Foreign Banks Face Hurdles
Kraus, James R., American Banker
Foreign banks, confronted with tough new legislation and a slow economy, are reassessing their roles in the United States.
They are wrestling with tougher legislation Congress has approved, large real estate and corporate loan losses, and the threat of higher taxes. In fact, foreign banks trying to get into the U.S. market are finding that the new legislation has virtually shut the door.
The legislation, embodied in the Foreign Bank Supervision Enhancement Act passed at the end of 1991, came in direct response to two major scandals.
The first scandal involved massive worldwide fraud by the former Bank of Credit and Commerce International. The other had to with billions of dollars in unauthorized lending to Iraq by the Atlanta branch of Italy's Banco Nazionale del Lavoro.
The act gave the Federal Reserve Board the last word in approving foreign bank applications.
Complexity and Cost
And the effect? Since its passage at the end of 1991, only three applications from foreign banks to open U.S. offices have received approval: two from Taiwanese banks and one from a Spanish bank.
Getting approval has not only become more complex, it also has become more expensive Lawyers who handle foreign bank branch applications say they are now charging as much as $100,000 to handle an application, compared with up to $20,000 before the new legislation took effect.
Rising costs and the dramatically slow pace of Fed approvals have caused dismay among foreign banks and open criticism from state banking authorities, who charge the delays caused by the legislation are slowing economic recovery.
"These laws were rushed to judgment in a matter of months and not years, and neither improve nor enhance," said Robert H. McCormick, deputy superintendent of banks in the foreign commercial bank division of the New York State Banking Department.
"Rather, they tend to make regulation increasingly mechanistic, inflexible, and burdensome, and - particularly in the case of the foreign banks - impose onerous and sometimes costly requirements that could well act as a disincentive for foreign banks' future investment in the United States."
Even Fed officials are prepared to admit that regulation may have gone too far.
"There's no question in my mind that we have an excessive amount of regulation placed on the U.S. banking system and that the reason for that was political," said Lawrence Lindsey, a member of the Board of Governors of the Federal Reserve. "One might argue that there was some overdoing."
In an effort to ease the regulatory burden, the New York State Banking Department is drafting a series of recommendations designed to make the act workable.
Tougher Tax Laws Loom
But even as efforts to ease regulations get under way, foreign bankers fear that tougher tax laws will further dampen their business in the United States.
"We may be looking at higher taxes," said Guido Schmidt-Chiari, chairman of Austria's Creditanstalt Bankverein.
Said Steven M. Lucas, a partner with the Washington-based law firm Wiley, Rein & Fielding: "Foreign banks are facing a far more hostile tax environment."
Deductible Interest Expense
Of the two biggest tax issues now confronting foreign banks, one involves computing an international bank's U.S. deductible interest expense.
Bankers say pending Internal Revenue Service proposals, contained in proposed revisions to Treasury Department regulations, contain a number of changes that would adversely affect the U.S. tax position of international banking.
Specifically, the IRS would like to set the interest expense foreign banks deduct from their income according to the percentage of total revenues a foreign bank derives from its U. …