The Foreign Bank Presence:
Will global financial relations save US?

As of December 2006, foreign banking organizations (FBOs) operated 188 branches, 133 agencies, 62 U.S. commercial banks, and 8 Edge or Agreement corporations. In addition, these foreign banking entities held approximately $216 billion in commercial and industrial loans, equivalent to about 18 percent of the total in the U.S.

When you think about the benefits, it isn’t really a bad thing at all. Today FBOs play an important role in the U.S. financial system as they hold approximately one quarter of all commercial banking assets in the U.S., and comprise almost 40 percent of loans made to American businesses.

Overall foreign banks contribute to the American economy largely by offering an alternative source of funding for businesses. Their parent companies are not as impacted by the U.S. market fluctuations as their domestic counterparts. Therefore, many times they are able to provide credit even during less than ideal economic times.

The major Federal laws governing foreign banks include the International Banking Act (IBA) of 1978 and the Foreign Bank Supervision Enhancement Act (FBSEA) of 1991. More recently state and federal bank supervisors developed a plan to monitor foreign banks together, offering a less complicated more cohesive and complete overview of the foreign organization’s presence in the U.S.

These foreign banking institutions may avail themselves of most of the rights that are offered by the Federal Reserve. Some of these privileges include direct access to check clearing, provision of coin and currency, Fedwire, and the discount window. However, a limitation that the FBOs are subject to is their inability to obtain U.S. deposit insurance if they were established after December 1991.

Some qualifying foreign banking institutions may receive exemption from certain rules and regulations. This is true only if more than half of the organization’s business is banking and if greater than half of its business is conducted outside of the United States.

Many foreign banks establish an initial presence by opening a representative office in the U.S. in order to cultivate relationships. Then later they may apply for Federal Reserve approval to open a branch in order to actually conduct business in the U.S.

This is the case with the Industrial and Commercial Bank of China (ICBC). After maintaining a representative office in the U.S. for about eleven years, the bank was recently granted permission to open a branch in New York.

Holding $1.3 trillion in assets, ICBC is China’s biggest lender as well as the largest bank in the world according to market value. The U.S. organization Citigroup previously held this title just a year ago; however Citigroup is now number seven in line behind ICBC.

“The tables have been completely turned,” said Daniel Yergin, chairman of Cambridge Energy Research Associates, during an interview at the World Economic Forum in Davos, Switzerland.

Over the past five years, the financial climate has changed considerably with regard to the positioning of foreign banks in the U.S. For example, in 2003 there were 13 American banks that were in the top 20, without one Asian competitor in the mix. However, according to current Bloomberg data, four Asian and six American banks now round out the top ten.

Several factors have contributed to this turnaround. The collapse of the subprime mortgage market has had a major influence on this climate change, cleaning out nearly $100 billion of worth from the three largest U.S. banks within the past year. Also, investors have been active in Chinese banks in order to partake in a global economy that has grown over 11 percent in 2007. In addition, the value of American banks has been bruised by the decrease in the worth of the dollar over the past five plus years.

The banking organizations that have maintained a high status have the commonality of accounting for approximately two thirds of their revenue via retail business including deposits, loans, and fees. Also banks that have faired well experienced significant growth globally. Further, the organizations experiencing lower debt to asset ratio are the highest in economic rankings.

For example, Bank of America is ranked second behind ICBC with a debt ratio of 19 percent. Part of Citigroup’s decrease in status from the number one position is due to the much higher debt ratio of 47 percent.

The branch approval benefits ICBC in its effort to continue its strategy of expanding its global presence. It is also advantageous to China’s financial industry as a whole as the country gains financial influence internationally.

According to Liu Mingkang, China Banking Regulatory Commission chairman, China will learn from the U.S. crisis, but it will still adhere to its strategy of continuing to expand its banking sector. Mingkang also said that banking regulators should work in conjunction globally in order to shield against financial risks.

ICBC’s main focus involves corporate and retail banking in China, Hong Kong, and Macau. It also operates several subsidiary banks outside of China. The new ICBC branch will manage wholesale deposit taking, lending, and trade finance as well as other banking services according to the Federal Reserve.

Typically FBOs conduct a higher level of screening before lending money than do domestic banks. Also, many times they are able to charge lower interest rates. However, they usually experience good profitability, mainly due to the receipt higher fess for their services.

A Federal Reserve representative stated, “ICBC has established controls and procedures for the proposed branch to ensure compliance with the U.S. law. In particular ICBC has stated that it will apply strict anti-money laundering policies and procedures at the branch consistent with U.S. law and regulation.”

ICBC has been enjoying large increases in profits, up 77 percent in the first quarter of 2008, due to more borrowing from companies and also from increased wealth management charges.

“The company has been quite innovative, such as lending more to the corporate section, which enjoys much higher returns,” Dorris Chen, a Shanghai-based analyst at BNP Paribas stated. “ICBC has also been quite aggressively retailing wealth management products,” Chen also stated.

Denise T. Davis has over 20 years of experience in business analysis. Through the years, Denise has written a variety of articles and vocational biographies. She can be reached at dtdavwrite@verizon.net.