Tighter rules in new banking bill stir fears that foreign institutions may abandon state.

Tighter rules in new banking bill stir fears that foreign institutions may abandon state

California could face a significant reduction in the presence of foreign banks and suffer repercussions in the local economy, if a congressional bill tightening regulations on foreign bank branches passes unamended, a representative for local foreign bankers said last week.

"It would affect California the most besides New York, because after New York, foreign banks are represented most heavily in California," said Frank Meister, chairman of the International Bankers Association in California. He is also a senior vice president of Credit Suisse and head of its Los Angeles office.

Meister said some foreign banks might reduce their presence in California if forced to split investment banking activities from commercial banking activities, as is proposed by the bill.

"They could reduce their lending activities, their presence could be curtailed and there could be a loss of jobs and taxation," Meister said.

As of Dec. 31, 1990, California's 122 offices of foreign banking corporations had total assets of $89.1 billion, making up nearly 21 percent of the total banking assets in the state.

Some local foreign bankers were clearly concerned by the legislation.

"If they (Congress) say we have to create a new holding company, then we have to reconsider everything," said Mauro Cicchine, chief executive of First Los Angeles Bank, as well as head of all North American operations of First Los Angeles' parent company, Istituto Bancario San Paolo di Torino. "We would reduce assets to have a smaller need of capital. "In my opinion they will reconsider, or they will have a big problem because Americans will be impacted by the loans not done."

Cicchine said the Brazilian bank's two U.S. branches have loans of $300 million in California and $2 billion in New York, mostly to Fortune 500 companies as well as Italian companies in the United States and American companies in Italy. The two branch operations, he said, are too large to be folded into First Los Angeles Bank, he said.

As it now stands, House Bill HR1505 contains language which would require foreign banks that want to participate in the broad array of new powers proposed for banks - such as branching without interstate barriers, underwriting securities or owning securities firms, and selling and underwriting insurance - to establish fully capitalized subsidiaries. Currently their foreign offices and branches rely on the capital of their overseas parent companies.

A representative for the Treasury Department, whose banking reform guidelines were the basis for the bill, said the regulations on foreign banks simply attempt to maintain a level playing field between foreign and domestic banks, which will have to establish separate subsidiaries to engage in expanded powers.

Others, however, pointed out that in most developed countries banks are allowed to engage in expanded powers without separate subsidiaries.

Currently, foreign bank branches in the United States are rated according to the capital in their home office overseas. Under the House bill, banks seeking additional powers would have to establish separately capitalized subsidiaries, a costly process which would reduce the amount of capital available for loans.

"Given what I've heard, it could clearly affect a number of banks operating loan production offices here," said Jim Bemowski, a principal in the Los Angeles office of management consulting firm McKinsey & Co. He added that reports from Capitol Hill gave the language a high chance of eventual inclusion in the final bill. "It could have a very significant effect. What we can expect to happen is that every institution will have to look at what are its incremental costs and are they justified by revenue market opportunities."

Expected to be considered this week is an amendment by Representatives Stephen Neal (D-N.C.) and Floyd Flake (D-N.Y.) which would require foreign banks to meet U.S. capital standards without mandating the creation of separate holding companies.

Another analyst said while the bill's language is disliked by foreign bankers, its effects on foreign bankers should not be severe and should not promote an exodus from the state.

"To set up a foreign agency is very expensive and the amount of money they'd have to devote to capital is not significant to the overall organization they have," said Wade Francis, president of Unicon Financial Services Inc. of Long Beach and a consultant to many Asian and Asian-American banks.

Meister said the bill would harm most of the 16 foreign banks which operate securities firms here under a grandfather provision in the international Banking Act of 1978.

The bill is one of several under consideration on Capitol Hill that could affect foreign banks. Another could increase the supervisory powers of the Federal Reserve Board, which currently regulates bank holding companies, foreign banks and member banks, in determining which foreign banks may set up offices in the United States.

That bill is opposed by the California Bankers Association, which calls it a threat to the dual system of federal and state bank regulation, because it would strengthen the powers of the former at the expense of the latter.