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Foreign Operations of U.S. Banks - General (3)
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Foreign Operations of U.S. Banks - General (3)
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The original documents are located in Box B49, folder "Foreign Operations of US Banks
(3)" 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States of America his copyrights in all of his unpublished writings in National Archives collections.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.
INTERNATIONAL CORPORATIONS
OF
AMERICAN BANKS
ALLEN F. GOODFELLOW
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.
Submitted in partial fulfillment of the requirements
of The Stonier Graduate School of Banking
conducted by The American Bankers Association
at Rutgers--The State University
New Brunswick, June 1968
BERALD R. FORD LIBRARY
PREFACE
The analyses and conclusions set forth are those of the writer
and are based solely on his independent study of the subject. They
do not purport to represent an expression or reflection of the
opinions or policies of the Board of Governors, of the Federal Re-
serve Banks, or of members of their staffs.
Allen F. Goodfellow
BERALD R. FORD LIBRARY
ii
CONTENTS
Chapter
Page
I.
INTRODUCTION
1
II.
STATUTORY, REGULATORY AND SUPERVISORY AUTHORITY AND
ACTIONS
3
Statutory Authority
3
Section 25 - Amendment of September 7, 1916
4
Section 25 (a) - December 24, 1919
5
Regulation K
7
Basis of the Board's Authority
8
Historical Development of Regulation K
9
1920-1954
10
1957 Revision
12
1963 Revision
15
Supervision
18
Applications
19
Conditional Consents
19
Examinations and Reports
21
Interpretations
22
Agreements
22
III.
THE EARLY YEARS
24
Prior to 1930
24
Ownership
25
Operations
25
1930-1948
25
1949 - Bank of America
26
The Mid-1950's - Prelude to the 1957 Revision
26
IV.
RECENT GROWTH AND UTILIZATION
30
Growth of the Corporations
31
Changes in Utilization
36
Ownership
36
Agreement versus Edge Corporation
40
"Twin" and Multiple Corporations
42
Independent versus Integrated Corporations
45
Various Operations of the Corporations
46
V.
THE BASIC FUNCTIONS OF A BANKING NATURE
51
International Banking Operations in the United
States
51
Growth of Banking Operations in the United
States
54
Coordination of Operations with those of the
Parent
56
iii
GERALD FORD LIBRARY
Chapter
Page
Types of Operations Undertaken and Services
Offered
59
Summary
63
Direct Overseas Operations
64
Specialized Financing
67
VI.
EQUITY INVESTMENTS
70
Geographic Distribution of Investments
71
Degree of Control
75
Investments in Banking Institutions
76
Holdings Representing Control
78
Substantial Minority Holdings
81
Smaller Minority Holdings
84
Specialized Functions
86
Investments in Finance and Investment Companies
87
Types of Financial Companies
88
The Wholesale Type of Operation
88
The Specialty Type of Operations
92
Counseling on Financial and Investment
Matters
93
Purposes of Financial Investments
93
Source of Local Currency
94
Euro-dollar Market
95
Source of Contacts
96
Alter-ego Subsidiaries
96
Investments in Nonfinancial Companies
97
Joint Ventures
101
Utilization of the General Consent
102
VII.
PROBLEMS AND QUESTIONS RELATING TO OPERATIONS AND
SUPERVISION
104
Problems Related to Banking Operations in the U. S
104
Problems Related to Acquisition of Stocks
107
Operations of Subsidiaries
108
When is a Company a Subsidiary
109
Scope of Restrictions on Subsidiaries
110
Equal Application of the Condition
113
Activities in the United States
114
Investments in Nonfinancial Companies
115
Acquisitions Under the General Consent
115
The Proper Carrying Value for Equities
119
Miscellaneous Problems and Questions
121
Board Interpretations
122
Underwriting
122
Guarantees
122
Summary
R.FORD
123
GERALD
LIBRARY
iv
Chapter
Page
VIII. PROSPECTIVE UTILIZATION OF THE CORPORATIONS
125
APPENDICES
131
BIBLIOGRAPHY
153
FORD & LIBRARY GERALD
V
TABLES
Table
Page
1
CORPORATIONS IN OPERATION IN 1954
32
2
STATISTICS SHOWING THE GROWTH OF THE CORPORATIONS
35
3
BANKING CORPORATIONS AND THEIR PARENTS
55
4
EQUITY HOLDINGS OF THE CORPORATIONS
72
APPENDICES
Appendix
Page
1
AMERICAN BANKS AND THEIR INTERNATIONAL CORPORATIONS
131
2
ESTABLISHMENT OF SECTION 25 AND SECTION 25 (a)
CORPORATIONS
136
3
ASSETS, LIABILITIES, AND EQUITY HOLDINGS OF EDGE AND
AGREEMENT CORPORATIONS
139
4
REGULATION K OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, INCLUDING SECTION 25 (a) AND EXCERPTS
FROM SECTION 25 OF THE FEDERAL RESERVE ACT
152
GERALD FORD LIBRARY
vi
CHAPTER I
INTRODUCTION
As a general rule banks that are members of the Federal Reserve
System are not permitted to hold the stock of other corporations.
Among the few exceptions are the stocks of certain corporations which
supplement and augment the international banking and financial operations
of the banks. These corporations accomplish this through several differ-
ent methods, but there are two which stand out as being the most signif-
icant. First, they can, in effect, breach the ban on branching across
State lines, insofar as it applies to strictly international operations.
Secondly, these corporations have the power, with supervisory consent,
to purchase and hold the stock of foreign or international companies.
The need for this additional flexibility in international banking
operations has become increasingly apparent to the banks during the
sharply accelerating growth of these operations which began in the late
1950's. The result has been a remarkable growth in the number, size, and
variety of utilization of these corporations. Thus far this growth in
the utilization of these corporations has shown no sign of abating.
One of the strange things about these corporations and the rapidity
of their recent growth is that they are not newcomers to the international
banking scene. The legislation making possible their use >y the banks
was actually enacted some 50 years ago. Furthermore, within 10 years of
the initial legislation no fewer than 18 had come into existence. Yet, in
another 10 years their number had dropped to five and there were still
only 6 by 1954.
1
FORD & LIBRARY GERALD
2
This uncertain background, contrasted with the current growth and
breadth of their utilization make these corporations an interesting
facet in today's international operations of American banks. While
the principal purpose of this paper is to set forth and analyze the
present functions and future prospects of these corporations, it is
necessary to first understand their legal basis and something of their
earlier history. Thus, the statutory authority, regulatory history,
and supervisory actions relating to these corporations is explored in
the following Chapter. Then, after a relatively brief review of their
earlier history, their current operations and functions are analyzed
in some detail. Next, there is an investigation of some of the problems
which they have encountered or have raised, and finally there is an
attempt to glimpse into what their future may hold.
As will be detailed in the following pages, there are two types
of these international corporations whose stock can be held by banks
that are members of the Federal Reserve System. These corporations are
known as Agreement Corporations and Edge Corporations. Henceforth,
these two types of corporations will be referred to jointly as
Corporations, except where they need to be referred to separately, in
which case the above names will be used.
FORD is LIBRARY 9ERALD
CHAPTER II
STATUTORY, REGULATORY AND SUPERVISORY AUTHORITY AND ACTIONS
The statutory authority for national banks and, since the Banking
Act of 1933, for State banks that are members of the Federal Reserve
System 1 to hold stock in the Corporations is found in Sections 25 and
25(a) of the Federal Reserve Act. The responsibility for the regula-
tion and supervision of these corporations is placed with the Board of
Governors of the Federal Reserve System. In fulfilling its regulatory
function the Board of Governors has issued Regulation K - "Corporations
Doing Foreign Banking or Other Foreign Financing Under the Federal
Reserve Act."
Statutory Authority
Prior to the enactment of the Federal Reserve Act in 1913 there
was no statutory authority for national banks to establish foreign
branches, create acceptances, or hold the stock in corporations engaged
in international banking and financing. 2 One of the many purposes of
the original Federal Reserve Act was to broaden and strengthen the
international operations of the national banks and hence it included
provisions authorizing the first two of these activities. However, it
made no provision for the third type of international operation.
1 United States Banking Organization Abroad, 11 Federal Reserve
Bulletin, December, 1956, p. 1284.
2 Banking Organization Abroad, P. 1286.
FORD & LIBRARY GERALD
3
4
Section 25 - Amendment of September 7, 1916³
This amendment to the Federal Reserve Act was the outgrowth of
renewed interest in banks being able to undertake operations abroad
through subsidiaries. This was considered of particular importance
for the smaller banks which did not have the capabilities of under-
taking foreign branch operations themselves, but could participate
with others through this corporate device.
This amendment permits banks, under certain conditions, to invest
in the stock of corporations "principally engaged in international or
foreign banking, or banking in a dependency or insular possession of
the United States, either directly, or through the agency, ownership,
or control of local institutions in foreign countries, or in such
dependencies or insular possessions. " The corporation can be chartered
either by the Federal or State governments, but no provision is included
in this Section for the Federal chartering of corporations.
The conditions under which such stock holdings are permitted are
that the bank have a capital and surplus of $1 million or more, that it
invest no more than 10 per cent of its capital and surplus in such
stock, that it receive the permission of the Board of Governors of the
Federal Reserve System, and that the corporation enter into an agreement
or undertaking with the Board of Governors. In this last, the corpora-
tion has to agree "to restrict its operations or conduct its business
in such manner or under such limitations and restrictions as said Board
may prescribe. It is because of the requirement for an agreement that
the corporations operating under this Section have come to be known as
"Agreement Corporations."
QERALD FORD LIBRARY
³₁₂ United States Code 601-604a. See Appendix 4, PP. 10-12.
5
Section 25(a) - December 24, 19104
As already noted the 1916 amendment to Section 25 did not provide
for Federal chartering of these international Corporations. Due to this
omission there were continued efforts to enact such a provision. These
finally resulted, some three years later, in the addition of Section 25(a)
to the Federal Reserve Act. The legislation which created this new
Section was sponsored by Senator Edge of New Jersey, and therefore
it has been called the "Edge Act" and the corporations chartered under
it have been known as, Edge Corporations. 11
Since this Section provides for the actual chartering of corpora-
tions it is a far more intricate statute than its predecessor. It
spells out in considerable detail the organization and powers of these
Edge Corporations. However, a basic understanding of its provisions can
be attained if one focuses on two aspects of the Edge Corporations:
first, the manner in which they differ from the Agreement Corporations,
and second, the specific restrictions that are imposed by statute on
their operations.
There are a number of differences between the Edge Corporations and
the Agreement Corporations, some of which are of considerable importance
and others merely of passing interest. The principal ones are the
following:
1. The Edge Corporation is Federally chartered and not subject
to corporation or banking laws of the States, while the Agreement
Corporation is normally chartered under and subject to State laws.
2. The Edge Corporation must have a minimum capital of $2
million, while there is no minimum for the Agreement Corporation.
GERALD FORD LIBRARY
412 U.S.C. 611-631. See Appendix 4, PP. 12-22.
6
Since a parent bank is limited in both cases to investing a
maximum of 10 per cent of its capital and surplus in the stock of
these Corporations, to have an Edge subsidiary requires that a
bank have a minimum of $20 million in capital and surplus, whereas
only the statutory minimum of $1 million is necessary for a bank
to have an Agreement subsidiary.
3. The majority of the shares of an Edge Corporation must be
owned by citizens of the United States, or legal entities controlled
by such citizens, and all directors must be citizens, while there are
no equivalent restrictions on Agreement Corporations.
4. All national and State member banks are by statute
authorized to invest in the stock of an Edge Corporation, whereas
they must receive the approval of the Board of Governors to invest
in the stock of an Agreement Corporation.
5. Edge Corporations are "organized for the purpose of engaging
in international or foreign banking or other international or foreign
financial operations
whereas Agreement Corporations must be
"principally engaged in international or foreign banking
"
Thus, the operations of the Edge Corporation may specifically
include "other international or foreign financial operations" while
those of the Agreement Corporation apparently are confined to
banking. However, the Agreement Corporation need only be "principally
engaged" in such activities, whereas no such leeway is granted the
Edge Corporation, having been specifically removed during its
5
passage through Congress.
GERALD FORD
5 Banking Organization Abroad, P. 1280.
7
The statutory restrictions on the operations of the Edge Corpora-
tions pertain primarily to operations in the United States. No Edge
Corporation is permitted any activity in the United States "except such
as, in the judgment of the Board of Governors of the Federal Reserve
System, shall be incidental to its international or foreign business."
They can receive "only such deposits within the United States as may be
incidental to or for the purpose of carrying out transactions in foreign
countries or dependencies or insular possessions of the United States
11
Furthermore, they cannot purchase and hold the stock of any company
which deals in merchandise or commodities in the United States, nor of
any company which transacts any business in the United States except,
such as the Board of Governors finds "may be incidental to its
international or foreign business
"
Other statutory restrictions include a limitation on the issuance
of bonds and debentures, a minimum reserve on deposits received in the
United States, and a prohibition on engaging in "commerce or trade in
commodities" or attempting to control or fix prices of commodities. The
statute also restricts the amount that a Corporation can invest in any
one stock, but permits exceptions to this when approved by the Board
of Governors.
GERALD FORD LIBRARY
Regulation K6
This regulation is issued under the broad discretionary authority
granted the Board of Governors of the Federal Reserve System (hereafter
the Board) in the enabling statutes and now applies to all operations of
6₁₂ Code of Federal Regulations Part 211, Regulation K - Corporations
Doing Foreign Banking or Other Foreign Financing Under the Federal
Reserve Act. See Appendix 4, pp. 1-9.
8
both Edge and Agreement Corporations. Neither Section sets forth
extensive guidelines or standards and both leave the supervision of the
Corporations primarily at the discretion of the Board.
Basis of the Board's Authority
Prior to 1957 the Regulation dealt. only with the Edge Corporations,
so that it was in this context that the Board's regulatory posture in
this regard was developed.
While Section 25(a) refers in several places to "rules and regula-
tions" of the Board, the basic statutory authority for Regulation K is
found in the preamble to the listing of the powers of the Corporations:
"Each corporation
shall have power, under such rules
and regulations as the Board
may prescribe:
11
As previously noted a few specific limitations or requirements of
an operational nature are established by the statute. However, the
vast majority of supervisory policy and detail is left to the discretion
of the Board with the purpose of the Edge Corporations- international
banking and financing--and two general statutory standards being its
only guidelines.
The first of these standards is related to the authorization for
the Board to add to the Edge Corporations' powers abroad, and sets forth
the guides to such additional powers. This statutory provision is found
at the end of the principal listing of these Corporations' powers, and
states:
=
and generally to exercise such powers as are incidental
GERALD FORD LIBRARY
to the powers conferred by this Act or as may be usual, in the
determination of the Board
in connection with the trans-
,
action of the business of banking and other financial operations
in the countries, colonies, dependencies, or possessions in which
it shall transact business and not inconsistent with the powers
specifically granted herein. 11
9
The second is that which establishes the standard for the limita-
tions on the Edge Corporations' activities in the United States!
"No corporation
shall carry on any part of its business in
the United States except such as, in the judgement of the Board.
shall be incidental to its international or foreign business
Under Section 25, the Board originally exercised its supervisory
power solely through the individual agreements and amendments thereto.
In general, these agreements, and the amendments to them, paralleled the
requirements of the Revision of Regulation K then in effect, at least
to the extent that such requirements were relative to the Agreement
Corporation concerned.
Finally, in the 1957 and 1963 Revisions of Regulation K, the
operations of the Agreement Corporations were brought within the purview
of that Regulation. The pertinent statutory provisions of Section 25 are
the following:
"Before any national bank shall be permitted to purchase stock in
any such corporation the said corporation shall enter into an
agreement or undertaking with the Board
to restrict its
operations or conduct its business in such manner or under such
limitations and restrictions as the said board may prescribe
for the place or places wherein such business is to be conducted.
Should
investigation result in establishing the
failure of the corporations in question
to comply with the
regulations laid down by the said Board
national banks may
be required to dispose of stockholdings in the said corporation
GERALD R.FORD (IBRAR)
upon reasonable notice."
Historical Development of Regulation K
Neither the relevant portion of Section 25 nor Section 25(a) has
been basically altered. since their original enactment in 1916 and 1919,
respectively. Because of this the alterations in the Regulation and
agreements have resulted either from changes in the Board's approach or
its response to the changing and expanding operations of the Corporations.
A knowledge of the historical development is of assistance in under-
standing the underlying policy problems, the considerations relating
10
thereto, and the development of the Board's posture in relation to them.
This is true even though the development of Regulation K has not been
particularly evolutionary in character, except for the last two major
Revisions, namely, those of 1957 and 1963.
1920-1954
7 The original version of Regulation K was issued in
March 1920, and there were subsequent revisions or amendments in 1924,
1927, 1928, 1930, 1943, 1945, and 1954. Aside from their being largely
a repetition of the statute, the most striking thing about these earlier
versions is their lack of emphasis on those functions of the Corporations
which today are the most utilized. Not a single version dealt in detail
with the Corporation's operations in the United States, but all merely
repeated the general wording of the statutory limitations. Likewise,
while there were a number of changes relating to the acquisition of
stocks by the Corporations, they appear to have been only a reflection
of philosophical changes in the Board's basic approach to the Regulation
FORD
as a whole, rather than any particular concern with the exercise of
this power.
GERALD
LIBRARY
The first version of the Regulation was understandably primarily
concerned with the chartering, naming, and establishment of the
Corporations. Subsequently, in 1927, a considerable portion of the
Regulation dealt with the issuance of bonds and debentures, provisions
which saw little if any utilization by the Corporations. The fact
that these two subjects continued to constitute virtually two thirds of
the Regulation throughout this period, would seem to indicate an absence
7While only the Regulation is referred to, the agreements followed
the same general pattern.
11
of any serious problems with the Corporations' operations, or perhaps a
lack of operations, and hence experience, on which to base more detailed
revisions of the Regulation.
Throughout this period there seems to have been a basic philoso-
phical, or practical difference in views as to whether it was proper to
allow the Corporations a limited freedom in certain operations or
whether they should always be required to obtain the Board's approval.
This difference appears to have extended even as to whether the Regula-
tion should provide for the Board to make exceptions to certain regulatory
limitations or prohibitions. Illustrative of these are the three
absolute reversals in the provision of the Regulation relating to the
acquisition of stocks and the changes relating to the names of Corpora-
tions and the limitations on aggregate liabilities.
The original Regulation of 1920 permitted stock acquisitions without
prior Board consent, except where the statute itself required Board
approval. In the 1924 Revision, Board consent was required in all
instances. In 1927, the provision reverted to the position of the
GERALD
LIBRARY
original version and finally in 1943 prior Board consent was again
required for all acquisitions.
The 1928 version of the Regulation stated that the name of a Corpora-
tion could not include the word "bank" and must contain either the word
"international" or "foreign." In 1930 the provision was added that the
Board could waive these requirements. The limitation on aggregate
liabilities similarly shows the differences in view as to whether the
Regulation should provide for exceptions to be granted by the Board. In
the 1920 version provision was made for Board approval of a Corporation's
exceeding the regulatory limit on aggregate liabilities. This provision
was removed in 1927 and reinstated in 1945.
12
As stated earlier, the history of Regulation K does not present any
clear picture of evolutionary development, particularly in these early
years. While an amendment to a provision on one type of operation
might give the Corporations a greater freedom or flexibility, other
changes often moved in the contrary direction in relation to other
operations. Furthermore, either, or both, changes were not infrequently
reversed by subsequent amendments. However, viewing the Regulation as a
whole, there was a gradual movement toward allowing the Corporations an
increasing degree of freedom and flexibility in their operations, both
directly and through provisions for Board approval of exceptions to the
regulatory restrictions.
1957 Revision. This version of the Regulation was fundamentally
the outgrowth of the general resurgence of interest in international
operations by American banks following the end of World War II. Various
overseas military facilities were opened, former foreign branches
reopened, and other new ones established. Also in the future was the
glowing potential of full fledged international banking operations,
GERALD
LIBRARY
should the major currencies once again become convertible.
Not too far from the beginning of this epoch there was established
in New York a newly organized Corporation called Bank of America, a
wholly-owned subsidiary of Bank of America National Trust and Savings
Association, San Francisco, the largest bank in the world. This Corpora-
tion immediately launched into an active and extensive international
banking business, including a large amount of deposit and loan activity.
As discussed in the preceding section, Regulation K's only references to
such operations in the United States were at this time still couched in
the rather vague language of the statute. This lack of clarity raised
13
innumerable regulatory and supervisory problems in relation to the new
Corporation. These were further compounded by questions regarding other
Corporations acquiring stock and generally entering into an investment
banking business.
As a result of these developments, the Board of Governors appointed
a committee to review the entire field of operations of the Corporations,
both actual and potential. This committee was composed of members of
the Board's staff and officers of several of the Federal Reserve Banks.
Since the committee's report dealt to a large extent with the then
present or contemplated operations of the Corporations it is discussed
in greater detail in the succeeding Chapter. Suffice it to say at this
point that this report, submitted in November 1954, was a dominating
factor in many of the provisions of the Revision which became effective
January 15, 1957.
In general, the 1957 Revision represented a considerable change
from the earlier versions which were largely a repetition of the
statutory language with only a few additions and interpretations.
While this Revision still repeated much of the statutory phraseology it
also contained extensive interpretations and innovations. The most
significant changes wrought by the 1957 Revision were: the creation of
two types of Corporations, Banking and Financing; the establishment of
specific restrictions and limitations on operations in the United States;
the provision for Financing Corporations obtaining limited general
consents for the purchase of stock in foreign companies; and the inclusion
of Agreement Corporations within the purview of the Regulation.
BERALD FORD LIBRARY
14
Earlier versions of the Regulation had made certain distinctions
between those Corporations which received deposits and those that did not.
These usually limited only the exercise of the power to issue bonds and
debentures. The 1957 Revision, however, created a sharp separation
between commercial and investment banking, thus following the philosoph-
ical distinction set forth in the banking legislation of the 1930's.
Banking Corporations were permitted to take deposits and create
acceptances, but were limited in underwriting, were prohibited from
issuing bonds and debentures, and their stock acquisitions were usually
restricted to those of foreign banks and bank related companies. On the
other hand, Financing Corporations were prohibited from accepting deposits,
creating acceptances and ordinarily from acquiring stocks in companies
engaged in banking. This division of the functions of the Corporations,
particularly as relates to stockholdings, caused the creation of "twin"
Corporations which are discussed in Chapter IV.
A considerable portion of the 1957 Revision of the Regulation was
concerned with the various permissible and prohibited operations in the
United States. It detailed various operations in both categories as
related to each the Banking and the Financing Corporations. For example,
Banking Corporations could ordinarily receive a deposit from a foreign
depositor, except where it was to be used in paying expenses of an office
or representative in the United States. Many of these detailed regulatory
requirements resulted from earlier experience arising out of the Board's
examinations of the Corporations. Their being set forth in such detail
has proven to be an aid, both to the Corporations and to the Board's
examiners and staff.
GERALD FORD LIBRARY
15
In the preceding section we have already seen how, prior to 1957,
the regulatory provisions for the acquisition of shares of stock had
swung between the two extremes of requiring a specific consent for all
acquisitions and granting a blanket consent, except where the Board's
approval was required because of size. Since 1943 the former rule had
been in effect. While the 1957 Revision basically continued this approach,
it did provide that Financing Corporations could obtain from the Board
a limited general consent to acquire stock that fell within a proposed
program. This concept of a limited general consent is important in
GERAAD FORD LIBRARY
understanding the development of the Regulation, not only because it
established a third position between the earlier extremes, but also
because out of it grew the subsequent provisions for the General Consent
that appeared in the Revision of 1963.
As mentioned earlier, this Revision included the Agreement Corpora-
tions within its purview for the first time. However, the Agreement
Corporations were restricted to those activities permitted Banking
Corporations, this seemingly being based on the fact that Section 25 makes
no reference to such corporations being engaged in international finance.
1963 Revision. The repetition of the statutory language, including
the specific limitations in the Act, virtually disappeared from this
Revision. Its various provisions were basically limited to matters of a
purely regulatory nature based on interpretations of the statutory
language. Additionally, it had an introductory section on the national
purpose of the Act. Despite this extreme change in format, the 1963
Revision was in substance only a further development and refinement of
the 1957 version. At the time that the 1957 Revision was formulated,
the policy was established that it should be reviewed in five years,
16
taking into consideration the experience gained in the meanwhile. The
current Regulation was the outgrowth of just such a review, and from the
substantive point of view incorporated only two fundamental changes: the
abolition of the formal distinction between the Banking and Financing
Corporations, and the creation of the regulatory General Consent.
The current Regulation provides for but one type of Corporation,
which may engage in both banking and financing operations of an inter-
national character. However, as was done in all prior Revisions, it
does retain certain special restrictions or limitations on the operations
of those Corporations "engaged in banking." Thus, where aggregate demand
deposits and acceptance liabilities of a Corporation exceed its capital
and surplus it is restricted in the underwriting of securities and has a
lower limit on the liabilities of one borrower.
There was considerable rewording of the interpretive provisions
relating to a Corporation's deposits, loans and other activities in the
United States and whether or not they are to be considered "incidental
to its international or foreign business." However, these changes were
primarily of a drafting nature, the principal substantive refinements
being restricted to (1) the elimination of prime commercial paper as a
permissible means of temporarily employing funds, (2) the permitting
of the subsequent acquisition of loans which could have been financed at
inception, and (3) the removal of the requirement for permissible
deposits that an individual residing abroad be a "foreign national.' "
Next to the abolition of the two types of Corporations, the most
important change in the 1963 Revision was the incorporation into the
FORD & LIBRARY GERALD
Regulation itself of a General Consent for the acquisition of certain
17
stocks. As already mentioned, a provision for the Board's approving
applications for a limited general consent for Financing Corporations was
included in the 1957 Revision. However, by its terms this provision did
not apply to Banking Corporations and, hence, did not extend to stock in
foreign banks and, furthermore, the specific general consents granted
under this provision were all limited to stock in non-financial companies.
In the 1963 Revision all Corporations were permitted to acquire stock of
a foreign company if (1) it was in connection with an extension of credit,
(2) represented less than a 25 per cent interest in a foreign bank, or
(3) was a small - not over $200,000 - investment that was likely to
further United States foreign commerce. In general, this provision was
considerably more flexible than the earlier one.
With the inclusion of a General Consent in the Regulation, one
other addition was also made, which is worthy of note. Prior to the
1963 Revision, the Board's grants of consent to acquire stocks had evolved
to the point where they always contained certain conditions. These
required that the Corporation dispose of the stock of any company that
(1) engaged in buying or selling goods in the United States or under-
took any other activity in the United States not incidental to its
international business, (2) engaged in the business of underwriting or
distributing securities in the United States, (3) or undertook any other
operation which the Board should find made a continued stock holding by
a Corporation inappropriate. In the new Revision the second and third
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of these conditions were incorporated into the text of the Regulation
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LIBRARY
itself, as conditions to all acquisitions of stock, whether by specific
or General Consent. In line with the general format of the Regulation,
the first condition was omitted since it was nothing more than a restate-
ment of a clear statutory limitation.
18
The 1963 Revision of Regulation K also continues the inclusion of
Agreement Corporations within its purview as was first done in 1957.
8
They are subject to the same statutory and regulatory restrictions
as Corporations chartered under Section 25(a) which are "engaged in
banking.'
Since the issuance of the 1963 Revision, the Regulation has been
amended once to bring it into conformity with the new provisions of
Regulation M which provided for the acquisition of foreign bank stock by
national banks. 9 This amendment deleted those parts of Regulation K
relating to the examination of foreign subsidiaries and to the maximum
10
liability of Corporations and their subsidiaries to parent banks.
Supervision
Besides its responsibility for the issuance of Regulation K, the
Board also has supervisory responsibilities, arising either directly
from the statutes or from the Regulation. Certain operations of the
Corporations require specific Board approval and the Board also has the
overall responsibilities of supervising the activities of the Corporations.
To help in fulfilling these responsibilities the Board has a
number of supervisory tools. In granting its approval - or consent - the
Board may do so unconditionally, or may feel it advisable to do so only
8 Except these relating to their organization.
9 12 CFR Part 213, Regulation M, "Foreign Activities of National Banks."
¹⁰Due to balance-of-payments considerations, it was again amended
effective February 8, 1968. This amendment removed the General Consent
provision in Section 211.0(a). "Press Release,' Board of Governors
of the Federal Reserve System, February C, 1968.
FORD & LIBRARY GERALD
19
subject to certain limitations or conditions. In discharging its more
general supervisory responsibilities the Board's specific tools are those
of examination and of requiring reports. Finally, for the general
guidance of the Corporations - short of regulatory changes - the Board
may issue interpretations. Such interpretations usually arise from
specific applications or supervisory examination problems where the
subject matter is of broad or general interest.
Applications
The applications for Board approval cover a variety of subjects, but
one stands out as by far the most. numerous and also as raising the more
difficult questions, namely requests for consent to purchase shares of
stock. Other applications, some of which are of a routine nature,
include requests for increases in capital, for amendments to Articles
of Association, for branches, for permission to exceed regulatory
limitations, for reversal of examiners' findings and conclusions, and
possibly for the issuance of bonds, although no Corporation has made
such an application in recent decades.
Conditional Consents
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Many requests for permission to acquire and hold shares of stock
in a given company can be of a fairly routine nature. However, others
can raise troublesome questions as to the propriety of such a holding
due to the type of business involved, the political situation in the
country, operations conducted in the United States, the degree of
control involved, or any combination of these factors. The more difficult
situation is where a holding is considered by the Board to be appropriate
only in certain circumstances. In such cases the Board has granted
its consent to the acquisition subject to certain conditions. As
20
mentioned in regard to Regulation K, two of the earlier conditions
were found to be of such common application that they were incorporated
into the 1963 Revision.
Since the issuance of the 1963 Revision the Board's consent to the
acquisition of minority stock interests has usually not been subject
to any conditions. The exceptions to this rule have been where the
company concerned was operating in the United States. In this regard
the operations of a subsidiary of the foreign company have been
considered to be those of the parent.
The statute itself sets forth one specific class of activities in
the United States which makesthe holding of stock by a Corporation
prohibited, namely, dealing in merchandise or commodities. Furthermore,
all other activities in the United States must be incidental to the
company's foreign or international business. The general premise, on
which the Board has acted in attaching conditions to consents, is that,
for a Corporation to hold stock in a company, the company generally
must not transact any business in the United States which is not
permissible for the Corporation itself.
The acquisition of stock which represents control of a company
BERALD FORD LIBRARY
raises parallel, but slightly different problems. The stock in all
subsidiaries for which the Board has granted its consent is held by the
Corporations subject to conditions which in essence place the subsid-
iaries in the same position as their parent. Thus, the Corporation
cannot continue to hold the subsidiary's stock unless the operations of
the subsidiary conform to the same restrictions and limitations as are
imposed by the statute and regulation on the operations of the Corpora-
tion itself. One specific exception to this is the limitation on loans
21
when made in the local currency of the country where the subsidiary
operates. Since the amendment to Regulation K of March 15, 1967,
deleting the requirement that a Corporation cause any subsidiary to
submit to examination by the Board, the parallel condition in consents
has not been used. However, the conditions still require that the
Corporation file such reports on subsidiaries as the Board may require.
To date these have consisted of reports on acquisitions and disposi-
tions of stock and semi-annual reports of condition.
Examinations and Reports
The principal supervisory tools that the Board has for keeping
it abreast of the activities of the Corporations are those of examination
and of requiring reports. Each Corporation is examined annually and
the report thereon is reviewed by the Board's staff. While foreign
subsidiaries are not examined, it has been expected that the parent
Corporation will have on file such information as is necessary to its
own supervision of any subsidiary. 11 Thus far this information has
proven adequate for the purposes of the Board's examination of the
Corporation's overall activities.
The Board also receives semi-annual Reports of Condition from each
Corporation, covering its own financial position, and also those of any
controlled subsidiary. At least one of the two reports received each
year contains schedules of the principal accounts, giving further
breakdowns as to currencies involved, affiliated relationships, etc.
11
See "Press Release," Board, March 15, 1967, p. 3-4.
BERALD FORD LIBRARY
22
Additionally, a report is received quarterly showing all acquisitions
and dispositions of stock by the Corporation and its subsidiaries.
Where basic information regarding the company invested in has not
previously been supplied to the Board, such data is included in the
quarterly report.
Interpretations
Thus far there have been only four Board interpretations dealing
12
with the Corporations.
Of these, two have involved questions relating
to Corporations engaged in banking, i.e., purchase and sale of Federal Funds,
and the manner of calculating deposits for aggregate liabilities.
Only one has had to do with a stock acquisition by a Corporation. In
that case it was found appropriate, based on the particular facts, for
a Corporation to hold a noncontrolling interest in a company acting
solely as a combination export manager in the United States. Besides
these published interpretations, a few Board decisions in the past
have been circulated to all or some of the then operating Corporations.
Agreements
Prior to the Revision of 1957 the Board exercised its supervision
of the Agreement Corporations primarily through the original and
amended agreements with those Corporations, the approvals required therein,
and through examinations and reports. The earlier agreements were
usually tailored to the needs of each Corporation and, hence, had a
considerable degree of variation. Gradually there evolved a single
GERALD FORD LIBRARY
12
Interpretations of the Board of Governors of the Federal Reserve
System, Chapter 18, PP. 481-2. One interpretation, regarding subsidiary
banks of Bank Holding Companies having a Corporation, has been deleted
from publication as it is no longer relevant due to a change in the
statute.
23
basic pattern which paralleled the general requirements of Regulation K.
Since that Regulation was revised to bring these Corporations within its
purview, the new agreements and amendments to older agreements have
generally been confined to the Corporation's acceptance of the
Regulation as controlling.
FORD is LIBRARY CERALD
CHAPTER III
THE EARLY YEARS - 1916-1954
A glimpse of the Corporations and their activities in these earlier
years is helpful in establishing perspective for the subsequent study
of their current activities.
Prior to 1930¹³
Eighteen Corporations came under the Board's jurisdiction during
these years, 3 of which were Edge Corporations and 15 were Agreement
Corporations. However, of the 18 only 3, all Agreement Corporations,
survived beyond the early Thirties. One of these dropped its agreement
in 1947 and one converted to an Edge Corporation in 1957.
The lack of success of these earlier Corporations appears to have
been due to a number of factors. First and foremost was probably the
general lack of experience in foreign banking and financing. This lack
of experience affected not only the parent or participating banks'
approach and attitude toward the Corporations' operations, but also the
availability of capable personnel. Aggravating this inexperience was
the economic crisis of 1920-21 and the instability of world prices
that followed. The difficulties of the Corporations were further
compounded as some of the banks themselves undertook many of the
functions that the Corporations had been fulfilling.
13
The source of most of the data in this section is "United States
Banking Organization Abroad," Federal Reserve Bulletin, December 1956,
P. 1284, et seq.
24
FORD & LIBRARY GERALD
25
Ownership
Of these 18 Corporations only 5 originated as wholly-owned subsid-
iaries and 3 of these were owned by the same bank. All of the others had
multiple ownership and the stock of 1 was sold to the public. In most
cases the stockholders consisted of several American banks, but in 3,
foreign banks also had an interest, and several had industrial or other
financial companies as stockholders. Additionally, there were two
instances where 1 Corporation held some of the stock of another Corpora-
tion. As time passed a number of the multi-owner Corporations became
wholly-owned subsidiaries and others sold all or parts of their business -
principally foreign branches - to other Corporations, to American banks,
or in one case to a foreign bank.
Operations
GERALD LIBRARY
The early Corporations generally emphasized operations abroad,
either through direct branches or through subsidiaries. Of the 18
Corporations 8 maintained foreign offices, ranging from a single repre-
sentative office to 21 branches, and at least 6 had foreign banking or
financial subsidiaries. While only 2 concentrated their activities on
international banking operations in the United States, 6 had financing
or investment operations in this country. All but 3 of the Corporations
maintained their head office in New York, but 8, principally those with
overseas branches, also maintained 1 or more other offices in the
United States.
1930-1948
This period of world depression and world war saw an overall decrease
in the international activities of American banks. Nonetheless, there
were formed during this time three Corporations, one Edge and two
26
Agreement. Each was established for a fairly specific purpose, to take
over foreign branch operations in two cases, and to act as a holding
device for the stock of an English trustee company in the other. All
three were still in existence at the end of 1954, which is when the
following Chapter takes up the recent growth and operations of the
Corporations. There was one casualty during this period, however, when
in 1947 one of the earlier Agreement Corporations cancelled its agree-
ment with the Board when the American banks sold their interests.
1949 - Bank of America
The formation of this Corporation is in some ways a connecting link
between the earlier and more recent periods of utilization of the Cor-
porations. Since it had opened eight foreign branches before they were
transferred to its parent in 1963, it could be said to form an epilogue
to the typical operations of the earliest Corporations. However, this
network of branches developed under special circumstances and never
played the dominant role in the Corporation's basic function as did the
branches of the 1920's. Bank of America's basic function was the estab-
lishment of a New York presence for its Pacific Coast parent. In this
it was a forerunner or prologue to the revival of interest in the utili-
zation of this corporate device. Despite Bank of America's relatively
broad scope of operations and rapid growth, which illustrated the
Corporation's potential, it was 10 years before another bank established
a new subsidiary Corporation and 12 years before another was formed to
establish a New York presence for its parent institution.
FORD & LIBRARY GERALD
The Mid-1950's - Prelude to the 1957 Revision
By the mid-1950's the industrial countries of western Europe and
Japan were well on the way to recovering from the devastation of World
War II. International trade and investment had increased substantially.
27
Nevertheless, international transactions were still hampered by continued
controls on trade and capital movement, and major currencies remained
inconvertible. A principal aim of the international economic policy of
the United States was the dismantling of this residue of wartime controls
and the restoration of currency convertibility, with a view to promoting
still further international trade. At the time, however, despite the
vast potential of the American banking system it had not yet developed
its international activities to the point where they were commensurate
with this country's economic stature in relation to the rest of the world.
Illustrative of this was the fact that during the postwar period the banks'
reported claims on foreigners had remained fairly constant and in the
mid-1950's amounted to only about 15 per cent of the amount of short-
&
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term liabilities reported by the banks as owed to foreigners.
14
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LIBRARY
It was in this context that the Board initiated a review of the
foreign operations of American banks. This review was made by members
of the staffs of the Board and of the Federal Reserve Banks in the
Districts most concerned with international trade and finance, and a
number of banks and several exporting manufacturers were consulted. The
participants included men with backgrounds and experience in law, bank
supervision and international economics. This permitted a broad and
multi-faceted consideration of the foreign operations of American banks
in general and those of the Corporations in particular.
The essential conclusions of this review are reflected in the pro-
visions of the 1957 Revision of Regulation K. These provisions show an
14In contrast, as of December 31, 1967, the short- and long-term
claims on foreigners reported by banks were more than 10 times the earlier
amount and over 60 per cent of demand and time deposits reported by banks
as due to foreigners. International Capital Transactions of the U. S.,
Federal Reserve Bulletin, February 1968, pp A73 and A77.
28
obvious concern with the relationships of the Corporation's operations
and certain traditional characteristics of American banking.
The 1957 Revision contained for the first time a detailed delineation
of the deposit and loan activities that could not be carried on by the
Corporations in the United States. These delineations represent a balanc-
ing between the needs of the Corporations for viable and effective inter-
national banking operations, and the traditional decentralization of
American banking as epitomized by the rule prohibiting inter-State
branching.
Similarly the requirement in the Revision for the formal separation
of the Banking Corporations and Financing Corporations was a clear reflec-
tion on the Corporations' operations of the philosophy of the Banking Act
of 1933 which separated commercial and investment banking.
While these two provisions could be considered as trying to adapt the
requirements of an international banking operation to a traditional
domestic banking mold with a minimum of distortion, there were other
provisions which had more of a tendency to expand and increase the
flexibility of the Corporations' international operations and hence those
of the parent banks. The Revision emphasized the possible scope of such
operations by including in the Regulation for the first time the essence
of the statutory provision permitting a Corporation " ... generally to
exercise such powers .as may be usual, in the determination of the
Board
in connection with the transaction of banking or other financial
operations in the countries, colonies, dependencies, or possession
which it shall transact business and not inconsistent with the powers
FORD is LIBRARY CERALD
29
"specifically granted herein "15 This provision and that for a
specific general consent for stock acquisitions by Financing Corporations
indicated a desire that the Corporations be utilized in a manner foreseen
in the original enactment of the Edge Act, namely to permit American banks
to compete more effectively in the international market.
The changes in the Regulation removed much of the vagueness and
generalities of the statutory language. In many ways they demonstrated
the methods whereby the Corporations could increase the scope and flexi-
bility of the international operations of American banks and help to
overcome some of the weaknesses in those operations. These methods were
quickly adopted and put to use by the American banking community. Within
six years after the issuance of the Revision, more Corporations were
formed than in the previous forty years. Furthermore, the scope of their
activities was vastly increased.
1512CFR Part 211, effective January 15, 1957, p.5. A somewhat
parallel provision relating to foreign branches of member banks was
incorporated in a 1962 amendment to Section 25 of the Federal Reserve
Act (12 U.S.C. 601-604a) and the subsequent Revision of Regulation M
(Foreign Activities of National Banks, 12 CFR Part 213).
FORD i LIBRARY 03RALD
CHAPTER IV
RECENT GROWTH AND UTILIZATION
A revival in the use of the Corporations has formed an integral
and essential part of the overall expansion of the international
activities of U. S. banks since the mid-1950's. At the end of 1954
there were still only 6 Corporations in existence. By the end of
1967 there were 52 Corporations in operation. This tremendous
revival of interest in the Corporations was the result of a new
appreciation of their unique powers--powers that were often an
essential factor in the expansion of a bank's international opera-
tions.
These 13 years have seen not only a large increase in the
number of Corporations, but vast changes in their size and range
of activities. As already noted, they have also seen two extensive
revisions of Regulation K under which they operate. The first 5
years of this period, however, were largely a time of experimenta-
tion and adjustment, and there was no widespread increase in numbers
or activity. Despite this relatively slow beginning these years
were a precursor of the tremendous growth which has taken place
during the 1960's.
30
FORD & LIBRARY GERALD
31
Growth of the Corporations
The six Corporations in existence at the end of 1954 are
shown in Table 1 on the following page. The two Corporations with
non-New York parents, First of Boston International Corporation
and Bank of America, maintained complete international banking
operations in New York, and the latter also had a branch in
Duesseldorf, Germany. All operations of Morgan & Cie Incorporated
were concentrated at its office in Paris, France, where it conducted
a general commercial banking business. Bankers Company of New York
acted purely as a holding device for the stock of Bankers Trustee
and Executor Co. Ltd., London, England. The remaining two Corpora-
tions were generally inactive at the time, although each held some
stocks and bonds and each had an inactive overseas office.
The development of the Corporations and their parent banks
has naturally been similar to the growth and spread of interna-
tional banking operations in general. Since the mid-1950's interna-
tional banking in the United States has had a phenomenal growth.
These operations today are not only several times their previous
size, but also involve many more banking institutions. Moreover,
these institutions are no longer in only a few of the principal
trade centers along the coasts but are now spread among most of the
major financial centers of the country.
FORD & LIBRARY GERALD
TABLE 1
CORPORATIONS IN OPERATION IN 1954
Corporation
(Parent Bankᵃ)
Yearᵇ
Type
International Banking Corporation
1901
Agreement
(First National City Bank)
First of Boston International Corporation
1918
Agreement
(The First National Bank of Boston)
The Chase Bank
1930
Edge
(The Chase Manhattan Bank (National Association))
Bankers Company of New York
1931
Agreement
(Bankers Trust Company)
Morgan & Cie. Incorporated
1941
Agreement
(Morgan Guaranty Trust Company of New York)
Bank of America
1949
Edge
(Bank of America National Trust
and Savings Association)
ᵃCurrent name.
b
For Agreement Corporations date of State charter shown, the date
of the Agreement often being subsequent thereto.
FORD & GERALD LIBRARY
32
33
Paralleling this development of international operations in
general, the number of Corporations in operation has increased from
the 6 in 1954 to 53 today, 15ª and their total capital accounts from
$41 million to almost $360 million. 15ᵇ While in 1954 they were all
located in New York, they are today scattered in a dozen cities
ranging from Seattle to Los Angeles on the Pacific Coast and from
Boston to Miami on the Atlantic, as well as at several interior
centers and the Virgin Islands. However, despite this increased
geographic spread, New York still remains the predominant center of
the Corporations' activities, as is true with international finan-
cial operations in general. Thus, the majority of the Corporations
are still located in New York, and of the 34 Corporations so
situated, 14 are subsidiaries of non-New York City parents. 16
Today, 37 banking institutions, 17 including virtually every
major bank conducting international operations, have at least 1
Corporation. In 1954 the 6 banks with Corporations included the
3 largest banks in the country, with all others being among the
15a
As of December 31, 1967, including one not yet opened for
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business.
15b
As of June 30, 1967.
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LIBRARY
¹⁶For these purposes Marine Midland Corporation, Buffalo,
New York, parent of Marine Midland International Corporation,
New York, is considered a New York based parent as its lead bank,
Marine Midland Grace Trust Company is located there. Since the end
of 1967, one Corporation, a subsidiary of Bank of America National
Trust and Savings Association, Bamerical International Financial
Corporation, which is not "engaged in banking" was authorized to
move from New York to San Francisco, Board of Governors of the
Federal Reserve System K.3 1968 No. 7 for the week ended February 24,
1968, "Changes in Corporations Engaged in Foreign Banking and
Financing.
"
17 Including two Bank Holding Companies, the lead bank of which
is used in subsequent comparisons as to size.
34
30 largest. Now the 37 parents include the 18 largest banks in
the country and 31 of the 52 largest. In 1967 they also represented
every member bank with overseas branches 18 and all banks with a
base of over $100 million under the voluntary foreign credit
restraint program. Whereas in 1954 the parents consisted of 4
New York City banks and only 1 each in Boston and San Francisco,
today there are 11 New York City based parents 19 and 26 that are
situated in 11 cities scattered throughout the country.
The dramatic growth in the utilization of the Corporations
over the past dozen years is shown in Table 2 on the following
page. The table also shows that the renewal of interest did not
really gain momentum until the 1960's, over 10 years after the
establishment of Bank of America. While the number of parent
institutions increased over six-fold, it was in the single year
of 1963 that one-fourth of all present parent institutions first
organized an international Corporation. It is also noteworthy
that of these nine parents, seven were located outside New York. 20
In these dozen years the number of Corporations increased almost
nine-fold, their total capital accounts by virtually nine-fold,
¹⁸Only one non-member bank, Bank of Hawaii, has overseas
branches, these being situated in U. S. Pacific possessions and
Trust Territories.
19See footnote 16 above.
20 Appendix 2contains a list of the Corporations organized,
liquidated, and converted from an Agreement to Edge Corporation for
each year since 1954.
FORD & LIBRARY GERALD
TABLE 2
STATISTICS SHOWING THE GROWTH OF THE CORPORATIONS
No. of
--(amounts in thousands of dollars)
Year-
No. of
Corpo-
Equity Holdings
Capital
end
Parents
rations
Total Assets
(at cost)
Accounts
1954
6
6
$ 231,916
$ 2,004
$ 41,019
1955
9
7
252,654
3,956
52,424
1956
9
7
400,984
3,980
57,688
1957
7
7
429,027
16,002
78,115
1958
7
7
471,572
16,466
79,969
1959
7
9
427,856
20,479
84,826
1960
10
15
550,177
26,353
91,484
1961
10
16
592,950
28,487
98,221
1962
13
27
665,356
48,816
150,059
1963
22
36
635,388
68,992
179,906
1964
25
38
888,672
90,891
200,342
1965
29
42
1,016,142
146,314
254,389
1966
33
49
1,387,604
199,588
311,531
6-30-67
36
51
1,626,176
218,904
359,886
1967
37
53
See Appendix 3 for the source and bases of these statistics.
FORD & GERALD LIBRARY
35
36
and their equity investments over a hundred-fold. In Appendix 1
is a list of the banking institutions that currently have one or
more operating Corporations, together with the names and locations
of the latter.
Changes in Utilization
Since the mid-1950's there have been a number of areas in
which there have been changes and experimentations in the utilization
of the Corporations. These include the type of ownership, the
Agreement versus the Edge Corporations, the use of "twin" and
multiple Corporations, the independent versus the foreign depart-
ment integrated Corporations, and finally the different operations
which various Corporations have undertaken in the overall interna-
tional business of their parent institutions.
Ownership
Today all of the Corporations in operation are wholly-owned
subsidiaries. This is in striking contrast to the experience prior
to 1930 when 12 of the 18 Corporations which came under the Board's
jurisdiction were originally owned by more than 1 bank. Of these
12, three also had foreign as well as United States banks as stock-
holders and there was one Edge Corporation whose stock was sold to
the public.
Since 1930, 58 Corporations have been established. Of these
only 1 had multi-bank ownership, and 1 other was a wholly-owned
subsidiary of a non-banking company, The former, American Overseas
FORD & GERALD LIBRARY
37
Finance Corporation, was formed in 1955 by The Chase Manhattan
Bank, Chemical Corn Exchange Bank, The First National Bank of
Boston, Mellon National Bank and Trust Company and National Bank
of Detroit. One, if not the principal, purpose for its establishment
was to extend foreign credits in cooperation with and under the
guarantee of the Export-Import Bank. When satisfactory arrangements
with that institution proved impractical, several of the share-
holding banks desired to withdraw from the operation. Thus in 1957
the business of the Corporation was sold and the Corporation
liquidated. The purchaser was American Overseas Finance Company,
another Edge Corporation, which was wholly-owned by American Overseas
Investing Company, Inc., a New York Corporation, which was controlled
by industrial interests. In 1960 the new "AOFC" merged its business
into that of an affiliated company and entered liquidation.
The reasons for the lack of success of the earlier multi-bank
Corporations have never been clearly documented. However, the
principal causes were, at least in part, the same problems that were
encountered by all Corporations of that period, namely the highly
unstable condition of international trade and the lack of experienced
personnel. Regardless of the cause of their lack of success, 6 of
the 12 were subsequently taken over by wholly-owned Corporations or
by a single bank which incorporated the foreign branches into its
own foreign branch network. In another instance the foreign branches
were taken over by a foreign bank, The Royal Bank of Canada.
FORD & LIBRARY 9ERALD
38
The more recent dissolution of American Overseas Finance
Corporation appears to have resulted from its inability to obtain its
principal objective of working closely with the Export-Import Bank.
However, there may also have been some subtle fears on the part of one
or more of the non-New York banks of losing their independence in
international operations to their large New York partners.
In any event subsequent efforts toward establishing a multi-bank
Corporation have to date been ineffective. When the Fidelity-
Philadelphia Trust Company established a Corporation in 1963, it
intentionally chose a name, The Company for Investing Abroad, that
was not specifically associated with the bank's name, in the anticipa-
tion that banks in other parts of the country might join as share-
holders. Such expectations were never realized and eventually the
Corporation's name was changed to The Fidelity International Corpora-
tion, when its parent shortened its name to The Fidelity Bank. 21
The lack of success of the multi-bank international corporate
operations to date is of particular interest in that this was orig-
inally considered as one of the prime advantages of this corporate
device. It was expected that banks which were unable to maintain a
full-fledged international operation by themselves would utilize this
device to pool their resources and thus be able to compete with the
larger banks and to better serve their customers than could otherwise
21 Since the end of 1967, The Fidelity Bank, together with
Wachovia Bank and Trust Company, Winston-Salem, North Carolina,
GERALD FORD LIBRARY
and Zilkha & Sons Inc., New York, have been authorized to form an
Edge Corporation, American International Bank to be headquartered
in New York City. Board of Governors of the Federal Reserve System
H.2 No. 7 (1968), page 2.
39
be done by each individual bank. It was apparently these aims which
recently moved James J. Saxon, former Comptroller of the Currency and
subsequently Co-chairman of American Fletcher National Bank and Trust
Company, Indianapolis, Indiana, to recommend that various medium-sized
banks throughout the country should join together in forming an Edge
Corporation. 22
In discussing multi-bank Corporations, some mention should be
made of the anomalous position of those Corporations which are wholly-
owned subsidiaries of Bank Holding Companies. In many ways such
Corporations are in a position to serve a number of banks in their
international operations, not only through overseas contacts and
relationships, but perhaps more particularly in serving the non-New York
banks through having the head office of the Corporation in New York.
On the other hand, these holding companies and their subsidiary banks
can be regarded as a single banking institution which has taken this
particular form due to the laws relating to branch banking. Thus far,
there have been three Corporations owned by Bank Holding Companies and
all have been located in New York City. 23
22An application by American Fletcher National Bank and Trust
Company to form an Edge Corporation was received in early November 1967,
but has not yet been acted on. Board of Governors of the Federal
Reserve System H.2 No. 44, (1967), page 3.
23Since the end of 1967, United Virginia Bankshares Incorporated,
Richmond, Virginia, has been authorized to form an Edge Corporation,
United Virginia Bank International, to be headquartered in Norfolk,
Virginia. Board of Governors of the Federal Reserve System H.2, 1968-No.2,
page 2.
GERALD FORD LIBRARY
40
In 1962 Western Bancorporation established the first Corporation
to be a subsidiary of a Bank Holding Company, Western Bancorporation
International Bank. The company actually would have preferred having
the Corporation a subsidiary of United California Bank, the company's
lead bank, but the Board of Governors interpreted the restrictions of
the Bank Holding Company Act as prohibiting such an ownership by a
subsidiary bank. In actual fact the Corporation's operations were
coordinated with those of the international department of United
California Bank, although it also worked with at least two of the
company's other banks. However, when the Board of Governors reversed
its interpretation of the statutory restrictions in 1966, the Corpora-
tion's stock was transferred to United California Bank, and the
Corporation's name was changed to United California Bank International.
In 1963 wholly-owned Corporations were formed by each, Marine
Midland Corporation of Buffalo, New York, and Northwest Bancorporation
of Minneapolis, Minnesota. The Marine Midland International Corpora-
tion works closely with the international department of the Marine
Midland Grace Trust Company of New York, but also serves other banks
in the holding company system. In contrast Northwest International
Bank is somewhat more independent, although working primarily with
its parent's lead bank, as few others in the holding company system
are of sufficient size to have much international business.
FORD & LIBRARY GERALD
Agreement versus Edge Corporation
The utilization of one versus the other of these types of Corpora-
tions has undergone drastic changes. Prior to 1930, 15 of the 18
Corporations coming under the jurisdiction of the Board were Agree-
41
ment Corporations. Between 1930 and the end of 1954 two out of the
4 new Corporations operated under an agreement with the Board. However,
since 1954 only 5 of the 54 Corporations organized have been Agree-
ment Corporations and 3 Agreement Corporations have converted to Edge
Corporations. Today, of the 52 operating Corporations only 5 are
Agreement Corporations: International Banking Corporation (owned by
First National City Bank, New York), which was chartered in 1901 and
was one of the first Corporations to sign an agreement with the Board
of Governors; Bankers Company of New York (owned by Bankers Trust
Company, New York), which was organized in 1931 and signed an agree-
ment with the Board in 1938; and 3 that came under the jurisdiction
of the Board subsequent to 1954, The Gallatin Co., Inc. (owned by
Manufacturer Hanover Trust Company, New York), Virgin Islands National
Bank (owned by First Pennsylvania Banking and Trust Company, Philadelphia),
and First Foreign Investment Corporation (owned by The First National
Bank of Miami, Miami, Florida).
Today, both types of Corporations are subject to the same super-
vision and virtually the same regulations, with the scope of activities
of an Agreement Corporation being somewhat more restrictive. Because
of this there are now only two basic reasons for choosing an Agree-
ment rather than an Edge Corporation, both being of a technical or
FORD & LIBRARY GERALD
legal nature. One is where State banking laws have provisions for
State banks to acquire the stock of a State-chartered international
banking company, but not that of an Edge Corporation. Until recently
this was true in California. The other reason for choosing an Agree-
ment Corporation is where the purpose of the Corporation does not require
42
a capital of $2,000,000, which is the required minimum for an Edge
Corporation. This latter is illustrated by Bankers Company of
New York, The Gallatin Co., Inc., and First Foreign Investment Corpora-
tion, each of which was utilized to acquire and hold a single stock
issue. Of course, in a case where an Agreement Corporation has been
in existence for a considerable period of time, as is true with
International Banking Corporation, there may be a desire to maintain
this continuity.
Additionally, there was another unique situation where the utiliza-
tion of the Agreement Corporation made possible a stock acquisition
by a member bank which could not otherwise have been done directly.
Thus, First Pennsylvania Banking and Trust Company acquired the con-
trolling stock of Virgin Islands National Bank since the latter signed
an agreement with the Board of Governors and otherwise comes within
the requirements of an Agreement Corporation under Section 25. Today,
such a direct acquisition by a member bank can be made under the 1966
amendment to Section 25 and the March 1967 Revision of Regulation M.
"Twin" and Multiple Corporations
"Twin" Corporations developed from the differentiation between
"Banking" and "Financing" Corporations in the 1957 Revision of
Regulation K. Only the former could conduct an international busi-
ness or hold stock of foreign banks, while only the latter could hold
the stock of non-banking companies, issue debentures, or undertake
underwriting operations abroad. This differentiation was based on
the same philosophical concepts that were the foundation of the banking
FORD & LIBRARY GERALD
43
statutes of the 1930's, which required the separation of commercial
and investment banking. As a practical matter, this provision of the
Regulation meant that even those banks that only desired to utilize
a Corporation for holding stock in foreign banks and foreign finance
companies were still required to have 2 Corporations, one of each type.
As a result, during the period that this Revision was in effect, no
fewer than 11 banks acquired "twin" Corporations. In 4 instances the
bank acquired an additional Corporation so as to have twins, 24 and
in the other 7, 2 new Corporations were chartered, although in one
case one of the "twins," has never been utilized and is not yet
opened for business. 25
The 1963 Revision of Regulation K abolished the major distinctions
between these 2 types of Corporations, and as a result there is no
longer any statutory or regulatory reason for a bank having separate
"Banking" and "Financing" Corporations. However, of the 11 banks
which had created "twins," only Bankers Trust Company has merged its
Corporations.
The reasons for the banks' continuing to maintain "twin" Corpora-
tions do not appear to form any consistent pattern. While the phil-
osophical concepts, which formed the basis for the original regulatory
24 First National City Bank retained its Agreement Corporation,
International Banking Corporation, as its "Banking" Corporation and
established a new Edge "Financing" Corporation. In 1957 The First
National Bank of Boston converted its State-chartered Agreement
Corporation into an Edge Corporation, but this is not considered as
a new Corporation in this regard.
25Irving International Banking Corporation.
FORD : LIBRARY GERALD
44
distinction, seem to play a continuing role in the banks' thinking,
the predominant reasons seem to be based more on various practical
or administrative considerations. This appears to be particularly
true where one or both of the Corporations have developed a partic-
ular role or character, such as establishing a New York presence for
the parent, acting as a part of the foreign branch system in holding
the stock of subsidiary foreign banks, or in specializing in project
financing or underwriting. Also in some cases there may have been
tax considerations which militated against a merger.
Six banks have multiple Corporations, other than those that were
originally "twins." In all of the cases one Corporation has a special
role or characteristic. Three cases arose prior to the 1963 Revision
and occurred where an Agreement Corporation was acquired for a
special purpose: to hold the stock of an English fiduciary in two
instances, and to conduct a local banking business in the Virgin
Islands in the other--and the parent bank subsequently organized
another Corporation, or even "twins," to work more directly with its
International Banking Department. The other three cases are within
the past year, when banks with one or more Corporations headquartered
with their International Banking Department, decided that they also
desired to establish an international presence elsewhere through a
Corporation's engaging in banking. In two instances the new Corpora-
tion was established in New York and in the other it was located in
San Francisco.
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45
Independent versus Integrated Corporations
Some Corporations operate with a reasonably high degree of
independence from the parent bank's International Banking Department.
Others have their operations and activities so closely integrated with
the parent's International Banking Department that they are nothing
but a corporate shell with no personality or character of their own.
As a general rule, the Corporations that are engaged in inter-
national banking in a city other than that of their parent bank, have
developed a considerable amount of independence. This appears to be
a natural outgrowth of the distances, communication problems, and time
factors involved. On the other hand, the necessary coordination of
the parent bank's overall international activities forms a natural
barrier or limitation to the degree of such independence.
Corporations headquartered with their parent bank have not usually
developed any appreciable amount of independence or character of their
own. Of the 37 such Corporations in operation, only 2 or 3 have a
completely independent staff and a clearly defined sphere of activities
which is separate from the bank's International Banking Department.
At most, only about 5 or 6 others show some lesser degree of independ-
ence. This is not particularly surprising when one considers that the
primary purpose for most of these Corporations is that of a simple
holding device for foreign stocks. Except for International Bank of
Commerce, Seattle, which conducts a banking business at its Hong Kong
branches, none of these Corporations is engaged in banking, which is
is only natural since they are located with the parent's International
Banking Division. Furthermore, only a relative few make any loans
46
other than in the temporary employment of funds. Where a Corporation's
function is so limited it seldom requires a large or independent staff,
and this has the tendency of making it dependent on the staff of the
International Banking Department.
Various Operations of the Corporations
The growth in the number of Corporations and of their parent banks
has been accompanied by a marked expansion in the variety of operations
which the Corporations have undertaken. By the mid-1950's the six
Corporations then in existence really undertook only four types of
operations. The first was the establishment of a New York presence and
maintenance of a regular foreign banking business in that city; second,
the maintenance of foreign branches; third, the establishment of sub-
sidiaries operating in connection with foreign branches of the parent
bank, primarily fiduciary companies and real estate holding companies;
and, fourth, the holding of minority equity interests in foreign financing
companies and in one instance in a foreign bank. The last two types of
operations were, of course, attained through the exercise of the
Corporations' power to hold stock in other companies. Of the six
Corporations, three undertook only one of the above operations, two
had both types of stockholdings, and one fulfilled three functions.
In the past 12 years, the operations that the Corporations under-
took for their parent banks have had a prolific growth. While some
completely new types of operations have appeared, many have resulted
from the development and subdivision of the earlier operations mentioned
above, this latter being particularly true in relation to the utiliza-
tion of the stockholding power of the Corporations.
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47
The establishment of an out-of-State presence is no longer limited
to New York, for within the past year a New York bank, First National
City Bank, has established a Corporation in San Francisco. Additionally,
most Corporations, even though not "engaged in banking," now undertake
some type of foreign financing, at least to the extent of acquiring
bankers acceptances. (usually their parent's) or short-term foreign paper
as a temporary means of employing unallocated funds. Furthermore, others
have specialized in making medium-and long-term loans that are generally
not made by their parent's International Banking Department, and a few
have undertaken special project financing.
The foreign or overseas branch operations of the Corporations have
diminished in importance insofar as volume is concerned, but have
increased in diversity. A decade ago all foreign branch operations were
fairly substantial in size, and similar in their scope of services to
the foreign branches of U. S. banks in general. Today only the Hong
Kong branches of International Bank of Commerce approach this type of
operation, although they cannot yet be called substantial. However,
there is a new variation in that the London office of Philadelphia
International Investment Corporation is limiting its deposit function
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to Euro-currency time deposits. Additionally, First Pennsylvania
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Banking and Trust Company's Agreement Corporation, Virgin Islands
National Bank, runs what amountsto a purely local banking business in
that possession of the United States, even though two of its branches
are situated in the adjacent British Virgin Islands.
The utilization of the Corporations' stockholding powers has shown
the greatest amount of growth and variation. Assistance to the parent
bank's foreign branches through stockholdings now takes not only the
48
form of wholly-owned fiduciaries and real estate holding companies, but
also nominee companies, controlling or minority interest in various
types of finance companies, and minority interests in government-
sponsored development finance companies. This last is often considered
a political or public relations necessity for the local branch. An
entirely new function has appeared in the form of subsidiary banks in
lieu of foreign branches. These have occurred where foreign branches
were not permitted under local law, or because, in a given situation,
other considerations led the parent to choose the affiliate route
rather than direct branching. Equity interests in finance companies--
other than those cooperating with local foreign branches- have become
of vastly greater importance, and now include controlling as well as
minority interests. Some are even considered as substitutes- though
admittedly second choice--for branches or subsidiary banks where these
are not permitted. Minority interests in foreign banks have not only
increased tremendously, but have often developed into a method of
further cementing correspondent relationships. Another new development
has been the creation of the foreign-based "alter ego" subsidiary,
which exercises basically the same powers as the Corporation itself.
These have been formed for various reasons, including among others
tax considerations, the compartmentalization of operations in certain
geographic areas, and the avoidance of direct involvement of the parent
bank's name in certain operations. More recently equity investments
have been utilized in establishing "joint ventures" with one or more
partners, which may or may not include other Corporations. Another
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49
innovation has been the formation of companies to tap the Euro-dollar
bond market. These have become increasingly important with the
tightening of the Board's voluntary foreign credit restraint effort.
Some of these companies have taken the form of an "alter ego" company,
while others have been in the form of a "joint venture."
The variety of possible combinations of the operations for which
the Corporations have been utilized by their parent banks is apparent.
It also appears equally obvious that a really broad utilization of
these various operations requires time to develop. In actual practice,
less than half of the 37 parent banks are currently utilizing their
Corporations in more than 3 of the ways set forth, and of these only
1 acquired its first Corporation subsequent to 1963. In contrast, of
the parents using their Corporations for less than 4 of these opera-
tions, only 5 established their first Corporation in 1963 and all the
others are of more recent origin.
Despite the variety of the current operations of the Corporations
as set forth above, they fall into four groups, or basic functions,
namely:
(1) Foreign banking operations in the United States;
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(2) Direct overseas operations;
(3) Specialized financing, including underwriting; and
(4) Equity investments.
Some of these functions, while easily distinguishable, have certain
common features. For example, the first two categories ordinarily
require the Corporation to be, or anticipate being, "engaged in banking,"
whereas the others need not; and aforeign presence may be established
by direct branching or through a subsidiary. Furthermore, some
50
functions can be combined in a single Corporation more easily than
others. Thus, Corporations utilizing any of the other three functions
may also have stockholdings, but it is unlikely that those "engaged
in banking" would also engage in specialized financing to any consid-
erable extent.
In the following two chapters, these basic functions are discussed
as to their development, the extent of their utilization and the rate
of their growth over the past 12 years. Also past and developing trends
are investigated and future possibilities explored.
GERALD R. FORD LIBRARY
CHAPTER V
THE BASIC FUNCTIONS OF A BANKING NATURE
As noted in the preceding chapter, the operations of the Corpora-
tions encompass four basic functions. Three of these are entirely or
principally of a nature that is commonly related to banking in the
United States. These form the subject matter of this chapter. The
fourth function, the acquisition and holding of equity interests, is
generally prohibited, except in strictly circumscribed circumstances,
to U. S. banks. It is also the function which has shown the most
attraction for the international banking community in this country.
This attraction has resulted in its having the most phenomenally large
and varied growth of any of the basic functions of the Corporations.
Because of the many facetsinvolved in its increased utilization, it
is treated separately in the following chapter.
Direct overseas operations and specialized financing each have a
distinct role in the current operations of the Corporations. However,
among the Corporations' banking type operations it is the full fledged
international banking business which has been the center of interest
and hence the principal focus of growth among these activities.
International Banking Operations in the United States
Not since Colonial times, or at the latest the first years of the
Republic, has New York been challenged as either the national or inter-
national financial center of the United States, Beginning with the
51
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52
period of World War I it also became one of the principal financial
centers of the world and eventually one of the world's two financial
capitals. As a result, few foreign businessmen or financiers that
visit the United States do not at least pass through New York City.
There is hardly a major American business that does not maintain some
sort of office in New York, and a large number of those with overseas
branches or operations have their International Corporation or Division
headquartered there. Because of this there is no other place in the
country, if not in the world, where information on the current inter-
national conditions, trends, and even rumors is so readily available.
New York thus offers the maximum exposure to possibilities in
international financial transactions and the most comprehensive informa-
tion on international conditions. Logically, it is also the location
of the vast majority of foreigners' deposits in the United States.
Under these circumstances it is not surprising that the non-New York
FURD
banks, which have been most aggressive in the field of international
finance, have seen distinct advantages in being able to establish a
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New York presence. Even somewhat less aggressive banks have also
found such a presence a necessity. A necessity, that is, if they are to
remain the principal banker for some of their important local customers,
many of whom in recent years have entered into international operations,
or upgraded such activities. Besides these local situations, there
are also the competitive forces at play among the larger banks through-
out the country, each trying to maintain its share of the national
and international business of the principal U. S. companies. These
companies have operations that are spread throughout this country and
much of the rest of the world, and their financial requirements exceed
FORD is LIBRARY GERALD
53
the capabilities of any single bank. To maintain a share of this
business, whether of local or national companies, banks have found
that they must be in a position to extend a broad range of services.
On the foreign side many of these services must be available in U. S.
cities other than where the bank's head office is located, primarily
in New York.
The use of domestic correspondent banks in such cases has often
proven more futile than useful. This is true, because any correspondent
with adequate international services is no doubt also a competitor,
not only for any international business, but also for a more lucrative
share of the national business of the large companies. As compared to
correspondents, a subsidiary Corporation offers the banks an opportunity
for a direct representation in another State. Of course, the business
in the United States of these Corporations is limited by statute to
that which is incidental to their international business. However, this
does not inhibit certain deposit and loan relationships and it has
not prevented the Corporations from being an effective device for the
banks in establishing their presence in international financial centers
outside their own State.
The local competitive realities have at times been highlighted by
the near coincidental establishment or transfer of some of the Corpora-
tions. Thus in 1962 the two largest banks in Chicago each established
a Corporation in New York to undertake an international banking opera-
tion. Eighteen years after Bank of America, New.York, opened, and
five years after the establishment in that city of what is now United
California Bank International, there suddenly appeared in a single
54
year three Corporations in New York owned by California banks. Even
more enlightening as to the strength of these competitive factors is
the fact that in the past year a New York City bank, First National
City Bank, has felt it desirable to establish a banking Corporation in
San Francisco, a reversal of what had been the common pattern.
Growth of Banking Operations in the United States
The first, and for 30 years, the only such operation in New York
by a wholly-owned subsidiary was that of The First National Bank of
Boston. In 1918 it established an Agreement Corporation with its
operating office in New York. In 1957 it was converted into an Edge
Corporation, now Bank of Boston International. In 1949 Bank of America
National Trust and Savings Association, San Francisco, established a
New York-based Corporation, Bank of America, which since then has been
the largest and most active of all Corporations with banking operations.
It was not until 1962, thirteen years later, that another Corporation
was organized to undertake similar banking operations. Since then
there has been a rapidly increasing interest in this type of operation
and today there are 13 Corporations operating an international banking
business in New York and another owned by a New York City bank is
located in San Francisco,
The table on the following page shows the growing breadth of
participation in this type of operation, the relative newness of most
of the entries, and that the banks undertaking this type of operation
have generally been among the larger of the non-Metropolitan New York
banks.
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TABLE 3
BANKING CORPORATIONS AND THEIR PARENTS
Date
Estab-
Parent Bank
Parent's
lished
Corporation (current name)
Rankᵇ
The First National Bank of Boston
10
1918
Bank of Boston International, New York
Bank of America NT&SA, San Francisco
1
1949
Bank of America, New York
Continental Illinois Nat' Bank & Trust Co. of Chicago
2
1962
Continental Bank International, New York
The First National Bank of Chicago
4
1962
First Chicago Int'l Banking Corp., New York
United California Bank, Los Angeles
7
1962
United California International Bank, New York
Northwest Bancorporation, Minneapolis
52c
1963
Northwest International Bank, New York
State Street Bank and Trust Company, Boston
41
1965
State Street Bank Boston International, New York
Bank of California National Association, San Francisco 19
1966
Bank of California International, New York
Mellon Nat'l Bank and Trust Company, Pittsburgh
8
1966
Mellon Bank International, New York
Crocker-Citizens National Bank, San Francisco
6
1967
Crocker-Citizens International Bank, New York
Philadelphia National Bank
17
1967
Philadelphia International Bank, New York
Wells Fargo Bank, San Francisco
5
1967
Wells Fargo Bank International Corp., New York
First National City Bank, New York
2
1967
First National City Bank (International),
San Francisco
Northern Trust Company, Chicago
29
1967
Northern Trust International Corporation
a Where a Corporation was established and subsequently transferred so
as to undertake a banking operation, the later date is given. Where a
Corporation converted from an Agreement to an Edge Corporation, but
continued to be engaged in banking the earlier date is shown.
b
In order of December 31, 1967, deposits of non-Metropolitan New York
banks, except for First National City Bank which is ranked among New
York City banks only.
c Ranking is of the lead bank, Northwest National Bank, Minneapolis.
d Not yet opened for business as of December 31, 1967.
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55
56
This list also shows that in less than six years the number of cities
with banking institutions maintaining a subsidiary banking operation
in New York has jumped from two to seven, and additionally one New York
bank now has such an operation on the Pacific Coast. Not only has the
number of these Corporations increased, but their total assets and
total capital accounts have grown at an even faster rate. While the
increase in numbers was six-fold, that in both of these accounts was
more than eight-fold, so that by mid-1967 they were $1,267 million and
$127 million, respectively. Despite the increasing number of Corpora-
tions, Bank of America has maintained its position as the predominant
factor, so that in mid-1967 it still had well over half the total
assets and almost half of the total capital accounts.
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Coordination of Operations with those of the Parent
As noted earlier, all of the Corporations conducting international
banking operations tend to have some degree of independence, but
such independence is limited by the need for an over-all coordination
of the bank's international operations. The manner of attaining this
coordination varies from one institution to another and, as a result,
there are variations between the Corporations both as to the amount of
independence and the manner of operating.
Primarily two factors appear to determine the form of this
coordination and, hence, the degree of the Corporation's independence
and the scope of its operations. These are the geographic or time zone
difference between a Corporation and its parent, and the role that
the parent visualizes for the Corporation. While the former unques-
tionably exerts an influence on the latter, each can have a separate
effect on the manner of coordination finally chosen.
57
The greater the geographic distance, the greater the tendency
toward more independence. This can be seen in any branch banking
operation, especially among foreign branches. The increased cost of
communication is an example of the forces which militate for this
greater independence. Furthermore, where the distance is such that
different time zones are involved, certain integrated types of opera-
tions become less practicable, if not impossible, and hence operations
of a more independent character become more likely.
Different banks can conceive of a variety of different roles
for a Corporation located in another State. They may see it purely
as an extension of the international banking department's loan plat-
form, tellers' cages, etc.; as a specialized separate department with
limited functions; like a domestic branch with limited independence;
similar to a foreign branch with even less restrictions on its independ-
ence; as an independent entity with coordination only at the policy
level; or as the center of certain of the bank's international opera-
tions. Furthermore, the parent may visualize the Corporation fulfilling
one role in relation to certain functions and yet another role as to
other functions. Thus in its credit operations it may be closely
tied to the parent's International Banking Department, but in foreign
exchange transactions it may be the center of all such operations for
the bank.
In actual practice there are no two Corporations that maintain
exactly the same relationship with their parent, However, the Corpora-
tions do seem to fall into two general groups. The first act as out-
FORD i LIBRARY 9ERALD
58
of-State extensions of the parent's international banking department.
These may also have independent operations such as maintaining deposit
accounts, making loans and performing other services, but the bulk of
the transactions handled are for the account of the parent bank.
Experience to date indicates that in these cases the parent and the
Corporation are usually in the same time zone. The second general
group operates more like independent entities. These Corporations
often develop substantial customer relationships, deposit and loan,
which have no direct connection with the parent bank, although they
naturally also serve the parent's customers. These Corporations may
also become chiefly responsible for certain of the parent's inter-
national functions such as foreign exchange trading. Thus far these
Corporations have tended to be in a different time zone from their
parent, and to have a greater degree of independence than the Corpora-
tions in the first group,
In all cases the directors, and often the principal officers,
of the Corporation include the top executive officers of the parent
bank. Thus at the top policy level there is complete coordination.
The degree of coordination and cooperation at the lower levels seems
to depend on the role of the Corporation and on the individuals
concerned. Where the role envisages only a minimum of independence,
major decisions are made at the international banking department and,
hence, coordination is achieved automatically. On the other hand,
where there is considerable independence, coordination may be achieved
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59
through the executive officer of the Corporation, or may be diffused
through the organization, i.e., the various area loan officers, credit
review officers, etc. The degree of such diffusion appears to depend
largely on the individuals involved and the size of the operation.
Types of Operations Undertaken and Service Offered.
As of mid-1967, all 11 of the Corporations with international
banking operations in New York were maintaining a deposit and loan
business, and 10 of the 11 also had customer acceptance finance out-
standing. However, only 7 had sufficient demand deposits and acceptances
outstanding so as to appear to be technically "engaged in banking"
under Regulation K²⁶. Two of these only opened in New York in 1966
or 1967 and the others in 1962 or earlier. On the other hand, only 1
of the 4 not technically "engaged in banking" opened prior to 1965.
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Furthermore, only 6 of the 11 Corporations appeared in mid-1967 to be
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funding their loan operation through deposits received, and for these
the loan-to-deposit ratio varied widely. Here again, the period of
time the Corporation has been operating a banking business does not
always seem to be the controlling factor, as one of the 6 funding their
loan operations with deposits only started such operations in 1966,
while 2 that are not so funding their loans commenced operations four
or five years ago.
26
Section 211.2(d)--A Corporation is "engaged in banking" whenever it
has aggregate demand deposits and acceptance liabilities exceeding its
capital and surplus. Regulation K, page 2. However, the Board has
issued an interpretation that deductions permitted in calculating required
reserves may also be deducted in calculating "aggregate demand deposits"
under this section. Interpretations of the Board of Governors of the
Federal Reserve System, June 1967, 15705, page 481.
60
The above data indicate that while all of these Corporations
basically offer checking account, loan, and acceptance services, the
emphasis and manner of operating vary considerably. This becomes even
more noticeable when one studies the Corporations! other typically
internationally oriented operations such as foreign exchange, letters
of credit, and collections. Perhaps one should also include with this
second group of services those which the Corporation offers purely as
an agent of the parent. A general insight into the operations of the
Corporations and their variations are best understood through specific
examples.
Bank of America is without doubt not only the largest, but also
has the greatest scope of operations of any of the Corporations. It
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has the broadest base of deposits, which is not surprising when one
realizes that it has been active in this area more than three times as
long as any other of these Corporations, except Bank of Boston Inter-
national. Additionally, it has the advantage of being a subsidiary of
the world's largest bank and one that, except for a single New York bank,
has more overseas branches than any other United States bank. With this
deposit base and its parent's contacts it has been able to aggressively
enter the New York international financial market and to become a not
inconsiderable factor in that market.
To lure new borrowing clients, either in making their first
international banking account or in transferring their foreign business
from previously established bank connections in New York, Bank of America
has as broad a range of financing methods as virtually any New York
institution. Besides the usual short-term commercial loan, advances on
61
collections, acceptances, and letters of credit, it also makes term
loans and issues deferred payment letters of credit. Lines of credit
to foreign correspondent banks and to large international concerns are
often available at the Corporation in New York, as well as in San
Francisco with its parent. Any exceptionally large credits may, of
course, be partially participated to its parent, although the Corpora-
tion alone has a single borrower limit of over $4.5 million.
Besides these more or less standard services, it can also offer a
large range of other international services, both on its own and drawing
on the knowledge and abilities of its parent's California offices or
those in foreign countries. It has established itself as an important
factor in the New York foreign exchange market, operating primarily on
its own, but at times as agent for its parent.
These foreign exchange operations, both in the spot and future
markets, have an important influence on the balance sheet, not only of
Bank of America, but of all other Corporations handling a volume of
such transactions. According to the custom of the New York market,
foreign exchange transactions, and all other international payments, are
payable in Clearing House Funds unless Federal Reserve Funds are
specified. While Federal Funds are payable the same day, Clearing
House Funds are not payable until the following business day. This
means that in liquidating most foreign exchange transactions or other
payments of funds, the amounts will appear overnight in both the "Due
from Banks" and the "Deposits-Officers Checks outstanding" accounts.
This is, of course, also true for all New York City banks, but because
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62
of their relatively larger deposit bases, the effect of this "float" on
their balance sheet is largely masked. However, for the Corporation
handling a large volume of these transactions, such as Bank of America,
the "Due from Banks" account often reflects a very high amount in
relation to Total Deposits. While this type of transaction was certainly
not the only reason, it is interesting to note the apparently highly
liquid positions of the Corporations with banking operations in New
York. As of mid 1967, only 2 of the 11 such Corporations showed "Cash
Assets" of appreciably less than 50 per cent of deposits.
In contrast to Bank of America, Bank of Boston International over
the years has acted principally as an agent for its parent bank, rather
than as a separate entity. Checks drawn in international transactions
on accounts at the parent in Boston are honored at the Corporation.
Similarly foreign loan funds can be disbursed or payments made through
the Corporation, and documentary credits can be honored and processed
at the Corporation. There is never any question of establishing contact
during banking hours when there are problems to be answered or important
policy decisions to be made, as both offices are in the same time zone.
Thus, where the bulk of the operations of Bank of America are for its
own account, a large proportion of the transactions at Bank of Boston
International have been for the account of its parent in Boston. Of
FORD i LIBRARY GERALD
course, on the other side of the ledger the latter had almost at its
fingertips all of the expertise of the entire International Banking
Department of its parent. The fact that it has acted principally as an
agent for its parent, does not mean that Bank of Boston International
has not maintained certain services of its own. On the contrary it has
63
maintained checking accounts and made loans on its own, although it
apparently has not done any extensive acceptance financing in its own
name, and foreign exchange operations are still handled primarily in
Boston.
Another variation in the parent's utilization of a New York banking
Corporation is illustrated by Continental Bank International. The
Corporation in New York does virtually all of the foreign exchange
trading for its parent bank, as well as for itself. As might be ex-
pected its "Cash Assets" form a relatively larger proportion of Depos-
its than is true of most of these Corporations. In addition to this
special operation, the Corporation also maintains checking accounts,
makes loans, and offers the services of a full fledged international
operation, and in general competes actively for international business
in the New York market.
Summary
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The number of banking institutions which have utilized a Corpo-
ration to establish an international "out-of-State" presence has grown
six-fold over the past 12 years, and now encompasses a far broader
geographic spread. However, as in 1954, only about one-third of all
the banks with Corporations are utilizing them in this manner.
There is considerable variation in the manner in which the inter-
national operations of the parent banks and of the Corporations are
coordinated and this naturally influences the degree of independence
the Corporation may have. Distances, time zones, and the differing
roles visualized for the Corporation all enter into these variations.
It also affects the emphasis the Corporation may place on different
services and operations.
64
In general, all the Corporations tend to offer, directly or
indirectly, the same scope and types of international financial services
as are offered by their parent banks and by the other commercial banks
with which they compete for foreign-oriented customers.
Direct Overseas Operations
In 1916 the passage of Section 25 of the Federal Reserve Act first
permitted national banks to acquire the stock of "Agreement" Corporations,
and in 1919 Section 25(a) was enacted making possible the Federally
chartered "Edge" Corporations. Shortly after the enactment of the former
legislation The National City Bank of New York (now First National City
Bank) acquired the controlling interest of International Banking Corpora-
tion and it became an Agreement Corporation. This company was established
in 1901 and at the time it entered into an agreement with the Board of
Governors was already operating a number of foreign branches scattered
through various parts of the world. In the next few years other
Corporations were organized and also established foreign branches.
Until 1925 the Corporations actually operated more overseas branches
than did the banks themselves. 27 Then there began a period of two decades
during which many foreign branches were closed and only a few new ones
were opened. At the same time most of the branches of the Corporations
were transferred to banks, usually the parent, but in one instance to a
foreign bank, The Royal Bank of Canada.
27
"United States Banking Organization Abroad," Federal Reserve
Bulletin, December 1956, page 1289.
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65
By the middle of the 1950's, Corporations were operating only two
active branches, the Paris Branch of Morgan & Cie. Incorporated, and
Bank of America's branch in Dusseldorf, Germany. Additionally there
were, and still are, two inactive offices, Chase International Invest-
ment Corporation's Paris Office and International Banking Corporation's
London Office, both of which had transferred their banking business to
their parent banks, but continue to maintain a legal presence for
technical reasons.
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Within the next nine years the Paris Branch of Morgan & Cie.
Incorporated was combined with that of Guaranty Trust Company, when the
two parents merged, and the branches of Bank of America were transferred
to its parent bank. By the time of the transfer to its parent, Bank of
America had a branch in each Dusseldorf, Paris, Beirut, Singapore, Kuala
Lumpur, and Hong Kong, and two in Guatemala.
During the 1960's three new direct overseas operations have been
undertaken through the use of Corporations. All are distinct from the
previous types of overseas operations of the Corporations.
In 1964 the International Bank of Commerce, which had been formed
in 1963 by The National Bank of Commerce of Seattle, opened a branch in
Hong Kong. Since then four additional branches have been opened in
that Crown Colony. When these branches opened the parent bank had no
overseas offices of its own. These branches are not as yet strongly
engaged in financing international trade, but concentrate more on loans
to local businesses and individuals. However, they do establish a
Far East presence for their parent bank, whose international transac-
tions are largely oriented toward that area. The opening of the parent
bank's London branch will no doubt assist these Asian operations.
&
FORD
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66
Early in 1967 Philadelphia International Investment Corporation
opened an office in London. Such an office must be considered a sub-
stitute for the establishment of a direct branch by The Philadelphia
National Bank. Its purpose would seem to be the tapping of the Euro-
dollar market to assist the parent bank in financing the foreign
needs of its customers without affecting its position under the vol-
untary foreign credit restraint program. It will also give the parent
organization a European presence and the ability to maintain a closer
contact with the financial developments in that area.
The unique position of the Virgin Islands National Bank calls for
some special comments. In 1960 it signed an agreement with the Board
and its controlling stock was acquired by The First Pennsylvania Bank
and Trust Company, Philadelphia, a State-member bank in the Third Federal
Reserve District. Part of its uniqueness is that, although it fits
precisely into the requirements of the Act, it was probably not a
situation originally contemplated by the drafters of the legislation.
While it operates under an agreement with the Board, it was chartered
by and also remains subject to the jurisdiction of the Comptroller of
the Currency. Subsequent to its agreement, the bank opened two branches
in the adjoining British Virgin Islands, and thus technically is
operating foreign branches. It is thus the only Corporation situated
outside the United States proper, the only one under the direct juris-
diction of both the Board and the Comptroller, and one of the few with
overseas branches. However, its operations are not such as are generally
considered as having a basic international character. It conducts a
general local banking business within the archipelago, is not particularly
67
concerned with the financing of foreign trade, and treats all branches
as local, whether in the American or British Virgin Islands, except
insofar as different treatment is required by law.
Summary. The direct overseas operations of the Corporations was of
considerable importance
in the earliest stages of their development.
Today, however, these operations play a relatively small part in the
activities of the Corporations as a whole. In the past few years there
has been some indication that there may be some renewal of interest in
direct overseas activities, as shown by the establishment of branches in
Hong Kong and a limited purpose London office, but this current interest
seems to be in activities of a far more restricted character or
FUND
different scope than was true in the early periods.
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Specialized Financing
Some of the Corporations that are located with their parent and
not "engaged in banking," have undertaken specialized financing, usually
in conjunction with other functions. This financing has taken a number
of different forms, ranging from relatively simple term loans to the more
sophisticated formation of syndicates which undertake loan-equity packages
for more complicated projects.
One type of operation which falls perhaps marginally within this
function of specialized financing and deserves mention, is the partici-
pations with the International Finance Corporation ("IFC"). Over the
years IFC has put together a number of loan-equity packages to assist
in the financing of various private and government-sponsored organiza-
tions in the developing countries. Some of these have been producers or
manufacturers, while others have been development finance companies,
which are to assist local producers and manufacturers. A number of the
68
Corporations have taken a percentage of one or more of these packages
in participation with IFC, and some have turned out to be very profitable
where the stock has gone up sharply in value. Since virtually none of
the expertise that goes into the arrangement of the financing is
contributed by these Corporations, such participations can hardly be
considered as one of the more sophisticated forms of specialized
financing by the Corporations. In many ways such participations are
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similar to the acquisition of foreign paper through brokers, as in
neither operation are the results due to the prior development of a
foreign clientele, foreign contacts, or any special expertise in inter-
national financial operations.
The simplest form of specialized financing by the Corporations is
where the parent's International Banking Department does not choose to
make certain types of loans--for example, term loans--and the Corporation
has become the arm of the bank which specializes in these types of
international financing. Some of these arrangements were consciously
planned, while others developed more or less unconsciously as the
customary term of foreign loans lengthened. Usually the Corporations
fulfilling this particular function also have other activities, although
thus far they have not usually included those which would cause them to
become "engaged in banking."
Other Corporations have undertaken to give extensive assistance to
customers in establishing overseas operations. This has often included
market surveys and extensive investigations of the availability of local
financing and local equity partners. One or two of the Corporations have
at this point turned over the financing to foreign branches of the parent
bank. Others have continued on and either undertaken the financing
69
themselves or organized syndicates to underwrite the enterprise. Some
of these arrangements have been extremely complicated, including the
finding of local or foreign partners, arranging for the assistance of
companies with specialized skills or knowledge, the placing of bonds or
debentures, arranging term loan facilities and short-term operating
lines of credit in foreign or local currencies, and the public sale of
equity interests. Only a very few Corporations have undertaken the
more sophisticated of these operations.
Underwriting has also been done by a few Corporations. This usually
has taken the form of debt obligations and in some instances they have
been a means of obtaining contacts and at the same time adding to the
Corporation's security or loan portfolio, by taking their portion of
the issue and not reselling it. There have been only a few known
instances of the underwriting of stocks. One Corporation has on several
occassions requested the Board's consent to participate in a syndicate
underwriting a Mexican stock, and in another instance took a portion of
an underwriting in conjunction with a foreign subsidiary.
FORD i LIBRARY GERALD
CHAPTER VI
EQUITY INVESTMENTS
No change in the utilization of Corporations has been as dramatic
as the growth in the use of their powers to make equity investments in
foreign companies. 20 In the mid-1950's the Corporations had a total of
eight stock holdings at a cost of $2 million whereas by mid-1967 they
had 327 holdings which cost $219 million. As striking as these figures
are, they fail to illustrate the changing and increasing multiplicity
of purposes of such equity investments.
Of the eight holdings in 1954, there was one small minority invest-
ment in a foreign bank, a similar minority investment in a foreign
finance company, one holding in a New York discount house and the remain-
ing stocks were all in companies servicing the parent's foreign branches.
Today over 60 per cent of the dollar value of investments is in foreign
banking institutions. These investments are primarily utilized as an
alternative to direct foreign branching or as a means of strengthening
correspondent bank relationships. Only a relatively small amount is in
the stock of companies servicing the parent's foreign branches. Various
types of finance and investment companies, including development finance
companies, constitute the bulk of the remaining investments. Although a
28
"Foreign companies" as used here includes domestically-
chartered organizations in which investments are permitted by
statute. The statistical basis is set forth in Appendix 3.
FORD & GERALD LIBRARY
70
71
minority of the dollar value, they represent almost two-thirds of the num-
ber of individual stock holdings. This type of investment is sometimes
used in conjunction with foreign branch networks or as a source of local
funds. In other instances it is regarded as a means of broadening and
improving contacts with correspondent banks and commercial enterprises,
and as a source of financial information and servicing. In terms of dol-
lars, there has been only a relatively small investment in nonfinancial
companies and such holdings have usually been acquired in connection with
FURL
an extension of credit, the majority in participation with the
International Finance Corporation.
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The table on the following page shows the general growth, and to
some degree the changing utilization of this power of the Corporations to
hold the stock of foreign companies. To attain a real understanding of
the variety of ways in which this stockholding power has been utilized,
each of the classes of investment must be scrutinized. The following sec-
tionsundertake to do this both by breaking them down into further subtypes
and by analyzing the various functions which the similar or different in-
vestments may fulfill. However, before approaching the various functions
of these investments, it is of interest to see something of the changes in
their geographic spread and their degree of control.
29
Geographic Distribution of Investments
At the end of 1954 the Corporations had eight stock investments, six
in Europe and one each in Latin America and the United States. Today the
29
Appendix 3 contains a table with this distribution. The geograph-
ical location of the companies is based on the site of their principal
operations, not necessarily where they are chartered.
TABLE 4
EQUITY HOLDINGS OF THE CORPORATIONS
Year
Banking
Nonfinancial
endᵃ
b
Institutions
Finance Companies C
Companies
Totals
Dollars
No.
Dollars
No.
Dollars
No.
Dollars
No.
1954
*
6
*
2
-
-
2,004
8
1955
*
7
*
5
-
-
3,956
12
1956
*
7
*
4
-
-
3.980
11
1957
*
9
*
5
-
-
16,002
14
1958
*
10
*
5
*
2
16,466
17
1959
*
13
5,580
7
*
3
20,479
23
1960
16,356
20
9,997
12
-
-
26,353
32
1961
18,533
27
9,848
18
106
2
28,487
47
1962
31,460
37
16,552
36
804
14
48,816
87
1963
44,932
46
22,969
79
1,091
18
68,992
143
1964
50,099
54
39,006
129
1,786
24
90,891
207
1965
91,924
70
50,776
159
3,614
31
146,314
260
1966
128,833
82
66,175
182
4,580
43
199,588
307
6/67
143,632
94
70,173
188
5,099
45
218,904
327
* Data deleted to preserve confidentiality.
ᵃs of December 31, except 1967, as of June 30.
b
Includes bank, bank holding companies, trust companies, nominee
companies, and realty holding companies - bank premises.
ᶜIncludes development finance companies and finance and investment
companies.
See Appendix 3 for the sources and bases of these statistics.
72
FORD & LIBRARY GERALD
73
Corporations' more than 300 investments are in more than 60 countries lo-
cated on 6 continents and in most of the major archipelagos. As of mid-
1967 over one-third of investment cost was represented by holdings in
Europe; almost one-fourth by holdings in Latin America, and approximately
one-sixth in Africa, the conglomerate grouping of the Bahamas, Bermuda,
and Canada. Each of these and the other areas have interesting character-
istics, including when they were made and in what types of companies.
Europe was the major focus for foreign equity holdings in 1954 and it
remains so today, but with a less predominant position. However, the types
of investments have changed completely. Twelve years ago five holdings
were in foreign branch related companies, i.e., trust companies or bank
premises holding companies, and only one was in a bank. Of the $78 mil-
lion invested in 93 stockholdings in mid-1967, over two-thirds were in
banks and bank holding companies, barely two per cent in branch related
companies, with most of the balance being in finance and investment com-
panies. Whereas the investments 12 years ago were in only three coun-
tries, they are now located in all of Western Europe except for Ireland,
Denmark, Norway, Sweden and Portugal.
While the first investment in Africa was made in 1955, there were
still only three at the close of the decade, all being wholly-owned subsi-
diary banks. Today there are investments in companies chartered by at
least 17 African countries and several other holdings in banking organiza-
tions which operate in a number of the African countries. In mid-1967,
there were 43 investments totaling $37 million, of which almost $35 million
was in banks and bank holding companies and almost all of the balance in
finance organizations.
FORD & LIBRARY QERALD
74
Latin America attracted but one or two investments throughout the lat-
ter part of the 1950's, but in 1960 the number and amount began to increase,
the latter exceeding $1 million in that year. By June 1967 there were 87
investments costing over $50 million. In contrast to Europe and Africa,
the investments in Latin America were for several years much more closely
balanced between banks and finance companies. However, beginning with
1965, the holdings of bank stocks have taken the lead and today amount to
almost two-thirds of the total investment. While only a small amount--
about five per cent of the area total is invested in non-financial organi-
zations, this represents almost half of all such equity holdings.
The developed areas of the Bahamas, Bermuda and Canada became an
early focus for investments by the Corporations, primarily in wholly-owned
subsidiaries. The investments have tended to be relatively few in number,
but large in amount with the cost of the holdings in banks and finance
companies having been fairly evenly balanced since 1965. In contrast to
finance companies in other areas, virtually all of these have been in
GERALD
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alter ego" type operations and they have often specialized in financing
trade and development in Latin American countries.
Investments in Asia and the Near East began in 1955 and have always
been predominantly small minority holdings. Thus while the number of in-
vestments has been large, actually competing fairly closely with Latin
America for second place after Europe, the amount has been small, repre-
senting less than five per cent of total investments in mid-1967. Well
over 80 per cent of the total is invested in non-bank financial companies.
Australia and New Zealand represent the newest of the areas in which
the Corporations have become interested. The investments here are still
relatively small both in number and amount. There are no holdings of bank
stock in this area.
75
Investments in the United States and its possessions have played only
a very minor part in the Corporations' stock portfolios, with the excep-
tion of the last years of the 1950's when there was a sizable investment
in a New York discount house which has been held for many years. Despite
this minor role as to number and amount of investments, proposed stock-
holdings in such companies have often raised thorny questions of regula-
tory policy because of statutory limitations on such investments.
Degree of Control
Over the past 12 years there have been many changes in the degree of
ownership represented by the Corporations' investments as between the vir-
tually wholly-owned subsidiary (over 90 per cent) the controlled subsidiary
(45 to 90 per cent) substantial minority interests (10 to 45 per cent) and
small minority interests (10 per cent or less). Until 1960 the principal
emphasis was on the wholly-owned subsidiaries, both as to amount invested
and number of investments. The year 1961 saw the beginning of a transition
FORD
with the total number of the two kinds of minority investments exceeding
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the number of wholly-owned investments although their dollar value remained
less than one-seventh of total costs. In 1962 controlled subsidiaries
appeared for the first time and holdings of wholly-owned subsidiaries rep-
resented a dwindling proportion of total dollar investments. This trend
has continued to the present despite the increase in the number of such
investments.
Large dollar investments in substantial minority interests began to
appear in 1963 and have continued to show substantial growth in recent
years. By mid-1965 the two types of minority investments represented over
half of the Corporations' total stock portfolio. Measured by the dollars
invested there seems to have been a generally increased emphasis on the
76
middle ground of the controlled subsidiary and the substantial minority
interests, as distinguished from the extremes of the wholly-owned subsi-
diary and the small minority interest.
It is interesting to note the relationship between the degree of con-
trol and the average size of investments. From 1957 until 1962 the rela-
tionship was direct, the greater the control the greater the average in-
vestment. However, since the advent of controlled, but not wholly-owned,
institutions, this type of holding has represented the largest average
investment by a considerable margin.
There are also certain geographic concentrations relative to the
degree of control. Of the virtually wholly-owned subsidiaries over nine-
tenths of the dollars invested are in Europe and the Bahamas, Bermuda, and
Canada group with most of the balance in Africa. Nearly nine-tenths of
the amount invested in controlled subsidiaries is in Latin America and
Europe. Over two-fifths of the dollar investment in substantial minori-
ties is in Africa, over one-fourth in Latin America, and one-fifth in
Europe. Europe and Latin America represent three-fourths of the dollars
invested in small minority interests with over one-tenth in Asia and the
ruRD
Near East.
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Investments in Banking Institutions
In the mid-1950's banks and bank-related companies were the predomi-
nant foreign stock investments of the Corporations. This remains true
today, but the functions and purposes of such holdings have undergone con-
siderable change and development. At the end of 1954 there was only one
very small stockholding in a commercial bank, the bulk of the investments
being in bank-related companies. Today the holdings in commercial banks,
directly or through holding companies, represent two-thirds of all types
77
of investments, while bank-related companies are only slightly over
five per cent of the total.
In 1954 investments in bank-related companies were limited to English
fiduciaries, which were operated as adjuncts of the parent London branches,
and branch premises holding companies. Today, investments in banking
institutions include not only these, but also full-fledged trust companies,
some with attributes approaching those of commercial banks, and nominee
companies. Some of these operations are independent and others are re-
lated in varying degrees to the activities of an overseas branch of the
parent bank. With the exception of some of the full-fledged trust com-
GERATO FORD LIBRARY
panies, all are controlled, if not wholly-owned subsidiaries.
However, the change in the utilization of bank-related companies has
been minimal compared with the expanded use of stockholdings in commercial
banks and bank holding companies. In 1954 these investments represented
only an exceedingly small part of the total holdings of $2 million. Today,
they constitute over two-thirds of the $219 million in total stock invest-
ments. From a single minority holding in a small European bank they have
expanded to include controlled banks in Africa, Latin America, Canada and
Europe, plus several substantial interests in large regional banking systems,
to say nothing of numerous smaller minority interests. Today, they func-
tion in lieu of branches for some institutions, for some they supplement
branch operations, for others they are an alternative to establishing a
foreign branch network, and yet for still others a method of strengthening
relationships with foreign correspondents.
The function that an investment is to fulfill and the degree of control
represented by that investment are usually interrelated, but this is not to
say that a given function requires a single given degree of control, or
78
vice versa. Thus, an investment, made in lieu of foreign branches may
achieve that end through either wholly-owned, majority controlled, or sub-
stantial minority interests. Despite this, the fulfillment of certain
functions generally seems totend toward investments within certain degrees
of control. Thus, for purposes of analyzing the various investments in
banks and the functions that they fulfill, they are discussed under the
following subdivisions: holdings representing control; substantial minor-
ity holdings; and smaller minority holdings. Additionally, there are cer-
tain functions of a very specialized nature that deserve separate comment.
Except where special reference is necessary, the following refers only to
investments in commercial banks and bank holding companies, and does not
include bank-related companies, whose functions are normally self-evident.
30
Holdings Representing Control
The first such acquisition was made by International Banking
Corporation in 1955 with the purchase of control of Bank of Monrovia,
Monrovia, Liberia. This was followed in 1957 by Bank of America's acquir-
ing virtually all of the outstanding stock of Banca d'America e d'Italia,
Milan, Italy, which had also been established by A. P. Giannini, founder
of Bank of America NT&SA. In 1958 and 1959 International Banking
Corporation and Chase Manhattan Overseas Banking Corporation each organ-
ized subsidiary banks in South Africa.
These last two subsidiaries have thus far been the only controlled
subsidiary banks which have been newly established by a Corporation, all
others having been acquired through the acquisition of stock of a going
30
These include wholly-owned, with over 00 per cent, and
controlled, with over 45 to 90 per cent.
FORD is LIBRARY GERALD
79
concern, which at times has required the payment of a premium. They also
illustrate one of the principal reasons for establishing such subsidiaries,
as the Corporations' parent banks were not permitted by South African law
to establish branches in that country. 31
It was not until 1962 that a Corporation acquired a barely control-
ling interest in a foreign bank. In that year Chase Manhattan Overseas
Banking Corporation acquired approximately one-half of the outstanding
common stock of Banco Mercantil y Agricola, Caracas, Venezuela, and
Banco Lar Brasileiro S. A,, Rio de Janeiro, Brazil. By entering these
countries in this manner the Chase organization acquired branch networks
and hence a broader deposit base, than it could have otherwise achieved.
It also obtained institutions which maintained at least a semblance of
local identity, which would have been difficult if not impossible to
achieve by direct branching.
In June 1967 the Corporations of six individual United States banks,
directly or indirectly, held the controlling interest in 16 foreign banks,
and in six of these they held virtually all of the outstanding stock.
Chemical International Banking Corporation, Continental International
Finance Corporation, and Morgan Guaranty International Banking Corporation
each holds such control in a bank in Liberia, Belgium, and Italy, respec-
tively. However, it is the three American banks with the largest branch
networks--First National City Bank; The Chase Manhattan Bank (NA) and
Bank of America NT&SA-- that are the most active in utilizing their
Corporations in this manner.
GERALD FORD LIBRARY
31
This illustration remains true, even though Chase subsequently pur-
chased a substantial minority interest in The Standard Bank, Ltd., London,
and sold its South African subsidiary to The Standard Bank of South Africa,
Ltd., a subsidiary of the London Bank. The holding of Chase in Standard
is discussed subsequently under Substantial Minority Holdings.
80
Chase Manhattan Overseas Banking Corporation controls six banks
abroad. Originally, these were all located in Latin America, where it
now holds the controlling stock of banks in Brazil, Honduras, Peru, and
32
Venezuela.
Recently it also acquired control of two banks in Europe,
one in Belgium and one in Austria.
First National City Bank's subsidiary, International Banking Corpora-
tion, has four subsidiary foreign banks, located in Canada, Honduras,
Liberia, and South Africa. All except the bank in Honduras are
wholly-owned.
Bank of America and its "twin," Bamerical International Financial
Corporation, have wholly-owned banking institutions in Germany and Italy
and a controlled bank in Spain. It is of interest that in Germany the
parent bank also maintains a branch.
GERALD
LIBRARY
Since the parent banks do not operate branches in the countries
where they have subsidiaries, except for Bank of America NT&SA in
Germany, it is quite obvious that most of these controlled banks function
in lieu of direct branches of the parent bank. This is confirmed when
one studies the administrative and operational control exercised by the
parent bank's International Banking Department. The tendency is for the
administrative control of these subsidiaries to be completely coordinated
with the operation of the foreign branches. This does not mean that they
are treated in precisely the same manner as branches, for their
independent and quasi-local character must be recognized, but it does
mean that in regard to general policy, administrative control, and
reports, they are accepted for what they generally are, namely operations
in lieu of direct branches.
32
In the latter part of 1967 the Chase group also acquired control
of a bank in Colombia,
81
Among these three U. S. banks with major foreign branch networks,
only The Chase Manhattan Bank (NA) has shown an extreme willingness to
take the affiliate route, particularly with majority holdings as
contrasted with the wholly-owned subsidiary. There is at least a
possibility that there even exists a preference, at least in some cir-
cumstances, for the affiliate route over direct branching. During the
past three years, while Chase entered four countries via the affiliate
route, Bank of America NT&SA entered the same four countries with
direct branches.
Substantial Minority Holdings
33
The present substantial minority holdings first appeared in 1960
and for four years were found to only a small extent in Africa and in
the Near East. Only since 1963 have they shown a sizable dollar value,
but have grown rapidly, particularly with two large investments made
in 1965. Recently, 16 Corporations held 27 direct investments of this
type covering most of the world except the Far East and the South
FORD i LIBRARY GERALD
Pacific.
What constitutes a truly "substantial" or influential minority
holding naturally depends on both size and how widespread the balance
of the shares are held. As has been noted, they are here arbitrarily
said to be greater than 10 per cent and no more than 45 per cent. In
practice there is little doubt that some of the smaller holdings in this
range are far more influential in the management of the foreign bank,
than are larger holdings in other banks. Different functions of an
investment can require different degrees of influence and thus there is
a considerable variety of ways in which these holdings have been utilized.
33
Over 10 per cent but no more than 45 per cent.
82
The Corporations of the three banks with major foreign branch-
subsidiary systems have a total of eight investments representing
substantial minority interests. These Corporations, Bank of America,
Chase Manhattan Overseas Banking Corporation, and International Banking
Corporation, have among others such holdings in Societe Financiere pour
les Pays d'Outre-Mer, Geneva, The Standard Bank Ltd., London, and Banque
Internationale pour l'Afrique Occidentale, Paris, respectively, each of
which has a network of branches and/or subsidiary banks throughout
various countries in Africa. There is no general overlapping with the
American banks' branches or subsidiaries; the Chase group actually having
sold their branch in Nigeria and subsidiary in South Africa to the
Standard organization. In all instances, these investments are in lieu
of branches, although they certainly cannot be said to be a part of the
bank's foreign branch-subsidiary system. The same is probably also true
of Bank of America's interest in World Banking Corporation, Nassau,
Bahamas.
Two other banks with branches other than just in London, Continental
Illinois National Bank and Trust Company of Chicago and Morgan Guaranty
Trust Company of New York, each holds four such interests through their
Corporations. These banks also have smaller minority holdings of
substantial value and in no case is there any overlapping with branches.
Additionally, Bankers Trust Company, with branches only in London,
indirectly holds substantial minority interests in banks in Liberia
FORD i LIBRARY GERALD
Belgium, and Germany and four smaller minority holdings of banks in
Africa. All of these investments, while definitely not a part of a
branch network, do appear to some extent to be in lieu of branches,
giving the parent bank and hence its customers many of the services and
benefits which a branch might give.
83
Of the remaining 10 banks whose Corporations have substantial
minority interests in foreign banks only 3 have, or have been authorized
to have, foreign branches, all in London. However, with one possible
exception, their investments do not appear to be in lieu of foreign
branches, although they may fulfill some of the functions that a foreign
branch might perform for the parent bank.
The exception is Mellon Bank International's investment in Bank of
London and South America, Ltd. ("BOLSA"), London. It illustrates how a
bank without foreign branches may view the benefits of this type of
investment. BOLSA has several branches on the European continent and
numerous branches throughout South America. It also has a substantial
interest in the Bank of London and Montreal, Ltd., Nassau, Bahamas,
which has branches throughout the Caribbean area. The situation of this
Corporation's parent bank - Mellon National Bank and Trust Company - was
similar to that in which many of the large and medium sized American
banks found themselves. Most of these banks had never developed truly
international banking departments nor direct overseas operations, but
maintained what amounted to only a foreign service section. In the late
Fifties and early Sixties, these banks recognized that they would have
to be able to service adequately the rapidly growing international needs
of their customers or very likely face the danger of losing a share of
the customers' domestic banking business. However, to establish an
GERALD FORD LIBRARY
adequate overseas operation these banks were faced with both the high
initial costs and the almost insuperable task of obtaining experienced
staffs in this country and abroad. An alternative to these direct
overseas operations is the establishment of a close affiliation with an
overseas bank, or banks, which are already functioning. Such a close
84
affiliation normally requires a participation in the management decisions
in the overseas banks and this in turn requires a mutuality of aims and
usually a substantial stock interest. Through the establishment of such
a close reciprocal working relationship, the American bank cannot only
service the foreign needs of its own customers, but can also assist the
overseas bank in developing its business. Thus, while such investments
do not yield the exact equivalent of foreign branches, they do permit the
American bank to offer its customers a scope and quality of service not
readily available through regular correspondents. This would appear to
be the case in the Mellon-BOLSA relationship.
One special situation should be mentioned in passing, namely the
holdings of 35 per cent of the stock of the Banque Europeene de
Financement, Paris, France, by each Fidelity International Corporation
and Wachovia International Investment Corporation. Here two American
banks share control of a foreign bank. Neither of the parent banks has
overseas branches and both have established truly International Banking
Departments in the present decade. Since these investments were made
fairly recently, there has not yet been time to evaluate the functions
that these holdings will fulfill, but at this point it appears to be
more of a door to the Euro-dollar market than a true branch operation.
The remaining holdings of substantial minority interests in foreign
banks seem more closely related to some of the functions of smaller
minority interests, that are discussed in the next subsection.
FORD LIBRARY GERALD
Smaller Minority Interests
This type of investment in commercial banks is of relatively recent
origin, none having been made until 1960, and there are still none in
the "eastern world," and few in Latin America.
35
The largest number are in Africa, largely the result of the formation
of local banks through the spin-offs of branches of French and Belgian
banks, but the largest dollar volume by far has been in Europe.
Bankers International Corporation and Morgan Guaranty International
Banking Corporation each holds a number of this type of investment. As
mentioned in the preceding section, these particular investments appear
to be in lieu of branches.
The balance of these minority investments appear to be more in the
order of strengthening correspondent relations. As previously mentioned,
some of the substantial minority interests are also fulfilling this
same function. One factor influencing the making of such larger invest-
ments is no doubt the enactment of the Interest Equalization Tax, which
has required since the summer of 1963 the payment of at least 15 per cent
tax on many foreign stock investments of less than 10 per cent.
The precise manner in which correspondent relations were expected
to be assisted through these minority investments is not always completely
clear, nor is it yet possible to judge their overall success, or lack
thereof. In general, the holdings usually have been sufficient in size
to carry a directorship with them and it is easy to visualize the
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possible advantageous position that a correspondent might gain under
this arrangement. The director would be in a position to assist the
stockholding bank and its customers in relations with the local manage-
ment, perhaps even to the extent of getting special treatment. On the
other hand, the director would also be in a better position to understand
the local bank's problems, and the manners in which the stockholding
bank might be able to be of assistance. However, in at least some
instances it appears that the anticipated benefits of an equity holding
86
have been disappointing. A judgment of the value of collateral benefits
is difficult at best and where these difficulties are compounded by the
problems of newly independent nations additional time is necessary to
judge the utility of many of these investments.
Specialized Functions
There are two types of investments in banks or bank-related companies
that have highly specialized functions; the Bahamian trust companies, and
other institutions utilized as an entree to the Euro-dollar market. The
latter has usually taken the form of specialized finance companies, and
while some investments in banks undoubtedly also come within this specialty,
e.g. the holdings in Banque Europeene de Financement by The Fidelity
International Corporation and Wachovia International Investment Corpora-
tion, the analysis of this type of specialized function falls more
logically in the following section.
GERALD LISAARY R. FORD
In recent years banking and trust operations in the Bahamas have
become of increasing interest to American banks. With the advent of
the Interest Equalization Tax and the voluntary foreign credit restraint
program, a large volume of funds that formerly went to accounts in the
United States have been diverted elsewhere. Thus, these funds avoid
the restrictions which have been or might be placed on them if kept in
the United States. Funds generated in Latin America in general, and
the Caribbean area in particular, have tended to be placed in the Bahamas,
and to some extent in Panama. For various reasons a number of the owners
of these funds prefer placing them elsewhere than in a branch of an
American bank. Thus, due to the Bahamas' liberal banking laws, as well
as the lack of foreign exchange restrictions, a number of institutions
have been established to specialize in the handling of this business.
87
As early as 1961 the two largest New York City banks had established
wholly-owned trust companies in the Bahamas, and another New York bank
held a minority interest in a similar organization. As the situation
referred to above developed, the institutions in the Bahamas were quick
to take advantage of the new and growing business. Additionally, other
American banks became increasingly interested in establishing an opera-
tion in the Bahamas. This affords them the means of retaining funds
that are no longer being placed in the States and maintaining contact
with these customers. With these funds, and others that can be tapped
in the Euro-dollar market, the banks are able to service indirectly
a portion of the borrowing needs of their customers abroad. With these
increasing opportunities it is apparent that at least some of the
Corporations, through their Bahamian subsidiaries and affiliates, are
going still further afield in seeking new business, including such
places as Australia, New Zealand, and the Far East. It seems likely
that this growth will continue at least until such time as the United
States is in a position to relax the present balance of payments
restrictions.
GERALD FORD
Investments in
Finance and Investment Companies
Included in this classification are all organizations involved in
the financial and investment business, except for commercial banks and
their related companies. Investments in such financial companies
fulfill as broad a range of purposes for the parent banks as the range
of operations encompassed by these enterprises and the variety of
countries in which they operate. The investments necessary to achieve
such purposes are likewise diverse and range from wholly-owned subsid-
iaries to very small minority interests.
88
In the early 1950's only a single investment was made in an
overseas financial company, namely a newly formed Latin American invest-
ment
house. 34 By the beginning of 1960 such investments still consisted
of only 4 minority interests and 2 wholly-owned subsidiaries. However,
during the 1960's there has been a very rapid increase in this type of
investment by the Corporations, so that by mid-1967 there were 188 such
investments totaling over $70 million. Of this amount, over 40 per cent
was in small minority holdings and over 25 per cent in wholly-owned
subsidiaries, with the balance almost equally divided between majority
controlled and substantial minority interests. Almost half of the small
minority interests were in Latin America, and the wholly-owned subsidiaries
were largely in the Bahamas, Bermuda, and Canada.
Types of Financial Companies
Although the range of operations of the finance companies invested
in is almost limitless, they fall within three general categories:
wholesale or development financing and investment, specialty financing,
and counseling on financial and investment matters. Excluded from this
commentary are the wholly-owned subsidiaries which act as the parent's
"alter-ego" as they are discussed in a later section.
The wholesale type of operation is here considered to consist of
those companies which offer a number of types of financing, which may
include short- medium- and long-term loans, equity participations, and
underwriting facilities for debt and equity obligations. They usually
do not offer instalment or other such specialized financing.
34
FORD & LIBRARY GERALD
There was also an additional investment in a United States
based financial institution.
89
The most common type of investment in this category has been the
development finance company. The distinguishing feature of these
companies is that, while not eleemosynary organizations, the application
of their resources is dictated more by the developmental needs of the
national or regional economy rather than purely by the demands of the
market. Many of these are sponsored by the governments of developing
countries, and such investments were among the first made by the
Corporations in financial enterprises. Many of these government-
sponsored companies have received assistance from the International
Finance Corporation both in the form of loans and equity participation.
While most were formed with the purpose of aiding in the development of
a domestic industrial base, others have also assisted the improvement
of agriculture, fishing, mining, etc. Two of the best known companies
in this subcategory are Industrial Credit and Investment Corporation of
India, Ltd. ("ICICI") and Pakistan Industrial Credit and Investment
Corporation, Ltd. ("PICIC").
FORD i LIBRARY GERALD
The private development finance companies are of two basic types,
namely the national and international. The nationally-oriented private
development finance companies are often given specific encouragement
through special tax concessions, either on the company's own tax
liability or on the tax liabilities arising from the company's obligations,
or both. While such companies are found elsewhere, they naturally tend
to be more numerous where they have these advantages, such as in Spain.
Included in this subcategory are the "financieras" found in many Latin
American countries--particularly Colombia, the Spanish "industrial
banks," and the "development banks" found elsewhere. One of the better
known of these national companies is the Private Development Corporation
of the Philippines, whose stock is held by several of the Corporations.
90
By far the best known of the international private development
finance companies is ADELA Investment Company, S. A. While this is a
Luxembourg corporation, its operating office and all of its investments
and loans are in Latin America. It has one of the most prestigeous
list of stockholders and directors of any company in the world.
Fifteen of the Corporations hold stock in ADELA, and the Chairman of one
is Vice Chairman of ADELA.
As of mid-1966, the end of its first complete fiscal year, ADELA
had capital accounts of $35 million and available loans and lines of
credit of $28 million. It had made loan-equity commitments to 44
companies, 29 of which were new, in 14 different Latin American countries,
for a total of virtually $26 million. These companies' fields of
operations ranged from development finance companies and agriculture to
the manufacture of capital goods and chemical products. Since these
commitments had an initially slow rate of disbursements, ADELA made
heavy temporary investments in short- and medium-term notes of issuers
from 9 Latin American countries.
ADELA is not the only development finance company, government-
sponsored and private, that has more than one of the Corporations among
its stockholders. Often such investments are considered advisable if
the parent bank is to participate in the international banking of that
country, this being especially true where the participation is to be
in the form of a branch, and the company is government-sponsored.
Besides the development finance companies there are also wholesale
GERALD FORD LIBRARY
financial companies which operate in the general market and do not
restrict their operations in relation to the developmental needs of the
economy. While some of these companies may restrict their operations
91
to a given country, they more commonly have operations that are inter-
national in character, although often concentrating on a given
geographic area. In contrast to the development finance companies,
which are found primarily in the developing countries, these general
finance companies are more often located in the developed countries,
although some extend financial assistance to developing areas.
Investments in such companies in Western Europe have shown con-
siderable growth since the development of the Euro-dollar market, and
particularly subsequent to the inauguration of the voluntary foreign
credit restraint program in 1965. These companies usually extend longer-
term financing than banks, and can also take equity participations and
engage in underwriting. It is not unusual for more than one Corporation
to invest in this type of finance company, although the multiplicity of
Corporations with such investments is not as frequent as was noted in
the development finance companies. Some companies in this group are
wholly-owned subsidiaries, and are also discussed in the section on
"alter-ego" subsidiaries.
Pure investment companies seem to fit more nearly into this whole-
sale category than one of the others. These organizations give financial
assistance solely through the purchase of shares of stock. Investments
in this type of financial enterprise have primarily arisen where the
collateral contacts were considered to be of benefit to the parent bank
FORD & LIBRARY GERALD
Thus, in the case of Uganda Crane Industries Ltd., which has some
foreign stockholders, the company is controlled by Uganda Development
Corporation, a wholly-State-owned development finance company. Uganda
Crane's purchase of shares in industrial and agricultural affiliates from
Uganda Development Corporation, gave the latter organization additional
92
funds with which to carry on its various projects. A similar situation
occured when stock investment companies were formed by Spanish banks in
order to divest themselves of certain industrial stockholdings in accor-
dance with the revision of the Spanish banking law. Thus, in both such
instances not only was an investment considered economically sound,
but it also carried possible collateral benefits in the contacts with
the company and other stockholders. Additionally, there is always the
possibility that such a company might have available funds to invest in
the stock of a customer of the Corporation or its parent bank. Thus far
there have not been extensive investments in this type of company.
The specialty type of operations has generally been restricted to
one country. Also the companies have usually restricted their operations
to a single specialty, e.g. equipment leasing, factoring, or instalment
financing--frequently of only one type of product. Where a special
product or industry is being serviced there is a tendency for the other
stockholders to be associated with that product or industry, and less of
a tendency for other Corporations to be stockholders.
An example of a wholly-owned enterprise in this category is The
First National Bank of Boston's Corporation Financiera de Boston, S.A.F.y.C.
in Argentina. Although the bank has a number of branches in the country,
this subsidiary services the automotive industry through the purchase of
its instalment paper. Investments in minority interests in companies
specializing in the purchase or making of instalment loans have a fairly
wide geographic spread, although tending to concentrate more in the
developed countries or in those where the currency is reasonably stable.
The investments in equipment leasing companies have been primarily in
France and the former British Dominions. There are relatively few
FORD i LIBRARY GERALD
93
holdings in factoring companies, but included is one world-wide chain
which is based on the participation of local banks.
Counseling on financial and investment matters is, of course,
a part of the business of all financial companies and banking offices.
However, there have been a few investments in companies which have
limited their operations to the giving of such advice. These companies
specialize in servicing requests for specific information, including
the seeking of possible local partners in a given country or area. In
one instance the company acts as the investment advisor and distribution
manager for a European mutual fund. Thus far, these investments have
been primarily of an exclusive character, with no other Corporations as
partners, and several are wholly-owned subsidiaries.
Purposes of Financial Investments
The purposes of the parent banks in having their Corporations make
this type of investment have been varied. In virtually all cases such
investments are viewed as a source of funds. In recent years this has
become particularly true in relation to the Euro-dollar market. The
parent banks without extensive foreign branch networks often look upon
such investments as a method of improving contacts in a country or
geographic area, including those with the local government and correspon-
dent banks. Even for those banks with foreign branches, such investments
may have a similar purpose in that they are sometimes looked upon as
filling gaps in the bank's geographic coverage. Furthermore, in the
case of government-sponsored development finance companies, investments
are frequently considered politically advantageoùs when the parent bank
is engaging in other financial operations in the country, especially
where these operations include direct branches.
FORD is LIBRARY GERALD
94
Source of Local Currency. The finance companies make an attractive
investment for the banks' Corporations because of their ability to
generate local funds. This is often true regardless of whether the bank
has a branch situated in that country or not. For banks without a branch,
the company can offer an alternative to arranging loans through a
correspondent bank. It may also be a means of obtaining loans not other-
wise available, such as term loans and the discounting of instalment
paper. Even for banks with local branches, such investments may allow
the bank to offer to its customers a greater range in the types of
financing, as well as permitting it to tap additional sources of local
funds. This is illustrated by The First National Bank of Boston's
Argentine subsidiary, which was mentioned earlier.
The finance companies raise their local funds in a number of
different ways. While in some of the more developed countries they
may sell short-term commercial paper, the more common methods are loans
from local banks and the time deposits that many of them are permitted
to receive. These deposits are often from commercial companies whose
instalment paper they are handling and in at least one instance additional
capital leverage was gained by selling preferred stock to those companies
whose instalment paper the finance company purchased.
Besides being able to obtain local funds, these companies are often
large enough--and with sufficient credit standing--so as to be able to
obtain foreign currency loans to assist small local industries in
financing their import requirements. This is of particular importance
in the developing countries.
FORD to LIBRARY 9ERALD
95
Euro-dollar Market. With the development of this, and especially
following the establishment of the Interest Equalization Tax and the
voluntary foreign credit restraint effort, various banks, through their
Corporations, became interested in establishing or participating in
companies that could tap this source of funds. These companies have
been established in Europe or in key locations, such as the Bahamas.
The funds could be sought either through the issuance of debt obligations
or the purchase of time deposits. Banks with branches naturally place
more emphasis on debt obligations as their branches can obtain the
"deposits," but even here there is an interest in obtaining a means of
making loans for a longer term than is the custom for commercial banks
in the area. Also under the original version of the Interest Equalization
Tax, U. S. dollar loans made by the foreign branches with maturities
of over a year were subject to the tax. Hence, to be competitive in this
area it was necessary at that time to participate in this market indirectly,
if the branches were to serve the long term needs of the banks' customers.
There have been instances where long-term Euro-dollar funds obtained
by a subsidiary have assisted a bank's Corporation in carrying on with
its equity investment program, without affecting the bank's position
under the voluntary foreign credit restraint effort.
FORD i LIBRARY 03RA70
Besides investments in finance companies some American banks without
foreign branches have also made investments in banks, trust companies, or
similar institutions in Europe or the Bahamas. They are thus able to
participate more directly in the market for Euro-dollar "deposits."
These activities can either supplement or substitute for operations based
on less direct access to the shorter-term end of this market, or to the
long-term portion through the issuance of bonds or debentures by a
subsidiary.
96
Source of Contacts. For banks without branches in the area, finance
company investments can supply contacts which can be utilized in several
different ways. If the investment is sufficient to permit the election
of a director, he may develop contacts among the other directors, the
company's operating officers, other stockholders, interested government
officials, and the company's principal local banker--which may also be a
correspondent. Through them he may discover how the Corporation or its
parent can assist either the finance company, some of its customers, or
other parties which cannot be adequately serviced locally. He can also
see that the bank's customers receive proper consideration by the company
in the servicing of their needs, and that the bank receives adequate and
proper credit and other information or services when such is requested.
Without such a direct contact these same functions can still basically
be accomplished, but the flow of such collateral benefits is likely to
be somewhat slower.
Alter-ego Subsidiaries
These subsidiaries usually have the same spectrum of services and
operations as their parent Corporations, none of which, thus far, has
been "engaged in banking." This is true even though some are oriented
towards a particular geographic area, such as Latin America or Europe
and the holding of equities may be concentrated in the parent. The
distinguishing feature of these subsidiaries is that neither their
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operations nor those of their parent Corporations can really be
considered in isolation, as neither will give a true and complete
picture. These subsidiaries are not just a portion of the Corporations'
activities, but form an integral part of virtually all their activities.
Thus, they and their parent Corporations should be viewed only on a
consolidated basis. Illustrative of this alter-ego character is the fact
97
that besides extending credit through loans, one or more of these
subsidiaries hold stocks in various banking institutions, finance
companies, and nonfinancial enterprises.
The first of this type of subsidiary was Arcturus Investment and
Development, Ltd., Montreal, Canada, which was established in 1955 by
Chase International Investment Corporation. In 1959 and 1960 similar
subsidiaries were chartered in Panama and the Bahamas by Chemical
International Finance, Ltd., Philadelphia International Investment
Corporation, and Boston Overseas Finance Corporation, although the
subsidiary of the last is now inactive. More recently Bankers Inter-
national Corporation organized a Luxembourg company and in 1967 First
Pennsylvania Overseas Finance Corporation established such a company in
the Bahamas. Some of these companies were undoubtedly organized with
certain tax benefits in mind and the faster build-up of reserves which
would result. It is also interesting to note that in the case of
Arcturus its name in no way involves that of the parent bank. Recently
these companies have been utilized in avoiding or lessening the impact
of the Interest Equalization Tax and the voluntary foreign credit
restraint program.
FORDO is LIBRARY GERALD
Investments in Nonfinancial Companies
Both in terms of number and of cost, direct holdings of equity
interests in nonfinancial businesses by the Corporations have remained
small. Acquisitions of such holdings are indeed a fairly recent develop-
ment. Prior to 1961 all of the equity investments of the Corporations
were in banks or other companies providing financing or financial
98
services
35
In that year, however, two small holdings in nonfinancial
companies were acquired at a cost of about $100,000. At the time, all
equity holdings of the Corporations had a total cost of $28.5 million.
As of mid-1967, the Corporations' portfolio of direct share invest-
ments in nonfinancial businesses consisted of 45 separate holdings,
valued at cost at slightly more than $5 million. These holdings amounted
to less than 2.4 per cent of the value of the aggregate stock holdings
of the Corporations.
36
Approximately two-thirds of these stock holdings had been acquired
in connection with extensions of credit by the Corporations. About half
of these were participations in financing arrangements with the Inter-
national Finance Corporation (IFC). The remaining stock holdings have
been acquired under a variety of circumstances including dividends from
other investments, uses of blocked currency, and special arrangements to
accomodate customers.
All but one of the companies in which shares were directly held
operate exclusively abroad, though three were chartered in the United
States. Only three companies were located in major industrial nations,
the majority of the investments having been made in developing countries,
notably in Latin America, and in somewhat more advanced areas such as
Spain, Australia, and Puerto Rico.
FORD is LIBRARY GERALD
35
American Overseas Finance Company, which had no banks as stock-
holders, had two small nonfinancial holdings. Since the subject is the
utilization of the Corporations by banks, these nonfinancial holdings
are omitted from this discussion.
36
In addition, wholly-owned finance subsidiaries of the Corporations
had 12 holdings which had cost slightly over $2 million. The bulk of these
holdings were concentrated in one subsidiary. Inclusion of these equity
investments would not alter the conclusion that investments in nonfinancial
businesses are and have remained small.
99
With a single exception, these investments in nonfinancial
businesses were minority holdings and half involved ownership of less
than 2 per cent of the outstanding shares of the companies involved.
The Corporations have differed widely in their acquisitions of
FORD & LIBRARY GERALD
these interests. Only 5 held more than three equity interests in
nonfinancial businesses as of mid-1967 and 30 Corporations had no such
holdings. In general, there has been an apparent lack of suitable
opportunities for equity participations in nonfinancial companies and
this has affected all Corporations. Additionally, a number of Corpora-
tions appear to have avoided making such investments: some perhaps
because of lack of sufficient expertise in this area, others perhaps
because of a belief that equity investments outside the financial field
were not appropriate for their bank.
Where they have exercised it, the abilities of the Corporations to
acquire equity interests in nonfinancial businesses has proven a useful
adjunct to the conduct and furtherance of their parent bank's international
operations. The provision for some equity financing has made some credit
operations feasible that otherwise would not have been undertaken.
For example, some borrowers, in obtaining financing for certain projects,
have not wanted, or not been legally permitted, to pay interest rates
that alone would be attractive; however, the Corporation in extending
the credit has received shares or options to acquire shares at attractive
prices, which have supplemented the lower interest rate. In other cases,
where the Corporation has organized the financing of a project, shares
or stock options have been received as a commission for its services.
A number of these holdings have arisen, as already indicated, from
participations in IFC financing arrangements. Most of these arrangements
100
have involved furnishing a combination of loan and equity capital,
although others have included the issuance of stock options in connection
with credit extensions. These participations have been particularly
attractive to some of the smaller and less aggressive Corporations. The
parent banks have been able in this way to establish or enlarge business
and customer relations, especially in less developed countries, that
might not have been possible within their own organization.
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In addition to these direct acquisitions, the Corporations have
acquired indirect interests in nonfinancial businesses through their
holdings of equities in foreign financial institutions. In the cases
where these equities have represented minority interests, the indirect
nonfinancial interests so acquired have been small in number and the
degree of interest accruing to the investing Corporation has been
similarly minor. So far as the Corporations and their parent banks are
concerned, their principal interest has been in the foreign financial
institutions-- it bank, development finance company, investment bank--
and the benefits accruing from that relationship.
Where the direct equity is in a subsidiary there is, of course, a
different situation. Where the subsidiary is a financing company the
Corporations have apparently enforced virtually the same policies as
apply to their own operations. Where the subsidiary is a bank, there
are two possible situations--a newly organized institution, and a going
concern that has been acquired. In the former situation no subsidiary
bank--or for that matter any institution approximating a bank such as a
trust company--has acquired nonfinancial equity interests. However, a
number of banks, control of which has been acquired by the Corporations,
hold previously acquired equity interests in nonfinancial companies.
101
What the future role of these holdings may be is difficult to judge at
this time as many of these subsidiary banks have been acquired fairly
recently. Nonetheless, there are some indications drawn from the
experience of the past few years, that the Corporations and their parent
banks are primarily interested in strong affiliated banks, not local
industrial financial empires, and that they will tend to mobilize the
subsidiaries' assets to that end.
Joint Ventures
Joint or cooperative ventures between a United States bank--through
its Corporation--with one or more other U. S. and/or foreign banks have
only arisen in recent years. They are found in their purest form when
FORU
two institutions hold in equal parts the controlling stock of another
BRAKY GERALD
enterprise. The situation is less clear where two institutions both
have stockholdings in several organizations, some unequal and others
perhaps equal. It is even more complicated where one participant in the
joint venture also holds stock of the other participant.
A clear example is the 50-50 holdings of Bank of America and Banco
de Santander in Banco Commercial para America and Banco Intercontinental
Espanol (a development finance company). In this instance it would
appear that this partnership does not extend to activities outside of
Spain. Another good example is the 70 per cent holding in Banque
Europeene de Financement, Paris, France, half of which is held by each
Wachovia International Investment Corporation and The Fidelity
International Corporation. 37 A slightly more complex situation is that
37
The parent banks of these same Corporations have also
established an Edge Corporation in New York, owned jointly by them and
their partners in the French venture, the principals of Zilka and Sons,
Inc., New York.
102
involving Continental International Finance Corporation (CIFC) and
Netherlands Overseas Bank (NOB). Each owns 50 per cent of Continental
and Overseas Investment, N. V., which holds all of the stock of a Belgian
bank; each holds one-third of the stock of the Commercial Bank of Zambia
Limited; and each has a small interest in a Spanish industrial bank,
Union Industrial Bancaria. Additionally, CIFC holds stock of NOB, and
in Banco Atlantico, which has the largest single interest in Union
Industrial Bancaria.
In all cases it seems fairly obvious that these investments represent
more than a casual working relationship. It would appear that, whether
limited to operations in one or several countries, these joint invest-
ments amount in practice to partnerships wherein the mutual interests
are closely coordinated in a common project or projects. Such ventures
can be attractive to all banks where branch or subsidiary operations are
inhibited, but elsewhere probably only to those banks without extensive
foreign branch networks.
Utilization of the General Consent
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A discussion of the equity operations of the Corporations would
hardly be complete without some inquiry into the manner in which these
acquisitions were made. Under the Regulation, the Corporations can
acquire stock in two manners, either with the specific consent of the
Board, or under the terms of the General Consent. 38 Specific consents,
or approvals to exceed the statutory limitations, are almost invariably
necessary for substantial investments, due to the limited capital and
38.
In view of the aims of the Government's Balance of Payments
Program, the Board temporarily removed the General Consent provision
by amending Regulation K, effective February 8, 1968.
103
surplus of the average Corporation - less than $7 million. They are
also necessary where a given investment does not fit into the require-
ments set forth in the General Consent.
In the first four years after the 1963 Revision to Regulation K
established the General Consent, 39 the Corporations made approximately
400 direct stock acquisitions, over 100 of which were for additional
investments. Of the 400 purchases almost 45 per cent were made under
the General Consent; however, their total cost of approximately $12.6
million was only a very small fraction of the total amount invested.
Acquisitions that were incidental to an extension of credit constituted
almost a third of all those made under the General Consent. Virtually
75 per cent of investments made under the General Consent were in the
developing countries, both as regards number and cost, and well over
half of the balance was in Australia, the Bahamas, Canada, Spain, and
Puerto Rico.
39
September 1, 1963, to October 1, 1967.
FORDO is LIBRARY GERALD
CHAPTER VII
PROBLEMS AND QUESTIONS RELATING TO
OPERATIONS AND SUPERVISION
Since the current Regulation was issued over four years ago, the
number of Corporations has grown by almost 50 per cent and their total
assets and their equity investments have both increased to about three
times their previous amounts. Such a rate of growth would prove a
severe test for even an experienced area of regulation and supervision.
It is not surprising, therefore, that Regulation K has shown some
weaknesses and gaps, or that problems have arisen both for the Corpora-
tions and for the supervisory authority. These problems are discussed
below under three general headings: banking operations in the United
States; acquisition of stocks; and miscellaneous. The discussion in
several instances is fairly abbreviated. This is because a complete
inquiry into some of these problems and the possible solutions, could
in itself be a proper subject for a paper.
Problems related to Banking Operations in the U. S.
During the early and mid-1950's the principal problems relating to
the Corporations arose from their banking operations. These were solved
to a large degree by the 1957 Revision, which detailed what types of
deposits and loans would and would not be considered as incidental to
the Corporations' international business. The current version made
only slight changes.
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104
105
Since the current Regulation was issued September 1, 1963, the
Board has twice published interpretations regarding operations of a
banking nature. 40 The first related to the propriety of Corporations
purchasing or selling Federal Funds. In that interpretation the Board
stated that such transactions are permissible where they are merely
used to adjust the reserve balance, and not as a regular means of
investing funds. In the second interpretation the Board held that in
calculating deposits in determining aggregate liabilities a Corporation
FORD
may deduct from gross demand deposits the amounts permitted in
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LIBRARY
Regulation D, "Reserves of Member Banks."
At the present time there do not appear to be any serious problems
of a substantive nature regarding banking operations in the United States,
either on the part of the Corporations engaged in these activities, or
from the supervisory viewpoint. However, there is always the question
of whether there is not room for further liberalization of the permissible
types of deposits and loans permitted the Corporations. In view of the
statutory restrictions on the Corporations' operations in the United
States in general, and on the receipt of deposits in particular, the
present Regulation appears to represent virtually as liberal an inter-
pretation as is possible. Conceivably there might be room for changes
regarding savings deposits; demand deposit. accounts used basically for
international transactions but occassionally for small domestic payments;
and loans made for primarily international transactions, but where a
small admixture of domestic items are at times included. However, such
40
Interpretations of the Board of Governors of the Federal Reserve
System, $5700 and $5705, p. 481.
106
changes would at best be minor in character and would raise many of the
problems of interpretation and application such as existed prior to the
1957 Revision--both for the Corporations and for the supervisory
authorities. Any basic broadening of the Corporations' operations in the
United States would seem to depend on statutory changes and these would
appear unlikely in face of the strong American tradition against
inter-State branch banking.
There are two possible problems which could become acute at some
future time. These are the regulatory limitation on aggregate liabilities,
and the minimum reserve requirement on deposits in the United States set
forth in the statute.
Section 25(a) establishes a limit on a Corporation's liabilities
only as to bonds and debentures, but specifically authorizes the Board
to limit aggregate liabilities. 41 Since the earliest version, Regulation
K has applied to aggregate liabilities the same limit as the statute
specifies for bonds and debentures alone, namely, 10 times the Corpora-
tion's capital and surplus. 42 Included in these aggregate liabilities
are acceptances outstanding, average deposits, borrowings, guarantees,
endorsements, and bonds, debentures and other such obligations. Except
for the Board's interpretation permitting certain deductions in calculating
deposits, several Corporations would already have had to restrict their
operations or ask the Board's permission to exceed this limit. Should a
Corporation again approach the limit, the general question could well
41
FORD i LIBRARY GERALD
12 United States Code 615(a).
42 12 Code of Federal Regulation Part 211, Section 211.9(c), P. 8.
107
be raised as to why the Corporations are subject to such a limitation
when the banks with which they are competing have no such specific
restrictions. Many large banks have aggregate liabilities that run well
over 15 times their capital and surplus. Insofar as the Corporations
are subject to examination and reports of condition in the same manner as
the member banks, such a regulatory limitation on their aggregate
liabilities would appear to be no more of a necessity than a similar
limitation on all banks.
As to reserves on deposits received in the United States by a
Corporation, the statute specifies that they shall be in such amounts as
the Board may prescribe, "but in no event less than 10 per centum of
its deposits. 43 In the Regulation the Board has specified that the
Corporations maintain at least the same reserves as required of member
banks. At the present time none of the Corporations has sufficient time
deposits to cause the 10 per cent minimum to come into effect. At a
4 per cent reserve requirement for time deposits, such deposits would
have to constitute over half of total deposits for the statutory minimum
to come into effect for Corporations in reserve cities. However, with
corporate treasurers' maximizing of earnings and the resulting growth in
the importance of time deposits, it is not impossible that this
statutory minimum reserve may one day place the Corporations at a
competitive disadvantage vis-a-vis the commercial banks.
FORD is LIBRARY GERALD
Problems related to Acquisition of Stocks
As already seen, no other area of the Corporations' activities has
had the growth and change as that in their equity holdings. Except for
⁴³₁₂ U.S.C. 615(a).
108
five holdings in wholly-owned fiduciary and bank premises companies, all
of the Corporations' present stockholdings have been acquired in the
past 13 years and two-thirds since September 1963 when the current
Regulation was issued.
From the very earliest acquisitions, there have been questions as
to the appropriateness of given stockholdings. The basic problem has
been to what extent should a Corporation, through stockholdings of even
a minority interest, be permitted to do indirectly, that which it cannot
do directly. Neither the statute nor the Regulation sheds much light on
this subject. Where the investment is basically a means of financing,
the question does not appear to be critical. However, the contrary is
true where the investment is a means of extending the services offered
by the Corporation and its parent bank. The Board's sole published
interpretation on stock acquisitions, involved this very question. 44
The basic question of the Corporations' indirect operations vis-a-vis
their permissible direct operations still pervades most problems relating
to the Corporations' equity acquisitions. These problems fall into five
principal categories, although there are some overlapping areas:
operations of subsidiaries; activities in the United States; nonfinancial
interest; acquisition under the General Consent; and the value at which
equities should be carried on the Corporations' books.
Operations of Subsidiaries
If the statute is cryptic regarding stock investments in general,
it is absolutely silent as to the treatment of subsidiaries of the
Corporations. If the question of whether a Corporation should be
FORD & LIBRARY GERALD
44
Interpretation of the Board, 15710, p. 481.
109
permitted to do indirectly what it is prohibited to do directly, is
basic to stock acquisitions in general, it is the heart of the problem
of subsidiaries. Where there is a minority interest in a company, that
company may be identified with the Corporation, but it can normally never
be considered as a part of the Corporation. With a subsidiary, however,
it can never be said to be other than a part of the Corporation, and for
that matter, the Corporation's parent bank. It has been in this context
that all of the Board's specific consents for the acquisition of
controlling equities are conditioned on the subsidiary restricting its
activities to those permissible for its parent, or permissible if the
subsidiary itself had been chartered under the Section 25 (a). Virtually
the only exception to the broad application of this condition has been
as to loans in a local currency.
While the philosophy of this condition seems reasonable, if not
inescapable, problems do arise in its practical application. First, when
is a company a subsidiary? Second, since local loans are exempted from
the limitations of the Regulation, are there other operational limita-
tions--as distinguished from restrictions on basic functions--which can
be similarly treated? Last, how can conditions be applied in a completely
equitable manner?
When is a Company a Subsidiary? The answer is easy where the
FORD :- LIBRARY GERALD
Corporation holds a sufficient amount of the company's stock to have
control. It is likewise not difficult where the Corporation holds a
substantial block of the stock and also has a contract to operate the
company. In each of these cases there may be a question of fact, but
hardly of policy. Problems are encountered when no one stockholder has
absolute control: where two or more Corporations jointly have the
110
controlling interest, or where a single Corporation clearly has a
power of veto - exactly 50 per cent of the voting stock.
In the first of these situations it hardly seems reasonable to
allow two or more Corporations to join together in a venture to under-
take operations they would not be permitted alone. In the second
situation, especially if the other 50 per cent is held by a single
foreign institution, the answer is very far from clear. It would seem
likely that these cases would have to be treated on an individual basis
and that other factors would also have to be considered. Some of these
other factors would be the type of operations the company is to under-
take, whether they are broad or narrow in scope, the relative position
and strength of the stockholders and the limitations of the local laws
to which the company would be subject.
Scope of Restrictions on Subsidiaries. The restrictions and limita-
tions set forth in Section 25(a) pertain primarily to operations in the
United States. However, the conduct of foreign operations involving the
issuance of bonds or debentures, the establishment of branches, or the
acquisition of stock, do specifically require Board regulation, consent,
or approval. 45 Thus, the Corporations' activities abroad are subject
to some, but not extensive statutory restrictions. The provisions of
the 1963 Revision of Regulation K have a generally liberalizing effect on
these three areas. While still requiring Board approval for the
issuance of long term obligations, 46 additional branches in a foreign
country are permitted giving prior notice to the Board, 47 and certain
45 12. U.S.C. 615.
FORD i LIBRARY 0ERALD
46
12 CFR Part 211, Section 211.4, p. 3.
47
Section 211.5(b), p. 3.
111
48
stock acquisitions are permitted without specific prior Board consent.
The extension of these restrictions to the operations of subsidiaries,
would not appear unduly onerous, and would seem necessary if the
statutory limitations are not to be circumvented.
However, Regulation K also has other provisions of a limiting
character. It severely restricts underwriting when the Corporation is
engaged in,banking, 49 and places limitations, based on capital and
surplus, on the creation of acceptances, liabilities of one borrower,
50
issuance of guarantees, and a Corporation's aggregate liabilities.
These provisions have varying effects when applied to subsidiaries,
depending primarily on the subsidiary's business.
By the very nature of their function, the operations of "alter-ego"
subsidiaries would not seem to be prejudiced by any of the restrictions.
Similarly those subsidiaries whose activities are confined to nonbanking
financial operations would seem to be only slightly affected, except
where they might do acceptance financing. The subsidiaries which
apparently feel the impact most heavily of this second group of restric-
tions of Regulation K are the banks. Since the banks are the predominant
type of subsidiary and generally the most important by far, this adverse
effect is of general concern.
These subsidiary banks usually function in lieu of direct branches
of the parent American bank. The direct branches do have legal loan
limits, in conjunction with all other branches and their Head Office, but
48
Section 211.8(a), P. 6.
49
Section 211.5, p. 3.
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50
Section 211.9(a), (b), and (c), pp. 7-8.
112
these are based on the parent bank's capital and surplus which is
measured in the hundreds of millions of dollars. Both the foreign
branches and the subsidiary banks at times need to extend credits
disproportionately large in relation to their resources, to customers of
the parent bank. An inability to do so can seriously diminish their
value to the American bank. It was in recognition of this that the
limitations efRegulation K were suspended as to loans in a subsidiary's
local currency, and that subsidiaries have been allowed to use their
parent Corporation's capital and surplus as a basis for the limitations
on creation of acceptances, liabilities to one borrower, issuance of
guarantees, and aggregate liabilities. These adjustments appear to have
lightened the impact of the regulatory restrictions and limitations, so
they do not in general impede the necessary and desirable operations of
these subsidiaries. The principal exceptions to this are the restrictions
on underwriting, and the limitations on guarantees in those countries
where these operations are utilized by the local banking community.
Aside from this general concern with the effectiveness of the
subsidiaries' operations, there is an additional consideration which
arose recently. In March 1967, the regulatory requirements that Corpora-
tions cause their subsidiaries to submit to examination by the Board was
removed, due to its extraterritorial implications. 51 This amendment
raises the question, at least from the practical viewpoint, as to the
desirability of imposing types of limitations which may require examina-
tions to verify conformity.
51
Law Department, Federal Reserve Bulletin, April 1967, p. 570.
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113
In actual practice the Board has never examined a foreign subsidiary,
nor specifically required that it be subject to an audit approved by the
Board. The Corporations have naturally required a certain amount of
information on the activities of each subsidiary so as to maintain their
own supervision of such activities. Thus far, the Board's examiners
have found this information to be sufficient for their needs in forming
a judgment of the Corporation's overall operations. Therefore, the
removal of the regulatory provision for such examinations or audits
would not appear to have any direct practical effect. However, problems
could arise, should a Corporation fail to maintain on file adequate data
regarding a subsidiary's operations. The Board's attitude in this
regard was expressed in its press release of March 15, 1967, which
accompanied the issuance of the revised version of Regulation M and the
above mentioned amendment to Regulation K. In that release the
Board stated:
"The Board further expects that member banks (and their foreign
branches and affiliates) will conduct their activities, in the
United States and abroad, on the basis of high standards of
banking and financial prudence. Member banks are expected to
FORD & LIBRARY GERALD
make sufficient information available to the Board as will
enable the Board to satisfy itself that those standards are
being met."
Equal Application of the Condition. To say this is only correct
and proper is one thing, to accomplish it is another. Conditions which
begin with completely equal application sometimes change to a surprising
degree when only minor modifications are made in their terms. Such
modifications, of course, reflect intended changes, and usually some
inequality of application due to special circumstances. However, the
modifications sometimes can cause further inequalities unrelated to the
one intended. Such is particularly true where you are dealing with a
114
group of very similar but yet slightly different organizations such as
Agreement Corporations organized under Section 25, and Edge Corporations
organized under Section 25 (a), and where the latter may or may not be
"engaged in banking" with resulting differences in limitations.
Activities in the United States
The statute prohibits the purchase and holding of stock in companies
engaging in the general business of buying or selling goods, wares, etc.,
in the United States or transacting any business in the United States
not incidental to its international business. 52 Additionally, Regula-
tion K prohibits acquisitions where the company is engaged in the business
of underwriting, selling, or distributing securities in the United States 53
These indicate that there are certain types of companies operating
international businesses in the United States, whose stock may be
acquired by the Corporations. A perusal of the possible types of opera-
tions of such companies, indicates that the range of possible activities
is not large, and is limited primarily to finance and service oriented
activities. In practice acquisitions in this area have been very few.
However, experience has shown that they raise extremely difficult
questions, due primarily to conflicts with traditional American banking
practices and the limited operations permitted the Corporations themselves
within the United States. It would appear desirable, both from the view-
point of the Corporations and of the Board, that all acquisitions
involving operations in the United States be made only with Board consent.
52
12. U.S.C. 615(c).
53
12 CFR Part 211, Section 211.8(c)(1)(i), P. 6.
FORD & LIBRARY GERALD
115
Investments in Nonfinancial Companies
As noted in Chapter V, most investments of this type have been
incidental to an extension of credit and virtually all have represented
only a minor portion of the company's outstanding stock. As long as
these investments are essentially of a financing nature, they would not
seem to have any inherent problems, except where operations in the United
States are involved. However, it should be noted that in response to
an inquiry from the Treasury Department, the Board has stated that the
acquisition of more than half of the stock of a foreign company engaged
in manufacturing, wholesale selling, or in some similar business would
not be appropriate for a Corporation, except in rare instances where the
circumstances of some foreign banking or financial operations warranted
such an acquisition.
FORD & LIBRARY GERALD
Acquisitions Under the General Consent
Overall experience with acquisitions made under the General Consent
has indicated that in part it is too broad in some of its coverage, but
also that in other applications it is too narrow.
The first of the three subsections of the General Consent--that
permitting stock acquisitions which are incidental to an extension of
credit--was a recognition that such "sweeteners" are often a part of
foreign loan agreements, particularly in the developing countries. The
limitation that the extension of credit must be by the Corporation itself
is of uncertain derivation, but may well have come from the view that
the Corporation is a completely separate organization and should be so
treated. Actually, it would seem more logical to view a Corporation as
a part of the parent bank's overall international operations, including
those of the Head Office and foreign branches, and permit stock
116
acquisitions incidental to loans by any member of the group. The
limitation that the stock acquired may be only that of the borrowing
company also appears to be overly restrictive, particularly in those
countries where there are numerous interlocking and overlapping company
relationships. Frequently a loan may be to a subsidiary, but the more
attractive stock for a Corporation is that of the parent holding
company, or vice versa.
In practice this subsection of the General Consent has been
utilized primarily in acquiring stock in nonfinancial companies and
virtually all have represented only a small share of the outstanding
stock of the company. However, in at least one instance a wholly-owned
subsidiary was acquired by this means, which points up the question of
when is a stock acquisition "incidental" to an extension of credit?
Under normal circumstances it would seem that the acquisition of a
controlling stock interest would not be "incidental" to any credit
extension, but would itself be the primary purpose of the transaction.
Another questionable case of stock acquisitions being truly "incidental"
to an extension of credit, would be the conversion of all convertible
bonds held (or all of a loan with an option attached) into stock. In
both instances these would seem to be two step acquisitions without any
real credit extended.
The second subsection permits the acquisition of less than 25 per
cent of the stock of a "foreign bank." This subsection has not been
used to any great extent, primarily because acquisitions of bank stock
have usually either exceeded the statutory limits, or included 25 per
cent or more of the foreign banks' stock, and hence has required a
FORD is LIBRARY GERALD
specific consent.
117
The principal problem in regard to this provision is one of inter-
pretation, namely, what is meant by a "foreign bank." The more logical
interpretation would appear to be that "foreign bank" means commercial
bank--including English merchant banks and French banque d'affaires--but
excluding development banks, Spanish industrial banks, or Latin American
"financieras." While these latter institutions may receive certain
types of limited deposits, they do not conduct a regular commercial
banking business, particularly such as relates to international
transactions.
The third and last subsection permits acquisitions of up to $200,000
which are "likely to further the development of United States foreign
commerce." Except for the dollar limitation it is the broadest of the
grants under the General Consent and has been the most widely utilized.
Unlike the first subsection there is nothing in this provision to prevent
imputing the furtherance of U. S. commerce to the purchase of stock in a
parent where such furtherance will actually come from a subsidiary's
action, or vice versa.
While a few of the investments made under this subsection have been
made in nonfinancial companies operating abroad, the majority have been
in companies engaged in various phases of financing. In practice this
is virtually the only subsection under which this type of acquisition
can be made, as relatively few stocks in finance companies have been
GERALD FORD FIBRARY
connected with extensions of credit by the Corporations. Recently,
several subsidiaries have been established under this provision. Thus
far, the businesses of these subsidiaries have included holding foreign
bank premises, investment placement, and the handling of securities.
118
This provision has not given rise to any problems or questions that
are unique to it. This is no doubt due to the breadth of the terminology
used- "likely to further."
Besides these problems which are based on the specific provisions of
the subsections, there have been two problems of a more general nature,
to which some allusion has already been made. The first is that the
provisions are too broad in that they permit stock acquisitions (1)
representing a controlling interest and (2) in companies with activities
in the United States other than those specifically prohibited. Second,
the provisions are too narrow in that they include no adequate provision
for acquisitions in companies operating a purely financial business.
The problems encountered in stock acquisitions in subsidiaries and
in companies with operations in the United States have already been
discussed in detail. The combination of the intricate problems in these
areas and the possible difficulties encountered in undoing operations--
as compared with preventing their occurring in the first place--makes it
not only desirable, but virtually necessary, for the Board to have the
opportunity to scrutinize such investments prior to their consummation.
In practice the Corporations' investments in nontanking finance
companies represent over one-half of all stock investments by number and
over one-third by amount. Relatively few of these investments have been
connected with any credit extension by the Corporations, by definition
the companies are not banks, and recently the average size of such
investments has been in excess of $300,000; hence, they do not normally
come within any of the provisions of the General Consent. Excluding
subsidiaries, cases of 50-50 ownership, and operations in the United
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States, experience with investments in financial companies has not
119
revealed any serious problems, certainly none more involved than in
foreign banks. Insofar as the General Consent allows acquisitions of
less than 25 per cent of the outstanding stock of foreign banks, it
would appear logical to permit similar investments in finance companies,
including development finance companies. Such a broadening of the General
Consent would permit the Corporations greater flexibility in their
operations, and at no apparent risk to basic supervisory control.
There is one additional question of a general nature, namely the
need for the parenthetical clause eliminating acquisitions through
stock brokers or dealers. In some countries, or in certain situations,
stock must be acquired in this manner. If this clause is to prevent
the Corporations from "dealing" in stocks, the Board certainly has both
adequate means of surveillance via reports and examinations, and suffi-
cient power under its general regulatory and supervisory authority to
stop any imprudent operations.
The Proper Carrying Value for Equities
Problems regarding the value at which the Corporations should carry
stockholdings on their books can arise in two situations. One is in
relation to the condition in the Board's consent for acquisition of stock
of subsidiaries. This condition requires that the Corporation not carry
the stock on its books at more than the Corporation's proportionate share
of the net asset value shown on the books of the subsidiary. The second
is in regard to the appraisals of the examiners.
The condition in acquisitions of subsidiary stock has been applied
only where there was a premium being paid, or where there was to be an
additional contribution by the Corporation to cover prior operating
losses of the subsidiary.
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120
The appraisal method for examinations is to find the proportionate
net asset value of each stock. If this is less than the Corporation's
book value, credit is then given for any proven value of non-ledger
assets. If this amount is still less than the book value, an appraisal
may be made on the basis of an active stock market quotation, but for no
more than the Corporation's book value. Normally no depreciation in a
single stock is classified by the examiner as Loss, but only a net
depreciation in the entire portfolio. Thus some, if not all, deprecia-
tion (other than in a subsidiary's stock) may be offset by appreciation
in other stocks. It is generally expected that a Corporation will main-
tain adequate security valuation reserves to cover such net depreciation.
The need and appropriateness of these writedowns, and their
resulting affect on capital accounts, can well be questioned. As an
alternative to the use of net asset value, the use of actual cost can
muster not informidable arguments, two of which should be noted.
The first is founded on the historical and factual differences
between the situations in which the net asset--or book--value requirement
originated, and those involved in the Corporations' acquisitions of
stocks. The application of the book value basis to Corporations'
stockholdings stems from its long use in Bank Holding Company cases.
Prior to their being placed under regulatory control in the 1930's, these
companies accumulated a considerable amount of "watered" values, many
of which grew out of self-dealing situations, usually involving the
exchange of stock and not cash purchases. In view of these inflated
FORD is LIBRARY GERALD
values, particularly in relation to the prices of the 1930's, the
original cost of assets--that is the original book value--was taken as
the most logical bench mark. In contrast to this situation the
121
Corporations' stock acquisitions do not involve any self-dealing, but
are the result of arms-length negotiations. Additionally, they do not
result from the exchange of stock, but from the payment of cash.
Furthermore, the Corporations are subject to examination and close
supervision, including specific approval by the Board for all relatively
large stock acquisitions.
The second line of argument--based on generally accepted accounting
principles--claims that the application of the net book value basis,
rather than abolishing distortions, actually creates them not only in
the financial statements, but more particularly in the reports on income
and earnings. Thus, an immediate charge-off would at the minimum reduce
any net capital growth, and could cause an actual loss or impairment of
capital, and that this would then be followed by an illusory increase in
the rate of capital growth. Such distortions would apply not only to
the Corporations, but likewise to their parent banks with which they
are consolidated, The crux of this approach is that business activities
are no longer considered as separate ventures, but as going concerns
and that hence the emphasis has. shifted from the balance sheet to the
income and expense statement. In view of this, abnormal charges to
income, and the possibility of comparing net income to understated assets,
should be avoided. The use of cost, rather than net asset value would
avoid such abnormal charges.
Miscellaneous Problems and Questions
While none of the following areas appear serious at this time, any
of them could arise in a given situation and become critical.
FORD is LIBRARY GERALD
122
Board Interpretations
As set forth in an earlier chapter there have been four published
interpretations by the Board, only one of which pertained to the acquisi-
tion of stocks. With the increasing number of investments and since
experience has shown that there are certain areas where problems often
arise, a freer use of this device would seem to be desirable. Not only
would it be likely to prevent types of acquisitions which the Board had
already reviewed and felt to be inappropriate, but would place the
Corporations on notice of instances where consents might be subject to
conditions. Knowledge of such conditions would permit the Corporations
to prepare for such contingencies in their early negotiations with the
foreign parties.
Underwriting
The statute authorizes the Corporations to purchase and sell bonds
and stocks, the latter subject to restrictions, but does not specifically
refer to underwriting. However, it has generally been assumed that the
statutory language covers these operations. In practice there has been
only a minimal amount of experience with underwriting, most of which has
been in relation to debt obligations. The rare cases of stock under-
writing have all been on a purely standby basis. As is true with all
areas where there is a dearth of experience, there exists the possibility
of many latent problems. This would seem particularly true of a subject,
like underwriting, where there is a strong statutory prohibition against
the parent's undertaking such operations.
Guarantees
GERALD FORD CIBRARY
The 1963 Revision of Regulation K paralleling the revision of
Regulation M, authorized the Corporation to issue certain guarantees, but
123
limited them to 10 per cent of the amount of the Corporation's capital
and surplus for any one borrower and in the aggregate to 50 per cent of
that amount. Thus far, there have been two questions in relation to
these provisions.
One is why a Corporation, not engaged in banking, is permitted to
extend unsecured loans of up to 50 per cent of its capital and surplus
to a single borrower, but is limited in issuing unsecured guarantees for
a single person to only one-fifth that amount--10 per cent of capital
and surplus. At the time these provisions were included in the Regula-
tion this was a new authorization of power and therefore the Board had
had no experience with its use. In practice this power has not been
exercised extensively by the Corporations, although some subsidiaries
have a goodly volume of such operations, where they are traditional in
the local market, and it is in this regard that this question has
usually arisen.
The other question is precisely what is included in these
"guarantees"? Prior to this provision--and the parellel one for foreign
branches of member banks-banks in general, but particularly their foreign
branches, were accustomed to issuing certain Letters of Credit that were
virtually the equivalent of a guarantee. Additionally, all banking
institutions naturally endorse certain paper with recourse. Whether
these types of obligations of the Corporation's should be considered
"guarantees" has not yet been indicated.
FORD & LIBRARY GERALD
Summary
The discussion in this Chapter certainly does not exhaust all of
the problems related to the Corporations, neither as to those currently
encountered, nor as to those that may arise in the future. However, it
124
does cover the major areas where problems have, or may, be encountered.
Viewed individually, or as a whole, these problems, while admittedly
troublesome, do not appear to be of a character that impedes the
effective utilization of the Corporations by American banks.
FORD is LIBRARY 938470
CHAPTER VIII
PROSPECTIVE UTILIZATION OF THE CORPORATIONS
The preceding chapters have revealed the extent of the revived
interest in Edge and Agreement Corporations. They have shown that
since the mid 1950's this has resulted in an increase in parent banks
from 6 to 37; the number of Corporations from 6 to 53; those located in
a U. S. city other than their parent's, from 2 to 13; and their equity
holding from $2 million to almost $220 million. They have also shown
a statutory history which includes no major changes, and a regulatory
background of gradual liberalization which has accelerated in the past
dozen years. While a number of problems exist, most are of a technical
nature and are not real impediments to the utilization and growth of
the Corporations. This is particularly true when one recognizes that
such impediments as exist, are due to the Corporations' being a device
to breach, to a limited extent, certain strong traditions that are
basic to the American banking system, primarily those against inter-
State branching, the complete separation of banking and commerce, and
the more recent prohibition against combining commercial and investment
banking.
The growth in the number, size, and scope of operations of the
Corporations is, of course, only a reflection of the increased use of
this corporate device by the parent banks. This greater utilization of
the Corporations has focused on their two unique powers, namely to be
located in a State other than that of the parent bank, and to acquire
equity interests. The degree and manner of utilization of the
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125
126
Corporations by the various banks has, of course, varied in accordance
with the requirements of the bank's location and its individual type of
international operations. However, the experience of the past decade
clearly indicates that the utilization of the Corporations has become,
in one way or another, a necessary part of virtually all full-fledged
international operations of American banks. For those banks outside of
New York City, an international banking operation in that center of foreign
trade and finance has become increasingly indispensable. For all banks
the ability to acquire foreign stocks now appears to be well founded as
a necessary part of an international banking and financing operation,
whether such acquisitions be of minority interests or control, and
whether it be in banks, finance companies, or nonfinancial enterprises.
While the 1966 amendment to Section 25 of the Federal Reserve Act and
the consequent revision of Regulation M allows member banks to make
direct acquisitions of stock in foreign banks, only through the Corpora-
tions can the banks acquire equity interests in finance companies or
nonfinancial organizations. Furthermore, there has been at least some
indication that a number of banks prefer to continue to hold foreign
bank stock through their subsidiary Corporations.
In view of the foregoing it seems unlikely that the number, size,
and scope of activities of the Corporations are likely to decrease in
the future, unless there is a virtual disintegration of international
commerce, or the United States should isolate itself from the rest of
the world's trade and finance. There remains, however, the question of
what are the chances of there being a continuation of their rapid growth
such as has occurred.
FORD is LIBRARY GERALD
127
At the end of 1967 there were 103 banks in the United States with
deposits of over $500 million, 45 of which had over $1 billion. These
103 banks would appear to be a fair approximation of the number of banks,
which in the foreseeable future might need, and could support, a full-
fledged international banking operation, and hence might require a sub-
sidiary or affiliated Corporation. Special circumstances will no doubt
dictate that some smaller banks form a Corporation, either alone or in
conjunction with others. However, on the other hand, some of these
larger banks may never develop sufficient international business to
require a truly international operation and hence the need for a Corpora-
tion.
Early in 1968 over one-third of these banks already had a Corporation,
or were affiliated with one through a Bank Holding Company. Thus, there
appears to be a strong likelihood that additional banks will be forming
new Corporations in the next few years, although this likelihood will
probably diminish over the longer term, as the number of these larger
banks without Corporations diminishes. This conclusion is also borne
out by the activities in this area of the 45 largest banks in the United
States, which are naturally the prime candidates for utilizing this
corporate device. Over two-thirds, 31, already have or are affiliated
with Corporations. However, the utilization of the Corporations by
these banks is not so widespread when viewed solely from the standpoint
of their establishing an out-of-area presence within the United States
through the use of the Corporations. Of the 34 largest non-New York City
banks only 15 have or are affiliated with a Corporation located in New
York, and only one of the 11 New York City banks has a Corporation
located outside of the city.
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123
Aside from this likely growth in numbers, it also seems probable
that there will be an increase in the size and scope of operations of
many, if not all, of the Corporations. About half of all of the present
Corporations have been formed in the past six years, and more than half
of those located away from their parent started such banking operations
within the last three years. Thus, the operations of many of the Corpora-
tions already established are still basically in their formative stages
and additional growth in size and scope of operations is to be expected.
This would seem to be true whether the focus of their operations is on
equities or a banking business in the United States.
There are other factors that will also exert an influence, either
of a limiting or expansionary character, on the growth of the Corpora-
tions. These are the increase, or decrease, in foreign activities of
United States commerce and industry in general; the, hopefully, short-
term effects of this country's balance of payments problem and the
present foreign credit restraint program; and the availability of appro-
priate equity investments abroad. The possible influence of the first of
these is far outside the scope of this paper, but it would seem unlikely
that there will be any massive withdrawal by U. S. concerns from their
currently extensive foreign operations. The amount that they have in-
vested abroad, would alone seem to be a guarantee of this. As to the
foreign credit restraint program, its effect has thus far been to
GERALD FORD LIBRARY
increase the desirability, if not the necessity, for American banks to
acquire sources of offshore funds for lending abroad. To achieve this
end, equity investments are virtually the only alternative to direct
branching. Therefore the restraint program has in this regard supplied
an added impetus to the equity investments of the Corporations. However,
129
the program also has now virtually precluded such investments in Conti-
nental Europe. On balance it appears that the program has, and is
likely to continue, to accelerate the banks' utilization of the Corpo-
rations, particularly their power to acquire stocks.
A vital factor in the growth of the Corporations' equity investments
will be the availability of such foreign investments. Those in companies
of a nonfinancial nature have usually resulted from extensions of credit
and are basically of a temporary character. There would seem to be no
particular limit in utilizing Corporations in these operations abroad.
The opportunities to invest in various types of foreign finance companies
is unlikely to diminish to any great extent, although some of the more
lucrative investments may not long be available. Investments in foreign
banks might well prove to be a different story, particularly in any
given country or area. The number of banks permitted in any country is
usually limited. Furthermore, those which a foreigner may control, or
even hold stock in, are even more restricted. Thus it would not be
surprising if the opportunities for this particular type of equity in-
vestment became more limited within a relatively short period.
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Judging on all of the information presented, it seems reasonable to
believe that the number of Corporations will not decrease, and that on
the contrary it is likely to continue to increase fairly rapidly,
although in the long run the rate of increase will probably diminish as
their number reaches a natural plateau where few if any other banks will
be able to utilize them effectively. As to the size of the Corporations,
this too will no doubt grow as they gain experience and acquire new
customers, or regain old ones. The rate of such growth will, of course,
depend primarily on the trend of this country's international trade and
130
their parent bank's participation in financial transactions abroad.
Growth in size will, however, also come to a considerable extent from an
increasing scope of operations, particularly in the making of equity
investments abroad. The rate of increase in such investments has shown no
signs of slackening and as new Corporations are formed and reach maturity
there are good reasons to believe that the amount invested in equities
will continue to rise at a fairly fast rate.
The above projections could be strongly affected, particularly as to
growth in the number of Corporations, should there be a pronounced revival
of multi-bank Corporations. This would be especially true should there
be so strong a move in this direction that existing Corporations were
merged or consolidated. As cited in an earlier chapter of this paper
two applications for multi-bank Corporations have recently been received
by the Board, one of which has been approved and the Corporation is now
open for business. There is, however, no indication that these are the
beginning of a wave of such Corporations. Nevertheless, should there be
a severe recession in the United States, or a sharp diminution of the
country's foreign trade, an increased movement toward joint Corporations
could easily develop.
Despite the above caveat, all elements related to the Edge and
Agreement Corporations appear likely to increase for several years:
the number of banks holding stock in them; the number of Corporations;
their size; and their scope of operations and the number and size of
their equity holdings.
&
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APPENDIX 1
AMERICAN BANKS AND THEIR INTERNATIONAL CORPORATIONS
as of March 15, 1968
The total capital accounts, as of June 30, 1967--in thousands of
dollars--are shown in parentheses for those Corporations opened for
business on that date. All are Edge Corporations unless otherwise
indicated.
Bank of America National Trust and Savings Association, San Franicsco:
Bamerical International Financial Corporation,
San Francisco. ($3,120)
Bank of America,
New York. ($59,440) b
The Bank of California National Association, San Francisco:
Bank of California International Corporation,
New York. ($2,528) b
The Bank of New York:
The Bank of New York International Corporation,
New York. ($2,032)
Bankers Trust Company, New York:
ᵃBankers Company of New York,
New York. ($281)
Bankers International Corporation,
New York. ($8,895)
The Chase Manhattan Bank (National Association). New York:
Chase International Investment Corporation,
New York. ($17,981)
Chase Manhattan Overseas Banking Corporation,
New York. ($33,643)
Chemical Bank New York Trust Company, New York:
Chemical International Banking Corporation,
New York. ($4,088)
Chemical International Finance, Ltd.,
FORD & GERALD LIBRARY
New York. ($5,461)
The Citizens and Southern National Bank, Savannah:
Citizens and Southern International Corporation,
Atlanta. ($4,000)
Footnotes are at the end of this Appendix, page 135.
-131-
Continental Illinois National Bank and Trust Company of Chicago:
Continental Bank International,
New York. ($16,794)
b
Continental International Finance Corporation,
Chicago. ($11,456)
Crocker-Citizens National Bank, San Francisco:
Crocker-Citizens International Bank,
b
New York.
Crocker-Citizens International Corporation,
San Francisco. ($2,118)
The Fidelity Bank, Philadelphia:
American International Bank,
New York. ($3,089) b
c
The Fidelity International Corporation,
Philadelphia.
The First National Bank of Boston:
Bank of Boston International,
New York. ($5,251) b
Boston Overseas Financial Corporation,
Boston. ($3,458)
The First National Bank of Chicago:
First Chicago International Banking Corporation,
New York. ($3,191) b
First Chicago International Finance Corporation,
Chicago. ($2,180)
The First National Bank of Miami:
aFirst Foreign Investment Corporation,
Miami. ($5)
First National City Bank of New York:
First National City Bank (International),
San Francisco.
First National City Overseas Investment Corporation,
New York. ($2,564)
jono
ᵃInternational Banking Corporation,
New York. ($33,092)
GERALD
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First Pennsylvania Banking and Trust Company, Philadelphia:
First Pennsylvania Overseas Finance Corporation,
Philadelphia. ($2,153)
a Virgin Islands National Bank,
b
Charlotte Amalie, St. Thomas, V. I. ($2,616)
Franklin National Bank, Mineola, New York:
Franklin International Corporation,
New York.
-132-
Irving Trust Company, New York:
Irving International Banking Corporation,
New York. d
Irving International Financing Corporation,
New York. ($2,248)
Manufacturers Hanover Trust Company, New York.
ᵃThe Gallatin Company, Inc.,
New York. ($295)
Manufacturers Hanover International Banking Corporation,
New York. ($2,624)
Manufacturers Hanover International Finance Corporation,
New York. ($2,144)
Manufacturers National Bank of Detroit, Detroit:
Manufacturers-Detroit International Corporation,
Detroit. ($3,103)
e
Marine Midland Corporation, Buffalo:
Marine Midland International Corporation,
New York. ($5,178)
Mellon National Bank and Trust Company, Pittsburgh:
Mellon Bank International,
b
New York. ($10,229)
Morgan Guaranty Trust Company of New York:
Morgan Guaranty International Banking Corporation,
New York. ($8,350)
Morgan Guaranty International Finance Corporation,
New York. ($11,409)
The National Bank of Commerce of Seattle, Seattle:
International Bank of Commerce,
Seattle. ($3,108) f
National Bank of Detroit, Detroit:
International Bank of Detroit,
Detroit. ($16,349)
The National Shawmut Bank of Boston:
Shawmut International Corporation,
LISRARY GERALD FORD
Boston. ($2,569)
New England Merchants National Bank, Boston:
New England Merchants Bank International,
Boston. ($2,565)
The Northern Trust Company, Chicago:
The Northern Trust International Banking Corporation,
New York. b d
Northwest Bancorporation, Minneapolis:
g
Northwest International Bank,
New York. ($2,490)
133
The Philadelphia National Bank, Philadelphia:
Philadelphia International Bank,
New York. ($3,759) b
Philadelphia International Investment Corporation,
Philadelphia. ($3,989)
Pittsburgh National Bank, Pittsburgh:
Pittsburgh International Finance Corporation,
Pittsburgh. ($2,146)
Provident National Bank, Philadelphia:
Provident International Corporation,
Philadelphia. ($2,529)
Security First National Bank, Los Angeles:
Security First International Corporation,
Los Angeles. ($16,064)
State Street Bank and Trust Company, Boston:
State Street Bank Boston International,
New York. ($2,595)b
United California Bank, Los Angeles:
United California Bank International,
New York. ($5,735)
United States Trust Company, New York:
United States Trust Company International Corporation,
New York. ($2,490)
Wachovia Bank and Trust Company, Winston-Salem:
American International Bank,
New York. bc
Wachovia International Investment Corporation,
Winston-Salem. ($2,139)
Wells Fargo Bank, San Francisco:
Wells Fargo Bank International Corporation,
New York. ($12,307) b
GERALD ? FORD
Applications Received
But No Final Permits Issued
as of March 23, 1968
American Fletcher National Bank, Indianapolis:
American Overseas Banking Corporation,
New York.
Republic National Bank, Dallas:
Republic International Company,
Dallas.
134
Seattle-First National Bank:
Seattle-First International Corporation,
Seattle.
United Virginia Bankshares Incorporated, Richmond:
United Virginia Bank International,
Norfolk.
ᵃn Agreement Corporation.
b
Operates a banking business.
c35 per cent of stock held by the bank.
d
Not yet opened for business.
eA Bank Holding Company. Lead bank is Marine Midland Grace
Trust Company of New York.
f
Operates a banking business, but primarily at branches in
Hong Kong.
SA Bank Holding Company. Lead bank is Northwest National Bank
of Minneapolis.
Sources: Overseas Branches and Corporations Engaged in Foreign Banking
and Financing, Board of Governors of the Federal Reserve System,
Washington, D. C., December 31, 1967, H.2 and K.3 Releases of the Board
of Governors.
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135
APPENDIX 2
ESTABLISHMENT OF
SECTION 25 AND SECTION 25 (a) CORPORATIONS
The following shows the number and names of Section 25 and
Section 25 (a) Corporations operating as of December 31, 1954, and those
established (opened for business), or closed, for each subsequent year.
Also shown is the total number of Corporations in operation at the end
of each year.
Section 25 Corporations are indicated by a (*) preceding the name,
all others being Section 25 (a) Corporations. Where there has been a
change in the corporate name, but not in the type of corporation, only
the current name is used, except in the case of Bankers International
Financing Company, Inc.
Number
in
Operation
Prior to 1955
6
*Bankers Company of New York, New York
*First of Boston International Corporation, New York
*International Banking Corporation, New York
*Morgan & Cie., New York
Bank of America, New York
Chase International Investment Corporation, New York
1955
7
American Overseas Finance Corporation, New York
1956
7
1957
*First of Boston International Corporation, New York (closed)
American Overseas Finance Corporation, New York (liquidated)
American Overseas Finance Company
Bank of Boston International, New York
1958
7
(None)
FORD is GIRATO LIBRARY
136
Number
in
Operation
1959
9
*Chase Manhattan Overseas Corporation, New York
*Morgan & Cie,, New York (closed)
Bankers International Corporation, New York
Chemical International Finance, Ltd., New York
1960
15
American Overseas Finance Company (entered liquidation)
*The Gallatin Company, Inc., New York
*Virgin Islands National Bank, Charlotte Amalie, St. Thomas, Virgin Islands
Bankers International Financing Company, Inc., New York
Boston Overseas Financial Corporation, Boston
Morgan Guaranty International Banking Corporation, New York
Morgan Guaranty International Finance Corporation, New York
Philadelphia International Investment Corporation, Philadelphia
1961
16
Chemical International Banking Corporation, New York
1962
26
*Chase Manhattan Overseas Corporation, New York (closed)
Bamerical International Financial Corporation, New York
Chase Manhattan Overseas Banking Corporation, New York
Continental Bank International, New York
Continental International Finance Corporation, Chicago
First Chicago International Banking Corporation, New York
First Chicago International Finance Corporation, Chicago
First National City Overseas Investment Corporation, New York
First Pennsylvania Overseas Finance Corporation, Philadelphia
Manufacturers Hanover International Banking Corporation, New York
Manufacturers Hanover International Finance Corporation, New York
United California Bank International, New York
(Irving International Banking Corporation, final permit, but not yet
opened for business as of March 15, 1968).
1963
35
*Wells Fargo Bank International Corporation, San Francisco
The Fidelity International Corporation, Philadelphia
International Bank of Commerce, Seattle
International Bank of Detroit, Detroit
Irving International Financing Corporation, New York
FORD & GERALD LIBRARY
Manufacturers-Detroit International Corporation, Detroit
Marine Midland International Corporation, New York
Mellon Bank International, Pittsburgh
Northwest International Bank, New York
137
Number
in
Operation
1964
37
*Wells Fargo Bank International Corporation, San Francisco (closed)
Bankers International Corporation, New York (closed)
Crocker-Citizens International Corporation, San Francisco
Pittsburgh International Finance Corporation, Pittsburgh
Provident International Corporation, Philadelphia
Wells Fargo Bank International Corporation, San Francisco
(Bankers International Financing Company, Inc., New York, changed
its name to Bankers International Corporation, New York)
1965
41
Bank ofCalifornia International Corporation, San Francisco
Citizens and Southern International Corporation, Atlanta
State Street Bank Boston International, New York
Wachovia International Investment Corporation, Winston-Salem
1966
45
The Bank of New York International Corporation, New York
New England Merchants Bank International, Boston
Shawmut International Corporation, Boston
United States Trust Company International Corporation, New York
(Bank of California International and Mellon Bank International
moved their head office to New York.)
1967
51
Crocker-Citizens International Bank, New York
*First Foreign Investment Corporation, Miami
First National City Bank (International), San Francisco
Franklin International Corporation, New York
Philadelphia International Bank, New York
Security First International Corporation, Los Angeles
(Wells Fargo Bank International Corporation moved its head office to
New York)
(The Northern Trust International Banking Corporation, New York, final
permit, but not yet opened for business as of March 15, 1968.)
1968 (as of March 15, 1968)
52
American International Bank, New York
&
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APPENDIX 3
ASSETS, LIABILITIES, AND EQUITY HOLDINGS OF
EDGE AND AGREEMENT CORPORATIONS
1954 - 1967
1. Source.
All statistics were derived by the writer from Reports of Conditions
filed by the Corporations with the Board of Governors of the Federal
Reserve System. Data are as of December 31. of each year, except for
1967 as of June 30. Where necessary, deletions have been made to
preserve confidentiality.
2. Adjustments
Number of Corporations. The spreads of assets and liabilities
include not only operating Corporations, i.e., those opened for
business, but usually those for which a final permit had been issued,
but which had not yet opened for business. For the years 1962-1965
inclusive, there was one such Corporation, in 1966 there were four,
and in June 1967, there were three.
Equities. These are generally shown at original cost and include
investments in subsidiaries in the form of convertible debentures
and non-interest bearing loans. Federal Reserve Bank stock and
non-conforming stockholdings are excluded and carried under Other
Assets. Equities acquired prior to 1955 are shown at net book value,
when any write-down had been due to currency devaluation or reflected
depreciation in real estate.
Security Reserves. Included are all security valuation reserves,
both allocated and unallocated, as shown on the Corporations' reports.
Customers' and Corporations' Liability on Acceptances. Included are
liabilities on Deferred Payment Letters of Credit which are no longer
contingent insofar as the goods had been delivered.
3. Geographic Divisions used in Equity Spreads
Africa - the entire continent as commonly understood;
Asia and the Near East - the entire area from the eastern shore
of the Mediterranean (including European Turkey) to the
Pacific Ocean, including Japanese, Philippine, and the East
Indian archipelagoes;
Australia and New Zealand;
Bahama Islands, Bermuda, and Canada;
FORD is 07VR39 LIBRARY
139
Europe - Continental Europe, the Mediterranean islands appertaining
thereto, and the British Isles; includes Finland, but excludes
that part of Turkey which is on the continent;
Latin America - the entire western hemisphere lying south of the
United States, but excluding U. S. possessions and the Bahama
Islands;
United States and Possessions - includes Trust Territories, Puerto
Rico and the U. S. Virgin Islands;
"Developed" Countries - include the following, by area:
Africa - only the Republic of South Africa,
Asia and the Near East - only Japan and Hong Kong,
Australia and New Zealand - both,
Bahamas, Bermuda, and Canada - all three,
Europe - all, except Finland, Greece, and Portugal,
Latin America - none, and
United States and Possessions, all;
"Less Developed" Countries - includes all others; and
No investments have been made within the area of the Sino-Soviet areas.
4. Geographic Classification of Equity Investments
Equity investments have been classified geographically according to
the location of their head office, except where their business is'
predominantly in another geographic area when it has been classified
according to its business location. Example: ADELA Investment
Company, S.A., Luxembourg, has been included in Latin America.
5. Business Definitions
The definitions of the businesses used are those in common usage
with the following possible refinements:
Commercial Banks (Banks) - include merchant banks, banque d'affaires,
and in one case a "foreign trade bank," but do not include purely
"investment banks," or "industrial banks" or "financieras";
Realty Holding Companies - bank, or branch premises holding companies
only;
Development Finance Companies - include "industrial banks," most
"financieras," development banks and development companies,
government controlled and private;
Finance and Investment Companies - include investment banks and
companies, and companies engaged in general finance, equity
holding and underwriting, factoring, instalment or retail sale
financing, equipment leasing, investment/investor research, or
any combination thereof; and
"Other" Companies - includes those in any other types of business,
specifically including insurance and warehousing.
GERALD LIBRARY FORD
140
APPENDIX 3 (continued)
EDGE AND AGREEMENT CORPORATIONS
ASSETS 1954 - 1967
(Amounts in thousands of dollars)
Cash
Cust.
No.
& Due
Liab.
of
from
U. S.
Other
Security
Loan
Accept-
Fixed
Other
TOTAL
Year
Corps.
Banks
Govts.
Bonds
Equities
Reserve
Loans
Reserve
ances
Assets
Assets
ASSETS
1954
6
69,901
61,849
15,075
2,004
(192)
71,462
(807)
11,155
176
1,293
231,916
1955
7
67,982
54,953
21,163
3,956
(547)
93,077
(1,107)
8,967
348
3,862
252,654
1956
7
148,414
58,019
11,712
3,980
(582)
144,703
(1,624)
28,438
579
7,345
400,984
1957
7
126,275
40,654
14,151
16,002
(1,243)
189,957
(2,321)
39,307
970
5,275
429,027
1958
7
165,442
41,903
12,056
16,466
(1,882)
193,342
(3,268)
41,170
828
5,515
471,572
141
1959
9
142,814
31,879
4,791
20,479
(2,664)
195,705
(4,189)
27,784
3,539
7,718
427,856
1960
15
229,615
40,794
10,405
26,353
(2,983)
218,820
(3,938)
24,941
3,604
2,566
550,177
1961
16
194,104
29,259
6,427
28,487
(4,472)
286,957
(4,476)
45,416
4,725
6,523
592,950
1962
27
236,361
40,872
11,414
48,816
(6,311)
288,608
(4,961)
41,103
4,447
5,007
665,356
1963
36
228,438
28,126
9,492
68,992
(11,589)
255,221
(5,659)
54,923
4,018
3,426
635,388
1964
38
398,794
20,379
8,472
90,891
(14,496)
309,554
(7,410)
73,218
3,986
5,284
888,672
1965
42
403,060
27,346
9,042
146,314
(17,597)
371,060
(7,825)
72,617
3,989
8,136
1,016,142
1966
49
604,593
32,626
20,978
199,588
(20,815)
473,101
(7,939)
69,472
4,499
11,501
1,387,604
6/67
51
808,553
32,750
34,895
218,904
(16,991)
459,309
(7,729)
81,735
4,535
10,215
1,626,176
R.FORD is LIBRARY GERALD
APPENDIX 3 (continued)
EDGE AND AGREEMENT CORPORATIONS
LIABILITIES 1954 - 1967
(Amounts in thousands of dollars)
Liab.
(Memo:
Bor-
on
Undi-
Contin-
Total
Total
Time
row-
Accept-
Other
vided
gency
Capital
TOTAL
Year
Deposits
Deposits)
ings
ances
Liab.
Capital
Surplus
Profits
Reserves
Accounts
LIABILITIES
1954
170,973
28,561
3,092
12,710
4,122
20,498
14,683
5,662
176
41,019
231,916
1955
179,583
31,012
4,207
10,751
5,689
28,498
17,783
5,967
176
52,424
252,654
1956
290,449
95,784
11,821
32,944
8,082
31,498
19,783
6,288
119
57,688
400,984
1957
275,970
39,701
21,433
42,879
10,630
51,998
18,883
7,116
118
78,115
429,027
1958
142
309,751
62,047
29,853
43,074
8,925
51,998
19,083
8,770
118
79,969
471,572
1959
292,079
79,831
17,413
28,447
5,091
58,298
20,283
6,216
29
84,826
427,856
1960
425,482
135,431
1,486
25,991
5,984
62,758
20,539
7,000
937
91,234
550,177
1961
433,609
121,365
2,054
46,818
12,248
66,403
20,819
9,224
1,775
98,221
592,950
1962
459,356
108,188
4,448
42,537
8,956
104,248
34,101
9,955
1,755
150,059
665,356
1963
383,502
56,852
10,145
57,081
4,754
130,350
39,001
10,016
539
179,906
635,388
1964
580,779
75,590
27,222
75,009
5,320
146,308
44,994
8,690
350
200,342
888,672
1965
654,139
131,831
25,277
73,640
8,689
171,558
77,085
4,298
1,456
254,397
1,016,142
1966
881,181
120,058
107,638
77,555
9,699
212,218
89,420
8,270
1,623
311,531
1,387,604
6/67
1,078,115
141,091
94,016
84,609
9,550
244,693
91,961
11,661
11,571
359,886
1,626,176
BERALD R. FORD LIBRARA
APPENDIX 3 (continued)
EQUITY HOLDINGS OF EDGE AND AGREEMENT CORPORATIONS
GEOGRAPHIC DISTRIBUTION - Showing: COSTS (thousands of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
Asia and
Australia,
Bahamas, Ber-
Latin
U.S. Ter-
Year
Africa
Near East
N. Zealand
muda,Canada
Europe
America
ritories
Totals
1954
-
-
-
-
622 ( 6)
* ( 1)
* (1)
2,004 ( 8)
1955
* ( 1)
* ( 1)
-
* ( 1)
719 ( 6)
* ( 2)
* (1)
3,956 ( 12)
1956
* ( 1)
* ( 1)
-
* ( 1)
767 ( 6)
* ( 1)
* (1)
3,980 ( 11)
1957
* ( 1)
* ( 2)
-
* ( 1)
12,664 ( 8)
* ( 1)
* (1)
16,002 ( 14)
1958
* ( 2)
* ( 2)
-
* ( 1)
12,561 ( 8)
166 ( 3)
* (1)
16,466 ( 17)
143
1959
2,332 ( 3)
628 ( 3)
-
* ( 2)
12,561 (10)
166 ( 4)
* (1)
20,479 ( 23)
1960
2,781 ( 7)
1,407 ( 7)
-
* ( 2)
12,842 (12)
1,662 ( 3)
* (1)
26,353 ( 32)
1961
4,089 (10)
1,576 ( 8)
* ( 2)
7,767
( 5)
13,053 (15)
1,817 ( 6)
* (1)
28,487 ( 47)
1962
7,047 (19)
2,192 (14)
* ( 3)
11,827
( 6)
14,075 (23)
13,366 (20)
* (2)
48,816 ( 87)
1963
8,482
(26)
4,269 (36)
* ( 3)
16,031
( 8)
24,528 (42)
14,834 (26)
* (2)
68,992 (143)
1964
11,122
(37)
7,245 (53)
1,081 ( 5)
16,949
( 9)
31,033 (50)
23,410 (50)
51 (3)
90,891 (207)
1965
33,968 (40)
7,808 (61)
1,184 ( 7)
25,493 (11)
43,539 (70)
34,207 (68)
115 (3)
146,314
(260)
1966
35,707
(41)
9,736 (68)
7,138 (11)
33,428 (15)
65,106 (85)
48,358 (84)
115 (3)
199,588 (307)
6/67
37,057
(43)
10,474 (72)
8,673 (11)
33,740
(17)
78,026 (93)
50,674 (87)
260 (4)
218,904 (327)
*Data deleted to preserve confidentiality.
R.
FORD
GERALD
LIBRARY
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
GEOGRAPHIC DISTRIBUTION BETWEEN "DEVELOPED" AND "LESS DEVELOPED" COUNTRIES
Developed Countries
Less Developed Countries
Year
Amount
Per cent
Number of Holdings
Amount
Per cent
Number of Holdings
1954
*
*
7
*
*
1
1955
2,733
69.1
8
1,223
30.9
4
1956
3,059
76.9
8
921
23.1
3
1957
14,956
93.5
10
1,046
6.5
4
1958
15,414
93.6
11
1,052
6.4
6
144
1959
19,185
93.7
15
1,294
6.3
8
1960
22,335
84.8
17
4,018
15.2
15
1961
23,480
82.4
26
5,007
17.6
21
1962
30,044
61.5
36
18,772
38.5
51
1963
44,673
64.8
50
24,319
35.2
93
1964
53,435
58.8
64
37,456
41.2
143
1965
71,626
49.0
80
74,688
51.0
180
1966
106,729
53.5
103
92,859
46.5
204
6/67
121,641
55.6
114
97,263
44.4
213
*Data deleted to preserve confidentiality.
LIBRARY GERALD R. FORD
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
DISTRIBUTION BY BUSINESS OF COMPANY INVESTED IN - Showing: COSTS (thousands of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
Banks and
Realty
Development
Finance and
Bank Holding
Trust
Nominee
Holding
Finance
Investment
Year
Companies
Companies
Companies
Companies
Companies
Companies
Others
Totals
1954
* ( 1)
* (2)
-
a (3)
-
* ( 2)
-
2,004 ( 8)
1955
* ( 2)
* (2)
-
97 (3)
* ( 1)
2,476 ( 4)
-
3,956 ( 12)
1956
* ( 2)
* (2)
-
97 (3)
* ( 1)
2,452 ( 3)
-
3,980 ( 11)
1957
12,167 ( 3)
* (2)
-
437 (4)
* ( 2)
2,452 ( 3)
-
16,002 ( 14)
1958
12,729 ( 4)
* (2)
-
333 (4)
* ( 2)
2,452 ( 3)
* ( 2)
16,466 ( 17)
145
1959
14,000 ( 5)
* (2)
a
(2)
333 (4)
628 ( 3)
4,952 ( 4)
* ( 3)
20,479 ( 23)
1960
15,182 (10)
841 (3)
a
(3)
333 (4)
674 ( 6)
9,323 ( 6)
-
26,353 ( 32)
1961
16,416 (14)
1,784 (6)
a
(3)
333 (4)
829 ( 7)
9,019 (11)
106 ( 2)
28,487 ( 47)
1962
29,226 (23)
1,832 (6)
a
(3)
402 (5)
1,754 (13)
14,798 (23)
804 (14)
48,816 ( 87)
1963
42,000 (31)
2,428 (7)
a
(3)
504 (5)
6,343 (44)
16,626 (35)
1,091 (18)
68,992 (143)
1964
45,987 (37)
3,609 (8)
a
(3)
504 (6)
17,637
(75)
21,368 (54)
1,786 (24)
90,891 (207)
1965
86,853 (51)
4,566 (7)
1
(6)
504 (6)
22,267
(94)
28,509 (65)
3,614 (31)
146,314 (260)
1966
117,863 (61)
10,463 (7)
1
(7)
506 (7)
23,871 (95)
42,304 (87)
4,580 (43)
199,588 (307)
6/67
132,324 (72)
10,463 (7)
1
(7)
844 (8)
25,394 (97)
44,779 (91)
5,099 (45)
218,904 (327)
*Data deleted to preserve confidentiality.
FORD & LIBRARY 9FRALD
ᵃAmounts relatively insignificant in terms of the particular unit.
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
IN DEVELOPMENT FINANCE COMPANIES - GEOGRAPHIC DISTRIBUTION
Showing:
COSTS (millions of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
PER CENT of total investments in Development Finance Companies
b
Year
Africa
Asia & Near East
Australia & N.Z.
Europe
Latin America
Totals
1954
-
-
-
-
-
-
1955
-
* ( 1)
100%
-
-
-
* ( 1) 100%
1956
-
* ( 1)
100%
it
-
-
* ( 1) 100%
1957
-
* ( 2)
100%
-
-
-
* ( 2) 100%
1958
-
* ( 2)
100%
-
-
-
* ( 2) 100%
1959
-
.6 ( 3)
100%
-
-
-
.6 ( 3) 100%
1960
-
C
.7
( 6)
100%
-
-
-
.7 ( 6) 100%
146
1961
(1)
.8
100%
(6)
-
-
-
.8 ( 7) 100%
1962
(2)
1.1
58.3%
(7)
a (1) a
* ( 1)
*
* ( 2)
*
1.8 (13) 100%
1963
(3)
3.0
47.2%
a (1) a
1.4 ( 8) 22.0%
1.9 ( 6) 30.5%
6.3 (44)
100%
1964
1.3 (7)
7.1%
4.2
(32)
24.1%
a (1) a
2.9 (11) 16.3%
9.2 (24)
52.3%
17.6
(75)
100%
1965
1.6 (9)
7.0%
4.5
(36)
20.1%
a (1) a
5.0 (15) 22.3%
11.2 (33)
50.4%
22.3
(94)
100%
1966
1.6 (9)
6.6%
4.6
(35)
19.1%
a (1) a
5.9 (15) 24.5%
11.9
(35)
49.7%
23.9
(95)
100%
6/67
1.6 (9)
6.2%
4.8
(36)
19.0%
a (1) a
6.9
(15)
27.2%
12.1 (36)
47.5%
25.4
(97)
100%
*Data deleted to preserve confidentiality.
a Amounts relatively insignificant in terms of the particular unit.
FORD & LIBRARY 076839
b
Details may not add to totals because of rounding.
c Costs and percentages for the two areas are combined in certain years to preserve confidentiality.
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
IN FINANCE AND INVESTMENT COMPANIES
GEOGRAPHIC DISTRIBUTION - Showing: COSTS (millions of dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
PER CENT of total investments in Finance/Investment Companies
Asia and
Australia,
Bahamas, Ber-
U.S. Ter-
b
Year
Africa
Near East
New Zealand
Europe
muda, Canada
Latin America
ritories
Totals
1954
-
-
-
-
-
( 1)*
*(1)*
*( 2) 100%
1955
-
-
-
-
*(1) *
( 2)*
*(1)*
2.5( 4) 100%
1956
-
-
-
-
*(1)*
( 1)
*(1)*
2.5( 3) 100%
147
1957
-
-
-
-
*(1)*
*( 1)*
*(1)*
2.5( 3) 100%
1958
-
-
-
-
*(1)*
*( 1)*
*(1)*
2.5( 3) 100%
1959
-
-
-
-
*(2)*
( 1)*
*(1)*
5.0( 4) 100%
1960
-
-
-
-
*(2) *
1.7( 3)17.8%
*(1)*
9.3( 6) 100%
1961
-
-
*(2)*
*( 1) *
*(2) *
c
1.8( 5)20.0%
a(1)a
9.0(11)100%
1962
-
*( 4)
*(2)*
1.2( 7) 7.9%
(3)
12.9
87.5%
( 6)
a(1)a
14.8(23)100%
1963
*(1)*
c
.8( 7) 5.1%
*(2)*
(14) 10.8%
(3)
13.0
78.5%
( 7)
a(1)a
16.6(35)100%
1964
(3) 2.5
11.7%
(15)
1.1(4) 4.9%
4.2(18)19.5%
(3)
13.6
63.9%
(10)
a(1)a
21.4(54)100%
1965
(2) 2.7
9.3%
(17)
1.2(6) 4.0%
9.1(21)32.0%
11.3(5)39.7%
4.3(13)15.0%
a(1)a
28.5(65)100%
1966
(2) 4.4
10.4%
(22)
6.6(9)15.7%
13.8(29)32.6%
12.5(8)29.5%
5.0(16)11.8%
a(1)a
42.3(87)100%
6/67
(2)
4.5
10.0%
(23)
8.2(9)18.2%
14.2(31)31.7%
12.5(8)27.8%
5.5(17)12.3%
a(1)a
44.8(91)100%
See footnotes on page 146.
FORD i LIBRARY 938870
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
IN BANKS AND BANK HOLDING COMPANIES
GEOGRAPHIC DISTRIBUTION - Showing: COSTS (millions of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
PER CENT of total investment in Banks/Bank Holding Companies
Asia and
Bahamas, Ber-
U.S. Ter-
b
Year
Africa
Near East
Europe
muda, Canada
Latin America
ritories
Totals
1954
-
-
*( 1) 100%
-
-
-
*( 1) 100%
1955
*( 1) *
-
*( 1) *
-
-
-
*( 2) 100%
1956
*( 1) *
-
* ( 1) *
-
-
-
*( 2) 100%
1957
*( 1) *
-
*( 2) *
-
-
-
12.2( 3) 100%
1958
*( 2) *
-
*( 2) *
-
-
-
12.7( 4) 100%
148
1959
*( 3) *
-
*( 2) *
-
-
-
14.0( 5) 100%
1960
2.8( 7) 17.5% c *(1)
*( 2) *
-
-
-
15.2(10)100%
1961
( 9)
4.7
28.9%
(1)
11.7( 4)71.1%
-
-
-
16.4(14)100%
1962
(16)
7.4
25.5%
(1)
11.6( 3)39.6%
-
10.2( 3) 34.9%
-
29.2(23)100%
c
1963
(20)
8.4
20.2%
(1)
19.7( 6) 46.9%
(1)
13.8
32.9%
( 3)
-
42.0(31)100%
1964
(24)
10.1
21.8%
(2)
22.2( 6)48.3%
(2)
13.8
29.9%
( 3)
-
46.0(37)100%
1965
(27)
32.8
37.7%
(2)
26.1(12)30.0%
10.7(3)12.3%
17.4(
7) 20.0%
-
86.9(51)100%
1966
(27)
34.5
29.2%
(2)
42.5(19)36.1%
11.6(4) 9.8%
29.3( 9)24.9%
-
117.9(61)100%
6/67
(28)
35.6
27.0%
(3)
54.1(25)40.9%
11.9(5) 9.0%
30.6(10)23.1%
a (1) a
132.3(72)100%
See footnotes on page 146.
FORD & LIBRARY 9ERALD
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
IN TRUST, NOMINEE AND REALTY HOLDING COMPANIES
GEOGRAPHIC DISTRIBUTION - Showing: COSTS (in millions of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
Trust Companies
Nominee Companies
Realty Holding Companies
Year
Bahamas, Bermuda, Canada
Europe
Asia and Near East
Europe
Europe
Others
1954
-
* (2)
-
-
a (3)
-
1955
-
* (2)
-
-
.1 (3)
-
1956
-
* (2)
-
-
.1 (3)
-
1957
-
* (2)
-
-
.4 (4)
-
1958
-
* (2)
-
-
.3 (4)
-
149
1959
-
* (2)
-
a (2)
.3 (4)
-
1960
-
.8 (3)
-
a (3)
.3 (4)
-
1961
.9
(3)
.8 (3)
-
a (3)
.3 (4)
-
1962
1.0
(3)
.8 (3)
-
a (3)
.4 (5)
-
1963
1.6
(4)
.8 (3)
-
a (3)
.5 (5)
-
1964
2.6
(4)
1.0 (4)
-
a (3)
.5 (5)
a (1)
1965
3.5
(3)
1.1 (4)
a
(2)
a (4)
.5 (5)
a (1)
1966
9.4
(3)
1.1 (4)
a
(2)
a (5)
.5 (5)
a (2)
6/67
9.4
(3)
1.1 (4)
a
(2)
a (5)
.5 (5)
.3 (3)
*Data deleted to preserve confidentiality.
LIBRARY GERALD ? FORD
a Amounts relatively insignificant in terms of the particular unit.
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
IN "OTHER" COMPANIES
GEOGRAPHIC DISTRIBUTION - Showing: COSTS (millions of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
PER CENT of total investment in "Other" Companies
b
Year
Africa
Asia and Near East
Europe
Latin America
Other
Totals
1954
-
-
-
-
-
-
1955
-
-
-
-
-
-
1956
-
-
-
-
-
-
1957
-
-
-
-
-
-
150
1958
-
-
-
*( 2) 100%
-
*( 2) 100%
1959
-
-
-
*( 3) 100%
-
*( 3) 100%
1960
-
-
-
-
-
-
1961
-
*(1) *
-
*( 1) *
-
*( 2) 100%
1962
*(1) *
*(2)*
a (1) a
.4( 9) 53.7%
*(1) *
.8(14) 100%
1963
*(2) *
*(2)*
.3(3)24.7%
.5(10) 43.3%
*(1)*
1.1 (18) 100%
1964
*(3)*
.2(4) 8.9%
.2 (3) 12.3%
1.2 (13) 65.4%
*(1)*
1.8 (24) 100%
1965
*(2) *
.2(4) 5.4%
1.8(9) 51.1%
1.3(15)36.2%
*(1) *
3.6(31) 100%
1966
.2(3)3.6%
.3(7) 6.3%
1.3(8)28.6%
2.2(23)48.5%
.6(2) 13.0%
4.6(43) 100%
6/67
.2(3)3.2%
.5(8) 10.4%
1.3(8)25.7%
2.5(23)48.7%
.6(3) 12.0%
5.1(45)100%
See footnotes on page 146.
FORD & LIBRARY
APPENDIX 3 (continued)
EQUITY HOLDINGS (continued)
DISTRIBUTION BY PER CENT OF OUTSTANDING STOCK OWNED - Showing: COSTS (thousands of U.S. dollars-equivalent)
NUMBER OF HOLDINGS (in parenthesis)
PER CENT of total equity investments
Year
90+ to 100 per cent
45+ to 90 per cent
10+ to 45 per cent
Nominal to 10 per cent
1954
560 ( 5)
27.9%
-
1,444 ( 3)
72.1%
-
1955
2,171 ( 7)
54.9%
-
* ( 2)
*
* ( 3)
*
1956
2,449 ( 7)
61.5%
-
* ( 3)
*
* ( 1)
*
1957
14,346 ( 9)
89.7%
-
* ( 3)
*
* ( 2)
*
151
1958
14,804 (10)
89.9%
-
1,270 ( 3)
7.7%
392
( 4)
2.4%
1959
18,575 (14)
90.7%
-
1,270 ( 3)
6.2%
634
( 6)
3.1%
1960
22,939 (17)
87.1%
-
2,426 ( 8)
9.2%
988
( 7)
3.7%
1961
24,431
(20)
85.8%
-
2,065 (10)
7.2%
1,991
( 17)
7.0%
1962
29,949
(21)
61.4%
10,704 ( 4)
21.9%
3,002 (15)
6.1%
5,161
( 47)
10.6%
1963
31,094
(23)
45.1%
14,450 ( 7)
20.9%
10,605 (19)
15.4%
12,843
( 94)
18.6%
1964
33,198
(25)
36.5%
15,749
( 8)
17.3%
14,414 (35)
15.9%
27,530
(139)
30.3%
1965
45,088
(30)
30.8%
17,547
(12)
12.0%
38,865
(47)
26.6%
44,814
(171)
30.6%
1966
53,663
(36)
26.9%
33,393 (16)
16.7%
64,850 (63)
32.5%
47,682
(192)
23.9%
6/67
53,927
(37)
24.6%
42,999 (18)
19.7%
72,436 (74)
33.1%
49,542
(198)
22.6%
*Data deleted to preserve confidentiality.
GERALD FORD LIBRARY
APPENDIX 4
REGULATION K OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
including
SECTION 25 (a) AND EXCERPTS
OF SECTION 25 OF THE FEDERAL RESERVE ACT.
(See back pocket.)
FORD is LIBRARY GERALD
152
BIBLIOGRAPHY
Theses
Dean Arthur Dudley, Evolution of a Financial Institution: the Edge
Corporation, University of Washington, 1965.
Mimeographed Papers
T. M. Farley, The "Edge Act" and United States International Banking
and Finance, 1962.
Reports, Pamphlets and Booklets
The American Banker, various issues.
Fred H. Klopstock, "A New Look at Foreign and International Banking
in the United States," Research Study Six, Private Financial Institutions,
Commission on Money and Credit, Prentice-Hall, Inc., Englewood Cliffs,
N. J., 1963.
Periodicals
George H. Bossy, "Edge Act and Agreement Corporations in International
Finance," Federal Reserve Bank of New York Monthly Review, May, 1964.
Ronald E. Covault, "Foreign Branches and Edge Act Corporations," The
National Banking Review, December, 1963.
Frederick R. Dahl, "International Operations of U. S. Banks: Growth
and Public Policy Implications," Duke University School of Law Law and
Contemporary Problems, Winter, 1967.
"Edge Act Corporations and International Banking," Federal Reserve
Bank of Richmond Monthly Review, June, 1967.
Federal Reserve Bulletin, various issues.
R. Gerald Fox, "Why the New Interest in Edge Act Subsidiaries,"
Bankers Monthly, September, 1962.
153
FORD j LIBRARY GERALD
154
George Moore, "International Growth: Challenge to U. S. Banks,"
National Banking Review, September, 1963.
A. Morgan, "Banks are Going Global," Banking, November, 1963.
Robert V. Roosa, "How World Banker Role Benefits the U. S.," Banking,
November, 1963.
"United States Banking Organization Abroad," Federal Reserve Bulletin
December, 1956.
Government Documents and Reports
Annual Report of the Board of Governors of the Federal Reserve System,
Washington, D. c., various years.
H.2, Applications and Reports Received or Acted on, Board of Governors
of the Federal Reserve System, Washington, D. C., various of the weekly
releases.
K.3, Announcement by Board of Governors of the Federal Reserve
System, Washington, D. C., various of the weekly releases.
Press Release of Board of Governors of the Federal Reserve System of
March 15, 1968.
Statutes and Regulations
Federal Reserve Act, as amended through 1967.
Regulation D and Supplement, Board of Governors of the Federal
Reserve System, as effective January 18, 1968.
Regulation K, Board of Governors of the Federal Reserve System, all
revisions and amendments, including that effective February 8, 1968.
Regulation M, Board of Governors of the Federal Reserve System, as
revised effective March 15, 1968.
Regulation Q and Supplement, Board of Governors of the Federal
Reserve System, as amended effective January 18, 1968.
GERALD FORD