Foreign bankers still have the upper hand in US

The rules have changed but it has not been a major help for the home team. That is how US and foreign bankers describe the impact of the International Banking Act which took effect in November 1980. The foreign banks had been relatively free from federal supervision. The legislation, which was enacted in 1978, was designed to produce rough equality in the regulations governing foreign and domestic banks.

"The implementation of the act by the Federal Reserve has not necessarily changed the competitive balance between foreign and domestic banks," says the vice-president of a major New York bank. The executive asked not to be named.

"The Interantional Banking Act was a step in the right direction," says Citibank senior vice-president Patrick J. Mulhern. "But as far as having a level playing field for competition, there are still some problems."

Money center bankers would like to see additional regulatory changes. But there currently is no movement in Congress to change the rules for foreign bankers.

And staying with the current rule-book suits foreign bankers. "The act itself is pretty good considering the different views that had to be compromised ," says H. Patrick Kennedy, chairman of the Institute of Foreign Bankers in the US. Mr. Kennedy is also senior vice-president of the Bank of New South Wales.

Still Mr. Kennedy admits the law has not changed competitive conditions enough to affect a foreign banker's decision whether to set up shop in the US. "It would not persuade anyone not to come if they had a good reason for doing so ," he notes. "In our case, the reasons for being here were as great in 1978 as before."

However, the torrid pace at which foreign banks were setting up outposts in the US may cool somewhat. "The rate of increase may diminish because so many are already here," Kennedy says. "Still, bankers are coming in."

According to Federal Reserve Board data, the number of foreign banks operating in the US has grown from 104 in 1972 to 369 by December 1980. But the rate of growth slowed from 20 percent in the period 1973-1978 to a 10 percent rate in the period 1979-1980.

While there may be some slowdown in the number of foreign banks competing for business in the US, there has been no reduction in the growth of their assets.

Assets of foreign banks in the US grew approximately 35 percent in 1980 to a total of $187.9 billion. This compares with a 30 percent increase in 1979 and an 38 percent hike in 1978.

The banking act also has not had a major effect on foreign firms' desire to purchase US banks. According to data from the US comptroller of the currency, for the first nine months of 1980, nine US banks were acquired by foreign purchasers vs. 15 for the full year 1979.

The 110 foreign-owned US banks represent less than 1 percent of the 145,365 banks in the US. But their presence among the largest banks is much more pronounced. Almost 11 percent of the banks with assets between $1 billion and $ 5 billion are foreign owned.

"I don't think the law had any impact" on the appeal of US banks as possible acquisitions. Mr. Kennedy says. He notes that in 1980 Hongkong & Shanghai Banking Company acquired 51 percent of Marine Midland Banks Inc., the parent of New York City's Marine Midland Bank.

And this year the Federal Reserve Board approved the takeover of Crocker National Corporation of San Francisco by Midland Bank Ltd. of London. Crocker is the parent of Crocker National Bank, the nation's 12th largest.

Although the legislation has not radically altered the competitive balance, it has affected the way foreign banks operate in the US. Specifically the act:

* Provided for federal licensing of branches of foreign banks.

* Authorized the Federal Reserve Board to set reserve requirements for foreign banks with assets of more than $1 billion.

* Banned new interstate branching by foreign banks. But existing branches were "grandfathered." Foreign banks coming to the US now are required to pick a "home state." However, banks may open offices in other states to serve clients without taking deposits.

Despite these new regulations, US bankers argue that foreign concerns still have significant advantages. "The most important advantage is that if they lend to a US company from an offshore headquarters or offshore branch, they are not subject to reserves" on the loan, a money center bank vice-president notes.

If a US bank makes a loan to a US resident or firm from a branch outside the US, it must place on deposit with the Fed reserves equaling three-quarters of 1 percent of the loan.

While this seems like a minor amount, a recent American Bankers Association study notes that it is "a substantial portion of the typical interest spread" on such a loan. A spread is the difference between what a bank charges a customer for a loan and what the bank pays to acquire funds it lends.

US bankers also complain the Fed regulations on setting aside reserves discriminate in favor of foreign banks. Foreign banks purchase most of the funds they lend by selling certificates of deposit. However, the Fed assumes that 8 percent of these deposits are "inputed capital) against which reserves do not need to be set off.

"They only have to maintain reserves against 92 percent of their deposits vs. 100 percent of US banks," the money center bank executive complains. This reduces the foreign bank's operating costs and the amount of capital it must commit to US operations. "There is no substitute for capital," he says.

Criticism about the capital position of foreign banks is "misguided and ill-informed," Mr. Kennedy says. He notes that many foreign banks are owned by governments and thus could turn to the government in time of need.