Banks and banking, Foreign - United States ; Banks and banking - West ; Investments, Foreign - Japan

Gary C. Zimmerman

English

Research Papers in Economics

FRBSF WEEKLY LETTER
January 25, 1991
Slower Growth for Foreign Banks?
Japanese lead expansion
Based on the common measures of market
presence-assets and commercial loans-
foreign-owned banks (including commercial
banks, as well as agencies and branches of
foreign-owned banks) have grown twice as fast
as U.s. banks over the last five years.
Most ofthe foreign-bank expansion in the U.s.
has been by Japanese-owned banks. Over t~e
last five years their total assets booked in the US_
climbed from $184 billion to nearly $420 billion,
and their market share soared from 6.1 percent
to 10.5 percent (see Chart). While other foreign-
owned banks also increased the ir assets du ri Ilg
this period, from $365 to $448 billion, tlleir mar-
ket share actually declined from 12 percent to
11.3 percent. The figures are even more dramatic
for the commercial lending componentoi assets,
where Japanese banks have increased t~ei r mar-
ket share by over 9 percent, to 15.4 percent.
Percent
of As.eta
25
Forelgn-Owlled Bank Market Share
in the U.S.
Total Foreign Share
Other Foreign (Less Japanese) ShClre
---------------------------:;:..::::-r- ~-
....---
20
10
15
Foreign bank activity in the u.s. grew steadily
over the 1980s. Foreign-owned banks' assets
booked in the U.S. reached $866 billion in 1990,
and their share of u.S. banking assets grew from
about 18 percent to nearly 22 percent in the last
five years. According to a recent study offoreign
competition in the bankrng industry, "only one
broad industry group-leather goods" has a
higher percent of foreign ownership than the
service-oriented banking industry.
The strong growth of foreign banks has raised
questions about the relative competitiveness of
foreign and domestic banks in the U.S. and about
whether foreign banks in the u.S. will continue
to expand at a faster pace than domestic banks.
While a number of factors, such as relative
economic conditions, trade patterns, exchange
rates, and interest rates, will playa role, in this
Weekly Letter the focus is on two regu latory de-
velopments that may slow the future growth of
foreign-owned banks in the u.S.
Competition c2p ~Ir/
Foreign banks are important competitors for
many U.s. banks. They provide a significant
portion of the trade and direct foreign investment
fi ." 'n in the u.S. For example, they issuE\ov~
60 percent f the dollar volume of commercia:t .'
~-,.."..,ffrcredit. Their expertise in this area and
their established customer relationships often
give them an advantage over domestic banks.
Their strong credit ratings also helped establish
them as leaders in the credit enhancement mar-
kets. Again, they issue more than halfof the
standby letters of credit which "guarantee"
commercial paper, loans, bonds, or asset-backed
securities.
Japanese Share ~ - ----- 5 -
0+--,--,---,----,----,---,---,---,
1982 1983 1984 1985 1986 1987 19188 "989 1990P
Source: Call Report., FRBSF.
WESTERn BAnKinG Western Banking is a quarterly review of banking
developments in the Twelfth Federal Reserve District. !t is published in the Weekly Letter on the fourth
Friday ofJanuary, April, July, and October.FRBSF
Regulatory constraints
Given the significant role ofjapanese-owned
banks in the U.S., together with the probability
that European banks will concentrate on finan-
cial integration and the "opening" of Eastern
European markets, the focus on japanese banks
seems to be the key.
Regulatory developments in japan may have
begun to limit japanese-owned banks' future
expansion in the u.s. The most recent (prelimi-
nary) data show a slight decline in japanese-
owned banks' market share in the u.s. At a
minimum, it suggests a slowdown in the rapid
growth of japanese-owned bank market share
in 1990.
One factor that may slow the growth of japanese-
owned banks in the u.s. is the liberalization of
interest rate ceilings on retail deposits in japan.
This regulatory reform probably will increase
japanese banks' reliance on domestic funding,
just as deregulation of retail deposits (NOWs,
MMDAs, savings and time certificates) in the
u.s. allowed major U.s. banks to substitute retaii
deposits for wholesale funding (large CDs and
other borrowings, and Eurodollar borrowings). In
other words,eliminating theseregulatory ceilings
should reduce japanese-owned banks' need to
raise funds in offshore markets to fund an excess
of domestic loans.
Henry Terrell, a Senior Economist with the Fed-
eral Reserve Board recently presented evidence
supporting this hypothesis. In congressional testi-
mony he noted that the growthof japanese banks
in the U.S. was not funded by raising low-cost
funds in japan and lending them through their
affiliates in the u.s. Instead, Terrell indicated that
aggregate net sources of funds data show just the
opposite pattern. He noted that interest rate con-
trols led to a shortage of deposits in japan, which
created incentives for japanese banks to shift .
assets overseas and to fund them there as well.
japanese banks' overseas operation, including
their u.s. affiliates, were actually net lenders of
funds to their parents, not net borrowers. This is
also consistent with the observation that japanese
banks' u.s. affiliates raised most oftheir funds in
the u.s. He also provided evidence that as de-
regulation has proceeded, japanese banks have
reduced their head office borrowings from over-
seas affiliates.
Therefore, liberalization of deposit interest
rate ceilings in japan could increase their
domestic deposits and thereby slow the growth
of japanese-owned bank assets in the u.s.
Capitalization
More stringent international capital standards
and risk-based capital requirements also are
likely to constrain foreign and domestic banks
alike in their ability to expand rapidly. Indeed,
in a recent Loan Officer Survey conducted by
the Federal Reserve, foreign-owned agencies and
branches "put somewhat more emphasis on their
capital positions as an element in their decision
to exercise more [credit] restraint."
Moreover, in the case of japanese banks, the
sharp decline in the japanese stock market has
reduced the value of japanese banks' "hidden
reserves;' or unrealized gains on equity invest-
ments, thus lowering their market capitalization,
and probably fUithei constraining their grovvth
prospects.
Summary
These regulatory developments may signal slower
growth ahead for foreign banks in the u.s. liber-
alization of japanese deposit interest rate controls
should increase the proportion of domestic bank-
ing activity and interbank transactions that can
be funded in japan, and reduce the need to shift
business to the u.s. Still, while this may affect
the asset growth of japanese banks, it may have a
smaller impact on the amount of credit extended
to borrowers in the u.s.
At the same time, more stringent capital stand-
ards and the reduction in "hidden reserves" are
likely to limit the ability of japanese banks to
increase loans and assets as rapidly as they have
in recent years. Thus, while foreign banks will
continue to be a significant presence in U.S.
banking markets, recent regulatory developments
are likely to reduce their appetite for further
rapid expansion in the u.s.
Gary C. Zimmerman
EconomistREGIONAL BANK DATA
SEPTEMBER 30, 1990
(Not SeasonaLLy Adjusted, Preliminary Data)
DISTRICT ALASKA ARIZONA CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH.
-------- -------- -------- -------- --------
ASSETS TOTAL 485,738 4,445 29,629 337,044 17,392 8,425 14,259 23,269 11,592 39,684
FOREIGN 41,804 1 N/A 39,078 2,297 N/A N/A N/A 90 338
DOMESTIC 443,934 4,444 29,629 297,966 15,095 8,425 14,259 23,269 11,502 39,346
LOANS TOTAL 353,696 1,955 18,852 253,633 10,225 5,734 10,371 16,090 7,374 29,462
FOREIGN 34,942 7 N/A 33,645 1,163 N/A N/A N/A N/A 127
DOMESTIC 318,754 1,949 18,852 219,988 9,061 5,734 10,371 16,090 7,374 29,335
REAL ESTATE 154,952 765 6,812 118,127 4,326 1,545 2,577 5,352 2,783 12,665
COMMERCIAL 76,736 708 3,504 52,220 2,758 1,475 1,440 5,374 1,697 7,562
CONSUMER 56,810 280 5,062 31,262 1,302 1,588 5,908 3,339 2,128 5,942
AGRICULTURE 5,793 4 464 2,811 45 756 23 411 148 1,130
INTERNATIONAL 374 N/A 11 356 0 N/A N/A 6 N/A 0
SECURITIES TOTAL 44,251 1,790 4,478 21,708 3,585 1,606 1,789 3,520 2,144 3,631
U.S. T.S. 13,155 1,091 1,470 5,946 1,263 410 648 703 497 1,128
SECONDARY MARKET 19,465 278 1,862 10,554 1,527 728 474 1,662 1,137 1,244
OTHER SEC. 11,631 422 1,146 5,209 795 469 666 1,155 511 1,259
LIABILITIES TOTAL 454,541 3,965 27,617 316,181 16,379 7,865 13,170 21,637 10,783 36,945
DOMESTIC 412,736 3,964 27,617 277,103 14,082 7,865 13,170 21,637 10,693 36,606
DEPOSITS TOTAL 386,385 3,497 25,190 267,428 15,328 6,738 8,582 18,074 9,284 32,263
FOREIGN 35,002 1 N/A 32,439 2,138 N/A N/A N/A 90 335
DOMESTIC 351,383 3,496 25,190 234,990 13,190 6,738 8,582 18,074 9,194 31,928
DEMAND 79,218 1,005 4,374 56,407 2,218 1,136 2,092 3,386 1,700 6,900
TIME AND SAVINGS 272,165 2,491 20,816 178,583 10,972 5,602 6,490 14,689 7,493 25,029
NOW 32,979 259 2,297 20,811 1,294 759 901 2,301 1,101 3,257
MMDA 68,275 464 4,605 46,801 2,136 1,050 1,864 3,556 1,527 6,272
SAVINGS 31,604 374 1,358 22,065 1,444 392 862 1,444 835 2,832
SMALL TIME 79,903 724 10,102 45,280 1,813 2,699 1,224 5,562 3,179 9,321
LARGE TIME 59,111 652 2,436 43,481 4,283 685 1,640 1,818 846 3,269
OTHER BORROWINGS 44,237 424 1,860 28,909 561 1,043 3,850 2,818 1,332 3,441
EQUITY CAPITAL 31,197 480 2,012 20,863 1,013 560 1,088 1,631 809 2,739
LOAN LOSS RESERVE 7,654 39 666 5,663 148 91 239 232 144 431
LOAN COMMITTHENTS 199,189 533 9,682 150,361 7,515 1,963, 2 "I.e..n o nt:1/. ., on., .,c: OQn , 'uu ~f\l7"'" "',''1.1 , I~, ,..,.."
LOANS SOLD 58,198 27 335 56,965 136 42 66 302 19 . 307
LOAN LOSS RESERVE (ALL BANKS) 2.16 2.01 3.54 2.23 1.45 1.59 2.30 1.44 1.95 1.46
NET CHARGEOFFS, TOTAL 1.09 0.64 2.07 1.11 0.05 0.24 3.27 0.50 0.92 0.43
REAL ESTATE 0.24 1.17 2.06 0.12 -.01 0.08 0.39 0.20 0.52 0.37
COMMERCIAL 0.60 0.11 4.15 0.49 -.09 0.22 1.83 0.51 1.65 0.19
CONSUMER 2.04 0.45 2.14 1.96 0.51 0.59 4.94 1.14 1.20 0.91
AGRICULTURE -.39 N/A -.03 -1.1 -.06 -.07 0.41 0.35 0.31 0.80
PAST DUE & NON-ACCRUAL, TOTAL 4.40 4.91 7.90 4.41 1.08 1.85 8.84 2.97 3.80 3.02
REAL ESTATE 4.00 6.82 13.2 3.57 0.70 1.97 3.07 4.48 6.41 3.90
COMMERCIAL 5.19 5.01 12.6 5.53 1.03 2.50 9.17 2.76 2.54 2.51
CONSUMER 3.54 1.85 2.00 2.93 2.12 1.80 11.5 1.59 2.42 2.12
AGRICULTURE 5.58 48.7 10.6 7.17 5.71 1.26 0.41 2.48 2.65 2.97
INCOME TOTAL 41,023 340 2,295 28,525 1,259 662 1,918 1,829 940 3,256
INTEREST 34,190 289 1,890 23,618 1,121 589 1,568 1,569 827 2,719
FEES & CHARGES 1,m 16 120 1,215 27 33 42 106 49 169
EXPENSES TOTAL 35,071 274 2,352 24,205 1,032 556 1,576 1,517 826 2,734
INTEREST 18,998 147 1,090 13,282 653 336 688 865 466 1,470
SALARIES 6,402 62 457 4,485 192 87 148 292 126 552
LOAN LOSS PROVISION 2,401 8 259 1,547 17 12 294 83 52 129
OTHER 7,270 57 545 4,891 170 120 445 276 182 584
INCOME BEFORE TAXES 5,917 66 -58 4,289 227 106 342 312 111 521
TAXES 2,066 17 -23 1,565 82 34 121 95 33 142
NET INCOME 4,004 50 -34 2,868 146 73 221 217 79 385
ROA (%) 1.10 1.51 -.15 1.13 1.15 1.17 2.01 1.26 0.90 1.31
ROE (%) 17.1 13.8 -2.2 18.3 19.2 17.3 27.1 17.7 13 18.8
NET INTEREST MARGIN (%) 4.16 4.33 3.60 4.07 3.68 4.06 8.01 4.09 4.14 4.24
Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author.... Free copies of Federal Reserve publications can be
obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974-2246.OUt>6 v::> 'OJSPUI?J:I UI?5
wa x09 'O"d
O)SI)UOJ::J UOS
JO ~uo8
a"Jasa~ IOJapa::J
~uew~Jodaa lpJOeSe~
DEPOSITORy iNSTITUTIONS REQUIRED TO HOLD RESERVES UITH THE FEDERAL RESERVE ON A WEEKLY BASIS
PERCENT OF COMBINED MARKET TOTAL FOR NOVEMBER 1990, BY REGION
DISTRICT ALASKA ARIZONA CALIF HAWAII IDAHO NEVADA OREGON UTAH WASH
DEPOSIT TYPE CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU
TOTAL DEPOSITS
DEMAND
NOW
SAVINGS
MMDA
SMALL TIME
LARGE TIME
51 45 5
92 3 4
6330 7
50 33 17
66 31 2
32 65 3
44 54 2
74 422
99 0 1
59 5 35
36 3 62
90 7 2
76 816
95 3 3
80 15 6
94 1 5
86 5 9
59 11 30
92 6 1
72 25 3
86 10 4
45 52 4
92 4 4
58 36 6
49 38 12
61 36 2
2474 3
39 59 2
69 28 3
93 4 4
73 26 1
53 38 9
82 18 0
42 55 3
83 16 2
8710 4
92 1 7
88 9 3
77 11 11
94 6 0
84 14 2
83 10 6
6928 4
99 1 0
76 15 9
66 18 16
82 16 2
46 51 3
65 34 0
72 22 6
95 1 4
7914 7
56 25 20
84 12 4
5738 5
81 14 5
79 8 13
93 3 5
84 3 13
58 5 37
84 6 10
761410
7911 10
5637 7
92 5 3
64 24 12
46 21 33
68 30 2
43 53 4
49 50 1
CB =COMMERCIAL BANKS; SL =SAVINGS & LOANS AND SAVINGS BANKS; CU =CREDIT UNIONS; MAY NOT SUM TO 1OO~ DUE TO ROUNDING
TYPE OF ACCOUNT OR LOAN DATE US DISTRICT ARIZ CALIF HAWAII IDAHO OREGON UTAH WASH
-----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET DEPOSIT ACCOUNTS SEP90 6.20 6.11 5.77 6.30 5.72 5.96 6.47 6.26 5.86
OCT90 6.19 6.09 5.76 6.28 5.72 5.95 6.35 5.98 6.11
NOV90 6.09 6.05 5.90 6.25 5.63 5.96 6.23 5.99 6.05
92 TO 182 DAYS CERTIFICATES SEP90 7.58 7.16 6.90 7.54 6.72 7.47 7.16 7.50 6.91
OCT9O 7.53 7.11 6.71 7.46 6.67 7.41 7.17 7.41 6.95
NOV9O 7.40 6.99 6.65 7.34 6.67 7.29 6.94 7.23 6.90
2-1/2 YEARS AND OVER CERTIFICATES SEP90 7.88 7.62 7.36 7.72 7.91 7.93 7.51 7.85 7.66
OCT9O 7.81 7.61 7.43 7.67 7.95 7.89 7.48 7.75 7.59
NOV9O 7.69 7.48 7.39 7.61 7.82 7.78 7.27 7.56 7.58
COMMERCIAL, SHORT-TERM' AVE. RATE 9.77 10.36 9.72 10.59 9.72 9.96 10.48 9.93 10.11
AVE. MAT. (DAYS) 59 103 78 234 78 133 69 68 89
COMMERCIAL, LONG-TERH* AVE. RATE 10.82 10.31 10.75 11.11 12.02 N/A 10.96 11.63 8.66
AVE. MAT. (MONTHS) 50 36 32 51 52 N/A 31 43 18
LOANS TO FARMERS* AVE. RATE 11.51 10.64 10.44 10.53 N/A 10.88 10.81 11.82 11.35
AVE. MAT. (MONTHS) 9 5 6 5 N/A 5 6 21 5
CONSUMER, AUTOMOBILE AVE. RATE 11.62 12.23 12.63 13.29 N/A 12.00 11.18 11.56 11.47
CONSUMER, PERSONAL AVE. RATE 15.69 15.98 16.75 19.79 N/A 13.50 14.11 15.05 14.89
CONSUMER, CREDIT CMOS AVE. RATE 18.23 18.75 18.00 19.44 N/A N/A 19.24 21.00 17.93
-----------------------------------------------------------------------------------------------------------------------------
SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON iNTEREST RATES ON SELECTED ACCOUNTS.
, DATA ARE COMPOUNDED ANNUAL RATES.

Slower growth for foreign banks?

http://www.frbsf.org/publications/economics/letter/1991/el91-04.pdf

Slower growth for foreign banks?

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics