SIC 6082

This category covers establishments of foreign trade companies operating in the United States under federal or state charter for the purpose of aiding or financing foreign trade. Also included in this industry are federal or state chartered banking institutions that only engage in banking outside of the United States.

NAICS Code(s)

522293 (International Trade Financing)

The deregulated posture of the U.S. financial sector in the late 1990s resulted in a more international banking market by the early 2000s. While for much of the twentieth century the regulatory environment was aimed at restraining banking concentration and bank involvement in other financial activities, such restrictions gave way to more liberalized capital flows and a more relaxed attitude toward consolidation and foreign involvement, both by U.S. banks operating overseas and by foreign banks in the United States. According to the Institute of International Bankers, in the early 2000s three other factors also contributed to the increasingly international nature of banking: the reliance of national economies upon one another, the globalization of trade, and technological developments that enhanced both communication and transportation.

The number of foreign banks with offices in the United States totaled approximately 700 at the turn of the millennium, controlling assets of $1.38 trillion. Of these, 305 were branch banks; 81 were agencies; and 90 were subsidiaries more than 25 percent owned by branch banks; 211 were U.S. representative offices of foreign banks; 12 Edge Act and Agreement Corporations; and three New York investment companies in which a majority is owned by foreign banks.

Back in 1919, the U.S. government adopted a federal law called the Edge Act named for its sponsor, Republican Walter E. Edge of New Jersey. The Edge Act of 1919 allowed the Federal Reserve to charter foreign and domestic banks to permit them to participate in international trade finance and investment through what became known as Edge Act banks. These banks were allowed to expand their offices in more than one state without the usual nonbanking restrictions.

An Edge corporation offers foreign banks and their affiliates ways to expand operations in the United States without being subject to the nonbanking restrictions set by the Bank Holding Company Act of 1956. Edge banks can accept deposits and engage in a broad array of financial activities, without necessitating a foreign office to purchase international loans or process credit.

The late 1970s witnessed a great expansion of Eurobanks, which acquired an increased share of the U.S. banking market, generating heated political debate in the U.S Congress. This dialogue resulted in the International Banking Act of 1978, implemented to equalize regulatory treatment of foreign and U.S. banks doing business in the United States. This act, along with revisions to Regulation K (International Banking Operations), gave foreign banks and affiliates the right to own a majority of shares in these Edge corporations.

Prior to revisions to the Edge Act in 1984, the Fed used the "transaction-by-transaction" approach, which imposed fairly stringent constraints on the U.S. operations of the Edge banks. This approach required that all deposits to Edge corporations be related to international transactions and that all transactions with domestic residents be related to identifiable international transactions. With the debt crisis in the 1980s, combined with a flood of consolidations and bank mergers, many Edge banks disappeared.

In 1984, three major revisions were made. Two of the revisions expanded the U.S. activities of the Edge banks, while the third closed a loophole in the Edge banking statute that permitted three nonbanking firms to enter the Edge banking field.

The first revision expanded U.S. activities to provide full banking services—deposit-taking, lending, and other services—to any entity that engaged in international business. These companies included international airlines, shipping lines, and export-trading companies that were engaged exclusively in international activities and that were restricted to international business by their charters or licenses.

The second revision permitted an increase from $2 million to $15 million in the amount an Edge bank could invest or lend in permissible activities without prior approval from the Federal Reserve.

The third revision to Regulation K closed a loophole in the existing Edge banking laws, which allowed nonbank financial service companies to acquire the charters of existing Edge banks without the requirement of prior approval of the Federal Reserve. The new statute required any persons to give 60 days of notice before acquiring 25 percent or more of the voting shares of an Edge corporation. This regulation allowed the Fed to impose conditions necessary to prevent adverse effects such as conflicts of interest, undue concentration of resources, or unsound banking practices.

Although subject to capital restrictions and the limitations of the Edge Act, an Edge corporation could engage in contracts to finance activities involving projects performed substantially abroad, importing or exporting goods, assembly or repackaging of goods imported or exported, issuing long-term debt, and financing the costs of production of goods and services for export. In addition, the Edge was involved in buying and selling spot and forward foreign exchange, issuing securities to finance foreign activities, guaranteeing debts of customers, acquiring participation in extensions of credit, and holding securities or buying and selling securities upon the order of the customer.

An Edge possessed certain limited powers as a corporation. It had the power to maintain its corporate existence for 20 years, to sue and be sued, to make contracts, to appoint officers and employees, to elect directors, and to adopt by-laws. The banking powers of an Edge corporation with a final permit included borrowing and lending money, issuing letters of credit, and effecting transactions in coin, bullion, exchange, and securities.

U.S. banks, which are bound by law to focus foreign investment only in other banks, are able, by investing in Edge corporations, to spread their portfolios into just about any foreign company. By 1998, about 70 percent of U.S. banking assets of foreign subsidiaries was channeled through Edge corporations.

While restrictions from interstate banking diminished substantially, the benefits for foreign activities remained attractive to some firms. As of 1998, there were still more than 30 Edge branches, concentrated primarily in New York and Miami, with assets of $18 billion.

International banking facilities (IBFs), a legal classifi-cation created in 1981, differed from Edge corporations in that they had no separate organizational identity but constituted separate accounts established by host banks, including both U.S. banks and U.S. branches of foreign banks. IBFs were compelled by law to limit their activities to international transactions that demonstrably did not directly affect U.S. markets. Such facilities offered several incentives, such as the exemption from reserve requirements and, in some states, favorable tax status. In 1998, such facilities possessed $46 billion in assets for U.S. banks and $169 billion for U.S. branches of foreign banks.

The passage in 1999 of the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, paved the way for new conglomerations of financial services formerly prohibited by the Glass-Steagall Act of 1933. Among other provisions, the Financial Services Modernization Act allowed for the creation of financial holding companies, by which banks might combine diverse financial operations, such as insurance firms, brokerages, securities underwriters, travel agencies, and others within one establishment. It thus opened the door, for instance, to mergers between U.S. insurers and foreign banking operations as well as between foreign and domestic banking concerns, without necessitating the divestiture of one party's operations by the merged company. For a foreign banking firm operating in the United States to establish a financial holding company, the Federal Reserve had to bestow a sound rating on the firm's capitalization and management based on an evaluation of accounting and lending practices, the nature of the firm's capital exposure, and its reliance on federal support to meet capital standards, among other considerations.

The further deregulation of the U.S. financial sector at the end of the 1990s spurred the increased centralization of foreign firms' U.S. banking operations. While relaxed restrictions on interstate banking led to substantially increased merger and consolidation activity among U.S. banks, foreign banks likewise recognized the need for greater efficiency and centralization in order to compete with U.S. players. Fuji Bank Ltd. and Sanwa Bank Ltd. closed down many of their U.S. branches in order to shore up and expand the operations of regional headquarters. Meanwhile, some U.S. states, such as Delaware, went to great lengths to attract foreign banks through the relaxation of tax laws. In 1999 Delaware Governor Tom Carper signed into law the Foreign Banking Amendments, which allowed foreign banking concerns to establish Delaware as their home state, thereby allowing them to maintain branches with full banking capabilities equal to those of out-of-state U.S. banks.

Total U.S. banking assets of foreign banks increased sharply from $27 billion in 1972 to $1.38 trillion in 2001. The combined U.S. banking and nonbanking assets of international banks totaled more than $3 trillion. European banks held 80 percent of this total, while Asia accounted for 10 percent. South America, Central America, and North America were responsible for the remaining 10 percent. International banks spent roughly $20 billion per year on their U.S. operations; roughly half of this total was spent on employee compensation. In fact, international banks employed a total of approximately 120,000 individuals in the United States.

Leading foreign banks operating in the U.S. in the early 2000s included Mitsubishi Tokyo Financial Group of Japan, Société Generale of France, Mizuho Financial Group of Japan, Bank of Nova Scotia, and the Bank of Montreal.

Of all the foreign banks, Canada, France, and the United Kingdom had the largest number of bank offices in the United States. The U.S. cities with the greatest numbers of foreign bank offices are New York, Los Angeles, Chicago, Miami, and San Francisco.

Further Reading

International Activities of U.S. Banks and in U.S. Banking Markets. Washington, D.C.: U.S. Federal Reserve, December 1999.

McTaggart, Timothy R. "With New Law Delaware Opens Door Wider to Foreign Banks." American Banker, 23 July 1999.

Overview of Economic Benefits to the United States from the Activities on International Banks. New York: Institute of International Bankers, 2002. Available from .

Rehm, Barbara A., and Dean Anason. "Fed Opens Fast Lane for 1-Stop-Shop Applications." American Banker, 20 January 2000.

Structure Data for U.S. Offices of Foreign Banks. U.S. Federal Reserve, 31 September 1999.

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