aging Director of Chemical Bank, on behalf of the Bankers Association for Foreign Trade and the American Bankers Association. BACKGROUND When the Banking Committee first reported the Fair Trade in Financial Services Act in 1990, it stated: Recent events have made it clear that a world economy dominated by Cold War confrontation is giving way to one of global market competition. World leadership in such an economy will be based on economic performance. If the United States cannot compete effectively in the new global market, our relative economic strength will decline, as will our capacity for world leadership. It is thus important for our country to consider more carefully the economic and trade implications of polices adopted during the Cold War era to determine whether they remain valid in a new age of global economic competition. The Committee is concerned that wise policies adopted to advance the interests of our nation in a prior age not be adhered to blindly so that they become unwise dogmas that hinder our nation's ability to respond to the challenges of the current period of history. The Committee was concerned that the United States should not cling dogmatically to a policy of unconditional national treatment when a policy of reciprocal national treatment might better serve our nation's interest in opening foreign financial markets. To do otherwise could contribute to a decline in the competitiveness of our industries. One area in which the United States has experienced a significant competitive slide is international banking. During the 1950s and 1960s, U.S. banks dominated international banking, helping American companies finance their expanding exports and funding their overseas subsidiaries. Reflecting their size and market dominance in the late 1970's, American banks accounted for two of the three largest banks in the world and made over 30 percent of all international loans. Over the past decade, however, U.S. banks have lost their world dominance. In 1992, the largest U.S. bank ranked thirtieth in the world and there were only five U.S. banks among the largest 100. While the U.S. dominance in international banking and finance has slipped, the growth of foreign banks (particularly Japanese) in the U.S. market has increased. In 1992, 30 of the largest 100 banks in the world were Japanese, including 18 of the top 25, and 9 of the top 10. Loss of domestic market share has accompanied the international decline of U.S. banks. Foreign bank loans in the United States are growing three times as fast as domestic bank loans. Foreign banking institutions currently control over 30 percent of all banking assets booked in the United States. Furthermore, an article in the October 1993 Federal Reserve Bulletin indicated that when you include loans made to U.S. businesses by foreign banks' offshore branches (e.g., Cayman Islands), foreign banks have a 42 percent share of all business loans being made in the United States. Japa nese banks alone have 14 percent of all such assets. In some markets, such as California, Japanese banks have 25 percent of total assets. By contrast, the share of banking assets held by American and all other foreign banks in Japan, while never large, has continued to decline. In recent years, the U.S. share of the Japanese market has declined from 3 per to 1 percent. Foreign banks in aggregate now have less than a 3 percent share of the Japanese market. The Committee does not contend that a denial of market access for U.S. financial institutions in key foreign markets is the chief cause of these trends. American's macro-economic policies in recent years have contributed to massive deficits in America's current account balances. This in turn has fueled the growth of foreign banks in this country and has contributed to the new problems U.S. banks now face in international competition. The Committee believes, however, for reasons that will be discussed below, that a lack of competitive opportunity for U.S. financial institutions in certain important markets has contributed to these trends. It concluded, therefore, that the U.S. Government must be more aggressive ensuring U.S. financial institutions are not discriminated against in foreign markets. THE INTERNATIONAL BANKING ACT OF 1978 Beginning in the 1970's, American banks complained that foreign banks actually enjoyed competitive advantages in their operations here. Foreign banks, for example, could branch and take deposits nationwide, while the McFadden Act prohibited their American competitors from such deposit taking. In addition, foreign banks were not subject to the Glass-Steagall Act, while American commercial banks were. In 1978, Congress passed the International Banking Act (IBA), which established the rules governing foreign bank operations in the United States. Until that time, there had been no national policy on the regulation of foreign banks in this country. The IBA established a national treatment standard to create a level playing field for domestic and foreign banks in this country. Beyond providing national treatment, the International Banking Act grandfathered the competitive advantages of foreign banks mentioned above to the extent that the banks were engaged in such activities as of the date of enactment of the IBA. The Committee's Report on the IBA stated: Foreign chartered banks are accorded operating privileges in the United States which enable them to compete in the United States on terms which equal or exceed the domestic operating privileges of our own domestically chartered banks. The Report went on to state that under the International Banking Act of 1978: The United States has more than abided by the principle of national treatment for foreign banks operating here *** In contrast, our domestic banks operating abroad have not always received equal treatment in foreign coun- The 1978 Report then noted that treatment of U.S. banks abroad varied from country to country. European Common Market countries have been most receptive to the benefits of competition brought by American banks to their economies. Japan is a contrast. By the restrictive practices of its officials, American banks are competitively disadvantaged in Japanese banking markets. Not only are American banks limited in their branching abilities, but they are also deterred from soliciting local deposits. While Congress was concerned at that time about the inconsistency between our national treatment policy and the differing policies of many of our competitors, it hoped these matters could be resolved by U.S. negotiators, without further Congressional action. Congress did require the Treasury Department to report to Congress by 1980 on the extent to which American banks were denied national treatment in their banking operations abroad. The original Treasury report was completed in 1979, and, at the request of Congress, has been updated three times, most recently in 1990. In 1988, during passage of the Omnibus Trade and Competitiveness Act, Congress added a new section to the International Banking Act that instituted these national treatment reports as items the Treasury must submit to Congress every four years. The next report is due in the autumn of this year. FEDERAL SECURITIES LAWS As under the International Banking Act, foreign firms enjoy national treatment under the Federal securities laws. Foreign firms may register as broker/dealers under the Securities Exchange Act of 1934 and as investment advisers under the Investment Advisers Act of 1940, without even establishing residency in the United States. (As a practical matter, most foreign broker/dealers establish subsidiaries in the United States to comply with residency requirements of the various U.S. securities exchanges.) Neither the Federal securities laws, nor the execution of those laws by the Securities and Exchange Commission, distinguish between U.S. firms, U.S. subsidiaries of foreign parents, and foreign firms. As an example of the openness of the U.S. securities market, Investment Company Institute President Matthew Fink testified that as of September 1993, over 300 foreign entities were registered as investment advisers. RECIPROCAL NATIONAL TREATMENT Most of our major trading partners have a reciprocal national treatment standard for financial services. Japan, for example, has a banking law which requires the Minister of Finance, in reviewing foreign institutions' banking license applications, to examine whether Japanese banks are entitled to equivalent status in those countries. On December 15, 1989, the European Community (EC) itself adopted the Second Banking Directive which instituted a reciprocal national treatment standard for the EC. Article 9(4) of the directive permits the EC to retaliate against countries if financial institutions from the EC "do not receive national treatment offering the same competitive opportunities as are available to domestic credit institutions, and the conditions of effective market access are not fulfilled." EC officials have stated that Article 9(4) is intended to ensure that the current internationally accepted standard of "national treatment" should work in practice to ensure effective market access in third countries. The Second Banking Directive thus requires de facto national treatment, not just de jure national treatment, or else permits retaliation. OPENING FOREIGN FINANCIAL MARKETS The principle of national treatment embodied in the International Banking Act of 1978 requires the Federal Government to treat foreign banks in the U.S. the same as domestic banks. This treatment is not predicated on reciprocation by the home country of a foreign bank, although the Congress in passing the IBA hoped our example would lead other countries to extend national treatment to our institutions. Nevertheless, reciprocation has not happened in many important markets. Thus, the primary focus of the Fair Trade in Financial Services Act is the treatment of U.S. financial institutions abroad. It clarifies national treatment as receipt of "the same competitive opportunities (including effective market access) as are available to domestic financial firms," and asks foreign countries to grant our firms such treatment. As Under Secretary of the Treasury Lawrence Summers stated at the Committee's October 26, 1993 hearing: U.S. financial firms face two challenges when they look abroad for markets in which to compete. First, they must receive the right to establish, and second, they must obtain the right of national treatment and equality of competitive opportunity. Unfortunately, U.S. financial institutionsour banks, securities firms, investment managers, and non-bank banks-which are major players in some international markets, have had little or no success in clearing both hurdles in many other countries. One of the principal objectives of the Fair Trade in Financial Services Act is to make it clear that de jure national treatment is not satisfactory. De jure national treatment can be frustrated by opaque or informal practices preventing effective market access. The United States expects de facto national treatment; i.e., equality of competitive opportunity with domestic financial firms. LINK BETWEEN TRADE AND FINANCIAL SERVICES The role of the U.S. in an increasingly global economy magnifies the importance of making sure that U.S. financial firms are not discriminated against in their operations abroad. This is important not only for the financial institutions themselves, but also for U.S. exporters in general. Deputy U.S. Trade Representative Rufus Yerxa, at the Committee's October 26, 1993, hearing, stated: *** it's been demonstrated by all of the studies we've The Banking Committee voiced a similar view in its report on the International Banking Act of 1978: American banks abroad can and should play a significant role in supporting American exports. The Committee is concerned with the uneven treatment accorded to American banks abroad, particularly in contrast with the open reception foreign banks have been given in our domestic market and its consequent effect on our balance of trade. At a time when it is crucial for American industry to export in order to reverse the massive current account deficits that have accrued in the last decade, our Government must ensure industry is not impeded by foreign market barriers to our financial services firms. THE IMPORTANCE OF ACCESS TO FOREIGN MARKETS Foreign financial firms have a better opportunity to expand in our market if they are protected from foreign competition in their home market. The profits foreign financial firms earn from growth in their restricted home market can provide a significant boost to entry into the U.S. market. Such firms, for example, can operate with lower spreads and charge lower fees in the U.S. than U.S. financial institutions are able to. Several witnesses emphasized this point in testimony before this Committee. Under Secretary of the Treasury David Mulford testified in 1990 that: I have always had the view that one of the reasons we're in the business of opening the Japanese markets and getting them to liberalize their markets is that there is a very low cost of capital there * * * people have begun to look at the financial area as one in which the Japanese institutions are engaging in sort of an unfair practice because they work off of a cheap source of capital at home and use that, in a sense to expand their position overseas * * *. At that same hearing, Mr. David Silver of the Investment Company Institution testified that: There seems little doubt that foreign firms which develop and grow in the sheltered environment of a restricted market may benefit from the existence of a monopoly or oligopoly in their home market. The profits gleaned |