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Remarks by
John P. LaWare
Member, Board of Governors of the
Federal Reserve System
at the
Annual Washington Conference
of the
Institute of International Bankers
Washington, D.C.
March 7, 1994

While it is always a pleasure to hobnob with a rich
assortment of influential international bankers, I am somewhat
chagrined that the Congress of the United States and the
Administration seem to be headed down a path toward making U.S.
financial markets somewhat less open to foreign organizations.


refer to the provisions of the Federal Deposit Insurance
Corporation Improvement Act which impose additional hurdles for
new entrants and new fees on those already here; and the Fair
Trade in Financial Services Bill which seems to have a good
chance of becoming law.
At the same time, neither the Congress nor the
Administration seem to have any interest in basic structural
reform of the United States financial system to make it more
competitive with Europe and the rest of the developed world.
European banks have enjoyed broad securities powers, in the bank,
for years without serious mishap, but a few key men in the

Congress refuse to dismantle the archaic Glass-Steagall law which
essentially excludes U.S. banks from the non-Treasury securities

And now insurance and banking alliances in Europe and

Canada particularly have spotlighted another handicap for U.S.

Integration of the financial system is an accepted policy

in our fellow industrial nations.

It is a growing tragedy that

it cannot be a reality here.
The disparities created by these legal differences force
U.S. authorities to severely limit activities of foreign banks in
the U.S. in order to protect the competitive position of U.S.
banks in domestic markets.

This creates delicate supervisory

problems to be sure, but, more important, it denies U.S.
financial markets the advantage of competition by completely
integrated financial enterprises.
Growing international trade and investment continue to be
the principal underlying factors in the expansion of banks
outside their home countries.

As with U.S. banks and those of

the major industrialized nations a generation ago, banks from the
Pacific Rim countries, Latin America, and Eastern Europe are
expanding abroad in order to service the international needs of
their domestic customers and perhaps attract indigenous business
in the host country as well.

The United States has been a

targeted host country for many of these new "international"

Some of these banks are already here, and some also

present current supervisory challenges, even though their
presence in the long run is likely to benefit the U.S. and global

For those banks that do not yet have a U.S. presence,

one might question the extent to which their entry can or should

be accommodated under the Foreign Bank Supervisory Enhancement
For those countries whose markets are already well
integrated into the global economy and whose banks established
international branch systems in the 1970s, "international
banking" today has acquired a new dimension, and taken on a
somewhat different meaning.

In the United States, international

banking has become more concentrated in a few institutions and
different in terms of activities.

The U.S. banks which are most

active internationally are readily recognized by the scope of
their off-balance-sheet trading activities.

These banks

generally have a volume of off-balance-sheet activity that is a
sizable multiple of their balance sheet assets.

In addition,

there are certain U.S. banks which are not particularly
"international" in the geographic sense.
significant foreign office network.

They may not have a

But they are significantly

engaged in international banking activities, such as, foreign
exchange trading and'other derivative trading activities.


among U.S. banks a market-making role in these trading activities
is currently limited to a few institutions, there is some
indication of increased interest in more active trading among the
newer "superregional" banks.

It is not clear at present that the

international ambitions of these superregionals include a
significant foreign presence.

Many of the institutions which

come under this definition had branches or consortia banks abroad
and have since abandoned that approach.

My guess would be that

geographic expansion among this group in the future will be

International supervision today is challenged on two fronts.
There is a need to monitor effectively the cross-border expansion
of traditional deposit-taking/lending institutions from countries
which are beginning to become integrated into the global economy.
We must also be able to identify accurately the potential risks
to international financial markets from high volume trading of
new, and sometimes exotic, instruments.

A great deal of

analytical activity in pursuit of that goal is underway here in
the United States as well as internationally.
Certainly one of the most important lessons of the recent
past is that international supervision is only as strong as its
weakest link.

It was agreed in principle in the Basle Concordat

of 1974 that no bank operating internationally should be able to
escape supervision.

Most recently the Basle Committee proposed

"minimum standards" for the supervision of international banking

Greater effort still needs to be made, however, to put

this principle into practice.

Reluctance in certain

jurisdictions to this cession of authority to an international
organization should not be allowed to block adoption of standards
designed to protect the interest of all of the players.


United States has adopted the principle of consolidated
comprehensive supervision in the Foreign Bank Supervision
Enhancement Act.

In judging the fitness of a foreign bank to

enter the U.S. market, the Federal Reserve must conclude that it
is subject to effective consolidated supervision.

One might

argue with some justification that the terms are too vague and
leave too much to subjective judgment.

But the intent of

Congress, in the aftermath of well publicized scandals, is very



This statute has not been easily implemented because

banking structure and the techniques of bank supervision vary
greatly among countries.

In putting into practice the principle

that all foreign banks seeking to operate in the United States
should be subject to effective consolidated supervision, the
Federal Reserve is trying not to inhibit the efficient working of
other banking markets or to impede their development.

We are

finding that most bank supervisory systems provide at least some
of the elements of consolidated, comprehensive supervision.


it is clear that some new entrants cannot meet this standards
without further development, and we are actively assisting those
who seek our help.

On another front, the Federal Reserve, in

coordination with the other federal banking regulators, has been
in the process of developing a program for improving the
supervision of the U.S. operations of foreign banking

This approach will explicitly take into account

the financial condition of the foreign banking organization as a
whole, as well as the level and quality of its home country

Branches and agencies are by far the predominant

organizational form of foreign bank operations in this country.
The new program is designed to provide a targeted supervisory
plan based on the U.S. role as host country in the home/host
country system of responsibilities adopted by the Basle group.
It will also focus on the specific concerns for our markets and
laws presented by the specific operations of foreign banks.
Over the longer term, it is clear that additional bilateral
and multilateral initiatives are needed to strengthen supervision
over the full range of global trading and derivative activities.

We must devise a reliable system to measure the exposure of banks
to the market risks of trading and derivatives activities, and
that system should be incorporated into the Basle risk-based
capital framework.
The increasing disparity between U.S. and European banks in
terms of permissible activities has become a matter of real
concern in the past few years, in particular in the area of

While all the evidence is not yet in on the projected

economies of scale and "synergies" to be derived from the
banking-insurance link-up, the fact remains that European banks
have this option and U.S. banks do not.
distinct advantage for European banks.

In my opinion, that is a
The U.S. banking

situation is probably not going to change in this respect in the
near term.

In order to maintain competitive equity between U.S.

and foreign banks, as required by law, foreign banks which have
both banking and insurance activities in the United States must
divest one or the other.

We are currently looking closely at

what constitutes adequate "de-banking" and what kinds of
financial activities foreign institutions may continue to pursue
in the United States if conventional banking is foreclosed.
Fair trade in financial services legislation continues to
move forward.

if the legislation ultimately passes, the United

States' policy of unconditional national treatment in financial
services will be changed to one of essentially reciprocal
national treatment.

This is consistent with a more demanding

stance by the Administration on trade.

Although the Board has

continued to oppose the legislation, the present House bill has a
number of safety valves which somewhat reduce the original

severity of the proposal.

The current bill requires consultation

with the appropriate federal banking agency prior to the
imposition of sanctions and includes significant grandfathering

It also narrows the targets for possible sanctions

to include only those matters that now require application to or
authorization from a regulator to expand operations in the United
Let me turn now, briefly, to the issue of regulatory reform
in the United States which has become a serious matter of
The Treasury proposal to combine all of the federal bank
regulatory functions in a single new Federal Banking Commission
is seriously flawed in my opinion.
The idea of a monopoly regulator for the entire banking
system almost assures a too restrictive regulatory environment —
one which would be likely to stifle innovation and so limit risk
taking that there could be serious negative impact on the

A single regulator, with no other responsibilities,

would tend to want to eliminate bank failures and consequently
limit risk taking in the industry to the point that it would shut
off the flow of credit to support commerce.
A single regulator which would have state-chartered banks as
well as national banks under its rule-making authority would
inevitably have the tendency to blur the distinction between a
national bank charter and a state bank charter, spelling the
eventual demise of the dual banking system which has served the
country well for 131 years.

In any case, banks would no longer

' have a choice of federal regulators and no way to escape from
over-restrictive regulatory policies by changing charters.
The Treasury proposal removes all rule making and most
supervisory and examination functions from the Fed.

I believe

that hands-on involvement in supervision, rule making and
examinations over a broad spectrum of banking organizations is
essential to enable the Federal Reserve to discharge its
responsibility for the integrity of the payments system, the
operation of the window, as lender of last resort, and the
central player in crisis management when there is an accident in
the financial system which might destabilize the system.
Putting the entire banking system under one agency that is
at least potentially more vulnerable to political manipulation
does not appear to me to be good public policy.
A better approach would be to have two regulators at the
federal level.

This could most directly be accomplished by

merging the OTS and the OCC, thus combining the two agencies
presently responsible for federally chartered institutions.


second step would be to transfer responsibility for statechartered nonmember banks to the Federal Reserve which already
has oversight of state member banks.

This would reduce the

number of federal regulators from four to two and strongly
underscore the importance of the dual banking system by having
one federal regulator for federally chartered banks and a
separate one for state-chartered banks.
Because there is a small group of 3 0 to 40 banking
organizations which are so large and have such reach to their
operations that they are special, both agencies should have some

degree of oversight.

This could be accomplished by joint

examination of the parent holding companies and the lead banks.
In all other cases, duplicative examination and overlapping
supervision could be eliminated by giving top-to-bottom
supervision and examination authority to the regulator of the
lead bank.

Our proposal has the following advantages.
It avoids over-restrictive and stultifying rule making
by a monopoly regulator.
It provides strong support for the dual banking system
at the federal level.
It maintains the role in bank supervision critical to
the Federal Reserve's needs.
It provides choice of federal regulator to banks.
It reduces federal regulators from four to two.
With the exception of a small special group of banks,
it assures one examiner per banking organization.
It maintains a healthy dynamic tension between two
agencies in rule making.

The outlook then is cloudy.

While financial markets

globally are becoming more integrated and there is real movement
toward homogeneity in rules and operating procedures, the trend
in the United States is in many ways defensive, paranoid and

These measures may discourage the free entry of

foreign banks to our markets.

Free entry and national treatment

have served the United States well, and to retreat from these
principles just at a time when the leadership position of the
United States economy has been reconfirmed, seems to me to be
counterintuitive and certainly counterproductive.


Thank you for listening.