Foreign banks control almost half of the U.S. commercial lending market, far more than previously estimated, according to the Federal Reserve Bank of New York.
In a study released last week, the New York Fed attributed the increase to previously unreported offshore loans by foreign banks to U.S. corporations.
The conventional view is that the foreign bank share of corporate lending had reached 33% in 1991, the Fed report noted. Based on the more-complete data, however, foreign banks actually turned out to hold 45% of the market.
The study documents how Japanese and European institutions have used their lower funding costs to obtain near-dominance over a market that was once the lucrative preserve of U.S. banks.
More Dominant than in Autos
The rapid expansion has made commercial lending one of the most foreign-dominated U.S. business sectors, even ahead of autos and chemicals.
The study, released in the New York Fed's latest quarterly review, found that:
* The buildup in corporate debt by U.S. companies was even faster than generally thought in the late 1980s, primarily because of the previously undisclosed offshore loans.
* More corporate funding was supplied by banks, including foreign banks, and less by the commercial paper market than was generally thought.
Many Loans Booked Offshore
According to the study, U.S. banks controlled $428 billion of corporate loans at the end of the last year, while foreign banks had $348 billion.
Offshore loans to U.S. commercial and industrial borrowers -- booked by foreign banks in places such as the Cayman Islands -- had risen to $152 billion by the end of 1991, up from $20 billion in 1983.
That compares with a rise in onshore lending, or loans booked through U.S. offices of foreign banks to $196 billion from $66 billion during the period.
Onshore and offshore lending by U.S. banks rose at a far slower rate, to $428 billion from $381 billion in 1983.
The figures for offshore lending by foreign banks are more than twice the previous estimates.
The Fed cited two reasons for the rapid growth in lending by foreign banks: first, foreign banks could undercut prevailing pricing; and second, they could persuade U.S. corporate treasurers to switch to them by offering international services.
"Continental and Japanese banks enjoyed substantially lower costs of equity than did U.S. banks in the period 1984-90," the report noted.
"Such pricing in turn allowed Continental and Japanese bank managers to target a smaller spread between the cost of funds and commercial lending rates than U.S., Canadian, or British bank managers could accept."
Spreads Higher for U.S. Banks
During this period, the Fed estimated that U.S. banks required spreads on commercial loans 50 basis points higher on average than those of Japanese banks in the United States.
The spread offered by American insitutions was 30 basis points higher than those of German and Swiss banks and 10 basis points higher than those of British and Canadian banks.
"In the competitive world of commercial banking, these are telling differences," the Fed report noted.
Until recently, one of the main reasons foreign banks booked so many loans through offshore offices was that it permitted them to avoid U.S. reserve requirements that would have been applied to borrowings used to fund onshore lending.
Under Federal Reserve Regulation D, which covers reserve requirements, a foreign bank branch or agency had to post a noninterest-bearing 3% reserve when funding a U.S. corporate loan, the Fed noted.
Havens from Regulation
In addition, once a foreign institution's U.S. offices had run up net obligations to its units abroad, the bank had to post a 3% reserve to fund U.S. assets, including corporate loans.
Such funding costs can be avoided by booking loans overseas in countries with lower or nonexistent reserve requirements.
"Clear evidence of regulatory arbitrage is seen in the use of shell branches in offshore centers such as the Cayman Islands," the Fed noted.
"More than two-thirds of all loans to nonbanks booked in the Cayman Islands were to U.S. addressees in 1990 and these loans amount to nearly 50% of all offshore loans made" to American companies.
U.S.-chartered banks did not enjoy a similar advantage, the Fed noted, since they could not avoid reserve requirements by booking loans offshore.
Both foreigh-bank reserve requirements were reduced to zero at the end of 1990, slowing re-bookings in offshore loans by foreign banks for the first time in nearly a decade.
However, the Fed cautioned that it would be "premature" to assume that foreign banks will eliminate their offshore bookings.