A powerful senator has spoken up for community bankers who worry that foreign banks might one day threaten their markets.
Kentucky Democrat Wendell H. Ford, the Senate majority whip, said last week he would oppose the interstate banking bill if Senate language on foreign banks is killed in a conference committee.
The Senate bill, which was passed last week, would require foreign banks doing business in the United States to obtain a domestic charter. Under the House bill, foreign banks would be treated as if they were domestic banks for purposes of interstate branching.
Because the House bill would not require the domestic charters, foreign banks would remain exempt in certain circumstances from fair-lending rules and other regulations. Sen. Ford, addressing the Senate on April 26, said the exemptions give foreign banks a competitive advantage that is particularly threatening to small banks.
Protecting the System
"On one hand, we need to eliminate unnecessary federal barriers and allow interstate banking to proceed as market forces dictate," he said. "On the other, we need to do this in a manner which does not threaten the safety and soundness of our banking system, and which respects both states' rights and the legitimate franchise interests of community banking institutions."
Currently, foreign banks are exempt from the Community Reinvestment Act as long as they do not take retail deposits. And, as long as deposits remain purely commercial, foreign banks are not required to carry deposit insurance. As a result, says Frank Pinto, executive director of the Pennsylvania Community Bankers Association, "It's not just that we don't have a level playing field. We're not even in the same game.
"Allowing foreign banks to branch all over without paying for deposit insurance just aggravates the inequity of the situation," he added. "Their deposits have to be commercial for the exemption, but they're still allowed to make any kind of loan."
Sen. Ford said foreign banks issued 42% of all commercial and industrial loans - which make up most of the earning assets in many small-bank portfolios -- in 1993. Foreign banks aren't targeting the small-business market, but they might in the future, some bankers warn.
For now, says Arkansas Bankers Association president Bill Maris, "Foreign banks are more interested in branching as way to expand their source of funds, not to employ the funds."
Mr. Maris, chairman of the $39 million-asset Bank of Little Rock, adds that Arkansas would be appealing as a source of funds because its usury law -- which pegs the maximum interest rate for most credits at 5 percentage points over the Fed's discount rate -- has not always held down rates imposed by out-of-state banks.
"The way it's been, all you need is a legal opinion stating that a transaction was performed by a bank in a state other than Arkansas," Mr. Maris said.
As a result, "The idea that foreign banks -- without the burden of FDIC insurance -- will be in here pricing up deposits is nightmarish," Mr. Maris added. "I don't think there will be a horde of them -- they don't even know where Little Rock is -- but they'll find us, in time."
The Independent Bankers Association of America and the banking associations of 15 states have expressed similar warnings.
