Break for US banking centers: tax-free international zones

If a wealthy Saudi or English or French businessman wants to put money in the Chase Manhattan Bank and get the best possible interest he has to go to a Chase "offshore" branch in London, or Nassau in the Bahamas, or elsewhere.

But soon, because of a ruling issued June 9 by the Federal Reserve Board, such an investor may be able to bank in New York City and get a return for his money similar to what he gets now from foreign branches.

The new policy, effective next Dec. 3, permits international banking zones in the US which will not be subject to "Fed" interest rate ceilings and reserve requirements under which US banks have to keep a certain percentage of their cash assets in the Federal Reserve System. Nor will banks in these zones be required to pay premiums on federal deposit insurance.

The ruling will not only make things easier and perhaps more profitable for foreign investors; many banking analysts say it will eventually make US banking "capitals" such as New York, Boston, and Los Angeles all the more competitive with foreign centers. As the "international banking zones" develop, more jobs and revenue for fiscally hard-pressed New York and other US cities are expected to be generated.

New York, already a major world banking center, is well positioned to benefit from the new policy: Anticipating it, the state legislature enacted a law in 1978 exempting income from such banks from local and state taxes. Connecticut, Florida, Georgia, and Maryland have adopted similar legislation. And similar laws are pending in California, Hawaii, Illinois, and Massachusetts.

Bankers foresee other repercussions from the new ruling. James M. Howell, senior vice-president of the First National Bank of Boston, says: "Clearly, the Federal Reserve Board ruling is going to lead incrementally to national banking across state lines."

Jim Conmy, a spokesman for Chase Manhattan here, sees a national ripple effect: "Eventually, this will lift state prohibitions and taxes on international transactions."

For Chase, he explained, the only way to compete effectively with foreign-based banks has been to establish so-called offshore branches, a step which has been highly criticized at times as an attempt to circumvent US banking laws.

In effect, the Fed ruling "basically legitimizes what's long been viewed as sort of a "back door" operation," Mr. Conmy noted.

Some bankers feel the Fed ruling did not go far enough -- that foreign banks will still have the competitive edge. One thing they don't like is that US banks still have to have a two-day notice for deposit withdrawals, while foreign institutions do not.

However, say industry analysts, for many foreign investors the solidity of US banks, operating in the relatively stable climate of this country's political system, will go a long way to offset any lingering competitive disadvantages.

Last November the Fed agreed, at least in principle, to let US banks establish international banking facilities in this country. Reportedly, the board held up its action -- and, indeed, postponed its effective date to December -- to give states more time to change their laws in order to take advantage of the new rules.

It has been estimated that the change will add 5,000 banking jobs in New York.