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The original documents are located in Box B49, folder "Foreign Operations of US Banks (2)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library. Copyright Notice The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United States of America his copyrights in all of his unpublished writings in National Archives collections. Works prepared by U.S. Government employees as part of their official duties are in the public domain. The copyrights to materials written by other individuals or organizations are presumed to remain with them. If you think any of the information displayed in the PDF is subject to a valid copyright claim, please contact the Gerald R. Ford Presidential Library. Some items in this folder were not digitized because it contains copyrighted materials. Please contact the Gerald R. Ford Presidential Library for access to these materials. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 25, 1973 To Chairman Burns Subject: Analysis of Banking Directors' From Ralph W. Smith RWS Responses to Your Inquiry of June 13 1. Responses were received from all ten of the banking directors to whom the questionnaire was sent. Of these ten, international activities were a substantial portion of the business of nine of the banks. Nearly all of these nine could be described as conducting "full service" inter- national operations. 2. Eight of the nine replied that the recent situation prevail- ing in exchange markets had not interfered with their conduct of inter- national banking activities in any substantial degree. One respondent said that it had had a substantial effect. The one bank that was not heavily involved in international business said that it had experienced no substantial interference. 3. The one bank that had experienced substantial interference with normal business cited wide fluctuations in exchange rates in thin markets as the source of its difficulties. It said that its management of currency positions now required [considerably] more attention. Thin, volatile markets were also cited by three other banks as being a source of [minor] difficulties. Minor problems resulting from capital controls were mentioned by three banks. 4. As for problems encountered by their commercial customers, four banks mentioned increased uncertainty caused by fluctuations in exchange rates, while two specifically mentioned increased costs of hedging. BERALD FORD LIBRARY -2- 5. Five of the ten banks indicated that recent experience had resulted in some change in their attitude with regard to floating rates. All five indicated that floating rates were working better than they had anticipated. Of those expressing a preference for floating versus "fixed" rates, five preferred floating and two preferred fixed. Of the remaining three, one indicated that it now prefers even more flexibility than it had previously (though it did not specifically endorse floating); one indicated that it saw no marked disadvantage for floating rates to continue; and one was ambiguous. 6. On the question of whether they would anticipate greater or lesser difficulties if floating rates should persist for an indefinite period, three respondents specifically answered less, while one implicitly answered less. Three specifically answered greater, while two indicated greater, if controls should proliferate (perhaps implicitly assuming that that might be the case). FORD & LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYS Office Correspondence Date May 15, 1974 To Governor Mitchell Subject: Data on Leading New York City From Robert J. Lawrence RJS Banks At the Board Meeting on May 14, you indicated that you felt some data should be developed on the international positions of the leading New York City Banks. Attached are tables containing data on the domestic and foreign positions of the New York Banks from the Call Report of December 31, 1973. I have also included a table showing Euro-dollar borrowings of these banks. Is this the type of material you had in mind? Should it? be distributed to the Board 2 cc: Sam Chase Attachments FORD & GERALD LIBRARY Deposits of Leading New York Banks (December, 1973) Domestic Deposits in Consolidated % of Deposits Foreign Branches Deposits Foreign Bank ($ Millions) ($ Millions) ($ Millions) to Total Chase Manhattan Bank 17,128 12,690 36 29,818 43 First National City Bank 18,278 16,005 42 34,283 47 Manufacturers Hanover Trust 11,421 5,556 19 16,977 33 Chemical Bank 17,119 12,699 36 29,818 43 Bankers Trust Company 8,528 5,487 18 14,015 39 Morgan Guaranty Trust 8,875 6,492 20 15,367 42 Marine Midland Bank 2,699 3,956 8 6,655 59 Irving Trust Company 4,837 2,133 8 6,970 31 The Bank of New York 1,413 540 1,953 28 Franklin National Bank 2,600 1,131 2 3,732 30 189 30 34 189/420 17 378 30 3 520 20 14 156] 34.0 15 7 7 2 156 d FORD GERALD LIBRARY Selected Call Report Items (December 31, 1973) (Millions $) Chase Manhattan Bank Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 4,073 4,451 8,525 52 Federal Funds Sold 54 3 58 6 Other Loans, Gross 13,529 8,204 21,733 38 Securities 3,749 149 3,897 4 Other Assets 767 327 1,093 30 TOTAL ASSETS 23,106 13,217 36,317 36 TOTAL DEPOSITS 17,128 12,690 29,818 43 Demand Deposits 9,983 -- 9,983 0 Time Deposits / 7,145 12,690 19,835 64 Federal Funds Purchased 1,694 -- 1,694 -- Other Liabilities 1,114 208 907 23 TOTAL LIABILITIES 21,008 13,207 34,216 39 Capital Notes and Debentures 151 -- 151 -- Preferred Stock -- -- -- -- Common Stock 536 -- 536 -- Surplus 709 -- 709 -- Undivided Profits 385 -- 385 -- TOTAL EQUITY CAPITAL 1,630 -- 3 1,630 -- 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slight for foreign branches. FORD i LIBRARY GERALD Selected Call Report Items (December 31, 1973) (Millions $) First National City Bank Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 4,110 5,016 9,127 55 Federal Funds Sold 334 -206 128 -161 Other Loans, Gross 14,890 10,876 25,766 42 Securities 3,172 863 4,035 21 Other Assets 564 1,296 1,860 70 TOTAL ASSETS 24,195 18,090 42,285 43 TOTAL DEPOSITS 18,278 16,005 34,283 47 Demand Deposits 9,401 -- 9,401 -- Time Deposits 1/ 8,877 16,005 24,882 64 Federal Funds Purchased 1,810 491 2,301 21 Other Liabilities 701 694 1,395 50 TOTAL LIABILITIES 21,907 18,162 40,069 45 Capital Notes and Debentures -- -- -- -- Preferred Stock -- -- -- -- Common Stock 638 -- 638 -- Surplus 764 -9 755 -1 Undivided Profits 583 -42 541 -8 TOTAL EQUITY CAPITAL 1,985 -51 1,934 -3 1/ A small share of deposits in foreign branches is represented by demand dep its. Thus, this item is overstated slightly for foreign branches. FORD is GERALD LIBRARY Selected Call Report Items (December 31, 1973) (Millions $) Manufacturers Hanover Bank Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 3,708 701 3,779 2 Federal Funds Sold 9 -- 9 -- Other Loans, Gross 7,768 5,654 13,422 42 Securities 1,246 154 1,400 11 Other Assets 241 120 361 33 TOTAL ASSETS 13,498 5,895 19,393 30 TOTAL DEPOSITS 11,421 5,556 16,977 33 Demand Deposits 7,233 -- 7,233 -- Time Deposits 1/ 4,188 5,556 9,743 76 Federal Funds Purchased 576 -- 576 -- Other Liabilities 182 181 363 50 TOTAL LIABILITIES 12,473 5,878 18,351 32 Capital Notes and Debentures 100 -- 100 -- Preferred Stock -- -- -- -- Common Stock 210 -- 210 -- Surplus 340 --- 340 -- Undivided Profits 201 -- 201 -- TOTAL EQUITY CAPITAL 751 -- 751 -- 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. GERALD FORD CIBRARY Selected Call Report Items (December 31, 1973) (Millions $) Chemical Bank Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 2,825 2,242 5,067 44 Federal Funds Sold 72 -- 72 -- Other Loans, Gross 8,667 1,566 10,233 15 Securities 1,681 270 1,951 14 Other Assets 403 690 1,093 63 TOTAL ASSETS 14,207 22,110 36,317 61 TOTAL DEPOSITS 17,119 12,699 29,818 43 Demand Deposits 5,623 -- 5,623 -- Time Deposits 1/ 4,700 19,495 24,195 81 Federal Funds Purchased 1,835 -141 1,694 -8 Other Liabilities 515 392 907 43 TOTAL LIABILITIES 13,201 21,015 34,215 61 Capital Notes and Debentures 203 52 151 34 Preferred Stock -- -- -- -- Common Stock 161 376 536 70 Surplus 302 407 709 57 Undivided Profits 198 187 385 48 TOTAL EQUITY CAPITAL 661 969 1,630 59 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. GERALD R. FORD LIBRARA Selected Call Report Items December 31, 1973 (Millions $) Bankers Trust Company Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 2,791 2,997 5,788 52 Federal Funds Sold 18 -- 18 -- Other Loans, Gross 6,902 2,454 9,356 26 Securities 1,032 603 1,635 37 Other Assets 241 117 358 33 TOTAL ASSETS 11,769 5,737 17,506 33 TOTAL DEPOSITS 8,528 5,487 14,015 39 Demand Deposits 5,447 -- 5,447 -- Time Deposits 1/ 3,082 5,486 8,568 64 Federal Funds Purchased 1,372 -- 1,372 -- Other Liabilities 233 116 349 33 TOTAL LIABILITIES 11,051 5,713 16,764 34 Capital Notes and Debentures -- -- 20 -- Preferred Stock -- -- -- -- Common Stock 91 -- 91 -- Surplus 341 -- 341 -- Undivided Profits 163 -- 163 -- Total Equity Capital 595 -- 595 -- 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. GERALD FORD Selected Call Report Items December 31, 1973 (Millions $) Morgan Guaranty Trust Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 3,350 2,715 6,065 45 Federal Funds Sold 87 -- 87 -- Other Loans, Gross 6,545 3,926 10,470 37 Securities 1,408 1,073 2,481 43 Other Assets 685 175 861 20 TOTAL ASSETS 13,150 7,156 20,307 35 TOTAL DEPOSITS 8,875 6,492 15,367 42 Demand Deposits 5,761 -- 5,761 -- Time Deposits / 3,111 6,495 9,606 68 Federal Funds Purchased 1,569 -- 1,569 -- Other Liabilities 634 321 955 34 TOTAL LIABILITIES 11,764 7,149 18,913 38 Capital Notes and Debentures 191 -- 191 -- Preferred Stock -- -- -- -- Common Stock 237 -- 237 -- Surplus 427 -- 427 -- Undivided Profits 359 -- 359 -- TOTAL EQUITY CAPITAL 1,024 -- 1,024 -- 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. FO is GERALD BRARY Selected Call Report Items December 31, 1973 (Millions $) Marine Midland Bank Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Bank 1,106 2,592 3,698 70 Federal Funds Sold 11 -- 11 -- Other Loans, Gross 1,686 1,379 3,065 45 Securities 345 167 512 33 Other Assets 53 110 163 68 TOTAL ASSETS 3,363 4,207 7,570 56 TOTAL DEPOSITS 2,699 3,956 6,655 59 1,817 -- 1,817 -- Demand Deposits Time Deposits 1/ 888 3,950 4,838 82 Federal Funds Purchased 273 -- 273 -- Other Liabilities 104 135 239 57 TOTAL LIABILITIES 3,140 4,177 7,317 57 ⑉⑉ Capital Notes and Debentures 30 30 : -- : : -- Preferred Stock Common Stock 61 -- 61 : Surplus 83 -- 83 -- 47 -- Undivided Profits 47 -- 190 -- 190 : TOTAL EQUITY CAPITAL 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. FORD & LIBRARY GERALD Selected Call Report Items December 31, 1973 (Millions $) Irving Trust Company Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 1,616 1,631 3,247 50 Federal Funds Sold 51 -- 51 -- Other Loans, Gross 3,230 527 3,757 14 Securities 765 31. 796 4 Other Assets 94 45 139 32 TOTAL ASSETS 6,005 2,211 8,216 27 TOTAL DEPOSITS 4,837 2,133 6,970 31 Demand Deposits 3,124 - 3,124 -- Time Deposits 1/ 1,693 2,153 3,846 56 Federal Funds Purchased 325 -7 318 -2 Other Liabilities 102 57 159 36 TOTAL LIABILITIES 5,638 2,206 7,844 28 Capital Notes and Debentures -- -- -- -- Preferred Stock -- -- - -- Common Stock 91 -- 91 -- Surplus 153 -- 153 -- Undivided Profits 78 -- 78 -- TOTAL EQUITY CAPITAL 323 -- 323 -- A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. GERALD R. FORD $ : Selected Call Report Items December 31, 1973 (Millions $) Bank of New York Total % of Item Domestic Foreign Consolidated Foreign to Total Cash and Due From Banks 392 440 832 53 Federal Funds Sold 3 -- 3 -- Other Loans, Gross 1,071 97 1,168 8 Securities 303 2 305 1 Other Assets 24 9 33 27 TOTAL ASSETS 1,827 546 2,373 23 TOTAL DEPOSITS 1,413 540 1,953 28 995 -- 995 -- Demand Deposits Time Deposits 1/ 418 540 958 56 Federal Funds Purchased 204 -- 203 -- Other Liabilities 23 6 29 21 TOTAL LIABILITIES 1,648 546 2,194 25 Capital Notes and Debentures -- - -- -- Preferred Stock --- -- -- -- Common Stock 31 -- 31 -- Surplus 69 -- 69 -- Undivided Profits 61 1 62 -- TOTAL EQUITY CAPITAL 161 1 162 : 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. GERALD FORD LIBRARY Selected Call Report Items (December 31, 1973) (Millions $) Franklin National Bank Total % of Item Domestic Foreign Consolidated Foreign to total Cash and Due From Banks 615 581 1,196 49 Federal Funds Sold 110 -- 110 -- Other Loans, Gross 2,172 595 2,767 21 Securities 626 103 729 14 Other Assets 84 27 111 24 TOTAL ASSETS 3,805 1,191 4,996 24 TOTAL DEPOSITS 2,600 1,131 3,732 30 Demand Deposits 1,410 -- 1,410 : Time Deposits 1/ 1,189 1,131 2,321 49 Federal Funds Purchased 797 -- 797 : Other Liabilities 93 29 122 24 TOTAL LIABILITIES 3,551 1,192 4,743 25 Capital Notes and Debentures 58 -- 58 -- Preferred Stock 19 -- 19 -- Common Stock 27 -- 27 : Surplus 82 -- 82 -- Undivided Profits 40 -- 40 -- TOTAL EQUITY CAPITAL 168 -- 168 -- 1/ A small share of deposits in foreign branches is represented by demand deposits. Thus, this item is overstated slightly for foreign branches. FORD & LIBRARY GERALD STRICTLY CONFIDENTIAL (FR) Daily Average Euro-dollar Borrowings by U.S. Banks from their Foreign Branches in the Computation Period Ended March 13, 1974 and December 19, 1973 And Number of Foreign Branches (millions of dollars) March 13, 1974 December 19, 1973 December 31, 1973 Net Liabilities Net Liabilities Number of Foreign + Assets Sold + Assets Sold Branches Chase Mahhattan Bank, N.Y. 389.9 501.8 104 First National City Bank, N.Y. a/* 3.1 239 Manufacturers Hanover Trust Co., N.Y. 60.0 2.3 6 Chemical Bank, N.Y. 430.5 108.2 8 Bankers Trust Company, N.Y. 103.2 30.0 6 Morgan Guaranty Trust a/* 42.6 12 Marine Midland Bank, N.Y. 13.0 27.7 5 Irving Trust Co. a/* 114.3 5 The Bank of New York, N.Y. 31.2 60.7 2 Franklin National Bank, Brooklyn 1.0 1.1 2 *Less than $50,000 a/ Assets sold only; net liabilities were reported as negative but the amount was not shown. b/ N.A. but assumed zero / Did not report FORD & LIBRARY GERALD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 25, 1974 To Chairman Burns Subject: Bank Loans to Foreigners From Robert F. Gemmill In response to your request at a recent briefing, I am attaching two tables on bank loans to foreign commercial banks and to private nonbank foreigners from November 1973 through the latest date available. The tables show both weekly and monthly data for these types of loans. As the figures on outstandings suggest, the coverage of the weekly data is considerably smaller than for the monthly data. The weekly data are reported only by the weekly reporting banks (as regards loans to foreign commercial banks) or by a sub-sample of these (as regards commercial and industrial loans). By contrast, the monthly data are reported by all banks in the United States with foreign claims of at least $500,000, including the following institutions which are not weekly reporting banks: U.S. agencies, branches and subsidiaries of foreign banks, and Edge Act Corporations. In addition to the difference in coverage, comparison of the two series is made difficult by the differences in timing of the report- ing dates. FORDO is LIBRARY GERALD - 2 - Table 1. Bank Loans to Foreign Commercial Banks (millions of dollars) Weekly data Monthly data Date Amount Date Amount Outstandings 1973-Nov. 28 4,543 1973-Nov. 30 4,639 1974-Jan. 2 5,093 Dec. 31 5,159 Jan. 30 4,637 1974-Jan. 31 4,988 Feb. 27 4,714 Feb. 28 5,572 Mar. 27 5,863 Mar. 31 6,450 May 1 6,365 Apr. 30 6,877 May 29 6,328 June 12 6,209 Changes (no sign = increase) 5 wks. to Jan. 2 550 December 520 4 wks. to Jan. 30 -456 January -171 4 wks. to Feb. 27 77 February 584 4 wks. to Mar. 27 1,149 March 878 5 wks. to May 1 502 April 427 4 wks. to May 29 -37 2 wks. to June 12 -119 1/ From FR 416 filed by 328 weekly reporting banks. 2/ From Treasury foreign exchange forms. FORD i LIBRARY 076830 - 3 - Table 2. Bank Loans to Nonbank Private Foreigners (millions of dollars) Weekly data¹/ Monthly data²/ Date Amount Date Amount Outstandings 1973-Nov. 28 3,352 1973-Nov. 30 6,294 1974-Jan. 2 4,092 Dec. 31 6,464 Jan. 30 4,159 1974-Jan. 31 6,199 Feb. 27 4,017 Feb. 28 6,311 Mar. 27 4,198 Mar. 31 6,422 May 1 4,381 Apr. 30 6,816 May 29 4,478 June 12 4,647₽ Changes (no sign = increase) 5 wks. to Jan. 2 740 December 170 4 wks. to Jan. 30 67 January -265 4 wks. to Feb. 27 -142 February 112 4 wks. to Mar. 27 181 March 111 5 wks. to May 1 183 April 394 4 wks. to May 29 97 2 wks. to June 12 169 1/ Commercial and industrial loans only. From FR 416a, filed by about 160 (one-half) of the weekly reporting banks. 2/ From Treasury foreign exchange forms. p/ Preliminary. GERALD FORD LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date July 26, 1974 To Chairman Burns Subject: Foreign Lending and Borrowing From Samuel Pizer op by U.S. Banks Reports on the balance of payments situation have indicated for some time that U.S. banks have been very active this year as foreign lenders, and also in borrowing from abroad. The data from the post-VFCR monitoring reports show vividly the steep rise in the foreign assets of U.S. banks through May, amount to $8-1/2 billion for their own account and $1.3 billion for the account of customers. Data from the Treasury reports used in compiling the balance of payments show the same pattern of increase, with foreign assets rising by $9.6 billion in the January- May period. The balance of payments data also show, however, that short-term liabilities of the banks to private foreigners rose by $7.1 billion in the same period, so the net bank-reported outflow was about $2-1/2 billion (table 1, attached). Data for bank lending in June are still partial, but there was probably an increase in claims of over $1.5 billion. Whether this was fully offset by an increase in comparable liabilities is still not clear, though liabilities to foreign accounts have been rising substantially, especially in recent weeks. I am attaching a note which explores the Treasury data in more detail. We are also examining other data available on banks' foreign activities and should be able to provide a more rounded picture of these activities when more information is pulled together. FORD & LIBRARY GERALD Notes on Capital Flows Through U.S. Banks in January - - May 1974 The following are the main points that emerge from a close look at the monthly Treasury data on international capital flows through U.S. banks for the period 12/73 - 5/74: 1) Total reported claims increased by $9.6 billion; total reported liabilities (apart from Treasury obligations held in custody for foreign official accounts) rose by $7.1 billion; consequently, net foreign claims by banks rose by about $2-1/2 billion (table 1). 2) The gross increase in claims includes an increase of $1.3 billion in claims held for account of customers (derived from the VFCR reports); if this also is netted out, the net increase in claims on foreigners by banks becomes about $1.2 billion. 3. Most of the large flows of funds in both directions have been vis-a-vis foreign banks (table 6) and much of this appears to be between U.S. banks and their foreign branches, or the U.S. agencies and branches of foreign banks and their head offices. Unfortunately, the Treasury data do not give a clear breakdown for dealings among banks, but most of what appears in table 6 represents such transactions. In that table, it can be seen that net claims on foreign banks increased about $0.9 billion in January-May, and that within that total there was a large increase -- about $3.8 billion -- in U.S. banks' net borrowed position vis-a-vis Europe, and an increase in net asset positions vis-a-vis other areas, especially a net increase of $2.9 billion in the net asset position with Japan. FORD & LIBRARY GERALD -2- 4) Within the banking data (table 6), it can be estimated from various sources that of the $6.5 billion increase in liabilities (from $17.2 billion to $23.7 billion) about $3.2 billion represented liabili- ties to foreign branches of U.S. banks, and about $1.8 billion was in liabilities to foreigners reported by U.S. agencies and branches of foreign banks. There was only a minor increase ($0.5 billion) in deposit liabilities to foreign banks. Most of the increase in liabilities shows up opposite Europe, representing mainly Euro-market flows, plus an increase of about $1.0 billion in amounts due to the Bahamas (presumably largely to U.S. branches there). On the asset side, increases are more scattered; the largest increase is $2.6 billion for Japan, and there is also an increase of $1.0 billion for the Bahamas, matching the increase in liabilities noted above. 5) Apart from transactions with foreign banks, foreign claims and liabilities of U.S. banks did not show any striking activity in the first five months of the year. Claims on other foreigners (tables 4 and 5) show a minor increase ($0.1 billion) in loans to foreign official institutions and $0.3 billion in other loans. Collections outstanding were up $0.8 billion -- mainly against Japan -- and this could be largely customers' claims. On the liability side (tables 2 and 3), GERALD FORD LIBRARY there was a small reduction in liabilities to foreign official institu- tions (other than their holdings of U.S. Government obligations), but a large element in this was a switch by international organizations out of CD's into Agency securities -- a matter of no significance. There were scattered increases in banks' liabilities to foreigners other than official institutions and banks, which aggregate to about $1.0 billion for the five months --- but it is difficult to attach any particular significance to this. -3- What can be said in general about this pattern of flows? a) The increases reported in claims probably could not have occurred without the lifting of the VFCR, so to some extent we are seeing foreign loan activity shifting back to U.S. offices of the banks. b) Changes in borrowings from foreign banks -- largely drawings from the Eurodollar market -- are not necessarily related to the step-up in foreign lending from U.S. offices; use of this source of funds depends primarily on relative costs of funds here and abroad (not necessarily realistically measured by quoted interest rates), and probably also to a degree on banks' rules of thumb regarding some desired distribution over time among the various sources of funds they can draw on. In more recent weeks, there is probably an impact from large deposits in London by oil-producing countries, in the sensethat the London branches are unable to place such funds immediately into appropriate channels abroad, so that a large residual amount spills over into U.S. money markets. c) There is little evidence of direct lending to countries especially hit by increases in their oil imports (except for Japan, where other factors also operate), and probably only the beginnings of any direct placements in the U.S. by the oil-producing countries. Samuel Pizer FORD is LIBRARY GERALD July 26, 1974 Table 1 International Capital Flows Reported by U.S. Banks (in billions of dollars; outflow from U.S. (-)) 1973 1974 Year Q-1 Jan. Feb. Mar. April May Jan- Ma Capital flows reported by U.S. banks Short-term claims on foreigners. -5.0 -4.9 - .4 -1.9 -2.7 - .9 -3.0 -8.8 Liquid -1.1 -2.2 - .6 - .9 - .8 +.5 -1.5 -3.2 Nonliquid -3.9 -2.7 +.2 -1.0 -1.9 -1.4 -1.5 -5.6 Short-term liabilities to private foreigners +4.4 +4.3 +.4 +1.7 +2.2 +.2 +2.6 +7.1 To: Commercial banks +3.0 +4.4 +.4 +1.7 +2.3 * +2.2 +6.6 International & regional organizations +.4 - .6 * - .1 - .4 - .1 +.3 - .4 Other foreigners +1.1 +.6 +.1 +.2 + .3 +.3 +.1 +1.0 (to foreign branches of U.S. banks) (+ .3) (+3.4) (- .2) (*) (+3.6) (-2.0) (+1.8) (+3.2) Net short-term banking flows - .6 -- - .6 -- - .2 - - .5 - .7 - .4 -1.7 Long-term claims on foreigners - .8 - .2 +.1 -.1 - .2 - .6 * - .8 Net flows, short- and long-term -1.4 - .8 +.1 - .3 - .7 -1.3 - .4 -2.5 1/ Includes temporary month-end bulge in March of about $2.0 billion, which was reversed in April. * = Less than $50 million. Details may not add to totals because of rounding. GERALE R. FORD Table 2 CONFIDENTIAL (FR) Liabilities to Foreigners Reported by U.S. Banks (Treasury B-1 Reports), Outstanding 12/73 and 5/74 ($ billions) December 1973 Official Commercial Banks Other Deposits Treas. Deposits Deposits Fgn. Total Demand Time Oblig. Other Total Demand Time Other- Total Demand Time Other / Curr. Total 45.9' 2.2 4.0 31.9 7.8 17.2 6.9 .5 9.7 5.7 2.2 2.5 1.0 .6 Europe 31.6 .6 1.8 24.7 4.6 7.7 3.8 .1 3.7 1.2 .5 .3 .5 .4 (U.K.) (3.0) (x) (-) (3.0) - (2.6) (.7) (.1) (1.8) (.4) (.1) (x) (.3) (.1) Canada .8 X X .7 .1 2.3 .2 .2 1.9 .7 .3 .3 .1 .1 Latin America 2.5 .8 1.1 .2 .4 2.0 1.0 .1 .9 3.0 1.0 1.6 .4 X Venezuela (1.0) (.2) (.7) - (.1) ( .1) (.1) (x) (x) (.3) (.1) (.2) (x) ( x) Bahamas - - - - - (.7) (.1) (.1) ( .5) (.1) - - - - Asia 5.5 .5 .6 3.4 .9 4.6 1.4 .1 3.1 .7 .3 .3 .1 .1 Japan (3.7) (.1) (x) (3.0) (.5) (3.2) (.7) (x) (2.5) (.1) (x) (x) ( x) ( x) Africa .6 .1 .1 .4 X .3 .3 X X .1 .1 X X X Other Countries 2.9 X .3 2.0 .5 .2 .2 X X X X X X X Int'l Orgs. 2.0 .1 .1 .3 1.5 - - - - - - - - " May 1974 Total 47.3 2.4 4.0 33.8 7.0 23.7 7.1 .8 15.9 6.7 2.3 2.9 1.5 7 Europe 28.5 .6 1.5 22.3 4.1 12.8 3.9 .3 8.6 1.6 .6 .3 .7 .4 (U.K.) (2.8) (.1) (x) (2.6) (x) (5.4) (.5) (.1) (4.7) (.6) (.1) (.1) (.3) (.1) Canada 1.0 X X .9 X 2.4 .2 .2 2.0 .6 .2 .2 .1 .2 Latin America 3.3 .8 1.3 .5 .7 3.4 1.0 .2 2.2 3.5 1.0 2.0 .4 X Venezuela (1.8) (.4) (1.1) - (.3) (.1) (.1) (x) (x) (.4) (.1) (.2) ( x) ( x) Bahamas (x) - - - - (1.7) (x) (.2) (1.5) (.1) X x x x Asia 8.9 .6 .7 6.9 .6 4.5 1.4 .1 3.0 .9 .4 .3 .2 X Japan (6.0) (.1) (x) (5.8) (.1) (2.9) (.6) ( x) (2.3) (.1) (.1) (x) ( x) ( x) Africa 1.5 .2 .1 1.1 (x) .4 .4 X X .1 .1 X X X Other Countries 2.8 X .2 2.0 .5 .2 .2 X X X X X X X Int'l Orgs. 1.3 .1 .1 X 1.1 - - - - - - - - 1/ Includes CD's. X = Less than $50 million. GERALD Details may not add to totals because of rounding. CONFIDENTIAL (FR) Table 3 Changes in Liabilities to Foreigners Reported by U.S. Banks (Treasury B-1 Reports), 12/73 -- 5/74 ($ billions) Official Commercial Banks Other Deposits Treas. Deposits Deposits 1/ Fgn. Total Demand Time 1/ Oblig. Other Total Demand Time Other Total Demand Time Other Curr. Total +1.4 +.2 - +1.9 -.8 +6.5 +.2 +.3 +6.2 +1.0 +.1 +.4 +.5 +.1 Europe -3.1 - -.3 -2.4 -.5 +5.1 +.1 +.2 +4.9 +.4 +.1 - +.2 - (U.K.) (- .2) (+.1) (0) (- .4) (0) (+2.8) (-.2) (-) (+2.9) (+ .2) (-) (+.1) (-) ( - ) Canada +.2 0 0 +.2 -.1 +.1 - - +.1 - .1 -.1 -.1 - +.1 Latin America +.8 - +.2 +.3 +.3 +1.4 - +.1 +1.3 +.5 - +.4 - 0 Venezuela (+.8) (+.2) (+.4) ( - ) (+.2) (-) (-) (0) (0) (+ .1) (-) (-) ( 0 ) (0) Bahamas ( 0 ) ( -- - ) (-) (- - ) (-) (+1.0) (-.1) (+.1) (+1.0) ( - ) (0) (0) (0) (0) Asia +3.4 +.1 +.1 +3.5 -.3 - .1 - - - .1 +.2 +.1 - +.1 -.1 Japan (+2.3) (-) (0) (+2.8) (-.4) (- .3) (-.1) (0) (- .2) ( - ) (+.1) (0) (0) (0) Africa +.9 +.1 - +.7 0 +.1 +.1 0 0 - - 0 0 n Other Countries - .1 0 -.1 - - - - 0 0 0 0 0 0 Int'l Orgs. - .7 - - - .3 -.4 - - - - - - - I - 1/ Includes CD's. X = Less than $50 million. Detail may not add to totals because of rounding. R. GERALD FORD LIBRARY Table 4 Claims on Foreigners Reported by U.S. Banks (Treasury B-2 & B-3 Reports), 12/73 and 5/74 ($ billions) December 1973 Loans Total Offic. Banks Other Total Collect. Accept. Other For. B-3 B-2 & Total Curr. Total B-3 Total , 20.7 .3 4.6 2.9 7.7 4.3 4.2 3.9 .7 5.9 26.6 Europe 4.0 .1 1.4 .4 1.8 .5 .2 1.2 .3 1.2 5.2 (U.K.) (1.5) (x) ( .5) (.1) (.6) ( .1) ( .1) ( .6) (.1) (.1) (1.6) Canada 2.0 X .2 .6 .8 X .1 .8 .3 .5 2.5 Latin America 5.9 .1 1.8 1.6 3.4 .7 .9 .8 .1 2.1 8.0 Venezuela ( .5) x ( .1) (.3) (.4) ( .1) X X X (.3) ( .8) Bahamas ( .9) - ( .2) (.1) (.2) X X ( .6) X (x) ( .9) Asia 8.2 .1 1.1 .2 1.5 3.0 2.7 1.1 X 1.5 9.7 Japan (6.4) X ( .7) (x) (.7) (2.6) (2.2) ( .9) X (.2) (6.6) Africa .4 X .1 .1 .2 .1 .1 X X .4 .8 Other Countries .3 X X X .1 .1 .1 X X .2 .5 May 1974 Total 29.6 .4 6.6 3.2 10.2 5.1 6.5 7.0 .9 6.7 36. Europe 5.6 .1 2.0 .4 2.6 .5 .3 1.8 .4 1.7 7.3 (U.K.) (2.2) X ( .6) (.1) (.7) ( .1) ( .1) (1.2) (.1) (.2) (2.4) Canada 2.4 X .2 .4 .6 X .1 1.3 .3 .5 2.9 Latin America 8.3 .1 2.5 1.8 4.5 .7. 1.1 1.8 .1 2.4 10.7 Venezuela ( .6) X ( .1) (.3) (.4) ( .1) X X X (.3) ( .9) Bahamas (1.9) X ( .3) (.1) (.4) X x (1.5) X ( x) (1.9) Asia 12.4 .1 1.6 .4 2.2 3.5 4.6 1.9 .1 1.6 14.0 Japan (9.7) X (1.0) (.2) (1.3) (3.1) (3.7) (1.7) (.1) (.2) (9.9) Africa .6 X .1 .1 .3 .1 .1 X X .3 .9 Other Countries .4 X .1 X .1 .1 .2 X X .2 .6 FORD Detail may not add to totals because of rounding. GERALD LIBRARY X = Less than $50 million. Table 5 Change in Claims on Foreigners Reported by U.S. Banks (Treasury B-2 & B-3 Reports), 12/73 -- 5/74 ($ billions) Loans Total Offic. Banks Other Total Collect Accept. Other For. B-3 B-2 & Total Curr. Total B-3 Total +8.9 +.1 +2.0 +.3 +2.5 +.8 +2.3 +3.1 +.2 +.8 +9.6 Europe +1.6 - +.6 - +.8 - +.1 +.6 +.1 +.5 +2.1 (U.K.) (+.7) (0) (+.1) (-) (+.1) (-) (-) (+.6) (-) (+.1) (+.8) Canada +.4 0 - -.2 - .2 0 - +.5 - - +.4 Latin America +2.4 - +.7 +.2 +1.1 - +.2 +1.0 - +.3 +2.7 - Venezuela (+.1) (0) (- - ) (-) ( - ) (-) (0) ( 0 ) (0) ( - ) (+.1) Bahamas (+1.0) (0) (+ .1) (-) (+ .2) (0) (0) (+.9) (0) (0) (+1.0) Asia +4.2 - +.5 +.2 +.7 +.5 +1.9 +.8 +.1 +.1 +4.3 Japan (+3.3) (0) (+.3) (+.2) (+ .6) (+.5) (+1.5) (+.8) (+.1) (-) (+3.3) Africa +.2 0 - - +.1 - - 0 0 -.1 + Other Countries +.1 0 +.1 0 - - +.1 0 0 - +.1 X = Less than $50 million. Detail may not add to totals because of rounding. is GERALD FORD LIBERTY Table 6 CONFIDENTIAL (FR) U.S. Banks' Positions Vis-a-Vis Banks Abroad - 12/73 and 5/74 ($ billions) December 1973 Change in Due to Foreign Banks Due from Foreign Banks Net Net Position Total Deposits Other Total Loans Accept. Other Position 12/73 - 5/74 Total , 17.2 7.4 9.7 12.7 4.6 4.2 3.9 -4.5 Europe 7.7 3.9 3.7 2.8 1.4 .2 1.2 -4.9 (U.K.) (2.6) ( .8) (1.8) (1.2) ( .5) ( .1) ( .6) (-1.4) Canada 2.3 .4 1.9 1.1 .2 .1 .8 -1.2 Latin America 2.0 1.1 .9 3.5 1.8 .9 .8 +1.5 DEPARTMENT 3) Venezuela ( .1) ( .1) (0) ( .1) ( .1) ( 0 ) ( 0 ) ( 0 ) Bahamas ( .7) ( .2) ( .5) ( .8) ( .2) (0) ( .6) (+ .1) Asia 4.6 1.5 3.1 4.9 1.1 2.7 1.1 + .3 Japan (3.2) ( .7) (2.5) (3.8) ( .7) (2.2) ( .9) (+ .6) Africa .3 .3 0 .2 .1 .1 0 - .1 Other Countries .2 .2 0 .1 0 .1 0 - .1 May 1974 Total 23.7 7.9 15.8 20.1 6.6 6.5 7.0 -3.6 +.9 Europe 12.8 4.2 8.5 4.1 2.0 .3 1.8 -8.7 -3.8 (U.K.) (5.4) ( .6) (4.7) (1.9) ( .6) ( .1) (1.2) (-3.5) (-2.1) Canada 2.4 .4 2.0 1.6 .2 .1 1.3 - .8 + .4 Latin America 3.4 1.2 2.2 5.5 2.5 1.1 1.8 +2.1 + .6 Venezuela ( .1) ( .1) ( 0 ) ( .1) ( .1) (0) (0) - - Bahamas (1.7) ( .2) (1.5) (1.8) ( .3) (0) (1.5) (+ .1) - Asia 4.5 1.5 3.0 8.2 1.6 4.6 1.9 +3.7 +3.4 Japan (2.9) ( .6) (2.3) (6.4) (1.0) (3.7) (1.7) (+3.5) (+2.9) Africa .4 .4 0 .3 .1 .1 .1 - .1 0 Other Countries .2 .2 0 .3 .1 .2 0 +.1 +.2 1/ "Other" includes, among other things, accounts between U.S. banks and their foreign branches or head offices. X = Less than $50 million. Detail may not add to totals because of rounding. BOARD OF GOVERNORS OF THE FEDERAL BOARD RESERVE SYSTEM OF GOVERNORS Office Correspondence OF THE DERAL RESERVE SYSTEM Date August 22, 1974 Records Section To 1974 AUG 27 Subject: Changes in Overseas Branches of AND United States Banks and Foreign From Frederick R. Dahl OFFICE OF RECEIVED THE CHAIRMAN Banking Corporations during quarter ended June 30, 1974 Overseas Branches Opened Chemical Bank, New York Singapore 4-22-74 The First National Bank of Boston, Boston Frankfurt, Germany 5-14-74 Tokyo, Japan 6-3-74 The First National Bank of Chicago, Chicago Bridgetown, Barbados 6-19-74 Newcastle-Upon-Tyne, England 6-10-74 Nairobi, Kenya 6-3-74 Dubai, United Arab Emirates 4-15-74 The First National Bank of Denver, Denver Georgetown, Grand Cayman, Cayman Islands, W.I. 6-12-74 First National City Bank, New York Cartagena, Colombia 5-28-74 Amman, Jordan 6-1-74 Port Louis, Mauritius 6-3-74 Manufacturers Hanover Trust Company, New York Bucharest, Romania 5-27-74 Mellon Bank, N.A., Pittsburgh Tokyo, Japan 4-15-74 Seattle-First National Bank, Seattle London, England 4-16-74 United Virginia Bank, Richmond Georgetown, Grand Cayman, Cayman Islands, W.I. 5-1-74 Worcester County National Bank, Worcester Georgetown, Grand Cayman, Cayman Islands, W.I. 4-22-74 Overseas Branches Closed The Chase Manhattan Bank, National Association, New York Castries, St. Lucia 4-9-74 First National City Bank, New York Bahia Blanca, Argentina 4-30-74 M & I Marshall & Ilsley Bank, Milwaukee Nassau, Bahamas 6-30-74 Wells Fargo Bank, National Association, San Francisco Frankfurt, Germany 5-31-74 FORD & LIBRARY GLRALD -2- As of June 30, 1974, overseas branches of member banks and foreign banking Corporations totaled 736 as follows: State Member Banks American Security and Trust Company, Washington, D.C. 1 The Bank of New Orleans and Trust Company, New Orleans 1 The Bank of New York, New York 2 Bankers Trust Company, New York 6 Chemical Bank, New York 10 The Cleveland Trust Company, Cleveland 1 Commerce Union Bank, Nashville 1 The Connecticut Bank and Trust Company, Hartford 1 The Detroit Bank & Trust Company, Detroit 1 The Fidelity Bank, Rosemont, Pennsylvania 2 Fidelity Union Trust Company, Newark 1 First Pennsylvania Banking and Trust Company, Bala-Cynwyd 3 First Virginia Bank, Falls Church 1 Girard Trust Bank, Bala-Cynwyd, Pennsylvania 1 Harris Trust and Savings Bank, Chicago 2 Irving Trust Company, New York 5 Manufacturers Hanover Trust Company, New York 7 Marine Midland Bank-New York, New York 5 Marine Midland Bank-Western, Buffalo 1 Morgan Guaranty Trust Company of New York, New York 12 The Northern Trust Company, Chicago 2 Old Kent Bank and Trust Company, Grand Rapids 1 Peoples Trust of New Jersey, Hackensack 1 Southern Arizona Bank and Trust Company, Tucson 1 State Street Bank and Trust Company, Boston 1 Trust Company of Georgia, Atlanta 1 Union Bank, Los Angeles 1 The Union Commerce Bank, Cleveland 1 United California Bank, Los Angeles 3 United Virginia Bank, Richmond 2 78 National Banks American Fletcher National Bank and Trust Company, Indianapolis 2 American National Bank and Trust Company of Chicago, Chicago 2 American National Bank and Trust Company of New Jersey, Montclair 1 Bank of America National Trust and Savings Association, San Francisco 104 GERALD FORD -3- The Bank of California National Association, San Francisco 2 Bank of the Southwest National Association, Houston 1 Capital National Bank, Houston 1 Central National Bank in Chicago, Chicago 1 Central National Bank of Cleveland, Cleveland 1 Central Penn National Bank, Philadelphia 1 The Chase Manhattan Bank, National Association, New York 103 The Citizens and Southern National Bank, Savannah 1 City National Bank of Detroit, Detroit 1 Continental Illinois National Bank and Trust Company of Chicago, Chicago 15 Crocker National Bank, San Francisco 2 Equibank N.A., Pittsburgh 2 Exchange National Bank of Chicago, Chicago 3 The Fidelity National Bank, Lynchburg, Virginia 1 First and Merchants National Bank, Richmond 1 First American National Bank, Nashville 1 First City National Bank of Houston, Houston 2 The First National Bank and Trust Company of Tulsa, Tulsa 1 First National Bank in Dallas, Dallas 3 First National Bank in St. Louis, St. Louis 1 First National Bank of Arizona, Phoenix 1 First National Bank of Atlanta, Atlanta 1 The First National Bank of Birmingham, Birmingham 1 The First National Bank of Boston, Boston 31 The First National Bank of Chicago, Chicago 21 First National Bank of Commerce, New Orleans 1 The First National Bank of Denver, Denver 1 First National Bank of Fort Worth, Fort Worth 1 First National Bank of Louisville, Louisville 1 First National Bank of Maryland, Baltimore 1 First National Bank of Memphis, Memphis 1 The First National Bank of Miami, Miami 1 First National Bank of Minneapolis, Minneapolis 1 First National Bank of Oregon, Portland 1 The First National Bank of Saint Paul, St. Paul 1 First National City Bank, New York 247 The First New Haven National Bank, New Haven 1 First National State Bank of New Jersey, Newark 1 First Union National Bank of North Carolina, Charlotte 1 First Wisconsin National Bank of Milwaukee, Milwaukee 1 The Fort Worth National Bank, Fort Worth 1 Franklin National Bank, Brooklyn, New York 2 R. FORD GERALD LIBRARY -4- Hartford National Bank and Trust Company, Hartford 1 Hibernia National Bank, New Orleans 1 Houston National Bank, Houston 1 The Huntington National Bank, Columbus 1 The Indiana National Bank of Indianapolis, Indianapolis 2 Industrial National Bank, Providence 1 LaSalle National Bank, Chicago 1 The Liberty National Bank and Trust Company, Oklahoma City 1 Manufacturers National Bank of Detroit, Detroit 1 Marine National Exchange Bank, Milwaukee 1 Maryland National Bank, Baltimore 1 Mellon Bank, N.A., Pittsburgh 3 Mercantile Trust Company National Association, St. Louis 1 Merchants National Bank and Trust Company of Indianapolis, Indianapolis 1 Midlantic National Bank, Newark 1 National Bank of Commerce, Memphis 1 The National Bank of Commerce of Seattle, Seattle 2 National Bank of Detroit, Detroit 3 National Bank of North America, New York 1 National Central Bank, Lancaster, Pennsylvania 1 The National City Bank of Cleveland, Cleveland 1 National City Bank of Minneapolis, Minneapolis 1 The National Shawmut Bank of Boston, Boston 1 New England Merchants National Bank, Boston 1 New Jersey Bank National Association, Clifton 1 North Carolina National Bank, Charlotte 2 Northwestern National Bank of Minneapolis, Minneapolis 2 The Omaha National Bank, Omaha 1 The Philadelphia National Bank, Philadelphia 2 Pittsburgh National Bank, Pittsburgh 1 Provident National Bank, Bryn-Mawr, Pennsylvania 1 Republic National Bank of Dallas, Dallas 2 Republic National Bank of New York, New York 1 The Riggs National Bank of Washington, D.C. 1 Seattle-First National Bank, Seattle 2 Security Pacific National Bank, Los Angeles 4 Society National Bank of Cleveland, Cleveland 1 Sterling National Bank & Trust Company, New York 1 Texas Commerce Bank National Association, Houston 2 Third National Bank in Nashville, Nashville 1 BERALD FORD -5- Union Planters National Bank of Memphis, Memphis 1 United Bank of Denver, National Association, Denver 1 United States National Bank of Oregon, Portland 1 United Virginia Bank/Seaboard National, Norfolk 1 Valley National Bank of Arizona, Phoenix 1 Virgin Islands National Bank, Charlotte Amalie, St. Thomas 4 Virginia National Bank, Norfolk 1 Wachovia Bank and Trust Company, National Association, Winston-Salem 1 Wells Fargo Bank, National Association, San Francisco 3 The Whitney National Bank of New Orleans, New Orleans 1 Winters National Bank and Trust Company of Dayton, Dayton 1 Worcester County National Bank, Worcester 1 644 722 Section 25 (a) Corporations Allied Bank International, New York 2 Bank of America, New York 1 Bank of Boston International, New York 1 Detroit Bank and Trust International, Detroit 1 First National City Overseas Investment Corporation, New York 1 International Bank of Commerce, Seattle 5 International Bank of Detroit, Detroit 1 Philadelphia International Investment Corporation, Philadelphia 1 State Street Bank Boston International, New York 1 14 736 is FORD GERALD LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date October 23, 1974 To Board of Governors Subject: Board policy on bank expansion: Applications to expand into the Middle From Divisions of Banking Supervision and East and/or OPEC countries. M6M Regulation and International Finance (Messrs. Martinson, Dahl and Gemmill) Issues The Board is currently following a policy of denying applications which involve "significant" expansionary projects by banks whose condition is viewed as less than satisfactory. Most of the large U.S. banks engaged in international banking fall into that category. Several of these are now seeking to enter the Middle East, a financially important area which has heretofore been largely neglected by U.S. banks. The issue before the Board is whether there are special public benefits, beyond those generally present in foreign investments, which warrant making an exception to the Board's policy on expansion for applications involving ventures in the Middle East and/or OPEC countries. Accompanying this memorandum are applications from major U.S banks involving Iran, Kuwait, Bahrain, Egypt, and Nigeria. As can be seen, these applications involve oil producing countries and non-oil producing of the Middle East as well as one non-Middle East oil producing country. Because of the differences among the applications, not all of the policy arguments set forth in this memorandum may apply to each application. The discussion in this memorandum refers to the Middle East as a whole and not just to the oil producing countries. This is done for two reasons. First, the "oil problem" is usually discussed in terms of the region as a whole because of political, cultural, and linguistic ties between the various countries. Second, probably the most important applications to other government agencies involve Egypt, a non-oil producing but politically important country in the region. The Nigerian application is included in the batch currently before the Board because, while it is not in the Middle East, it is a major oil producer and many of the policy arguments in the memo would apply to it. Also, this application helps to illustrate some of the problems involved in trying to distinguish between applications on the basis of the country involved. DECLASSIFIED FORD is GERALD LIBRARY AUTHORITY Ful. Syste the 11/16/82 State guiddings BY taln NARA, DATE 9/11/09 -2- Background The presence of U.S. banks in the Middle East is currently limited except in Lebanon where many large U.S. banks operate branches or subsidiary banks. The only Middle East oil countries in which U.S. banks are well represented are the United Arab Emirates, where four banks have branches or joint venture banks. The other U.S. banking operations in the area are two branches of First National City Bank (FNCB) in Saudi Arabia, an FNCB branch in Jordan, branches of FNCB and Chase Manhattan in Bahrain, and joint venture banks by FNCB and Continental Illinois in Iran. The recent massive flow of oil money to Middle East countries is now prompting major U.S. banks to seek to increase their presence in the area. The primary goals of the banks entering the area appear to be: (1) to share in the financing which will be involved in many of the internal development projects contemplated by countries in the region; (2) to obtain better ac- cess to deposits of the oil producing countries; and (3) to sell their inter- national investment advisory and trust services to these countries. Banks hope that having operating facilities "on the spot" will better enable them to accomplish these goals. Possible special public benefits associated with Middle East investments The prinicpal economic argument that might be advanced in support of giving special consideration to ventures by U.S. banks in the Middle East is the possible assistance of such ventures in providing suitable investment outlets for revenues of oil producing countries. That argument has two strands. First, the ventures may facilitate increased local utilization of funds within the region, thereby increasing imports and reducing the Middle East's balance of payments surplus with the rest of the world. Second, operations of U.S. banks in the Middle East might aid in providing financing to oil consuming countries. On balance though, the staff finds neither of these arguments sufficiently persuasive to justify making an exception on economic grounds to the Board's general policy on expansion. The Board will, of course, wish to ascertain whether there are special political considerations to be taken into account in connection with these applications. Increased local utilization of funds The Middle East has long been neglected by major international financial institutions and because of its generally underdeveloped character, efficient local financial institutions have not developed. Bankers and others argue that the lack of such locally-based institutions severely limits the ability of the region to utilize its petroleum revenues for internal projects. It is possible that U.S. banks, by establishing new facilities in the area, would help fill this void. Indeed, one of the apparent reasons for the recent invitation by the Egyptians to the U.S. banks to establish offices FORD i LIBRARY GERALD -3- in that country is the belief that those banks will be able to assist in the financing of the development projects Egypt is planning, and that their expertise will help Egypt attract "petrodollars" for these projects from other Arab countries. The latter have indicated an interest in placing money in Egypt but have reportedly been reluctant to do so on a large scale because of the inefficiency of Egyptian institutions. Many of the other proposed ventures before the Board are also to some extent aimed at providing local financing for internal capital projects. Some of the applications before the Board involve joint ventures with local institutions (in some cases government entities). It is argued that these ventures can play an especially significant role in helping to solve the "utilization problem". This is because there are benefits resulting from these ventures in addition to those accruing from their financing activities. The joint ventures involve the local partner (usually a major institution) in a close working relationship with an international bank with the expertise which is often lacking in the local environment. This can increase the speed with which local institutions are able to accept and adopt modern financial practices. Another favorable aspect of some of these ventures is that they inject some Middle East money in the form of capital into the international banking system. While operations of U.S. banks may in fact provide some of these benefits, their effect is likely to be marginal and then of a long-term character. The real limiting factor in the utilization of oil revenues within the Middle East is the non-modern character of the economic, social and political structures of the region. These structures are not likely to change appreciably in the near term. Even in Egypt, with its large population, the economic and political structure makes it unlikely that the country will be able to attract or utilize petrodollars in amounts large enough to make any appreciable impact on the "recycling" problem. Facilitating lending to oil consuming countries The establishment of facilities by U.S. banks in the Middle East is unlikely to have any significant impact on the provision of loans to oil consuming countries. To the extent that banks participate in the reallocation process, this function can be carried out adequately through facilities which U.S. and other international banks have already established in the major money centers. In fact, it appears that the proposed Middle East ventures seem to be designed primarily as local or regional lending institutions and not as international financial entities. GERALD LIBRARY -4- Effect on allocation of "petrodollar" deposits among U.S. banks It is possible that the proposed Middle East ventures may help individual U.S. banks broaden their access to petrodollar funds, thereby adding to deposit stability. In particular, this seems to be the motivation of Continental Illinois National Bank and Trust Company (CINB) in its proposed joint venture in Bahrain. CINB believes that this joint venture will help it obtain deposits from Gulf states from which it is not currently receiving deposits. However, so far the record of joint ventures in achieving this goal is not impressive. For example, officers of CINB have stated that even though their bank has been a partner in a joint venture bank in Iran for about a year, CINB is not getting any of Iran's petrodollars. Similarly, a senior officer of Morgan Guaranty has indicated that he does not believe that Morgan's participation in a Lebanese joint venture bank with a Kuwaiti government agency has given Morgan any special benefits in dealing with Kuwait (Morgan though is apparently getting substantial Kuwaiti funds for other reasons). It should also be noted that to the extent these ventures do give particular U.S. banks more favorable access to petrodollar funds, the benefits will probably go primarily to those few banks which are already receiving the "lion's share" of these funds. Most of the applications currently before the Board involve the "giant" banks, and it seems likely that these banks are precisely the ones which the Arabs will allow to enter future ventures in the area. Problems associated with the Board distinguishing among countries The primary difficulty with making an exception for the Middle East cases is the problem of differentiating among applications on the basis of the country involved. One aspect of the problem concerns how to make any distinction on this basis in such a manner that the Board's overall policy on expansion is not seriously compromised. Another concerns potential political problems for the Board associated with, in effect, saying that investments by "overextended" U.S. banks in some countries are in the public interest while similar ventures in other countries (or in the United States) are not. A third aspect of this problem is the effect any Board action on these cases will have on the nation's overall foreign policy goals. The Board has taken the position that banks with "insufficient" capital should not be permitted to undertake new significant expansionary projects at this time. Therefore, any exception would have to be based on a finding that there were special public benefits associated with a particular application (assuming it was not "insignificant"), that outweighed the Board's concerns over the financial condition of the bank involved. The applications currently before the GERALD FORD (IBRART & FORD GERALD -5- Board illustrate some of the difficulties of making such exceptions on the basis of the country involved. For example, the Board could rule that there is a special benefit associated with permitting U.S. banks to go into major oil producing countries, since it would contribute to solving the "recycling" problem. However, a ruling on that basis would presumably exclude the Egyptian applications and could include countries like Canada, Venezuela, etc. Alternatively, if the Board based its decision on the grounds that because U.S. banks are not well represented in the Middle East, there is a special public benefit (e.g., the promotion of U.S. foreign commerce with the area) in allowing current entry, what about other areas where U.S. banks are not well represented? Also, how would the Board determine when an area had adequate representation? Could the Board make an exception to allow some "undercapitalized" U.S. banks into a country and then at a future date bar entry to other banks in similar financial condition on the basis that U.S. representation was now adequate? In general, it seems possible to find some special circumstances associated with virtually any foreign application which could be used to justify an exception to the Board's expansion policy. Thus, by making an exception in the Middle East cases, a risk would be run that one exception will lead to another and to a consequent deterioration of the rule itself. Distinguishing among applications on the basis of the country involved could also create certain political problems for the Board. Such distinctions would in effect result in the Board indicating publicly that it viewed some countries as more important (or more deserving of U.S. investment funds) than others. Already, the staff has had inquiries from the Philipping Embassy about whether the Board was discriminating against the Philippines because of the denial of a Bankers Trust application to invest there. Approval of investments in some countries but not others would undoubtedly lead to more inquiries of this nature. Also, to approve new foreign ventures, while at the same time denying applications for domestic expansion, could lead to criticism that the Board was permitting U.S. banks to use their scarce capital resources to finance foreign ventures (particularly those involving rich Arab countries), but not allowing them to provide additional financial services to U.S. consumers. These possible political consequences for the Board are intertwined with the U.S. Government's foreign policy considerations. As is well known, the Egyptian ventures were promoted and announced during Secretary Simon's trip to Cairo. Discussion has been held with State and Treasury Departments about their attitudes toward these investments. These discussions have included conversations by Governor Wallich with Assistant Secretary's Enders and Parsky, as well as conversations on the staff level. From these conversations it appears that the greatest interest is in the Egyptian applications and that much less importance from a foreign policy view is attached to investments in other Middle East countries. A formal response from Treasury (see attached) mentions only the Egyptian applications. Formal views of State have been requested and will be circulated to the Board. The Office of the Comptroller of the Currency has encountered similar reactions because of its classification of certain assets on the basis of country risk. - -6- Recommendations and Conclusions The staff believes that based on economic and banking considerations, no exceptions to the Board's policy on expansion should be made for applications involving Middle East countries. While the establishment of facilities by U.S. banks in these countries may help the area utilize more of its funds internally (and presumably reduce its balance of payments surplus by stimulating imports), the effect is likely to be marginal and any public benefits appear to be outweighed by the disadvantages associated with differentiating among applications on a country or regional basis. However, as discussed above, there are foreign policy considerations involved in some of these applications. In particular, the Board may wish to give special treatment to the Egyptian applications based on State and Treasury's strong interest in those proposals. Attachment - Letter from Department of the Treasury dated October 23, 1974. FORD & LIBRARY GERALD OF THE THE 1789 TREASURY DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220 ASSISTANT SECRETARY OCT 23 1972 Dear Mr. Dahl: Representatives of my office have discussed with you applications now before the Federal Reserve by Chase Manhattan Bank and Manufacturers Hanover Trust Company for authorization to establish certain banking operations in Egypt. I would like to set forth the reasons for our support of these applic- ations. As you are aware the Egyptian Government has made a major commitment to undertake significant and greatly needed liberalization of Egypt's economy, and to spur the development of both domestic and foreign investment as a means of providing a compet- itive influence presently lacking in Egypt's economic and financial system. During his visit to Egypt in July, Secretary Simon warmly endorsed this policy, including Egypt's willingness to permit foreign banking institutions to operate in Egypt. While the Secretary was in Cairo, the Egyptian Government demonstrated its good faith and announced approval of the applications of four foreign banks to establish operations in that country. Several weeks ago Egyptian Minister Taher Amin asked the Secretary for assistance in facili- tating U.S. approval of the present applications so that these new activities can commence. We believe that the presence of U.S. banks in Egypt will be a first, but nonetheless significant step in introducing into the financial structure of Egypt institutions that will aid in more efficient SERALD R. FORD - 2 - allocation of resources through a more market-oriented mechanism. As such it will assist in the process of stimulating the economic development of Egypt, and will not only supplement other efforts by the U.S. Government to aid this process, but will help estab- lish the conditions of self-sustaining development, bringing nearer the day when broad official aid is no longer required. For these reasons, we feel that Board approval of the applications now before the Federal Reserve is extremely important in furtherance of our political and economic objectives in Egypt and that denial of, or undue delay in acting upon, these applications will be not only a source of embarrassment to the U.S. Government, but counterproductive to our other efforts in that country. I hope that the Board will take these consider- ations into account in deciding upon the applications of the two banks with respect to Egypt and that it will be able to act upon them affirmatively. Sincerely yours, Gerald J. Passby Gerald L. Parsky Mr. Fred Dahl Assistant Director Division of Banking Supervision and Regulation Board of Governors of the Federal Reserve System Washington, D.C. 20551 BERALD FORD LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date October 30, 1974 To Chairman Burns Subject: Expansion of American Banks From Brenton C. Leavitt Into OPEC Countries and Egypt BEL For Use When Talking to Secretary Kissinger The expansion of large U.S. banks into oil producing countries and Egypt raises several issues possibly involving even the national wellbeing. Applications currently before the Board in this area are: 1. Chase Manhattan asks permission to acquire up to 40 per cent of Iran Chase International Bank (a commercial bank) for $10.5 million. The other partner in this joint venture is Bank Saderat, the largest privately owned bank in Iran with total assets of $1.2 billion. The total assets of the proposed bank in the near term are planned at $400-$500 million. 2. Chase Manhattan also seeks permission to acquire 49 per cent of a de novo commercial bank in Egypt at a cost of $13.4 million. The remaining 51 per cent will be held by the National Bank of Egypt which is one of four government-owned banks. This bank held total deposits of $2 billion as of December 31, 1972. Total assets at the new bank are expected to reach $500 million in a few years. 3. Chase also wishes to acquire all the shares of a new mer- chant bank in Lagos, Nigeria, at a cost of about $3.3 million. Chase would also expect to lend $10 million to the new bank to provide funds. 4. First National City Bank seeks permission to acquire up to 40 per cent of the shares of Liberal Bank, Beriut, Lebanon, for $4.3 million. This application involves a joint venture with prominent Kuwaiti organizations and individuals. The bank is expected to have $200 million in total assets in 4 or 5 years. 5. Continental International Financial Corp., an edge subsi- diary of Continental Illinois Bank, seeks permission to acquire 50 per cent of a new bank to be chartered in the Caymen Islands at a cost of $2.6 million. At this time, the Caymen Island bank's only office will be in Bahrain. The remaining 50 per cent will be acquired by two prominent Bahrainians for $13 thousand. One of these is the Prime Minister and brother of the ruler. 6. Manufacturer Hanover seeks permission to establish a branch in Egypt. The total of local deposits are estimated at $7 million in a few years. FORD & LIBRARY 9FRA70 October 30, 1974 Chairman Burns Expension of American Bonks Brenton C. Leavitt Into OFFC Countries and Egypt For Use When Talking to Secretary Kissinger The expansion of large U.S. banks into oil producing countries and Egypt raises several issues possibly involving even the national wellbeing. Applications currently before the Board in this area are: FORD 1. Chase Manhattan asks permission to acquire up to 40 per cent of Iran Chase International Bank (a commercial bank) for $10.5 million. The other partner in this joint venture is Bank Saderat, the GERALD LIBRARY largest privately owned bank in Iran with total assets of $1.2 billion. The total assets of the proposed bank in the near term areplanned at $400-$500 million. 2. Chase Manhatten also seeks permission to sequire 49 per cent of de novo commercial bank in Egypt at 8 cost of $13.4 million. The remaining 51 per cent will be held by the National Bank of Egypt which is one of four government-owned banks. This bank held total deposits of $2 billion as of December 31, 1972. Total assets at the new bank are expected to reach $500 million in a few years. 3. Chase also wishes to acquire all the shares of a new mer- chent bonk in Lagos, Nigeris, at a cost of about $3.3 million. Chase would also expect to lend $10 million to the new bank to provide funds. 4. First National City Bank seeks permission to acquire up to 40 per cent of the shares of Liberal Bank, Beriut, Lebanon, for $4.3 million. This application involves a joint venture with prominent Kuwaiti organizations and individuals. The bank is expected to have $200 million in total assets in 4 or 5 years. 5. Continental International Financial Corp., an edge subsi- diary of Continental Illinois Bank, seeks permission to scquire 50 per cent of a new bank to be chartered in the Caymen Islands st a cost of $2.6 million. At this time, the Caymen Island bank's only office will be in Bahrain. The remaining 50 per cent will be acquired by two prominent Bahrainions for $13 thousand. One of these is the Prime Minister and brother of the ruler. 6. Manufacturer Henover seeks permission to establish a branch in Egypt. The total of local deposits are estimated at $7 million in a few years. OVERNMENT PRINTING OFFICE: 1971-421-746 D3423 DEPARTMENT OF STATE Classification UNITED STATES OF ? Department of State INDICATE: TELEGRAM COLLECT CHARGE TO DISTRIBUTION ACTION: November 21, 1974 Ambassador Eilts Cairo, Egypt Your recent telegram stresses the desirability of prompt approval of pending applications by American banks to expand into Egypt. When I received your telegram, there were two such applications pending before the Board of Governors. One was a request by Chase Manhattan Bank to acquire a 49 per cent interest in a de novo bank in Egypt, and the other was a request by Manufacturers Hanover Trust Company to establish a branch in Cairo. The Board, after consid- eration of statutory criteria, promptly approved these applications and each bank was notified on November 15 of the Board's decision. The Board somewhat earlier had given First National Bank of Chicago permission to engage in banking activities in Egypt by joint venturing with Banco di Roma and Banc Misr of Egypt. I am informed that First National City Bank of New York and Bank of America plan to engage in some form of banking activity in Egypt. Neither of these banks has filed an application with the Federal Reserve System, but I can assure you that the System will act promptly when such applications are received. Gather 2. Buns Arthur F. Burns, Chairman Federal Reserve Board cm DRAFTED BY: N.B. DRAFTING DATE TEL. EXT. APPROVED BY: CLEARANCES: FORD LIBRARY BCL:slc or STATE ChmBurns * : STATE AMERICA Department of State TELEGRAM LIMITED OFFICIAL USE PAGE 01 CAIRO 09484 231125Z ACTION.COPY 13 ACTION FRB-01 File INFO OCT-01 NEA-06 ISO-00 EB-07 SS-15 RSC-01 /031 W 086101 R 231051Z NOV 74 FM AMEMBASSY CAIRO TO SECSTATE WASHDC 414 * LIMITED OFFICIAL USE CAIRO 9484' E.O. 11652: N/A TAGS: EGEN EG SUBJECT: MESSAGE TO FEDERAL RESERVE BOARD CHARMAN ARTHUR F. BURNS REF STATE 258858 PLEASE PASS FOLLOWING FROM AMBASSADOR TO CHAIRMAIN ARTHUR F. BURNS OF FEDERAL RESERVE BOARD: QUOTE THANK YOU FOR YOUR THOUGHTFUL LETTER. I GREATLY APPRECIATE THE BOARD'S ACTION IN APPROVING THE APPLICATIONS OF THE SEVERAL AMERICAN BANKS DESIROUS OF OPERATING IN EGYPT AND YOUR PERSONAL INTEREST IN THIS MATTER. THIS ACTION IS A SIGNIFICANT CUNTRIBUTION TO THE FURTHERANCE OF us POLICY TOWARD EGYPT AND COMES AT A PARTICULARLY TIMELY MOMENT. PLEASE CONVEY MY DEEP APPRECIATION TO THE OTHER MEMBERS OF THE FEDERAL RESERVE BOARD. HERMANN FREDERICK EILTS, AMERICAN AMGASSADOR, CAIRO. UNQUOTE. EILTS FORD is LIBRARY GERALD LIMITED OFFICIAL USE FORM DS-1652 BOARD OF GOVERNORS alan OF THE FEDERAL RESERVE SYSTEM 1975 SEP -9 AM 10: 42 RECEIVED TO: Chairman Burns OFFICE OF THE CHAIRM DATE: September 8, 1975 SUBJECT: Two Investments In FROM: Brenton B.C.R. C. Leavitt the Financial Institutions in Oil Producing Countries by U.S. Banks The Board recently reviewed an application of Chase Manhattan's Edge Corporation to invest in a Saudi Arabian bank. You stated that you wished to obtain views of Secretary Kissinger about this investment by an American bank in an oil producing country. Since that time, we have been informed that the Federal Reserve Bank of San Francisco has received an application from a subsidiary of Bank of America to make an investment in Kuwait. The purpose of your inquiry to Secretary Kissinger is to determine from him his views of the National interest involved and if denial of either one or both applications would adversely effect the National interest. I suggest that you might wish to ask Mr. Kissinger about both proposals at the same time. The essential facts of the two applications are: 1. Chase Manhattan wants to acquire 20% (cost of $1,700,000) of a commercial bank to be established in Jeddah, Saudi Arabia. There will be various other partners none of whom will own more than 10%. Chase would appoint the General Manager, two of ten Directors and Technical Assistants. 2. The Edge subsidiary of Bank of America wishes to acquire 40% (cost of $1, 800, 000) of a finance company to be formed in Kuwait. The bank would have two Kuwait partners and will appoint 40% of Directors and all principle operating officers. First National City Bank in New York has two branches in Saudi Arabia; no other U.S. bank has banking facilities in either Saudi Arabia or Kuwait. FORD j LIBRARY GERALD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Date 6-14-16 To: Mr. Chairman From: KEN GUENTHER () Per Conversation () For comments and suggestions () For your information () Phone me re attached Renss' latent press release aimed at Dr FORD is LIBRARY 9ERALD Comptrolly K () Over HENRY REUSS. WIS., CHAIRMAN ALBERT W. JOHNSON. PA. WRIGHT PATMAN TEX. J. WILLIAM STANTON, OHIO WILLIAM A. BARRETT. PA. GARRY BROWN. MICH. LEONOR K. (MRS. JOHN B) SULLIVAN, MO. CHALMERS P. WYLIE, OHIO THOMAS L. ASHI EY. OHIO JOHN H. ROUSSELOT. CALIF. WILLIAM S. MOORHEAD, PA. U.S. HOUSE OF REPRESENTATIVES STEWART B. MCKINNEY, CONN. ROBERTO. STEPHENS. JR., GA. JOHN B. CONLAN. ARIZ. PERNAND J. ST GERMAIN, R.I. GEORGE V. HANSEN, IDAHO HENRY B. GONZALEZ, TEX. COMMITTEE ON BANKING, CURRENCY AND HOUSING RICHARD T. SCHULZE, PA. JOSEPH G. MINISH, N.J. WILLIS D. GRADISON, JR., OHIO FRANK ANNUNZIO, ILL. NINETY-FOURTH CONGRESS HENRY J. HYDE. ILL. THOMAS M. REES. CALIF. RICHARD KELLY, FLA. JAMES M. HANLEY. N.Y. 2129 RAYBURN HOUSE OFFICE BUILDING CHARLES E. GRASSLEY, IOWA PARREN J. MITCHELL. MD. MILLICENT FENWICK, N.J. WALTER E. FAUNTROY. O.C. WASHINGTON, D.C. 20515 LINDY (MRS. HALE) BOGGS, LA. 225-4247 STEPHEN NEAL. N.C. JERRY M. PATTERSON, CALIF. JAMES J. BLANCHARD, MICH. HAROLD E. FORD. TENN. CARROLL HUBBARD. JR., KY. JOHN J. LAFALCE, N.Y. GLADYS NOON SPELLMAN, MD. LES AUCOIN. OREG. PAUL E. TSONGAS. MASS. BUTLER DERRICK. S.C. PHILIP H. HAYES. IND. MARK W. HANNAFORD, CALIF. DAVID W. EVANS. IND. NEWS RELEASE 6:00 p.m. EDT Sunday, June 13, 1976 REUSS WARNS COMMERCIAL BANKS ON LOANS TO CHILE, RELEASES CORRESPONDENCE WITH COMPTROLLER SMITH ON $125 MILLION SYNDICATE LOAN Chairman Henry S. Reuss (D-Wis.), of the House Committee on Banking, Currency, and Housing, issued the following statement today about loans by private U.S. commercial banks to Chile: "On May 21, sixteen U.S. and Canadian banks signed an agreement to lend $125 million to Chile. Today, I am releasing an exchange of letters between myself and Comptroller of the Currency James Smith, which raises serious doubts about the wisdom or propriety of this loan. "The present military government, after nearly three years, has failed to control inflation, to restore industrial production, to reduce unemployment, or to create the conditions which might attract the productive private investment the country so desperately needs. To survive, the Pinochet regime relies on loans of hundreds of millions of dollars every year from the U.S. government and from multilateral lenders. Even the International Monetary Fund has concluded that the Chilean economy will need continuous debt relief (or debt financing) on a substantial scale over the medium term to keep its balance of payments manageable. "Such debt relief or debt financing will happen only with the support of the United States Government. The fate of Santiago's Torquemadas thus lies squarely in the hands of those who make official lending policy in Washington. "Given this situation, it is difficult to distinguish the ordinary economic risk associated with the recent commercial bank loan from the political risk posed by the possibility that the U.S. may withdraw Chile's financial crutch. Normal mitigating circumstances, such as participation in the loan by banks from a wide range of countries, or the existence of a stand-by agreement between Chile and the IMF, attesting to the soundness of Chile's economic policies and to the presence of competent international surveillance of its economic program, are not present. "The response by the Comptroller of the Currency to this situation is a shallow one. The Comptroller has shown no inclination to criticize the banks he is supposed to regulate for pursuing short- term profit by the Chilean loan at whatever eventual risk to themselves or to the successful pursuit of U.S. foreign policy objectives. This contrasts with the Comptroller's recent eagerness to criticize U.S. commercial bank loans to Italy. V MAY Chase Friend GERALD FORD LIBRARY mentioned This 2 "In his reply, the Comptroller demonstrates that his office has not seriously considered several important issues, raised in my letter. Among them: 1. What is the proper relationship between a private United States bank and the public government of a foreign nation? Should banks extend commercial loans to such governments, when they generally only lend to the Government of the United States through the medium of marketable notes, bills, and bonds? 2. What is the proper role of the International Monetary Fund as the arbiter of the creditworthiness of a developing nation? When, as at present, the IMF fails to extend the seal of approval represented by a stand-by agreement, indicating an agreed program for economic policy and for IMF surveillance, should U.S. bank regulators permit a loan to the country in question to pass without objection? 3. To what extent, finally, do such loans by private U.S. banks interfere with the conduct of U.S. foreign policy? Are we not unwisely permitting a linkage of interest to arise between our own domestic financial institutions and a morally abhorrent foreign regime? "Secretary Kissinger's admirable speech before the General Assembly of the OAS in Santiago this week may signal the beginning of a shift in U.S. attitudes towards basic human rights in Chile. Certainly that shift will accelerate if a Democratic Administration takes office next winter. When that happens, we may expect the Administration to take a much harder look at the abysmal condition of the Chilean economy and the failure of the Pinochet regime either to restore industrial production or to control inflation. "Certainly, the 16 banks who signed the $125 million loan agreement with Chile on May 21 should beware. Any shift in U.S. policy will leave them in perilous condition on this loan, given Chile's manifest inability to meet its commitments without massive outside support. These banks should expect to bear alone any loss that may come from a return to a sane Chile policy. For my part, I shall continue to press for a better and more clearly defined Administration policy on this area of activity by private commercial banks. GERALD HENRY S. REUSS COMMITTEES: 5TH DISTRICT, WISCONSIN BANKING. CURRENCY AND HOUSING WASHINGTON OFFICE: CHAIRMAN 2413 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 Congress of the United States JOINT ECONOMIC COMMITTEE PHONE: 202-225-3571 CHAIRMAN, INTERNATIONAL MILWAUKEE OFFICES: House of Representatives ECONOMICS SUBCOMMITTEE FEDERAL BUILDING ROOM 400 517 E. WISCONSIN AVENUE Mashington, D.C. 20515 MILWAUKEE, WISCONSIN 53202 ECOLOGY House May 14, 1976 527 W. WISCONSIN AVENUE MILWAUKEE, WISCONSIN 53203 PHONES: 414-272-1226 414-224-1488 Honorable James E. Smith Comptroller of the Currency 490 L'Enfant Plaza East, S.W. Washington, D. C. 20219 Dear Mr. Smith: According to recent press reports, fourteen of the largest banks in New York, California, and Canada are "close to agreement" on a loan to the government of Chile of $100 to $125 million, to be applied to Chile's balance-of-payments deficit. A letter of commitment is expected to be signed shortly, with a final loan contract to follow within weeks. While no single bank has been designated the formal syndicate leader, it appears that Citibank of New York is playing a leading role. This proposed loan raises several disturbing questions about the relationship between private banks and U.S. foreign policy, and about the relationship between our banking system and the international lending institutions, such as the International Monetary Fund -- as well as doubts about the wisdom of this particular loan. Chile's record on inflation is terrible. In January, 1974, the Chilean government set a target inflation rate of 80 percent for the year. In fact, inflation went to 375 percent in 1974, and was 340 percent in 1975. Since November, 1975, the monthly inflation rate has nearly doubled: from a range 7 - 8 percent in November and December, 1975, to 10.0 percent in January, 10.5 percent in February, and 13.5 percent in March. Annual inflation will continue in triple digits this year, and may well exceed 200 percent. In 1975 the Chileans did manage to hold their balance of payments deficit to about $250 million, close to the target of 240 million dollars set in March, 1975, but only because their creditors accepted deferred pay- ment on almost a quarter of a billion dollars worth of debt. Most of Chile's FORD i LIBRAR 9ERALD Hon. James E. Smith May 14, 1976 Page 2 major European creditors -- who hold the largest share of Chilean debt falling due after 1976 -- are now refusing further debt relief. This year. Chile's debt service is expected to consume about 38 percent of its export earnings, according to the World Bank, compared to only 27 percent in the export slump year of 1975. For the next five years, Chile will continue to labor under an extremely heavy debt service burden; its obligations will total over $700 million this year, and will remain at about $600 million per year through 1981, compared with $124 million in 1970, the last year that could be called normal. In the meantime, the Chilean economy is being sustained by infusions of hard cash from the United States government, from the World Bank, the Inter-American Development Bank (IDB), from certain of the facilities of the International Monetary Fund (IMF) -- and from private U.S. banks. Direct U.S. assistance to Chile totalled $272 million in FY 1975, includ- ing $96 million in debt relief, and will total at least $120 million in aid and housing guarantees alone in FY 1976. The IMF, which has already extended credit to Chile equal to 327 percent of Chile's IMF quota, among the highest exposures of any nations, is contemplating an additional loan under the compensation facility this year. The World Bank, this year, has already committed $33 million to Chile's nationalized copper sector. The IDB has a tentative lending program for Chile of $120 million this year. Now our private banks are thinking of chipping in up to $125 million of their depositors' funds. It is clear that, in the absence of major new debt relief, which is unlikely, and without this assistance, Chile could not continue to meet current payments on its debts. Chile's reliance on foreign lending to avert bankruptcy takes on added significance in light of the evident failure of the Chileans to reach an agreement with the IMF on the terms of a stand-by arrangement for this year. As you know, an IMF stand-by assures that the economic policies of the recipient nation will be subject to close supervision by the Fund's staff. Private institutions often consider an IMF stand-by to be the sine qua non for lending to a foreign government in balance-of- payments trouble. In fact, when a letter of commitment for a loan of $175 million to Chile was signed last January by the same group of banks currently negotiating the new Chilean loan, it was made explicitly con- tingent on Chile's obtaining an IMF stand-by. Significantly, although Chile obtained stand-bys in 1974 and 1975, this year no stand-by was agreed upon, and the January commitment has lapsed. Now, as the banks negotiate the new loan, it is without the assurance of a supervised economic policy that a stand-by arrangement would provide. Accordingly, the large New York, California and Canadian banks who are engaged in this loan are assuming a very substantial risk: far more than would be involved in the usual temporary balance-of-payments assistance BERALD FORD LIBRARY Hon. James E. Smith May 14, 1976 Page 3 to a solvent country. They are effectively assisting Chile to roll over a massive foreign debt that it otherwise could not meet, at a time when the support that Chile might have hoped for from the IMF has not materialized. Chile's ability to pay off this loan when the time comes without yet another massive bank loan is seriously in doubt. In light of these facts, I believe that you have a clear duty to review the situation, in conjunction with the banks, and to assure that they are not taking an excessive risk. This should be done now, before the loan is extended. In conducting such a review, it would be appro- priate to ask the following questions, to which I also would like a response. 1. To what extent is the current loan an effort to protect assets the banks have already invested in Chile? Specifically, what is the cur- rent exposure, in dollar amounts and as a percentage of bank capital, in loans to the Chilean government, government agencies, private Chilean financial institutions, and to the rest of the Chilean private sector, of each of the 12 U.S. banks involved in this loan? Are there any other large U.S. banks with comparable exposure in Chile? How many, and how much have they loaned? What is the maturity structure of these loans? 2. What are the economic risks associated with this loan? Making reasonable assumptions about the path of copper prices, does the Chilean economy have the capacity to recover and meet all of its current debt com- mitments without major new debt relief? Can the Chilean government success- fully squeeze enough foreign exchange from the economy to meet its debts if copper prices do not recover? What other economic risks are involved? 3. To what extent does the success or failure of this loan depend on political events? In particular, does repayment depend on the continued willingness of the United States to support the junta with more aid? If so, is not repayment of this loan effectively contingent on the assumption that the next Administration will continue to pursue a policy of financial support to the junta? What will happen if it does not? 4. What in your view is the proper regulatory posture toward such a loan? According to what criteria does your office classify for regulatory purposes a non-marketable loan to the public sector of a developing nation, a loan which is extended without collateral and whose repayment depends on volatile political factors as well as on economic ones? What was the basis of your reported decision, since revoked, to "redline" Italy as a borrower from U.S. banks? Does the same rationale now apply to Chile's loan? Recently lending from private sources to the governments of stable industrialized nations has shifted from direct loans by banks to the Eurobond market. Lend- ing by private banks to the United States Government has long been in the GERALD FORD LIBRARY Hon. James E. Smith May 14, 1976 Page 4 form of marketable Treasury bills, notes and bonds. Why should banks adopt the more lenient standard of lending that may be incorporated in a non-marketable direct loan in dealing with an unstable developing nation such as Chile? 5. What is the proper role of the International Monetary Fund as arbiter of the creditworthiness of a developing nation? Does your office, in classifying for regulatory purposes a loan to the government of a developing nation, use the professional analyses of the IMF? Is the existence of a stand-by arrangement between a country and the IMF a factor? If you make an independent evaluation, what is your evaluation at the present time of the creditworthiness of Chile? 6. What is the truth of the allegation that both the State and Treasury Departments have encouraged the U.S. banks to make this loan? If the Executive branch were to encourage private U.S. banks to lend to Chile, would that not be an evasion of the spirit of Congressional ceilings on aid to Chile? 7. It is difficult, in this case, to separate the purely economic criteria which should govern the actions of the banks from matters which impinge on international politics and United States foreign policy. Nevertheless the effort should be made. Would not an ill-considered loan at this time tie the fortunes of our largest banks to that of the Chilean regime in future years -- with painful consequences if the U.S. later ends economic support for the junta? In the event this loan did go sour, would not the banks be able to transfer a substantial part of the loss to the U.S. taxpayer, through the tax deduction for bad loans? I look forward to your prompt response to these questions, surely before action is completed on this loan. Sincerely, denly S. Runs Henry S. Reuss Member of Congress GERALD FORD AIBRARY of Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 GERALE FORD June 7, 1976 Dear Congressman Reuss: This is in response to your letter of May 14, 1976, in which you raise several questions relative to the credit worthiness of the Government of Chile. You question the propriety of U.S. commercial bank loans to Chile as they relate to U.S. foreign policy, U.S. depositor funds and U.S. taxpayers. Further, you request my views on the proper regulatory posture with regard to these issues. When the present Chilean government assumed power in September 1973, the need for complete economic reform was obvious. As you know, the country was bank- rupt. It faced $4 billion in external debt and had no credit rating whatever. All of her revenues had been spent on nationalizations and debt service, leaving nothing available for investment. Chile's plant and equipment had been permitted to deteriorate almost beyond repair and inflation had reached estimated rates of 750 and even as high as 1,000%. In recognizing Chile's old debt to foreign governments (The Paris Club), the new regime was forced, first, to try to restructure that debt into an overall term and amortization schedule realistic to Chile's already worse than "normal" economic condition simultaneously compounded by the quadrupling of oil prices. Secondly, the new government had to rebuild Chile's credit rating, primarily with commercial banks, by demonstrating that they would promptly pay for their trade imports. They restricted non-essentials and concentrated on the machinery and spare parts needed to revive mineral and industrial production. Having been reasonably successful in accomplishing their primary objective and having performed perfectly on all of their short-term trade obligations, they were able to acquire some medium-term, commercial bank loans in late 1974 and throughout 1975. These loans have proved essential to the revitalization of Chile's economy. 1976 balance of payments deficits are projected to be much smaller than 1975 and after the signing of the $125MM loan in question, all but $20 million of the deficit will be financed. These 1976 projections were based on a copper price of 60¢, while copper prices are already at 70¢ and each one cent increase adds approximately $18 million to Chile's annual export revenue. The sixteen banks involved in the loan to which you refer have indicated to the IMF that, in their view, the Chilean economy is well enough in hand, particu- larily given the steady increase in the price of copper, to warrant granting the loan without the IMF standby. The loan has been finalized. The agreement was signed on May 21, 1976. The formal syndicate leader is Morgan Guaranty Trust Company of New York and of the twelve U.S. banks involved, four are national banks and therefore come under the purview of my Office. LIBRARY GERALD FORD -2- I do not feel that any of the national banks involved in this credit can be considered to have granted this loan to protect assets already on their books. Nor do I believe that any of the national banks have taken on excessive exposure by virtue of having participated in this loan. Data taken from each of the last reports of examination of the 20 largest national banks indicates outstanding loans to Chile as a percentage of gross capital funds at an average of .357% before the granting of this loan and .358% including the new loan. After dis- bursement, the largest percentage of Chilean loans at any of these twenty banks will be only 1.685% of gross capital funds. Aside from the largest twenty, one national bank carries 4.76% of its capital in loans to Chile. Approximately 36% of all national bank loans to Chile are in short-term trade credits due within one year with the balance spread over something less than five years. Since there does not appear to be any imminent political change afoot in Chile, the major factors governing the quality of these loans are basically of an economic nature. In the event that higher copper prices do not hold, the quality of these loans would probably continue to weigh on the present government's ability to make the proper economic policy decisions but with a significantly stronger, more efficient, economic base than existed when the government assumed power in 1973. I believe that Chile's economic future is viable and I certainly do not consider these loans to be in danger of not being repaid. The question of commercial banks lending U.S. depositor funds to international customers is somewhat academic in that these loans are funded by eurodeposits. The granting of such loans does not deprive U.S. customers of the use of any domestically lendable funds and, short of failure of the bank involved, does not effect U.S. depositors in any manner. It is true that both international loan profits and loan losses do alter the amount of dividends received by bank share- holders. Finally, the effect which individual international loan losses have on U.S. taxpayers depends significantly upon the income tax deductions granted each lending institution by the country in which the loss occurs. Tax deductions not permitted by the country in which the loan is granted, or by the country in which the loan is booked, would effectively be deductible in the United States. Perhaps this is a matter for discussion with the Internal Revenue Service. National bank examiners do occasionally criticize specific loans to foreign governments or their agencies. These criticisms are based on well defined credit weaknesses apparent either in a borrower's overall financial condition or in an individual loan. Marketability is seledom a consideration since, unlike investments in securities, bank loans are expected to be held to maturity. Examiners' criticisms of individual loans are not to be construed as a "redlining" or blacklisting of the borrower concerned. Similarily, such criticism does not constitute a directive by which a bank is ordered to cease lending to that borrower. Rather, loan criticisms, individually and in their aggregates, constitute one of many major factors upon which this Office evaluates each national bank's condition, the capabilities of its management and its earnings performance by asset category. Until such time as minor asset categories are proved to have a noticeably adverse affect upon any of these measurement factors, or until such time as concentration in any one potentially risky activity appears likely, or until such time as those activities become violations of law, I believe that individual credit decisions should be left to the discretion of professional lenders. -3-. I believe this to be proper regulatory posture and I am unaware of any allegations relative to either the State Department or the Treasury Department having encouraged U.S. banks to make this loan. I trust that the above information is responsive to your request. However, should you have further questions, please do not hesitate to write my Office. Sincerely, Jane James E. Smith a. Smith Comptroller of the Currency The Honorable Henry S. Reuss Member of Congress House of Representatives 2413 Rayburn House Office Building Washington, D.C. 20515 FORD & LIBRARY 076839 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date March 4, 1977 To Board of Governors Subject: From John E. Reynolds Attached is a memorandum from Henry Terrell and Robert Gemmill discussing two recent article in the New York Times on Nassau Branches. FORD is LIBRARY GERALD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date March 4, 1977 To Mr. Reynolds Subject: Nassau Branches From Henry S. Terrell and Robert F. Gemmill Introduction An article in the New York Times of March 3, 1977 (copy attached) has raised several issues concerning the operations of and the Board's policy towards Nassau branches of U.S. banks. This memorandum briefly discusses the issues raised in that article. * Background As of December 31, 1976, 130 U.S. banks maintained 136 branches (of which 130 are shell branches and 6 full service branches) in Nassau and the Cayman Islands with total assets of $67 billion. The two principal assets of these branches were claims on foreign banks of $25.3 billion and claims on foreign nonbanks of $21.5 billion. Principal liabilities were $21.5 billion to foreign banks, $16 billion to related branches in other countries, and $14.5 billion to their head offices. On a net basis, Nassau and Caymans branches received $13.4 billion net from their head offices, $7.2 billion net from related branches in other countires, and were net lenders of $17.9 billion to foreign nonbank borrowers. The net funding from domestic U.S. offices has resulted from the ample liquidity of U.S. banks. * The March 3 article and follow-up article that appeared on March 4 are attached to this memorandum. GERALD FORD is LIBRARY FORD -2- GERALD LIBRARY Issues Raised in Times Article 1. Lost Revenue to New York City and State. Income earned by Nassau branches is not subject to state and local income taxes but is subject to Federal income taxes. Therefore, to the extent banks have shifted loans from their domestic offices to their branches in offshore centers, state and local jurisdictions have suffered a reduction in tax receipts. However, a follow-up article in the New York Times of March 4, 1977, seriously overstates the revenue lost. That article assumes that Citibank shifted an estimated $1 billion in loans from its New York office to its office in Nassau resulting in a $10 million loss of revenue to New York State. Assuming a generous 1-1/2 percent interest spread on the $1 billion in shifted loans results in a shift of $15 million in earnings from Citibank (New York) to Citibank (Nassau). A 12 percent New York state income tax combined with a 30 percent surtax results in a reduction in state income taxes of only $2.34 million, compared to the $10 million estimated in the Times article. 2. The Federal Regulatory Authorities Know Little About These Activities. A standard condition of approval for a branch in Nassau or the Caymans is that duplicate records of all transactions be maintained at the head office so that examination of these branches may be conducted at the head office. In addition, the Federal Reserve collects monthly data on the assets and liabilities of all foreign branches of U.S. banks by type of customer. These figures are published monthly in the Federal Reserve Bulletin with separate figures for branches in Nassau and the Caymans. In addition the Federal Reserve collects quarterly data on the geographical 1/ The March 4 article in The New York Times estimated the lost revenue to New York State alone. In addition, there would be a revenue loss of $2.07 million to New York City based on a city income tax of 13.823 percent. -3- distribution of the assets and liabilities of all branches. Federal Reserve statistics were in fact utilized in preparing the article in the New York Times. There is of course, no Federal Reserve information on lending to U.S. borrowers from foreign offices of foreign banks because the Federal Reserve has no authority to collect such data. 3. The Federal Reserve has Sanctioned and Encouraged the Activities of these Branches. The Federal Reserve has approved these branches, often with dissenting votes, but has not actively encouraged their expansion. The Federal Reserve currently has a policy of limiting to one the number of limited service "shell" branches any bank may have. The principal reason for Board approval of these branches was to permit smaller banks without the financial resources to afford a London branch an opportunity to establish an offshore branch to permit them to compete in Euro-currency lending with larger banks. The Federal Reserve has discouraged foreign branches of U.S. banks in Nassau and the Caymans and elsewhere from lending to U.S. residents through a 4 percent reserve requirement imposed on such loans under Regulation M. In approving applications for foreign subsidiaries, the Board has imposed a condition that subsidiaries not engage in transactions with U.S. residents other than those incidental to their international activities. An Alternative to Nassau Branches An Alternative to Branches The Board has considered a proposal to allow U.S. banks to establish a "foreign window" in their domestic offices which could be used GERALO LIBRARY -4- to accept deposits from (and make loans to) foreigners free from reserve requirements and ceilings on interest rates. That proposal did not contain a reference to the tax status of the earnings by the banks from the foreign window. The Board did not favor that proposal because it would be difficult in practice to prevent misuse of the window by domestic customers. Since deposits at the proposed window would be exempt from reserve requirements, banks could offer higher rates of interest on "window" deposits than are offered on regular domestic deposits, and some domestic customers might thereby be induced to shift their activities to the foreign window, perhaps using foreign affiliates to disguise the transaction. Such shifts could reduce Federal Reserve control over money and creditflows used domestically. Nassau branches are not a perfect substitute for a foreign window. Deposits at foreign branches in the banks' view carry a certain element of "country risk". Moreover, some U.S. financial institutions are prohibited by law from placing funds abroad, even in the form of deposits at foreign branches of U.S. banks. Attachment LIBRARY GERALD FORD March 3, 1977 Growing Bahamian Loan Activity By U.S. Banks Causes Concern LIBRARY By ANN CRITTENDEN Special to The New York Times NASSAU, the Bahamas-For years this Little Known About Effect Finally, while the earnings of offshore string of sun-blessed islands off the coast Even more important, as the volume branches of Amerian banks are subject of Florida has enjoyed a lucrative, if of offshore lending by United States to Federal taxes, hey are beyond the slightly dubious, reputation as a tax banks increases, Federal regulatory au- reach of state an city tax collectors. haven-a pleasant locale where individu- thorities -and the public -know less Thus the surge inBahamas lending has al and corporate wealth finds refuge from and less about the banks' transactions meant a substantia revenue loss for New income taxes, gains taxes, inheritance and how they affect the American econo- York, where most i the big international banks are based. taxes, or any direct taxes at all. my. The widening gap in information has The banks have hifted New York busi- More recently, however, thanks to a already made it more difficult to analyze ness to the Bahasas in two ways. They marked trend in American banking, this what is happening in the nation's econo- are booking loanthat formerly were put my. For example, while most offshore on their books i New York directly in This is the first of two articles on lending is to foreign corporations or gov- the Bahamas. All some banks, including the shift in the international activities ernments, an intriguing but unknown Citibank, have also transferred large of American banks to the Bahamas. fraction of it is to United States corpora- blocks of loan from their New York tions for use at home. books to their Nassau branch. In doing tiny Caribbean nation has achieved a new In other words, instead of routinely this, the leadin banks have engaged in financial eminence that, may profoundly booking a short-term, $25 million loan affect both the United States economy to corporations like General Motors or "an unjustifiable avoidance of taxes," and international capital markets. Exxon in the United States, the compa- State Commissioner James H. Tull con- A rapidly growing portion of the inter- nies' banks in recent months may well tended in a recent telephone conversa- have booked such loans in the Bahamas. tion. national banking business is being This "cross-border" lending was so great More and more of this lending, espe- booked, or officially recorded, in the last year, according to Carlos M. Canal cially to Latin America, is being recorded Bahamas. Helped by a recent British tax Jr., executive vice president and head of on the books of American banks' Baha- international banking for the Bankers mian branches. Since the end of 1973, increase and enhanced by their conven- Trust Company, that it "could account the assets of American bank branches ience to New York, the islands have be- in part for lagging domestic loan de- in the Bahamas and Cayman Islands, a come a key link in the Eurocurrency mar- mand." much smaller Caribbean tax haven, have ket. "We're flying blind in this area," says increased by more than 150 percent, to The little-known Eurocurrency market Representative Fernand J. St. Germain, 31 percent of the assets of all foreign a Rhode Island Democrit who is chair- branches of American banks. is a vast and largely unregulated pool man of a House Bankirg, Currency and (Foreign branch assets, in turn, amount of funds, four-fifths of them dollars, that Housing subcommittee on financial insti- to 40 percent of the total assets of the are borrowed and lent outside their coun- tutions. "We don't have a reporting sys- largest United States commercial banks, try of origin. The market, which has tem that enables us to track the impact which total about $553 billion.) traditionally centered in London, has of overseas lending on our domestic By the end of last May, more offshore swollen from $65 billion to nearly $300 economy." loans by American banks were recorded billion in only six years. in the Caribbean than in London. The Long a crucial source of funds for mul- Underlies Monetry Policies Bahamas had 31.9 percent of the total, In the United States virtually all large versus 27.5 percent in the British capital. tinational operations, it has more recently banks have to report to the Federal Re- Only a year and a half earlier, loans become the chief vehicle for recycling the serve detailed inforr in on such things booked in London had amounted to 38.3 surpluses of oil-producing nations to fi- as the maturity of 10ms and deposits, percent of the total, compared with 24.8 nance the huge oil-import bills of hard- volume of business, consumer and mort- percent in the Bahamas. pressed governments around the world. gage loans and interestcharges. This data Unlike the Eurocurrency system in The impressive growth of the Bahamas is vital not only in meauring the stability London, where American bank lending in this credit market reflects the steadily of the banks themselve, but in determin- is mainly financed by outside deposits, increasing activity of big American ing the health of the overall economy. most of the lending from the Bahamas is banks, which have more than doubled It underlies the monetay policies adopted financed by transfers of the banks' own their lending in the last three years. In for guiding the economy. funds from London, or increasingly, New a sense, as one financial specialist put In contrast, banks ar: required to report York. it recently, the American banking busi- almost no specifies oncerning offshore $6 Billion More Than Year Ago ness "is moving aborad." loans. Thus, as banling shifts abroad. In the process, New York state and regulating not only the banks but the As of last Oct. 31, the latest date for city have lost millions of dollars in tax entire economy becores more uncertain. which figures are available, banks with revenues from banks-ironically at a Some Congressionil figures are also headquarts in the United States had $10.5 juncture when the major New York banks concerned that the wsurge in bank Euro- billion on loan to their Nassau and Cay- are demanding still more stringent fiscal currency lending is occurring at the ex- man branches, some $6 billion more than city. controls from the financially beleaguered pense of more urgnt credit needs at a year earlier. home. It is also chaged that the system favors the largest corporate borrowers over smaller busineses. New York TIMES March 4, 1977 pg. 1 Citibank Found To Lead in Shift To Tax Havens By ANN CRITTENDEN Special to The New York Times NASSAU, the Bahamas-In the sudden one country to another, depending on the demand for money. Nassau is to international banking what growth of international banking in the Bahamas, no institution has played as Internal Citibank documents, itemizing Liberia is to international shipping-a prominent a role as Citibank, the nation's its Bahamian loans and deposits, give a flag of convenience, a tax-free and com. rafe look into this highly secretive and pliant haven for officially recording busi- second largest bank and in the scope of complex world. Recently made available ness done elsewhere. Citibank's Eurocur- its global activities, the most truly inter- to the Times, the documents disclose that, rency operation in Nassau has some 65 national bank in the world. as of last year, Citibank accounted for employees, and their job is simply to keep The giant New York-based institution, almost one-fourth of the Eurocurrency ac- the books on the transactions, just as which ranks only behind the Bank of civity of American banks in the Bahamas the bank's loan department in New York and the Cayman Islands a much smaller handles the mechanics on domestic loans America, has led the way in a pronounced Caribbean tax haven. They show that, arranged by other departments. although the Bahamas were not men- The fundamental reason for the Baha- Second of two articles. tioned in Citibank's tabloid-sized, 43-page mas' attraction, is clear: Nassau levies annual report last year, a healthy portion no pofits taxes or direct taxes of any shift by American banks toward booking of the bank's profits are concentrated in sort. American banks began to increase this island nation. their lending there after bank taxes in international loans in offshore tax havens, The bank records reveal that a sizable- London, the traditional center for Euro- of which the Bahamas is the most impor- portion of Citibank's lending is concen- currency lending, were raised. Nassau, tant. The trend has involved a substantial trated in two debt-laden developing coun- with good communications and the con- venience of the same time zone as New loss of tax revenue for New York state tries, Mexico and Brazil, and that a sub- stantial part of Citibank's deposits-per- York's, was where the banks flocked. and city. It has also meant that more haps 10 percent-come from a few Arab About $1 Billion in Loans Moved and more of the activities of American banks are taking place outside the range states. The documents also support the Citibank, in particular, has also shifted bank's frequent assurance thatte vast ma- of Federal regulatory authorities and be- an enormous volume of loans from New jority of its offshoreloans are sound. York to Nassau, where the interest yond the knowledge of Congress and the Loans Shifted to Other Areas earned is not subject to New York State public. Nassau is Citibank's largest banking or city taxes. According to Donald S. Network of 2,026 Offices Howard, senior vice president for finance, center outside of the United States, larger Citibank moved approximately $1 billion As a result, the growth of offshore than London, Hong Kong, Singapore and worth of loans already recorded on its banking has already made it more dif- Bahrein in actual loans booked. In its New York books to the Bahamas. ficult to determine what the banks are ever-changing global strategy, the bank This could mean a loss of more than is now reducing the number of loans doing and how their activity affects the $10 million in tax revenues to New York recorded in Nassau, as it shifts loans American economy. State alone, assuming the loans remained made in Asia and the Middle East to othr outstanding a year at the state bank tax Although other major New York banks centers. rate of 12 percent plus a 30 percent sur- have transferred business offshore, none The bank's documents nevertheless charge. By comparison, total tax receipts has done it on anything resembling the show that, toward the end of last year, from all comercial banks in New York more than a third of Citibank's Eurocur- scale of Citibank, which already has far are estimated at $106 million during the Trency loans made in dollars outside of 1976-77 fiscal year. more loans and deposits offshore than the United States, were booked in the In an interview, Mr. Howard said that in the United States. With its worldwide Bahamas. About one-fifth of the bank's the transfer to Nassau of loans originally network of 2,026 offices and branches total offshore loans and one-eighth of its booked in New York was a one-time oc- in more than 100 countries, the enormous loans of all sorts, domestic and foreign, curence. He notes, that to his knowledge, bank can book its loans and take its Were placed in Nassau. all such loans were to foreign borrowers. Ironically, most of this enormous volume The bank now books such loans directly deposits from multinational corporations of business is conducted no coser to the in the Bahamas he said. and governments virtually whereever il bamy Caribbean than Citibank's Manat- Mr. Howard acknowledged that the chooses. It can readily shift funds from tan offices, where dozens of shirt-sleeved shift reduced Citibank's state and city employees and a sophisticated computer taxés, although. for a complicated set or system transfer billions of dollars in and reasons, it could increase the bank's out of an entity called Nassau. Here is Federal tax liabilities, he said. He insisted where most of the buying and selling and that taxes were not the reason for the GERALD transferring of funds to finance the loans shift to Nassau. it is simply cheaper to booked in Nassau takes place. They were fund loans here, he maintained. actually negotiated either in New York more often in the bank's Latin-American branches. Nassau is above all else the bank's booking center for Western Hemi- sphcre loans. Chairman Burns BOARD OF GOVERNORS B-2046 OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date April 19, 1977 To Board of Governors Subject: From Mr. Welsh 6 ww In light of Vice Chairman Gardner's inquiry last week con- cerning permissible activities for U.S. banks abroad, I am attaching for your information a copy of a paper prepared by Board staff and sent to the staff of the Senate Banking Committee in response to questions posed pursuant to their ongoing study of multi-national banking issues. Attachment FORD is GERALD LIBRARY SUMMARY OF THE KINDS OF FOREIGN ACTIVITIES PERMISSIBLE TO U. S. BANKS Staff Memorandum Board of Governors of the Federal Reserve System GERALD FORD LIBRARY SUMMARY OF THE KINDS OF FOREIGN ACTIVITIES PERMISSIBLE TO U.S. BANKS I. Board Jurisdiction. The Board presently has jurisdiction to regulate the foreign activities of member banks, Edge Act and Agreement corporations, and bank holding companies. It has no jurisdiction over the foreign activities of federally insured nonmember banks that are not affiliated with bank holding companies. II. Foreign Activities of U.S. Banks, Bank Holding Companies, and Their Affiliates. At present, member banks are permitted to engage in a considerably broader range of activities indirectly through foreign affiliates than directly through foreign branches. A. Foreign Branches of Member Banks. BERALD FORD CIBRARY Under section 25 of the Federal Reserve Act, the Board is given the authority to approve the establishment of foreign branches of national banks (12 U.S.C. 601) and to issue regulations which, in addition to regulating powers which a foreign branch may exercise under other provisions of law, may authorize foreign branches, subject to such conditions and requirements as such regulations may prescribe, to exercise such further powers as may be usual in connection with the transaction of the business of banking in the places where such foreign branch shall transact business (12 U.S.C. 604a). Under section 25 of the Federal Reserve Act, however, such regulations cannot authorize a foreign branch to engage in the general business of producing, distributing, -2- buying or selling goods, wares or merchandise; nor, except as to such limited extent as the Board may deem necessary with respect to securities issued by any "foreign State" as defined in section 25 (b) of the Federal Reserve Act (12 U.S.C. 632), can such regulations authorize a foreign branch to engage or participate, directly or indirectly, in the business of underwriting, distributing, or selling securities (12 U.S.C. 604(a)). Under section 9 of the Federal Reserve Act, State member banks, which have the requisite power to establish foreign branches under State law, may establish and operate such foreign branches with the Board's approval and on the same terms and conditions and subject to the same limitations and restrictions as are applicable to the establishment of foreign branches by national banks (12 U.S.C. 321). The Board thus has regulatory authority over the establishment and operation of foreign branches of both national and State member banks. Foreign branches of national banks are, however, examined by the Comptroller of the Currency. The Board has implemented its authority over foreign branches of member banks through the adoption and promulgation of its Regulation M (12 CFR Part 213), a copy of which is enclosed in the Appendix. Regula- tion M prescribes in detail the regulatory procedures, conditions, limitations, and prohibitions governing the establishment and operation of foreign branches of member banks. FORD & LIBRARY GERALD -3- Through foreign branches, member banks have been permitted by the Board to exercise the normal banking powers that they enjoy domestically under the federal or State laws under which they are chartered (as limited by the Federal Reserve Act), plus certain enumerated additional powers of the same general character that are exercisable only to the extent usual in the business of banking in the foreign countries where those branches transact their business. With respect to these latter additional powers not permitted domestically, the Board has not utilized its full regulatory authority under section 25 of the Federal Reserve Act to permit foreign branches of member banks (in the case of State banks, only to the extent authorized by State law) to exercise all powers usual in the business of banking in the places where they transact business. Rather, under § 213.3(b) of Regulation M (12 CFR § 213.3(b)), the Board has permitted foreign branches of member banks to engage only in the following powers where usual in the business of banking in the place where the foreign branch BERALD R. FORD LIBRANZ transacts business: (1) Guarantee customers' debts or otherwise agree for their benefit to make payments on the occurrence of readily ascertainable events, if the guarantee or agreement specifies its maximum monetary liability thereunder; but, except to the extent secured with respect thereto, no national bank may have such liabilities outstanding (i) in an aggregate amount exceeding 50 per cent of its capital and surplus 1/ Including, but not limited to, such types of events as nonpayment of taxes, retails, customs duties, or costs of transport and loss or nonconformance of shipping documents. -4- or (ii) for any customer in excess of the amount by which 10 per cent of its capital and surplus exceeds the aggregate of such customer's "obligations" to it which are subject to any limitation under section 5200 of the Revised Statutes (12 U.S.C. 84) ; (2) Accept commercial drafts or bills of exchange drawn upon it; (3) Acquire and hold securities (including certificates or other evidences of ownership or participation) of the central bank, clearing houses, governmental entities, and development banks of the country in which it is located, unless after such an acquisition the aggregate amount invested by the branch in such securities (exclusive of securities held as required by the law of that country or as authorized under section 5136 of the Revised Statutes (12 U.S.C. 24)) would exceed 1 per cent of its total deposits on the preceding year-end call report date (or on the date of such acquisition in the case of a newly established branch which has not so reported); (4) Underwrite, distribute, buy, and sell obligations of the national government of the country in which it is located, but no bank may hold, or be under commitment with respect to, obligations of such a government as a result of underwriting, dealing in, or purchasing for its own account in an aggregate amount exceeding 10 per cent of its capital and surplus; 2/ Including obligations issued by any agency or instrumentality, and supported by the full faith and credit, of such government. FORD i LIBRARY GERALD -5- (5) Take liens or other encumbrances on foreign real estate in connection with its extensions of credit, whether or not of first priority and whether or not such real estate is improved or has been appraised, and without regard to the maturity or amount limitations or amortization requirements of section 24 of the Federal Reserve Act (12 U.S.C. 371); (6) Extend credit to an executive officer of the branch in an amount not to exceed $100,000 or its equivalent in order to finance the acquisition or construction of living quarters to be used as his residence abroad, provided each such credit extension is promptly reported to its home office; except that, with the prior specific approval of the parent bank's board of directors, such amount limitation may be exceeded when necessary to meet local housing costs; (7) Pay to any officer or employee of the branch a greater rate of interest on deposits than that paid to other depositors on similar deposits with the branch; and (8) Act as insurance agent or broker. B. Foreign Affiliates of U.S. Banks and Bank Holding Companies. (1) Permissible Methods of Investment Abroad. United States banking organizations have essentially three methods of acquiring and holding investments in foreign banks and corpora- tions: FORDO & LIBRARY GERALD -6- (a) Direct Investments. National banks may, with the Board's permission, invest directly in the stock of foreign banks not engaged, directly or indirectly, in any activity in the United States except as, in the judgment of the Board, shall be incidental to the international or foreign business of such foreign bank (12 U.S.C. 601). State member banks may, with the Board's permission, also make such direct investments, if also authorized by State law. The Board has implemented its authority under section 25 of the Federal Reserve Act by adopting and promulgating § 213.4 of Regulation M, a copy of which is enclosed in the Appendix. These regulations are discussed infra. Under the Board's interpretation of the term "foreign bank" in section 25 of the Federal Reserve Act, member banks have only been permitted to invest directly in the stock of foreign institutions that are principally engaged in a commercial banking business abroad. To qualify as being engaged in a commercial banking business, a foreign institution must receive deposits to a substantial extent in the regular course of its business, must have the power to receive demand deposits, and must be regulated, supervised or otherwise recognized as a commercial bank by the banking or monetary authorities of its place of organization or principal banking operations. A copy of the Board's interpretation is enclosed in the Appendix. 3/ State member banks may only hold stock in corporations in which a national bank may invest (12 U.S.C. 335). Since national banks may directly hold shares of foreign banks, State member banks may also make such investments with the Board's permission, if otherwise permissible under State law. GERALD RD LIBRARY -7- In this regard, it should also be noted that the Board has ruled that member banks may not organize foreign operations subsidiaries abroad. A copy of this interpretation is also enclosed in the Appendix. (b) Indirect Investments. Any national bank may, with the Board's permission, invest in the stock of either a corporation organized under section 25 (a) of the Federal Reserve Act (12 U.S.C. 611-619) (an "Edge Act corporation"), or a corporation operating under an agreement with the Board pursuant to section 25 of the Federal Reserve Act (12 U.S.C. 601) (a so-called "Agreement Corporation"), so long as the aggregate amount of stock held in all Edge Act and Agreement Corporations does not exceed 10 per centum of the bank's capital and surplus (12 U.S.C. 618) Since stock of these corporations is eligible for investment by a national bank, State member banks may, with the Board's permission, also acquire and hold shares of these Corporations if permissible under State law. State nonmember banks seeking to organize an Edge Act Corpora- tion must also obtain the Board's approval since such Corporations are chartered by the Board; State nonmember banks investing in State-chartered international or foreign banking corporations, such as Agreement Corporations, need not obtain Board approval under the Federal Reserve Act. Edge Act Corporations are chartered with the Board's approval for the purposes of engaging in international or foreign banking or other international or foreign financial operations either directly or through the agency, ownership, or control of local institutions in foreign countries (12 U.S.C. 611). Edge Act Corporations may also, GERALD FORD LIBRART -8- with the Board's consent, acquire and hold stock of any companies that are not engaged in the general business of buying or selling goods or commodities in the United States and that do not transact any business in the United States except such as may be incidental to such companies' international or foreign business (12 U.S.C. 615). Thus, through their Edge Act Corporation subsidiaries, U.S. banks may engage indirectly in international or foreign banking or other international or financial operations abroad; in addition, U.S. banks may indirectly acquire stock of foreign companies through their Edge Act Corporation subsidiaries. Agreement Corporations are banks or corporations chartered or incorporated under the laws of the United States or of any State thereof principally engaged in international or foreign banking, or banking in a dependency or insular possession of the U.S., either directly, or through the agency, control, or ownership of local institutions in foreign countries, or in such dependencies or insular possessions (12 U.S.C. 601). In order for a member bank to invest in the shares of an Agreement Corporation, the corporation must enter into an agreement QERALD FORD with the Board to restrict its operations or conduct its business in such manner or under such limitations as the Board may prescribe for the place or places where it transacts business (12 U.S.C. 603). The Board has by regulation limited the activities and investments of Agreement Corporations to those permissible for an Edge Act Corporation not engaged in banking. Thus, a member bank through an Agreement Corporation S 211.10 of the Board's Regulation K (12 CFR S 211.10), a copy of which is enclosed in the Appendix. An Edge Act Corporation not engaged in banking is a corporation whose aggregate demand deposits and acceptance liabilities do not exceed its capital and surplus. See § 211.2(d) of Regulation K. Such a corporation is given broader lending limits than a Corporation engaged in banking. See § 211.9 (b) of Regulation K. -9- subsidiary may conduct the same foreign activities and hold the same foreign investments that it may conduct and hold through an Edge Act Corporation, unless the Agreement Corporation is subject to other specific requirements in its agreement with the Board or is otherwise limited by State law. For purposes of this memorandum, any reference to activities conducted or investments acquired and held by an Edge Act Corporation shall be deemed to include activities conducted or investments acquired and held by an Agreement Corporation, since the regulatory standards governing these Corporations are identical in each case. Pursuant to its authority under section 25 (a) of the Federal Reserve Act (hereinafter referred to as the "Edge Act"), the Board has adopted and promulgated its Regulation K, a copy of which is enclosed in the Appendix, which sets forth regulations governing the organization of Edge Act Corporations, their activities, and their investments. These regulations are discussed infra. (c) Bank Holding Company Investments. The Board has discretion under section 4 (c) (13) of the Bank Holding Company Act ("BHCA") to permit bank holding companies to acquire and hold stock of companies that do no business in the United States except as an incident to such companies' international or foreign business, if the Board concludes that such an exemption would not be substantially at variance with the purposes of the BHCA and would be in the public interest (12 U.S.C. 1843 (c) (13)). FORD is LIBRARY GERALD -10- Pursuant to its authority under § 4 (c) (13) of the BHCA, the Board has adopted and promulgated § 225.4 (f) of its Regulation Y (12 CFR 225.4 (f) which sets forth the regulations governing the foreign investments of bank holding companies. A copy of Regulation Y is enclosed in the Appendix. These regulations are discussed infra. Under § 4 (c) (5) of the BHCA, bank holding companies are also permitted to acquire shares which are of the kinds and amounts eligible for investment by national banking associations. Since, as discussed earlier, national banks may acquire shares of Edge Act Corporations FORD & LIBRARY GERALD and Agreement Corporations with the Board's approval, the Board has also permitted bank holding companies under § 4 (c) (5) to invest directly in the shares of Edge Act and Agreement Corporations. Such Corporations are, of course, subject to the Board's Regulation K to the same extent as if held directly by a member bank. (2) Activities of Foreign Affiliates of U.S. Banks and Bank Holding Companies. (a) U.S. Activities Prohibited Foreign Affiliates by Statute or Regulation. A member bank, an Edge Act Corporation, and a bank holding company are specifically precluded by statute or regulation from acquiring and holding, directly or indirectly, the stock or other certificates of ownership of any foreign bank or company engaged in any of the following activities in the United States: (1) any activity in the United States which, in the Board's judgment, is not incidental to the international or foreign business of such foreign bank or company; 5/ See 12 U.S.C. 601, 12 U.S.C. 615 and 12 U.S.C. 1843 (c) (13) (1970). An Edge Act Corporation itself may only directly engage in activities in the United States that are incidental to its international or foreign business (12 U.S.C. 616 (1970). -11- (2) the general business of buying or selling goods, wares, merchandise or commodities in the United States; or (3) the business of underwriting, selling or distributing securities in the United States. FORD & GERALD LIBRARY The types of activities which the Board has determined to be permissible "incidental" U.S. activities under paragraph (1) above for foreign companies in which an Edge Act Corporation or a member bank has a share interest are generally set forth in § 211.7 of the Board's Regulation K (12 CFR § 211.7), which sets forth the kinds of limited activities an Edge Act Corporation itself may directly engage in in the United States. In general, such activities are confined to such limited business activities in the U.S. as are usual in financing international commerce. Foreign banks in which Edge Act Corporations or member banks have a share interest are also limited in the United States to the limited operations permissible an Edge Act Corporation under Regulation K. Thus, if a foreign bank in which a member bank or Edge Act Corporation has a share interest desires to open a branch or agency in the U.S., the branch or agency must confine its U.S. activities to those permissible an Edge Act Corporation under Regulation K. The Board has also ruled in this regard that it is not permissible for a foreign bank in which a member bank or Edge Act Corporation has a share interest to organize See 12 U.S.C. 615 for Edge Act Corporation affiliates. The prohibitions of the Edge Act are applied by regulation to bank holding company foreign affiliates under § 225.4 (f) (1) of Regulation Y. Edge Act Corporations are by statute precluded from directly engaging in such activities (12 U.S.C. 617). 1/ See 12 CFR § 211.8 (c) (1), § 213.4( (b) (1), and § 225.4(f) (1) (by implica- tion). Edge Act Corporations are also proscribed from directly engaging in such activities. See 12 CFR § 211.5(b). -12- a national or State-chartered subsidiary bank in the U.S., since it would be engaging in a domestic banking business not incidental to its international or foreign business. Foreign companies in which bank holding companies have greater than a 5 per cent voting share interest are also subject to the same restraints on incidental U.S. activities as those imposed on companies in which Edge Act Corporations have a share interest, and in addition are subject to a regulatory prohibition against accepting deposits or similar credit balances in the U.S. (b) Permissible and Nonpermissible Foreign Activities of Foreign Affiliates. (1) General Consent "Venture Capital Investment". Under current Board regulations, a U.S. bank through its Edge Act Corporation subsidiary may, without obtaining the Board's prior consent, indirectly purchase and hold the shares of foreign corporations not doing business in the U.S., irrespective of the kind of foreign activities engaged in by such foreign corporations, so long as no more than 25 per cent of the shares of the foreign corporation are acquired and no more than $500,000 is invested by the Edge Act Corporation in the shares of the foreign corporation. Bank holding companies are also permitted by regula- tion to make such investments abroad under the same percentage and amount limitations. § 211.8 (a) of Regulation K and § 225.4(f) (2) of Regulation Y (12 CFR § 211.8 (a) and § 225.4(f) (2)) FORD & GERALD LIBRARY -13- The Board has permitted these noncontrolling venture capital investments in foreign companies by Edge Act Corporations and bank holding companies because (1) they provide flexibility in structuring a financing package, (2) secure a limited voice in management to protect extensions of credit, and (3) promote good will with a bank customer (sometimes a foreign government) and seek to develop a stable source of foreign deposits. In general, such "venture capital investments" are minority long-term passive investments in the stock of foreign companies (usually nonfinancial companies) that are made solely to earn a return and not with the intent to exercise influence over the operations of the companies invested in for the purposes of expanding the operating capabilities of the U.S. bank or bank holding company involved. (2) Investments in Foreign Affiliates. An Edge Act Corporation must obtain the Board's prior consent to invest more than $500,000 in the shares of a foreign company or acquire more than 25 per cent of the shares of a foreign company. Bank holding companies, by regulation, are subject to similar requirements. 10/ A member bank, however, must in every case obtain the Board's prior consent to acquire a direct share interest in a foreign bank, irrespective of the amount invested or percentage of shares acquired. If less than 25 per cent of the shares of a foreign company are proposed to be acquired with the Board's prior consent and if the § 211.8 (b) of Regulation K (12 CFR § 211.8(b)) 10 / § 225.4 (f) (2) of Regulation Y (12 CFR § 225.4 (f) (2) FORD & GERALD LIBRARY -14- Board determines the investment to be a purely passive venture capital investment which otherwise would be made under the general consent procedures but for the investing of more than $500,000, the Board will generally permit the Edge Act Corporation or bank holding company to purchase and hold the shares of such foreign company irrespective of the types of financial or nonfinancial activities it may engage in. Due to the greater amount of the investment, however, the Board, in such situations, carefully evaluates risks associated with nonfinancial activities. When a U.S. bank indirectly through its Edge Act Corporation subsidiary, or when a U.S. bank holding company directly or indirectly seeks to acquire more than a 25 per cent share interest in a foreign company, the Board has adopted a policy of narrowing the activities which may be conducted through such foreign companies to those of a banking and financial nature. The Board has adopted this line of more than a 25 per cent investment for imposing limitations on the kinds of activities that may be engaged in by such foreign companies, because & FORD at that level of investment the Edge Act Corporation or bank holding 11/ GERALD company has a significant operating interest in the company. LISRARY 11/ The Board generally evaluates foreign investments of Edge Act Corpora- tions under a standard of "control" that is based upon majority ownership of voting shares of a foreign company or actual control of its board of directors or principal officers. If a foreign company is controlled by an Edge Act Corporation it is subject by Board letter to the provisions of Regulation K the same as if it were an Edge Act Corporation. Many of these provisions relate to financial restrictions such as lending limits and not to permissible activities. In cases where an Edge Act Corporation does not have exclusive control of a foreign company but has greater than a 25 per cent interest, the Board has applied only the Regulation K limitations on activities that may be engaged in by an Edge Act Corporation and has not applied the other limitations in the Regulation. In the Board's judgment, a greater than 25 per cent interest substantially involves an Edge Act Corporation in the operations and management of a foreign company and thus the foreign company should -15- Specifically, under current Board policy, an Edge Act Corporation or a bank holding company may, with the Board's consent, acquire and hold more than 25 per cent of the shares of a foreign company subject to the condition that such foreign company "shall confine its activities to international or foreign banking and other international or foreign financial operations." This same standard also applies to the activities of a foreign bank in which a member bank has a direct interest of more than 25 per cent. It should be noted in this regard that, under the governing statutes, there is no restriction on the types of foreign activities that can be conducted by foreign companies in which member banks, Edge Act Corporations or bank holding companies have an interest. The imposition of this standard is rather through the exercise of the Board's administrative discretion in this area. This regulatory standard is taken from the Edge Act wherein it is stated that Edge Act Corporations are "to be organized for the purpose of engaging in international or foreign banking or other international or foreign financial operations. The Board has thus generally determined that Edge Act Corporations through significant operating investments in foreign companies should only be permitted to do indirectly the activities which they are permitted to do directly. By regulation, 12 the Board has imposed this same standard on bank holding companies. 11/ Con't. FORD & GERALD LIBRARY be subject to limitations on activities. Most investments falling in this 25-50 per cent range are joint ventures, where the investing Edge Act Corporation regards the foreign company as establishing an operating presence for the Corporation or its parent bank. See in this regard the Board's recent statement of policy on foreign joint ventures (12 CFR § 211.52) which is included in the Appendix. 12/ § 225.4 (f) (1) of Regulation Y. See press release and Federal Register Notice accompanying Board adoption of such Regulation enclosed in the Appendix. -16- In interpreting what constitutes permissible "international or foreign banking or other international or foreign financial operations" for companies or foreign banks in which Edge Act Corporations, member banks or bank holding companies have greater than a 25 per cent share interest (hereinafter collectively referred to as "foreign affiliates of U.S. banks"), the Board has determined that all of the specific inter- national and foreign banking and financing activities which Edge Act Corporations may engage in directly under the Edge Act and the Board's regulations are also permissible for such foreign affiliates. (These activities are specified in detail at 12 U.S.C. § 615(a) and § 211.7 of Regulation K.) Under the Edge Act, however, the Board is also authorized to empower Edge Act corporations to exercise additional powers usual in the business of banking or other financial operations in the foreign countries where they transact business. (12 U.S.C. § 615(a)). The purpose of such provision is to keep U.S. banks competitive abroad with their foreign bank counterparts. In keeping with this purpose, the Board, in construing the standard "international or foreign banking or other international or foreign financial operations," has, thus, also sought to permit activities of general importance to international banking, such as underwriting of stocks and bonds, that should be capable of being performed by foreign affiliates of U.S. banks anywhere outside the United States in order to make them competitive with foreign banks, and has thus approved these FORD & LIBRARY GERALD -17- activities as "international financial operations. m13/ While a foreign affiliate of a U.S. bank may be able to engage in investment banking abroad, as noted previously, such foreign affiliate may not, however, underwrite, distribute or sell securities in the U.S. Since enactment of the 1970 Amendments to the BHCA, the Board has generally construed the standard "international or foreign financial operations" to include activities which the Board has determined to be activities "closely related to banking" under the domestic standards of § 4 (c) (8) of the BHCA (12 U.S.C. 1843 (c) (8)) The Board has thus generally permitted foreign affiliates of U.S. banks to engage in (1) mortgage, finance company, credit card and factoring operations abroad; (2) servicing loans and other extensions of credit abroad; (3) performing or carrying on any one or more of the activities that may be performed or carried on by a trust company (including activities of a nominee, fiduciary, agency, or custodian nature) in the manner authorized in the foreign country where the business is to be transacted; (4) acting as investment or financial adviser abroad; (5) foreign leasing operations of a type permitted by section 225.4 (a) (6) of Regulation Y; (6) providing bookkeeping and data processing services abroad; (7) acting as insurance agent or broker abroad; (8) underwriting credit-related insurance; and (9) management consulting advice on banking operations. In some cases, such as foreign leasing activities, the Board has retained restrictions imposed domestically under Regulation Y on the activity, because the restrictions relate to ensuring the financing 13/ A paper in the Appendix discusses the legal authority for such activities in light of the Glass-Steagall Act. Address GERALD R. FORD -18- nature of the activity. 14/ Thus, foreign affiliates of U.S. banks may not engage in nonfull-payout leasing operations abroad, because the Board has not determined these activities to be a financial operation. In the case of the majority of 4 (c) (8) activities such as trust company activities, the giving of investment and financial advice, providing bookkeeping and data processing services, and acting as insurance agent or broker, the Board has not imposed conditions set forth in Regulation Y which were designed for the domestic market. Generally, foreign affiliates of U.S. banks may engage in such financial activities to the extent permitted competing foreign institutions in the foreign country. The Board has also approved other foreign financial operations for foreign affiliates of U.S. banks that are not considered closely related to banking domestically. For example, foreign affiliates of U.S. banks may engage in management consulting activities abroad subject to the condition that such services relating to the U.S. market will be confined to the initial entry of foreign companies into that market. They may also manage foreign mutual funds subject to the condition that shares of any such funds will only be sold to nonresident aliens of the U.S. and that such funds will not directly or indirectly control or participate in the management of any company. The Board has also permitted foreign affiliates to engage in travel agency and warehousing services in certain countries. None of these activities is a permissible closely related to banking activity under § 4 (c) (8). The Board has, however, used its discretion to approve these activities as permissible financial operations abroad for foreign affiliates of U.S. banks in 14/ See 12 CFR § 211.106. FORD is LIBRARY GERALD -19- order to keep U.S. banks competitive abroad because these activities are either generally performed by foreign banks in their foreign or international financial operations, or are performed by foreign banks in certain countries. The Board has, however, specifically denied requests to permit foreign affiliates of U.S. banks to engage abroad in underwriting insurance that is not sold in connection with a credit transaction, 15/ in customs house brokerage and freight forwarding activities, 16/ in purchasing and selling of land, real estate development, participating as a joint venturer in real estate development, hotel ownership and management and other "non-financial" activities. 17/ These requests were denied because the Board determined that these activities are not "financial operations" within the meaning of the governing standard, and U.S. banks would not be harmed competitively abroad if they could not engage in such activities. SUMAMRY: In general, the Board has limited the activities of foreign branches of member banks in a way that closely parallels the standards applied to the activities of domestic offices of U.S. banks, and has limited the foreign activities of foreign affiliates of U.S. banks to 2. FORD international or foreign banking or other international or foreign GERALD financial activities. LIBRARY 15/ See Board Order of June 19, 1974, denying BankAmerica Corporation's request to invest in Allstate International, S.A., Zurich, Switzerland, and Board Order of same date denying First National City Overseas Investment Corporation's proposed additional investment in Companhia De Seguros Argos Fluminense, S.A., Rio de Janeiro, Brazil. Copies of the Orders are enclosed in the Appendix. 16/ See Board letters of June 28, 1974 to Bank of Virginia Company and Boston Overseas Financial Corporation, copies of which are included in the Appendix. 17/ See Board letter of March 10, 1975 to Citicorp re: investment in I.A.C. (Holdings), Limited, Melbourne, Australia, a copy of the letter is in the Appendix. CHART II Principal Foreign Activities Permissible GERALD URD to U.S. Banks, by Type of Organization Edge and Agree- ment Cor- Foreign Foreign portations Foreign Affiliates Branches and Their Bank Affili- of Bank PRINCIPAL ACTIVITIES of Member Foreign ates of Mem- Holding Bank Affiliates 2 ber Banks Companies A. Normal Banking Powers Enjoyed in Home State in U.S. X B. Enumerated Powers Usual in Business of Banking in Host Country 1. Guarantee customers' debts. X X X X 2. Accept commercial drafts or bills of exchange. X X X X 3. Acquire and hold securities of clearing houses, central and development banks, and government entities. X X X X 4. Underwrite, distribute, buy and sell obligations of host country's national government. X X X X 5. Liens on foreign real estate related to credit extension. X X X X 6. Extend credit to executive officers and pay higher rates on deposits for officers and employees. X X X X 7. Act as insurance agent or broker. X X X X C. Prohibited Activities 1. General business of producing, distributing, buying or selling goods, wares or merchandise. X X X X 2. Underwriting, distributing, or selling [non-government] securities overseas. X * Corporations organized or operating pursuant to sections 25 and 25 (a) of the Federal Reserve Act. Foreign companies acquired by Edge and Agreement Corporations under section 25 and 25 (a) of the Federal Reserve Act. Foreign banks acquired by member banks under the third paragraph of section 25 of the Federal Reserve Act. Foreign companies acquired by bank holding companies under § 4 (c) (13) of the Bank Holding Company Act. *These activities may not be engaged in directly by Edge or Agreement Corporations engaged in banking. -2- Edge and Agree- ment Cor- Foreign Foreign portations Foreign Affiliates Branches and Their Bank Affili- of Bank PRINCIPAL ACTIVITIES of Member Foreign ates of Mem- Holding 3 Bank Affiliates ber Banks Companies 3. Underwriting, distributing or selling securities in the United States. X X X X 4. Engaging in activities in U.S. not incidental to international or foreign business. X X X D. Closely Related to Banking in U.S. 1. Mortgage, finance company, credit card, and factoring operations. ** X X X 2. Servicing loans and other extensions of credit. ** X X X 3. Trust company activities. ** X X X 4. Acting as investment or financial adviser. ** X X X 5. Leasing operations. ** X X X 6. Financially-related data processing services. ** X X X 7. Financially-related insurance agent or brokerage services. ** X X X 8. Underwriting credit-related insurance. ** X X X 9. Management consulting advice to banking organizations ** X X X E. Not Closely Related to Banking in U.S. 1. Underwriting and distribution of debt and equity securities abroad X X X 2. General management consulting. X X X 3. Management of mutual funds. X X X 4. Operation of travel agency. X X X 5. Operation of warehousing services X X X 6. General data processing services X X X 7. General insurance agency and brokerage services X X X 8. Portfolio investments of not more than 25 per cent. X X X **Only to the extent permitted parent bank under domestic federal or State banking laws, and foreign branch under local law. FORD i LIBRARY 97VR70 -3- Edge and Agree- ment Cor- Foreign Foreign portations Foreign Affiliates Branches and Their Bank Affili- of Bank PRINCIPAL ACTIVITIES of Member Foreign Affiliates 2 ber Banks Companies ates of Mem- 3 Holding Bank 4/ F. Activities Specifically Denied 1. Non-credit related insurance under- writing. *** X X X 2. Land sales or real estate development. *** X X X 3. Hotel ownership and management. *** X X X 4. Custom house brokerage and freigt forwarding. *** X X X 5. Investments in more than 25 per cent of the shares of nonfinancial companies. *** X X X ***These activities have not yet been applied for by foreign branches. is FORD, BERALD LIBRARY

nara / coll_grf-0001 / doc

Foreign Operations of U.S. Banks - General (2)

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id	324359067
sourceUrl	https://catalog.archives.gov/id/324359067
contentType	document
collections	Arthur F. Burns Papers Federal Reserve Board Subject Files
subjects	Investments, Foreign Banks and banking
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url	https://catalog.archives.gov/id/324359067
naId	324359067
coverageEndDate	logicalDate 1977-11-30 month 11 year 1977
coverageStartDate	day 1 logicalDate 1968-06-01 month 6 year 1968
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recordType	description
ocrSource	nara-archive

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