CHAPTER II U.S. BANK ACTIVITY ABROAD American banking abroad is a relatively new phenomenon in international banking circles. Significant U.S. participation dates only since World War I when banks, with their newly extended powers, were enabled to expand into overseas operations. The potential of the international markets became increasingly evident and served to attract banks into the field. Today, international operations of U.S. banks have become widely diversified and extensive. No longer do United Kingdom and French interests dominate international banking, and the dollar has replaced sterling as the most widely used form of international credit. Active U.S. participation in the international markets came at a most propitious time. Entrance into overseas banking had been virtually closed to national banks prior to 1914. Consequently, foreign operations were left to state and private banks. Neither of these, however, was engaged to any significant extent in financing through acceptance credits, the most common form of trade financing at that time. Few overseas branches, moreover, had been established. By the end of 1913, 26 foreign branches were in operation, six of which were direct branches of four U.S. banks, and the remainder were branches of two foreign banking corporations. With the enactment of the Federal Reserve Act, however, international banking was opened to national banks. A market for dollar acceptances was established and national banks were permitted to open overseas branches-both innovations to national banking. By 1920, there were 100 direct branches of State and National banks. Total branches, including branches of subsidiaries and affiliates, reached an early high of 181 in that year. Certainly there were extenuating circumstances beyond the opening of foreign markets that led to a comparatively large-scale rush of U.S. banks to international operations. Both the aftermath of World War I with its accompanying trade expansion, especially with Europe, and the lessening of reliance on sterling credits in international financing were instrumental in bringing about an active participation in international activities by American banks. As late entrants into the field, U.S. banks attempted to extend and diversify their operations as broadly as possible in order to compete with their more experienced counterparts in the United Kingdom and France. The early 1920's saw a tapering of expansion in foreign activities by U.S. banks as the abnormal international trade growth leveled off. By mid-1926, the steady withdrawals of banks from foreign branching had reduced the number of direct branches to 72 and the total number, including those of subsidiaries, declined to 107. The initial direct overseas expansion-with its particular emphasis toward 1 Section 25 of the Federal Reserve Act permits national banks with capital and surplus of $1 million to establish branches in foreign countries and in U.S. possessions. Prior to the passage of the act in 1914, foreign branching by national banks had been prohibited. Latin America and the Far East-had encountered major difficulties largely due to the inexperience of American banks abroad. The depression of the period only served to hasten the decline. The 1930's presented their own peculiar problems to U.S. banking overseas the depression and the decline of world trade, the widescale devaluations and, later, the influx of foreign funds into the United States were all deterrents to expansion of overseas operations. Throughout the World War II years, banks maintained their existing offices, albeit restrictively, and often in an official capacity. By the end of the war, however, banks had developed sufficient expertise to cope with the projected rise in international financing of the postwar period. Expansion into overseas operations was quick in developing in one form or another during the late forties and early fifties. This growth has been especially pronounced since the mid-fifties. Today, U.S. bank facilities are located in virtually every important world market, and banks are now in a position to conduct business in most overseas centers. Significantly, the leaders in overseas bank operations today or their predecessor banks were among the earliest entrants into the field. The Guaranty Trust Co. opened its first foreign office in London in 1897. The National City Bank of New York, the first of the national banks to open an overseas office, established a branch in 1914. The First National Bank of Boston opened its Argentine office the following year. Other leaders such as Chase National Bank, Bank of America, and Bankers Trust Co., soon followed, either through direct branches or through branches of subsidiaries. More recent interest by American banks in diversifying into international operations has been heightened by the expansion of world trade and by the growing investments abroad by U.S. firms, particularly since the mid-fifties. In many cases, the initiation of international activities has been prompted by the desire to expand services to accommodate important domestic bank customers in their activities abroad. International banking facilities, in turn, have promoted avenues for increased domestic business. Banks with facilities abroad are usually in a better position to service the needs of the U.S. firms operating in foreign markets. Active competition between local and U.S. banks is not unusual and has generally led to better banking services being offered, not only to U.S. firms operating overseas, but to national firms as well. To the general public the availability of worldwide banking services has now become almost synonymous with aggressive banking. No recognition of the forces causing U.S. banks to expand abroad would be complete without recognizing the influence of U.S. Treasury needs for depository institutions for funds held abroad. Most of these funds currently arise from Public Law 480, whereby agricultural surpluses of the United States have been disposed of among needy nations in return for local currencies. Other sources of funds include assistance programs requiring counterpart funds and surplus property disposals. It is interesting that the greatest expansion of American banking facilities abroad occurred during the buildup of Public Law 480 foreign currency funds in the period from 1957 through 1965. While these funds are often held in either the central banks or private banks of foreign countries, Federal law requires U.S. banking facilities be given preference as depositories if available. The result has been that frequently facilities of U.S. banks expanding abroad received their first major deposits from U.S. Government sources. Obviously, however, caution has had to be used in shifting funds from foreign banks to U.S. banking facilities, lest the effect on the country's economy be counter to the original intent of the program that generates the foreign currencies in question. International operations of U.S. banks, meanwhile, have taken a variety of forms. Bank policy has generally guided the type of activities individual banks undertake within the limits of foreign regulations, since banks today continue to be subject not only to U.S. regulations, but also to national regulations in the countries in which they operate. Together, these two factors are perhaps the major determinants of the extent and scope of international operations undertaken by the leading banks. Statistical data on international operations are highly inadequate to measure the extent of U.S. banking abroad. Only fragmentary data are available, since international transactions are generally incorporated with the overall banking statistics. The Board of Governors publishes monthly data showing claims on and liabilities to foreigners; however, this covers only a portion of international activity by banks. Similar material is published by the Treasury Department. The Comptroller of the Currency publishes annually the balance sheet items of branches of national banks. Any additional material which may be compiled is not in published form. Banking activities abroad include the traditional correspondent relationships, direct overseas branches, agencies, and subsidiaries and affiliates. The following descriptions briefly outline U.S. foreign banking activities. INTERNATIONAL DEPARTMENTS AND CORRESPONDENT RELATIONSHIPS Perhaps the most prevalent form of international activity is the international department and its correspondent relationships. Such activity is not confined to the larger banks nor to those located in major port cities. Medium-size and small banks throughout the country whose customer demand can command such services are increasingly engaging in international activities. The size of international departments varies from a one-man operation to an extensive and profitable adjunct to overall bank operations. Bank services range from the buying and selling of foreign exchange and the issuance of letters of credit, to acceptance financing, and foreign lending. Wide networks of correspondent relationships have been built up over a period of years to such an extent that individual banks are now able to channel and direct transactions to virtually every part of the globe. Where bank policy dictates, this form of international operation has been used to the exclusion or near exclusion of all others. Banks adopting this approach maintain that establishing direct operations abroad would only serve to jeopardize existing correspondent arrangements. Local banks are held to have greater and more comprehensive knowledge of the immediate market than would a foreign bank establishing operations in the same market; the gain in prestige, the closer contact with American firms operating abroad-even over a 76-359 0-67 period of time would not compensate for the loss of such important established contacts. Banks with extensive overseas branch operations are also dependent upon correspondent relationships, especially in areas where their direct activities are light, or where they have not established facilities. The foreign department itself, moreover, is a necessary prerequisite to the establishment of direct operations overseas. DIRECT BRANCHES While correspondent relationships through international banking departments are the most prevalent form of international banking activity, branching is the most directly associated with the concept of "overseas banking." Although few banks have direct branches abroad, branch operations of those that do use this form are scattered throughout the world, some branch systems being quite extensive. At the end of 1966, 13 member banks of the Federal Reserve System had a total of 244 branches. (See table 1.) Of these, seven were national banks operating 230 branches and six were State banks with 14 branches. Bank TABLE 1.-Foreign branches of member banks,1 Dec. 31, 1966 Number 44 42 2 12 2 124 1 2 Total.. 244 Including 23 branches in U.S. overseas areas and trust territories. 2 Agreement corporation owned by First Pennsylvania Banking & Trust Co. Source The American Banker, February 28, 1967. National banks are authorized to establish branches abroad through section 25 of the Federal Reserve Act. A recent revision of the Federal Reserve's Regulation M governing branches of national banks expanded their powers to extend to some of those that are usual in the banking operations in the foreign location. These included issuing guarantees subject to stated amount limitations; investing in the securities of central banks, clearinghouses, government entities and development banks; and underwriting obligations of the national government of the country in which the U.S. bank is located. The revision was designed to enable U.S. banks to compete on a more equitable basis in local markets. Further revisions to regulation Mare currently being studied, the most significant of which would permit U.S. banks to invest directly in a foreign bank rather than through a subsidiary. The only State banks currently operating foreign branches are those chartered under the laws of New York State. As contrasted to national branches, these may-in addition to those permitted domestic offices-assume further powers practiced in the foreign country. The growth of foreign branches has been particularly pronounced during the past decade with the number of branches doubling within this time period. Assets and liabilities of foreign branches as of December 31, 1965, are shown in table 2. The increase of direct investments abroad, the creation of trade areas, and to a certain extent, the partial liberalization of regulation M has created further inducements for banks to follow their customers abroad or to expand their overseas facilities. While one of the primary purposes in establishing foreign branches is retaining or expanding services to U.S. customers operating overseas, banks have also been successful in gaining local accounts. The degree of receptivity and national regulations applying to U.S. banks necessarily restricts the expansion of such operations. TABLE 2.—Assets and liabilities of foreign branches of member banks, Dec. 31, 1965 [Millions of dollars] Deposits of U.S. Government, State and municipal deposits.... Acceptances.. Due to head office and branches (gross, including capital) 231.6 6, 723.3 6, 954. 8 292.9 571.2 1,286. 3 9, 105. 2 196 14 Total... 210 NOTE.-The data presented in this table cannot be used to imply balance-of-payments contributions of U.S. banks for reasons given on page 6 of ch. I. Sources: Comptroller of the Currency and New York State Banking Department. AGENCIES Closely allied to branch facilities abroad are agency operations. Agencies include overseas offices authorized to carry on lending activities but, as contrasted to branches, they are not permitted to receive deposits. In certain countries where national law permits foreign branches to operate only in a restricted sense, branches are tantamount to agencies. Illustrative of this type of operation are the U.S. branches located in Taiwan, where banks are not permitted to accept deposits from the public but are allowed to extend loans to local as well as U.S. firms. |