Chapter 4 Views of Foreign Financial Institutions on Access to Fedwire A number of foreign banks have complained that the limited daylight overdraft capacity they are permitted on the Fedwire is not in accordance with national treatment. U.S. banks' access to Fedwire overdraft capacity is based on their worldwide capital, but foreign banks' access is generally limited to 5 percent of their third-party liabilities in the United States unless their overdrafts are fully collateralized. Thus, a foreign bank would be allowed only a portion of the uncollateralized overdrafts on the Fedwire permitted a U.S. bank of equivalent size. The Federal Reserve limits the uncollateralized daylight overdrafts that foreign banks may have on the Fedwire because of the risk that foreign institutions might be unable to meet their obligations for payment messages they have sent over the Fedwire. This is done for prudential reasons to protect the funds of the U.S. government. As the ultimate guarantor of all transactions made on the Fedwire, the Federal Reserve must cover all payments for institutions unable to do so. However, it believes that it does not have sufficient information on foreign bank parent organizations to monitor their credit quality and has therefore determined that the best way to limit risk is to place a greater limit on foreign banks' overdrafts which are not collateralized. Chapter 5 Emerging Issues in International A number of problems continue to demand attention, but national trea' ment is no longer a major concern for U.S. financial firms in the United Kingdom or Japan, or for foreign firms conducting business in the United States. In general, national treatment is a reality in these markets, and the competitiveness of U.S. financial firms is not substantially limited by foreign regulations. Some issues of limited market access remain to be resolved within the area of national treatment, but a denia of national treatment is not a major impediment to international financial markets or to the competitive opportunities of U.S. financial institu tions operating in the United Kingdom and Japan. Therefore, we believ that there is no reason to pursue a policy alternative to national treatment, such as reciprocity. During our review, we examined reciprocity in financial markets as an alternative to national treatment. The relative disadvantages of a regulatory policy of reciprocity that led to congressional adoption of nation treatment in 1978 have not changed. A number of these disadvantages were highlighted in the Treasury Department's September 1984 testimony before the Senate Committee on Banking, Housing, and Urban Affairs, which stated that a policy of reciprocity would "require a burgeoning regulatory bureaucracy and could lead to administrative chaos. If strictly applied, reciprocity would reduce U.S. policy to a lowest common denominator basis, removing flexibility, and work against building and developing the United States as a major international financial center." Reciprocity would result in an uneven and unpredictable array of regu lations that would be constantly changed to match foreign regulations. Furthermore, it would be difficult to apply reciprocal regulations, geared to match the regulations of a foreign nation, to a multinational firm whose ownership and operations are international. While reciproc ity can be useful as a negotiating tool in certain circumstances, its use entails an inherent risk of countermoves that would remove currently available U.S. access to foreign financial markets. With substantial progress made on national treatment, concern has shifted to the implications of internationalization for financial market regulation. The challenge for national regulation of financial markets is to ensure safety and soundness without unnecessarily impeding the fre flow of capital. National regulators need to continue to work together t This testimony was included in the Department of the Treasury's National Treatment Study: Repor to Congress on Foreign Government Treatment of US Commercial Banking and Securities Organiza tions. 1986 Update, page 18. Chapter 5 Emerging Issues in International coordinate regulations so they can be effective in an era of international capital markets, while at the same time ensuring that the benefits of international capital markets are realized. Remaining Concerns of Financial Institutions Regulatory Challenges of Internationalization The primary concerns expressed by multinational financial firms, including those that are primarily U.S. firms, relate to the internationalization of financial markets rather than to remaining problems in applying the national treatment principle to national regulations. For example, some U.S. laws and regulations may hinder the competi- The success of national treatment in eliminating many regulatory inequities has helped to facilitate the entry of financial firms into overseas markets. This ability to expand worldwide has coincided with the increase in international financial flows, increasing the demand for firms capable of conducting international business. These two factors have led to the development of truly international capital markets, which have unique benefits and risks. Some problems confronting international financial markets are beyond the ability or authority of any one nation's regulators to dictate rules and standards. Thus, banking regulators of major nations have been working to coordinate their supervisory oversight of multinational Chapter 5 Emerging Issues in International International Capital banking institutions. The goal of this coordination has been to ensure that regulatory practices of individual nations respond to the risks to the safety and soundness of the financial system caused by internationalization without conferring unfair competitive advantages on firms from any one nation. International regulatory coordination has been a particularly prominent issue in recent months in the area of international standards for bank capital adequacy. Different national standards for capital adequacy have been seen as an important source of competitive inequality among banks operating internationally or facing foreign competition in their home markets, since banks that have lower capital standards are able to operate at lower cost and thus offer lower priced loans and services than banks from nations with higher capital standards. Although not technically a national treatment issue, U.S. banks operating in Japan and the United Kingdom stressed the importance of uniform international bank capital requirements. Japanese capital standards, particularly, have been cited as unfairly low compared with the levels that other nations deem as essential to maintain the safety and soundness of the banking system. While it is difficult to make direct comparisons among the capital standards of different nations, some U.S. banks believe they are at a competitive disadvantage in Japan because Japanese regulators impose less stringent capital requirements on Japanese banks than U.S. regulators impose on U.S. banks. This disparity in minimum capital requirements has often been cited as an important disadvantage for U.S. banks competing against Japanese banks because it means that U.S. bank loans must be priced higher than similar Japanese bank loans. The Japanese have recently taken steps to bring their capital standards more in line with those of other major industrialized countries. In 1986, Japanese bank regulators raised the minimum capital guidelines for Japanese banks, and in December 1987 they agreed in principle that Japanese banks would be subject to the new risk-adjusted capital standards developed by the Basle Committee and the Bank of International Settlements. These standards grew out of a risk-based capital adequacy proposal developed by the Federal Reserve and the Bank of England. See our report. International Coordination of Bank Supervision: The Record to Date (GAO Chapter 5 Emerging Issues in International Under the December 1987 proposal, Japanese banks will be allowed to include 45 percent of unrealized securities gains3 in the calculation of capital, reflecting a compromise between Japanese and foreign bank regulators. Japanese regulators sought a higher percentage, arguing that the extensive securities holdings of Japanese banks were an important component of their total capital, but a component that they could not currently count to satisfy regulatory requirements. U.S. and other national regulators believed that including higher levels of unrealized securities gains in the computations of capital would have been unwarranted, given the price volatility of Japanese banks' securities holdings and the relatively thin markets for those securities. Regulatory Coordination In London and Tokyo, the representatives of U.S. financial institutions that we interviewed agreed that removing regulatory disparities would be an essential step toward fostering an equitable international market for financial services. They cited standardized capital adequacy requirements as a primary concern. Thus far, the banking sector has made the greatest progress in regulatory coordination, including agreement on capital adequacy requirements. Progress in regulatory standardization has not been as great in the investment community. In September 1986, the United States and the United Kingdom signed "A Memorandum of Understanding for the Exchange of Information Between the United States Securities and Exchange Commission and the U.K. Department of Trade and Industry in Matters Relating to Securities and Between the United States Commodities Futures Trading Commission and the United Kingdom Department of Trade and Industry in Matters Relating to Futures." The agreement is intended to gain better adherence by international firms to financial regulations. Informal discussions among the securities regulators of the G10 nations' began in December 1986, but no agreements have been announced. Unrealized securities gains are appreciations in the market value of securities which have not yet been sold, or realized. *The G10 is composed of the United States, United Kingdom, Japan, Belgium, Germany, Italy, France, Sweden, Canada, and the Netherlands. |