Foreign banks in the United States since World War II: A useful fringe

Abstract

Foreign banks have had an organizational presence in the United States since the early 1800s. Until after World War II, the foreign banks' presence was generally limited. They engaged in trade finance, and in some cases ethnic banking. The growth really dates to the period from the mid-1960s to 1990. Banks are service firms, and their growth reflects a demand for their services. This growth in demand is itself the consequence of the growth of four other activities: trade, the Eurodollar market, foreign exchange trading and non-financial foreign direct investment in the US. First, the General Agreement on Trade and Tariffs (GATT), and its successor the World Trade Organization (WTO), facilitated the rebound of trade from its collapse during the Great Depression. Since the end of World War II, world trade has grown more rapidly than world GNP, and this has generated an increase in the demand for trade financing and the execution of trade payments. Second, liberalization of capital flows and the growth of the Eurodollar market from the late 1950s on led many foreign banks to want to have a presence in the US money markets, and therefore New York, and perhaps a dollar deposit base as well, to be able to fund their customers' demand for US dollar loans. Third, the breakdown of the Bretton Woods systems of fixed exchange rates led to the development of foreign exchange trading, with New York again appearing as a leading center. Lastly, as companies in Europe and Japan recovered from World War II, they first rebuilt their domestic operations. By the mid-1960s (Europe) or mid-1970s (Japan), many of these companies were ready to establish operations in the US. As they did so, they wanted their bankers to accompany them. As we shall see below, this period of rapid growth in the presence and role of foreign banks in the US is over. Although the share of foreign banks in US Commercial and Industrial (C&I) loans reached a peak of 35 percent in 1995, we are now seeing a retreat. Wilkins (2001)… The second section below describes the legal and regulatory background to the foreign banks' presence and some legislative milestones. The third section focuses on the agencies and branches of foreign banks. The fourth section focuses on the foreign banks' subsidiaries. The last section is the conclusion.