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Statement by

Stephen S. Gardner

Vice Chairman, Board of Governors of the Federal Reserve System

before the

Subcommittee on Financial Institutions Supervision,
Regulation and Insurance

of the

Committee on Banking, Finance and Urban Affairs

United States House of Representatives

on H.R. 7325

July 12, 1977

Mr. Chairman, Members of the Committee, it is a pleasure to
testify in support of the International Banking Act of 1977.

This landĀ­

mark legislation is very important to American consumers and businesses,
to Federal and State bank regulatory authorities and legislators, to
the management of monetary policy, and to U.S. relations with our trading

Without attempting to weigh the importance of each relative

interest, because all must be considered fairly, I would emphasize that
the bill is a domestic bank regulatory measure and should be so characterized.
The only unique thing about foreign bank offices in this country is
that they are owned and managed from abroad mostly by large multinational
banks with worldwide assets exceeding one billion dollars.

As these

hearings will indicate, they are also a very large and rapidly growing
part of our domestic banking system.

Their banking services are sold

to American consumers and businesses and they compete directly with
domestic banks that are regulated and supervised under a comprehensive
system of Federal and State laws and regulations.
I am optimistic that these hearings will lead to the enactment
of a law that is fair and appropriate for all parties, embodying the
principle of national treatment for foreign banks and conforming their
regulation evenly and equitably to that imposed on similar domestic
banking organizations.

My optimism is based on these facts.

Last year

this Committee did an outstanding job in proposing an International
Banking Act to the full House which passed as H.R. 13876.

The appropriate

Subcommittee of the Senate held a full set of hearings on this proposal
and was prevented from continuing this work only because of the adjournment


of the Congress.

Further, proposals of this kind have been before the

Congress and the public since 1974, and there has been ample opportunity
for the Congress to hear all points of view germane to this bill.
Two things have happened in this process.

First, the original

legislative proposals have been changed significantly to meet some basic
objections, and the Federal Reserve has recommended further changes
which, in our judgment, should meet the remaining points of controversy.
Second, those who foresaw a continued and rapid growth of foreign bank
operations in the United States have seen their predictions fulfilled.
Since the introduction of the Board's first proposal in 1974, foreign
bank operations in this country have continued to grow in number, size,
and importance.

They have been assuming an increasingly important share

of the market for commercial and industrial loans, have been increasing
their penetration into regional markets and retail banking services,
and have been active participants in domestic money markets.

Our most

recent data show that 210 banking facilities are operated by 94 foreign
banks in the United States.

More than half of these foreign banks

operate across State lines:

twenty-two foreign banks have banking

offices in three or more States and another twenty-eight foreign banks
have banking offices in two States, an advantage denied to domestic

Foreign bank interest in the United States is growing at a

remarkably rapid pace and even the most partisan of those who oppose
any form of Federal regulation must grant that further delay will surely
complicate the work of the Congress in enacting appropriate legislation.
Mr. Chairman, I am submitting with my testimony a Statistical
Appendix providing data on the growth of foreign bank operations and


a compendium of supporting documents intended for the Committee's use.
In today's statement, I would like to address those provisions of the
Act that may be questioned by later witnesses.
As recently as three years ago, many held the belief that
foreign banks in our economy were highly specialized institutions operating
only in port and gateway cities where international trade was important,
and those opposed to legislation argued that their chartering and regulation
could be left to the States.

Such arguments today, in view of the extraordinary

expansion of these banks in the context of the development of multinational
banking, have been thoroughly disproved.
The rapid expansion of multinational banking has been occurring
abroad as well as in the United States.

The growth of this international

financial community is testing the regulatory frameworks and monetary
system in many other countries.

In Belgium, the Netherlands, the United

Kingdom and Canada, banking laws are currently being revised.


countries are reviewing their existing regulations and supervisory practices.
The business this Committee is about is thus very common in other nations
and it is an entirely responsible and appropriate activity.

For the

United States is alone among the leading trading nations of the western
world, in having virtually no national policy, monetary controls, or
national presence where foreign banks are concerned.
Over the past several years, as we have testified before,
we have generally found the banking authorities in other countries to
be sympathetic and understanding of the need to rationalize the treatment



of foreign banks in our country with our domestic banking system.


foreign central bankers consider it surprising that the United States
does not have a national policy on foreign banks, and, in particular,
they recognize the logic of extending monetary and credit controls to
foreign banks operating within our borders, and conducting transactions
in our currency.

This, of course, is a fundamental reason for enacting

this bill.
The Committee should not be misled by criticism from commercial
bankers abroad.

The objections to the legislation addressed to those

sections of the bill that would require divestitures or the closing
of existing facilities can be dealt with during the legislative process.
Objections to the United States having appropriate powers to guide
monetary and credit policies within this country should not be given
undue weight.
In the Board's letter to you endorsing the present legislation,
there are included proposals for amendments addressed to the most valid
concerns of those opposing certain of its sections.

I would like to

touch on these amendatory proposals and underline their importance to
the success of the legislation before you.
I have referred to monetary policy controls, and your bill
largely accomplishes the objective of establishing for foreign banks
a fair equivalent to the monetary regulations that affect comparable
domestic banking institutions.

The bill does not require formal memberĀ­

ship in the Federal Reserve System.

It simply requires that those




foreign banks operating in the United States that have $1 billion or
more in worldwide bank assets maintain reserves in the same way as the
largest U.S. banks, virtually all of which are members of the Federal
Reserve System.
There is, however, an omission in the present bill.

The State-

chartered subsidiaries of large foreign banks are exempted from monetary

The Board believes that the appropriate test for the imposition

of monetary controls is the size and the ability of a foreign bank to
compete and participate through its U.S. affiliates in our large money
and credit markets.

Thus, the Board recommends that Section 7 of the

bill be amended to require that Federal Reserve monetary controls be
applied to all the U.S. operations of a foreign bank that has $1 billion
or more in worldwide bank assets, irrespective of whether they are
conducted through agencies, branches, subsidiary banks, or subsidiary
New York Investment Companies.

If we omit one corporate form of organization

from such restrictions, the bill's purpose will be subverted and its
effectiveness severely reduced.
Consistent with national treatment, section 5 of the bill
generally subjects foreign banks to the same multi-State restrictions
that apply to domestic banks.

The Board believes, however, that direct

imposition of the branching restrictions of the McFadden Act should
be limited to Federal branches and agencies.

State branches

should be put on the same competitive footing as State banks in their
home State.

In this way, foreign banks may benefit from future reciprocal

interstate branching legislation that may be agreed upon among the States.


In our previous comments on the bill, we suggested that multiState restrictions apply to both branches and agencies of foreign banks.
I expect you will hear strong testimony from State authorities urging
that agencies remain exempted from multi-State branching restrictions
as the bill now provides.

The Board has carefully considered these

arguments which arise quite naturally from those States interested in
attracting offices of foreign banks to assist in expanding their local
industries' participation in foreign trade.
what appears to be a reasonable alternative.

I would like now to propose
That alternative would

be to limit agencies of foreign banks that are licensed by the States
in the future to powers that are no greater than Federally-chartered
Edge Act Corporations.

These future State-licensed agencies would thus

be able to conduct a full service international banking business and
thus promote the further development of international trade and investment
throughout the country.

At the same time, the multi-State restrictions

on banking offices conducting a full service domestic banking business
would not be compromised.

To exempt agencies entirely would, in our

judgment, exacerbate the present multi-State advantages enjoyed by
foreign banks, as, traditionally, agencies have been the most important
form of foreign bank activity.

This alternative would equitably meet

the interests of the States that wish to have international banking
agencies, the interests of foreign banks that wish to establish international
banking facilities in more than one trade center and the public interest
of competitive equality with our domestic banks.


The issue of deposit insurance on foreign bank operations
in order to protect U.S. consumers and businesses has been debated since

Following the action of this Committee and the House vote on

H.R. 13876 last year, the Federal Deposit Insurance Corporation suggested
in comments to the Senate a method of applying deposit insurance to
the domestic deposits of U.S. branches of foreign banks.

In the judgment

of the Board, that alternative is far more desirable than the present
Section 6 of the bill.

The Board favors compulsory FDIC insurance on

deposits in branches of foreign banks.

The arguments for extending

FDIC insurance to these deposits are very direct and simple.

The United

States has enjoyed an extraordinarily successful system of deposit
insurance protecting in its end effect jobs, businesses and our economies
locally, regionally and nationally since the 1930's.

It is a model

act covering virtually all full-service commercial banks in this country.
It is being studied and copied by foreign governments.

It would be

a curious turn of events to abandon our world leadership in this area
by substituting an imperfect form of protection.

Surety bonds or pledges

of assets cannot be considered comparable to the certainty of FDIC
insurance and the Federal Deposit Insurance Corporation's ability to
protect our citizens from bank failures.
Because of the continuing rapid growth of foreign bank operations
in this country, it will become progressively more difficult to adopt
grandfathering proposals for their existing activities that are equitable
and consistent with prior legislative precedent.

Your bill grandfathers


multi-State banking operations as of May 1, 1976.

Nonbanking activities,

other than securities affiliates, are permanently grandfathered as of
December 3, 1974.

The Board concurs strongly in the permanent grandfathering

of these activities and believes it appropriate for the Congress to
review the existing grandfathering dates.

A majority of the Board believes

these dates should be brought forward to afford equitable treatment
to all existing facilities.
As for securities affiliates, it will be recalled that the
Senate hearings on the International Banking Act of 1976 produced extensive
controversy concerning the securities affiliate provisions in the present

The Board urges that the securities affiliations that are in

place today be permanently grandfathered to quiet the controversy, and
that, as a safeguard, the Board be given the discretion to review these
activities under the nonbanking standards of the Bank Holding Company
Act for any abuses that might arise over time.

This would meet the

concerns expressed by the regional stock exchanges.

It would also

provide sane certainty to foreign banks that their securities affiliates,
which are still a very small part of the securities industry, could
continue to operate in essentially the same form and relative size as
at present.
As we have indicated to the Committee, the Board does not
see the necessity for the detailed guideline provisions on foreign bank
entry in Section 9 of the bill.

The State and Federal regulatory agencies

already have appropriate statutory requirements that must be fulfilled
by those who apply for permission to conduct a banking business in this



The provisions of the bill, which provide for consultation

between bank regulatory authorities and the Secretaries of State and
Treasury on new foreign bank applications, would seem entirely adequate
to insure that any important foreign policy issues are considered when

I would expect that in almost all cases this consultative

procedure would be entirely routine.
Legitimate issues that have been raised by foreign banks
concerning fair national treatment include a key issue related to the
nonbanking prohibitions of the Bank Holding Company Act.

Last year

there apparently was a misconception on the part of some foreign bankers,
who thought that the nonbanking prohibitions that we apply to banks
in our domestic market would seriously interfere with their nonbanking
interests abroad.

For that reason we have proposed a clarifying amendment

to this bill whereby foreign banks that are principally engaged in banking
abroad would not be prohibited from retaining or acquiring interests
in foreign-chartered, nonbanking companies that have U.S. activities,
but which are principally engaged in business outside the United States.
While the Board believes it has sufficient regulatory authority under
present law to deal with such problems, we also believe it would be
desirable for the Congress to embody this principle in the statute.
In this proposal, we have included a requirement that any banking transactions
with U.S.

offices of such foreign affiliates be conducted at competitive

rates and terms.

In this way the firm or bank involved would not have

an unfair advantage over their respective U.S. competitors.




The Board's carefully considered and strong support of the
International Banking Act of 1977 is based on the conviction that the
proposed bill with the amendments that we have recommended would fairly
implement the principle of national treatment of foreign banking organizations
operating in the United States.

In the opinion of the Board, as we

have repeatedly emphasized, that principle is the only workable and
equitable method of dealing with these organizations.
As I have suggested in this testimony, most responsible objections
to the legislation have been or can be met.

The question then is simply:

should we not put foreign and domestic banks on a relatively equal footing
now, for surely they should be in time.

This legislation is an essential

ingredient in the larger process of rationalizing and modernizing our
own banking laws.

That work will be fairer and easier if it is evenly

applicable to all banks as it would be under this legislation.
The conscientious and excellent work of Congress and the Committee
should continue until this bill is passed.
to assist in any way necessary.

Thank you.

The Federal Reserve is ready