Foreign Banks Seen to Pick Trading for Growth in Their U.S. Operations

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NEW YORK - Foreign banks in the United States will continue to expand selectively over the next few years despite the restraints imposed on their expansion by tough banking and tax legislation, according to a senior executive with KPMG Peat Marwick.

Stephen M. Brecher, partner at KPMG Peat Marwick in charge of international bank practice and national director of technical tax services for international banking, said much of the expansion will focus on trading operations and activities like private banking rather than foreign banks' old mainstay, commercial lending.

"There is a significant trend to trading activity as opposed to lending activity," Mr. Brecher said in a recent interview.

"There's still substantial lending by foreign banks, but the growth of trading activity has been explosive.

"It's been one of the most significant developments over the last few years."

Greater Controls

The executive noted that growth in trading operations among foreign banks in the United States has produced a commensurate demand for increased controls over credit and market risk.

It also has raised conflicts between tax authorities in the United States and other countries over what income should be booked where.

"Which locations do you allocate the profits to if you have a global book that passes around the world every 24 hours?" Mr. Brecher asked.

"Clearly, as your business grows, you face major taxation issues on cross-border trans-actions."

The accounting expert suggested that advanced pricing agreements, under which banks and the Internal Revenue Service agree in advance on a portion of earnings that will be allocated to the United States are probably among the better solutions.

"If you take foreign currency options as an example and you have a truly global book, it's virtually impossible to determine the appropriate points of profit and loss," Mr. Brecher said.

"This process [advanced pricing agreements] at least allow a taxpayer to allocate on an economically logical basis profit or loss to the United States."

Notwithstanding taxation and other issues affecting trading operations, Mr. Brecher said trading is slated to expand.

"Trading among foreign banks in the United States will continue to grow because it is an important activity that has the potential for substantial profits," he said.

"Trading will grow even if it does entail tax uncertainties."

Toward Clarification

In fact, a number of the tax uncertainties are already being reduced.

In particular, Mr. Brecher said, temporary and proposed regulations that the IRS issued on Oct. 18 reversing its previous position will substantially alleviate questions over how to characterize hedge transactions.

To benefit from the new regulations, banks and other corporations must identify hedging transactions on their books and records and specify both the hedging position and the item, items, or aggregate risk that is being hedged. …