thorities in considering applications from U.S. banks, it has not been a requirement in the majority of cases, and for U.S. authorities to insist on this principle might very well hinder rather than assist U.S. banks in local negotiations abroad. At the present time, the licensing of foreign banks in the United States is a matter of State rather than Federal banking law and, as a result, the matter of reciprocity accorded here is exceedingly complex.

The degree of difficulty confronting U.S. banks in obtaining authorization to establish operations abroad depends upon the official and unofficial requirements in the country concerned. Few countries legally require a specific form of organization under which foreign banks may operate within their borders, but a considerable number enjoy their discretionary prerogatives to exclude effectively one or more structures. As was mentioned previously, Brazil has practically shut the door on direct branches, as have Venezuela and Japan. In the United Kingdom, Germany, France, Belgium, the Netherlands, and Switzerland, on the other hand, branch offices appear to be no more difficult to establish than any other form of organization. Some U.S. banks with extensive overseas operations prefer to establish direct branches because they believe this method has advantages of control, implementation of policy, profitability, and simplification of the decisionmaking process. Other banks, feeling the affiliate route has real advantages, strongly prefer the latter. Thus, in some respects, U.S. banks find their choices limited, and at times their incentive to go into specific countries may be determined by restrictions on the form of organization they are required to employ.

In many countries, although the establishment of a direct branch is not prohibited, there is a limitation either officially or unofficially placed on the number of banking licenses that can be issued. In such cases, it becomes necessary to purchase an existing bank, or possibly a dormant banking license with a subsequent conversion to a direct branch. Although the purchase of an existing bank may not be required, there may be instances where this would be desirable. The reasons may be the opportunity to obtain premises and staff, as well as an existing clientele.

In many countries where it is not possible to establish a direct branch or to convert an existing bank into a direct branch, it may still be possible to purchase an existing bank outright and to continue to operate such a bank under its existing name. Some banks believe such an operation is less desirable than a direct branch because of difficulty in identifying such banks with the overall organization of the parent bank. There are often instances, however, where the continuation of the previous name of an acquired bank may be desirable, and this would be applicable in those cases where the bank acquired has an exceedingly good name, has historical importance, or where the continuation of the name would be politically desirable. In those countries where direct branches or the outright purchase of local banks is not permitted, the only avenue of operation is a minority participation in indigenous banks. There may also be instances in which a minority participation may be the most desirable regardless of whether or not there are restrictions on other types of operations.

European countries generally have no restrictions on the degree of foreign participation in a domestic bank, except where foreign owner

ship of banking facilities is restricted or prohibited by law, as in Spain and Sweden. While the same tends to hold legally true for most Latin American countries, there appears to be greater resistance to a foreign majority interest than in the case of Europe. Discretionary objections to foreign ownership can also be found in various Asiatic countries. On the whole, however, the difficulties encountered in locating attractive participation opportunities in underdeveloped countries are considerably greater than the problems associated with obtaining official approval to invest in foreign banks. The same holds true for restrictions on directorships: the smaller the participation and the fewer the number of directors, the greater the possibility of having one's application to invest approved.

A minority investment operation may be desirable in many developing countries and, in particular, in recently independent countries that were formerly colonial territories. By participating with local interests it is possible, to a major extent, to overcome inherent fears of economic domination by developed countries, whether it be real or imaginary.

It may also be possible to establish an operation through participation with major banks of other developed countries and, by so doing, present the posture of an international bank which is not controlled by banking interests of any single country. Such an approach has the additional advantage of having as partners major foreign banks that are experienced in international banking, and which can provide staff and other support which is not available from local banks.

Major banks of the former colonial powers have been particularly receptive to this approach. In these cases, the vestiges of colonial resentment have been offset by assuming the posture of an international bank which is not dominated by any single banking institution. For a U.S. bank such an arrangement often has the additional advantage of having an existing network of branches which have been established by the predecessor bank.

LICENSING AGENCIES

It is not possible to generalize with respect to the local authorities which must grant approval for a U.S. bank to establish operations. No two countries are exactly the same with respect to the necessary procedure which must be undertaken to obtain approval.

These procedures run the full gamut from those countries such as the United Kingdom, where no formal approval is required to establish a branch, to those countries where any type of an operation is prohibited by law, such as in Sweden, or through administrative discretion, as in the case of Australia. In a number of states the chief of state or his cabinet may have to give permission for a foreign bank to open. Occasionally, the decision must be made by the legislative branch of the government.

By far the most common licensing authority are the central banks, but there is a wide variety of procedures through which the various central banks must go in order to grant authorization to a foreign bank for the establishment of a banking operation. For example, the central bank may have the sole authority to grant licenses, but before doing so it must obtain the concurrence of other ministries, such as ministries of treasury, commerce, foreign office, bankers associations,

and chambers of commerce. Such concurrence may be required under law or be merely traditional or customary.

Normally, licensing by central banks is the most advantageous from the standpoint of U.S. banks. Central banks, because of their customary responsibility for monetary policy, economic development, as well as international monetary and balance-of-payments responsibilities, are in the best position to judge the advantages of the entrance of U.S. banks into the local economy.

In many countries authorization for a foreign bank to operate is given to a banking commission and, once again, such authority may be with or without the concurrence of other governmental or business entities. The key factor in such situations is the composition of a banking commission. In certain countries such commissions may be composed entirely of governmental and central bank representatives, while at the other extreme, certain commissions are composed entirely of representatives of the local bank community. More commonly, such banking commissions have a mixed government and banking composition.

Although the approval of such a banking commission may be more difficult, depending largely upon the representation of local bankers who can be expected to act in their own best self-interest, it may still be more desirable from the standpoint of U.S. banks. Approval by a commission which has both governmental and private representation will have a broader endorsement for the establishment of an operation and, therefore, should create a more advantageous initial climate.

As indicated previously, the actual licensing authority very often must obtain the concurrence of other authorities which may be on a more or less informal basis. In many instances, however, more than one authority must formally approve the request of U.S. banks or commissions to initiate a banking operation. For example, a central bank may have to recommend formally the granting of a license to the authority which ultimately grants the license, which in turn may have to obtain formal recommendations from other interested groups. In such situations, in which multiple authorizations are required, additional burdens are placed on the petitioning bank because it subjects them to justifying their request to the various interests, each of which may consider the application in a different context.

A final variation of multiple authorizations is the situation where even after having obtained a license to establish a banking operation it is still necessary to obtain formal registration to do business in the country concerned.

If entry is approved, the majority of countries grant licenses for an indefinite period. Several, however, restrict the license term: India, Pakistan, and Hong Kong require annual renewals; Canada, every 10 years; and Italy grants a maximum term of 99 years. In nearly all countries the banking authorities have a right of revocation, of course.

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CAPITAL REQUIREMENTS

A substantial number of countries have specific requirements on the amount of capital for the establishment of a new banking operation. For the most part these are similar for both foreign and domestic banks. Very often capital requirements are specified in terms of a

Ten-year renewals apply to all Canadian banks, not just foreign-owned banks.

minimum relationship to deposits. A number of countries, for example, specify that deposits may not be more than 15 times capital. An additional requirement for the establishment of a banking operation which has become common in an increasing number of countries is the provision that the foreign branch must be provided with its own capital. This means that the host government is unwilling to consider the capital of the parent bank as supporting the operation of a direct branch in their country and instead requires that capital funds actually be transferred prior to the opening of the branch. The requirement that a branch have its own capital funds may be made even more restrictive by prescribing the manner in which the capital will be employed and/or the imposition of balance sheet capital ratios. Capital requirements for foreign bank establishments vary widely from country to country, ranging from no legal requirement whatsoever, to very high requirements. In most countries requirements are identical to those applicable to domestic banks, which frequently means that they vary according to classification of bank, size of deposits or risk assets, capital structure, number of offices, and so forth. În some countries, notably in Argentina, Brazil, Peru, and Venezuela, capital requirements vary with location and population, with requirements in the large population centers often being multiples of those effective elsewhere. A few countries, including Pakistan, have foreign currency requirements. In the latter's case, 5 percent of the opening deposit figure must be invested in the form of acceptable dollar and sterling securities.

As for regulations requiring investments in the foreign country's debt instruments, such requirements are generally tied to official reserve requirements or deposit balances. Here again, foreign banking institutions are normally treated as domestic banks, without apparent discriminatory clauses against the former. As in the case of the United States, many countries require such reserves to be held on deposit with the central bank. Ĉountries which do require investments in debt instruments include Canada (unofficially), France, Italy (occasionally), Spain, Peru, Venezuela (unofficially), and Australia. As far as can be ascertained, no additional requirements for investments in development banks, and so forth, exist.

Perhaps the most vexing aspect of capital requirements arises in those countries where the banking authorities are vested with considerable discretion in licensing foreign branches. Particularly in those cases where there is known reluctance to grant foreign banks admission, it may be difficult to determine the capital requirements until the U.S. bank is actively engaged in negotiating for entrance. Since such negotiations may well establish the relationships between the U.S. bank and the government concerned for many years, the negotiations are not embarked upon lightly. Accordingly, there may be many years in which no U.S. bank attempts to enter and real knowledge of the acceptable capital to open a U.S. bank is lacking. Furthermore, there may not be any publicizing of capital requirements, as developed in unsuccessful negotiations since this would aid competing banks. In a number of countries, U.S. banks can merely speculate on the capital requirements and, if they know by reason of recent negotiations, they are not likely to tell competing banks or the general public. In a few cases, in the process of preparing the tables at the back of this study, different U.S. banks did not agree on the actual capital requirement.

DIRECTORSHIPS AND EMPLOYEES

In many countries, and particularly in developing countries where nationalistic tendencies are strong, but also in the countries where foreign financial influence is resisted, a U.S. bank may be required to appoint a minimum number of local directors. As such directors would be expected to act under instructions from their sponsors or sponsoring groups, such a requirement may in some cases constitute a severe limitation on the freedom of action of the U.S. bank. In other situations, however, local directors may be desirable from a public relations and business development standpoint. Once again, generalization is not possible and whether or not the requirement of local directors constitutes a real restriction would depend on the local situation of the country concerned.

Few countries have legal requirements concerning the hiring of indigenous personnel by foreign banks; included in this small group are, among others, Brazil (restrictions on salary payments to foreigners); Dominican Republic (80 percent of personnel must be indigenous); Mexico (indigenous personnel only, unless not available); Venezuela (75 percent of officers and staff must be indigenous); Switzerland (one of the managers must be Swiss); and Lebanon (staff must be Lebanese, but exceptions are granted). The absence of legal requirements is no indication that foreign banks are free to staff their operations as they see fit. In the vast majority of countries, informal pressure of varying degrees is exerted by the monetary authorities on foreign banks to employ as large a proportion of domestic personnel as is practically possible. Noncompliance with such requests may safely be expected to result in some form of discrimination in the treatment of the foreign banks.

CONDITIONAL ARRANGEMENTS

Foreign banks are permitted to own only a certain maximum percentage of the ownership of local banks in several countries. As this normally constitutes less than a controlling interest, it would discourage a U.S. banking operation unless, as indicated previously in this report, a minority participation is desirable for political or other reasons.

Although no instances are known in which participation in a development bank in the country concerned is a condition for establishing a banking operation, such a participation is apparently expected. This situation exists primarily in developing countries where every effort is made to obtain development capital from foreign enterprises seeking to conduct business. In at least one case, World Bank bonds are required.

A similar situation exists with respect to the purchase of government securities of the host country, and although this may not be a requirement for issuance of a banking license, it may be prescribed for the investment of required capital.

BRANCHING RESTRICTIONS

Expansion of U.S. banks into particular countries is sometimes hindered by host country restrictions on branching. This is particularly so where there are a number of important cities to be covered