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

If, contrary to this widely accepted practice, the Congress were to adopt the proposed legislation, the United States could no longer hold to a principled position in advocating liberalization in international circles. By telling existing foreign-owned banks in the United States that the rules and procedures that have applied equally to them and to all other banks operating in the United states now apply only to U.S.-owned banks, we would be denying national treatment to foreign banks. This could be counterproductive. We would run the risk of introducing instability and discouraging foreign investment in our markets. Moreover, market access for U.S. firms might be reduced de facto as countries tighten their own regulations in anticipation of the need to negotiate with the United States.

We should remember that we have witnessed substantial liberalization and structural reform in financial markets abroad over the past decade. Like members of the Congress, we too would like to see more progress. But it is easy to understate the extent to which progress has been made in opening up foreign markets as a consequence of both the inexorable pressure of market forces and the diplomatic efforts of U.S. officials. Many countries are already open to U.S. firms to an extent that was not true just several years ago. For example, deregulation of interest rates in Japan is now, or soon will be, largely complete, and a wide range of market instruments has been developed. These reforms, which had been a principal objective of U.S. negotiators, provide U.S. financial firms with a level playing field with respect to funding in Japanese markets.

CONCLUSION

National treatment is an important concept, but in its implementation it is also an elusive one. Because it is enormously difficult to apply national treatment in a world in which the structures of banking markets in various countries differ significantly, it is tempting to seek what may appear to be direct, clear-cut solutions. However, lawmakers in each country, including the United States, must balance considerations of competitive equity with other legitimate concerns.

We should remember that financial markets are regulated markets. They are regulated for a reason: Authorities in each country have the responsibility of ensuring the safety and soundness, and the integrity, of their markets. We should hesitate to dictate to others the pace of change or the specific nature of change any more than others should be allowed to dictate to us regarding such matters. We must recognize that U.S. markets are not as open as other countries would like and that many of the kinds of complaints lodged by us regarding the structure of other countries' markets are also lodged against us.

The desirability of liberalization as an objective in the financial sector, as in other sectors, is virtually universally accepted. U.S. financial firms have demonstrated their competitive ability to provide financial services to firms and residents of all countries, in a world in which national financial markets are increasingly integrated and international flows of capital are increasingly hard to constrain. To be sure, other countries have provisions for reciprocity in their statutes, but we do not need it. The United States alone has the opportunity to continue to exercise leadership in this area. I sincerely hope we take that opportunity.