Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on International Development, Finance, Trade and Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 9, 1993 - Statements to the Congress - Transcript

Federal Reserve Bulletin, Jan, 1994

Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on International Development, Finance, Trade and Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 9, 1993

I appreciate the opportunity to present the views of the Federal Reserve Board on the proposed legislation on Fair Trade in Financial Services (H.R.3248). Given our direct responsibilities with respect to the financial services industry and our desire to ensure a healthy and efficient environment for the provision of financial services, the Federal Reserve has a special interest in this legislation.

The proposed legislation has two major elements. First, the Secretary of the Treasury would be required to submit to the Congress every two years a report identifying those countries that do not offer national treatment to U.S. banks or securities firms. In the case of a country in which failure to accord national treatment is found to have a significant adverse effect on U.S. firms, the Secretary of the Treasury must, in general, enter into negotiations with the country to end the discrimination. The Secretary may, at his discretion, publish in the Federal Register a determination that a country does not give national treatment; if he does so, regulatory agencies would have discretionary authority to use such a determination as a basis for denying applications by financial institutions from that country to make acquisitions or start new activities.

Second, if the Secretary of the Treasury has published in the Federal Register such a determination with respect to a country, institutions from that country that are already operating in the United States may not commence "any new line of business" or conduct business from a "new location" without obtaining prior approval from the appropriate federal regulators. This provision would appear to apply to new U.S. activities or U.S. offices for which no approval is currently required for either domestic or foreign banks. For example, a foreign-owned U.S. bank may decide to begin to offer consumer mortgage lending or investment advisory services. Currently, no application for regulatory approval is required. However, under the proposed legislation such activities would appear to constitute "new lines of business" requiring regulatory approval.

Thus, the legislation would change two fundamental principles in our policy toward participation by foreign financial firms in U.S. markets--national treatment and maintenance of rights lawfully acquired, that is, grandfather rights. Both of these principles are worth preserving.

I want to emphasize that the Federal Reserve shares the objectives of the proposed legislation. These objectives are important and their achievement desirable. U.S. financial firms deserve to have the same opportunities to conduct operations in foreign financial markets as domestic firms have in those markets. They do not now have those opportunities in all markets. Such fair treatment would benefit not just U.S. firms but also the host foreign countries themselves and the world financial system in general.

Although the Federal Reserve shares these important objectives, it opposes this kind of legislation, as it has before. In our view, it is not clear that the proposed approach would achieve the objectives, and it could have unfortunate, unintended consequences.

The principle of national treatment was established as U.S. policy with respect to foreign banks by the International Banking Act of 1978. Over many years the U.S. government has assumed a leadership role in building an international consensus around this concept. National treatment is acknowledged by virtually all major industrial countries as the principle upon which regulation of the international operations of banks ought to be, but is not always, based. The U.S. policy of national treatment--which has long set an example to others--seeks to ensure that foreign and domestic banks have a fair and equal opportunity to participate in our markets. The motivation is not merely a commitment to equity and nondiscrimination, although such a commitment in itself is worthy. More fundamentally, the motivation is also to provide consumers of financial services with access to a deep, varied, competitive, and efficient banking market in which they can satisfy their financial needs on the best possible terms.

As the Federal Reserve has previously noted in connection with this proposed legislation, our policy of national treatment has served this country well. The U.S. banking market, and U.S. financial markets more generally, are the most efficient, most innovative, and most sophisticated in the world. It is not a coincidence that our markets are also among the most open to foreign competition. Foreign banks, by their presence and with the resources they bring from their parents, make a significant contribution to our market and to our economic growth; they enhance the availability and reduce the cost of financial services to U.S. firms and individuals, as well as to U.S. public sector entities.