Academic journal article Economic Perspectives

A Current Look at Foreign Banking in the U.S. and Seventh District

Academic journal article Economic Perspectives

A Current Look at Foreign Banking in the U.S. and Seventh District

Article excerpt

Foreign banks wield substantial influence within the financial services industry of the Seventh Federal Reserve District. The District, which encompasses all of Iowa and portions of Illinois, Indiana, Michigan, and Wisconsin, has more than ten percent of the approximately 652 foreign-owned banking offices in the United States.(1) The 69 foreign offices in the District account for $86 billion, or 17 percent, of the District's banking assets. Foreign offices hold 17 percent of the total value of loans outstanding in the District, and 32 percent of the total value of commercial and industrial loans. The picture for the nation is comparable. What does this foreign influence imply for the future of the U.S. banking industry? Is there cause for concern?

To address these issues, this article begins with a review of global banking. First, I look at trends in world banking over the last 25 years and the evolution of the regulatory environments in the home countries of the major players. Next, I analyze the factors behind the global expansion in banking. Then I present a detailed analysis of trends in foreign banking in the U.S. and the Seventh District since 1980 and assess which countries have played the main roles. Finally, I address the potential consequences of an increased foreign banking presence in the U.S.

World banking in review

In 1969, U.S. banks were dominant in the world; seven of the top ten banks worldwide (as measured by assets) were U.S. banks, with Bank of America in the top position. The United Kingdom and Italy shared the remaining three slots. The biggest Japanese bank at that time was Fuji Bank, ranking 14th in assets.

By 1972 the top ten list was more internationally diverse. Bank of America still ranked first, but only two other U.S. banks shared the top ten. Four Japanese banks, two British banks, and one French bank filled out the category. The next decade saw further change as the assets of French banks soared. Four French banks reached the top ten in 1982, with the remaining spots evenly split among U.K., Japanese, and U.S. banks. Bank of America still ranked first.

By 1993 the global banking community had again been transformed. Japanese banks had completely edged out U.S. banks, holding nine of the top ten positions; Credit Lyonnais (France) was the only non-Japanese bank among the top ten. Citibank, 30th in the world, was the highest-ranking U.S. bank.

While total assets measures absolute size, the amount of foreign assets a bank can attract provides a measure of its international competitiveness. At the end of 1960, banks from the U.S., U.K., and Switzerland were the leaders in this category, with approximately $9 billion in foreign assets (current U.S. dollars). By 1992, banks from the U.K., Japan, and France topped the list, with a combined $2.1 trillion in foreign assets.

On an individual bank basis, six banks conducted more than 50 percent of their business overseas in 1992--one French, two U.K., and three Swiss. Of these six banks' worldwide assets, nearly 10 percent were domiciled in the U.S.(2) Four U.S. banks ranked among the top 25 banks with substantial overseas business, with Bankers Trust and J. P. Morgan generating over 50 percent of their income overseas.

Reasons behind global expansion

One of the leading factors driving global expansion in the banking industry in the second half of this century has been the growth in number and size of multinational companies (MNCs). Worldwide foreign direct investment has grown significantly over the last 20 years, from almost $10 billion in 1970 to almost $180 billion in 1990. MNCs have special needs that make foreign offices a smart business practice for banks. Firms borrow capital not only to finance their investments overseas, but also for ongoing plant and physical equipment, acquisitions, and trade finance. In addition, they need foreign exchange, cash management services, and lock box operations--services that generate substantial fee income. …

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