Academic journal article Law and Policy in International Business

Towards Interdependence: A Decline in U.S. Dominance?

Academic journal article Law and Policy in International Business

Towards Interdependence: A Decline in U.S. Dominance?

Article excerpt

I hope it is not my job to pull together the themes of the prior commentators, because each 's going off in a somewhat different direction. Let me note at the outset that I have spent the last twenty years in private practice, mostly representing foreign banks active in one way or another in the United States, and have lived through interesting times in doing so. My comments are from that perspective.

I note with interest that the theme of the program is "Managing Economic Interdependence," and I think appropriately my remarks should be addressed to this broader topic. Ms. Burand's paper, so far as it represents a presentation of the legal analysis and implementation of the new statutory authority of the Board of Governors of the Federal Reserve System (the "Fed"), is excellent. It may not, however, be sufficient as a full assessment of how economic interdependence is being managed.

In my judgment, there is a fair case to be made that we may not be seeing the emergence of a consensus on how to deal with and manage economic interdependence. Instead, in the bank regulatory field we may be seeing the end of the system that has prevailed for many years--almost since the end of World War II--where the United States has been the dominant economy and basically has made the relevant bank regulatory rules to its own satisfaction. The push for comprehensive, consolidated supervision may in fact be the last occasion on which U.S. regulators are able to impose a largely U.S. solution on banking institutions elsewhere in the developed world.

Historically, the United States basically designed global rules at the time of the International Banking Act in 1978. It was able to do so because the dollar was the dominant global currency; foreign banks required access to the U.S. money markets through U.S. branch offices to assure a source of dollar funding. Important U.S. dollar markets had developed outside the United States as a result of balance of payments problems in the early 1960s and the U.S. policy responses to those problems; U.S. investment bankers had exported some of their personnel and techniques to European markets. As a result, the United States was in a position to make the rules on bank entry and operations and did so. In substance, the rules for foreign bank branch and agency office operations in the United States replicated, in a somewhat different and more complicated manner, the U.S. domestic dual banking system and its related patchwork of relevant regulators.

In my view, the same thing happened again in terms of U.S. dominance, with the introduction of risk-adjusted capital requirements for major global banks in the late 1980s. The perceived need for such requirements on a global basis derived from U.S. regulatory concerns in the early 1980s that foreign banks could do business at lower capital levels than U.S. banks, and therefore could compete successfully in global markets on a potentially unfair basis.

Fundamentally, the inroads made by foreign banks in the United States may result from the fact, as some of the earlier commentators on this program have noted, that the United States has an unusual, fragmented and weak commercial banking system. In most developed countries, a small number of commercial banks do business throughout the country. In the U.S. banking system, for historical reasons. there are more than 12,000 banks (down from about 15,000 a decade ago) that by and large cannot have branch offices outside their "home" state. From a national economic point of view, these banks may be weak and overconcentrated in their local areas. As a result, local and regional economic problems can cause large numbers of banks in a particular region to fail. We have experienced this phenomenon in the 1980s: first in Texas, then in New England, and now possibly in California. Other major foreign countries really do not have such a fragmented system of domestic banking. Instead, they often have only a small number of often government-owned (and, in any event, implicitly government-insured) banks that may not need much capital at all. …

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