TABLE 1.—NUMBER OF OVERSEAS SUBSIDIARIES AND AFFILIATES OF U.S. BANKS IN INDIVIDUAL COUNTRIES,

Note: These numbers differ from those given for total investments since several banks in some cases have investments

in the same company.

Source: Federal Reserve Board; compiled by committee staff.

EDGE ACT CORPORATIONS

The Edge Act Corporations, authorized by legislation sponsored by Senator Walter Edge in 1919, are domestic subsidiaries chartered by the Federal Reserve Board and empowered to engage in international banking and overseas investment activities similar to those permitted state chartered corporations-the so-called "Agreement" corporations-which had been brought under Federal Reserve Board

regulation in 1916.1 These corporations were a favored vehicle for international operations of U.S. banks in the post-World War I era but had declined significantly in importance by 1925 and until the mid 1950s-due to the Depression and World War II-were all but abandoned. Of the 6 banks with Edge or Agreement Corporations in 1955, all had a tradition of overseas banking and 4 of the corporations had been in existence before World War II.2

4

3

Edge Corporations are prohibited from carrying on any part of their business in the United States except that which, in the judgment of the Board of Governors of the Federal Reserve System, is incidental to their foreign business. The legislative history of the Act passed in 1919 indicates that the intent was to insulate international banking activities from the domestic credit structure. Edge Corporations may receive deposits outside the United States but can receive only demand deposits within the United States which are incidental to or for the purpose of carrying out transactions overseas. They may invest in the stock of other corporations but are prohibited from investing in the stock of corporations engaged in the general business of buying or selling goods, wares, merchandise or commodities in the United States or transacting any business in the United States except that which may be incidental to their international or foreign business. Because Edge Corporations are authorized only to conduct an international or foreign banking business, they can be formed in consortium with other U.S. banks and non-banking firms and may be established in a State or States other than that in which the parent bank is located. They are also not subject to domestic restrictions separating commercial and investment banking.5

The surge in international lending by banks in the United States was partly responsible for a 5-fold increase in the number of banks with Edge Corporations in the period 1955 and 1965 and a 6-fold increase in the number of corporations. Edge Act Corporations acted as New York branches for the international departments of banks located in other States. Banks without the resources necessary to establish branches found it convenient to invest in foreign banks

1 Section 25 of the Federal Reserve Act authorizes investments by national banks in state chartered Agreement corporations provided these corporations enter into an agreement with the Board to be governed by Board regulation. Because investments in Edge Corporations were authorized later and under somewhat more restrictive conditions, Agreement Corporations were the more popular vehicle for international operations in the pre-Depression period. Today both types of corporations are subject practically to the same regulatory treatment and differ only in that Agreement corporations are more limited in the scope of their activities under law and are not subject to the minimum capital requirement of $2 million as are Edge corporations. Of the 85 corporations in existence at the end of 1971, only 5 were Agreement corporations. These 5 are either maintained for historical reasons, conduct specialized operations or do not need $2 million capital.

2 These banks were First National City Bank, First National Bank of Boston, Chase Manhattan Bank N. A., Bankers Trust Co., Morgan Guaranty Trust Co., and Bank of America NT&SA. All but Morgan Guaranty and Bank of America had established corporations by 1938. In 1945, Morgan & Cie., Paris, a subsidiary of J. P. Morgan and Co., became an Agreement Corporation and in 1949 Bank of America was chartered as an Edge Act subsidiary in New York City.

3 Deposits received in the United States are subject to reserve requirements of no less than 10 per cent. In addition, the aggregate amount of liabilities outstanding may be limited by the Board. For these and other provisions, see Section 25(a), Federal Reserve Act.

4 An Edge Corporation cannot invest more than 10% of its capital stock in any one corporation except corporations engaged in banking in which case the limit is 15%. It cannot hold stock in a corporation with which it is in competition or which holds stocks in other corporations which are in competition with the purchasing corporation.

5 There was only one Edge Corporation in operation when the Glass-Steagall Act was passed in 1933, and the corporations were not included in its restrictions on purchasing, selling, underwriting and holding investment securities and stocks. In 1957 the Board amended Regulation K in an effort to make the operations of the corporations conform somewhat more closely to domestic restrictions by requiring that the operations of a corporation be confined either to commercial banking or to investment banking. As a result, 11 banks acquired "twin" corporations to engage in both types of operations. In 1963, Regulation K was again revised and Edge Corporations were again allowed to combine investment and commercial banking under one roof.

through the corporations. Moreover, the flexibility of an Edge Corporation and range of its permissable activities was much greater than that of branches. The extraordinary increase in the number of equity investments of Edge and Agreement Corporations-from 12 in 1955 to 260 in 1965-illustrates the extent to which their investment potential favored their growth during this period.

DIRECT INVESTMENTS IN FOREIGN BANKS

U.S. banks, not surprisingly, respond to pressures from their customers. With the imposition of the Voluntary Foreign Credit Restraint guidelines in February 1965, their response was to seek funds overseas to continue the foreign lending activities built up by their home offices. This response was applauded and facilitated by the regulatory authorities."

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The structure of U.S. international banking operations in 1965 suggested that the movement of foreign lending overseas would occur through the Edge Corporations and thier foreign subsidiaries. The three largest banks-Bank of America, Chase Manhattan Bank and First National City Bank-had extensive overseas branch networks but in 1965 and 1966, only 9 other banks had foreign branches and only 4 of these had branches in locations other than London. The fact that 16 other banks had established Edge Corporations and were engaged in overseas banking operations through investments in foreign financial institutions by the corporations indicated that this would be the preferred method of shifting foreign lending overseas for the majority of U.S. banks.

9

In July 1966, Section 25 of the Federal Reserve Act was amended to permit national Banks to invest up to 25 per cent of capital and surplus in one or more foreign banks without having to arrange such investments indirectly through Edge Corporations. While U.S. banks and bank holding companies making direct investments overseas are restricted to investments in banking institutions, the foreign banks and bank holding companies in which they may invest are not so restricted.10 Foreign banks and bank holding companies which are direct subsidiaries or affiliates of U.S. banks may hold investments in other banks, financial institutions or nonfinancial institutions. There is, therefore, very little difference in latitude or scope of operations possible in terms of overseas subsidiary and affiliate realtionships through either direct equity investments or those made through Edge Corporations.11

The 1966 amendments to the Bank Holding Company Act also permitted a regulated multi-bank holding company to acquire directly foreign institutions principally engaged in banking without Federal Reserve Board approval. In 1970 an amendment was added which required prior approval by the Board and waived the restriction of

6 In 1965, Edge Corporations held 70 investments in banking institutions at a cost of $91,9 million, 159 investments in other financial institutions at a cost of $50.8 million and 31 investments in nonfinancial companies at a cost of $3.6 million. (The International Operations of U.S. Banks, Division of Supervision and Regulation, Board of Governors of the Federal Reserve System, 1968, p. IV-14.)

7 See Section on Supervision and Regulation.

8 The 13th bank was the Virgin Islands National Bank, a subsidiary of First Pennsylvania Banking & Trust Co., organized as an Agreement Corporation which had 2 braches in the British Virgin Islands.

9 The provision was suggested by Comptroller of the Currency James J. Saxon as an amendment to the Senate version of the Bank Holding Company Act Amendments of July 1966.

10 See Section 2(n) of the Bank Holding Company Act of 1956 as amended by Act of July 1, 1966.

11 There are some advantages in choosing to invest in foreign subsidiaries through Edge Corporationscentralization and a greater degree of control over investments and limitation of responsibility for the liabilities of subsidiaries to the amount of the Edge Corporation's capital.

such investments to banks. Bank holding companies are now able to invest in any company in which an Edge Corporation can invest

under Section 25a of the Federal Reserve Act, subject to approval and regulation by the Board. However, the capital and surplus limitations which apply for foreign investments of Edge Corporations and

member banks do not apply for bank holding

companies.

ACTIVITIES OF SUBSIDIARIES AND AFFILIATES

The staff of the Federal Reserve Board has provided data on the foreign equity investments of the 30 largest U.S. banks, their parent holding companies and their Edge Act and Agreement Corporations (Tables 2 and 4) which give some indication of the pattern of investment by type and the nature of activities of subsidiaries and affiliates. As of year-end 1974, these banks had invested $1.6 billion overseas of which $1.1 billion was invested in commercial, merchant and investment banks and trust companies. Information on assets is available only for subsidiaries. Since investments in subsidiaries ($792 million) are only about half the total invested, the $23.2 billion in assets stated in Table 4 is a very conservative measure of the size of U.S.

banks' holdings overseas.

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12 It is also conservative because it excludes investments made by foreign affiliates unless the affiliate is primarily a holding company in which case the investments of the holding company are listed but not the holding company itself.