A door opener for export banking
Boston — For decades now, US banks have been prevented by law from offering a full range of services outside their home states -- and sometimes even outside their own home counties. In recent years bankers have taken a step-by-step approach to expand beyond these political borders, lobbying for and getting permission to offer a wider range of services in other states.
Now, Congress and the Federal Reserve System have combined to move American banks one step closer to their goal. In doing so, they may have also given a boost to US companies doing business overseas.
To serve international customers banks are permitted to set up what are known as "Edge Act corporations." The original Edge Act, passed in 1919, gave US banks very limited powers over foreign banking activity within US borders; but it did let them conduct some international banking activity outside their home states. The new rules, outlined in the International Banking Act of 1978, are an attempt to give US banks a chance to compete with the rapid growth of foreign banks operating in the US -- and serving US corporations.
International banking activity, starting from a low level in the 1950s, began to grow steadily in the 1960s. Since 1972 foreign banks have more than doubled their share of total US banking assets, according to a recent study by the General Accounting Office. And while US banks took 11 years to triple their activity in all overseas countries, foreign banks have tripled their activity in the US in just seven years, the study found.
One result of this, a bank official says, is that many US corporations, looking for ways to finance international activities, often had to turn to foreign banks and continued to do business with that bank once they set up operations overseas.
Walter Farrell, of the Federal Reserve Bank of Boston, offered a fictitious but likely example of why the new rules were needed:
A smaller Boston-based company, specializing in high-technology computer products, wants to find new markets outside the United States. It settles on the Caribbean and Latin America as the most promising spot for added customers.
But the company needs a source of financing to pay for the new production, storage, and, later, for shipment from Miami. But without a branch of its Boston bank in Miami, the company might either go to a foreign bank or to a Miami bank that is not familiar with the firm's executives or the company's reputation.
But with the new rules, an executive of that firm might be able to do business with an Edge Act office of his Boston bank in Miami that can meet all of his international financial needs. Not only would the office be able to handle financing for shopping, but it could also provide loans for the manufacture and storage of the overseas-bound equipment.
"One of the original intentions of the work that led to Regulation K [the Edge Act changes] was to make it easier for companies to export goods," Mr. Farrell said.
While the Boston bank's Edge corporation in Miami can serve its customers' international needs, it can also be gathering deposits from other foreign customers, as well as have access to the thriving Eurodollar markets in the Bahamas and on other Caribbean islands, he continued.
As long as they are dealing with international business Edge corporations of US banks are not subject to the laws that prohibit branching across state lines.
An attorney with the Federal Reserve in Washington said there has not been a rush by US banks to set up Edge corporations since the amendments went into effect. Many of the larger banks already had such offices, and the new law merely expanded these offices' powers, he explained. In Boston, Mr. Farrell said there has been only one applicatoin by a bank from outside the New England district to set up a new Edge corporation in this area.
"The major change is that it makes it easier to establish an Edge Act corporation in another city," said George Phelan, executive vice-president of the First National Bank of Boston and head of the bank's international banking department.
In addition, the new regulations permit Edge corporations to make a number of investments and transactions within the United STates without prior approval from federal regulators. All that is needed is 60 days notification. Previously, most of these investments had to wait for approval.