Foreign Banks: Assessing Their Role in the U.S. Banking System (Chapter
Report, 02/07/96, GAO/GGD-96-26).

Pursuant to a congressional request, GAO reviewed the laws and
regulations governing foreign banking operations in the United States.

GAO found that: (1) most foreign banks operate in U.S. wholesale banking
markets, serve their home country and U.S. corporate customers, and
engage in transactions with other financial institutions; (2) by the end
of 1994, foreign banks held 17 percent of U.S. domestic banking assets;
(3) foreign banks attained 24 percent of all U.S. commercial and
industrial loans in December 1994, but they held a negligible share of
the U.S. retail banking market during that same period; (4) although
foreign banks are subject to the same laws and regulations as U.S.
banks, they often receive different enforcement of these laws in their
home countries; (5) changes in U.S. banking laws and regulations have
diminished the competitive advantages previously enjoyed by foreign
banks; and (6) national treatment of foreign banks is a concern for both
U.S. and foreign bankers, since proposed legislation would expand the
powers of bank holding companies and have a differential impact on U.S.
and foreign banking operations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-26
     TITLE:  Foreign Banks: Assessing Their Role in the U.S. Banking 
             System
      DATE:  02/07/96
   SUBJECT:  Bank holding companies
             Banking law
             Banking regulation
             Foreign investments in US
             Lending institutions
             International economic relations
             Investments abroad
             Competition
IDENTIFIER:  Bank Insurance Fund
             BIF
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Banking, Housing,
and Urban Affairs, U.S.  Senate

February 1996

FOREIGN BANKS - ASSESSING THEIR
ROLE IN THE U.S.  BANKING SYSTEM

GAO/GGD-96-26

Foreign Banks

(233428)


Abbreviations
=============================================================== ABBREV

  BHC - Bank Holding Company
  C&I - Commercial and Industrial
  CRA - Community Reinvestment Act
  FBSEA - Foreign Bank Supervision Enhancement Act
  FSHC - Financial Services Holding Companies
  FDIC - Federal Deposit Insurance Corporation
  FX - Foreign Exchange
  IBA - International Banking Act of 1978
  IBF - International Banking Facility
  IBHC - Investment Bank Holding Company
  IPC - Individuals, Partnerships and Corporations
  OBS - off-balance sheet
  OCC - Office of the Comptroller of the Currency
  SLC - Standby Letters of Credit

Letter
=============================================================== LETTER


B-259971

February 7, 1996

The Honorable Paul S.  Sarbanes
Ranking Minority Member
Committee on Banking, Housing,
 and Urban Affairs
United States Senate

Dear Senator Sarbanes: 

This report examines the role of foreign banks in the United States
and reviews the U.S.  laws and regulations governing their
operations.  The former chairman of the Committee on Banking,
Housing, and Urban Affairs asked us to review these laws and
regulations and to evaluate whether they give foreign banks operating
in the United States a significant competitive advantage over U.S. 
banks.  This report identifies areas where U.S.  laws and regulations
have been adapted to meet the circumstances of foreign banks and
examines the competitive impact of these adaptations on U.S.  banks. 

We are sending copies of this report to appropriate congressional
committees, the Chairman of the Federal Reserve Board, the Chairman
of the Federal Deposit Insurance Corporation, the Comptroller of the
Currency, and other interested parties.  We will also make copies
available to others on request. 

Major contributors to this report are listed in appendix II.  If you
have any questions, please call me at (202) 512-8678. 

Sincerely yours,

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Over the past 2 decades, the share of U.S.  banking assets held by
foreign banks has increased significantly.  The Senate Committee on
Banking, Housing, and Urban Affairs asked GAO to review the laws and
regulations affecting foreign bank operations in the United States. 
The Committee was particularly interested in whether U.S.  laws and
regulations give foreign banks any significant advantages over U.S. 
banking organizations in the U.S.  banking market. 

This report examines the role of foreign branches and agencies in the
U.S.  banking system and identifies areas where U.S.  laws and
regulations have been adapted for foreign banks.  It also examines
the competitive impact of such adaptations on U.S.  banks. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Foreign banks operate in the United States under several
organizational forms.  For example, they may operate a U.S.  bank as
a subsidiary of their parent bank.  Or they may establish branches
and agencies, which are legal and operational extensions of the
parent bank.  As of December 1994, 82 percent of the U.S.  assets of
foreign banks were held in branches and agencies.  Branches, which
are also used by U.S.  banks overseas, and agencies are the principal
focus of this report.  Foreign banks also service U.S.  customers
from locations outside the United States, including offices in their
home or other countries or through what are termed shell
branches--offshore operations frequently managed from U.S.  offices. 

The landmark federal legislation governing the activities of foreign
banks in the United States was the International Banking Act (IBA) of
1978.  The act brought foreign branches and agencies under federal
regulation and adopted the policy of national treatment.  National
treatment accords foreign banks the opportunity to compete in the
United States on the same basis as U.S.  banks.  However, national
treatment does not mean identical treatment.  The policy recognizes
that foreign branches and agencies also operate under the regulations
of their home countries, which may differ from those in the United
States.  Adaptations of U.S.  laws and regulations were therefore
needed. 

In 1991, Congress passed the Foreign Bank Supervision Enhancement Act
(FBSEA).  This act amended the IBA and authorized the Federal Reserve
to oversee all foreign bank operations in the United States.  The act
also established uniform standards for all U.S.  offices of foreign
banks, generally requiring them to meet financial, management, and
operational standards equivalent to those of U.S.  banking
organizations. 

Data limitations restricted GAO's ability to describe and analyze
some aspects of foreign bank operations.  For example, differences in
reporting by foreign branches and agencies and U.S.  banks limited
comparisons by product categories.  In addition, the shell branches
of foreign banks did not report any data on their activities until
1993.  Since 1993, shell branch data have been collected, but they
are more limited than the data provided by branches and agencies in
the United States and are not verifiable by U.S.  bank regulators. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Foreign branches and agencies operate almost exclusively in the
wholesale banking markets in the United States.  That is, they serve
primarily their home country and U.S.  corporate customers and engage
in transactions with banks and other financial institutions.  While
many foreign banks are very large organizations and provide a full
range of banking services in their home markets, in the United States
most perform a narrow range of activities compared with U.S.  banks. 

The market share of foreign banks in the United States varies
according to the assumptions made about their activities and those of
U.S.  banks.  At the end of 1994, foreign branches and agencies held
17 percent of domestic U.S.  banking assets.  The addition of assets
held in foreign-owned U.S.  subsidiary banks increased the foreign
bank market share by about 4 percentage points. 

Foreign branches and agencies have attained a large share in some
wholesale U.S.  banking activities.  For example, foreign branches
and agencies held 24 percent of all U.S.  commercial and industrial
(C&I) loans in December 1994.  By contrast, they have a negligible
share of the U.S.  retail banking market.  For example, they held
less than 1 percent of total transactions (checking) deposits in
December 1994. 

The previously mentioned market shares include only data on foreign
branches and agencies located in the United States.  Including data
on the activities of shell branches increased the degree of foreign
bank penetration in some segments of the U.S.  banking market.  For
example, year-end 1994 data showed that the inclusion of shell
branches increased the volume of C&I loans reported by foreign
branches and agencies by about one-third.  This increased the foreign
branch and agency share of the C&I loan market to 29 percent.  In
addition, shell branches reported that they held about the same
amount of total deposits from individuals and corporations with U.S. 
addresses as did foreign branches and agencies in the United States. 

Foreign banks have been cited as an important source of capital to
the U.S.  economy because they are believed to supply more funds to
the United States than they raise from it.  GAO could not
definitively determine whether foreign branches and agencies in the
United States and their shell branches were net suppliers of funds to
the U.S.  economy.  It appeared likely that in 1994 foreign branches
and agencies and their shell branches supplied more funds to the U.S. 
economy than they raised.  However, available data did not allow GAO
to determine the magnitude of foreign branch and agency funding to
the U.S.  economy. 

GAO's review of current laws and regulations and interviews with U.S. 
and foreign bankers, officials at multinational and other
corporations, U.S.  bank regulators, and others indicated that
foreign branches and agencies operating in the United States are
subject to substantially the same laws and regulations as those
governing U.S.  banks.  Under the policy of national treatment, the
application of U.S.  laws and regulations was designed to confer no
competitive advantage to or impose no competitive disadvantage on
foreign banks compared with U.S.  banks.  However, because foreign
branches and agencies are subject to regulation in their home
countries, U.S.  laws and regulations cannot always be applied to
foreign branches and agencies in exactly the same manner as they are
applied to U.S.  banks. 

In areas where adaptations have been necessary, changes in U.S.  laws
and regulations or changes in the banking industry have reduced the
possibility that foreign branches and agencies have an advantage
compared with U.S.  banks.  In general, the bankers and others that
GAO spoke with reported that laws and regulations and adaptations to
them governing foreign-owned branches and agencies no longer produced
any significant competitive advantages vis-a-vis U.S.-owned banks. 
Still, the application of the policy of national treatment remains a
concern to U.S.  and foreign bankers and to policymakers, especially
as changes in banking legislation are considered.  For example,
because of structural differences in the way U.S.  and foreign banks
are organized (i.e., foreign banks are not generally organized under
a holding company structure), legislation to repeal the
Glass-Steagall Act could have a differential impact on the operations
of U.S.  and foreign-owned banks. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      FOREIGN BRANCHES AND
      AGENCIES OPERATE IN
      WHOLESALE MARKETS
-------------------------------------------------------- Chapter 0:4.1

The activities of foreign branches and agencies have been
concentrated in certain segments of the wholesale banking market.  In
1994, two-thirds of their assets were either business loans or claims
on other banks.  Foreign branches and agencies also relied on
wholesale markets for their funding.  In 1994, over one-half their
funding came from other banks, and they held 38 percent of the market
for large (over $100,000) time deposits.  Off-balance sheet
activities have increased at foreign branches and agencies.  In 1994,
they accounted for between one-fifth and one-half of such products as
standby letters of credit and foreign-exchange commitments. 

Some U.S.  bankers GAO spoke with stated that foreign branches and
agencies helped to maintain funding to U.S.  businesses during a
recent period when U.S.  banks were restricting lending in order to
rebuild their capital.  Between 1985 and 1992, C&I lending at U.S. 
banks fell by $39 billion.  At the same time, C&I lending at foreign
branches and agencies rose by $95 billion.  This was reflected in the
rise in the C&I market share of foreign banks, which peaked in 1992. 
Some U.S.  bankers also stated that foreign branches and agencies are
meeting trade financing needs not met by U.S.  banks. 

In GAO's interviews, U.S.  bankers discounted the statistics that
showed foreign banks gaining a large share of the U.S.  banking
market.  These bankers told GAO that profitability and capital
strength are the essential components of competitiveness and that
U.S.  banks do well by these measures. 


      DATA ON FOREIGN SHELL
      BRANCHES INDICATE INCREASED
      SHARE IN
      SOME MARKETS
-------------------------------------------------------- Chapter 0:4.2

The role of foreign banks in the U.S.  economy appeared even larger
when activities at their shell branches were considered.  For
example, the addition of shell branch assets to those in foreign
branches and agencies raised the market share of foreign branches and
agencies from 17 percent to 21 percent of domestic banking assets in
December 1994.  A study by the Federal Reserve showed that the
foreign bank share of C&I lending rose from 35 percent to 42 percent
in March 1993 with the addition of shell branch data. 


      FOREIGN BRANCHES AND
      AGENCIES MAY HAVE BEEN NET
      SUPPLIERS OF FUNDS TO THE
      U.S.  ECONOMY
-------------------------------------------------------- Chapter 0:4.3

Foreign branches and agencies report data for some of their
activities by the location (U.S.  address or non-U.S.  address) of
the borrower or supplier of funds.  These data showed that in 1994
foreign branches and agencies supplied $118 billion more in funds to
U.S.  addresses than they raised from U.S.  addresses.  Foreign
branches and agencies also raised $150 billion more from non-U.S. 
addresses in 1994 than they supplied to them. 

It would thus appear that foreign branches and agencies were net
suppliers of funds to the U.S.  economy in 1994.  However, GAO cannot
reach a definitive conclusion about either the magnitude or the
direction of the flow of funds from foreign branches and agencies
because, for a large portion of the data, it was impossible to
determine precisely the location of the borrower or lender. 


      U.S.  LAWS AND REGULATIONS
      DO NOT APPEAR TO CREATE
      SIGNIFICANT COMPETITIVE
      ADVANTAGES FOR FOREIGN
      BRANCHES AND AGENCIES
-------------------------------------------------------- Chapter 0:4.4

Since 1978, changes in U.S.  laws and regulations under the policy of
national treatment have diminished the competitive advantages
previously enjoyed by foreign branches and agencies.  Changes in
banking markets around the world also diminished many of the
differences between foreign and U.S.  banks and the advantages that
foreign branches and agencies were once said to have.  For example,
adoption of international risk-based capital standards and market
pressures for increased capital appear to have lessened concern about
the amount and type of capital that foreign banks hold.  Likewise,
the movement towards interstate banking in the United States over the
past decade reduced the advantage that a small number of foreign
banks had from operating full-service interstate branch networks. 
Finally, improvement in the Federal Deposit Insurance Corporation's
Bank Insurance Fund has led to lower deposit insurance premiums for
most banks.  Any advantage that foreign branches and agencies may
have had from not paying these premiums has been reduced
significantly. 

However, areas remain where the adaptation of U.S.  laws and
regulations results in some differences between U.S.  banks and
foreign branches and agencies that could produce advantages for
foreign branches and agencies.  These differences include the ability
to engage in transactions with nonbank subsidiaries of the parent
bank and the limited supervision of shell branches by U.S.  bank
regulators. 

Some U.S.  bankers told GAO that any advantages that foreign branches
and agencies have result from economic environments in the home
countries of these banks and from bank management's decisions on
which markets to serve and what services to offer.  In general, the
U.S.  bankers who GAO interviewed felt that adaptations of U.S.  laws
and regulations currently gave foreign branches and agencies no
significant advantage over U.S.  banks. 

Because of differences in U.S.  and foreign bank corporate
structures, authorized activities, and access to insured deposits,
national treatment is likely to be an important issue whenever
changes are contemplated in the powers of banks or bank holding
companies (BHC).  For example, the House Banking and Financial
Services Committee has approved legislation that would expand the
powers of BHCs.  Under the legislation, foreign and U.S.  banks that
do not take insured deposits in the United States would be subject to
fewer restrictions than banks that take insured deposits.  Because
foreign banks would be able to raise insured deposits in their home
countries, this legislation could create an advantage for them. 
However, the extent of this possible advantage is unknown. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO received written comments on a draft of this report from the
Federal Reserve.  In its letter, the Federal Reserve stated that the
findings and conclusions concerning the activities of foreign banks
in the United States are generally consistent with those of the
Board's staff. 


INTRODUCTION
============================================================ Chapter 1

This report is in response to a request from the former Chairman of
the Senate Committee on Banking, Housing, and Urban Affairs to
determine the reasons for the rapid growth of foreign bank operations
in the United States.  We were requested to assess the role of
foreign banks in providing funds to the U.S.  economy and to
determine whether foreign banks have any significant advantages over
U.S.  banks because of differences in the way they are regulated. 

Between 1972 and 1990, the assets of foreign banks operating in the
United States increased at a faster rate than did the assets at
domestic offices of U.S.  banks.  As a result, the market share of
foreign banks grew, especially in certain wholesale banking markets
where foreign banks concentrate their products and services.  This
report examines (1) the reasons why foreign banks have expanded so
rapidly, (2) the role foreign banks play in financing the U.S. 
economy, and (3) whether foreign banks enjoy any significant
competitive advantages in the United States over U.S.  banking
organizations because of regulatory differences. 


   BACKGROUND
---------------------------------------------------------- Chapter 1:1

Capital markets have become increasingly integrated and international
in character.  Expansion of international trade and the growth of
multinational corporations have led U.S.  and foreign banks to open
offices overseas to service customers of their home country and to
seek new growth opportunities. 

In 1994, 378 foreign banks operated 921 offices in the United States,
as shown in table 1.1.  Branches and agencies\1 were the most common
organizational form--accounting for 61 percent of foreign bank
offices and 82 percent of foreign bank assets at the end of 1994. 
Separately chartered U.S.  bank subsidiaries were next in
importance--accounting for 18 percent of foreign bank assets.  The
remaining forms--commercial lending companies, Edge Act Corporations,
and representative offices--accounted for less than one percent of
foreign bank assets in the United States.\2 Foreign banks also
provided services to many U.S.  customers through shell branches
located outside the United States but managed by their U.S.  branches
or agencies.  Because foreign branches and agencies are the dominant
form of organization in the United States, this report focuses on the
activities of these entities and the shell branches they manage. 



                               Table 1.1
                
                Foreign Bank Organizations Operating in
                  the United States and Shell Branches
                 Managed by U.S. Offices, December 1994

                         (Dollars in billions)

Forms of organization                                   Number  Assets
------------------------------------------------------  ------  ------
Branches and agencies                                      559    $750
Subsidiary banks                                            97     165
Commercial lending companies                                 4       1
Edge Act Corporations                                       11       1
Representative offices                                     250       0
Total, U.S. offices                                        921    $917
Shell branches, managed by U.S. offices                    142   293\a
======================================================================
Total                                                    1,063  $1,210
----------------------------------------------------------------------
Note:  Numbers may not add to total because of rounding. 

\a Of the $293 billion, $113 billion represented claims on U.S. 
addresses other than to related depositories, $84 billion represented
claims on related depositories in the United States, $12 billion
represented claims on U.S.  addresses denominated in currencies other
than U.S.  dollars, and $85 billion represented claims on non-U.S. 
addresses. 

Source:  Federal Reserve. 

Like their U.S.  counterparts, foreign branches and agencies are
legal and operational extensions of their parent banks.  Their assets
and liabilities are consolidated into the accounts of their parent
banks, and they operate on the consolidated equity of those banks. 
For example, their lending limits are based on the capital of their
parent banks.  Regulators in both the United States and their home
country oversee their operations. 

Before passage of the International Banking Act of 1978 (IBA), only
states could license, supervise, and regulate the operations of
foreign branches and agencies.  Some states specifically prohibited
foreign branches but allowed other types of foreign bank activity. 
Passage of the IBA made foreign banks eligible for federal licenses
and subject to federal regulation.\3

Foreign branches and agencies may conduct a wide range of banking
activities, including lending, money market services, trade
financing, and other activities related to the service of
home-country and U.S.  clients.  They can also access the U.S. 
payments system through the Federal Reserve and obtain other Federal
Reserve services.  However, they are banned from certain activities. 
Foreign branches have been prohibited from accepting insured deposits
since the end of 1991.\4 In addition, federally licensed agencies and
most state-licensed agencies cannot accept deposits.\5

Foreign banks can charter or acquire a full-service U.S.  bank
subsidiary.\6 Foreign banks have exercised this option when state law
prohibited them from establishing branches or when a foreign bank
wanted to offer retail banking services.  Foreign-owned subsidiary
banks have all the powers of U.S.-owned banks, are insured by the
Federal Deposit Insurance Corporation (FDIC), and are subject to all
the rules and regulations governing U.S.-owned banks.  However,
subsidiary banks have some disadvantages compared with branches and
agencies.  They are more costly to operate, requiring not only
separate boards of directors and managers but also their own capital
base.  They are also subject to the collateralization requirements
and lending limits of the Federal Reserve's section 23A and 23B
restrictions, which limit banks' extension of credit to their
affiliates. 

Foreign banks also offer services to U.S.  customers through offices
located outside the U.S.  (offshore offices).  Some offshore offices
have practically no office or staff and are referred to as shell
branches.  Much of their management--including funding decisions and
setting lending policies--is handled elsewhere, in many instances by
branches or agencies located in the United States.\7 In these cases,
banking products--such as commercial and industrial (C&I) loans or
deposits--are marketed to U.S.  customers from U.S.  offices but are
held by the shell branch.  Although the shell branches of U.S. 
banks, including foreign-owned U.S.-chartered banks, are subject to
all U.S.  laws and regulations, the shell branches of foreign banks
are subject to U.S.  regulation only for those activities that are
managed within the United States. 

Foreign banks can also serve U.S.  customers through International
Banking Facilities (IBF).  Like shell branches, IBFs represent a
separate set of accounts rather than an operating entity of the bank. 
For this reason IBFs are sometimes referred to as onshore shell
branches.  The Federal Reserve authorized U.S.  banks and the offices
of foreign banks to establish IBFs to engage in Eurocurrency lending
in 1981 in response to the growth of shell branches.\8 The activities
of IBFs are restricted.  They can be used to take deposits from the
non-U.S.  offices of U.S.  and foreign banks, other IBFs, IBF parent
banks, and foreign governments.  They can also make loans to those
cited above, plus non-U.S.  residents, and the foreign offices of a
domestic corporation.  They are free from reserve requirements,
federal deposit insurance premiums, and some state income taxes.  An
IBF may not engage in domestic banking activities.  Shell branches,
by contrast, may be used to make loans to or hold deposits from any
U.S.  or non-U.S.  customer. 


--------------------
\1 Branches and agencies are often discussed together because they
perform the same functions, with the exception that agencies cannot
generally accept deposits.  In this report, we will follow this
convention. 

\2 Commercial lending companies are specialized nondepository
institutions authorized under state law.  They may engage in
borrowing and lending activities and have numerous other powers. 
They may maintain credit balances but may not accept deposits.  To
date, these companies have located in New York and are also known as
New York investment companies.  Edge Act Corporations allow U.S.  and
foreign banks to conduct international banking activities in the U.S. 
without the myriad of laws and regulations that apply to domestic
banking activities.  Representative offices are similar to the loan
production offices of U.S.  banks.  They allow foreign banks to
attract business for the parent bank and to develop correspondent
relationships with local U.S.  banks.  They are prohibited, however,
from engaging in general banking activities although they may conduct
administrative functions, such as receiving checks to forward to
their home office and handling the signing of loan papers. 

\3 States, however, still determine whether foreign banks may
establish branches or agencies in their jurisdiction. 

\4 Those foreign branches that accepted insured deposits before the
end of 1991 are still permitted to do so. 

\5 Agencies may, however, accept credit balances.  These balances
consist of receipts from transactions and undisbursed loan balances
and, in fact, serve the same purpose as transactions (checking)
accounts.  In some cases, states have allowed agencies limited
deposit-taking capabilities.  New York, for example, allows some
agencies to accept large-denomination deposits, but the agency cannot
accept deposits as a normal course of business (New York agencies
that accept such deposits are considered branches for purposes of
administering the IBA). 

\6 These banks are corporate entities separate from their foreign
parent bank. 

\7 At the end of 1994, 122 foreign banks operating in the United
States reported that they managed one or more shell branches through
their U.S.  offices. 

\8 A "Eurocurrency transaction" is a transaction conducted in a
currency other than that of the country in which the bank is located. 
For example, loans made abroad but denominated in U.S.  dollars are
referred to as Eurodollar loans. 


   GROWTH OF FOREIGN BANKS
---------------------------------------------------------- Chapter 1:2

Between 1972 and 1990, the number and assets of foreign banks
operating in the United States grew rapidly.  The number of foreign
branches and agencies increased more than sevenfold--from 77 to
600--and foreign-owned bank subsidiaries more than tripled--from 25
to 88.  During this period, the average annual growth rate of branch,
agency, and foreign-owned bank subsidiary assets was more than 20
percent (see figure 1.1).  By December 1990, 295 foreign banks from
59 countries operated in the U.S.  and held $785 billion in assets. 
Since 1990, the growth of assets in these banks has slowed, and the
number of foreign bank offices has declined. 

   Figure 1.1:  Asset Growth in
   Foreign Branches, Agencies, and
   Foreign-Owned Bank
   Subsidiaries, 1972 to 1994
   (Dollars in billions)

   (See figure in printed
   edition.)

Source:  For 1972 to 1988, Faramarz Damanpour, The Evolution of
Foreign Banking Institutions in the United States, (Quorum Books: 
New York, 1990).  For 1989 to 1994, Board of Governors of the Federal
Reserve System, Structure Data for U.S.  Offices of Foreign Banks. 

Forty-seven of the 50 largest banks in the world (excluding
U.S.-owned banks) had commercial banking operations in the United
States as of December 1993.  These banks held 69 percent of foreign
branch and agency assets.  Of the top 20 banks, 10 had 5 percent or
more of their total assets in the United States in 1993. 


   REASONS UNDERLYING THE GROWTH
   OF FOREIGN BANKS
---------------------------------------------------------- Chapter 1:3

Several factors have contributed to the growth of foreign branches
and agencies since the 1970s. 

First, expansion of foreign-owned businesses gave foreign banks a
growing client base in the United States.  Imports of goods and
services in the United States doubled between 1970 and 1975 and again
between 1975 and 1980.  Since 1980, imports have continued to grow,
although at a slower pace.  Between 1980 and 1994, imports doubled. 
As foreign business has expanded, foreign banks have entered the
United States to service clients from their home countries.\9

Second, rising federal budget deficits increased the United States'
demand for capital--including foreign capital--while large trade
deficits created a surplus of dollar assets abroad.  Part of the
dollar surplus was deposited into foreign banks.  This allowed
foreign banks to expand their U.S.  operations because growth in
their dollar-denominated deposits provided a large funding base for
entering the U.S.  market.\10 The recycling of dollar surpluses back
into the U.S.  economy helped the United States to finance its budget
deficit as well as maintain economic expansion.  Lending in the
United States also provided foreign banks with another means of
diversifying risks.  For example, lending in the United States
lessened foreign exchange risk by matching dollar-denominated assets
to dollar deposits. 

Third, as discussed later in this chapter, before passage of the IBA
in 1978, foreign branches and agencies enjoyed a number of advantages
in their operations compared with U.S.  banks.  Passage of the act,
however, removed many of these advantages and brought foreign
branches and agencies under federal banking laws and regulations. 
Some observers have said that foreign banks established branches and
agencies in the United States in anticipation of receiving
grandfathered privileges under this act. 

Finally, the United States is a large and open economy and has a
currency that plays a key role in world markets.  The United States
is the largest market for dollar exchange and is home to one of the
world's largest financial centers.  Technological advances in
computers and telecommunications have also made it easier to manage
overseas expansion. 

Since 1990, foreign bank growth has slowed.  Some of the slowdown may
simply be due to the size and maturing of the industry.  In addition,
foreign banks have experienced many of the same difficulties that
slowed the growth of U.S.  banks in the late 1980s.  Problem real
estate and other loans have led foreign banks to search for less
risky assets.  The need to improve capital ratios has led some to
seek sources of income that require little or no additional capital. 


--------------------
\9 Traditionally, banks expanded into foreign markets to serve their
domestic customers overseas.  Banks have a comparative advantage in
serving nonfinancial firms based in their home country.  They have
firsthand knowledge of the language and customs of their country. 
They also know their own country's legal system and their
government's rules on capital flows, exchange restrictions, and
taxation.  Banks that want to keep their customers must offer
services in the countries in which their customers do business. 
Establishing a presence in a foreign country also makes it easier to
obtain information about that country. 

\10 For example, foreign banks could use their dollar deposits to
make loans to large corporations.  They could also lend dollars to
other banks through the Federal Funds market.  Although foreign banks
could recycle dollar deposits through offshore branches or through
other banks, the large volume of deposits in some foreign banks made
it profitable to establish offices in the United States where they
could lend their funds directly. 


   REGULATION OF FOREIGN BANK
   ACTIVITIES IN THE UNITED STATES
   AND THE CONCEPT OF NATIONAL
   TREATMENT
---------------------------------------------------------- Chapter 1:4

The IBA of 1978 stands as the landmark federal legislation affecting
foreign bank operations in the United States.  In passing the IBA,
the United States adopted a policy of national treatment governing
the activities of foreign banks.  The goal of national treatment is
to allow foreign banks to operate in the United States without
incurring either significant advantage or disadvantage compared with
U.S.  banks.  To implement this policy, the IBA brought U.S. 
branches and agencies of foreign banks under federal banking laws and
regulations.  The Federal Reserve was given regulatory authority for
all U.S.  international banking laws, which it administers through
regulation K.\11

Before passage of the IBA, foreign branches and agencies operating in
the United States enjoyed many regulatory advantages compared with
U.S.  banks.  They were not subject to reserve requirements or
deposit interest-rate ceilings, they could operate full-service
branches in any state that allowed them to enter, and they could
offer both commercial and investment banking services.  The 1978 act
was designed to eliminate these advantages and to place foreign banks
on an equal footing with U.S.  banks.  The act required foreign banks
to choose a home state and prohibited them from establishing
full-service branches in states outside the home state.  The IBA also
limited foreign bank involvement in U.S.  securities and other
nonbanking markets by restricting them to those activities that could
be done by U.S.  bank holding companies (BHC). 

The act also expanded the options of foreign banks.  Prior to the
IBA, only states could license foreign branches and agencies. 
Foreign banks were subject to the laws of the states in which they
were licensed, and, in some cases, these laws were more restrictive
than federal law for national banks.  The act made federal licenses
available to foreign banks.  It also allowed foreign branches to
obtain federal deposit insurance, requiring it for any branch with a
significant amount of retail deposits.\12 The act permitted foreign
banks to establish Edge Act Corporations\13 and it granted foreign
branches and agencies access to the Federal Reserve's discount
window. 

Although the IBA eliminated many of the advantages that foreign
branches and agencies had over U.S.  banks, those foreign branches
and agencies that were already engaged in interstate branching or
securities activities were allowed to continue these activities under
the grandfathering provisions of the act.\14 Restrictions, however,
were applied to their growth.  Foreign banks with interstate branches
were only allowed to establish new full-service branches in their
home state.  They could not establish full-service branches in other
states, even in those states where they were already located. 
Similarly, foreign banks with grandfathered securities activities
were limited to those activities in which they were engaged (or had
applied to engage) on the grandfather date.  In addition, securities
firms owned by foreign banks could only expand by internal
growth--they were restricted from acquiring or merging with other
securities firms or from expanding by hiring significant numbers of
employees from other securities firms.\15 Foreign banks that acquire
U.S.  banks lose their grandfathered securities rights. 

With the exception of the grandfathered activities, the IBA and
subsequent laws and regulations brought foreign banks under the same
restrictions as those governing U.S.  banks with some adaptations. 
The application of U.S.  laws and regulations to foreign banks
reflects the fact that structural and organizational differences
exist between foreign and U.S.  banks.  For example, foreign banks
are not generally organized under the holding company structure, as
are most U.S.  banks. 

Because of these differences, subjecting foreign banks with branches
and agencies in the United States to all U.S.  laws and regulations
without adaptation would likely violate the policy of national
treatment.  While this policy tries to ensure equal treatment of U.S. 
and foreign banks in the United States, it recognizes that equal
treatment does not necessarily mean the same treatment.  Similarly,
the United States seeks to have the policy of national treatment
applied to U.S.  banks operating abroad.\16

In 1991, Congress passed the Foreign Bank Supervision Enhancement Act
(FBSEA).  This act, which amended the IBA, authorized federal
oversight of all foreign bank operations in the United States and
vested this responsibility with the Federal Reserve.  It also
established uniform standards for all U.S.  offices of foreign banks,
generally requiring them to meet financial, management, and
operational standards equivalent to those required of U.S.  banking
organizations.\17 Finally, the act prohibited foreign branches from
accepting retail deposits, although it grandfathered the branches
that already offered insured deposits. 

FBSEA increased the Federal Reserve's supervisory and regulatory
power over foreign banks by (1) requiring Federal Reserve approval
for all foreign banks seeking to establish U.S.  offices, whether
licensed by state or federal authorities, (2) permitting the Federal
Reserve to terminate the activities of a state-licensed branch or
agency, or to recommend that OCC terminate the license of a federally
licensed branch or agency, and (3) clarifying and strengthening the
Federal Reserve's authority to ensure that foreign bank operations in
the United States are examined in a comprehensive and coordinated
manner. 

The act required the Federal Reserve to approve all applications for
entry or expansion of foreign bank activities in the United States. 
The Federal Reserve may not approve such applications unless it
determines that the applicant bank engages directly in banking
outside the United States and is subject to comprehensive supervision
on a consolidated basis by home country authorities.\18 In
coordination with OCC, FDIC, or the state bank regulator, the Federal
Reserve was given authority to examine all records pertaining to the
foreign bank's activities in the United States.  The act required
that branches and agencies be examined at least once a year.  It gave
the Federal Reserve the power to order a foreign bank that operates a
state-licensed branch or agency in the United States to terminate its
activities (1) if the Federal Reserve finds that the foreign bank is
not subject to comprehensive consolidated supervision by its home
country supervisor or (2) if it has reasonable cause to believe that
the foreign bank or an affiliate has committed a violation of law or
engaged in an unsafe or unsound banking practice in the United
States.  If the Federal Reserve finds these problems in a federally
licensed branch or agency, it may transmit a recommendation to OCC
for such action. 

The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 also amended the IBA and gave foreign banks the same interstate
branching rights as U.S.  banks were granted under the act.  Under
Riegle-Neal, foreign banks will be allowed to establish de novo
full-service branches across state lines whenever U.S.  banks are
allowed to establish de novo branches across state lines. 
Riegle-Neal will also allow foreign banks to expand across state
lines by acquiring an existing bank or branch provided that the state
also allows U.S.  banks to expand in such a manner. 

Riegle-Neal added additional regulations for foreign banks and
tightened some existing restrictions.  The act provided that if a
foreign bank expanded across state lines by acquiring an existing
bank or branch that was subject to the Community Reinvestment Act
(CRA), the new foreign branch would also be subject to CRA.  This
requirement contrasts with previous practice where foreign branches
without insured deposits were not subject to CRA.  Riegle-Neal also
directed FDIC and OCC to review the definition of the types of retail
deposits foreign branches can accept.  The act lowered the exception
to the prohibition on offering uninsured deposits of under $100,000
from any party from 5 percent to 1 percent of average branch
deposits.\19 Finally, it amended the IBA to provide that a U.S. 
branch or agency of a foreign bank may not manage activities for a
shell branch that a U.S.  bank is not permitted to manage overseas. 


--------------------
\11 Subpart B addresses the U.S.  banking powers of foreign banks, as
determined by the IBA. 

\12 The act required branches that receive deposits of less than
$100,000 to obtain deposit insurance, unless the FDIC or the Office
of the Comptroller of the Currency (OCC) determined that the branch
was not engaged in retail deposit activities.  FDIC and OCC have
defined a nonretail deposit as, in general, a deposit of over
$100,000.  However, FDIC and OCC regulations permit uninsured foreign
branches to accept some deposits under $100,000.  These include
deposits from any business, association, or trust that engages in
commercial activity for profit; any government unit or international
organization; and any noncitizen or nonresident at the time of the
initial deposit.  In addition, any other depositor may establish a
deposit account under $100,000, but only if the total amount of such
deposits does not exceed 5 percent of the branch's average deposits. 
The branch cannot solicit these deposits. 

\13 Edge Act Corporations can engage in international transactions
free of U.S.  restrictions.  U.S.  banks can also establish these
offices. 

\14 The practice of grandfathering activities is not unique to
legislation affecting foreign banks.  For example, when the Bank
Holding Company Act was passed in 1956, it allowed BHCs that were
operating interstate banking networks to retain them.  More than 60
foreign banks had interstate branches and were grandfathered under
the act.  In addition, 17 foreign banks claimed grandfather rights
for their securities firms. 

\15 The exception to this practice has been Credit Suisse and its
relationship with First Boston.  Prior to 1990, First Boston was the
only grandfathered securities affiliate to qualify as a "domestically
controlled affiliate" under the IBA.  As a result, it was not subject
to the activity and growth restrictions on grandfathered securities
affiliates.  However, in 1990 Credit Suisse acquired additional
shares of First Boston (in excess of the 45 percent restriction on
"domestically controlled affiliates").  Nevertheless, the Federal
Reserve determined that on the relevant grandfather date, First
Boston was a major participant in the investment banking business and
could continue to engage in that business. 

\16 A study by the Department of the Treasury indicated that U.S. 
banks have not always received such treatment abroad. 

\17 The act required the Federal Reserve to establish guidelines for
converting data on the capital of foreign banks to the equivalent
risk-based capital requirements for U.S.  banks for purposes of
determining whether a foreign bank's capital level is equivalent to
that imposed on U.S.  banks. 

\18 A bank is subject to comprehensive consolidated supervision if
the supervisor in the bank's home country receives information on the
bank's worldwide operations that the Federal Reserve considers
sufficient to assess its overall financial condition and compliance
with laws and regulations. 

\19 See footnote 12 p.  17. 


   SCOPE AND METHODOLOGY
---------------------------------------------------------- Chapter 1:5

To understand the role of foreign branches and agencies in the United
States and the magnitude of their operations, we obtained data on
their activities and funding sources from the Federal Reserve.  We
also obtained data from the Federal Reserve on shell branches managed
by foreign branches and agencies in the United States.  Data
collected on foreign branches and agencies are similar to the call
report data on domestic banks and have been collected quarterly since
1980.  Data on shell branches have only been collected since March
1993.  In addition, shell branch data cannot be verified because the
Federal Reserve has no authority to audit the operations of a shell
branch, except for those operations that are managed by a branch in
the United States.  We did not independently verify any of these
data. 

In using call report data to compare U.S.-owned banks and
foreign-owned U.S.  bank subsidiaries and foreign branches and
agencies, it must be noted that the domestic assets and liabilities
reported by these entities represent the location of the bank,
branch, or agency--not the nationality of the borrower or depositor. 
For example, domestic loans could represent loans made to
foreign-owned companies operating in the United States while foreign
loans could represent loans made to the overseas offices of U.S. 
corporations. 

To understand the relationship between foreign branches and agencies
in the United States and their shell branches, we reviewed the most
recent examination report of the 50 largest foreign banks with
branches or agencies operating in New York.  In 42 of these reports,
we found that the branch or agency managed some assets for a shell
operation.  We also reviewed 19 other examination reports, selected
at random, of branches or agencies with offices in New York, which
indicated that they also managed some operations for shell branches. 

To explore the reasons for foreign bank expansion in the United
States, the role that foreign banks play in the U.S.  economy, and
whether U.S.  banks face disadvantages in competing against foreign
banks in U.S.  markets, we interviewed officials at both U.S.  banks
and branches, agencies, and subsidiaries of foreign banks operating
in the United States.  Because we were able to speak with only a
limited number of bankers and other market participants, the results
are not generalizable to the entire banking industry.  We also
reviewed the literature on foreign bank operations in the United
States.  We did not attempt to assess the benefits to the U.S. 
economy from foreign bank participation in U.S.  markets or to
undertake a study of the comparative role and treatment of U.S. 
banks abroad.\20

We interviewed officials at eight foreign banks operating in the
United States.  The banks were chosen on a judgmental basis with
consideration given to their size, location (New York City is the
most common location of foreign branches and agencies), and ability
to compete with U.S.  banks across a number of product lines.  The
U.S.  operations of these banks reported assets between $2 billion
and $47 billion.  All of the banks had branches or agencies in the
United States and four owned subsidiary banks.  The interviews were
conducted in either the banks' New York or San Francisco offices. 
All of the banks had operations in more than one state, and six banks
had shell branches managed by a U.S.  office. 

To understand how U.S.  banks view their competitive position
compared with foreign banks, we interviewed officials at six large
U.S.  banks.  These banks were chosen because their size and the
extent of their U.S.  operations made it likely that they faced
competition from foreign banks in some of their markets.  Each of
these banks had over $10 billion in assets and competed with foreign
banks in providing loans and services to multinationals and other
corporations.  The banks also offered products in overseas markets,
and some operated branches in foreign countries. 

To gauge the impact of foreign bank activity in domestic retail
markets, especially to determine whether foreign branches and
agencies are competing to provide products and services to small- and
medium-sized business customers, we interviewed officials at six
smaller banks.  These banks had assets of between $250 million to $2
billion, and none operated foreign branches.  The banks were chosen
because of their domestic retail orientation.  The banks served
smaller businesses, and they were located in areas also served by
foreign branches and agencies. 

We interviewed officials at various trade associations, including the
(1) American Bankers Association, (2) Independent Bankers
Association, (3) Institute of International Bankers, (4) Bankers
Association for Foreign Trade, and (5) Bankers Roundtable to get an
overall view on the extent of foreign bank competition and to
determine whether their memberships expressed concern about
advantages that foreign banks in the United States might have.  We
were also contacted by several attorneys who represented foreign
banks and by officials of foreign governments. 

To get a perspective on how U.S.  and foreign corporations use
foreign and domestic bank services and meet their funding and
banking-services needs worldwide, we interviewed corporate treasurers
and other finance officials at nine large multinational corporations. 
These corporations were chosen because they have extensive
operations, in the United States and abroad, and use a variety of
banking services.  All of the corporations raise funds in U.S.  and
foreign markets for their worldwide operations and have extensive
cash management needs.  We also spoke with officials at five smaller
U.S.  companies with limited, if any, overseas operations.  These
companies were chosen because they used a variety of banking services
and did business in areas serviced by domestic and foreign banks. 

We interviewed federal bank regulators at the Federal Reserve's Board
of Governors and the Federal Reserve Bank of New York to determine
what regulations apply to foreign banks, how foreign banks are
supervised in the United States, and what role shell branches play. 
We spoke with officials at the New York State Banking Commission
which, until 1992, regulated and supervised more foreign banks than
any other U.S.  regulator.  We also spoke with officials at the
California State Banking Department.  Officials at the Federal
Reserve Bank of New York and the New York State Banking Commission
explained the laws and regulations governing the operations of
foreign banks in the United States.  They also explained their
examination and supervision authority to give us a better
understanding of what their roles are regarding supervision of
foreign banks.  We spoke with officials at the Office of the
Comptroller of the Currency and reviewed the Department of the
Treasury's national treatment studies done in 1990 and 1994 for
information on how foreign banks are treated in the United States and
how U.S.  banks are treated abroad. 

Our work was conducted in Washington, D.C.  and San Francisco,
between May 1994 and May 1995, in accordance with generally accepted
government auditing standards.  We obtained written comments on a
draft of this report from the Federal Reserve.  It said our findings
and conclusions concerning the activities of foreign banks in the
United States are generally consistent with those of the Board's
staff.  The Federal Reserve's comments are reproduced in appendix I. 


--------------------
\20 The Treasury Department assesses the treatment of U.S.  banks
abroad in its national treatment studies, which are updated every 4
years. 


FOREIGN BRANCHES AND AGENCIES
============================================================ Chapter 2

Foreign branches and agencies operate almost exclusively in selected
wholesale banking markets in the United states, serving home-country
and U.S.-corporate customers and engaging in transactions with banks
and other financial institutions.  Over the past decade, foreign
branches and agencies appear to have supplied more funds to the U.S. 
economy than they have raised in the United States.  In turn, foreign
branches and agencies have gained relatively large shares of some
U.S.  banking markets, particularly in commercial and industrial
(C&I) lending, interbank funding, foreign exchange, and loan
guarantees.  In this chapter we will examine (1) the role of foreign
branches and agencies, (2) their funding sources, and (3) their
relative position in various segments of the U.S.  banking market. 


   FOREIGN BRANCHES AND AGENCIES
   ARE MAJOR PARTICIPANTS IN U.S. 
   WHOLESALE MARKETS
---------------------------------------------------------- Chapter 2:1

Analysis of foreign branch and agency data confirmed what regulators,
U.S.  bankers, and representatives of foreign banks told us--that the
activities of foreign branches and agencies and their funding sources
are wholesale in nature.  However, even in the wholesale market,
foreign branches and agencies are selective in their activities and
funding sources.  They tend to specialize in a few activities, such
as C&I lending and interbank transactions, and most of their funding
comes from other financial institutions.  In some of these
activities, foreign branches and agencies account for a relatively
large share of the domestic market. 

Foreign branches and agencies conduct little retail activity.  They
hold few retail deposits and make few consumer loans.  Their market
share in retail deposits is generally less than 1 percent and cannot
be readily calculated for consumer loans.  This section describes the
activities and funding sources of foreign branches and agencies on
the basis of data collected by the federal bank regulators.  Where
possible, comparisons are made with U.S.  commercial banks.\1


--------------------
\1 Data on U.S.  commercial banks include data on foreign-owned U.S. 
bank subsidiaries. 


      ASSETS
-------------------------------------------------------- Chapter 2:1.1

To understand the role of foreign branches and agencies, we grouped
their assets into five categories--(1) interbank assets,\2 (2)
business lending,\3 (3) securities holdings, (4) claims on the parent
bank and related depository institutions\4

(related depositories), and (5) all other assets.\5 We looked at the
amounts in each of these categories as of December 1994 and also at
the growth in these categories over the period 1985 through 1994.  In
addition, we compared the portfolios of foreign branches and agencies
to those of U.S.  banks with foreign offices.\6 Among these U.S. 
banks, only a few would be considered wholesale institutions.  This
is not surprising since, in looking at the U.S.  operations of
foreign branches and agencies, we are considering only a portion of
their parent banks' worldwide assets. 

   Figure 2.1:  Asset Distribution
   in Foreign Branches and
   Agencies, December 1994

   (See figure in printed
   edition.)

Source:  Call report data. 

Figure 2.1 shows the percentage of assets accounted for by each of
these categories, as of December 1994.  Interbank assets accounted
for 37 percent of foreign branch and agency assets in 1994 and
represented the largest share of foreign branch and agency assets. 
Over two-thirds of the interbank assets represented transactions with
other foreign banks, although claims on other financial institutions,
such as credit unions and savings and loans, have grown.  From
December 1985 through December 1994, the percentage of interbank
claims on other financial institutions rose from 5 percent to 20
percent of interbank assets.  In 1994, interbank assets accounted for
only 12 percent of the banking assets in U.S.  banks with foreign
offices.  Over 40 percent of these assets were held in their foreign
offices. 

Business lending accounted for 30 percent of foreign branch and
agency assets in 1994, a decline from the 35 percent share at
year-end 1991.  The fall in the volume of business loans held by
foreign branches and agencies since 1991 has been due to declines in
real estate lending and trade financing.  C&I lending has continued
to grow, although modestly, since 1991.  Business lending by U.S. 
banks with foreign offices accounted for 27 percent of total assets
in December 1994.\7 From December 1990 through December 1993, the
volume of business loans held by these U.S.  banks also declined. 
However, at U.S.  banks, the decline was due to a decrease in the
volume of C&I loans as well as real estate loans.  In 1994, the
volume of business loans held by U.S.  banks with foreign offices
rebounded--growing over 3 times faster than at foreign branches and
agencies. 

Most foreign branches and agencies appeared to be lending to home
countries and large businesses rather than to small or medium-sized
U.S.  firms.  Our review of the examination reports of selected
branches and agencies indicated that most foreign branch and agency
business loans were either made to subsidiaries of home-country
corporations or represented loans to multinationals or Fortune 500
companies.  Interviews with foreign and domestic bankers and their
representatives also supported this observation. 

We were told by several of the people with whom we spoke that foreign
branches and agencies would need to provide retail deposit services
to attract the business of most retail customers (including small-
and mid-sized businesses).  To gauge whether foreign branches and
agencies in the United States provide such services, we compared the
volume of cash items in process of collection reported by foreign
branches and agencies with the volume reported by U.S.  banks with
foreign offices.\8 In December 1994, foreign branches and agencies
reported $3 billion (less than one-half of 1 percent of assets) as
cash items in process of collection, compared with $63 billion (about
3 percent of assets) reported by the U.S.  banks. 

We also attempted to compare the extent of consumer lending in
foreign branches and agencies with that in U.S.  banks with foreign
offices.  However, foreign branches and agencies do not report
consumer loans as a separate item, as do U.S.  banks.  In December
1994, the U.S.  banks with foreign offices reported that consumer
lending accounted for 9 percent of their assets.\9


--------------------
\2 Interbank assets include loans to other depository and financial
institutions, balances due from other depository institutions, and
federal funds sold and securities purchased under agreements to
resell to other financial institutions. 

\3 Business lending is comprised of C&I loans, trade finance, and
real estate loans.  Data are not available to indicate what
percentage of real estate loans represent home mortgages or home
equity loans.  However, our review of examination reports suggest
that few real estate loans are retail in nature.  Therefore, we have
classified these as business loans. 

\4 Claims on the parent banks and related depository institutions
represents a balancing asset.  It is the amount of funds transferred
by the branch or agency to related depositories--either in the United
States or offshore. 

\5 Other assets include items such as cash, consumer loans, leases,
and loans to foreign governments. 

\6 At the end of 1994, 169 of the 10,453 banks in the United States
had foreign offices or International Banking Facilities (IBF).  About
70 percent of these 169 banks had $1 billion or more in assets.

As of December 1994, U.S.  banks with foreign offices had $2.2
trillion in assets; about $500 billion was held in foreign offices. 
Assets in U.S.  banks' IBFs totaled $42 billion. 

\7 Real estate loans on 1-to-4 family residences were excluded from
this category for U.S.  banks.  Comparable break-out data did not
exist for foreign branches and agencies. 

\8 A cash item represents any check that a bank has accepted and
given immediate credit to a customer's account.  While in the process
of collection, it is, in effect, a short-term loan from the bank to
its customer. 

\9 The figure rose to 21 percent when 1-to-4 family mortgages were
included. 


      LIABILITIES
-------------------------------------------------------- Chapter 2:1.2

To examine how foreign branches and agencies fund themselves, we
divided their funding sources into four categories--(1) interbank
liabilities;\10 (2) deposits of individuals, partnerships, and
corporations (IPC); (3) other liabilities; and (4) funds borrowed
from related depository institutions.  With the exception of IPC
deposits, each of these funding sources is generally considered
wholesale in nature.  IPC deposits may be either wholesale or retail,
although as we show in figure 2.2, most of these deposits appeared to
be wholesale in foreign branches and agencies.  We also looked at
growth in these categories and compared their funding sources with
those of U.S.  banks with foreign offices.  In contrast to foreign
branches and agencies, which accounted for only a portion of their
parent banks' worldwide liabilities, most of these U.S.  banks
depended on retail deposits as their primary funding source. 

   Figure 2.2:  Distribution of
   Foreign Branch and Agency
   Liabilities in the United
   States, December 1994

   (See figure in printed
   edition.)

Source:  Call report data. 

Figure 2.2 shows the relative importance of each of these funding
sources.  As the figure shows, foreign branches and agencies funded
themselves primarily through the interbank market.  In 1994, 51
percent of their liabilities represented funds owed to other
financial institutions.  Moreover, three-fourths of their interbank
liabilities were owed to other foreign banks.  From 1985 through
1994, interbank liabilities held by foreign branches and agencies
doubled.  However, as a funding source they actually declined in
importance over that period.  In 1994, U.S.  banks with foreign
offices held only 18 percent of their liabilities in the interbank
market.\11

Only 15 percent of foreign branch and agency funding came from the
deposits of individuals or businesses (IPC deposits) in December
1994.  By contrast, 59 percent of the funding in U.S.  banks with
foreign offices came from IPC deposits.  In addition, about 28
percent of these U.S.  banks' IPC deposits were in transaction
accounts.  By contrast, one-half of 1 percent of foreign branch and
agency IPC deposits represented transaction deposits. 

Between December 1990 and December 1991, IPC deposits in foreign
branches and agencies rose by 58 percent.  This growth coincided with
the Federal Reserve's move to lower reserve requirements at the end
of 1990 and may represent the movement of deposits from offshore
branches into U.S.  branches.  However, we have no data on deposits
in offshore branches to verify this possibility.  Since December
1992, the volume of IPC deposits in foreign branches and agencies has
declined. 


--------------------
\10 Interbank liabilities included deposits of other banks and
financial institutions, federal funds purchased and securities sold
under agreements to repurchase, and other money borrowed from
financial institutions. 

\11 Forty-two of the U.S.  banks with foreign offices used the
interbank market to fund more than 25 percent of their liabilities. 
Of these banks, about one-quarter were foreign-owned. 


      MARKET SHARE
-------------------------------------------------------- Chapter 2:1.3

Market share calculations provide a measure of the competitive impact
of foreign branches and agencies in the U.S.  banking market. 
However, these calculations are only an imperfect measure, depending
on factors such as how the market is defined and finding comparable
data among potential competitors.  The broadest calculations of
foreign branch and agency market share are based on banking assets. 
However, these calculations vary as different assumptions are made
about which banking assets to include.  For example, in December
1994, foreign branches and agencies reported total banking assets of
$750 billion while U.S.  commercial banks reported $4 trillion.  This
suggests that foreign branches and agencies had a market share of
15.7 percent.\12 However, the $4 trillion of assets in U.S.  banks
included about $500 billion held in foreign offices.  Excluding these
assets, the market share of foreign branches and agencies rose to
17.4 percent in 1994. 

When evaluating the market shares of foreign branches and agencies,
it must be recognized that much of their business is focused on
international and interbank activities and is not related to the
provision of domestic retail or business banking services.  For
example, IBF assets and interbank claims (excluding those recorded in
IBFs) accounted for 26 percent and 15 percent, respectively, of
foreign branch and agency assets in 1994.\13 Adjusting for these
activities reduced the share of the U.S.  banking market held by
foreign branches and agencies to 11.9 percent in December 1994. 


--------------------
\12 If we included the assets held by the U.S.  bank subsidiaries of
foreign banks, the market share of foreign banks in the U.S.  would
rise by about 3.5 percentage points. 

\13 Because of the possibility of double counting between
foreign-owned IBFs and foreign branches and agencies, we used only
IBF assets owed by nonrelated parties in our calculations. 


         ASSET COMPOSITION
------------------------------------------------------ Chapter 2:1.3.1

Market share statistics for particular segments of the banking market
give a clearer picture about the business and relative importance of
foreign branches and agencies in the United States.  In general,
foreign branches and agencies have become a substantial presence in
the C&I loan market and in interbank lending.  They have almost no
presence in retail markets, although precise market shares cannot be
calculated. 

In recent years, attention has been focused on the market share
attained by foreign branches and agencies in the C&I loan market. 
Between December 1985 and December 1992, the volume of C&I loans held
by foreign branches and agencies rose by $95 billion while they fell
by $39 billion at U.S.  banks.  As a result, at the end of 1992,
foreign branches and agencies held 24 percent of the market in C&I
loans.  Since then, their market share has dropped by about 1 percent
as C&I loans have grown faster at U.S.  banks.\14 The portion of
foreign branch and agency C&I loans that goes to the U.S. 
subsidiaries of foreign companies is unknown. 

While foreign branches and agencies are clearly an important part of
the C&I loan market, their importance as originators of such loans is
more limited.  Foreign branches and agencies often purchase loans
originated by U.S.  banks through syndications and loan sales.\15
Purchases of C&I loans from U.S.  banks account for a significant
portion of the presence achieved by foreign banks in this market. 
For example, the Federal Reserve Bank of New York estimated that in
1991 foreign banks took about one-half of the loans made to U.S. 
corporations in syndications. 

Banks that originate loans earn origination fees as well as receive
interest payments from the portion of the loans they retain.  Banks
that buy loans receive only interest payments.  While foreign banks
sometimes act as agents or co-agents (i.e., the originator or
co-originator) for C&I loans in the syndicated loan market, data show
that the market was dominated by U.S.-owned banks.  In 1993, 9 of the
top 10 originators (measured by the number of deals) were U.S. 
banks. 

The market share for the previously mentioned C&I loans only deals
with one part of the market for business financing.  Over the past
decade, increasing numbers of nonfinancial corporations have turned
to the commercial paper market as a lower-cost source of short-term
funding.  In addition, finance companies, which also make loans to
businesses, have raised an increasing portion of their funds by
issuing securities rather than obtaining bank loans. 

Foreign branches and agencies provide a significant amount of funding
in the interbank market, primarily by selling funds in the federal
funds market and by making loans to other depositories.  Since 1985,
foreign branches and agencies have held an increasing share of the
funds sold in the federal funds market.  In 1985, they held only 7
percent of the funding in this market, and by 1994, their share had
climbed to 29 percent.  In addition, foreign branches and agencies
have consistently held almost one-half of loans to depositories. 

We were told by foreign bankers that foreign branches and agencies
make few, if any, residential mortgage loans, consumer installment
loans, or credit card loans.  This was supported by our review of
foreign branch and agency examination reports.  Although data are
collected separately on residential mortgage lending and consumer and
credit card lending in U.S.  banks, these data are only reported as
part of total real estate lending and other lending, respectively, by
foreign branches and agencies. 

In December 1994, foreign branches and agencies held $40 billion in
real estate loans.  Our review of foreign branch and agency
examination reports suggested that little of this was likely to
represent single-family mortgage lending.  By contrast, U.S.  banks
held $998 billion in real estate loans of which $569 billion
represented loans on 1-to-4 family residential property.  Other
loans, which would include consumer loans, at foreign branches and
agencies totaled $19 billion in 1994.  For U.S.  banks, consumer
loans alone totaled $489 billion.  Although it was not possible to
calculate market shares for these activities, it is clear from the
limited information that foreign branches and agencies represented a
small portion of the U.S.  retail banking market. 


--------------------
\14 The C&I loan market includes loans made to U.S.  and non-U.S. 
addresses.  Calculating the C&I loan share for only U.S.  addresses
does not significantly change the results.  In December 1994, foreign
branches and agencies reported $20 billion in C&I loans made to
non-U.S.  addresses, while U.S.  banks reported $88 billion of such
loans.  This gave foreign branches and agencies a 23 percent share of
the market for C&I loans to U.S.  addresses.  Loans made to U.S. 
addresses represent the location of the borrower and not whether the
borrower is a U.S.  or foreign-owned business. 

\15 Large C&I loans are often syndicated, i.e., shared among a number
of banks.  For example, some commercial loans are too large to be
provided by a single bank and can only be made if a number of banks
agree to take parts of the loan.  In syndications, one or more banks
take the lead by originating the loan.  Other banks then participate
by taking a part of the loan.

Banks also sell loans either outright or with recourse.  Reasons for
selling loans include diversification, avoiding lending limits,
reducing capital requirements, or reducing lending costs by taking
advantage of lower funding costs at other institutions.  Reasons for
buying loans include diversification, an ability to raise funds that
exceeds the ability to generate loans directly, and an attempt to
establish a banking relationship with a customer. 


         FUNDING SOURCES
------------------------------------------------------ Chapter 2:1.3.2

Concerning funding, total deposits accounted for one-half of the
liabilities of foreign branches and agencies and over three-quarters
of the liabilities of U.S.  banks, in December 1994.  However, the
mix of deposits at foreign branches and agencies contrasted sharply
with that of U.S.  banks.  U.S.  banks depended primarily on retail
deposits--represented by transaction (checking) deposits and small
(less than $100,000) nontransaction deposits.\16 Foreign branches and
agencies funded themselves primarily with wholesale
deposits--represented by IBF deposits and large (over $100,000) time
deposits. 

In December 1994, foreign branches and agencies held 87 percent of
all IBF deposits.  They also held 38 percent of large time
deposits.\17 By contrast, foreign branches and agencies had almost no
presence in the retail deposit market.  They held only 1 percent of
total transaction deposits and less than one-half of 1 percent of
nontransaction deposits of less than $100,000. 


--------------------
\16 Nontransaction deposits include savings accounts and all time
deposits. 

\17 The foreign branch and agency share of large time deposits has
increased significantly since year-end 1990, when they held just 14
percent of such deposits.  Since then, the volume of these deposits
at U.S.  banks has dropped by over $150 billion while the volume at
foreign branches and agencies has increased by over $75 billion. 


   OFF-BALANCE SHEET ACTIVITIES
---------------------------------------------------------- Chapter 2:2

Changes in credit markets, the expansion of world trade, and
increased volatility in foreign exchange and interest rates over the
past 25 years have increased demand for off-balance sheet (OBS)
products.\18 Moreover, before implementation of the risk-based
capital standards, OBS products allowed banks to provide services to
customers without increasing bank assets, which required regulatory
capital.\19 These products have become increasingly important to U.S. 
and foreign banks as a way to maintain and expand their customer base
and increase profitability.  They represent wholesale activities. 

Off-balance sheet products fall into two broad categories--(1)
contingent liabilities and (2) derivative products.  Contingent
liabilities represent agreements by a bank to provide funds when
certain conditions are met.  They have been used, in part, to replace
traditional loans from banks.  For example, contingent liabilities
allow those that borrow directly in the securities markets to protect
themselves against refinancing problems, which could arise if the
demand for their debt declined.  Corporations, state and local
governments, and others receive this protection through backup lines
of credit (e.g., loan commitments).  Similarly, standby letters of
credit (SLC) are used to enhance the credit quality of borrowers in
the securities markets.  They can be used to guarantee repayment when
certain conditions occur. 

Bank customers have also sought to protect themselves from adverse
foreign exchange rate, interest rate, and commodity price movements
through derivative products such as futures, forwards, options, and
swaps.\20 A derivative is a security whose value depends on the value
of another underlying financial product.  OBS products have grown
substantially in U.S.  banks and foreign branches and agencies since
1985. 


--------------------
\18 Off-balance sheet products represent commitments, contingencies,
and other claims on the issuer and generally generate fees for these
services. 

\19 An important motive for expanding OBS activities was to minimize
the effect of capital standards imposed by U.S.  and foreign
regulators.  However, the implementation of risk-based capital
standards, which require U.S.  and foreign banks to hold capital
against their OBS activities, has eliminated this motive. 

\20 Forwards and futures obligate the holder to buy or sell a
specific amount or value of an underlying asset or index at a
specified price on a specified date.  Options grant the holder the
right, but not the obligation, to buy or sell a specific amount of
the underlying asset at a specified price within a specified period. 
Swaps are agreements between counterparties to make periodic payments
to each other for a specified period. 


      MARKET SHARE
-------------------------------------------------------- Chapter 2:2.1

The U.S.  branches and agencies of foreign banks operate on the
consolidated capital of their parent banks and use that relatively
large base to engage in OBS activities.  As U.S.  banks came under
capital pressures in the late 1980s and early 1990s and had their
credit ratings downgraded, foreign branches and agencies gained a
significant share of this market.  Foreign branches and agencies have
become large issuers of SLCs and loan commitments--products for which
the bank's credit rating is important as an indicator of its ability
to stand behind the product.  For example, SLCs reported by foreign
branches and agencies, net of participations--part of the SLC sold to
other institutions--grew from $55 billion at the end of 1985 to $153
billion at the end of 1994.\21 At the same time, net SLCs at U.S. 
banks remained relatively constant at about $155 billion.  Foreign
branches and agencies had thus gained about one-half this market in
1994.  Figure 2.3 shows the volume of selected OBS products at
foreign branches and agencies and U.S.  banks, as of December 1994. 

Among the derivative products, interest rate swaps and foreign
exchange (FX) commitments have grown fastest at foreign branches and
agencies.  From $31 billion in 1985, interest rate swaps grew to $1.3
trillion at the end of 1994.  Foreign branches and agencies
represented 23 percent of this market at the end of 1994, up from 14
percent at the end of 1985.  Foreign branches and agencies held $1.6
trillion in FX commitments in December 1994 and accounted for 23
percent of this market.\22

   Figure 2.3:  Volume of Selected
   OBS Activities at Foreign
   Branches and Agencies and U.S. 
   Banks, December 1994 (Dollars
   in billions)

   (See figure in printed
   edition.)

Source:  Call report data. 


--------------------
\21 Foreign branches and agencies have been especially active in
support of debt issues by U.S.  states and municipalities. 

\22 A large volume of derivative products are bought and sold among
financial institutions resulting in double counting for the banking
industry as a whole. 


   SHELL BRANCHES
---------------------------------------------------------- Chapter 2:3

The Federal Reserve began collecting limited data on the assets and
liabilities of the shell branches of foreign banks managed or
controlled by a branch or agency in the United States in March
1993.\23 Since then, the Federal Reserve has used these data to
refine its estimates of foreign banks' share of the U.S.  banking
market.  To understand the activities and impact of shell branches in
the U.S.  economy, we obtained these data and reviewed studies done
by the Federal Reserve and the Federal Reserve Bank of New York.  We
also reviewed the most recent examination reports for the 50 largest
foreign banks operating in New York--most of which also have shell
branches.  However, the examination reports contained little
information on the activities of shell branches. 

The addition of assets reported by the shell branches of foreign
banks raised the total assets of foreign branches and agencies
operating in the United States from $750 billion to over $1 trillion
in December 1994.  However, as figure 2.4 shows, 29 percent of the
assets in shell branches were to non-U.S.  addresses, and another 29
percent represented claims on related depository institutions in the
United States.  Of the reported $293 billion in assets, $125
billion--or about 43 percent--represented claims on U.S.  addresses
other than to related depositories. 

   Figure 2.4:  Asset Distribution
   of Foreign-Owned Shell
   Branches, December 1994

   (See figure in printed
   edition.)

Note:  Amounts may not total to 100 percent due to rounding. 

Source:  Federal Reserve data. 

Regarding liabilities, figure 2.5 shows that 40 percent of shell
branch funding ($118 billion) came from U.S.  addresses not related
to the branch, in December 1994.  Of this amount, $86 billion was
reported as liabilities to U.S.  businesses and residents--about the
same as the IPC deposits from U.S.  addresses reported by foreign
branches and agencies in the United States.  Interbank liabilities
were much less important to the shell branches of foreign banks than
to their branches and agencies in the United States.  These
liabilities accounted for only $23 billion in shell branches, as
compared with $379 billion in their U.S.  branches and agencies.  The
remainder of shell branch funding came from related depository
institutions in the United States, home countries, and other
addresses. 

   Figure 2.5:  Liabilities of
   Foreign-Owned Shell Branches,
   December 1994

   (See figure in printed
   edition.)

Note:  Amounts may not total to 100 percent due to rounding. 

Source:  Federal Reserve data. 


--------------------
\23 Some foreign banks operate offshore branches but do not have
branches or agencies in the United States or do not manage their
offshore branches through their U.S.  offices.  Therefore, data are
not available that cover all banking transactions with U.S. 
residents. 


      IMPACT ON U.S.  MARKET SHARE
      OF FOREIGN BRANCHES AND
      AGENCIES
-------------------------------------------------------- Chapter 2:3.1

In general, the studies we reviewed found that foreign banks' share
of banking assets, especially in selected markets, increased
substantially when shell branch operations were included.  A large
portion of foreign banks' transactions with U.S.  residents
apparently have been booked in shell branches.  We calculated the
market share of foreign branches and agencies, including those assets
in shell branches that were owed by U.S.  addresses.  Using these
data, foreign branch and agency market share rose from 17 percent to
21 percent of domestic U.S.  banking assets in December 1994.\24

In the commercial and industrial (C&I) loan market, the Federal
Reserve estimated that the foreign bank share of lending rose from 35
percent to 42 percent in March 1993, when shell branch data were
included.\25 Since then, the total volume of C&I loans reported by
foreign branches and agencies and their shell branches has declined
while loans held by U.S.  banks have risen.  For year-end 1994,
foreign branches, agencies, and shell branches reported $204 billion
of C&I loans to U.S.  addresses ($151 billion in branches and
agencies and $53 billion in shell branches).  This represented 29
percent of the C&I loan market.\26


--------------------
\24 Assets in U.S.  banks exclude those in foreign offices but not
IBFs. 

\25 These data include the C&I loans held by the U.S.-chartered bank
subsidiaries of foreign banks.  They also include C&I loans made to
U.S.  addresses and held in foreign offices of U.S.  banks. 

\26 If C&I loans to U.S.  addresses held by the foreign offices of
U.S.  banks are excluded, the percentage of C&I loans held by foreign
branches, agencies, and their shells rises to 30 percent. 


   FOREIGN BRANCHES AND AGENCIES
   WERE LIKELY NET SUPPLIERS OF
   FUNDS TO THE U.S.  ECONOMY
---------------------------------------------------------- Chapter 2:4

Foreign branches and agencies supply funds to, and raise funds from,
the U.S.  market.  Although it appears likely that foreign branches
and agencies supplied more funds to the U.S.  economy than they
raised in the United States in 1994, the magnitude of this flow is
uncertain.  As table 2.1 shows, foreign branches and agencies
supplied $118 billion more to U.S.  addresses than they raised from
U.S.  addresses.  By contrast, funds raised from non-U.S.  addresses
exceeded the funds used by $150 billion--more than enough to make up
the difference to U.S.  addresses.  However, as table 2.1 shows, for
a large volume of transactions the location of the parties could not
be determined.  Because of the magnitude of this category, we cannot
definitively say that foreign branches and agencies provided more
funds to the U.S.  economy than they raised in 1994. 

Under various scenarios, foreign branches and agencies could have
supplied as much as $336 billion to the U.S.  economy in 1994 or
could have raised $44 billion more from the U.S.  economy.  To
illustrate this point, if the $218 billion in funds used by unknown
parties represented transactions with U.S.  addresses and the $162
billion in funds raised came from transactions with non-U.S. 
addresses, foreign branches and agencies would have supplied $336
billion more to U.S.  addresses than they raised from them in 1994. 
However, if the $218 billion represented transactions with non-U.S. 
addresses and the $162 billion represented transactions with U.S. 
addresses, there would have been a net outflow from U.S.  addresses
of $44 billion in 1994. 

Although we do not know the actual magnitudes of all transactions
with U.S.  and non-U.S.  addresses, it appears likely that foreign
branches and agencies in the United States were net suppliers of
funds to U.S.  addresses in 1994.  Categories that could not be
identified by location included real estate lending, federal funds
sold to nonbank participants, and all securities except U.S. 
government securities.  Funds raised from unknown locations included
federal funds purchased from nonbank sources and miscellaneous
deposit accounts and other borrowed monies.  If we assumed that all
of the transactions with unknown locations occurred with U.S. 
addresses, then foreign branches and agencies would have supplied as
much as $174 billion to the U.S.  economy in 1994. 



                               Table 2.1
                
                  Sources and Uses of Funds in Foreign
                Branches, Agencies, and Shell Branches,
                             December 1994

                         (Dollars in billions)

                                                 Funds   Funds  Differ
Sources/uses of funds                           raised    used    ence
-------------------------------------------  ---------  ------  ------
Transactions with customers with U.S.             $357    $475   -$118
 addresses
Transactions with customers with non-U.S.          340     190     150
 addresses
Transactions with customers whose locations        162     218     -56
 are unknown
Transactions with parent bank and related          184     160      24
 depositories
----------------------------------------------------------------------
Source:  Call report data. 

Sources and uses of funding varied greatly between individual
branches and agencies.  For example, our review of examination
reports showed one case in which a foreign bank funded its New York
branch almost exclusively (over 95 percent) from its Cayman branch. 
The New York branch used the funds primarily for foreign exchange
trading and to channel dollars from the parent bank's overseas
offices to the Federal Funds market.  In another case, a foreign bank
used its New York branch as a way to raise funds to support economic
development in its home country. 

We also analyzed foreign branch and agency data to determine whether
foreign banks made more C&I loans to U.S.  addresses than they raised
in deposits from individuals and corporations in the United States. 
For the period December 1985 through December 1994, about two-thirds
of the foreign branches and agencies in the United States reported
that they made more C&I loans to U.S.  addresses than they raised
from individuals and businesses with U.S.  addresses.  However, as
previously mentioned, we do not know all the sources and uses of
funds by foreign branches and agencies. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

Although their operating strategies and reasons for entering the U.S. 
market differ, foreign branches and agencies in the United States
compete primarily in the wholesale banking market.  Interbank
transactions and provision of services to large corporations and
home-country clients dominate their activities.  Foreign branches and
agencies have gained large shares in many of the market segments in
which they specialize.  Foreign branches and agencies accounted for
29 percent of the C&I loans in the U.S.  banking market at the end of
1994,\27 and accounted for 38 percent of time deposits over $100,000. 

Many of the wholesale activities of foreign branches and agencies
were international in nature and were booked in their IBFs.  Foreign
branches and agencies use these facilities much more widely than do
U.S.  banks.  By contrast, foreign branches and agencies held minimal
shares in the retail banking market and do not appear to be
competitors in this market. 


--------------------
\27 This market share calculation includes C&I loans to U.S. 
addresses reported by shell branches. 


ADAPTING U.S.  LAWS AND
REGULATIONS TO FOREIGN BANKS
============================================================ Chapter 3

In implementing the policy of national treatment embodied in the
International Banking Act (IBA), concern has been raised that
adaptations of U.S.  laws and regulations have given foreign banks a
competitive advantage over U.S.  banks.  In this chapter, we review
the laws and regulations affecting the operation of foreign banks in
the United States and evaluate whether such adaptations give foreign
banks any significant competitive advantages over U.S.  banking
organizations.  Our review of current laws and regulations and our
interviews with U.S.  and foreign bankers, executives at
multinational and other corporations, U.S.  bank regulators, and
others indicated that differences in the legal and regulatory
treatment of U.S.  and foreign banks have diminished substantially
since passage of the IBA.  From our interviews, we found no area
where adaptations of the laws and regulations were causing foreign
banks to have significant competitive advantages compared with U.S. 
banks.  However, because we were able to speak with only a limited
number of bankers and other market participants, their impressions
are not generalizable to the entire banking industry.  National
treatment will remain an important issue whenever changes in the
powers of U.S.  banks or bank holding companies (BHC) are
contemplated because of differences in U.S.  and foreign banks'
corporate structures, authorized activities, and access to insured
deposits. 


   ADAPTATIONS OF U.S.  LAWS AND
   REGULATIONS
---------------------------------------------------------- Chapter 3:1

In our interviews, we found general agreement that differences in the
legal and regulatory treatment of U.S.  and foreign banks operating
in the United States have narrowed and currently pose little concern
to U.S.  banks.  This section reviews the adaptations of U.S.  laws
and regulations that are made for foreign banks operating in the
United States and examines the arguments that have been made
concerning the competitive impact on U.S.  banks of these
adaptations.  The arguments have focused on seven areas:  (1) capital
adequacy, (2) reserve requirements, (3) retail deposit-taking and
deposit insurance, (4) interstate branching, (5) consumer protection
requirements, (6) nonbanking activities, and (7) supervision. 


      CAPITAL ADEQUACY
-------------------------------------------------------- Chapter 3:1.1

U.S.  banking regulations regarding capital adequacy apply to
U.S.-chartered banks and BHCs, including those owned by foreign
banks.  They do not apply to branches of U.S.  banks or to branches
and agencies of foreign banks because these entities hold no capital
of their own.  However, federal and state regulators attempt to
address this difference by requiring foreign branches and agencies to
maintain capital equivalency deposits or asset pledge agreements as
additional protection to U.S.  depositors.\1 The parent foreign banks
are also responsible for meeting their home country's capital
requirements and their capital levels are monitored by federal and
state bank regulators. 

For many years, U.S.  bankers argued that differing capital
requirements across countries resulted in a cost advantage for
foreign branches and agencies operating in the United States.  This
cost advantage was attributed to capital requirements that were
perceived to be higher for U.S.-chartered banks than for foreign
banks and to differing restrictions on the composition of capital
across countries.  This cost advantage was argued to have allowed
foreign branches and agencies to make C&I loans and provide other
services--such as guarantees--at prices that U.S.  banks could not
match.\2

In December 1992, the United States and other major industrialized
countries fully implemented a set of international capital standards. 
These risk-based capital standards established guidelines for setting
minimum capital ratios for large, internationally active banks and
standardized, to a greater degree, the components of bank capital
across countries.\3 The primary objectives of these standards were to
strengthen the soundness and stability of the international banking
system and to level the international playing field.  Since their
imposition, differences in bank capital requirements across countries
have narrowed.\4 However, because the guidelines allow each country
to vary some of the capital components and impose capital
requirements beyond the minimum standards, and because the authorized
activities for banking organizations vary across countries,
disparities can remain.  It is difficult to say whether these
disparities give foreign banks an advantage.  In addition, banks
operate outside the United States in accordance with different
regulatory and supervisory requirements, accounting principles, and
asset quality standards.  These differences also make it difficult to
compare capital positions across countries. 

Changes in U.S.  laws and regulations have sought to diminish the
potential advantage caused by differences in capital positions across
countries.  The Foreign Bank Supervision Enhancement Act (FBSEA) of
1991 required the Federal Reserve and Treasury to issue a Capital
Equivalency Report that would contain guidelines to be used by the
Federal Reserve in converting data on the capital of foreign banks to
the equivalent capital requirements for U.S.  banks.\5 Federal
Reserve officials told us that they are to consider foreign bank
capital and its equivalency to U.S.  bank capital requirements when
reviewing applications for the establishment or expansion of foreign
bank operations in the United States.\6 The Federal Reserve has
reported that it expects the parent banks of foreign branches and
agencies operating in the United States to meet the same standards of
financial strength (including capital equivalency), experience, and
reputation as required for U.S.  banks undertaking similar
activities. 


--------------------
\1 For example, federal branches are required to establish a capital
equivalency deposit equal to the greater of 5 percent of the branch's
liabilities to nonaffiliates or the minimum capitalization required
of a national bank in the same location. 

\2 Foreign branches and agencies have also been said to have lower
costs due to cost of capital advantages and different expectations
about their rates of return. 

\3 See International Banking:  Implementation of Risk-Based Capital
Adequacy Standards, (GAO/NSIAD-91-80, January 25, 1991). 

\4 It is important to note that bank regulators only set minimum
capital standards.  Market forces may require banks to hold greater
amounts of capital. 

\5 The report was submitted to Congress in June 1992. 

\6 The determination is to ensure that any differences in capital
standards do not place U.S.  banks at a competitive disadvantage. 


      RESERVE REQUIREMENTS
-------------------------------------------------------- Chapter 3:1.2

Within the United States, foreign branches are required to maintain
reserves in the same manner and to the same extent as U.S.  Federal
Reserve member banks.\7 Foreign agencies are also subject to reserve
requirements on the same basis, provided that the foreign parent bank
has total worldwide assets of more than $1 billion.  Reserve
requirements are imposed against three types of liabilities:  (1)
transaction deposits, (2) nonpersonal time deposits, and (3)
Eurodollar activities.  However, U.S.  reserve requirements do not
apply to offices of foreign banks outside the United States,
including shell branches managed by branches or agencies in the
United States. 

Prior to 1991, the United States imposed a 3 percent reserve
requirement on Eurodollar deposits whenever a bank's U.S.  offices
had net obligations to its foreign branches.  A U.S.-chartered bank
could not get around this requirement by booking Eurodollar-funded
loans offshore because such loans were included in the bank's
consolidated books.  However, foreign banks could avoid the
Eurodollar reserve requirement by booking Eurodollar-funded U.S. 
loans offshore. 

Although the ability to avoid U.S.  reserve requirements could confer
an advantage on foreign branches and agencies, whether it did
depended on the cost of U.S.  deposits relative to the cost of
Eurodollar deposits.  As long as the cost of U.S.  deposits remained
far enough below the cost of Eurodollar deposits to offset the cost
of reserves, U.S.  banks were not disadvantaged.  By the mid-1980s,
however, U.S.  deposits were no longer inexpensive enough to offset
the cost of reserves.  Foreign branches and agencies appeared to have
responded to this situation by booking loans in offshore offices so
they could be funded without reserve requirements.  The Federal
Reserve Bank of New York reported that between year-end 1984 and
year-end 1990 offshore claims, including those in shell branches, on
U.S.  nonbanks reported by foreign banks grew from $31 billion to
$148 billion.  In December 1990, the Federal Reserve lowered the
Eurodollar reserve requirement to zero.  This eliminated the
potential advantage foreign banks received from booking loans
offshore without reserve requirements. 


--------------------
\7 Reserve requirements determine the amount of cash and Federal
Reserve deposits a bank must hold against its funding base and are
costly for a bank to hold. 


      RETAIL DEPOSIT-TAKING AND
      DEPOSIT INSURANCE
-------------------------------------------------------- Chapter 3:1.3

Current U.S.  banking law bars foreign branches, except for 52
grandfathered branches, from accepting domestic retail deposits or
obtaining deposit insurance.\8 According to Federal Reserve
officials, the reason for this is to limit the exposure of the U.S. 
deposit insurance funds in case of failure of the branch or parent
bank.  However, foreign branches are permitted to take certain
deposits of less than $100,000 from five categories of depositors and
may accept deposits of less than $100,000 from any depositor subject
to a de minimis rule.\9

By contrast, any U.S.-chartered commercial bank may solicit retail or
other deposits.  Moreover, deposit insurance is required for national
banks and most state banks.\10 Deposit insurance premiums are
collected on all deposits, including uninsured deposits, held in
offices in the United States.  In recent years, the high cost of
deposit insurance has led some observers to argue that foreign banks
receive an advantage because they do not bear the cost of deposit
insurance. 

Overall, it is not clear how much of an advantage foreign branches
have derived by not paying deposit insurance premiums.  Although they
do not bear the cost of deposit insurance, foreign branches do not
have access to insured deposits--a stable funding source.  Rather,
depositors at foreign branches are expected to recognize that they
must rely on the strength of the parent bank or the willingness of
its government to guarantee their deposits if difficulties arise in
the bank or branch.  In addition, the Office of the Comptroller of
the Currency (OCC) and state banking authorities can impose asset
maintenance requirements on foreign branches, which require foreign
branches to collateralize their liabilities.  However, OCC officials
said that this is not usually done unless there is a sense of trouble
in the parent bank or the country, or as part of an enforcement
action. 

In addition, U.S.  banks have substituted other funding sources for
domestic deposits.  For example, 38 of the 169 U.S.  banks with
foreign offices reported that at least 25 percent of their
liabilities were foreign deposits, in December 1994.\11 Finally, the
FDIC lowered deposit insurance premium rates for most U.S.-chartered
banks in 1995.  This should substantially reduce any advantage
foreign branches and agencies have had from not paying deposit
insurance premiums. 


--------------------
\8 Under FBSEA, foreign banks must establish a separate subsidiary
bank in order to take insured deposits.  The 52 branches that were
grandfathered under FBSEA are required to have deposit insurance. 

\9 See chapter 1, p.  17. 

\10 State-chartered banks that are members of the Federal Reserve
System are required to obtain FDIC insurance.  In addition, virtually
all states require state-chartered banks to obtain FDIC insurance. 

\11 About one-third of the 38 banks were foreign-owned. 


      INTERSTATE BRANCHING
-------------------------------------------------------- Chapter 3:1.4

Prior to the IBA, foreign banks could establish full-service branches
in any state that would permit their entry.  By contrast, U.S.  banks
were prohibited from establishing interstate branches.  Passage of
the IBA ended this advantage for foreign banks by bringing them under
federal regulation.  However, foreign banks that had full-service
interstate branches were allowed to keep them under the
grandfathering provisions of the IBA.  These banks were precluded
from adding full-service branches except in their home state.  As of
December 1994, 70 foreign banks operated grandfathered branches. 

Foreign banks have also been able to expand across state lines by
establishing restricted branches, agencies, and Edge Act
Corporations.\12 However, none of these alternatives has the range of
powers of a full-service branch.  Restricted branches can only accept
deposits from U.S.  citizens or residents in connection with foreign
trade, and agencies are even more restricted in their deposit-taking
abilities.  Edge Act Corporations must not only restrict their
deposit-taking to that resulting from foreign trade, but their
lending must also be related to international activity. 

In the years since passage of the IBA, any advantages afforded
foreign banks from their grandfathered privileges or from their
ability to expand through restricted branches or agencies have likely
been eroded by subsequent changes in U.S.  laws and regulations. 
Almost all states now allow some form of interstate banking, albeit
through BHCs, and most allow nationwide entry.  By June 1997,
Riegle-Neal will allow U.S.  and foreign banks to establish
full-service branches across state lines. 


--------------------
\12 Foreign banks can only establish restricted branches in states
that specifically authorize such branches to exist.  This is in
contrast to establishing full-service branches, which may be
established in any state that does not specifically prohibit such
branches.  U.S.  banks may also expand across state lines by
establishing Edge Act Corporations. 


      CONSUMER PROTECTION AND THE
      COMMUNITY REINVESTMENT ACT
-------------------------------------------------------- Chapter 3:1.5

Foreign branches and agencies operating in the United States are
subject to the same consumer protection statutes as U.S.  banks,
provided that foreign branches and agencies engage in the activities
targeted by each statute.\13 However, since foreign branches and
agencies do not generally offer the full range of products and
services typically offered by U.S.  banks, they do not trigger all of
the consumer protection statutes.  For example, foreign branches and
agencies do not generally offer mortgage loans.  Therefore, they are
not required to comply with consumer protection statutes that apply
to mortgage lending.\14

In general, the application of consumer protection laws to U.S. 
banks should not place them at a disadvantage with foreign branches
and agencies, since foreign branches and agencies can only avoid
these laws if they do not engage in the activities that trigger them. 

Specific attention has focused on the Community Reinvestment Act
(CRA), which only applies to insured depositories.  Since foreign
branches and agencies do not generally offer insured deposits, they
are not generally subject to CRA requirements.\15 However, since
virtually all U.S.  banks, even those that are considered wholesale
banks (i.e., they do not rely on insured deposits as a funding
source), must have deposit insurance, they must comply with CRA
requirements.  Whether foreign branches and agencies that do not
offer insured deposits benefit specifically by not having to comply
with CRA requirements is unknown. 


--------------------
\13 Riegle-Neal affirmed that all consumer protection statutes apply
to foreign banks in the United States.  For example, foreign branches
and agencies are subject to the provisions of the following federal
consumer statutes:  Truth in Lending Act, Fair Credit Reporting Act,
Equal Credit Opportunity Act, Fair Debt Collection Practices Act,
Expedited Funds Availability Act, Federal Trade Commission Act,
Electronic Funds Transfer Act, Truth in Savings Act, Home Mortgage
Disclosure Act, Fair Housing Act, and the Real Estate Settlement
Procedures Act. 

\14 Those foreign branches and agencies that do make mortgage loans,
even if only to their own employees, are subject to the relevant
consumer protection statutes. 

\15 Those foreign branches and agencies that do offer insured
deposits are subject to CRA.  In addition, Riegle-Neal requires
foreign banks that acquire banks that are subject to CRA to continue
meeting CRA requirements. 


      NONBANKING ACTIVITIES
-------------------------------------------------------- Chapter 3:1.6

Banks around the world differ in the products they can offer, the
activities in which they may engage, and the structures under which
they operate.  U.S.  banking laws prohibit banks from offering
certain nonbanking related products and services such as insurance
underwriting.  Other nonbanking activities, such as selling life
insurance, are allowed with limitations.  Some banking-related
products or services, such as corporate securities underwriting,
cannot be offered by a bank but can be provided through a BHC.\16 In
addition, U.S.  law prohibits U.S.-chartered banks from mixing
banking and commerce.  By contrast, many foreign countries allow
banks to operate as universal banks--offering a variety of products
and conducting banking and other financial and nonfinancial
activities within a single entity.\17

Although U.S.  laws governing banking activities are applied to
foreign branches and agencies, in practice an attempt is made to
accommodate the structural and operating differences between U.S. 
and foreign banks.  Unlike most U.S.  banks, foreign banks are not
generally organized in a holding company structure.  For regulatory
purposes, the foreign (parent) bank is considered both a bank and a
BHC.  For example, the Federal Reserve treats foreign banks as BHCs
for purposes of applying firewalls\18 to Section 20 companies.\19 The
significance of this treatment is that foreign banks may lend to
their Section 20 subsidiaries just as U.S.  BHCs may lend to their
Section 20 subsidiaries.  However, any such loans from foreign banks
must come from offices located outside the United States.  Likewise,
Section 20 companies affiliated with U.S.  banks may borrow from
foreign bank affiliates within certain limits, which are also applied
to foreign banks.  The U.S.  branches and agencies of foreign banks
may not lend to their Section 20 affiliates just as U.S.  banks may
not lend to their Section 20 affiliates. 

In general, firewalls that are concerned with a bank's safety and
soundness, such as section 23A and 23B restrictions,\20 are not
applied to foreign branches and agencies.  Other firewalls that are
concerned with competitive advantage, such as those applied to
Section 20 companies, are applied to foreign branches and agencies
and their nonbank subsidiaries. 

Allowing foreign banks to conduct activities through subsidiaries of
the parent bank could give foreign banks a potential advantage over
U.S.  banks.  For example, eliminating the need for a BHC structure
could reduce some of the costs of operating branches or agencies and
nonbank affiliates.  Adopting a BHC structure is not costless--for
example, a BHC requires a separate board of directors and auditors. 
A BHC structure may also prevent a bank from realizing economies of
scope from nonbanking activities and prevent the bank from receiving
profits directly from those activities as the profits accrue to the
BHC parent.  However, a BHC structure does limit a bank's liability
for its nonbank affiliates' activities and insulates the bank from
the affiliates' losses. 

Under the BHC Act, foreign banks that have controlling interests in
commercial or industrial firms are permitted to operate branches and
agencies, own bank subsidiaries, and conduct commercial activities in
the United States subject to certain conditions.\21 They cannot
establish or acquire lines of business in the United States in which
they are not principally engaged overseas.  However, the act
prohibits foreign banks with commercial banking activities in the
United States from engaging in other financial activities in the
United States without the Federal Reserve's approval.  Officials
stated that the Federal Reserve has prohibited foreign banks from
engaging in financial activities such as insurance underwriting.\22

Because of differences in U.S.  and foreign bank corporate
structures, authorized activities, and access to insured deposits,
national treatment is likely to be an important issue whenever
changes are contemplated in the powers of banks or bank holding
companies.  For example, legislation has been approved by the House
Banking and Financial Services Committee that would expand the range
of BHC powers.  This bill would repeal the Glass-Steagall Act and
would allow companies to choose between two structures for the
affiliation of banking and securities firms.  Companies with an
insured depository institution would have to become Financial
Services Holding Companies (FSHC) while companies without an insured
depository institution could become Investment Bank Holding Companies
(IBHC).  FSHCs would have higher firewalls because of federal deposit
insurance.  Under this bill, foreign banks that do not have
operations that raise insured deposits in the United States could be
treated as wholesale depository institutions and would be regulated
as IBHCs.  We do not know if this could create an advantage for
foreign banks since they would be able to raise retail funds in their
home country.  The bill would also repeal grandfathering for those
foreign banks with commercial and investment banking activities. 


--------------------
\16 A BHC is a company that owns or controls one or more banks.  The
BHC structure can be used to attempt to isolate banking activities
from other activities in which a bank cannot engage. 

\17 U.S.  banking organizations have been able to take advantage of
the opportunities provided by universal banking systems in other
countries.  Under regulation K, and subject to host country
restrictions, U.S.  banks--through Edge Corporations--have been able
to underwrite and deal in debt and equity securities. 

\18 U.S.  banking laws and regulations have established firewalls
between commercial banks and their nonbank affiliates.  These
firewalls are intended to facilitate the conduct of activities
between a bank and its affiliate(s). 

\19 Section 20 companies are separately incorporated and capitalized
subsidiaries of BHCs.  They may underwrite and deal in debt and
equity securities that banks may not, subject to revenue limitations. 
They are named after Section 20 of the Glass-Steagall Act, which
prohibits banks from engaging in certain securities activities. 

\20 Sections 23A and 23B of the Federal Reserve Act were designed to
protect banks from abuses in financial transactions with affiliates. 
Section 23A restricts loans and other transactions with affiliates
and section 23B requires that transactions with affiliates be on an
arm's length basis.  The Federal Reserve stated that sections 23A and
23B do not apply to the U.S.  branches and agencies of foreign banks
because the United States does not regulate their safety and
soundness.  However, the exemption for transactions between bank
affiliates of a common parent do not apply to transactions between a
U.S.-chartered bank subsidiary of a foreign bank and a branch or
agency of that same foreign bank. 

\21 The BHC Act prohibits BHCs from engaging in a commercial or
industrial activity not closely related to banking.  However, the act
sets forth express exemptions under which certain foreign banks
(i.e., those banks that are principally engaged in banking activities
outside the United States) with such affiliates can conduct their
banking operations and their commercial or industrial activities in
the United States.  In general, these exemptions allow a foreign
banking company to engage in a commercial or industrial activity in
the United States only if a majority of the activity is conducted
outside the United States. 

\22 One exception to this is when a bank is owned by a foreign
government.  Because a foreign government is not considered a company
under the BHC Act, a foreign government-owned bank with a U.S. 
branch or agency may be affiliated with a foreign insurance company
also operating in the United States without violating the BHC Act. 


      SUPERVISION
-------------------------------------------------------- Chapter 3:1.7

Until enactment of the IBA, regulation and supervision of foreign
branches and agencies operating in the United States rested solely
with state banking authorities.  Foreign banks wishing to establish
branches or agencies obtained state licenses to operate.  The IBA
brought foreign branches and agencies under federal regulation and
gave them the option of obtaining federal licenses.\23

Passage of FBSEA in 1991 further expanded federal regulation of
foreign banks in the United States.  This legislation delegated to
the Federal Reserve enhanced powers not only to examine all foreign
bank operations in the United States on an annual basis, but also to
approve and monitor their initial entry and subsequent expansion
plans.  In particular, it required the Federal Reserve to certify
that foreign banks entering or expanding in the United States are
subject to comprehensive consolidated supervision in their home
countries. 

FBSEA also required that foreign branches and agencies have annual
examinations.  The Federal Reserve, in coordination with OCC, FDIC,
or relevant state banking authority, is responsible for these
examinations.  The consolidated operations of a foreign bank are
regulated and examined by its home-country regulator.  Like U.S. 
banks, foreign banks must file quarterly condition and income reports
on their U.S.  operations.  The parent bank, as well, must file
information on its condition and on that of its nonbank subsidiaries. 
Reports filed by branches, agencies, and their parent banks are
generally less detailed than those of U.S.  banks and their BHCs. 

The Federal Reserve reviews the activities of shell branches that are
managed by U.S.  offices of foreign banks.  However, U.S.  bank
regulators have no authority or responsibility to examine the
activities of foreign banks that occur outside the United States. 
Review of activities in shell branches is used only as an input into
assessing the quality of management in the U.S.  offices of the bank. 
Since 1993, foreign banks that manage shell branch operations from
the United States have had to file reports on the activities of their
shell branches.  However, because U.S.  regulators do not have the
authority to examine a foreign bank's operations outside the United
States they cannot independently verify this information. 


--------------------
\23 States retained the power to prohibit foreign branches or
agencies from operating within the state.  However, states cannot
allow state-licensed branches and agencies but exclude federally
licensed branches and agencies. 


   VIEWS ON THE COMPETITIVE
   POSITION OF FOREIGN BANKS
   OPERATING IN THE U.S. 
---------------------------------------------------------- Chapter 3:2

In preparing this report, we spoke with representatives from major
money center banks, foreign banks operating in the United States,
regional banks that actively participate in international markets,
smaller banks in markets where foreign banks compete, multinational
corporations, other corporations that have little or no international
presence, and officials of state and local governments.  We also
spoke with officials at trade associations representing these
organizations and with federal and state banking regulators.  We
asked these officials for their views on the competitive position of
foreign and U.S.  banks and whether foreign banks enjoy advantages
vis-a-vis U.S.  banks due to the adaptations of U.S.  laws and
regulations under which they operate.  We also asked them to discuss
the role and importance of U.S.  and foreign banks in providing
financial services. 


      U.S.  AND MULTINATIONAL
      CORPORATIONS
-------------------------------------------------------- Chapter 3:2.1

Executives at the corporations we surveyed stated that they
maintained relationships with many banks but received the majority of
their banking services from a few of these banks.  This subset of
banks, referred to as core banks, provided the corporations' domestic
cash management services as well as other domestic and international
banking services.\24 Several factors were cited as important in
choosing core banks.  These included existing relationships with the
bank, level and quality of service, price, and reputation for
specialized services.  Relationship, often built around the provision
of cash management services, appeared to be the most important
factor.  The multinational corporations generally used the largest
U.S.  banks as their core banks.  Several other companies we surveyed
used these banks as well as large U.S.  regional banks for their core
accounts. 

Multinational corporations appeared to use foreign branches and
agencies primarily when their prices for particular services were
lower or they believed their services were better than those of U.S. 
banks.  This might occur because bank management had decided to
specialize in certain services, such as trade financing.  One
official stated that a bank's competitiveness in seeking the business
of growing and internationally focused companies was in part
contingent on the size of the banking organization as a whole and the
scope of its activities.  Additionally, officials stressed the
importance of a bank's international presence in providing services
to growing companies.  One official stated that a strong
international presence and the ability to provide high-quality
services worldwide were very important for businesses that were
looking to grow internationally.  He added that a bank that can
minimize red tape and speed up the transfer of funds worldwide will
have a distinct advantage over those that cannot. 

Executives at several of the corporations told us that foreign
branches and agencies are not able to offer any services in the
United States that domestic banks cannot offer.  Officials at
multinational corporations said that competition varies according to
the product line or specialty that each bank decides to pursue, but
extensive retail networks have provided U.S.  banks with an advantage
in providing deposit-based services in the United States.  Corporate
officials also told us that when U.S.  banks have a strong presence
in local overseas markets and can support a corporation's needs,
especially cash management, these banks will typically get their
business--often because of an existing relationship.  In countries
where U.S.  banks do not have the branch network or local presence to
be able to provide cash management services, corporate officials told
us they rely on foreign banks to provide such services.  This can
sometimes lead to the bank's supplying the company with other
products and services, including some in the United States. 

In interviews with officials at multinational corporations, we found
that these companies typically had a group of second-tier banks that
they used for specialized services or in geographic locations not
served by their core banks.  Often this second tier included foreign
banks.  Some of the corporations had 100 or more secondary or
tertiary banking relationships.  Some of the officials at the other
firms we interviewed stated that they had fewer core bank
relationships and only used other banks for cash management services
in areas not served by their core banks. 


--------------------
\24 Cash management services comprise the majority of the daily
banking needs of businesses.  They include concentration,
disbursement, and payroll services; wire transfers; and lock boxes. 
Other services provided by core banks include back-up lines of
credit, letters of credit, foreign wire transfers, automated fund
transfers, trust management services, and mortgages. 


      STATE AND LOCAL GOVERNMENTS
-------------------------------------------------------- Chapter 3:2.2

State and local government officials told us they use banks in much
the same way as corporations do, although they seek some different
services.  One official summarized municipalities' banking needs as
encompassing four basic services:  (1) municipalities use banks for
short- and long-term financing, in particular, underwriting and
selling municipal bonds; (2) banks provide cash management services;
(3) banks act as trustees and paying agents for bond issues; (4)
banks provide credit services such as standby letters of credit (SLC)
to enhance a municipality's credit rating and lines of credit for
interim borrowing. 

According to state and local government officials and their
representatives, the underwriting and sale of state and local
government bonds is provided almost exclusively by domestic
commercial and investment banks.  These officials told us that
foreign banks generally do not participate in this market because
they do not need or benefit from holding tax-exempt bonds, and they
do not have a customer base interested in purchasing such bonds. 
However, some officials reported that some municipalities have used
foreign banks to issue bonds denominated in foreign currencies, such
as Japanese yen. 

Municipalities also appear to use domestic banks for cash management
services for the same reasons as corporations.  However, some state
and local officials told us that for credit support and liquidity
services foreign banks are very useful.  Because many foreign banks
have higher credit ratings or are willing to accept lower profit
margins than U.S.  banks, foreign banks can offer guaranteed
investment products and credit enhancement services at prices not
available from U.S.  banks. 


      U.S.  BANKERS
-------------------------------------------------------- Chapter 3:2.3

In our meetings with U.S.  bankers, we discussed the market share
statistics that show foreign banks have gained a significant share of
the U.S.  banking market.  Two of these bankers questioned the
attention given to these statistics, which suggest that foreign bank
business has increased significantly in the United States.  Another
banker stated that asset size alone is an incomplete measure of
foreign bank penetration and, more importantly, is not an accurate
indicator of their competitiveness.  He stated that profitability and
capital strength are essential components of competitiveness, which
must be taken into account, and he believed that U.S.  banks do well
by these measures. 

Several U.S.  bankers stated that foreign banks have become an
integral component of the domestic financial markets.  They
acknowledged that some differences exist in the way U.S.  laws and
regulations are applied to foreign branches and agencies and U.S. 
banks but cited no area in which they felt that this created a
significant competitive advantage for foreign banks.\25 Some U.S. 
bankers we spoke with stated that the risk-based capital standards
and increased home-country supervision had made a difference in their
ability to compete with foreign banks.  One banker felt that much of
the pricing advantage enjoyed by foreign banks had been eliminated. 
However, another banker stated that foreign banks still enjoyed some
pricing advantages because of lax enforcement of the capital
standards by their home countries. 

Several U.S.  bankers observed that foreign banks have contributed to
the liquidity of the credit markets within the United States.  They
cited the late 1980s in particular as a time when U.S.  banks were
reducing their lending activities because of balance sheet
constraints, and foreign banks stepped in to provide credit to U.S. 
corporations.  Several of the bankers stated that during this period
some large U.S.  multinational corporations would not have survived
their liquidity problems without the credit infusions provided by
foreign banks. 

The financial markets in the United States have undergone a dynamic
evolution characterized by the fact that large U.S.  corporations
increasingly are bypassing commercial banks and are accessing the
capital markets directly to meet their financial needs.  Several U.S. 
bankers with whom we spoke expressed the view that Glass-Steagall
restrictions were the primary cause of any eroding competitive
position of U.S.  banks with respect to their ability to service U.S. 
multinationals.  These U.S.  bankers stated that they felt more
threatened by competition from investment banks than foreign banks in
this area. 

When asked about C&I lending, bankers from several of the large U.S. 
banks stated that they depended on foreign banks to participate in
the syndicated loan market.  Several bankers credited foreign banks
with helping to maintain the C&I loan market in the face of
increasing competition from investment banks.  One banker stated that
if foreign banks were not willing to participate in C&I lending, some
businesses would likely issue securities such as commercial paper as
substitutes for bank loans because other U.S.  banks would not
provide funding at prices that would be competitive with these
alternatives.  This banker said that the C&I loan market would be
much smaller without foreign bank participation.  We were told that
foreign banks are more often purchasers rather than originators in
this market and comprise the second tier of this market. 

One U.S.  banker stated that U.S.  banks are at a disadvantage
relative to foreign banks because foreign banks can move their
operations offshore.  By contrast, he stated that restrictions
imposed on U.S.  banks under regulation K constrain the size of their
offshore securities subsidiaries, keeping them smaller than their
foreign competitors.  The banker stated that this puts American banks
at a disadvantage when trying to underwrite securities for
multinational corporations. 

In general, the U.S.  bankers expressed no concern about foreign bank
competition in other areas.  Rather, they stated that any advantage
that does exist is one resulting from the economic environments in
home countries and bank management's decisions as to what markets to
serve and what services to offer.  For example, foreign branches and
agencies appear to have developed niches in areas such as trade
financing, foreign exchange, and SLC.  A banker from a large U.S. 
bank told us that his bank preferred not to offer trade financing
because the bank found it to be labor intensive and costly, relative
to the profits generated.  He stated that regional banks and foreign
banks have moved in to fill this niche.  Another U.S.  banker told us
that foreign banks cannot compete with U.S.  banks in providing the
services that U.S.  corporations require domestically--i.e., cash
management, lock boxes, and deposit services. 

Several of the officials we interviewed at smaller U.S.  banks stated
that foreign banks did not compete in many of their markets, such as
loans to emerging companies, cash management, or trust services. 
Rather, these bankers stated that most of their competition from
foreign banks was in the provision of trade finance.  However,
several bankers stated that foreign banks are beginning to compete in
the market for loans to mid-sized businesses.  Although foreign banks
were not generally regarded as a competitive threat, several U.S. 
bankers believed that foreign branches and agencies could price below
most domestic banks because they received funding from their parent
bank. 


--------------------
\25 Concerning the application of consumer protection statutes to
foreign branches and agencies, one U.S.  banker stated that foreign
banks are not the only competitors to whom these statutes, especially
CRA, do not apply.  He was particularly concerned that CRA does not
apply to investment bankers, finance companies, and other municipal
and local credit providers. 


      FOREIGN BANKERS
-------------------------------------------------------- Chapter 3:2.4

Several foreign bankers told us that the mission of foreign banks in
the United States is to provide global banking services to large
international corporations and that most foreign banks serve
customers of their home countries.  An industry representative told
us that only a few banks are large enough to penetrate through home
country loyalties to attract other customers.  However, several
bankers stated that the proportion of loans to businesses from the
bank's home country has diminished, although it is still significant. 
We were also told that any advantages their offices have in the
United States derive from their relationship with their worldwide
parent organization. 

From our review of foreign branch and agency examination reports, it
appeared that most foreign banks that try to attract U.S.  customers
tend to focus on Fortune 500 businesses.  An industry representative
stated that if foreign banks wanted to attract middle-market and
small-business customers they would need to establish subsidiary
banks.  The representative stated that it would be difficult to
attract such businesses without being able to offer them deposit
services.  Another foreign banker acknowledged that the definition of
a nonretail deposit may be broad enough for foreign branches to offer
deposit services to these businesses, but he believed federal deposit
insurance would be necessary to attract them as customers. 

On the basis of our interviews, it appeared that since the passage of
FBSEA, foreign bankers have found the United States a difficult, and
according to one banker--a hostile, environment in which to operate. 
One banker stated that the proposal to assess fees for Federal
Reserve examinations of foreign banks, which was mandated by FBSEA,
is seen as clearly discriminatory by foreign bankers.\26 Another
banker said he felt strongly that the U.S.  regulatory structure has
put his bank's U.S.  operations at a disadvantage, relative to
domestic banks.  Two foreign bank officials commented that since
enactment of FBSEA, paperwork processes have become time consuming
and costly.  Moreover, there appears to be strong sentiment that the
Federal Reserve has been overly cautious in reviewing applications of
foreign banks seeking to enter the United States or expand existing
operations.  One foreign branch official whose branch is trying to
get Federal Reserve approval to acquire a small bank said he believes
it could take between 1 and 2 years to get such approval.  Some
foreign bankers stated that completing the necessary paperwork, as
well as lengthy delays in obtaining regulatory approvals for branch
expansions, are costly for foreign banks.  Two foreign bank officials
said they felt that the application process serves as an effective
barrier to foreign bank entry or expansion into the United States. 


--------------------
\26 Riegle-Neal has since delayed implementation of these fees. 


      U.S.  BANK REGULATORS
-------------------------------------------------------- Chapter 3:2.5

Federal Reserve officials affirmed that foreign banks operating in
the United States are subject to all laws and regulations governing
the activities of banks in the United States.  They stated that
foreign banks enjoy no significant advantages because of regulatory
differences.  Federal Reserve officials have acknowledged that there
have been delays in processing applications for entry or expansion of
activities of foreign banks in the United States.  Many of the delays
have been caused by requirements that the Federal Reserve evaluate
each bank's comprehensive consolidated supervision and determine
whether the Federal Reserve will have access to information on the
bank's operations in material jurisdictions. 

Federal Reserve officials stated that foreign branches and agencies
have been rated on an AIM basis, i.e., asset quality, internal
controls, and management capability with each office viewed as an
independent entity.  However, this is changing as federal bank
regulators begin to focus their examinations on risk management
rather than asset quality.  Foreign branches and agencies are to be
rated on a ROCA system, i.e., risk management, operational controls,
compliance, and asset quality.  The Federal Reserve also plans to
conduct an annual assessment of the consolidated U.S.  operations of
foreign banks. 

U.S.  bank regulators have no authority or responsibility to
supervise activities of foreign banks that occur outside the United
States, even those activities that are managed by a foreign bank's
U.S.  office.  Rather, the supervisory responsibilities of U.S.  bank
regulators extend only to the safety and soundness of U.S.  banking
operations.  To the extent that shell branches are managed by U.S. 
offices of foreign banks, U.S.  regulators are to look at the shells
as part of their overall determination of the quality of a foreign
branch or agency's management.  OCC and Federal Reserve officials
stated that they were somewhat uncomfortable with this situation. 
They were concerned about who is responsible for supervising the
activities of offshore branches managed in the United States.  More
generally, they are concerned about whether home-country regulators
are able to examine banks with offices outside their home countries,
especially in countries with secrecy laws.  These concerns have
contributed to the delays, mentioned earlier, in processing
applications for entry and expansion in the United States. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

For many years foreign banks clearly had advantages operating in the
United States that U.S.  banks did not have.  They were not subject
to federal laws and regulations and, as a result, were able to
establish interstate branching networks and conduct securities as
well as commercial banking activities.  Although they could not offer
deposit insurance, their business strategy did not depend on this
source of funds.  Moreover, some foreign banks attracted retail
deposits even without deposit insurance. 

The IBA and subsequent legislation eliminated most of the advantages
that foreign banks had in the United States.  Although the laws and
regulations affecting U.S.  and foreign banks are not exactly alike,
we found general agreement among the U.S.  and foreign bankers whom
we interviewed that the major differences that had once existed are
now gone.  In general, the U.S.  bankers we interviewed expressed
little concern that adaptations of U.S.  laws and regulations give
foreign banks significant advantages compared with U.S.  banks. 
However, as legislation moves forward that would change the
activities in which banks or BHCs could engage, the structural and
regulatory differences that exist between U.S.  and foreign banks, if
not recognized, could change the competitive environment affecting
U.S.  and foreign banks. 




(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL RESERVE
============================================================ Chapter 3


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Thomas J.  McCool, Associate Director
Stephen C.  Swaim, Assistant Director (Retired)
Rose M.  Kushmeider, Economist-in-Charge
Robert F.  Pollard, Economist

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Rachel DeMarcus, Assistant General Counsel

SAN FRANCISCO REGIONAL OFFICE

Susan J.  Kramer, Senior Evaluator


*** End of document. ***