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FED STUDY SAYS U.S. BANKS CAN COMPETE WITH FOREIGN BANKS DESPITE SIZE

 FED STUDY SAYS U.S. BANKS CAN COMPETE
 WITH FOREIGN BANKS DESPITE SIZE
 SAN FRANCISCO, July 31 /PRNewswire/ -- U.S. banks need not reach ultra-mega status to compete effectively around the globe and with foreign banks domestically, according to an economist at the Federal Reserve Bank of San Francisco.
 Noting that a favorable regulatory policy and domestic economic conditions usually spawn mega banks internationally, particularly in Japan and Europe, Fred Furlong said several major countries have relatively concentrated banking structures due to policies limiting the number of banks. "The banking structures observed in other countries, then, are not proof that big banks are generally more efficient in providing financial services," he added.
 Since 1980, the number of commercial banking organizations in the United States has fallen 24 percent, from about 12,700 to 9,700. Currently, the United States has about 40 commercial banking organizations per 1 million people, while the United Kingdom has around 10 per million, and Japan has a little more than one per million. Although further consolidation in the U.S. banking system will occur, Furlong said it is unlikely to become as concentrated as the ones in many other countries.
 "In the U.S., many banks with $20 billion-plus in assets are involved to a significant extent in overseas business," wrote Furlong in the Bank's Weekly Letter of Aug. 7. "Among these large banks, size does not seem to have much bearing on the degree of globalization. The importance of foreign activities relative to domestic banking is not strongly related to the size of the bank. Moreover, the ability of some moderately large U.S. banks to have 50 percent or more of their activity related to international banking suggests that they can compete effectively.
 "It is also important to note that a good deal of international banking involves off-balance sheet items, such as options, swaps and forward contracts. In this area, U.S. banks have been very strong competitors, which tends to belie the notion that U.S. banks are at a disadvantage owing to their size relative to larger foreign banks."
 Furlong said the relationship of asset size to globalization among the world's banks is mixed. For Japan, size is positively correlated with globalized activities. For large German banks, there does not appear to be a connection between size and globalization. For Canadian and French banks, the correlation is negative -- that is, the larger the bank, the smaller its proportion of international activity.
 Despite the fact that eight Japanese (and no U.S.) banks are among the world's 10 largest banking organizations, the economist noted the Japanese banks do not appear to have an advantage in providing general banking services or have higher earnings than domestic banks in the California market.
 "Last year, Japanese-owned banks in the state posted a net loss, while domestic banks showed positive, though modest, earnings," said Furlong. "Also, over the past four years, domestically owned banks in California have had a higher return on assets than Japanese-owned banks which hold approximately 25 percent of the state's banking assets.
 "As a group, other foreign banks operating in the U.S. have underperformed domestic banks over the past several years. U.S. banks, then, certainly are not at any disadvantage competing with foreign banks in U.S. markets.
 Furlong said further consolidation in the U.S. banking system is inevitable. "But the result should be a competitive domestic banking system with numerous banks, including small banks and several large banks that are active internationally, even if they do not match the ultra-mega status of some of their foreign competitors."
 -0- 7/31/92
 /CONTACT: Fred Furlong of the Federal Reserve Bank of San Francisco, 415-974-3205/ CO: Federal Reserve Bank of San Francisco ST: California IN: FIN SU:


DG-RM -- SF004 -- 5611 07/31/92 12:44 EDT
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Date:Jul 31, 1992
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