20 1. Interstate Branching would be allowed for foreign banking subsidiaries and branches, subject to the approval of the Federal Depository Institutions Commission, and subject to the same conditions which would apply to interstate branching by domestic banks. 2. Underwriting.-Foreign banks chartered in the U.S. would be permitted to engage in the underwriting of state and municipal securities including revenue bonds. The present prohibitions on underwriting of corporate securities by depository institutions would be extended to foreign banks, which would have an appropriate interim period to phase out existing operations. 3. Corporate Equity Investment.-Foreign banks, branches and holding companies (chartered in the U.S.) would, like domestic banks, be prohibited from holding equity investments in commercial companies. 4. Bank Related Activities.-Foreign banks would be subject to the "closely related to banking" restrictions of the Bank Holding Company Act of 1970. 5. Reserve Requirements and Deposits.-Foreign bank subsidiaries (chartered in the U.S.) could engage in all activities allowed domestic banks and would be subject to the same reserve requirements as are domestic banks, including reserve requirements on Eurodollar borrowings from their parent banks and other foreign deposits. Foreign bank branches (whose parents are not chartered in the U.S.) could not accept deposits in the U.S. from individuals, partnerships, corporations, states and municipalities, because deposit insurance is not now legally available, and would be difficult to supervise if it were. These branches would have reserve requirements imposed upon their borrowings from other depository institutions in the U.S. and upon their Eurodollar borrowings. 6. The Federal Depository Institutions Commission. The Commission would be responsible for the chartering, conversion, mergers, examination, supervision and regulation of foreign banks operating in the United States. TITLE VII: UNITED STATES BANKS ABROAD Overseas networks of branches and subsidiaries have been a major factor in the expansion of U.S. banks over the last decade. In 1964 there were only 11 U.S. banks with 181 overseas branches. Now there are 125 banks and 732 branches overseas, and branch assets have grown from $6.9 billion in 1964 to $155 billion currently. At year end 1974, assets held by U.S. banks in their foreign branches were 14 per cent of total domestic and foreign assets of all U.S. commercial banks. An additional volume of assets is held overseas in subsidiaries and affiliates. This extraordinary expansion has created a reserve-free and largely unregulated international banking market. 1. Capital Adequacy. The Federal Depository Institutions Commission would be authorized to impose such capital requirements, in addition to the present capital requirements, on banks currently engaged in foreign activities upon a finding that their capital is not sufficient to support such activities. 2. Overseas Departments in U.S. Banks.-To promote competition among banks of different sizes in international financial markets, U.S. banks would be authorized to establish overseas departments in their domestic offices. These departments would be allowed to engage in the same activities as foreign branches of U.S. banks. They could raise funds from abroad and lend to foreign residents without being subject to the restrictions placed on the bank's domestic activities. 3. Examination.-United States banks would only be permitted to establish branches in those countries which permit periodic examination of the branch, and complete access to its records, by the Federal Depository Institutions Commission. The Federal Depository Institutions Commission would determine the degree of examination of subsidiaries and joint banking ventures which would be required to insure that the parent bank's capital would not be endangered, and would only permit these activities in countries where such examination was allowed. 4. Branches, Subsidiaries and Joint Foreign Banking Ventures.-U.S. banks would be prohibited from investing in joint foreign banking ventures, from acquiring a financial interest in a bank operating overseas, or from establishing a foreign subsidiary without advance approval by the Federal Depository Institutions Commission. Subsidiaries and joint banking ventures would be allowed to the extent that the Federal Depository Institutions Commission determined that such activities would not endanger the bank's capital. Joint ventures overseas between U.S. banks would be governed, as now, by U.S. anti-trust law. Federal Depository Institutions Commission approval of joint ventures between foreign banks operating in the United States and U.S. banks would also be governed by U.S. anti-trust law. 5. Federal Reserve Privileges.-Federal Reserve discount and borrowing privileges would be extended to U.S. banks only on domestic paper. HOUSING AND FINANCIAL REORGANIZATION (By Dr. Craig Swan*) INTRODUCTION This paper tries to make some simple points. Unfortunately to understand the interactions between housing and financial markets often involves rather complex interrelationships. The basic thesis of the paper should not be lost sight of and should be emphasized from the beginning. The case for financial reorganization is very strong and compelling. It is only natural, because of the importance of mortgage financing, that concerns about housing get involved with questions about financial reorganization. Looking at the way housing has been financed only strengthens the general case for financial reorganization. There is some uncertainty about how specific plans for financial reorganization will affect housing markets. The appropriate response to this inherent uncertainty is not to oppose financial reorganization, but rather to consider complementary policy responses that will work to mitigate any adverse impact on housing and mortgage markets. The traditional ways of financing housing have worked well in normal times but not so well in periods of large movements in interest rates. This volatility in interest rates has characterized the last ten years and there is no good reason to believe it will not continue to be a major factor in financial markets into the future. Further, the development of new technology, related to the widespread use of computers, is giving rise to new ways of managing money that tend to blur and erase the traditional distinctions between financial institutions. Finally, some of the past responses of public policy to these two developments are not without their serious and unfortunate side effects. These public policy responses, primarily the regulation of deposit rates, have in some measure been designed to preserve existing institutional distinctions. While they might have had their intended effect in the short run, their long run impacts have been much less beneficial, if not perverse. Changing the financial structure would allow one to eliminate these artificial restrictions as well as providing the resulting financial institutions with the means to cope with volatile interest rates and new technology. There have, of course, been other policy responses that have been valuable additions to the working of mortgage markets. Their further development should be continued following financial reorganization. Examples of these sorts of responses are the elimination of the Federal National Mortgage Association from the federal budget, the development of GNMA guaranteed mortgage backed securities and a whole host of initiatives by the Federal Home Loan Mortgage Company to broaden and stabilize the sources of mortgage financing. Associate Profesor of Economics. University of Minnesota. A paper prepared for the FINE Study, October 1975, revised February 1976. |