Financial Markets and Institutions (2-downloads)

Edge Act corporation, a special subsidiary engaged primarily in international bank-

ing. U.S. banks (through their holding companies) can also own a controlling inter-

est in foreign banks and in foreign companies that provide financial services, such

as finance companies. The international activities of U.S. banking organizations are

governed primarily by the Federal Reserve’s Regulation K.

In late 1981, the Federal Reserve approved the creation of international

banking facilities (IBFs) within the United States that can accept time deposits

from foreigners but are not subject to either reserve requirements or restrictions

on interest payments. IBFs are also allowed to make loans to foreigners, but they

are not allowed to make loans to domestic residents. States have encouraged the

establishment of IBFs by exempting them from state and local taxes. In essence, IBFs

are treated like foreign branches of U.S. banks and are not subject to domestic reg-

ulations and taxes. The purpose of establishing IBFs is to encourage American

and foreign banks to do more banking business in the United States rather than

abroad. From this point of view, IBFs were a success: Their assets climbed to nearly

$200 billion in the first two years, and were $1.3 trillion at the end of 2009.

Foreign Banks in the United States

The growth in international trade has not only encouraged U.S. banks to open offices

overseas, but it has also encouraged foreign banks to establish offices in the United

States. Foreign banks have been extremely successful in the United States. Currently,

they hold more than 16% of total U.S. bank assets and do a large portion of all U.S.

bank lending, with nearly a 26% market share for lending to U.S. corporations.

Foreign banks engage in banking activities in the United States by operating an

agency office of the foreign bank, a subsidiary U.S. bank, or a branch of the foreign

bank. An agency office can lend and transfer funds in the United States, but it can-

not accept deposits from domestic residents. Agency offices have the advantage of

not being subject to regulations that apply to full-service banking offices (such as

requirements for FDIC insurance). A subsidiary U.S. bank is just like any other U.S.

bank (it may even have an American-sounding name) and is subject to the same

regulations, but it is owned by the foreign bank. A branch of a foreign bank bears

the foreign bank’s name and is usually a full-service office. Foreign banks may also

form Edge Act corporations and IBFs.

Before 1978, foreign banks were not subject to many regulations that applied

to domestic banks: They could open branches across state lines and were not

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Part 6 The Financial Institutions Industry

TA B L E   1 9 . 4

Ten Largest Banks in the World, 2009