U.S. branches and agencies of foreign banks: a new look.

Branches and agencies of non-U.S. banks have been active in U.S. banking markets for the past two decades. Initially, these U.S.-based offices of foreign banks served primarily the credit and other banking needs of U.S. affiliates of their homecountry customers. They also tended to be active in the broad domestic U.S. interbank market, using that market as a source of funds, an outlet for investments, and an element in their general liquidity management. In recent years, many foreign banks have expanded their customer base by actively soliciting business from U.S. companies, competing in terms of price and quality of service, and in some cases by purchasing loans to U.S. customers that were originated by U.S. banks. Foreign bank branches and agencies have shown considerable diversity in their approaches to U.S. markets, and their activities cannot be described with simple generalizations.

U.S. ACTIVITY OF FOREIGN BANKS, 1973--92: TWO DECADES OF GROWTH

From year-end 1973, the first year for which the Federal Reserve collected data, through year-end 1992, the reported assets of branches and agencies of foreign banks located in the United States grew from $25 billion to more than $700 billion. Over the same period, assets at domestic offices of U.S. banks increased about threefold, to more than $3 trillion. U.S. branches and agencies of foreign banks currently account for about 18 percent of the assets of all banking offices in the United States, up from 3 percent at year-end 1973.

Asset growth did not proceed at an even rate over the two decades. Between year-end 1973 and year-end 1990, the assets of U.S. branches and agencies of foreign banks grew rapidly, at an average annual rate of nearly 21 percent, and in no year was asset growth less than 8 percent. Between year-end 1990 and year-end 1992, in contrast, annual growth averaged only 6.5 percent. The slowdown in asset growth occurred against a backdrop of a slowing U.S. economy, an economic slowdown in the home countries of some of the banks, and concerns about meeting the enhanced capital standards required of their consolidated banking entity. Nevertheless, the growth of assets of foreign bank branches and agencies in the United States exceeded the sluggish growth of assets of domestic offices of U.S. banks, which increased less than 1 percent over the two years.

The reported slowdown in asset growth at foreign bank branches and agencies between year-end 1990 and year-end 1992 differed widely with respect to the home countries of these institutions. Over the two-year period, the assets of U.S. offices of Japanese banks declined about 8 percent, largely because of problems at their parent banks resulting from increasing levels of problem assets and the impact of the decline in the Japanese stock market on the value of their equity holdings. By contrast, the reported assets of U.S. branches and agencies of banks of other foreign countries increased nearly 45 percent, and their share of total foreign bank branch and agency assets increased from 40 percent at year-end 1990 to 52 percent at year-end 1992. Not all the rapid asset growth at U.S. branches and agencies of non-Japanese banks was due to an expansion of their U.S. business, however; some of the growth reflected the transfer of business from offshore offices to branches and agencies located in the United States. These transfers, or rebookings, were largely a response to a change in the reserve requirements for banking offices located in the United States: In December 1990, the requirement for their large time deposits and Eurocurrency borrowings was reduced to zero.(1)

Throughout the two decades of growth, the Federal Reserve collected detailed balance sheet data for the branches and agencies of foreign banks located in the United States. Data on deposits and loans at these offices were included in data on U.S. monetary and credit aggregates, as U.S. offices of foreign banks offer deposit and credit services to nonbank U.S. customers that are virtually identical to those offered by domestic U.S. banks. Where appropriate, these balance sheet data also aided in supervision of these offices and were used in studies of structural competitive issues in U.S. banking markets. Until March 1993, the data collected by the Federal Reserve covered only the assets and liabilities directly on the books of the branches and agencies of foreign banks located in the United States; transactions on the books of the offshore branches were not covered.

CHANGING LEGISLATIVE ENVIRONMENT

The growth of reported foreign bank activity in U.S. markets over the 1970s and 1980s led to enactment of federal legislation governing these banks' U.S. activities. Before passage of the International Banking Act of 1978 (IBA), the U.S. activities of foreign banks were governed only by state laws. The IBA, in implementing a federal legislative framework, established a policy of national treatment for U.S. offices of foreign banks by (1) limiting any new multistate branching activities to activities more comparable to those of U.S. banks, (2) placing the foreign bank offices under the same reserve requirements that apply to U.S. banks, (3) limiting foreign bank involvement in U.S. securities and other U.S. nonbanking activities, and (4) making federal-deposit insurance available to U.S. offices of foreign banks if they chose to engage in retail banking.(2)

In 1991, in response to a request by the Federal Reserve for broader supervisory powers over the substantially expanded U.S. activities of foreign banks, Congress passed the Foreign Bank Supervision Enhancement Act (FBSEA). FBSEA increased the Federal Reserve's supervisory powers over foreign banks by (1) requiring Federal Reserve review before a foreign bank enters or expands in the United States, (2) tightening the standards for entry and expansion that must be considered by the Federal Reserve (for example, a foreign parent bank must be subject to consolidated home-country supervision before entry or expansion in the United States can be approved), (3) requiring Federal Reserve Board approval of U.S. representative offices of foreign banks and, (4) requiring that each U.S. office of a foreign bank be examined at least once a year by the Federal Reserve.(3)

BANKING FROM OFFSHORE BANKING CENTERS

For many years, both U.S.-chartered banks and foreign banks have conducted extensive activities at branches in offshore banking centers, principally the Bahamas and the Cayman Islands. The activities of offshore branches of U.S. banks, both in the aggregate and with respect to transactions with U.S.-based residents, have been monitored closely through regular monthly and quarterly statistical reports collected by the Federal Reserve from all foreign branches of U.S. banks, including branches in offshore centers. The data from foreign branches of U.S. banks serve a variety of purposes, including improving information on deposits and credit transactions of U.S.-based customers for monetary policy, and in some cases have assisted in the supervision of U.S. banks. Data on overnight Eurodollar deposits of U.S. residents are included in the U.S. monetary aggregate M2, while data on other (term) Eurodollar deposits held by U.S. residents are included in the broader U.S. monetary aggregate M3.(4)

Offshore Branches Of U.S. Banks

Over the past decade, the year-end assets of branches of U.S. banks in the Bahamas and the Cayman Islands, the two offshore centers where U.S. banks conduct the preponderance of their foreign branch transactions with U.S. residents, averaged about $150 billion (table 1).(5) Since the late 1980s, about two-thirds of the assets and liabilities of these branches arose from transactions with U.S. residents, mainly the branches' parent banks. Over the same period, these branches' claims on nonbank U.S. residents averaged only about $20 billion, a figure that has grown little in the past five years and is quite small relative to total loans to nondepository institutions by the domestic offices of U.S. banks of about $1.2 trillion.

[TABULAR DATA 1 OMITTED]

The year-end liabilities of branches of U.S. banks in the Bahamas and the Cayman Islands to nonbank U.S. residents averaged about $40 billion over the past decade; dollar-denominated deposits payable in overnight funds accounted for about half that amount. Offshore branches are an attractive booking location for deposits for both U.S. banks and their U.S. customers because in some instances these deposits are not subject to reserve requirements and deposit insurance premia; avoidance of the costs of required reserves and deposit insurance allows the branches to offer higher interest rates on deposits. Relative to deposits at domestic offices of U.S. banks, nonbank U.S. residents' deposits at offshore branches of U.S. banks are quite small.

Offshore Branches of Foreign Banks

For a number of years, foreign banks have also offered banking services to nonbank U.S. residents from offices outside the United States, including offices licensed in offshore banking centers. In many instances, these banking services, though booked offshore, are marketed to U.S. customers from offices of the foreign banks located in the United States. Some of the same general incentives that induced U.S. residents to place deposits at offshore branches of U.S. banks existed for making deposits at offshore offices of non-U.S. banks. Before the Eurocurrency reserve requirements were reduced to zero in December 1990, non-U.S. banks had an additional advantage in booking loans to U.S. borrowers at offshore branches: Such loans were not subject to the Federal Reserve's Eurocurrency reserve requirements, whereas loans to U.S. borrowers booked at foreign branches of U.S. banks were potentially subject to the 3 percent Eurocurrency reserve requirement.(6) State-licensed branches and agencies of foreign banks have additional incentives for booking transactions offshore, as some states impose capital equivalence and asset maintenance requirements, and all foreign banks have an incentive for booking transactions offshore when states and localities tax their U.S. activities.

Before 1993, scattered data on the transactions of non-U.S. banks with U.S. residents from offshore offices were available, but data were not collected regularly. In early 1983, the Federal Reserve conducted a one-time survey of loans to and deposits from nonbank U.S. residents on the books of offshore branches of non-U.S. banks at the end of 1982. Conducted through contacts with the U.S. branch or agency offices of the foreign bank, the survey indicated that at the end of 1982, the offshore branches of these offices had $18 billion in commercial and industrial loans to U.S. borrowers on their books, compared with about $57 billion on the books of the branches and agencies located in the United States. The survey also indicated that dollar-denominated deposits of nonbank U.S. residents at offshore branches of these non-U.S. banks amounted to $31.2 billion, about one-third of their U.S. branch and agency deposit liabilities. Data collected annually since 1989 by the Banking Supervision Department of the Cayman Islands Government also indicate that foreign banks in that offshore center conduct a large volume of transactions with U.S. residents.

NEW REPORTING REQUIREMENT FOR FOREIGN BANKS

The volume of transactions at offshore branches of foreign banks is large, a large proportion of the transactions are with U.S. residents, and decision-making about such matters as credit extension, interest rate pricing, accounting, and other customer-related activities often is located at the banks' U.S. branches or agencies. Therefore, the Federal Reserve, on behalf of the Federal Financial Institutions Examination Council (FFIEC), recently implemented new requirements for reporting on the offshore activities of non-U.S. banks that have related U.S. offices. As of March 31, 1993, data on assets and liabilities of offshore branches of non-U.S. banks that are managed or controlled by a U.S. branch or agency of the same parent bank must be reported on a supplement to the regular quarterly report of assets and liabilities (Call Report) for branches and agencies (form FFIEC 002s). The new data are expected to serve some of the same purposes served by data collected from offshore branches of U.S. banks. The primary reason for collecting the data is to improve estimates of deposits and credits of U.S. residents. The information will be available to supervisory personnel. It will also contribute to a more accurate estimate of the size and nationality structure of foreign bank participation in U.S. markets.

The new quarterly supplements covering the activities of these branches are filed by U.S. branches and agencies of foreign banks. To the extent that the loans and deposits at these offshore branches are transactions with U.S. customers, they are virtually indistinguishable from similar loans and deposits on the books of the banks' U.S. branches and agencies, except for a booking convention. Therefore, the new data will give a much more accurate picture of the extent of foreign bank business with U.S. customers and improve the database on the banking transactions of U.S. residents.

Because some non-U.S. banks that operate offshore branches do not have branches and agencies in the United States, and because some non-U.S. banks operating both in the United States and in offshore centers do not manage or control their offshore branches from their U.S. offices, the sample of reporting banks, though large, does not cover all banking transactions with U.S. residents undertaken by all non-U.S. banks in these offshore centers. However, this gap in coverage may not be significant. The lack of a related U.S. agency or branch, or the lack of management or control of the offshore branch from outside the United States, can be assumed to limit the extent to which these nonreporting offshore branches of non-U.S. banks are conducting day-to-day transactions with U.S.-based customers.

DATA FROM THE FIRST QUARTERLY REPORTS

The first quarterly supplemental reports of offshore activities were received from 132 foreign banking organizations, including 73 of the world's 100 largest non-U.S. banks. Reported assets and liabilities of these offshore branches at the end of March 1993 amounted to $329 billion--more than twice the assets reported by offshore branches of U.S. banks (table 2). Nine-tenths of this amount was reported by branches of non-U.S. banks licensed in the Cayman Islands. Most of the remainder was reported by branches licensed in the Bahamas; very small amounts of activity were reported by branches in the other offshore centers--Panama, the Netherlands Antilles, and Turks and Caicos Islands.

[TABULAR DATA 2 OMITTED]

Approximately two-thirds of the total reported assets of these offshore branches were dollar-denominated claims on U.S. residents. The largest categories of assets were (1) dollar-denominated claims of $86 billion on the branches' related U.S. branches and agencies, mainly intrabank funding of lending by related U.S. branches and agencies of Japanese banks, and (2) dollar-denominated commercial and industrial loans to U.S. companies of nearly $80 billion, about four times as much as was reported at the end of 1982 in the Federal Reserve survey cited earlier. Lending to U.S. businesses by offshore branches of non-U.S. banks was also about four times as large as the lending to all nonbank U.S. residents by offshore branches of U.S. banks.

Assets of other types held by these offshore branches of non-U.S. banks generally were fairly small. Interbank claims on nonrelated depository institutions in the United States, both loans to and balances due from nonrelated depository institutions, amounted to only about $12 billion, or 4 percent of total assets, a relatively small component for multinational banks that tend to be active in interbank markets. These offshore branches of non-U.S. banks held $16.5 billion in securities issued by U.S. residents (including U.S. Treasury and federal agencies), $13 billion in real estate loans to U.S. residents, and about $10 billion in non-dollar denominated claims on U.S. residents, the latter reflecting primarily transactions with their related U.S. offices.

Offshore branches of non-U.S. banks also engaged in transactions with non-U.S. residents. About $40 billion, or one-eighth of their assets, were claims on residents of their home countries.(7) More than half these home-country claims were claims on the banks' parent offices. In addition, these branches reported approximately $48 billion in claims on third-country residents (that is, residents of neither the United States nor their home country) for which no customer detail was provided; a large proportion of these third-country claims likely also represented intrabank transfers of funds.(8)

Nearly two-thirds of the liabilities of offshore branches of non-U.S. banks on March 31, 1993, were dollar-denominated liabilities either to their related U.S. branch or agency or to nonrelated parties in the United States. More than $90 billion, or about three-fourths of their dollar-denominated liabilities to nonrelated parties in the United States, were overnight or term liabilities to nonbank U.S. residents, more than twice as much as reported by offshore branches of U.S. banks. This pattern for liabilities is consistent with the pattern for assets and suggests that the offshore branches of foreign banks were not heavily involved in interbank markets.

The offshore branches of non-U.S. banks also obtained funds from non-U.S. sources. In the aggregate, they obtained about $47 billion from homecountry residents, largely their parent offices; relatively little came from nonbank residents in their home countries. In addition, they had liabilities of about $73 billion to third-country parties, an unknown but presumably large proportion of which was owed to their related branches operating in other financial centers, such as related branches in London or other international funding centers.

OFFSHORE FOREIGN BANKING IN PERSPECTIVE

Comparisons of data on assets and liabilities from the new supplemental report with similar data for branches and agencies of foreign banks located in the United States, and with data for U.S. banks, put the activities of the offshore branches of non-U.S. banks into perspective (table 3). Unlike U.S. banks, which book the preponderance of their transactions with U.S. residents at their domestic offices, non-U.S. banks book a large proportion of their transactions with U.S. residents at their offshore offices.

[TABULAR DATA 3 OMITTED]

Adding the new data on offshore activities to existing data on branches and agencies increases by nearly 50 percent the estimate of total U.S. assets of foreign banks, to more than $1 trillion. The estimate of their total loans increases $1 1 0 billion, or one-third, and the estimate of their commercial and industrial loans to U.S. businesses increases nearly $80 billion, or more than one-half, to more than $220 billion. On the liabilities side, inclusion of data for offshore branches nearly doubles the estimate of the deposits of nondepository U.S. residents (individuals, partnerships, and corporations) at non-U.S. banks; the additional amount includes nearly $28 billion in overnight deposits and more than $63 billion in term deposits.

Comparable data for U.S.-chartered commercial banks are also given in table 3. The first column for U.S. banks gives data for large U.S. banks that have foreign offices and thus would appear to be the principal competitors of the large multinational foreign banks operating in the United States. The second column for U.S. banks gives data for all U.S.-chartered banks. Both sets of data for U.S. banks cover their transactions with U.S. residents from all domestic and foreign offices. The new data show that the branches and agencies of foreign banks operating in the United States, in combination with their branches in offshore banking centers, had about 30 percent as much in total assets as all U.S. banks. With commercial and industrial loans to U.S. borrowers of more than $220 billion, these offices of foreign banks have extended about one-half as much in business loans to U.S. residents as all U.S.-chartered banks. The new data on deposit liabilities of reporting offshore branches also increase estimates of foreign bank participation in U.S. markets both in percentage terms and in absolute amounts. Foreign bank assets and liabilities are even higher relative to the large (mainly moneycenter) banks who are the foreign banks' principal competitors.

The new data have also helped refine estimates of foreign banks' "share" of lending in U.S. markets. Foreign banks' share of lending can be measured in several ways, depending on assumptions about the location of the banking office extending the loan, the residence of the borrower (U.S. or foreign), and the currency in which the loan is denominated. Beyond issues of definition are more general issues of what a lending share in a geographically defined market means in a world of integrated global banking and capital markets, where businesses can either borrow from banks or issue securities in a variety of centers, and can alternatively use home-country companies or foreign subsidiaries as the nominal borrowing vehicle. Measures of market share in national banking markets are heavily influenced by preferences of borrowers and lenders as to where transactions are booked, as well as by choices between obtaining bank loans or issuing securities. Therefore, such measures by themselves are not meaningful indicators of the competitive presence of foreign banks.

The traditional approach to estimating market share from data made available by the Federal Reserve has been to measure foreign banks' share of business loans to all domestic and foreign borrowers, by all foreign-controlled banking offices in the United States, in all currencies. This traditional measure (which includes lending by domestically chartered U.S. commercial bank subsidiaries of foreign banks not included in the foreign bank data in table 3) indicates that on March 31, 1993, offices of foreign banks located in the United States together had about 35 percent of such loans booked by all banking offices located in the United States. Adjusting the numerator of that share to include business loans (denominated in U.S. dollars) to U.S. borrowers by offshore branches of non-U.S. banks, and adjusting the denominator to include both that lending and business lending to U.S. borrowers by foreign offices of U.S. banks, results in an estimated foreign bank lending share of about 42 percent.

NATIONALITY STRUCTURE: A CHANGING PICTURE

The new data on banking activities of offshore offices of non-U.S. banks modify estimates of the distribution of foreign bank participation in U.S. markets by nationality of the parent bank. The following discussion focuses primarily on loans to U.S. businesses and deposits from nonbank U.S. residents, two lines of banking activity for which direct customer contact, and therefore a U.S. presence, is important.

Table 4 summarizes the effects of the new data on the nationality distribution of foreign bank activity in U.S. markets. On the asset side, the new data reduce the estimated share of foreign bank lending to U.S. businesses of Japanese banks from more than one-half to a proportion closer to one-third. About two-thirds of the decline in the share of Japanese banks was accounted for by an increase in the shares of French, German, and British banks. On the liabilities side, adding the new data for offshore branches changes the nationality share in deposits relatively little, with declines in Canadian and French banks' shares partially offset by increases in British and Japanese banks' shares.

[TABULAR DATA 4 OMITTED]

Japanese Banks: More Involved in Deposit Business and a Smaller Share of Lending

Throughout most of the 1980s, the U.S. activities of foreign banks were heavily influenced by the activities of U.S. branches and agencies of Japanese banks. Between year-end 1980 and year-end 1990, Japanese bank branches and agencies in the United States accounted for more than 80 percent of the reported growth in commercial and industrial lending to U.S. businesses by all foreign bank branches and agencies in the United States, and their share of total foreign bank activity in the United States soared. The share of Japanese bank branch and agency lending to U.S. businesses in total foreign bank branch and agency lending of all types increased from slightly less than one-third in 1980 to well over two-thirds in 1990, before declining to slightly more than one-half in early 1993 (chart 1). In contrast, other types of assets of Japanese bank branches and agencies, particularly interbank claims, increased much less as a share of total foreign bank activity in the United States, and by March 1993 that share was little different from its 1980 level.

Chart 2 scales the growth of business lending by U.S. offices of Japanese banks (end-of-quarter data in U.S. dollars) to the growth of Japanese foreign trade, defined as the sum of total Japanese imports and exports (quarterly data in U.S. dollars). This scaling was motivated by previous research that observed a statistical correlation between lending at U.S. offices of Japanese banks and Japan's total international trade.(9) That correlation is due to the nature of this lending: Lending by U.S. offices of Japanese banks often financed the foreign trade (typically invoiced in dollars) of large Japanese companies. Had Japanese international trade and Japanese branch and agency lending to U.S. businesses grown at the same rate over time, the curve in chart 2 for commercial and industrial loans would be a flat line at 100.

Between mid-1980 and 1983, Japanese external trade and lending by U.S. offices of Japanese banks retained a roughly proportional relationship, with the ratio of lending to trade rising only slightly through the middle of 1983. Starting in the second half of 1983 and continuing until 1989, business lending by U.S. offices of Japanese banks expanded much more rapidly than did Japanese external trade, and by June 1989 the ratio of U.S. office loans to trade was approximately five times as large as in June 1980, suggesting clearly that during the later period factors other than external trade were the principal determinants of lending at U.S. offices of Japanese banks.

Chart 2 also plots the quarterly average Nikkei stock index. The rapid runup of the index between 1984 and 1989 paralleled the expansion of Japanese bank lending in the United States. This statistical association is not surprising, as the increase in the market valuation of the stocks in the Nikkei index improved the capital position of Japanese banks because they were able to count unrealized gains (up to 45 percent) on their equity holdings as tier 2 capital. This period of rapid increase in Japanese bank lending in U.S. markets was characterized by large purchases of loans originated by other banks, primarily U.S. banks.

The sharp decline in the Nikkei index beginning in early 1990 affected the ability of Japanese banks to compete in U.S. markets because it reduced the capital positions of their parent banks and raised their costs of acquiring additional capital through offerings of their own stock. With a time lag, these U.S. offices of Japanese banks began to reduce their lending to U.S. companies; the lag reflects the time it took to reduce the absolute amount of loans without incurring a major loss.

Table 5 shows how the new supplemental information collected from offshore branches of Japanese banks changes the picture of the types of business activities conducted in the United States by Japanese banks. U.S. offices of Japanese banks have historically had very large domestic interbank transactions in both assets and liabilities, and from 1985 through 1992 they raised large amounts of funds, net, in U.S. interbank markets.(10) They tended to fund a relatively small portion of their assets (less than 10 percent) with deposits from nonbank U.S. residents.

[TABULAR DATA 5 OMITTED]

Augmenting the traditional data with the new data from branches in offshore banking centers suggests several significant differences. The new data increase the estimate of assets of U.S.-run offices of Japanese banks at the end of March 1993 only $50 billion, or about 16 percent, with a negligible increase of $3 billion, or 4 percent, in estimated lending to U.S. businesses. On the funding side, however, the data covering offshore branches indicate more than twice as much in total deposits from nonbank U.S. residents. The new data indicate that Japanese banks also borrowed an additional $10 billion, net, in U.S. interbank markets than was estimated from data covering only branches and agencies located in the United States.

French Banks: More Loans and More Deposits

The new data increase the estimate of assets of U.S. offices of French banks as of March 31, 1993, more than 50 percent and more than double the estimate of business loans by French banks to U.S. borrowers. With U.S. assets of nearly $120 billion, Frenchbanks ranked second among non-U.S. banks in U.S. markets. The new data indicate that French banks had more than $25 billion in deposits from U.S. residents and were small net borrowers, rather than small net placers, in U.S. interbank markets.

German Banks: More Loans and More Deposits

The new data more than double the estimated U.S.-based assets of German banks as of March 31, 1993, and increase the estimate of their U.S. business lending fivefold, from $3 billion to more than $15 billion. On the liabilities side, German banks had about twice as much in deposits from nonbank U.S. residents than was previously estimated. The new data do not change the estimate that German banks are small net placers of funds in domestic U.S. interbank markets, a position they have maintained consistently over time.

Canadian Banks: More Loans

The new data increase the estimate of assets of U.S.-based offices of Canadian banks by three-fourths. Estimated business loans to U.S. residents by Canadian banks increased by the same proportion despite the fact that in 1991 one large Canadian bank shifted a large amount of commercial and industrial loans from its offshore branch to a U.S. office. The new data suggest that Canadian banks were slightly larger net borrowers in U.S. interbank markets than was previously estimated. They do not appear to have a significant amount of deposits from nonbank U.S. residents at their offshore offices. The reason that these offshore branches had relatively little in U.S.-resident deposits is that Canadian banks have a locational advantage over European and Japanese banks in booking such deposits at their head offices because of the similarity of time zones and ease of direct communication with the United States.(11)

Swiss Banks: More Loans and More Deposits

Until fairly recently, U.S. offices of Swiss banks lent relatively little to U.S. companies. In 1991, the reported amount of loans to U.S. companies by Swiss banks increased greatly, as loans from offshore branches of Swiss banks were rebooked to their U.S. offices. The new data indicate that even after that rebooking, Swiss banks still had about three-fourths as much in U.S. business loans at their offshore offices as they had on the books of their U.S. branches and agencies. The new data nearly double the estimate of deposits from U.S. residents at U.S.-based offices of Swiss banks. Adding in data from the new supplemental report confirm a tendency of Swiss banks, on balance, to be net placers of funds in domestic U.S. interbank markets.

British Banks: More Loans and More Deposits

The traditional data for branches and agencies alone indicate a very small role for U.S. branches and agencies of British banks in both lending to U.S. businesses and deposit-taking from nonbank U.S. residents. The new data covering offshore branches of British banks belie these conclusions. Adding these data more than doubles the estimate of total assets of U.S.-based British banks, increases more than sevenfold estimated lending to U.S. businesses, and more than triples estimated deposits from nonbank U.S. residents. The new data confirm the general impression that British banks are small net placers of funds in domestic U.S. interbank markets.

SUMMARY AND CONCLUSION

Collecting data on the assets and liabilities of offshore branches of non-U.S. banks will enhance the Federal Reserve's ability to monitor, on a quarterly basis, a major source of banking transactions with U.S. residents. The new information will improve the interpretation of domestic credit and deposit aggregates and will also aid in evaluating the response of foreign banking institutions to various policy measures, such as changes in reserve requirements. Besides improving aggregate banking statistics, the new data will enhance the quality of information on the size, composition, and nationality structure of foreign bank activity in U.S. markets. The first quarterly supplementary reports, which provide data as of March 31, 1993, indicate that foreign banks are more active in U.S. markets than was previously estimated, and that shares of foreign bank activity by nationality are different from the shares revealed by data covering only branches and agencies located in the United States. (1.) For detailed information on such transfers, see David C. Lund, "Foreign Banking in the United States," in U.S. Department of Commerce, Foreign Direct Investment in the United States: An Update (Department of Commerce, June 1993), pp. 40-50. (2.) See Sydney J. Key and James M. Brundy, "Implementation of the International Banking Act," Federal Reserve Bulletin, vol. 65 (October 1979), pp. 785-96. (3.) See Ann E. Misback, "The Foreign Bank Supervision Enhancement Act of 1991," Federal Reserve Bulletin, vol. 79 (January 1993), pp. 1-14. (4.) Data for M3 collected by the Federal Reserves are augmented by data on liabilities to nonbank U.S. residents at offices of non-U.S. banks in the United Kingdom and Canada through statistical cooperation with the Bank of England and the Bank of Canada. (5.) U.S. banks operate branches in other international banking centers, such as Hong Kong, Singapore, and London. (6.) Loans to U.S. borrowers by foreign branches of U.S. banks were subject to the reserve requirement if the U.S. bank was a net borrower from its foreign branches. If the domestic office of the U.S. bank was a net lender to its foreign branches, the Eurocurrency reserves applied only to the excess of foreign branch loans to U.S. borrowers over net domestic office funding of branches. (7.) For example, reporting branch of a Canadian bank dealing with customers resident in Canada. (8.) For example, an offshore branch of a Canadian bank in the Cayman Islands may be using that branch to fund its London branch. (9.) See Henry S. Terrell, Robert S. Dohner, and Barbara R. Lowrey, "The United States and United Kingdom Activities of Japanese Banks: 1980-1988," North American Review of Economics and Finance, vol. 1 (1990), pp. 53-73. (10.) Interbank assets consist of cash and amounts due from banks, federal funds sold, and deposits placed at depository institutions. Interbank liabilities include federal funds borrowed, deposits owed to depository institutions, and borrowings from depository institutions. (11.) As of March 31, 1993, Canadian banks located in Canada had on their books about $11 billion in U.S. dollar-denominated deposits from nonbank U.S. residents.

REFERENCES

Key, Sydney J., and James M. Brundy. "Implementation of the International Banking Act," Federal Reserve Bulletin, vol. 65 (October 1979), pp. 785-96. Lund, David C. "Foreign Banking in the United States," in U.S. Department of Commerce, Foreign Direct Investment in the United States: An Update. Washington, D.C.: Department of Commerce, June 1993, pp. 40-50. Misback, Ann E. "The Foreign Bank Supervision Enhancement Act of 1991," Federal Reserve Bulletin, vol. 79 (January 1993), pp. 1-14. McCauley, Robert N., and Rama Seth. "Foreign Bank Credit to U.S. Corporations: The Implications of Offshore Loans," Federal Reserve Bank of New York, Quarterly Review, vol. 17 (Spring 1992), pp. 52-65. Terrell, Henry S., Robert S. Dohner, and Barbara R. Lowrey. "The United States and United Kingdom Activities of Japanese Banks: 1980-1988," North American Review of Economics and Finance, vol. 1 (1990), pp. 53-73.