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For release upon delivery
Tuesday, April 8, 1975
9:30 a . m . , E.D.T.


Remarks by
Robert C. Holland, Member
Board of Governors of the Federal Reserve System

at the
53rd Annual Meeting of the
Bankers' Association for Foreign Trade
Greenbrier, White Sulphur Springs, West Virginia
April 8, 1975

I am pleased to be here with you today to
discuss some of the outstanding issues in international
banking regulation.
Banks and banking systems the world over
have been going through a time of testing.

The strains

of the past two years--and particularly of last summer-are well-known to everyone here.

Under those pressures,

the fabric of international banking has in general held
up well, and it is important not to lose sight of that

However, some banking weaknesses have surfaced.

It comes as no surprise, therefore, that issues of
bank regulation and modifications of regulatory policy
are being actively reviewed in virtually every major

The problems being faced by bank regulators

in these different countries are sufficiently similar
to engender a number of efforts to improve cooperation
and consultation among the bank supervisory agencies of
the major industrial countries.

I welcome these develop­

Hopefully in the long run these consultations

I wish :o acknowledge the assistance of Mr. Henry S. Terrell,
Chief of the International Banking Section in the Board's
Division of International Finance, in developing the ideas
in this paper. The views herein expressed, however, are
my own personal responsibility.

- 2 will result in a more nearly harmonized regulatory

In the meantime, we shall have to deal with

banking problems on an essentially national basis,
reaching out to achieve coordinated multinational action
as we can.
As you know, a little over two years ago the
Federal Reserve established a Steering Committee on
International Banking Regulation to review the issues
confronting the System in this area.
Over the past year that Committee has con­
centrated much of its attention on designing a compre­
hensive framework for foreign banks operating in the
United States that would place them under essentially
the same regulations as their domestic bank counterparts.
That effort has produced a legislative proposal which
has now been introduced in both Houses of the Congress.
I should like to take this opportunity to
reiterate the appreciation of the members of our
Committee for the contributions made by the Bankers'

- 3 -

Association for Foreign Trade to the work on this

I should also like to express my personal

gratification that the leadership of your Association
and so many of your members have indicated their
general support for this Federal Reserve bill.
Congressional hearings on our proposal will probably
be scheduled soon and hopefully definitive legislation
will ensue.
The attention attracted by our proposed
foreign banking legislation has tended to obscure the
other half of our Steering Committee's assignment,
namely, to review and propose revisions in the regula­
tions governing the foreign activities of U.S. banks
in the light of the substantial changes which have
occurred in recent y e a r s .

It is to this latter task

that our Steering Committee is now returning its
a ttentions.
You may recall that in its press release of
February 1, 1973, announcing the formation of our

- 4 Steering Committee, the Federal Reserve noted that
one reason for its creation was the fact that foreign
branches of U.S. banks had increased their total assets
nearly eight-fold— to about $75 billion--between the
end of 1965 and 1972.

Since then, the total assets

of the foreign branches of U.S. banks have doubled
again, to approximately $150 billion.

For some of

the largest U.S. banks, foreign branch activity now
accounts for between one-third and one-half of their
total banking activity.

And in addition to foreign

activity conducted through their foreign branches,
U.S. banks engage in international financing activities
at their domestic offices as well as through invest­
ments in foreign subsidiaries and affiliate corporations.
Thus, the sheer magnitude, complexity and rate of growth
of the foreign operations of U.S. banks provides an
impetus for bank regulators to devote considerable
resources to periodically reviewing and updating the
relevant regulatory framework.

- 5 I cannot tell you today what the shape of
the proposed Federal Reserve revisions in the regulation
of the operations of U.S. banks abroad may be.

I can,

however, outline for you four of the key issues on which
our studies are focussing and what I regard as some of the
more significant related questions.


Those issues are:

entry by U.S. banks into foreign
countries and the range of their
permissible activities,


problems of capital adequacy and
where the capital of a multinational
banking organization should be


the impact of international banking
on domestic monetary policies and
the related question of who serves
as whose lender of last resort,
and finally

- 6 -


the proper scope of bank surveillance,
reporting and examination in a c on­
temporary international context.

A little over a year ago, our Committee met
with representatives of your Association to obtain the
benefit of their views in this matter.

Hopefully, that

dialogue can be renewed and broadened in the coming
months to assist us in weighing the appropriate set of
regulatory and supervisory policies.
Entry and permissible activities
The first of these issues is entry into
foreign jurisdictions and the range of foreign activities
in which U.S. banks will be permitted to engage.


most logical point of departure for any revision of
U.S. regulations in this area is the principle of
"mutual nondiscrimination," the same principle that is
embodied in our proposed legislation on foreign bank
activity in the United States.

Under this principle

individual countries would permit foreign-owned banks
to perform the same types of financial activities which
are permissible to indigenous banks.

Adhering to this

principle, foreign countries would have essentially
one set of rules and regulations for all banks within
their jurisdictions, rather than one set for domestic
banks and a second and different framework for foreignowned b a n k s .
It is only realistic to recognize that this
guiding principle is likely to be tempered in certain
instances by considerations of "national interest."
Some countries would be hesitant to permit the pre­
ponderance of money and credit flows within their
borders to pass through foreign controlled banks.


worry may be especially troublesome for some of the
lesser developed countries which do not have strong
locally-owned banking institutions.

At least within

industrial nations, however, it is to be hoped that
the extent of any discriminatory restraints would be

- 8 -

reduced to a practical minimum.

Over the long run the

best warranty for such treatment by a foreign host
country is the performance of U.S. banks and banks
from other countries in that host country; nothing
works more effectively to reduce unfair barriers than
a demonstrated beneficial impact by foreign banks on
the economies of their host countries.
But home as well as host countries can impose

Thus, an important corollary question

concerns the range of financial activities which U.S.
banks should be permitted to engage in abroad by the
U.S. regulatory authorities.

Since U.S. banks compete

actively with foreign banks outside the United States,
and since many foreign banks are permitted to engage
in a wider range of activities than is permitted to
U.S. banks in their domestic operations, the Federal
Reserve generally allows U.S. banks to engage in a
wider range of activities in their foreign affiliates
than in their purely domestic operations.

- 9 -

How much further it is wise to go in this
direction is a very difficult question to answer.

To be

sure, the ability to compete on even terms in any
market is highly prized by a banking organization.
Yet the United States has a definite statutory
and regulatory view of the limited range of activities
in which commercial banks should engage within its own

One important aspect of U.S. banking structure,

for example, is the separation of banking from commer­
cial and industrial enterprises, a distinction which
is not preserved in many countries in continental
Europe where commercial banks have large equity interests
in commercial and industrial enterprises.
It can be argued that U.S. banks in their
operations abroad should be afforded the greatest
liberality available under foreign regulations, if and
to the extent that such activities are insulated in
some way from the "domestic” parent bank.

By insulation,

I mean shielding the domestic bank from the risks of

- 10 .
those foreign operations.

That insulation is clearly

not possible with respect to the foreign branches of
U.S. banks that are legally integral parts of the
U.S. institution.
Therefore the question devolves upon the
activities permissible to foreign subsidiaries and
foreign joint ventures and affiliates in which U.S.
banks have invested.

This is a much more complicated

To a very large extent it is analogous to

the domestic issue of the degree of insulation of banks
from their parent holding companies and nonbanking

Theoretically, a U.S. bank enjoys a degree

of legal insulation from the obligations of both its
domestic and foreign subsidiaries.

Knowledgeable market

participants are aware of this legal distinction with
regard to the liabilities of any such subsidiary corporation.

However, practical business considerations typically

impel a bank to try to stand behind the obligations
of its wholly-owned and controlled sv.bsicJieerier.


- 11 business practice compels U.S. bank supervisors, in
turn, to be concerned about the activities of foreign
subsidiaries and their potential impact on their
parent U.S. banking organizations.
As regards consortium banks and other joint
venture enterprises in which a U.S. bank is a minority
partner, the U.S. bank has legal insulation and it has
a greater degree of practical insulation from the
affairs of the affiliate.

Precisely how much practical

insulation exists probably depends in good part on how
prominently the U.S. bank has been associated with the
foreign venture.

Nevertheless, there is still an issue

of the extent to which a U.S. bank could or should walk
away from responsibility for an affiliate of this kind.
How properly to reconcile these conflicting
considerations of freedom

and risk is one of the most

difficult tasks facing our Federal Reserve Committee.
Among various options, one possible approach would be
for insulated foreign affiliates of U.S. banks to be

- 12 explicitly permitted to engage in a considerably wider
range of activities abroad than could integrated

That permission could be given by a

regulation listing either a "positive" list of approved
foreign activities or a "negative" list of activities
which would not be permissible to U.S. bank affiliates
in foreign countries.

I am aware that preparing and

publishing either type of list, rather than continuing
the existing case-by-case approach, might reduce the
flexibility of U.S. banks in their foreign investments,
since no list could cover the entire range of possible

Either type of list might, however, be

beneficial to banks in determining their long-range
investment plans, since they would have better informa­
tion on the types of activities which were likely to
receive Board approval.
In the case of a "positive" list of approved
activities, one way to prevent the loss of flexibility
for banks could be to provide a certain amount of leeway

- 13 for banks to make investments ,in activities not otherwise
permitted, subject to Federal Reserve review.


limiting the leeway for total investments of this sort
for any one bank to a small fraction of its total capital,
the risk exposure for individual banks could be constrained.
The list could be modified as banks and regulatory authori­
ties gained more experience with the activities performed
by the banks under this leeway provision.
Banking capital
A second important issue in the regulation of
the international activities of U.S. banks is capital

The Federal Reserve, of course, has been

highly concerned with the capital position of U.S.
banks, in relation to their exposure both at home and

the international area, the question of

capital adequacy is particularly complicated.

In addition

to the normal risks associated with domestic banking,
international banking involves risks of exchange market

- 14 fluctuations, lack of foreign information, adverse
political action, and the risks involved in a wider
range of financial activities.

These additional and

different risk elements introduce another dimension
to the already thorny capital problem.

A first and

obvious question is whether the very existence of those
elements requires that additional capital provisions
be made in banks with significant international

The Board has come to no conclusion on

this question.

One has to admit that there is no

persuasive empirical evidence to support such a con­

The data we have bearing on this issue are

partial and not completely satisfactory; but they do
suggest that actual loss experience in international
operations has been no worse than domestic operations
and perhaps has been better--so far!
It has also been argued that a bank with
extensive international operations is better able to
diversify its activities and hence reduce its overall
risk exposure.

There is merit to the argument, but

- 15 how much counterbalancing weight it should be given
is unclear.

Nevertheless, if one cannot answer that

question conclusively with respect to traditional
banking operations, one is necessarily cautious about
permitting banks to extend their overseas activities
into nonbanking a r e a s .
Clearly, the level of capital adequacy in
international banking ought to be associated with the
business risks attaching to the activities of the banks.
Accordingly, capital needs might be diminished to
some extent by resort to risk-reducing arrangements
such as obtaining credit or deposit insurance or
denominating more affiliate assets and liabilities
in the home currency of the banking organization.
Similarly, it is possible that a policy of permitting
U.S. banks to engage in a range of riskier activities
only through insulated affiliates abroad might
require a smaller bank capitalization than if such
activities were undertaken in full-fledged branches.

- 16 But is it practical to conceive of the
development of insulated foreign affiliates?

I have

already touched on the difficulties of insulating a
bank from a foreign subsidiary and hence the potential
impact of that subsidiary's activities on the bank's

One possible step toward minimizing that

impact might be rules encouraging the foreign affiliate
to "stand on its own balance sheet."

Such rules could

aim to keep the foreign subsidiary from being o v e r ­
leveraged to the extent that it is more than ever
dependent on the backing of its parent bank for its

There have been several instances in the

past year where U.S. banks have been thrown into the
necessity of bailing out a foreign subsidiary partly
because that subsidiary was so heavily leveraged.

In some

I think the issues of risk in international banking,
the institutional and legal framework in which U.S.
banks will operate in their international activities,
and the question of capital adequacy for banks with

- 17 a range of foreign affiliates will have to be
rethought carefully in the light of experience,
including the sometimes unfortunate experiences of
the recent past.
Monetary policies
A third area of concern in international
banking regulation involves questions of control by
central bankers over conditions in money and credit
markets, and the role of central bankers as lenders
of last resort.

Large banks with multinational

operations have access to sources of funds in money
markets all over the world.

These institutions are

able to bid for substantial sources of funds at their
offices in one country and transfer the funds through
their internal networks to an eventual user of funds in
another country.

This flexibility in financing arrange­

ments by U.S. banks and by banks of other countries has
had the beneficial effect that depositors in some countries
are offered higher rates on their savings while borrowers
have obtained credit on better terms than they might have

- 18 received if their range of choice had been confined
to purely local banks.

In many ways, this n international­

ization of banking” has had the procompetitive effect of
increasing the number of participants in various banking
On the cost side, the internationalization
of banking has meant that some countries have lost a
measure of control over conditions in their credit

The comparatively uncontrolled Euro-dollar

and other Euro-currency markets become attractive
sources of intermediation between ultimate borrowers
and lenders, in part because financial institutions
operating in these markets are not required to bear
the burden of required reserves and some of the other
costs of banking regulation that fall upon domestic
banking enterprises.
A rapid expansion in intermediation through
the Euro-dollar market, could mean that some borrowers
and depositors in the United States would be able to

- 19 obtain credit and deposit services from banking offices
which are not under the control of the central bank.
Thus a policy of monetary restraint in the United States
could become less effective if key borrowers had ready
access to major sources of credit to finance activities
in the United States over which the Federal Reserve had
little effective control.

By the same token, a policy

of monetary expansion might have less predictable
effects on expanding credit in the United States and
might be rendered less effective if U.S. banks utilized
available resources to expand their overseas Euro­
dollar activities rather than for loans which might
expand business activity here in the United States.
In analyzing credit flows through the Euro­
dollar market I do not mean to imply that a large share
of what is essentially a domestic U.S. banking business
is currently taking place in the Euro-dollar market.
Our best information indicates that U.S. users of
banking services have a strong preference for conducting
their banking activities with banking offices here in

- 20 the United States.

Depositors and borrowers both desire

the maintenance of established banking relationships,
despite the occasional existence of interest rate or
other incentives for obtaining banking services from
banking offices outside the United States.
My concern over the existence of an unregulated
and reserve-free market in bank services i3 prospective.
I am concerned that in the future the existence of this
market will become increasingly attractive to potential
customers who today may not regard it as a feasible

I believe that the present is a good time

for us to begin to think about some of the policy
implications of a continued growth of an unregulated
market in banking, for I am convinced that the cost
advantages of the Euro-dollar market will promote its
continued growth into the foreseeable future.
I have mentioned the costs to banks and their
customers of regulation and the fact that banks can
sometimes avoid some of these costs by conducting their

- 21 operations from offices foreign to the countries in
which they may be obtaining resources and/or extending

Some of these ’
banking havens” do not regulate,

examine, or place reserve requirements on banking activity
which are in currencies external to their own.

In other

countries, banking regulation imposes costs on banks
that are largely passed on to the banks' customers in
the form of higher charges for services or lower rates
of interest on deposits.
But bank regulation is not simply a burden
to be avoided if possible or else to be borne with a
sense of resignation.

Banking regulation also conveys

various generalized benefits to the banks and their
customers by protecting the soundness and stability of
institutions which accept deposits from the public,
service the payments mechanism, and meet a large share
of the credit needs of our economic system.

In essence,

bank regulation can build and maintain confidence, and
in today's troubled world that is an attribute to be

- 22 Beginning about a year ago, a number of
commercial banks learned that one value of having a
strong central bank in their home country was its
ability to serve as a lender of last resort in the event
that the bank experienced liquidity difficulties.


events of last summer--when some soundly run banks had
trouble renewing their Euro-market and other short-term
liabilities, sometimes simply because the banks were
small or were from countries with balance of payments
difficulties--indicated the importance of central banks
standing ready to assist qualified commercial banks
experiencing such difficulties.

Such assistance can

help insure that serious problems affecting an individual
bank or a small group of banks can be kept localized
and prevented from causing a generalized loss of con­
fidence in international markets.
In looking towards the future, it seems
reasonable to ask whether banking organizations that
enjoy the benefit of having a central bank lender of last
resort should not also bear the burden of central bank


- 23 regulation.

In particular, I think that central

banking authorities need to consider whether the time
has come for some coordination of their reserve
requirement regulations so that comparatively
unregulated and reserve-free market in banking services
does not evclve to such an extent that it threatens the
ability of individual countries to pursue their domestic
monetary policies.
Oversight of banking abroad
There is a fourth and final subject area
concerning foreign offices of U.S. banks which needs
careful review, and that is the matter of surveillance,
reporting, and examination.

Your subsequent speaker

this morning, the Comptroller of the Currency, will be
exploring this subject with you in some detail.


should like to note merely that bank regulators, and
central bankers responsible for national economic
policy, need timely information on what banks are doing
in their international business.

This information is

- 24 needed both for purposes of analyzing the activities
and condition of an individual bank and for the larger
economic purposes of understanding capital and credit
flows and their impact on the economies of different
c ountries.

I commend the respondent banks for their

cooperation in the existing reporting arrangements, and
I hope that in the future banks will continue to assist
the Federal Reserve and our colleagues in developing
information flows that answer the main public policy
questions without excessive reporting burdens on the

Concluding observations
What I have given you today is really an

I have not attempted even tentative answers

to the key questions, but rather have supplied you with
a description of relevant issues and various unresolved
questions in four major areas of concern to the Federal

The policy implications of the answers to

some of these questions I have posed may take a

- 25 considerable amount of time and effort to resolve.
We solicit comments and suggestions on all these
matters from you and your colleagues.

I hope that as

the year progresses we can all contribute to bringing
international banking regulation into better alignment
with present realities and prospective n e e d s .