In a world in which capital flows around the globe around the clock, the current legislative debate over whether banks should be able to operate branches across state lines seems almost quaint.
Only government intervention could possibly maintain "bricks and mortar" as one of the critical issues facing the U.S. financial sector as it enters the 21st century. There can be no other U.S. industry in which restraint of trade and cartelization masquerade as good public policy with less embarrassment than financial services.
Restraint of trade arises in its purest form in the Senate effort to deny expanded branching rights to foreign banks in the United States.
The Senate bill would abandon the federal policy of national treatment for foreign banks, embodied in the International Banking Act of 1978, by denying foreign banks the broader branching rights accorded U.S. banks by the new legislation.
This would be a dramatic demonstration of federal largesse, in which the federal government not only recognized state's rights, but actually handed over an important area of international financial policy to them.
This effort is supported by a collection of state banking associations representing mostly small banks.
Broader Interests
During preparation of the 1991 banking bill, one banker from Kentucky explained his crusade to limit foreign competition in terms of the months he spent watching the progress of a new commercial project across street from his bank that was financed by two banks from Europe and Japan.
In defending the Senate position, Sen. Wendell Ford vowed to defend "the legitimate franchise interests of community banking institutions." But what of the broader interests of the community?
For example, it would be interesting to know how the developers of that commercial project -- the construction workers who built it, the businesses that occupy it and service it, and the citizens of Kentucky who now work there - feel about foreign financing.
During the recent U.S. credit crunch, foreign banks provided an expanded share of municipal financing and commercial and industrial loans. Do the cities and companies that benefited from this financing share the view of a reluctant U.S. banker that an open financial sector is bad for America?
No Dog in the Fight
Equally interesting is the internal logic of the anti-competilive position. In a recent press report, national treatment opponents argued that a foreign bank without U.S. deposit insurance would enjoy a competitive advantage over a U.S. bank backed by the full faith and credit of the United States.
They argued that a foreign bank attempting to penetrate the Arkansas banking market would enjoy a competitive advantage over the Bank of Little Rock.
They apparently feel that this has something to do with the right of the foreign bank to operate a direct branch. If they really believe any of these things, foreign competition is the least of their problems.
The fact is that the community bankers have no dog in this fight. No international bank wants to compete for their local business in Alabama or West Virginia, and competition for large corporate accounts and-large project financing is little affected by institutional identify or location of branches in a global financial market. What is at stake are broad U.S. interests in the international marketplace.
Banks at Risk
Denial of national treatment could place at risk the 15 U.S. banks with multiple direct branches in individual countries or the European Union.
Ten of these banks have multiple branches across the European Union and two have multiple branches in Japan. Denial of national treatment would foreclose further progress on direct branching in the GATT financial service negotiations and the future hope of smaller banks along the Mexican and Canadian borders to branch into those markets under Nafta.
Leadership at Stake
The issue here is not foreign banks or community banks. Neither will have their ability to do business much affected by the resolution of the national treatment issue.
What is at stake, however, is the U.S. leadership in formulating international financial policy and the status of the United States as one of the world's most open and innovative financial markets.
Principles do matter and the principle of national treatment should be maintained.
Mr. Walsh is deputy director of the Group of 30, an international association of bankers and investment bankers that proposes operating standards and guidelines for securities markets.
