Q.: What brings a foreign bank to the U.S.?

KLEINBAUM Well, the first thing to remember is that not all foreign banks are here. Some have chosen not to come.

One of the reasons is that banks and regulators in some other countries are more organized when it comes to their common interest.

They might decide, for example, that one bank might be better suited to doing business in the U.S., while another would be better placed to do business in China.

At the other extreme, you have Japanese banks, which arrived here amid a lack of coordination and a "me too," herd mentality that has since led to overcapacity. They have hurt themselves by providing similar services in the same markets.

Q.: Does that mean that Japanese banks are likely to pull out?

KLEINBAUM I'd say consolidate, rather than retrench. Japanese banks might cut back on plans to lend to the middle market because they've found it's to when you're not part of the establishment. And when the market dries up, it often dries u faster for foreign banks.

We also probably won't see are more big acquisitions, like Bank of Tokyo's purchase o Union Bank in California.

Q.: So why do foreign banks come here?

KLEINBAUM To follow their customers from home, handle trade finance, learn about new products, make a market for their home currency, and diversify their operations.

However, one of the things that emerges is that when several foreign banks from one country say they're here to serve their customers from home, it turns out that they're all serving the same customers.

Italian banks, for example, all seem to lend to Fiat.

Actually, foreign banks' first concern is going through the regulatory hoops getting approval from their home country as well as U.S. regulators in order to establish an operation here.

For second-tier banks, there's less of a focus on what sort of business they should be doing here.

Q.: Do foreign banks play an important role in the U.S.?

KLEINBAUM Yes, and not only the ones that have offices here.

Abbey National, a British mortgage bank that doesn't have a U.S. presence, is a major investor in U.S. Treasuries and asset-backed securities and also issues commercial paper in this market.

This opens another avenue to investors in the U.S. market. That's something else that's frequently overlooked.

In general, we have a situation where foreign banks have been helpful during the "credit crunch," when a large number of European and Japanese banks moved in to make loans U.S. banks weren't making.

Q.: But do foreign banks make any money in the U.S.?

KLEINBAUM It's easy to set up an office here. The more challenging part is identifying a competitive advantage. The tough, and expensive part is regulatory compliance, legal costs, and taxes.

Competition, too, is intense, not only from U.S. banks, but from finance companies and broker-dealers.

This market is also much less consolidated than many foreign banks are accustomed to in their home countries.

The question for foreign banks is where the profitability is going to be.

I believe much of it will continue to come from trading rooms and dealing in derivatives and other exotic instruments. Most of the big Swiss, French, and Japanese banks are already in them.

A related issue is how you measure profitability.

Some banks are here for symbolic purposes' That means different things in different cultures, even if their operations here are coming under a lot more scrutiny in their home countries.

Other banks make more money here than they make at home.

You also have to evaluate U.S. profitability as part of the overall operation. Since branches aren't separately capitalized, setting up a U.S. operation is relatively inexpensive.

Q.: Alongside branches, a number of foreign banks operate in the United States mainly through retail banking subsidiaries. Do they have a chance of succeeding in the U.S. market?

KLEINBAUM Foreign banks' expansion here through subsidiaries has generally been poor.

Being outside their home market, they've been unable to identify management talent. Initially, they gave local management the benefit of the doubt as to their ability to understand credit risk. If you are going to pick people in whom you are putting your confidence, you better pick the right people. Unfortunately, some didn't and have subsequently had to replace management with home-country pros.

Their parent companies had to bail them out, recapitalize them, and take scarce management talent away from the home office.

Q.: What's the future for foreign banks in the United States?

KLEINBAUM You're not going to see any full-scale retrenchment, but the market will get more competitive. It was a lot easier for European and Asian banks to pursue U.S. customers when, for example, Chemical Bank was working out its problems.

A key question is how planners in the home country will make strategic decisions as to pursuing or closing business here because they are unprofitable.

I think that's something that's becoming more of an issue because domestic loan quality concerns and better opportunities in some cases have prompted home country management to reevaluate whether U.S. operations can provide adequate returns.

For example some Japanese banks have reallocated international management talent to emerging Asian countries.

Q.: How does Fitch, a U.S. rating agency, tackle foreign banks?

KLEINBAUM We're a full-service rating agency, and we felt it was important to build up our market share at home before going abroad aggressively.

However, due to investor demand, we have been increasing our direct ratings for foreign banks and related structured finance transactions.

We currently rate around 35 foreign-owned banks that operate here or U.S. subsidiaries of foreign-owned banks.

We also feel its important to be responsible to investors about international credit and market risks.

We expect that this will be an important area of growth and that it's important to understand foreign banks and not try to impose a U.S. domestic analytical framework on their activities.

Instead, we try to understand how they operate in their own financial environment and culture.

For instance, we try to help investors understand what a foreign bank's accounting is saying or not saying.

This helps us explain to investors how determinations of loan quality and the approach to reserve adequacy differ in each system.

We also try to help them understand relationships a foreign bank might have with its government and how that might change for government-owned banks that are privatized.

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