Fervor grows in Congress to eradicate foreign restrictions on financial firms.

WASHINGTON -- Momentum is building in Congress to pass legislation aimed at cracking open foreign markets where U.S. banks, securities firms, and investment advisers now face restrictions.

Under bipartisan legislation introduced in the Senate by Banking Committee Chairman Donald Riegle, D-Mich., banks and other financial service firms based in a foreign country would not be allowed to expand their operations in the U.S. unless U.S. financial companies can compete on equal terms in that country.

Riegle's bill, which has the support of a majority of committee members, is scheduled for a final drafting on Nov. 18. An identical bill with bipartisan support has been introduced in the House by Rep. Charles Schumer, D-NY.

The Clinton administration has signed on as an enthusiastic supporter. The legislation has also drawn unqualified endorsements from the Investment Company Institute, which represents mutual funds, the American Bankers Association, the Securities Industries Association, and the Independent Bankers Association of America.

The legislation stems from a growing frustration in Congress that U.S. financial service firms are top-flight competitors unable to get a fair shake abroad, while Japanese and other foreign-based firms have been free to lap up profits in the U.S.

"It's ludicrous that we have allowed this to go on, year after year," said Sen. Lauch Faircloth, R-NC, at a recent hearing of the Senate Banking Committee. "No amount of talking has gotten us anywhere no matter what kind of framework we have set up," said Schumer.

Treasury Department officials count more than 700 offices and subsidiaries of foreign banks in the U.S. market that hold almost a one-quarter, or $850 billion, of the total assets in the banking system. Foreign institutions also hold an estimated 35% of all business loans, making them an important source of credit.

In Europe, U.S. banks generally have equal access to financial markets, while European-based banks have long been free to lend and do business in this country.

But Treasury officials say financial institutions in Japan and elsewhere continue to be shielded from competition through a variety of regulations and laws. In Japan, U.S. banks control only $21 billion, or 1%, of all banking assets, while Japanese banks control an estimated $434 billion in U.S. assets.

The Uruguay round of global trade talks includes provisions aimed at opening up financial service markets. But the Dec. 15 deadline for completing the negotiations is rapidly approaching, and the talks are at an impasse over farm subsidies. Moreover, U.S. officials say that even if the talks succeed, they are determined to prevent "free riders" from taking advantage of open U.S. markets while U.S. firms stay locked out overseas.

The Riegle bill is "is a scalpel rather than a sledgehammer," Lawrence Summers, Treasury's undersecretary for international affairs, told the banking panel.

Critics say the legislation smacks of protectionism, a charge denied by Laura D'Andrea Tyson, head of the president's Council of Economic Advisers. "We are totally committed to opening foreign markets and keeping our markets open," she said.

Tyson dismissed fears that foreign banks could retaliate by shutting off credit to U.S. small businesses and other borrowers, disrupting financial markets. "That is not a concern," she said. Proponents also note that the legislation would only bar foreign firms from expanding or setting up new business while grandfathering existing services.

Still, not everyone is convinced the legislation is the right thing to do. The Federal Reserve objects, a Fed spokesman said. In previous testimony to Congress, the Fed said that the legislation risks destabilizing U.S. financial markets and inviting "almost certain" retaliation.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER