Remarks on Economic, Supervisory, and Regulatory Issues Facing Foreign Banks Operating in the United States

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I am delighted to be here today to address this important conference on economic, supervisory, and regulatory issues facing foreign banks operating in the United States. I also very much appreciate the efforts of my colleague Gene Ludwig and his staff at the Office of the Comptroller of the Currency in organizing these sessions. Foreign banks contribute importantly to the depth and breadth of financial markets throughout the United States, enhancing the sophistication and flexibility of our markets. It is a special pleasure for me to be here because so many of your institutions are located in the Second District and have close working relationships with us at the Federal Reserve Bank of New York.

What I would like to do in my remarks to you this morning is to stand back and take a look at the environment for foreign banks in the United States and comment on some recent developments. I will also touch on some of the challenges facing the banking industry.

I am very aware that the prospects for banks are linked closely to the overall economic performance of the United States. As has been widely reported, the near-term outlook for the U.S. economy is uncertain. Particularly in this environment, it is essential that the Federal Reserve pursue a disciplined monetary policy, one aimed at fostering a sustained, noninflationary growth environment in which the economy continues to shift from a higher to a lower inflation climate. Only with price stability can productivity, real income, and living standards achieve their highest possible levels and thereby enable both households and businesses to function as efficiently as possible. The key, of course, is to instill a sense of confidence that inflation is trending lower in the long term. It is the path that in the long run creates the most hospitable environment for businesses to grow and households to thrive.

Fostering such an environment remains the number one job of the Federal Reserve and is a key element in maintaining the status of the United States as an attractive market for domestic and foreign banks alike. Another very important element contributing to an attractive climate for banks in the United States - and especially for foreign banks - is this country's longstanding policy of providing national treatment to foreign banks operating in the U.S. markets.

What does national treatment do? Most fundamentally, national treatment accords foreign banking institutions the same rights and privileges as domestic institutions in participating in our markets for financial services. In practice, national treatment seeks to create a level playing field for foreign and domestic banking institutions by giving them substantially equal access to benefit from participating in our economy and by subjecting them to substantially similar regulations and supervisory oversight. The national treatment policy followed by the United States is premised on the belief that open and competitive markets strengthen all market participants and thereby provide both cost and quality benefits to the banking institutions themselves and their customers. Our nation feels strongly that this is the right way to achieve fairness in the financial marketplace for all competitors, and U.S. political leaders recently have raised the issue of reciprocity in the policy of national treatment by others.

The principle of national treatment in banking was reflected in bilateral treaties and later in major banking legislation enacted in the United States. It was, for example, embodied in the Foreign Bank Supervision Enhancement Act of 1991, which was enacted to align supervision and regulation of foreign banks in the United States with that applied to U.S. institutions. The strengthening of supervision and regulation of foreign banks in 1991 went hand in hand with comparable changes in legislation affecting U.S. institutions. These changes were reflected in the Federal Deposit Insurance Corporation Improvement Act of 1991, as well as in the earlier Financial Institutions Reform, Recovery and Enforcement Act 1989. …