Academic journal article Federal Reserve Bulletin

Statement Submitted by the Board of Governors of the Federal Reserve System

Academic journal article Federal Reserve Bulletin

Statement Submitted by the Board of Governors of the Federal Reserve System

Article excerpt

Statement submitted by the Board of Governors of the Federal Reserve System to the Committee on Ways and Means, U.S. House of Representatives, July 29, 1991

We are pleased to present the views of the Federal Reserve Board on the proposed Fair Trade in Financial Services Act of 1991. Given our direct responsibilities with respect to the financial services industry and our desire to ensure a healthy and efficient environment for the provision of financial services, the Federal Reserve has a special interest in this legislation.

The proposed act has two major elements that are relevant to a discussion of the policy issues presented by the proposed legislation. First, the Secretary of the Treasury would be required to submit to the Congress every two years a report identifying those countries that do not offer national treatment to U.S. banks, securities brokers and dealers, or investment advisers. A country offers national treatment to foreign firms if it offers "the same competitive opportunities (including effective market access)" as are available to their domestic firms. In the case of the country where a significant failure to accord national treatment is found, the Secretary of the Treasury must, in general, enter into negotiations with the country to end the discrimination. The Secretary may, at his discretion, publish in the Federal Register a determination that a country does not give national treatment; if he does so, regulatory agencies would have authority to use such a determination as a basis for denying applications by financial institutions from that country.

Second, if the Secretary of the Treasury has published in the Federal Register a determination with respect to a country, institutions from that country that are already operating in the United States may not commence "any new line of business" or conduct business from a "new location" without obtaining prior approval from the appropriate regulators. This provision would apply to new U.S. activities or U.S. offices for which no approval process is currently required for either domestic or foreign banks. For example, a foreign-owned U.S. bank may decide to begin to offer consumer mortgage lending or investment advisory services. Currently, no application for regulatory approval is required. However, under the proposed act such activities would be viewed as "new lines of business" requiring regulatory approval.

While we share the objectives of this proposed legislation, in that we too would like to encourage other countries to liberalize their financial markets, we think that the legislation itself is unwarranted and would have unfortunate consequences. It would reject national treatment-a policy that has been fundamental to the U.S. approach to the international operations of financial organizations. This policy should be preserved.

The principle of national treatment was established as U.S. policy with respect to foreign banks by the International Banking Act of 1978. Despite some individual legislative initiatives in recent years, it is acknowledged by virtually all major industrial countries as the principle upon which regulation of the international operations of banks ought to be based. Over many years the U.S. government has assumed a leadership role in building a consensus around this concept. At home, our policy of national treatment seeks to ensure that foreign and domestic banks have fair and equal opportunity to participate in our markets. The motivation is not merely a commitment to equity and nondiscrimination, though such a commitment in itself is worthy. More fundamentally, the motivation also is to provide consumers of financial services with access to a deep, varied, competitive, and efficient banking market in which they can satisfy their financial needs on the best possible terms.

Our policy of national treatment has served this country well. The U.S. banking market, and U.S. financial markets more generally, are the most efficient, most innovative, and most sophisticated in the world. …

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