International Banking Act of 1978

What Is the International Banking Act of 1978?

The International Banking Act of 1978 put all American branches and agencies of foreign banks under the control of U.S. banking regulators. It allowed Federal Deposit Insurance Corporation (FDIC) insurance to be provided to these branches. It also required them to conform to U.S. banking regulations related to issues such as reserves and accounting and regulatory requirements, so that all banks operating domestically are treated equally from a regulatory perspective.

Understanding the International Banking Act of 1978

The International Banking Act of 1978 was the first legislation enacted in the U.S. to bring domestic branches of foreign banks operating in the U.S. into the framework of Federal banking regulation. Until then, foreign banks operating in the U.S. had been subject to various state laws with no unity nationally in how they were treated. This had given foreign banks both certain advantages and certain disadvantages compared to US banks.

For example, foreign banks had the advantage of being able to branch interstate, but suffered in trying to attract retail deposits because they could not offer FDIC insurance.

Pressure for legislation to deal with American branches of foreign banks intensified over the course of the 1970s as the number and size of foreign banks operating in the U.S. increased significantly. In 1973, 60 foreign banks with assets of $37bn were operating in the U.S.; by April 1978, this had grown to 122 banks with $90bn in assets. By that stage, they also held $26bn worth of loans in the U.S. These statistics meant that the previous conception of foreign banks being specialized institutions primarily financing foreign trade no longer applied, and their wide involvement in general banking services highlighted calls for Federal oversight.

Concerns Leading to the International Banking Act of 1978

The Federal Reserve Bank and U.S. Treasury Department were particularly concerned that foreign banks had advantages over domestic banks in attracting deposits through their multi-state operations — with deposit-taking being critical to a bank's business. Combined with the variety of services these banks could offer, there were significant concerns that if the status quo were allowed to continue, only a handful of large domestic banks would end up being able to compete with foreign institutions.

The 1978 Act attempted to address these concerns by establishing rules that promoted competitive equality between foreign and domestic banks, while preserving the ability of states to attract capital and establish international banking centers. At the same time, the Act allowed Federal authorities to regulate and supervise foreign banks operating in the U.S. (an important factor behind banking system stability). It is in terms of this that foreign banks need to comply to the same reserve ratios and other regulatory issues as domestic banks, including reporting and bank examination requirements. Control over reserve requirements of these banks also allows the Federal Reserve to be more efficient in setting monetary policy.