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For Release on Delivery
9:30 A.M. E.D.T.
May 8, 1992
Testimony by
John P. LaWare
Member, Board of Governors of the
Federal Reserve System
Before the
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
May 8, 1992
Introduction
I am pleased to appear before you this morning to
present the views of the Federal Reserve Board on Title II of
H.R. 4803, the Non-Proliferation of Weapons of Mass Destruction
and Regulatory Improvements Act of 1992.
We recognize the broad
policy objectives of this legislation which will be addressed by
the other witnesses before the Committee.
As requested, I will
focus my remarks on Title II which concerns the activities in the
United States of foreign banks owned or controlled by foreign
governments.
If enacted, this legislation would severely curtail
the U.S. activities of such banks.
It also would impose
reporting requirements on all foreign banks and would provide for
new sanctions on financial institutions for violations of export
control provisions.
I will begin by providing you with an overview of the
existing U.S. operations of foreign government-owned banks and
the manner in which current law and regulation apply to them.
I
will identify the issues that have been associated with
government ownership of foreign banks and the reasons why the
Federal Reserve believes such issues do not require a prohibition
on participation by foreign government-owned banks in the U.S.
market.
Then I will discuss the specific issues raised by the
proposed legislation.
2
At the outset, I would like to say that the Federal
Reserve appreciates the new authority to regulate foreign banks
in the United States granted to us last year.
As enacted by the
Congress, the Foreign Bank Supervision Enhancement Act improves
substantially the regulatory authority available to the Federal
Reserve to monitor and examine the participation of all foreign
banks in the U.S. market.
We are now implementing this
legislation; in April, the Federal Reserve adopted a regulation
governing the entry by foreign banks into the U.S. market and we
are hiring 200-250 new examiners to conduct frequent examinations
of U.S. offices of foreign banks, including, for the first time,
representative offices of such banks.
We intend to use our
authority to enforce vigorously both the statutory and
supervisory standards applicable to foreign bank operations in
the United States, whether conducted by government or privately
owned banks.
Existing U.S. Operations of Foreign Government-Owned Banks
A foreign government is deemed to own or control a bank
if it directly or indirectly owns 25 percent or more of the
bank's voting shares or otherwise controls the bank.
While the
absolute number of banks owned by foreign governments is large,
such banks hold only a small percentage of the total U.S. assets
of foreign banks.
As of December 31, 1991, there were 275
foreign banks operating in the United States and their U.S.
3
offices had total assets of $888 billion.
Of these foreign
banks, 85 are owned by foreign governments; the assets of their
U.S. operations amount to $120 billion or about 13 percent of the
total assets of U.S. offices of foreign banks or 3 percent of the
total assets of all banking offices in the United States.
A
regional and country-by-country breakdown of these amounts is set
forth in Exhibit I to my testimony.
As shown in Exhibit II, banks owned by foreign
governments, like privately owned foreign banks, do business in
the United States primarily through branches and agencies.
Foreign government-owned banks operated 162 offices in the United
States as of year-end 1991.
Of those offices, 10 were bank
subsidiaries, 147 were branches and agencies, 2 were Edge
corporations, and 3 were New York state-chartered Article XII
investment companies.
The branches and agencies accounted for 87
percent ($105 billion) of the assets of foreign government-owned
banks in the United States, while the assets of bank subsidiaries
represented only 11 percent ($13 billion) of the U.S. assets of
foreign government-owned banks.
The remaining 2 percent is
accounted for by Edge Act corporations and Article XII companies.
Government-owned banks from 37 countries currently
operate in the United States.
In terms of total assets of the
U.S. operations, government-owned banks from countries in Europe
clearly dominate.
The European banks had U.S. assets of $83
4
billion as of December 31, 1991, representing 70 percent of the
total assets of foreign government-owned banks, compared with $28
billion for Asian and Middle Eastern government-owned banks and
$5 billion for Latin American banks.
Italy, France, Israel and
Germany have the most significant U.S. presence of foreign
government-controlled banks.
For foreign banks overall, it is
the Japanese banks that have the largest share of U.S. assets;
however, all but one of the Japanese banks operating in the
United States are privately owned.
The one Japanese government-
owned bank, Shoko Chukin Bank, accounts for only 0.3 percent of
the assets of Japanese banks in this country.
Government ownership of foreign banks may be either
direct or indirect.
That is, a foreign government, at the
national, regional or local level, or an agency of the
government, may own the foreign bank directly or a foreign
government may own or control a corporation that, in turn, owns a
bank with U.S. operations.
Most foreign government ownership is
direct; however, there are currently 10 foreign banks operating
in the United States that are indirectly owned by foreign
governments.
As of December 31, 1991, the U.S. operations of
these 10 banks, which consisted of 26 branches and agencies and 1
Edge corporation, had total assets of approximately $24 billion.
Exhibit III shows the ownership and U.S. operations of banks
indirectly controlled by foreign governments.
5
The Federal Reserve has considered the three types of
issues that have been associated with foreign government
ownership of banks operating in this country.
First, foreign
government-owned banks may have competitive advantages under U.S.
law with respect to interstate banking and nonbanking activities.
Second, foreign government-owned banks may make biased credit
decisions based on priorities dictated by the government owner
that could unduly favor foreign nationals and, if such nationals
were not creditworthy, could weaken the condition of their U.S.
operations.
Finally, foreign government-owned banks may attempt
to exploit competitive advantages to gain market share in the
United States.
Banks owned by foreign governments may have more
advantageous access to funding than private banks to the extent
that they can benefit from implicit government guarantees.
They
also may have more flexibility in pricing of services because
government owners may be willing to accept lower levels of
profitability.
The Federal Reserve monitors the participation of
foreign government-owned banks in the U.S. market in light of
these three issues.
We have found no evidence suggesting that
government-owned banks as a class operate in the United States
differently from other foreign banks.
Indeed, our information
suggests that these banks have operated and continue to operate
competitively on market terms.
In our view, current law and
regulation, including the increased regulatory authority granted
6
in the Foreign Bank Supervision Enhancement Act enacted last
year, provide the Federal Reserve with the ability to regulate
the activities of all foreign banks, including those that are
owned by foreign governments.
The major competitive advantages potentially available
to a foreign government-owned bank that have been identified thus
far derive from the fact that the restrictions on interstate
banking and nonbanking activities in the Bank Holding Company Act
("BHC Act") do not apply to a foreign government that owns one or
more foreign banks with U.S. operations because a foreign
government is not a "company."
One concern in this regard was
that several government-owned banks from a single country might
act in a coordinated fashion to select different states as their
home states for purposes of avoiding the limitations on
multistate expansion of domestic deposit-taking activities under
the BHC Act and the International Banking Act.
By contrast, a
foreign privately owned company with several foreign banks would
be permitted only one home state.
This concern has diminished
significantly as interstate restrictions have become less of a
constraint on domestic banking organizations.
In any case, there
has been no indication that foreign banks owned by the same
foreign government behave in such a coordinated fashion to take
advantage of interstate opportunities.
From all available
evidence, these banks operate independently of one another and
follow separate business plans.
For example, all 7 Italian
7
government-owed banks operating in the United States have
selected New York as their home state.
Another concern arose in connection with the BHC Act's
restrictions on nonbanking activities.
Some foreign governments,
in addition to owning banks that operate in the United States,
also own companies that engage in extensive nonbanking
activities.
For example, both France and Italy, among others,
own several banks with U.S. operations and also own national
airlines.
Such cross industry links may be incompatible with one
of the stated purposes of the BHC Act —
maintaining a separation
between commerce and banking in the United States.
The operation
of both banks and nonbanks in the United States controlled by the
same government owner could be viewed as inconsistent with the
purposes of the BHC Act.
However, a strict application of the
Act's nonbanking restrictions in these circumstances would have
serious ramifications beyond the regulatory realm and might
preclude certain foreign government-owned banks from engaging in
any banking activities in the United States, even where there is
no evidence that the banks and nonbanks act together or in any
way derive advantages in the United States from their common
ownership.
Although the BHC Act nonbanking restrictions do not
apply to a foreign government that owns a foreign bank, there are
several ways in which the bank regulatory agencies address the
8
potential for abuse.
If a foreign government-owned bank owns a
subsidiary bank in the United States, the restrictions of Section
23A of the Federal Reserve Act apply to transactions between the
U.S. bank and any company owned by the foreign government.
This
provision imposes limits on loans by banks to affiliates and
establishes strict collateral requirements.
The application of
Section 23A is designed to curtail practices that conflict with
the purposes of the BHC Act; that is, it helps insure the safety
of the U.S. bank by prohibiting unsound transactions with
affiliated government-owned companies and also insures that such
companies do not have greater access to credit from the bank than
non-affiliated companies.
In addition, the U.S. branches and
agencies of foreign banks are monitored to insure that they do
not engage in preferential lending to affiliates, including
government-owned affiliates.
In sum, our experience has been
that government-owned banks do not enjoy competitive advantages
in the U.S. market by virtue of the nonbanking companies owned by
the same government nor do the nonbanking companies obtain access
to preferential credit.
Similarly, we see no evidence that
domestic banks are disadvantaged by such foreign organizations.
We have also been concerned about the potential
negative impact of government policies on the U.S. operations of
banks owned by foreign governments.
Such banks might not operate
in a fully market-oriented way through their U.S. branches and
subsidiaries.
In particular, government-owned banks might make
9
biased credit judgments, discriminating in favor of companies
headquartered in their home country.
Such biased credit
judgments could give competitive advantages to the companies so
favored; these biased judgments could also weaken the balance
sheet of the U.S. branch or subsidiary of the foreign bank.
Although this concern is greatest with respect to companies owned
by a government that also owns a bank, it could in principle
apply to private borrowers of the same nationality.
Another dimension of this concern is that a foreign
government-owned bank might be operated in such a way as to
support the general political-economic agenda of the home country
(as distinct from a particular enterprise) by, for example,
lending to support marketing agreements, cartels, or the
government's foreign policy objectives.
The result of these
types of lending policies could be that the U.S. bank would
become overexposed to the home country, to certain industries, or
to groups of related borrowers.
However, as I stated earlier, foreign government-owned
banks, as a class, operate on market terms.
Indeed, the ratio of
home country exposure to total assets for banks owned by foreign
governments is lower than the comparable ratio for privately
owned foreign banks.
Similarly, the ratio of nonperforming loans
to total assets is lower for foreign government-owned banks than
10
for privately owned banks.
These ratios are set forth in more
detail in Exhibit IV.
Another possibility is that a foreign government-owned
bank may have funding advantages over other banks.
In contrast
to private owners, governments may be willing to provide funding
at below market cost to their banking entities and to accept
lower levels of profitability.
In theory, this would allow such
entities to grow at unusually high rates.
Actual data on the
growth of U.S. branches and agencies of foreign government-owned
banks, however, indicate that these entities have grown at a
slower rate than branches and agencies of privately owned foreign
banks.
Furthermore, any potential advantage to foreign
government-owned banks in terms of capital —
that is, the
ability to operate with very low levels of capital —
has been
eroded substantially by the adoption of the Basle capital
standards and the emphasis placed by market participants on
capital strength.
The Basle standards themselves apply to all
internationally active banks of the G-10 countries and
Luxembourg, regardless of the ownership of such banks.
Many
other governments have adopted these standards and there is
increasing pressure on banks from all countries to meet the
internationally agreed capital rules.
11
It must be kept in mind that there are a number of
different ways, other than direct provision of funding, that a
government can subsidize its banks.
These include tax policies,
cheap discount window credits, controlled interest rates in
domestic markets, and toleration of non-competitive domestic
markets that favor local banks or provide a safety net.
A
government may provide these sorts of subsidies to any of its
banks, regardless of whether such banks are government-owned.
The Federal Reserve plans to continue its monitoring of
the activities of government-owned foreign banks in the United
States in light of the issues I have outlined.
To date, the
Federal Reserve has not found a pattern of abuse by governmentowned banks or any measurable competitive disadvantage to
domestic banks.
Current law and regulations provide the Federal
Reserve with adequate tools to supervise and regulate the U.S.
activities of foreign government-owned banks.
Issues Raised by H.R. 4803
I would now like to turn to the specific proposals set
forth in Title II of H.R. 4803.
The most troublesome is Section
202, which effectively denies access to the U.S. market by
foreign
government-owned banks.
12
The bill would preclude foreign government-owned banks
from engaging in any financial transactions in the United States,
either through any type of subsidiary, whether a bank or a
nonbanking company, or through branches and agencies, except for
extensions of credit for trade financing.
Even trade financing
would be difficult given the limitations on funding for such
activities that would be imposed by the legislation.
In the
Federal Reserve's view, this proposal virtually to eliminate the
activities in the United States of all foreign government-owned
banks cannot be justified and would have serious negative
ramifications.
The issues that I discussed earlier do not
justify effectively closing the U.S. market to foreign
government-owned banks.
This bill would preclude participation
in the U.S. market by some of the world's largest and soundest
institutions.
Implementation of these restrictions on the
activities of foreign government-owned banks also may well have
implications for the most favored nation obligations set forth in
treaties of the United States with foreign countries.
Such
restrictions would also make negotiation of additional
international agreements in financial services, which could
provide substantial benefits to U.S. banks, much more difficult
because access to the U.S. market by banks from our trading
partners would be curtailed.
These provisions raise questions of consistency with
the principle of national treatment and may also raise the
13
possibility that retaliatory action of some sort could be taken
against U.S. commercial banks operating overseas.
As the Federal
Reserve has testified before, the traditional U.S. policy of
national treatment seeks to insure that foreign and domestic
banks have a fair and equal opportunity to participate in our
markets.
The motivation is not merely a commitment to equity and
nondiscrimination, although such a commitment in itself is
worthy.
More fundamentally, the motivation also is to provide
U.S. consumers of financial services with access to a deep,
varied, competitive, and efficient banking market in which they
can satisfy their financial needs on the best possible terms.
Current law applies the policy of national treatment to
all foreign banks alike, whether they are privately owned or
government-owned.
In our view, the existing legal and regulatory
framework, including the particular regulatory attention that has
been paid to the U.S. operations of foreign government-owned
banks, is adequate to deal with abuses by government-owned banks
on a case-by-case basis.
The Federal Reserve advocates a case-
by-case approach in this area because we have not observed a
pattern of abuse.
Most government-owned banks operating in the
United States behave in a manner fully consistent with market
practices and in compliance with law.
While we recognize abuses
have occurred, such abuses have been limited in number and cannot
be attributed to the mere fact of government ownership.
14
Section 201 of the bill would require each branch,
agency or representative office of a foreign bank and each
affiliate of a foreign bank that is organized under the laws of
any state or maintains an office in any state to report to the
Federal Reserve annually the names of the depository institutions
at which it retains deposit accounts.
In the Federal Reserve's
view, this type of reporting does not appear to serve any
meaningful purpose because, to the extent it is needed, it can be
obtained in the examination process.
The Federal Reserve already requires substantial
reporting by foreign banks.
Branches, agencies and subsidiary
banks of a foreign bank must file periodic call and country
exposure reports.
These reports provide regulators with
information to judge the behavior and performance of foreign
banks.
Information in these reports also permits the Federal
Reserve and the other regulatory agencies to compare foreign
banks with their domestic counterparts.
Moreover, under the
recently enacted Foreign Bank Supervision Enhancement Act, each
branch, agency and subsidiary bank of a foreign bank is examined
at least annually and more frequently if necessary.
In contrast,
the information required to be reported by this bill could become
quickly outdated, since deposits may be created and liquidated
very quickly.
15
The requirement also would not appear to be consistent
with the principle of national treatment in that comparable
reporting is not required of domestic banks and bank holding
companies.
Finally, we are concerned about the extraterritorial
reach of the provision —
as drafted, it may require reporting of
deposits held by a foreign affiliate of a foreign bank whether or
not such deposits are related to U.S. operations.
The final section of Title II would require revocation
of the charter or impose other comparable sanctions on any bank
that is found to have violated export control laws and
regulations.
Unlike the provisions applicable to government-
owned banks, these provisions are applied on a national treatment
basis.
I would note, however, that current law permits
regulatory authorities to terminate the U.S. activities of a
foreign bank that violates U.S. law, including any violation of
export control provisions.
Conclusion
In summary, the Federal Reserve believes existing
regulatory tools, bolstered by the recently passed Foreign Bank
Supervision Enhancement Act, are sufficient to deal with the
issues presented by the activities of foreign banks that are
owned by foreign governments.
Accordingly, we oppose the bill's
attempt to close the U.S. market to foreign government-owned
16
banks.
If such a provision were enacted, the ultimate losers
would be U.S. consumers of financial services.
The incidence of
improper activities does not appear any greater for governmentowned banks than for other banks, whether foreign or domestic.
We recognize the need to monitor the activities of governmentowned banks and we fully intend to take appropriate enforcement
action on a case-by-case basis.
We also believe, however, that
the problems encountered do not justify the result called for in
this legislation.
EXfflBIT I
U.S. PRESENCE OF FOREIGN BANKS AS OF DECEMBER 31,1991
TOTAL U.S. ASSETS
Gov’t
NUMBER OF BANKS
Private
Gov’t
Private
(dollar amounts in billions)
NUMBER OF OFFICES
Gov’t____ Private
WESTERN EUROPE
France
Italy
Germany
Austria
Portugal
Spain
Switzerland
Sweden
United Kingdom
Netherlands
Others
TOTAL
$33
$32
$7
$6
$1
$1
$0
$0
$0
$0
$3
$83
$29
$14
$17
$2
$1
$13
$39
$11
$48
$30
$8
$212
5
7
4
2
3
1
0
0
0
0
6
28
10
7
9
1
1
5
6
4
9
3
7
62
18
18
4
3
4
3
0
0
0
0
11
61
16
8
17
1
1
19
16
4
31
22
10
145
ASIA AND MIDDLE EAST
Israel
Korea
China
Indonesia
Taiwan
Japan
India
Malaysia
Thailand
Pakistan
Singapore
Hong Kong
Others
TOTAL
$12
$3
$2
$2
$2
$1
$1
$1
$1
$1
$0
$0
$3
$28
$0
$6
$0
$0
$4
$432
$0
$0
$1
$0
$1
$22
$8
$474
4
2
2
5
6
1
3
2
2
3
1
1
7
39
0
6
0
3
2
54
0
0
3
0
4
9
12
93
21
9
3
6
8
1
8
3
5
6
2
2
1
75
0
21
0
3
7
146
0
0
6
0
7
22
20
232
LATIN AMERICA
Brazil
Mexico *
Argentina
Colombia
Venezuela
Others
TOTAL
$2
$1
$1
$1
$0
$0
$5
$2
$10
$0
$0
$2
$3
$17
5
1
2
3
1
2
14
11
5
1
1
5
7
30
10
1
3
5
2
0
21
15
12
1
1
9
10
48
OTHER
New Zealand
Australia
Canada
TOTAL
$2
$2
$0
$3
$0
$6
$60
$66
1
3
0
4
0
3
7
10
1
4
0
5
0
11
46
57
$120
$768
85
195
162
482
GRAND TOTAL
* Five of the six Mexican banks with U.S operations were privatized between August 1991 and March 1992.
Source: Call reports.
EXHIBIT II
U.S. PRESENCE OF FOREIGN BANKS AS OF DECEMBER 31, 1991
(dollar amounts in billions)
Government
Offices Assets
Branches
& Agencies
147
$105
Bank
Subsidiaries
10
$13
Other
5
Total
162
Private
Offices
Assets
V
$2 2/
$120
Total
Offices Assets
383
$601
530
$706
84
$164
94
$177
15
$3
20
$5
482
S768
644
S888
Notes:
jV The ten U.S. bank subsidiaries of foreign government owned banks are: Banco de Bogota Trust Co.
(Banco de Bogota), State Bank of India California (State Bank of India), Bank Leumi Trust Co. of NY
(Bank Leumi-le Israel), Israel Discount Bank of NY (Israel Discount Bank), UMB Bank and Trust Co.
(United Mizrahi Bank), California Korea Bank (Korea Exchange Bank), Century Bank California
(Philippine National Bank), Bank of the West (Banque Nationale de Paris), Extebank (Banco Exteriorde España), and Atlantic Bank of NY (National Bank of Greece).
2/ Includes two Edge Corporation subsidiaries and three Article XII New York Investment Companies.
Source:
Call reports.
EXHIBIT III
U.S. OPERATIONS OF FOREIGN BANKS WITH INDIRECT GOVERNMENT OWNERSHIP
COUNTRY/
CORPORATE PARENT
ITALY
Istituto per la
Ricostruzione
Industriale (IRI)
FOREIGN
BANK
Banco di Roma
Banca Commer
ciale Italiana
Credito Italiano
U.S. OPERATIONS
2 branches,
2 agencies
2 branches,
1 agency
1 branch,
1 agency
12/31/91
U.S. ASSETS
$ MM
$ 10,639
4,617
2,163
Fondazione Cassa di
Risparmio di Roma and IRI
Banco di Santo
Spirito
1 branch
1,825
ISRAEL
Histradut (Government
controlled labor org.)
Bank Hapoalim
7 branches,
1 agency
2,830
COLOMBIA
National Coffee Fund
Banco Cafetero
1 Edge corp.
186
AUSTRALIA
Commonwealth Banking
Corporation
Commonwealth
Bank of Australia
1 branch,
1 agency
303
Bank Bumiputra
1 branch,
1 agency
498
Development
Bank of Singapore
2 agencies
371
Ka Wah Bank Ltd
2 branches
154
MALAYSIA
Petrolian Nasional
(National Oil Co.)
SINGAPORE
Tamasek Holdings
(Govt. holding co.)
HONG KONG
China International
Trust & Investment
Corp. (PRC)
TOTAL U.S. ASSETS
$23,586
EXHIBIT IV
U.S. BRANCHES AND AGENCIES
OF FOREIGN GOVERNMENT OWNED BANKS
(AS OF DECEMBER 31, 1991)
Type of Government Ownership
------------------------------------------------------------------DIRECT
INDIRECT
TOTAL
ASSETS J/
($ in billions)
GROWTH RATE FOR U.S. OFFICES
Average annual rate of growth
in assets for individual
offices from 1980-91
LENDING TO HOME COUNTRY
Home country exposure/assets
NONPERFORMING LOANS
Nonperformina loans/assets:
Foreign and domestic nonperforming
Domestic nonperforming only
Notes:
_[/
—
$66
$21
$87
$585
11.4%
8.7%
10.1%
16%
26%
21%
25%
30%
2.39%
1.28%
2.21%
1.35%
2.91%
2.09%
2.15%
1.37%
"Assets" include only claims on third parties— this amount is net o f any claims on the parent bunk or its other affiliates.
Mexican banks privatized in 1991 are included in “Government Ownership" calculations above since affects of privatization will not be represented
in 1991 financial statements.
—
PRIVATE
OWNERSHIP
SOURCE: U .S. branch and agency call reports and U.S. branch and agency country exposure reports
@FedFRASER