the view that "it doesn't make sense to allow foreigners to acquire big U.S. banks when foreigners won't allow outsiders to buy their large banks." 1 Such sentiments lie behind calls for U.S. authorities to consider "reciprocity" in connection with foreign bank applications. A policy based on reciprocity would require that opportunities available to U.S. banks in the foreign applicant's home country be at least roughly equivalent to the privileges sought by the foreign bank here. The U.S. Government has chosen, instead, to apply pressure for national treatment through diplomatic and other channels. Reciprocity has been rejected as the basis for U.S. policy because it would conflict with the government's policy of avoiding impediments to international investment, and for other reasons as well.

THE POLICIES OF OTHER NATIONS

The available evidence confirms the view that the United States is quite liberal, compared to other countries, in its policy on foreign bank acquisitions. The ability of multinational banks to make significant bank acquisitions outside their home countries is generally limited by foreign laws, policies, and official practices. Those factors do not tell the story, however; it is important to note, as discussed below, that there are striking structural differences between the U.S. and foreign bank markets. The number of substantial banking organizations in other countries is quite small by comparison to the United States, and the number potentially available for acquisition is smaller still.

There are various reasons why governments may wish to limit foreign banking activity generally and foreign acquisition of local banks in particular.'

Large banks typically play a more important role in economic development abroad than in the United States, in part because of the lesser development of indigenous capital markets. Many governments deliberately use the banking sector as a key instrument of national economic policy. In addition to implementing monetary policy through controls on the banking system, governments may use banks as vehicles for controlling the allocation of credit or for promoting broad economic develop

1 "Outcome of Foreign Bids for U.S. Banks Put in Doubt by New Interest in Congress," The Wall Street Journal, March 5, 1979, p. 13.

The following summary is based on more detailed discussion in Foreign Government Restraints on United States Bank Operations Abroad, Joint Economic Committee, 90th Cong., 1st Sess. 7-14 (1967), and Report to Congress, pp. 17-18.

ment or balance-of-payments objectives. Even though regulations designed to foster national policy objectives can be applied to foreign bank operations and to foreign-controlled domestic banks, some governments may feel that their control over foreign-owned banks may be difficult to maintain, or that foreign-controlled banks will be less responsive to national policy objectives. As a result, they may deliberately limit foreign bank presence or exclude them altogether.

A desire to protect domestic banking systems from more efficient or aggressive foreign bank competition may motivate restrictive policies in some countries, particularly where the domestic system is relatively underdeveloped. Where local banks are strong, restrictions on foreign bank competition may stem from other concerns. In some cases there may be a strong desire to maintain domestic ownership of banking for nationalistic reasons or to preserve cultural homogeneity.

None of the considerations just mentioned apply forcefully to the United States. The banking system is not a critical vehicle for multiple national economic policy objectives, and many financing alternatives exist in the extremely well developed private capital markets. U.S. authorities have no inclination (or good reason) to protect domestic banks from foreign bank competition; on the contrary, procompetitive effects of foreign entry by acquisition have often been noted. Concern about restricting foreign banks to preserve cultural homogeneity would be quite out of character, and nationalistic impulses are generally restrained, although there may be more than a trace of such sentiments underlying support for a moratorium on large foreign takeovers.

While the U.S. policy is clearly stated and well known, many countries' policies are ambiguous. Even where laws or regulations are clearly stated, there is often a difference between the letter of the law and effective policy. Evaluation of the operational effect of stated policies must sometimes rest largely on informed judgment and limited knowledge of the experience of banks that have sought acquisitions.

NATIONAL TREATMENT STUDY

The best comprehensive information on foreign governments' laws, policies, and practices regarding

activities of nondomestic banks was gleaned for the "National Treatment Study," which was mandated by the International Banking Act of 1978. The study contains information for 141 foreign governments, derived from a detailed survey of U.S. banks with overseas operations, cables from all U.S. diplomatic posts, and comments from foreign supervisory authorities, as well as a thorough search of U.S. Government agency files and the sparse previously published material on the subject.

The study identified forty-four countries which currently prohibit any foreign ownership of domestic banks. They fall into several subgroups. Nineteen prohibited all forms of foreign bank presence, by law or current practice. Another twenty-two countries permit foreign bank presence only through representative offices. Some of these countries permitted foreign ownership in the past and permit continued operation of foreign bank affiliates or branches, but such grandfathered operations are often subject to severe regulatory restraints. (The forty-four countries are listed, by subgroup, in Table 1.)

Thirty-four countries were found to limit foreign bank acquisitions to less than controlling interests in domestic banks. (These countries are listed in Table 2, again grouped according to the nature of their policies.) In most of these cases, specific limits are set, ranging as low as 5 percent (Japan). Such limits sometimes reflect deliberate nationalization or "indigenization" strategies (e.g., Nigeria). Some countries' foreign ownership restrictions make exceptions for common market or similar international associations (e.g., the European Economic Community or the Andean Pact nations). The Bank of England, for example, announced in 1972 when the United Kingdom joined the EEC that it was not, in general, willing to permit any bank registered outside the EEC to acquire a participation of more than 15 percent in a major U.K. bank, although it maintains a flexible approach on the subject.

3 US. Department of the Treasury, Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations, 1979. (Information in this source was current as of mid-1979.)

Exceptions to stated policies may be granted in special circumstances (e.g., to permit the takeover of a failing bank).

Where specific limits are not set, potential acquirers may be subject to considerable uncertainty. The Netherlands provides an interesting case in point:

Permission for any ... change in ownership, including any interest of more than 5 percent, must be obtained from the Minister of Finance. Permission may be refused if the central bank determines that the change is counter to sound banking policy, or if the Finance Ministry or central bank determines that it would lead to undesirable developments in the banking industry. Those rules could be used to limit foreign banks' acquisition of shares in Dutch banks. The guidelines

utilized have to date been applied on an ad hoc basis and have varied depending on circumstances. One U.S. bank noted a policy apparently limiting foreign bank acquisition of existing banks' shares to 33 percent, while another indicated a 49 percent limit. In at least one case, a U.S. bank was initially limited to a smaller equity position than desired, and then the amount of equity acquired was permitted to increase by stages over several years. Although equity participation has been permitted, even in large banks, the policy has increased foreign banks' uncertainty about the total. . . equity position [that would eventually be permitted].

The study identified forty-seven countries which impose no apparent limit on foreign control of indigenous banks. (These countries are listed in Table 3.) The composition of this group is extremely heterogeneous, including major industrial nations, major offshore banking centers, and a large number of less developed countries, some of which reportedly aspire to becoming new regional offshore centers.

The available evidence does not support any clear generalizations about the relative permissiveness of national policies adopted by countries which

1 Maximum two-thirds foreign equity participation in any domestic bank. No laws pertaining to foreign bank entry.

* Maximum foreign ownership is 60 percent.

SOURCE: Report to Congress, Appendix II, Table II-1.

Restrictions on foreign acquisition of shares in domestic banks appear to exist commonly as a matter of unwritten policy in many foreign nations. With regard to foreign acquisition of large banks, much of the evidence is soft, or impressionistic. Policies on acquisitions of large banks have not often been clearly enunciated or tested, at least within the realm of public knowledge. Informed judgment suggests that, as a general matter, such acquisitions would be discouraged by most govern

ments.

Many countries' policies are ambiguous.

Information on transnational bank acquisitions is not readily available, but data compiled by the Comptroller of the Currency does suggest a paucity of large foreign takeovers outside the United States. A telephone survey and an exhaustive search of specialized reference sources revealed that twentytwo U.S. banking organizations have acquired interests in 197 banks in forty-eight foreign countries (excluding purely offshore banking operations),

nearly half of which were majority-owned or effectively controlled by U.S. institutions. The median asset size of the foreign banks identified as acquired and controlled by U.S. banking organizations was less than $150 million (as of year-end 1977), and less than one-fourth of the banks were larger than $500 million. Very scanty evidence on non-U.S. transnational acquisitions by foreign banks does not suggest that their experience has been any different from that of the large U.S. multinationals.

Structural Characteristics of
Foreign Banking Markets

The difference in foreign bank acquisition activity in the United States vis-à-vis other countries can probably be explained in large part by salient differences in banking structure characteristics. This factor may well overwhelm minor policy differences in some cases.

In the major foreign industrial nations, banking markets are typically very highly concentrated. In most cases, a top tier of three to seven banks controls 40 to 80 percent of total commercial banking assets (Table 4). A foreign bank that acquired any one of the top-tier banks would immediately hold a substantial share of the country's domestic banking assets, together with a nationwide network of offices. Below the small number of top-tier banks, most foreign banking markets are fragmented and comprised of considerably smaller institutions, many of which have specialized or locally oriented operations. There is generally a dearth of mediumsized banks that would constitute logical targets for foreign takeover. Fred Klopstock has observed that "For the most part, the largest banks abroad have not been for sale. Many of them are owned by foreign governments.'

The U.S. structure presents a striking contrast. Concentration is much lower at the national level; the top three banking organizations hold less than one-fifth of total commercial bank assets and the top ten hold just about one-third. More importantly, in terms of significant acquisition opportunities for foreign banks, of the approximately 14,700 commercial banks in this country, 169 have over $1 billion in assets. Moreover, because U.S. law confines full service banking operations of banks and bank holding companies to a single state, acquisition of even a leading U.S. banking organiza

Fred H. Klopstock, "A New Stage in the Evolution of International Banking." 6 International Review of the History of Banking 14 (1973).

The availability in the United States of banks, including large banks, for acquisition by foreign banking organizations appears clearly to be unmatched elsewhere. This result stems from the traditional U.S. policy of receptivity to foreign investment, generally, and the absence to date of political or socioeconomic policy considerations that underlie less permissive attitudes of other governments// The extraordinarily fragmented structure of banking in the United States is a unique, facilitating factor.

As transnational banking develops further in the future, other nations' attitudes toward foreign acquisitions may become more liberal, but nowhere else will there be such a supply of substantial banks for acquisition as presently exists in the United States.