foreign banks had ra tio s s ig n ific a n tly higher than th e ir peers.
This d ifferen ce
might re fle c t the need fo r the former to stand alone, w hile the la tte r can
be more "1oaned-upN and r e ly on the financial backing o f a large foreign bank
should the need a ris e .
The ra tio of "cash" and U.S. government se c u ritie s to
tota l assets fu rth e r supports th is fin d in g .
Have the banks changed in d iffe re n t ways?
The th ird and perhaps
the most important question relates to the way foreign owners have changed
the operations of the acquired banks.
In evaluating these changes and the
differences between the groups, one must also keep in mind the differences
discussed e a rlie r.
In terms of s ize and loca tion , the selected peers are,
indeed, comparable to the acquired banks.
However, in terms of earnings— a
key fa ctor— many are not.
1/ Banks 1n the study that were acquired by large foreign banks averaged $1.1
b illio n in assets p rio r to th e ir change in ownership, compared with average
assets of $180 m illio n fo r those banks acquired by "small" foreign parents.
I f Crocker and Marine Midland were included, the difference would be much
greater.
-13-
In many cases, the s h ift in ownership was probably caused by the
banks' low earnings, and one should expect the new owners to make changes.
Therefore, one should look at the d iffe re n t rates o f changes in tandem with
the previous and present finan cial ra tio s o f both groups.
The e a rlie r
problems o f the acquired banks might re la te to th e ir e a rlie r differences
from th e ir peers that were "corrected" by bringing th e ir ra tio s closer to
industry standards.
This s h ift might produce s t a t is t ic a lly s ig n ific a n t
differences in the rates of change between the two groups, but not produce
differences in the way each group now performs.
The e a rlie r study- id e n tifie d a rapid drop in holdings o f state
and municipal government se c u ritie s o f the acquired banks as the o n ly change
d iffe re n t from the U.S.-owned banks.
This study revealed more.
Tables 9-11
show th a t, when compared w ith th e ir peers, the acquired banks:
(a) reduced holdings o f state and municipal government
s e c u ritie s ;
(b) reduced consumer loans and sustained a decline
in savings deposits;
(c) increased the use of purchased funds;
(d) improved eq u ity capital ra tio s ; and
(e) improved earnings.
The drop in state and municipal se c u ritie s probably relates d ire c t ly
to the p rio r low earnings record o f the acquired banks and to th e ir federal
-14-
tax p o sitio n , rather than to th e ir foreign ownership.
1/
Many banks had tax
losses to c a rry forward and did not need to s a c rific e higher yie ld s fo r ta xsheltered income.
By i t s e l f , the drop in consumer loans and savings deposits suggests
that the foreign owners are retrea tin g from small customers.
While th is is a
p o te n tia lly damaging claim, i t should be tempered w ith the analysis of present
differen ces.
At year-end 1980, the le ve l o f consumer loans at the acquired
banks was not d iffe re n t from that at the U.S.-owned banks.
Many acquired
banks started with moderately large consumer p o rtfo lio s and reduced them to
average or moderately low (but not s t a t is t ic a lly d iffe re n t) le ve ls compared
with le ve ls fo r th e ir peer banks.
This condition is illu s tra te d by the data fo r the banks acquired by
small parents.
For the pre-a cq u isition period, these banks had a mean ra tio
of consumer loans to tota l assets of 27.5 percent compared w ith 24.8 percent
fo r the peer group.
The acquired banks were somewhat higher than th e ir peers,
but, given the degree of dispersion, the difference was not s t a t is t ic a lly sig
n ific a n t.
By year-end 1980, the re la tio n had reversed; the ra tio fo r the
acquired banks was 21.5 percent, w hile that of the peer banks remained almost
constant at 24.2 percent.
At neither period was the differen ce between the
two ra tio s s t a t is t ic a lly s ig n ific a n t.
1/ Note in tables 6-8 that at year-end 1980, the acquired banks remained sig
n ific a n tly less p ro fita b le than th e ir peers. Low-earning ("problem") banks
and th e ir investment and lending were addressed in an analysis by Joseph F.
Sinkey, J r . , "A M u ltivariate S ta tis tic a l Analysis of the C h aracteristics o f
Problem Banks,” Journal of Finance, v o l. 30 (March 1975), p. 21. That analysis
indicated that problem banks had s ig n ific a n tly higher percentages of assets
in loans (presumably o ffs e t by lower amounts of investment se c u ritie s) and
derived s ig n ific a n tly lower percentages of revenues from state and municipal
government secu rities than did the control group. Both findings support the
statement that the clear tendency fo r foreign-acquired banks to invest less
in these se c u ritie s than do th e ir peers is linked more c lo s e ly to the banks1
financial conditions than to the c itize n sh ip of th e ir owners.
Table 9
Comparison of performance of all U.S. banks acquired by foreign parties and
of their domestically owned peers, from period preceding acquisition to year-end 1980
Item
Mean annual percentage
rate of change
ForelgnPeer
owned banks
banks
Standard deviation
x f - xp 1/________
t-va lu e
Level of
significance
Ratio to to ta l assets
Cash and due from banks
plus U.S. government securities
State and municipal secu rities
-2.4
NC
-
1.1
NC
1.94
NC
-.67
15 o f 47 3/
2/
.020
2.14
2.24
-.83
-2.14
.58
2/
.050
2/
-.8
.42
-1.67
1/
-12.4
-9.2
1.62
-1.98
.100
30.0
-8.3
5.29
7.24
.005
E q uity capital
6.8
.5
3.42
1.84
.075
Income
NC
NC
NC
30 o f 47 3/
.100
4.02
2.44
.020
NC
29 o f 47 3/
Total loans
Consumer
Commercial and in d u stria l
-1.4
-5.4
.7
-.4
1.20
-.8
-.6
Total deposits
-1.5
Savings deposits
Purchased funds
Other ra tio s
Adjusted e q u ity to ris k assets
9.0
Income to equ ity capital
NC
-.8
NC
2/
1./ Foreign-owned value minus peer value.
2/ Not s ig n ific a n t at the 0.10 le v e l.
3/ The "sign te st," rather than the " t-test," was used fo r th is ra tio because of p e c u lia ritie s of the data. The figures
shown id e n tify the number of foreign owned banks (out of the to ta l number of such banks in the study) whose ra tio s in
creased fa s te r than, or decreased more slow ly than, those of th e ir dom estically owned peers. The p ro b a b ility of getting
a re su lt th is fa r from the expected value, i f there were no differences between the bank a ro u c i. is shown in the ’ ast
column when the differences were s t a t is t ic a lly s ig n ific a n t.
NC = Nnf ralrulatpd.
Table 10
Comparison of performance of U.S. banks acquired by "small" foreign parents and of
their domestically owned peers, from period preceding acquisition to year-end 1980
Item
Mean annual percentage
rate of change_______
fo reign Peer "
banks
owned banks
Standard devia tion
x - xp 1/_________
t-va lu e
Level of
significance
.08
2/
Ratio of to ta l assets
Cash and due from banks
plus U.S. government se c u ritie s
1.1
-1.3
2.50
NC
NC
NC
Total loans
Consumer
Commercial and in d u s tria l
-2.5
-9.3
1.7
-.7
-1.4
-.7
1.61
2.43
2.93
-1.12
-3.25
.82
21
.005
y
Total deposits
-1.5
-.8
.49
-1.43
y
10.8
2.22
-1.67
y
State and municipal s e c u ritie s
-
12 o f 33 2/
II
Savings deposits
-14.5
Purchased funds
36.6
-8.4
7.09
6.35
.005
Eq u ity capital
7.8
1.3
3.61
1.80
.100
Income
NC
NC
NC
10.8
-.4
4.71
NC
NC
NC
-
23 o f 33 3/
.050
Other ra tio s
Adjusted e q u ity to ris k assets
Income to eq u ity capital
2.38
21 o f 33 3/
.025
y
1\J Foreign-owend value minus peer value.
2/ Not s ig n ific a n t at the 0.10 le v e l.
3/ The "sign test," rather than the "t-test," was used fo r th is ra tio because of p e c u lia ritie s of the data. The figures
shown id e n tify the number o f foreign owned banks (out of the tota l number of such banks in the study) whose ra tio in
creased fa ste r than, or decreased more slow ly than, those of th e ir dom estically owned peers. The p ro b a b ility of getting
* ^ ¡ ¡ 1 £hi5 i f lifa C4& 0" the exPected value, i f there were no differences between the bank groups, is shown in the last
column when the differences were s t a t is t ic a lly s ig n ific a n t.
NC = Not calculated.
id uie i l
Comparison of performance of U.S. banks acquired by large foreign banks and for
their domestically owned peers, from period preceding acquisition to year-end 1980
Item
Mean annual percentage
rate of change
ForelgnPeer
owned banks
banks
Standard deviation
Xf - xp \ L _______
t-va lu e
-2.57
Level of
significance
Ratios to to ta l assets
Cash and due from banks
plus U.S. government secu rities
State and municipal se c u ritie s
-5.5
-.7
1.87
NC
NC
NC
3 of 14 3/
1.2
.025
.100
Total loans
Consumer
Commercial and in d u stria l
4.1
-1.7
.3
.7
-.3
1.41
3.66
2.26
.64
.92
-.62
2/
2/
2/
Total deposits
-1.4
-.8
.69
-.87
2/
Savings deposits
-7.6
-5.3
2.25
-
Purchased funds
15.3
-
8.1
5.68
4.12
.005
E q u ity capital
4.6
-
1.2
7.84
.74
1/
Income
NC
NC
NC
7 o f 14 3/
1.8
8.05
.82
NC
NC
1.02
2/
y
Other ra tio s
Adjusted e q u ity to ris k assets
Income to e q u ity capital
4.8
NC
-
8 of 14 3/
y
2/
2/ Foreign-owned value minus peer value.
2/ Not s ig n ific a n t at the 0.10 le v e l.
ZJ The "sign te st," rather than the " t-test," was used fo r th is ra tio because of p e c u lia ritie s of the data. The figures
shown id e n tify the number of foreign owned banks (out of the tota l number o f such banks in the study) whose ra tio in
creased fa s te r than, or decreased more slow ly than, those of th e ir dom estically owned peers. The p ro b a b ility of getting
a re su lt th is fa r from the expected value, I f there were no differences between the bank groups, is shown in the last
column when the differences were s t a t is t ic a lly s ig n ific a n t.
= Not calculated.
Digitized for NC
FRASER
-15-
Regarding changes by type o f owner, the U.S. banks acquired by
"small" parents accounted fo r the drop in the consumer loan ra tio and fo r the
improvement in the income and equ ity to ris k asset ra tio s .
Banks acquired
by large foreign banks did not d iff e r in these areas from th e ir peer groups.
They d id , however, show a meaningful decrease in holdings of state and munici
pal government se c u ritie s .
Both groups of acquired banks increased th e ir use
of purchased funds much fa ster than th e ir respective peers.
SUMMARY AND CONCLUSION
The trend in foreign-ownership o f U.S. banks gathered substantial
momentum in the mid-70s and shows no signs of slowing.
Several foreign banks
have recen tly purchased large U.S. banks, and other major purchases may occur.
The Bank Holding Company Act, which governs these purchases, d ire c ts the Federal
Reserve Board to base it s decision on the e ffe ct o f an acquisition on three
fa cto rs:
(1) com petition, (2) the finan cial and managerial resources and future
prospects of the organizations in volved , and (3) the convenience and needs of
the communities to be served.
It provides no a u th o rity to deny a request on the
basis of the n a tio n a lity of the applicant.
Moreover, under present laws and
regula tions, a foreign bank can acquire any U.S. bank, provided the acquirer's
1/
banking a c t iv it y remains predominantly abroad.
Given the large s ize o f many
foreign banks, any but the ve ry largest U.S. banks could p o te n tia lly become
foreign-owned.
]_/ In order to q u a lify fo r exemptions on nonbanking a c t iv it ie s , a m a jo rity of
the foreign bank's business must be banking and more than h a lf it s banking
business must be conducted outside the United States. If th is te st is not met,
the foreign bank (worldwide) becomes subject to p rohibitions on nonbank a c t iv itie s contained in Section 4 o f the BHC Act. This re su lt would be unacceptable
to v ir t u a lly any sizeable foreign bank, and would be an e ffe c tive deterrent to
it s acquiring a larger U.S. bank.
-16-
Forelgn individua l investors have also increased th e ir a c t iv it y .
The
United States has over 14,000 commercial banks, r e la t iv e ly few b a rrie rs pre
venting e n try or changes in ownership, a stable government, and no banking laws
that discrim inate against foreign p a rtie s .
In the past, these investors came
m ostly from Canada and the Western European countries.
More re c e n tly, however,
they have been joined by in d ivid u a ls from Middle Eastern, Latin American, and
Aslan countries who seek to d iv e r s ify th e ir holdings.
Given the p o litic a l
uncertainty in many countries, the stru cture of the U.S. banking system, and
the absence of b a rrie rs to foreign Investment, foreign investors w ill probably
continue to buy U.S. banks.
In view o f these developments, 1t 1s important to know how foreign own
ership has affected the acquired banks.
This study revealed three major areas
where the performance of the acquired banks changed r e la tiv e to th e ir peers.
The
acquired banks:
(1) reduced th e ir holdings of state and municipal
se c u ritie s;
(2) became much more dependent on purchased funds; and
(3) improved in th e ir earnings and equity capital ra tio s .
The decline in holdings of state and municipal government se c u ritie s
could be viewed as in d ic a tive of less bank support fo r local governments.
How
e ve r, 1t is probably more related to the ( s t i l l ) r e la t iv e ly lower p r o f it a b ilit y
of the acquired banks than to th e ir foreign ownership; the acquired banks
probably continue to have less need fo r tax-sheltered income than th e ir peers.
The remaining factors have supervisory Im plications.
Other things
equal, a bank increases it s funding risks when i t re lie s h e a vily on "purchased
funds."
However, with high in te re st rates, increased consumer awareness, and
deposit deregulation, the concept of a bank having stable and low-cost “core"
deposits carries less weight than before.
-17-
Final l y , the improved earnings and equity capital ra tio s must be
viewed as fa vorable.
While there was c e rta in ly much room fo r improvement,
e s p e c ia lly regarding earnings, at least the change was in the rig h t d ire c tio n .
The foreign owners do not appear to have abused the acquired banks.
Banks acquired by foreign individua l investors performed d iffe re n tly
1n certain respects than those that were acquired by large foreign banks, but
neither group showed disturbing trends.
The former produced s t a t is t ic a lly
s ig n ific a n tly increases in th e ir earnings and equ ity ra tio s , w hile the la tte r
gained p o te n tia lly important strength and liq u id it y from th e ir new foreign
bank parents.
This potential improvement is not ye t apparent in the financial
ra tio s o f the acquired banks, but i s , nevertheless, a p o s itive fa c to r.
Neither
group showed a meaningful movement away from consumer lending, which is a
concern that 1s often voiced.
Foreign ownership does raise potential sup ervisory concerns re la tin g
to legal ju ris d ic tio n and to transactions between the U.S. bank and it s foreign
a f f ilia t e s .
It may also raise p o lic y questions about the level o f foreign
ownership of U.S. banks 1n general or about acquisitions of e sp e c ia lly large
U.S. banks 1n p a rtic u la r.
In the author's opinion, however, th is study gives
no suggestion that foreign ownership o f U.S. banks to-date, by e ith e r foreign
in d ivid u a ls or banks, has been harmful to the acquired in s titu tio n s or to the
communities they serve.
FEDERAL RESERVE press release
For immediate release
June 9, 1982
The Federal Reserve Board today announced its approval of
an application by Banca Commerciale Italiana, Milan, Italy, to become
a bank holding company by acquiring LITCO Bancorporation of New York,
Inc., Garden City, New York.
Attached is the Board's Order relating to this action.
Attachment
FEDERAL RESERVE SYSTEM
BANCA COMMERCIALS ITALIAHA
Order Approving Formation of Bank Holding Company
Banca Commercial« Italiana ("BCI"), Milan, Italy, has applied
for the Board's approval under section 3(a)(1) of the Bank Holding Company
Act (12 O.S.C. S 1842(a)(1)) to become a bank holding conpany by acquiring
100 per cent of the voting shares of LITCO Bancorporation of New York,
Inc. ("LITCO1*), Garden City, New York.
LITCO, a registered bank holding
company, owns 100 per cent of the voting shares of Long Island Trust
Company, N.A. ("Bank"), Garden City, New York.
Notice of the application, affording opportunity for interested
persons to submit comments and views, has been given in accordance with
section 3(b) of the Act.
The time for filing comments and views has
expired, and-t^e Board has considered the application and all comments
received in light of the factors set forth in section 3(c) of the Act
(12 O.S.C. S 1842(c)).
BCI, with consolidated assets of approximately $34.5 billion,^
is the second largest commercial bank in Italy and the 36th largest
banking organization in the world.
BCI operates primarily as a short
term credit institution and generally makes loans and accepts deposits
with a maximum maturity of 18 months.
Domestic banking is conducted
through a network of over 350 branches throughout Italy.
In addition,
BCI operates worldwide through branches, agencies, and subsidiary and
affiliated organizations.
~1/
BCI is majority-owned by Istituto per la
Unless'otherwise noted, 'all financial data are as of December 31,
1981.
- 2 Ricostruzione industriale (?IRI”), a holding company that is controlled
by the government of the Republic of Italy.
IRI also holds two other
major Italian banks and numerous commercial and industrial companies.
BCI operates in the United States through branches in New
York City and Chicago and an agency in Los Angeles.
These offices are
grandfathered under section 5 of the International Banking Act of 1978
(the "IBA")
(12 O.S.C. § 3102) and BCI has selected New York as its
home State under the Board's Regulation K (12 C.F.R. S 211.22).
LITCO# with consolidated assets of $1.1 billion, is the 22nd
largest commercial banking organization in New York State.
Bank, with
consolidated deposits of $870.0 million, has 46 branch offices in the
Metropolitan New York banking m a r k e t ^ and two branch offices in the
Eastern Long Island banking market.-^
Bank ranks as the 17th largest
commercial banking organization in the New York banking market, holding
0.5 per cent of total commercial bank deposits in the market.
BCI's
New York office is a wholesale, uninsured branch with total deposits
and credit balances of $328.5 million as of June 30, 1981.
In light
of the small presence that BCI and LITCO have in the New York banking
market, the Board finds that consummation of the proposal would have
no significantly adverse effects on the concentration of banking resources
or on existing competition in any relevant area.
Moreover, consummation
of the transaction would have no adverse effect on potential competition
2/ The Metropolitan New York banking market is defined to include southwestern
Fairfield County in Connecticut; northeastern Bergen County and eastern
Hudson County in New Jersey; New York City; and all of Nassau, Putnam,
Westchester and Rockland Counties and western Suffolk County, New York.
3/ The Eastern Long Island banking market is approximated by the eastern
portion of Suffolk County.
- 3in the Eastern Long Island market.
LITCO is the eleventh largest o£
28 commercial banking organizations operating in that market and holds
3.7 per cent of market deposits in commercial banks.
The market is
not highly concentrated and there are numerous potential entrants into
the market.
Thus, the Board concludes that consummation of the proposal
would have no significantly adverse effects with respect to potential
competition.
Section 3(c) of the Act requires in every case that the Board
consider the financial resources of the applicant organization and the
bank or bank holding company to be acquired.
The Board has considered
this application in the context of the Board's guidelines for capital
adequacy^/ and its policy statement on the supervision of foreign bank
holding companies ^
in that policy statement the Board indicated that,
in reaching- a^ judgment on the strength of a foreign bank, the Board
would consider several factors:
the bank's financial condition; the
record and integrity of management; its role and standing in its home
country; and the opinion of the home country regulators.
The Board evaluated the financial and managerial resources
of BCI and, applying the Board's capital adequacy guidelines within
a solely U. S.
context, had some concern that the stated capital of
BCI may not warrant an investment of the size of LITCO.
At the same
time, evaluating BCI in the context of the policy statement on supervision
of foreign bank holding companies, the Board noted that BCI is primarily
4/ 68 Federal Reserve Bulletin 33 (1982); 1 Federal Reserve Regulatory
Service 1 3-1506.1 (1982).
5/
1 Federal Reserve Regulatory Service 1 4-835 (1981).
a short-term credit institution with a relatively stable deposit base
characteristic of Italian banks.
BCI has an established record of
operating successfully both in its local market and as an international
bank and the Board understands that the board of directors of BCI has
embarked on a program designed to improve its capital position.
More
over, BCI has committed to inject capital of $20 million into LITCO
within six months of consummation and the Board considered it particularly
important that BCI has committed to maintain LITCO as among the more
strongly capitalized banking organizations of comparable size in the
United States.
Having considered these and other related factors, the
Board finds that BCI would serve as a source of strength to LITCO and
Bank, and concluded that the financial and managerial resources of BCI,
LITCO and Bank are generally satisfactory and the future prospects for
each appear"£$vorable.
As noted, BCI, through common government ownership, is affiliated
with a number of banking and nonbanking organizations, some of which
operate locally in Italy and others internationally.
Upon acquisition
of LITCO by BCI, Bank will become affiliated with these organizations.
Section 23A of the Federal Reserve Act (12 U.S.C. S 371c) applies to
extensions of credit to and investments in affiliates by member banks.
Generally, section 23A sets limits on the amounts that may be loaned
by a member bank to affiliates and strict collateral requirements for
any loans to an affiliate.
Thus, Bank's extensions of credit to any
majority-owned subsidiaries of the Italian government, including IRI
and its majority-owned subsidiaries, will be subject to the requirements
of section 23A.
In light of all the facts of record, the Board concludes that
banking factors and considerations relating to the convenience and needs
of the communities to be served are consistent with approval of the
application.
BCI currently has interests in two firms that engage in certain
activities in the United States, BSI Securities, and Lehman Brothers
Kuhn Loeb Holding, Inc., both in Hew York, New York.
BCI owns indirectly
100 per cent of the shares of BSI Securities, which engages solely in
providing information to its direct parent, Banca della Svizzera Italiana,
a Swiss bank subsidiary of BCI.
Lehman Brothers engages in investment
banking, securities trading and brokerage activities.
While both holdings appear to meet the requirements for the
grandfather privileges under section 8(c) of the International Banking
Act of 1978 ("Jb a ") (12 U.S.C. 3106(c)), the Board has previously determined
that an otherwise grandfathered foreign banking organization loses that
status upon the acquisition of a U.S. subsidiary bank.
Midland Bank
Limited» 67 Federal Reserve Bulletin 729, 733 n. 9 (1981).
Under section 4(a)(2)
of the Act and section 8(e) of the IBA, a company may not retain, two
years after becoming a bank holding company, more than 5 per cent of
the shares of a company that engages in the business of underwriting,
selling or distributing securities in the United States.
Consistent
with this requirement, BCI will reduce its interest in Lehman Brothers
to 5 per cent or less within two years of consummation of the proposed
transaction.
BSI Securities does not actively engage in the securities
business in the United States, and its New York office# which acts merely
as a representative office, does not appear to engage in any prohibited
- 6 -
activities.
Accordingly, the Board finds that BCI's proposed retention
of certain interests in these two organizations is consistent with the
Act and the Board's regulations.
In acting on this application, the Board noted, as discussed
above, that BCI is owned, in major part, by a government-owned holding
company, IRI, which owns two other commercial banks. Banco di Roma,
S.p.A., and Credito italiano, each of which has a banking presence in
the United States, as well as over 100 subsidiaries engaged in nonbank
ing activities.
In several cases since the 1970 Amendments to the Act, the
Board has approved applications in which foreign government ownership
of the applicant was noted but the Board did not apply the Act to the
applicant's government owners,^ and the Board recognizes that the
banking commuitity understands, without dissent, that this is the Board's
practice in handling such applications.
The Board has decided that
it is appropriate to continue this practice in the present case and
to confirm it with respect to currently conducted activities of foreign
government-owned entities with a banking presence in the United States.
However, as more foreign government-owned banking entities
become established here, making additional acquisitions of existing
banking institutions, the Board believes that further attention should
be given to the policy issues involved in government ownership of multiple
6/ S~ociete~SeneraLe/Sogelease Corp., 67 Federal Reserve Bulletin 453
(1981)j Banco Exterior de Bspana, S.A.# 66 Federal Reserve Bulletin
504 (1980)i Banco Exterior de Espana, S.A., 63 Federal Reserve Bulletin
1079 (1977); Korea Exchange Bank, 39 Fed. Reg. 20,423 (1974); Banque
Nationale de Paris, 58 Federal Reserve Bulletin 311 (1972); and Banco
di Roma, 58 Federal Reserve Bulletin 930 (1972).
-
7
-
banks and commercial-industrial enterprises.
complex problems were considered by the Board.
Several significant and
Where the applicant
is owned by a government agency, or by a government directly, that is
engaged in a wide range of banking and commercial-industrial activities,
there may be problems of compatibility of these cross-industry links
with one of the stated purposes of the Act— maintaining a separation
between commerce and banking in the United States.
Similarly, common
ownership by a government or its agencies of multiple banking organizations,
even though organized under separate corporate and management structures,
but operating in this country in different states, could raise issues
of compatibility with the interstate banking limitations of the Act
and the IBA.
The Act prohibits domestic companies under common ownership
from engaging*in these types of nonbanking and interstate banking activities,
and Congress, in applying the concept of national treatment in the IBA,
placed similar limitations upon foreign privately-owned enterprises
under common ownership.
Thus, consistency with national treatment does
not prevent application of the Act to foreign government-owned institutions
in similar circumstances.
The Board examined the issues involved in interpreting the
Act.
It considered whether a foreign government or agency meets the
jurisdictional test for application of the Act— the entity must be a
"company" for the purposes of the Act.
In focusing on whether the Act
was intended to reach governments or governmental corporations, the
Board discussed two key issues:
(a) whether a foreign government-owned
- 8bank is in fact operated independently from other banks and commercial
enterprises that
are subject to common government ownership and, therefore,
as an independently organized and operated entity, should not be considered
commonly owned, thus avoiding application of the Act to its parent;
and (b) the conditions under which the Act's focus on prohibiting the
potential for conflicts of interests and concentration of resources
requires application of the Act because of the fact of common ownership.
Moreover, the Board noted the possibility that applying the Act could
have a restrictive impact on the ability of foreign government-owned
banks to operate in this country if the nonbanking prohibitions of the
Act were to be rigidly applied, and noted the international economic
policy issues that would be raised in this context.
The Board believes that more extensive analysis and broader
participation ’in the decisionmaking process are necessary before these
public policy issues are resolved.
The issues and policy considerations
outlined in this Order should facilitate the necessary full public discussion.
Moreover, the Board believes that the complex issues raised by applying
the Act are best resolved in a Congressional framework which allows
for the bringing to bear of broader international economic policy considerations,
and the present Board action would allow an opportunity for Congressional
review.
Within the framework and under the authority of existing law,
however, the Board wishes to avoid a situation of competitive inequality
and to apply as a general matter the policy that foreign governmental
entities should be entitled only to the benefits of national treatment.
The Board would be particularly concerned should a circumstance arise
where a
government-owned entity is established for the principal purpose
of evading the interstate banking prohibitions of section 3(d) of the
Act, or where the activities of commonly owned banking and nonbanking
entities were conducted in a manner that clearly frustrates the purposes
of the Act.
Moreover, the Board believes that the application of section 23A
of the Federal Reserve Act, as described above, will make a contribution
towards limiting the potential for actions inconsistent with the policies
of the Act.
Based on the foregoing and other facts of record, the Board
has determined that consummation of the transaction would be consistent
with the public interest and that the application should be and hereby
is approved.
The transaction shall not be made before the thirtieth
calendar day following the effective date of this Order, or later them
three months after the effective date of this Order, unless such period
is extended for good cause by the Board or by the Federal Reserve Bank
of New York pursuant to delegated authority.
By order of the Board of Governors,^ effective June 9, 1982.
(signed) James McAfee
James McAfee
Associate Secretary of the Board
[SEAL]
7/ Voting for this action: Chairtian Volcker and Governors Martin,
Wallich, Partee, Teeters, Rice and Gramley.
August 25» 1981
Por immediate release
The Pederal Reserve Board today announced its approval of
the applications of Credit and Conmerce American Holdings, N.V., Willemstad,
Netherlands Antilles; Credit and Commerce American Investment, B.V.,
Amsterdam, The Netherlands; and PGB Bolding Corporation, Washington,
D.C., to become bank holding companies by acquiring Financial General
Bankshares, Inc., Washington, D.C.
Attached is the Board's Order relating to this action.
Attachment
FEDERAL RESERVE SYSTEM
CREDIT AND COMMERCE AMERICAN HOLDINGS, N.V.
CREDIT AND COMMERCE AMERICAN INVESTMENT, B.V.
FGB HOLDING CORPORATION
Order Approving Formation of Bank Holding Companies
Credit and Comaerce American Holdings, N.V. ("CCAH"), Willemstad,
Netherlands Antilles; Credit and Commerce American Investment, B.V.
("CCAI"), Amsterdam, The Netherlands; and FGB Holding Corporation ("FGB”),
Washington, D.C., have applied for the Board's approval under section 3(a)(1)
of the Bank Holding Company Act (12 U.S.C. S 1842(a)(1)) to become bank
holding companies through the acquisition by FGB of up to 100 per cent
of the voting shares of Financial General Bankshares, Inc. ("FG"), Washington,
D.C.
FG is a grandfathered multi-state bank holding company with subsidiary
banks in Maryland, New York, Tennessee, Virginia and the District of
Columbia.^
Applicants have also applied under section 4(c)(8) of the
Act (12 U.S.C. S 1843(c)(8)) and*section 225.4(b)(2) of the Board's
Regulation Y (12 C.F.R. S 225.4(b)(2)) for permission to acquire indirectly,
as an incident to their acquisition of FG, shares of National Mortgage
Corporation and Money Exchange Services, Inc., both of Washington, D.C.
\/ F6's 'subsidiary banks are First American Bank, N.A., District of
Columbia; Eastern Shore National Bank, Pocomoke City, and First American
Bank of Maryland, Silver Spring, Maryland; Community state Bank, Albany,
and Bank of Commerce, New York City, New York; Valley Fidelity Bank
and Trust Company, Knoxville, Tennessee; and the following Virginia
bankst First American Bank of Virginia, McLean; The Valley National
Bank, Harrisonburg; The Peoples National Bank of Leesburg, Leesburg;
The First National Bank of Lexington, Lexington; The Round Hill National
Bank, Round Hill; and Shenandoah Valley National Bank, Winchester.
These companies are existing nonbanking subsidiaries of FG.
national
Mortgage Corporation, is a saall, presently inactive, aortgage banking
coapany, and Money Exchange Service Corporation provides electronic
data processing services for certain affiliated banks.
Such activities
have been deterained by the Board to be closely related to banking (12 C.F.R.
S 225.4(a)(1) and (8)).
Notice of the applications, affording opportunity for interested
persons to submit ooaannts and views, has been given in accordance with
sections 3 and 4 of the Act (45 Fed. Reg. 85,521 (1980)), and the tiae
for filing views and coaaents has expired.
The Board has considered
the applications and all coaaents received, including those of the Coaaissioner
of Financial Institutions for the State of Virginia and several shareholders
of
in light of the factors set forth in section 3(c) of the Act
(12 U.S.C. s 1842(c)) and the considerations set forth in section 4
of the Act.
CCAH and CCAI first applied to acquire FG in November 1978.
The applications grew out of Securities and Exchange Coaaission ("SBC1*)
allegations that certain individuals, soae of whoa are principals of
CCAH and CCAI, had violated section 13(d) of the Securities and Exchange
Act of 1934 by acquiring, as a group, aore than 5 per cent of the equity
securities of FG without aaking appropriate filings with the SBC.
Without
adaitting or denying these allegations, the defendants entered into a
consent agreeaent with the SBC; according to the terms of that agreeaent,
2/ The Board has deterained that the shareholder protests do not raise
issues that would warrant denial of the applications.
-3certain of the defendants represented that they intended to make a tender
offer for any and all shares of FG at the previously highest offered
price, subject to obtaining appropriate regulatory approvals.
CCAH
and CCAI were created as the vehicles for making the tender offer.
When these applications were first filed in 1978, the Commissioner
of Financial Institutions of the State of Virginia, the Commissioner
of Banking of the State of Tennessee, and the Bank Commissioner of the
State of Maryland, as well as the management of FG, objected to the
applications.
In addition, the Attorney General for the State of Maryland
issued an opinion interpreting a section of Maryland State law to preclude
unfriendly affiliations.
Since the Maryland State bank affiliate of
FG was objecting to the proposal, the Attorney General found that the
proposed acquisition of FG would violate Maryland law.
The Board decided
to address this legal issue before acting on the merits of the applications,
and by Order dated February 16, 1979 (65 Federal Reserve Bulletin 254
(1979)), determined that it was precluded by law from approving the
applications &
3/ In that Order the Board also determined that section 3(d) of the
Act (12 O.S.C. S 1842(d)), which generally prohibits the Board from
approving an application by a bank holding company to acquire voting
shares of banks in more than one state, was not applicable to the proposed
transaction. While the Board determined that section 3(d) applies to
■-he formation of a multi-state bank holding company as well as the expansion
of an existing multi-state bank holding company, the Board held that
the Congressional intent of prohibiting the formation and limiting the
expansion of such holding companies would be preserved even if the Board
approved those applications. The Board reached this determination since
the acquisition of FG by these two shell corporations would increase
neither the number of multi-state bank holding companies nor the number
of out-of-home state banks owned or controlled by FG (65 Federal Reserve
Bulletin at 255-56).
In July 1980, CCAH and CCAI and their principals, and FG entered
into a definitive agreement for the sale of FG's voting shares to CCAH
and CCAI.
This agreement concluded the struggle over control of FG
between FG's management and CCAH and CCAI and their principals, and
led to the filing of the subject applications.
Applicants are non-operating corporations organized for the
purpose of becoming bank holding companies by acquiring FG.
CCAH, a
corporation organized under the laws of the Netherlands Antilles, owns
all of the outstanding shares of CCAI, which is organized under the
laws of The Netherlands.
CCAI, in turn, owns all of the outstanding
shares of FGB, a corporation chartered under the laws of the State of
Virginia.
Upon acquisition of FG (total deposits of $2.1 billion).
Applicants would control 10.2 per cent of total deposits in commercial
banks in the District of Columbia, 4.7 per cent of such deposits in
Virginia, 2.2 per cent in Maryland, and negligible percentages of such
deposits in New York and Tennessee.^
Inasmuch as Applicants and their
principals control no other banks and engage in no nonbanking business
in the United States, oonsunmation of the transaction would have no
adverse effects on either existing or potential competition in any relevant
market and would not increase the concentration of resources in any
relevant area.
Therefore, competitive considerations are consistent
with approval of the applications.
The financial and managerial resources of Applicants, FG, and
its subsidiary banks are considered generally satisfactory and the future
prospects of each appear favorable.
4/
The proposed transaction would
Banking data are as of March 31, 1980.
5provide F6 with $12 aillion in new capital.
Moreover, the Board expects
Applicants to serve as a continuing source of strength to PG and its
subsidiary banks, and Applicants recognize their responsibility to do
so.
Although Applicants will incur $50 aillion in debt in connection
with this proposal, Applicants have aade certain commitments that ensure
that they will be able to service the debt without adversely affecting
the financial position of FG or its subsidiary banks.
Also, as part
of the proposal. Applicants have stated they will not be paying any
dividends to their principals in the near future.
In the Board's judgaent,
banking factors are consistent with approval.
Convenience and needs considerations relating to this proposal
are favorable.
The additional capital to be injected into FG's subsidiary
banks is expected to strengthen the organization and allow it to provide
new services to the public.
Applicants plan to increase the coapetitive
posture of FG by expanding the branch networks of its subsidiary banks,
increasing coaaercial lending and services, and establishing an international
departaent at the New York City subsidiary bank.
The Board finds that
considerations relating to the convenience and needs of the coaaunities
to be served lend soae weight toward approval of these applications.
It is the Board's judgaent that, with respect to the applications filed
under section 3 of the Act, oonsuaaation of the proposal would be in
the public interest and these applications should be approved.
In reaching these conclusions, the Board considered the public
coaaents received on these applications, and has given particular attention
to the submissions aade by the Coaaissioner of Financial Institutions
for the State of Virginia (the "Coaaissioner").
The Coaaissioner aade
-
6
-
a timely recommendation of denial of these applications, which would
ordinarily require the Board, in accordance with section 3(b) of the
Act (12 U.S.C. S 1842(b)), to order a formal hearing on the applications.
However, the Commissioner subsequently concurred in a decision by the
Virginia State Corporation Commission to withdraw the request for a
formal hearing.
The Board determined it would be useful for Board and Reserve
Bank staff to conduct an informal meeting, on the record, to be attended
by representatives of CCAH and CCAX.
The bank supervisors for the States
of Maryland, Hew York, Tennessee and Virginia, and the Comptroller of
the Currency were invited to participate.
Only the Commissioner decided
to participate in this proceeding held at the Board on April 23, 1981,
while all the other invited parties, except for the Banking Department
of the State of Tennessee, sent representatives as observers.
The Commissioner was given an opportunity to submit written
question to the Applicants, make an oral presentation at the meeting,
and submit a closing statement in response to issues and questions raised
by representatives of CCAH and CCAX at the meeting.
The Board has
examined carefully all of these comments, and Applicants' responses
thereto, and determined that while the Commissioner has raised issues
regarding foreign acquisitions of U.S. banks and supervisory and regulatory
issues related to such acquisitions, these matters were addressed responsively
by Applicants, and, in certain instances, have previously been addressed
by the Board itself.^
Accordingly, the Board finds that the objections
of the Commissioner do not warrant denial of these applications.
With respect to the applications to acquire FG's nonbank subsidiaries,
the Board has determined that the balance of public interest fictocs
prescribed by section 4(c)(8) of the Act favor approval of FG's retention
of National Mortgage Corporation (65 Federal Reserve Bulletin 72 (1979)).
Nothing in the record suggests that Applicants' acquisition of F6 would
alter that balance.
Money Exchange Services, Inc., provides data processing
services to FG's subsidiary banks.
It does not appear that the ae<yiisition
of this company would have any adverse effect cm competition in any
relevant area. There is no evidence in the record that consommation
of the proposal would, with respect to these applications, result in
undue concentration of resources, decreased or unfair competition, conflicts
of interests, unsound banking practices or other adverse effects on
the public interest.
Accordingly, the Board has determined that the
balance of public interest factors it oust consider under section 4(c)(8)
of the Act favors approval of the applications filed under that section,
and that these applications should be approved.
On the basis of the record, the applications are approved
for the reasons summarised above.
The acquisition of FG shall not be
made before the thirtieth calendar day following the effective date of
this Order, or later than three months after the effective date of this
Order unless such period is extended for good cause by the Board or
by the Federal Reserve Bank of Richmond pursuant to delegated authority.
5/ In its February 23, 1979 "Statement of Policy on Supervision and
Regulation of Foreign Bank Bolding Companies,” the Board endorsed the
principle of national treatment, or nondiscrimination, as a b*sis for
the rules governing the entry and subsequent operations of foreign banks
in this country. The Board noted that the International Banking Act' of
1978 generally incorporates that principle in its provisions.
The determination as to Applicant's acquisition of FG's nonbank subsidiaries
under section 4(c)(8) of the Act is subject to the conditions set forth
in section 225.4(c) of Regulation Y, and to the Board's authority to
require such modification or termination of the activities of a holding
company or any of its subsidiaries as the Board finds necessary to assure
compliance with the provisions and purposes of the Act and the Board's
regulations and orders issued thereunder, or to prevent evasion thereof.
By Order of the Board of Governors,^ effective August 25,
1981.
(Signed)
William W. Wiles
William W. Wiles
Secretary of the Board
[SEAL
6/ Voting for these actionss Chairman Volcker and Governors Schultz,
Wallich, Partee and Gramley. Absent and not voting: Governors Teeters
and Rice.
FEDERAL RESERVE press release
August 25, 1981
For immediate release
The Federal Reserve Board today announced its approval of
applications by Midland Bank Limited, London, England, to become a bank
holding company by acquiring Crocker National Corporation, San Francisco
California, to acquire indirect control of the nonbank and Edge Act
subsidiaries of Crocker National Corporation, and to retain certain
U.S. nonbank subsidiaries of Midland Bank Limited.
The Board also
announced its denial of Midland's application to retain Thomas Cook,
Inc., New York, New York.
Attached is the Board's Order relating to these actions.
Attachment
FEDERAL RESERVE SYSTEM
MIDLAND BANK LIMITED
Order Approving Formation of Bank Holding Ccnpany,
Acquisition of Nonbank and Edge Act Subsidiaries and
Retention of Nonbank Companies} Order Denying
Retention of Travel Agency Activities of Thomas Cook, Inc.
Midland Bank Limited ("Midland"), London, England, has applied
under section 3(a)(1) of the Bank Holding Company Act ("BHCA”) (12 U.S.C.
S 1842(a)(1)) for approval of the formation of a bank holding company
by acquiring 51 per cent of the voting shares of Crocker National Corpora
tion ("Crocker"), San Francisco, California.
Midland has also applied to do business under section 25(a)
of the Federal Reserve Act (the "Edge Act”) (12 U.S.C. SS 611-631) by
acquiring indirectly the shares of three Edge Corporation subsidiaries
owned by Crocker National Bank:
Crocker Bank International (Chicago),
Chicago, Illinois; Crocker Bank International (New York), New York,
New York; and Crocker International Investment Corporation, San Francisco,
California.
The factors that are considered in acting on these applications
include those set forth in section 211.4(a) of the Board's Regulation K
(12 C.F.R. S 211.4(a)).
Midland has also applied, pursuant to section 4(c)(8) of the
BHCA (12 U.S.C. s 1843(c)(8)) and section 225.4(b)(2) of the Board's
Regulation Y (12 C.F.R. s 225.4(b)(2)), for permission to acquire indirectly
voting shares of the following subsidiaries of Crocker:
(1) Bishop
Building Co., Inc., Honolulu, Hawaii, which owns and operates the Bishop
Trust Building in Honolulu and leases it to subsidiaries of Crocker
-2and othec tenants; (2) Bishop Trust Company, Ltd., Honolulu, Hawaii,
which conducts a full-service trust business and provides limited data
processing services to other Crocker subsidiaries; (3) Hawaii Finance
Company Ltd., Honolulu, Hawaii, which operates as an industrial loan
company making secured and unsecured loans to individuals; M) Miles
Crossing Ltd., Honolulu, Hawaii, which owns real estate mortgages and
other real estate receivables; (5) CNC Insurance Agency Inc., San Francisco,
California, which engages in the activity of acting as agent for credit
life and credit accident and health insurance directly related to extensions
of credit by Crocker's subsidiaries; (6) Crocker Investment Management
Corp., San Francisco, California, which engages in the activity of providing
portfolio investment advice and general economic and financial information
and advice; (7) Crocker Mortgage Investment Company Inc., Los Angeles,
California, which engages in the activities of originating, purchasing
and servicing loans secured by real estate and servicing loans and other
extensions of credit; (8) Western Bradford Trust Company, San Francisco,
California, a trust company which furnishes services to security holders,
brokers, dealers and issuers, provides data processing services to
Crocker and its subsidiaries, and provides computer software services
to Crocker and its subsidiaries; and (9) Crocker Holdings Inc., Germantown,
Tennessee, which holds real estate related assets of Crocker that are
in the process of liquidation.
In addition. Midland has applied, pursuant to section 4(c)(8)
of the BBCA and section 225.4(b)(2) of the Board's Regulation 7, for
permission to retain the following indirect subsidiaries:
(1) Samuel
Montagu (Metals), Inc., New York, New York, which engages in the activity
-3of dealing in precious metals by buying and selling gold and silver
on the spot and futures market for its own account, and deals with other
precious metals dealers; (2) Thomas Cook, Inc., Mew York, New York,
a company that engages in the issuance and sale of travelers checks;
and (3) London American Finance Corporation, New York, New York, a
commercial finance company specializing in overseas trade financing
of products manufactured in the United States; (4) LAFCO (Western Hemisphere),
Ltd., New York, New York, which markets in the western hemisphere the
services of certain financing affiliates and extends credit to Latin
American importers of United States products; and (5) Export Credit
Corporation, a commercial finance company specializing in overseas trade
financing of products manufactured in the U.S.
Hie activities applied for have either been specified by the
Board in section 225.4(a) of Regulation Y as permissible for bank holding
companies, subject to Board approval of individual proposals in accordance
with the procedures of section 225.4(b), or have been authorized by
Order under section 4(c)(8) in particular cases.
Midland has also applied, pursuant to section 4(c)(9) of the
BHCA (12 U.S.C. S 1843(c)(9)) and section 211.23(f)(5) of the Board's
Regulation K (12 C.F.R. § 211.23(f)(5)), to retain Midland's interest
in The Thomas Cook Group Ltd. ("TOG”), Peterborough, England.
TCG provides
retail and wholesale travel arrangements and issues and sells travelers
checks on a worldwide basis through its subsidiaries.^
1/ As noted above, Midland applied pursuant to section 4(c)(8) to retain
TOG's U.S. travelers check business.
-
4
-
Notice of receipt of these applications has been given in
accordance with sections 3 and 4 of the EHCA (if. Fed. Reg. 18,066 (1981)),
and the time for filing views and comments has expired.
The Board has
considered the applications and all comments received in light of the
factors set forth in section 3(c) of the BHCA (12 U.S.C. S 1842(c)),
the considerations specified in sections 4(c)(8) and (9) of the BHCA,
and the purposes of the Edge Act.
Midland is the third largest of the major London clearing
banks and the lead bank of the 15th largest banking organization in
the world, with total deposits of approximately $55.1 billion.-^ Midland's
business consists of the provision of a wide range of banking, financial
and related services through its various subsidiaries and affiliated
companies.
Domestic banking is conducted through a network of more
than 3,000 branches by Midland itself in England and Wales, and by
subsidiaries in Scotland, northern Ireland, and the Republic of Ireland.
In addition to commercial banking and trust services. Midland engages
in merchant banking, equity financing, mortgage banking, consumer financing,
equipment leasing, factoring, and providing travel services and issuing
and selling travelers checks mi a worldwide basis.
Approximately 60
per cent of Midland's profits derive from domestic banking; 25 per cent
from its international activities; and 15 per cent from related services.
2/
Banking data for Midland are as of December 31, 1980.
-5Crocker does not engage directly in any activity except holding
shares of its subsidiaries.
Its banking subsidiary, Crocker National
Bank ("Bank"), San Francisco, California, holds domestic deposits of
approximately $11.4 billion, is the fourth largest banking organization
in California,with 385 branches, and the 12th largest banking organization
in the United States.-^
Upon consummation of this proposal. Midland
would be the 10th largest banking organization in the world.
Midland does not operate any banking offices in the United
States.-^
Accordingly, the Board finds that approval of the proposal
would have no significant effect on the concentration of banking resources
or existing competition in any relevant area.
Furthermore, while Midland
has demonstrated that it is a likely entrant into the United States
banking market, and has the financial resources to establish de novo
offices in Bank's major market areas, most of the metropolitan California
markets in which Bank competes are competitive markets; therefore, the
elimination of probable future competition would not be significant.
Accordingly, the Board finds consummation of the proposal would have
no significant effect on probable future competition.
The financial and managerial resources and future prospects
of Midland appear generally satisfactory.
Under the proposed transaction,
Crocker would receive capital injections totalling $495 million.
In
the first stage of the proposal. Midland would acquire 51 per cent of
3/ Banking data for Crocker and market data are as of December 31,
1980.
y
Midland does have, as discussed below, a 20.125 per cent interest
in European American Bancorp, New York, New York, which has a whollyowned subsidiary bank, European American Bank and Trust Company, New
York, New York. In addition, Thomas Cook Travellers Cheques, Ltd.
is licensed as a banking agency under New York State Banking Law.
Crocker for $595 million, of which $270 million would be added to Crocker's
capital funds through the purchase of newly issued shares.
In the second
stage of the proposal, Midland, at its option or upon call by Crocker,
would purchase over four years new common shares from Crocker for a
total of $225 million.
The additional purchase would increase Midland's
ownership of Crocker from 51 per cent to 57 per cent.
The Board regards the additional capital being provided to
Crocker as a result of the transaction as a positive factor in that
it provides the opportunity to achieve a permanent enhancement of Crocker's
capital position.
Moreover, the Board expects that both Midland and
Crocker will be mindful of this opportunity in the employment of the
new capital funds.
The Board notes that Crocker's capital ratios are comparable
to the ratios of other large U.S. banks at the present time.
The Board,
however, is aware that the capital ratios of the largest U.S. banks
have generally declined over the past few years while, at the same time,
the risks to which they are exposed have increased.
The Board believes,
therefore, that banks in this position should avail themselves of every
opportunity to strengthen their capital positions.
The injection of
capital by Midland provides such an opportunity consistent with a reasonable
rate of growth in Crocker's assets.
In exercising its responsibility
under the Bank Holding Company Act, the Board will monitor closely the
capital position of large banking organizations in connection with their
future expansion plans.
-7In light of all the facts of record, the Board concludes
that banking factors and considerations relating to the convenience
and needs of the communities to be served are consistent with approval
of the applications«
It is the Board's judgment that, with respect to
the application filed under section 3 of the BHCA, consummation of the
proposal would be in the public interest and should be approved.
In reaching these conclusions, the Board has given due con
sideration to the public comments received on these applications, and
the views expressed at the public meeting ordered by the Board on the
proposal and held in San Francisco, California, on June 22, 1981.
The
Board had ordered this meeting because of the importance of Crocker
in the communities in which it operates and the interest of the public
in the proposal.
The objections expressed in the written submissions
and at the public meeting were based primarily upon issues related to
the foreign acquisition of U.S. banks in general and Community Reinvestment
Act ("CRA") considerations.
The Board has determined that these objections
do not warrant denial of the application.
The Board notes that there
is no statutory authority in the BHCA for taking into account the nationality
of the acquiring company, and that CRA does not apply to a transaction
where the acquiring banking organization has no banking presence in
the U.S.
Hie Board also considered the written submissions and oral
presentations at the June 22 meeting in regard to their bearing on the
convenience and needs factors that the Board must consider under the
BHCA and found that these factors are positive and consistent with
approval as discussed above.
Accordingly, the Board has determined
that the public comments on the applications do not raise issues that
would warrant denial, or conditioning the approval of this application.
As discussed above. Midland currently has a 20.125 per cent
ownership interest in European-Amer ican Bancorp ("EAB"), New York, New
York, a bank holding company with respect to Buropean-American Bank
and Trust Company ("EABTC"), New York, New York.
At the time the Board
approved EAB's application to become a bank holding company in 1977
(63 Federal Reserve Bulletin 595), the Board concluded that neither
Midland nor any of the other five foreign banks having interests in
EAB should be considered bank holding companies, individually or collectively.
Section 3 id) of the BHCA (12 U.S.C. S 1842(d)) generally prohibits
the Board from approving an application that would permit a bank holding
company to acquire more than 5 per cent of the voting shares of a bank
located outside of the bank holding company's principal State of banking
operations, unless such acquisition is specifically authorized by State
law.
Although Midland is not currently a bank holding company, the
effect of Midland's acquisition of Crocker while maintaining its present
interest in EAB would be inconsistent with the legislative direction
contained in section 3 (d).
5/ The other shareholders of BAB are Societe Generale de Banque, S.A.,
Brussels, Belgium (20.125%); Deutsche Bank A.G., Frankfurt, Germany
(20.125%); Amsterdam-Rotterdaa Bank, N.V., Amsterdam, The Netherlands
(17.0%); Societe Generale, Paris, France (20.125%); and Creditanstalt
Bankverein, Vienna, Austria (2.5%).
Therefore, in order to prevent any evasion of the provisions
and purposes of section 3 (d), the Board has determined that Midland
should be required to divest its interest in EAB.
In light of the
unique structure of EAB as a consortium organization, and taking into
consideration EABTC's acquisition in 1974 of the assets of Franklin
National Bank, the Board believes that it would be appropriate to allow
Midland a longer period of time than is usual in order to complete the
divestiture.
The additional time will provide EAB and its owners flexibility
to assure that the capital strength of the institution will be adequately
maintained.
Therefore, the Board has determined that Midland should
reduce its interest in EAB to five per cent or less of EAB's shares
within three years of consummation of the transaction, provided that
such period may be extended for good cause by the Board or by the Federal
Reserve Bank of San Francisco under delegated authority.
With respect to the applications to acquire Crocker*s nonbank
subsidiaries, it was previously determined that the balance of public
interest factors prescribed by section 4(c)(8) of the BHCA favored approval
of the acquisition of these companies when they were acquired originally
by Crocker.
Nothing in the record suggests that Midland's acquisition
of Crocker would alter that balance.
Furthermore, the Board has determined
that retention by Midland of Samuel Montagu (Metals), Inc., Thomas Cook,
Inc. (issuance and sale of travelers checks), London American Finance
Corporation, LAFOO (Western Hemisphere), Ltd., and Export Credit Corporation
would produce benefits to the public and would be in the public interest.
There is no evidence in the record that consummation of the proposal
would, with respect to these section 4(c)(8) applications, result in
-10undue concentration of resources, decreased or unfair competition, conflicts
of interests, unsound banking practices, or other adverse effects on
the public interest.
Accordingly, the Board has determined that
the balance of public interest factors it must consider under section 4(c)(8)
of the BHCA favors approval of the applications filed under that section,
and that those applications should be approved.^
Similarly, with respect to Crocker's three Edge corporations,
the public interest in the uninterrupted continuation of their service
to customers favors approval of their retention after Crocker is acquired
by Midland.
The financial and managerial resources of Midland are
regarded as consistent with approval of the affiliation of these three
corporations with Midland, an organization broadly represented in foreign
markets, and their acquisition by Midland would enable these Edge corporations
to continue the international services Crocker's Edge Corporations are
able to provide to their customers, consistent with the purposes of
the Edge Act to afford at all times a means of financing international
trade, to stimulate competition for international banking and financing
services, and to facilitate and stimulate United States exports.
Accord
ingly, the Board finds that the applications filed under the Edge Act
for the retention of Crocker Bank International (Chicago), Crocker Bank
International (New York), and Crocker international Investment Corporation
should be approved.
6/ In light of the Board's action requiring Midland's divestiture
of EAB, the applications filed under section 4(c)(8) to retain EAB's
nonbank subsidiaries are rendered moot.
-11Midland has also applied, pursuant to section 4(c) (9) of the
BHCA and section 211.23 of the Board's Regulation K, to retain its whollyowned subsidiary, Thomas Cook Group Ltd. ("TOG"), a worldwide travel
agency whose U.S. subsidiary is Thomas Cook, inc. ("TCI").
Midland,
through its indirect subsidiary, TCI, engages in providing travel services
in the U.S. as part of the worldwide travel services provided by its
parent company, TOG.
Section 211.23(f)(5)(iii)(B) of the Board's Regulation K
specifically states that a foreign banking organization may engage in
the activity of arrangement of passenger transportation (Standard industrial
Code 4722) in the United States only with the approval of the Board
pursuant to section 4(c)(9) of the BHCA.
TOG, a British company controlled by Midland since 1972 and
wholly owned by Midland since 1977, provides retail and wholesale travel
arrangements and sells travelers checks on a worldwide basis through
its subsidiaries.
TOG currently engages in the wholesale and retail
travel business through the Travel Division of its wholly-owned U.S.
subsidiary, TCI, a New York Corporation.
TCI serves customers in both
the business (70 per cent of its revenues) and pleasure (30 per cent
of its revenues) travel segments through a nationwide retail network
of 66 travel outlets in 53 cities in the U.S.
Several of the outlets in
New York engage in both wholesale (i.e., packaging of tours) and retail
travel business.
All other U.S. outlets engage only in retail business.
In support of its application to retain TCI, Midland has nade
a number of commitments and presented evidence to demonstrate that an
exemption under section 4(c)(9) would not be at variance with the purposes
of the BHCA and would be in the public interest.
In the past. Midland
and TCI have not sought public recognition of their connection and there
is little public identification in the U.S. of one with the other.
Midland has committed to preserve the complete separation of its banking
operations in the U.S., whether conducted through Crocker or otherwise,
from the travel business conducted in the U.S. by TCI.
Midland also
contends that retention of TCI would be in the public interest because
of the fragmentation of the U.S. travel agency industry and because
TCI brings foreign revenues to the U.S. by virtue of its relationship
with TOG.
Section 4(c)(9) of the BHCA provides that the nonbanking prohi
bitions of section 4 shall not apply to the investments or activities
of a foreign company that conducts the greater part of its business
outside the U.S. if the Board by regulation or order determines that,
under the circumstances and subject to the conditions set forth in the
regulation or order, the exemption would not be substantially at variance
with the purposes of the BHCA and would be in the public interest.
In determining whether to grant an exemption under section 4 (c)(9),
the Board has generally considered among other things whether such exemption
would give the foreign institution a competitive advantage over domestic
banking organizations .-2/
7/ See The Royal Trust Company, 60 Federal Reserve Bulletin 58 (1974);
Lloyds Bank Limited, 60 Federal Reserve Bulletin 139 (1974); The Bank
of Tokyo, Ltd., 61 Federal Reserve Bulletin 449 (1975); and Israel Discount
Bank Limited, 66 Federal Reserve Bulletin 910 (1980).
-13With respect to this application, the Board notes that not
only are the travel agency activities of TCI impermissible for domestic
banking organizations but TCI, in addition to providing travel services
to its customers, provides nationwide outlets for the sale of Thomas Cook
travelers checks and the conducting of foreign currency transactions.
Thus, Midland would be able, through TCI, to combine under common ownership
and operation permissible section 4(c)(8) activities with the impermissible
activity of operating a travel agency.
MO U.S. banking organization
is able to market section 4(c)(8) services throughout the U.S. in the
same manner.^
Midland's commitments regarding the separation of its
U.S. travel and banking business do not reduce the competitive advantage
Midland would gain over domestic organizations in the conduct of its
permissible nonbanking activities.
Thus, based on all the facts of
record, the Board concludes that Midland's retention of the travel services
of TCI would be substantially at variance with the purposes of the BHCA
and that the application to retain TCI under section 4(c)(9) should
be and is denied.
Accordingly, under section 4(a)(2) of the BHCA, Midland
8/ By Order dated January 26, 1976, the Board found that the operation
of a travel agency is not closely related to banking and therefore deter
mined not to add the operation of a travel agency to the list of permissible
activities in Regulation 7 (62 Federal Reserve Bulletin 148 (1976)).
-14must divest the travel agency operations of TCI within two years of
acquiring Crocker, unless such period is extended for good cause by
the Board or by the Federal Reserve Bank of San Francisco pursuant to
delegated authority.^
Midland has also indicated that it intends to retain certain
indirect investments in the United States through foreign nonbanking
companies on the basis of section 2(h) of the BHCA (12 U.S.C. § 1841(h)).
In each instance, Midland has provided information on the size and amount
of assets and revenues of the foreign company abroad and of its U.S.
operations, and information on whether the activity of the U.S. operations
is in the same general line of business as that of the foreign nonbanking
company.
From the information provided, it appears that retention of
these investments is permissible under section 2 (h).
Based on the foregoing and other considerations reflected
in the record, the Board has determined that the applications under
sections 3(a)(1) and 4(c)(8) of the BHCA and under the Edge Act should
be and hereby approved subject to the following conditions:
(1)
that Midland reduce its interest in EAB to five per cent or
less of EAB's shares within three years of consummation of
the transaction; and
9/ As noted above, a subsidiary of Midland is licensed by the New York
State Banking Department to maintain an agency in New York City and
has operated the agency since prior to July 26, 1978. Although Midland
has not asserted grandfather rights under the International Banking
Act of 1978 to retain TCI, the Board has examined the question of Midland's
grandfathered status. In light of previous Board determinations that
an otherwise grandfathered foreign bank loses that status upon the acqui
sition of a U.S. subsidiary bank, the Board has determined that Midland
may not retain the travel agency operation of TCI pursuant to 12 U.S.C.
S 3106(c). National Westminster Bank Limited, 65 Federal Reserve Bulletin
357 (1979) j Algenene Bank Nederland, N.V., 65 Federal Reserve Bulletin
658 (1979).
-15(2)
that Midland divest the travel agency operations of TCI or
reduce its interest in TCI to five per cent or less of TCI's
shares within 2 years of consummation of the transaction.
The periods referred to above may be extended for good cause by the
Board or by the Federal Reserve Bank of San Francisco under delegated
authority.
The acquisition of Crocker shall not be made before the
thirtieth calendar day following the effective date of this Order, or
later than three months after the effective date of this Order unless
such period is extended for good cause by the Board or by the Federal
Reserve Bank of San Francisco pursuant to delegated authority.
The
determination as to Midland's acquisition of Crocker's nonbank subsid
iaries and retention of its own nonbank subsidiaries under section
4(c)(8) of the Act is subject to the conditions set forth in section 225.4(c)
of Regulation Y, and to the Board's authority to require such modification
or termination of the activities of a bank holding company or any of
its subsidiaries as the Board finds necessary to assure compliance with
the provisions and purposes of the Act and the Board's Orders and regulations
issued thereunder, or to prevent evasion thereof.
By Order of the Board of Governors,^/ effective August 25,
1981.
(Signed)
William W. Wiles
william W. Wiles
Secretary of the Board
10/ Voting for these actions: Chairman Volcker and Governors Schultz,
Wallich, Partee and Gramley. Absent and not voting: Governors Teeters
and Rice. Not voting on the insurance activities: Governors Schultz
and Wallich.
@FedFRASER