Introduction to Finance

3.9
International Banking and 
Foreign Systems
GLOBAL
Banks with headquarters in one country may open offi
ces or branches in other countries. 
When banks operate in more than one country, we call this 
international banking
. European 
banks dominated international banking until the 1960s, when world trade began expanding 
rapidly and multinational corporations increased in number and size. As a response to these 
and other developments involving international trade, American banks began opening offi
ces in 
foreign countries and establishing correspondent banking arrangements with foreign banks. In 
essence, as U.S. corporations began expanding their operations in other countries, the American 
banks with which they were working followed them. Likewise, the growing importance of the 
U.S. dollar in international transactions and the movement by foreign corporations to invest in 
the United States resulted in foreign banks opening offi
ces in the United States. Today, U.S. 
banks are actively involved throughout the world with major operations in Europe, Asia, and 
Latin America, and foreign banks have opened hundreds of offi
ces in the United States.
Banking in the United States has traditionally been highly regulated to protect depositor 
funds and to maintain citizen confi dence in the U.S. banking system. European and most other 
countries generally have adopted less-restrictive approaches to bank regulation. This led to 
a competitive disadvantage for U.S. domestic banks relative to foreign-owned banks. The 
result was the passage of the 
International Banking Act (IBA)
of 1978, which was intended to 
provide a “level playing fi eld” for all banks. Some of the provisions included restricting for-
eign banks in terms of their U.S. interstate banking activities and giving authority to the Fed to 
impose reserve requirements on foreign banks. Rules against nonbanking operations for U.S. 
banks were extended to foreign banks operating in the United States. Congress strengthened 
regulations relating to foreign banks by enacting the 
Foreign Bank Supervision Enhancement 
Act 
in 1991. This act requires that the Fed give its approval before foreign banks can open 
offi
ces in the United States and that the Fed examine U.S. offi
ces of foreign banks each year.
While most countries have central banking systems that operate much like the U.S. Fed-
eral Reserve System, some countries allow their banks to engage in both commercial banking 
and investment banking. This is called 
universal banking
. As noted earlier in the chapter, 
Germany is a universal banking country. Its largest banks participate in both types of banking.