The Effects of the International Banking Act on Domestic Bank Profitability and Risk

Abstract

THE PASSAGE OF THE INTERNATIONAL BANKING ACT of 1978 was the first major step towards imposing consistent and uniform federal regulations on the growing number of foreign banks entering the United States. Prior to this date, foreign banks had been subject to a patchwork of state laws of varying degrees of stringency covering their entry, expansion, and portfolio behavior (see White 1982 and Walker 1983). The net result of this patchwork of state regulation was that by 1978, foreign banks had developed certain competitive advantages over domestic banks. These advantages emanated from the fact that foreign bank branches and agencies (i) were not required to meet Federal Reserve determined reserve requirements on liabilities such as large CDs, and (ii) they were not subject to federal laws governing interstate banking (the 1927 McFadden Act) and activity diversification (the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act, including its 1970 Amendments). However, foreign banks were also subject to certain disadvantages compared to domestic banks. In particular, they were inhibited from entering into retail banking markets by being ineligible for FDIC insurance and being denied access to Fed services such as check collection and the discount window. To eliminate these discrepancies in relative regulation, the International Banking Act (IBA) was introduced in the House of Representatives in February 1978, re-