Multinational banking

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Title:
Multinational banking outline of a study
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iii, 11 p. : ; 24 cm.
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English
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United States -- Congress. -- Senate. -- Committee on Banking, Housing, and Urban Affairs
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U.S. Govt. Print. Off.
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Washington
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Banks and banking, International   ( lcsh )
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federal government publication   ( marcgt )
non-fiction   ( marcgt )

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CIS Microfiche Accession Numbers: CIS 76 S242-9
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At head of title: 94th Congress, 2d session. Committee print.
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Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.
Statement of Responsibility:
by the staff of the Committee on Banking, Housing, and Urban Affairs, United States Senate, July 1976.

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University of Florida
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All applicable rights reserved by the source institution and holding location.
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aleph - 024431603
oclc - 02432998
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Table of Contents
    Front Cover
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
    Introduction
        Page 1
    Main body
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
    Back Cover
        Page 12
Full Text




94th Congress I COMMITTEE PRINT
2d Session f







MULTINATIONAL BANKING


Outline of a Study by the Staff of the


COMMITTEE ON" BANKING, HOUSING


URBAN


UNITED


AFFAIRS


STATES SENATE


JULY 1976


Printed for the use of the Committee on Blii'.' 2. IIos:i.-. aind
Urban Affairs

U.S. GOVERNMENr PRINTING OFFICE


WASHINGTON : 1976


AND


75-038







































COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
WILLIAM PROXMIRE, Wisconsin, Cliairman


JOHN SPARKMAN, Alabama
HARRISON A. WILLIAM-, JR New Jersey
THOMAS J. McINT Y R E. New Hampshire
ALAN CRANSTON, California
ADLAI E. STEVENSO )N, I'liiwoi.
JOSEPH R. BIDEN, JR., Delaware
ROBERT MORGAN, North Carolina


JOHN TOWER, Texas
EDWARD W. BROOKE, Massachusetts
BOB PACK WOOD, Oregon
J E --E HIE LMIS, North Carolina
JAKE GARN, Utah


KENNETH A. McLEAN, Staff Dir ctor
ANTHONY T. CLUFF, Minority Staff Director
(1r)


(r.' ;*** r


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CONT ENTS

Pag-e
Introduction- ------ --- --- ------ -- -------- -- I
1. The growth of multinational banking --------
2. Political an d economic risks in multinational banking -_----- 3
3. Structure for regulating [.S. banking :abroad -------------------- 5
4. Regulation of foreign banking in the United States-.-------- 7
5. Lender of las't resort res-ponsibilitvy in multinational banking-- ---------- 8
6. The impact of mulitinational banking on the structutre of U.S. banking- 9
7. The impact of multinational banking on 1.S. bamk performance ------ 10
8. The imnipact of multinational banking on mionetarv policy------------ 10
(III)



















Digitized by the Internet Archive
in 2013














http://archive.org/details/mul Itinban00u nit











MULTINATIONAL BANKING
Introduction
Multinational banking has grown in a single decade from a fringe
activity for the U.S. banking system to its centerpiece. The dramatic
growth of multinational banking has opened new avenues of expansion
and profit for U.S. banks abroad and for foreign banks in the United
States. Banks have responded to this opportunity by inventing new
forms of financial institutions and servic'-, and by developing new
markets. The dynamic, innovative char-cter of multinational banking
activity poses a major competitive challenge for banks in almost all
countries and also presents a formidable challenge, to the traditional
concepts and current practices of bank regulation.
Bank regulatory systems in most countries, including the United
States, have evolved primarily in response to domestic banking devel-
opment and are oriented largely to the regulation of the domestic
activity of domestic banks. The response by bank regulators to the
rapid emergence of multinational banking activity has been hesitant,
sporadic, and almost exclusively national. That is not to sugg.-t that
bank regulation has bee'n either too lax or too restrictive, but simply
to observe that the goals and means of bank regulation in this country
and other countries have not been designed with multinational banking
in mind. In such circumstances there are the twin dangers-to borrow
from cybernetics-of "overstrfin g" and "understeeringo". In the
haste to cope with problems which seem to suddenly loom up, but
are only dimly perceived, remedies may be adopted which are far too
drastic. On the other hand, developments may outpace comprehension,
leading to a failure to solve problems which have ari-en, or anticipate
difficulties and opportunities on the horizon.
In order to aid public understanding, and in order to assist the
committee in determining the need for legislative or regulatory action,
the committee staff has begun a comprehensive study of multinational
bankingL. The study is not intended to prejudge any of the issues, nor
is it intended to -erve as a reason for postponing such legislation as
the committee may deem appropriate in this arva prior to completion
of the study. Any opinions expres-ed in the study will be those of the
staff and will not necessarily reflect the views of any member of the
committee.
The first chapter of the study will describe the growth of multi-
national banking. The next three chapters will focus on some of the
key regulatory issues arising out of that growth. The last four chapters-
will assess the economic impact of multinational banking. The study
may obtain information through surveys, questionnaires, and inter-
views with regulatory and financial officials and experts on multi-
national banking. Comments and suggestions from intere-ted member-
of the public are welcome and may be addressed to the person having
primary responsibility for particular subjects as follows:
(1)








1. The growth of multinational banking____ ____ John Henderson.
2. Po1itic:l1 and economic risks in multinational banking- Stanley J. Marcuss,
Robert W. Russell.
3. Structure for regulating U.S. banking abroad------- Charles L. Marinaccio.
4. Regulation of foreign banking in the United States--- William R. Weber.
5. Lender of last re-ort responsibility in multinational
banking ,a---------------------Robert W. Russell.
6. The impact of multinational banking on the struc-
ture of U.S. banking------------------------- Stanley J. Marcuss.
7. The impact of multinational banking on the per-
formance of U.S. banking--------------------- William R. Weber.
S. The impact of multinational banking on monetary
policy-------------------------------------- John Henderson.

1. The Growth of Multinational Banking
The expansion of international activities of U.S. banks in the post
World War II period began as a natural accompaniment to the growth
of world trade and of direct U.S. investment abroad. Until the mid-
1960's, however, comparatively few banks had an extensive system of
foreign branches.
The banks' use of domestic funds for foreign loans contributed to
the increasing deficits in the U.S. balance of payments during the
1960's. The voluntary foreign credit restraint guidelines, first imposed
,on U.S. banks in 1965, provided a strong incentive to the banks to
seek funds over-eas for lending to foreign customers. These controls
also boosted offshore trading in dollars in the Eurocurrency market
which is substantially unregulated. The Federal Res.erve acceded to
the progre.-,ive int elnationalization of the banking and credit systems
of different countries by allowing U.S. banks to open shell branches in
the Bahama, dealing in foreign liabilities and making foreign loans,
mostly in the Eurocurrency markets.
The consequences were a rapid increa-e in the number of U.S.
banks with overseas branches, and in the number and asset size of
those branches. Whereas only 15 U.S. banks had 295 overseas branches
at the end of 1967, 53 banks had 459 branches by the end of 1969
and the assets of these overseas branches had more than doubled
to over $40 billion. As-ets doubled again in the next 3 years to $80
billion held by 108 U.S. banks with 627 overseas branches.
Accompanying this growth was a great increase in the inflow and
outflow of banking funds. For example, the home offices of U.S. banks
with London or other foreign branche- borrowed as much as one-
quarter of their branches' total resources in 1969, in order to evade the
i'-1trictive monetary policy of the Federal Reserve. The decline in
demand for loan -4 in the rece-sion of 1970 permitted repayment of most
of the U.S. parent bank-;' borrowing, but this contributed to our
balance of p)aymrnents deficit and may have influenced sl)ecilation in
foreign exchange markets which preceded the devaluation of the
dollar in Augiut 1971.
After the -econd devaluation of the dollar in early 1973 and the
adoption of floating exchangee rates, there was another surge in the
growth of U.S. banks' activities abroad, total branch assets growingin
that year by over 50 percent to $118 billion. When oil prices qua-
drnlpled in late 1973 there was a crisis of confidence, due to the fear
tlhat the private international banking system would be unable to








recycle the prodigious surpluses projected for the oil-producing coun-
tries and due to the deteriorating credit ratings of some borrowers.
These fears were heightened by a few spectacular bank failures.
Neverthele-s the situation had stabilized by the end of 1974, after
an agreement by the central bank governors of the group of ten to
engage in cooperative support arrangements. After a pztii.,e in the
growth of U.S. bunks' offshore activities, there was a reurgence before
the yearend, as U.S. domestic output declined and U.S. interest rates
fell even more sharply than foreign rates. Consequently in 1975 the
United States shifted from being a net user of branch bank funds to
being a net supplier, with a net outflow of some $10 billion of bank
funds. At the end of 1975, foreign branch i:t-ets had grown to over
$177 billion in the aggregate, repre-enting over 15 percent of the
combined assets of U.S. baiik' domestic offices and foreign branches.
There have been substantial shifts in recent years in the location
and structure of U.S. banks overseas activities. Since 1973, when
continental European countries impo-ed exchange controls on fund
movements and reserve requirements on external liabilities of banks in
their countries, the major growth of U.S. branches has been outside
Europe. U.S. banks' activities have also become increasingly diverse
and complex. Especially in the case of the large banks, more business
is being done in terms of other currencies than the dollar, more deposits
are foreign-source and a growing portion of international busine-'s is
being done through finance company subsidiaries and Edge Act and
Agreement corporations. 'Moreover, more bank holding companies,
under the authority granted in the 1970 amendments to the Bank
Holding Company Act, have made equity investments in nonbanking
enterprises abroad.
This chapter will seek to describe in greater detail those trends in
multinational banking and to provide some quantitative estimates of
the .-ize and scope of multinational banking.

2. Political and Economic Risks in Multinational Banking
Multinational banking activity opens U.S. banks to potential
losses (and gains) through actions taken by sovemeigni foreign govern-
ments for a variety of political and economic purpo-es. There are also
unique economic and financial risks involved in multinational banking.
These special risks are quialitatively, and perhaps quantitatively,
different from the risks presented by domestic banking activity. The
issue is whether U.S. bank regulation is properly attuned to these
unique risk factors.
Political and economic risks arise in three basic forms: Foreign
exchange exposure, country loan concentration, and foreign deposit
concentration. Each involves distinct, usually separate, aspects of
bank operations and po.e different questions for U.S. bank regulatory
agencies.
Foreign exchange trading involves the downside risk that a b:!Ilk
will be left holding too much of a foreign country's currency when that
currency's value is suddenly changed or the use of the currencyv is
restricted through Government action. Banks ordinarily set prudent
limits on position taking by their trading departments in ecich foreign
currency. Problems have arisen when banks failed to set prudent
limits or when foreign exchange traders violated the limits.








Opportunities for fraud in foreign exchange operations arise from
the complex, specialized nature of foreign exchange trading and the
reliance by traders upon personal trust and verbal commitments by
telephone. Instances of massive abuse were uncovered in the cases of
the Lugano branch of Lloyds Bank International, Union Bank of
Switzerland, Franklin National Bank, and Banque de Bruxelles.
In each of these cases, senior officials of the banks were unaware of the
size of forward commitments being undertaken by their foreign ex-
change traders. Furthermore, in some cases, traders have traded
forward currency for their personal accounts while using the bank's
name.
Internal bank controls over foreign exchange trading operations
have been improved in response to the heavy foreign exchange losses
suffered by some bank-, in 1973 and 1974. Reporting requirements have
been placed on banks in order to enable the Federal regulatory agencies
to monitor foreign exchange exposure. Questions persist about the
completeness of the information obtained by the Federal agencies and
about the effectiveness of regulatory action to compel banks to set
and maintain limits on foreign exchange position taking. Central
banks in other countries have used different measures to manage
foreign exchange risk in their banking systems. A comparative analysis
is required.
The risk that a country will freeze or expropriate foreign assets or
default on its international financial obligations has led to concern
over the degree of exposure of U.S. banks in certain foreign countries.
Also, a severe economic recession in a country could jeopardize loans
to business firms in that country. Data collected by the Federal
Reserve Board on the foreign assets of a sample of 21 large U.S. banks
suggest that individual banks have sizable loan exposure in a few
countries. Experience to date with international lending shows that
loan los.e- have been less than in domestic lending, but it is question-
able whether in this instance the past is a good guide to the future,
given the balance of payments and debt service problems faced by
many countries and the widespread discussion of possible defaults and
moratoria on loan repayments. In the circumstances, it is discom-
forting that the Federal bank agencies disagree on the very concept
of country risk.
The Comptroller of the Currency, James Smith, testified before the
Senate Banking Committee on March 1, 1976, that his Office:
has undertaken in the examination of international banking activities to classify
and comment on international lending activity on the basis of sovereign or country
risk, * and we are the only examining agency that so comments on inter-
national lending.
Governor Holland of the Federal Reserve Board testified before
the Committee on February 5th, that:
country risk exposure is too sweeping a label for a useful analysis of risk in inter-
national operations * the idea of a country risk concept, I believe frankly,
is obsolescent if not obsolete.
Overseas loans by national banks are apparently examined by the
Comptroller in part on the basis of a country risk concept which is
rejected by the Federal Reserve, the agency which examines overseas
loans by state member banks. The controversy over the country risk
concept must be resolved so that overseas loans by both state-chartered






5

and national banks receive consistent treatment from bank super-
visory agencies.
The large placements of surplus funds in the Eurodollar market in
the past 3 years by a few oil producing countries have generated con-
cern that some U.S. banks may become too reliant on short-term de-
posits placed with them by particular foreign countries'. The Federal
Reserve Board's data reveal that the larg-et U.S. banks obtain an
average of 5 percent of their total deposits from Middle East and north
African oil producing countries. If those countries, for whatever reason,
should decide to suddenly shift their funds to other banks, particular
banks could suffer temporary liquidity shortages. The funds could
probably be replaced through the interbank market, but at a cost to the
bank in question. The probability of substantial deposit withdrawals
and the potential impact on individual banks and the banking system
as a whole needs to be more adequately assessed.
The competition for source, of funds may have tempted certain
U.S. banks to develop very special relationships with certain foreigII
countries. If so, the issue is whether such special relationships consti-
tute sound practice for the banks and a sufficient regard for the U.S.
national interest. The Federal bank regulatory agencies have shown
little eagerno-s to study and debate this issue, perhaps for fear that
rigid restrictions on deposit concentration would be forced upon the
banks by Congress. But the real risk is that existing laws and reigula-
tions will not be reexamined and that the problem of deposit concen-
tration in multinational bankin will be left to fester unattended.

3. Structure for Regulating U.S. Banking Abroad
The diffusion of supervisory re-ponsibility for the international
activities, of U.S. banks among three Federal agencies-lthe Federal
Reserve Board, the Office of the Comptroller of the (Currency, and tlhe
Federal Deposit Insurance Corporation--raises obvious (questions-
about duplic.ation of effort, consistency of supervisory standards, and
possible gaps in the coverage of multinational banking activitie-. At
pre-elnt, the Fed is responsible for supervising and regulating State
member banks, Edge Act corporations and bank holding companies:
the Comptroller examines and regulates national banks: and the FDI( (
examines and regulates insured State banks which do not belong to the
Federal Reserve System. The issue of supervisory adequacy is partic-
ularlvy evident in thie case of national banks.
Most of the multinational banking activity of U.S. banks is con-
ducted through national banks, and nearly all of the 99 national banks
with foreign branches or foreign banking sub-idiaries are part of a bank
holding company. Therefore, most multinational banking activity is
subject to the supervisory jurisdiction of both the Fed and the (Conip-
troller. The formation of foreign branches by national banks is au-
thorized by the Fed, but examination of those branches is the r,-pon-
sibility of the Comptroller's Office. The parent bank holding coip;iJ:Iies
are regulated by the Fed, which rules on their formation, their acqupi-
sitions and the type, of activities in which they may engage overseas.
The question is whether this bifurcated arrangement provide- ap-
propriate, coordinated supervisory treatment of the multinational
banking operations of the national bank and its bank holding company.


75-038-76--2








The question of consistent treatment is illustrated by the super-
visory handling of bank capital positions. Capital adequacy is a key
element in the determination of a bank's soundness and has been
much discussed among bankers and bank regulators. The issue of
capital adequacy is particularly relevant for those banks which carry
on the bulk of multinational banking activity. There is a historical
decline in the capital ratios calculated by Federal agencies, and the
ratios are lowest for the largest U.S. banks-those banks which carry
on the bulk of U.S. international banking activity and for whom inter-
national activity yields one-third to one-half of total earnings.
It has been argued that large banks do not need capital ratios as
high as those needed by small banks, and that diversified banking
activity does not require as much capital as concentrated activity-
whether the diversification is geographic or by type of activity.
Many students of bank regulation have also argued that certain kinds
of financial activity not within the domestic definition of banking,
but permitted to foreign branches, subsidiaries, and affiliates of U.S.
banks, require more capital than is required for ordinary commercial
bulking.
Through their foreign branches and subsidiaries, Edge Act Cor-
poraitions and bank holding companies, U.S. banks are permitted to
hold stock in foreign companies, as well as foreign banks, to engage
in investment banking abroad, and such other financial operations as
management consulting, management of foreign mutual funds, travel
agency and warehousing services. In short, a significant range of
activities. is open to U.S. banks overseas which is not open to them at
home, and many of those activities require substantial capital backing.
Capital adequacy for national banks is considered by the Comptrol-
ler's office in the bank examination process, but the overseas activities
of those banks are subject to approval and regulation by the Federal
Reserve Board.
It is no secret that the Comptroller and the Board have different
standards of bank capital adequacy. Situations can arise-and
preliminary investigation suggests they have arisen frequently-in
which the Comptroller is sati-fied with the capital position of a national
bank but the Federal Re-erve Board denies that bank's applications
to expand overseas activities on the grounds that the one bank holding
Company in which the national bank is located has insufficient capital
to support exp)aini-on.
The Board fac(-, a dilemma in ruling on the overseas activities of
U.S. bank holding companies, and Edge Act corporations because both
State and national banks are active overseas. Unless the Board and
the Comptroller are in full agreement on capital adequacy standards,
which lias clearly not been the (ca.e in the past, the Board has to
chlioo-e between accepting the Comptroller's judgment with respect to
national baink.--thereby ratifying for the multinational banking
activities of national banks capital standards which are different from
the standards it applies to similarr activities by State banks--or
insi-ting on equal treatment of the multinational banking activities of
all U.S. bank,, whether those banks are Federal or State chartered.
The treatment of bank capital is by no means the sole basis for
concern about the adequacy of the present bank supervisory structure








for dealing with multinational banking, nor are the Comptroller and
Fed the only agencies involved. The FDIC does not have authority
at present to regulate the establishment of foreign branches or sub-
sidiaries by the U.S. banks under its jurisdiction (State nonmember
banks). At least 13 banks under FDIC jurisdiction maintained foreign
branches as of March 1975; all but one of these branches were located
in the Caribbean. Six of the insured State-chartered nonmember banks
with foreign branches are subsidiaries of large foreign banks, including
such behemoths as Lloyds, Barclays, and the Bank of Tokyo. Legisla-
tion has been l)ropoeled which would give the FDIC regulatory
authority over foreign branching by insured nonmember banks. Biut
is the FDIC the proper agency to regulate and supervise these frag-
ments of giant multinational banking entities? Under legislation
proposed by the Federal Reserve Board, the Board would obtain
supervisory authority over most foreign bank activity in the United
States, including the U.S. branches of such baniks as Lloyds, Barclays,
and the Bank of Tokyo, but not over State-chartered subsidiaries of
those same foreign banks. How many different Federal and State bank
agencies should be given authority to deal with multinational banking?
Both the Federal Reserve Board and the Comptroller's Office have
testified that supervision of large banks with extensive multinational
operations is a difficult challenge, and that multinational banking
operations require analysis by specialists. The extent and complexity
of multinational banking activity suggest that adaptations in the
present supervisory structure may be needed to assure more uniform
and equitable supervision.
Another issue that will be explored is whether the regulatory
agencies are adequately examining loans to foreign companies by
U.S. banks. Unlike domestic corporations, foreign corporations often
reveal less information about their internal financial condition. As
a result, U.S. bank examiner, may find it difficult to evaluate the
creditworthiness of the foreign loans in a bank's portfolio.

4. Regulation of Foreign Banking in the United States
Legislation is pending in Congiress to revise the present framework
for regulating foreign banking in the United States.
This legislation highlights not only the uniquene-s of the dual
system of chartering and regulating banks in the United States but
also the manner by which permissible banking activity may vary
under the laws of different countries.
At issue are the competitive advantages allegedly enjoyed by foreign
banks doing business in the United States, particularly with regard to
multi-State banking operations and the maintenance of securities
affiliates. Also at issue is the manner to which foreign banks should be
subject to Federal Reserve Board regulations, including re-.rwve
requirements, and be required to carry FDIC insurance.
Congress is attempting to assess the appropriate interest of the
Federal Government in monitoring or regulating the business activities
in the United State. of the world's large-4st banking concerns. Such an
asse-eminent will require continuing analysis beyond the scope of
legislation currently pending, and will be addre-sed in this chapter.





5. Lender of Last Resort Responsibility in Multinational
Banking
The Federal Reserve System acts as a lender of last resort to U.S.
member banks which are basically solvent, but facing a temporary
liquidity problem. The purpose of a lender of last resort facility is to
increase the banking system's resistance to contagious loss of con-
fidence. While the lender of last resort responsibility is clear with
respect to domestic banking, the lines of responsibility are not as
clear a. they might be in multinational banking. The issue is whether
the multinational banking system has or should have a lender of last
resort arrangement corresponding to that for the U.S. domestic bank-
ing system.
Foreign branches are part of the parent U.S. bank, and rely upon
it for support. If a U.S. bank has to assist an overseas branch that
is in difficulty, and if the result is a liquidity strain on the U.S. bank,
it can look to the Federal Reserve as lender of last. resort. But branches
are not the sole institutional form that multinational banking takes;
subsidiaries, joint ventures and affiliates are a significant and growing
portion of the international operations of U.S. banks.
Foreign subsidiaries, joint ventures and affiliates of U.S. banks are
separately incorporated in the host foreign country and have capital
resources of their own. However, there are a number of instances in
recent years in which such entities have had to fall back on the re-
sources of the stockholder banks.
Any bank with a global reputation to preserve will feel a business
responsibility to extend financial as i tance to an ailing subsidiary or
joint venture, even where legal responsibility is absent or limited.
The United California Bank went far beyond its legal obligation to its
Basle subsidiary when that entity failed in 1973; most multinational
banks assert that they would do the same for their own foreign ven-
tures. The probability that U.S. banks will come to the assistance of
their overseas; entities in London in particular has apparently been
increased by recent actions. The Bank of England in the fall of 1974
requested all U.S. banks with operations in London to indicate form-
ally their willingness to back up all their subsidiaries and affiliates
located in Britain. The banks are reported to have complied with this
request.1
If U.S. banks do come to the rescue of their foreign joint venture,
will the Federal Reserve be prepared to assist the U.S. banks if
liquidity problems result? The answer is unclear. The Fed has recently
announced that it will treat all applications to form joint ventures as
if the U.S. bank were fully liable for all operations of such joint ven-
tures, unless the U.S. bank can prove otherwise. But the Fed has not
said what support it feels responsible for providing to U.S. banks which
provide full support to a joint venture.
The issue is complicated by the question of the responsibility of the
foreign central bank to assist a U.S. owned subsidiary firm incorpo-
rated in the foreign country, and the corresponding responsibility
of the Federal Reserve Board to assist foreign owned banking sub-
sidiaries in this country which are members of the Federal Reserve
System. Review and clarification of the lender of last resort responsi-
SSee remarks by Georg- Bhlinden. delivered on Mar. 17, 1975. reprinted in the Bank of
England Quarterly.v Bulletin, Volume, 15, No. 2 (June 1975), pp. 1SS-194.








ability is needed so that all parties-multinational banks, their
customers, foreign central banks, the Fed, Congrc-s and the public-
will know what assistance is available to U.S. banks which go to the
aid of their foreign subsidiaries and affiliates. Central bankers meeting
at the Bank for International Settlements in Basel, Switzerland, have
discussed the problem and reported agreement in )rincil)le on suppl)lort
for multinational banks which have liquidity cri-e-. The natutire of
that agreement is not clear, and it would appe:i r that further effort to
define the lender of last resort responsibilities of central banks is
req(uir.d1.
An added consideration about which the Fed has been consistently
mute, is the accumulation of foreign Zi-sets by the Fed when it performs
the lender of last resort function for a bank whose portfolio contains
a large proportion of assets payable abroad or in foreign currencies.
IThe collateral obtained in such cases can only be collected if foreign
governments and cent rial banks are svm pathetic to the collection effort.
Fortunately there have been no problems of this nature to date, but
as multinational banking grows and the responsibility of the Fed
expands, the practice of discounting foreign assets should be
reconsidered.

6. The Impact of Multinational Banking on the Structure of
U.S. Banking
The expansion by U.S. banks into nonbanking activity overseas,
and the competition among U.S. banks for multinational banking
business have raised questions about the degree of concentration of
economic power and the fairness of competition fostered by multi-
national banking. The large multinational banks have been particularly
eager to develop close link, ges with large multinational corporations
by moving into financial transactions other than commercial banking.
The Federal Reserve Board in ruling in 1974 against attempts by
America's two largest banks to acquire sizable equity interests in
insurance underwriting firms incorporated overseas, stated that:
Close working relationships abroad between large U.S. banking organizations
and large U.S. iii-irir ce companies could in time weave a matrix of relationships
between the joint ventures in the U.S. and abroad that could load to an und'le
concentration of economic resources in the domestic and foreign comnimerce of the
United States.
The Board's decisions are reassuring with res-pect to insurance
underwriting, but U.S. banks are already involved in a hlost of other
nonbanking activities overseas, including securities under writing.
Some of these activities could lead to precisely the kind of web of
economic concentration which the Board warned against. A study of
these activities can help detcnn.11ile whether continued growth should
be encouraged or discouraged.
The net effect of multinational banking activityV on icompjIetition
among U.S. banks may be to heighten bankig concentration in this
country. There is an obvious question of whether smaller banks lose
their corporate customers if they cannot afford to follow the corpon'a-
tions overseas and open banking branches, subsidiaries and joint
venture, abroad. But there is also a question about the competitive
relationship among the btii'ks which do succeed in developing mitlti-
national bankiig activities. Loan syndication patterns ap)pear to








follow the linkages established through correspondent banking
relationships and consortium banking ventures. The larger Eurodollar
loans are arranged by the larger multinational banks, which receive
the special fees and choose the participants. Other banks may have
significant international operations, but be squeezed out of the most
profitable aspects of multinational banking. There is insufficient
evidence presently available to determine the impact of multinational
banking on bank competition and concentration; the staff study is
intended to probe this issue.
7. The Impact of Multinational Banking on U.S. Bank
Performance
The foreign operations of U.S. banks are becoming increasingly
significant in terms of their impact on domestic bank performance.
Foreign operations already account for a substantial percentage of
total income of large U.S. multinational banks.
The growth of multinational banking calls into question the relative
profitability of foreign and domestic banking operations. This, in turn,
will likely affect the manner in which U.S. multinational banks
structure their domestic banking operations to serve the public, both
in terms of availability and costs of financial services.
The continuing quest for foreign source income nee(d- to be examined
in terms of both the regulatory environment in which multinational
banking operations are pre-ently conducted and the overall safety,
soundness, and stability of U.S. multinational banks.
These considerations will be explored in this chapter.
8. The Impact of Multinational Banking on Monetary Policy
The growth of multinational banking has brought about a greater
de,-ree of internationalization of money markets and has thus magnified
the impact on U.S. monetary policy of international flows of funds.
Congre,,ional oversight of monetary policy would be assisted by a
better understanding of how institutional change may have altered
the efficacy of Federal Reserve methods of regulation and market
intervention.
The first issue is that U.S. multinational banks, through their
access to offshore markets, are now able to make a new response to,
and even perhaps to frustrate, the policies of the Federal Reserve.
Movements of U.S. bank funds to take advantage of interest rate
differentials now c.n alter the supply and cost of funds available for
domestic ue--. For example, in 1969 tight money in the United States
cIlI-od U.S. banks to borrow from their foreign branches, thereby
tnin-mnitting monetary -tringency to other financial markets. The
removal of regulation Q ceilings on large certificates of deposit, in
1970 in(luc.d a repayment of most of these borrowings. An expansion-
ary monetary policy could also be rendered less effective by reason of
the outflow of bank funds for forvin lending at higher interest rates.
A second problem is that the increasing volume of liquid funds in
the hl iids of multinational banks, which can shift from one currency
to another, may bring preesstre, on domestic monetary policy to
accommodate exc cbini(, rate need-. Balance-of-payments problem-,
which under the fixed exchange rate sy-temin had been accommodated








mostly by shifts in international re-,rve- or holdings of dollar bain nces,
are now, under the floating exchange rate system, accommodated
by changes in foreign currency exchange rates. The activity of the
Eurocurrenicy markets and, in particular, the offshore operations of
U.S. banks are responsible for a high proportion of the financial
tran-fers that generate these new pressures on policy. If the United
States seeks for domestic purposes a pattern of interest rates lower
than in other major financial centers, it may happen that the dollar
will depreciate and other countries will consequently lose competitive
advantage in trade. These countries may then pult pressure on U.S.
monetary authorities to adopt a somewhat stiffer monetary posture
than warranted by domestic considerations alone. The study will
investigate the extent to which those pressures exist and whether
domestic monetary policy is being unduly influenced by exchange
rate consider t ions.
A third issue is whether U.S. banks' participation in tlhe markets
for foreign currencies has a stabilizing or destabilizing effect. rThe
banks take positions in curien(cies subject to daily trailing limits
which they place on their traders. There are questions whether the
banks change their limits in ways which increase the volatility of
rate movements and whether the regulatory agencies have adequate
information to insure that the banks are not fostering disorderilv
conditions in the exchange markets through speculative activities-.
A fourth question is whether the expansion of the Eurocurrencv
markets is a significant contributor to world inflation, and, if so, what
changes in national and international policies might be needed.
Economists differ on the potential for credit creation through tlihe
Eurocurrency markets. Quite apart from this question, the high
velocity of circulation of funds in these markets c;irries the potential
of aggravating any existing tendency to inflation. Even if it is found
that the Eurocirrencv markets contribute substantially to world
inflation, it may prove difficult to devise satisfactoryy methods of
international control.




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