Bankers Can Drop Anchor at Home

Washington lets offshore financiers set up shop in the U.S.

Global money flows freely, neatly skirting legal impediments of governments along the way and eventually arriving at its destination ready to do business. Some of the most successful repositories of this stateless money are the offshore branches of major U.S. banks in such out-of-the-way places as Bahrain in the Persian Gulf, the Bahamas and the Cayman Islands in the Caribbean. In all, more than $1 trillion is held by banks and borrowers outside the U.S. in offshore banking bases set up by American and foreign banks.

Since the banks are not on U.S. soil, they are exempt from costly federal regulations, which helps them compete more aggressively with foreign banks for international business. But while these offshore banks have permitted U.S. financial institutions to fight for foreign accounts, they have created a disadvantage for New York City as a world financial center. In recent years, London, The heart of the large Eurodollar market, has jumped ahead of New York City in many foreign banking operations.

Last week, after years of intensive lobbying by large money center banks, the U.S. Federal Reserve authorized banks to set up international banking facilities (l.B.F.s) in the U.S. Banks will be permitted on Dec. 3 to create l.B.F.s that will be freed of the key regulations that govern U.S. institutions, namely minimum reserve requirements and limits on the level of interest that they can pay. The old system, for example, required banks to keep a portion of deposits, say 8%, in reserve with the Federal Reserve, regardless of whether the deposits came from domestic or foreign sources. On a foreign deposit of $1 million, $80,000 would have to be kept with the Fed, leaving the bank with only $920,000 to lend.

The banks will do I.B.F. business mainly with corporate or government clients; the minimum deposit or withdrawal will be $100,000. U.S. banks are expected to set up l.B.F.s soon in New York, Connecticut, Florida, Georgia and Maryland, where state legislatures have already passed laws exempting such financial operations from local and state income taxes.

Perhaps the biggest winners from the Federal Reserve's action will be the twelve New York City banks that make up the Clearing House Association. They handle between $180 billion and $200 billion worth of domestic and international banking transactions daily through a computer link to the 100 largest overseas banks. John Lee, executive vice president of the association, anticipates a doubling during the next two years of such financial transactions, which might include, for example, Saudi Arabia paying for U.S. refinery equipment with offshore dollars. Says he: "We are gearing up for this expansion." All told, the relaxed regulations should lure back some $200 billion of the roughly $600 billion U.S. banks have booked in their offshore branches.

Among the most ardent backers of the changes are the two New York monetary officials: Muriel Siebert, superintendent of banks of New York State, and Anthony Solomon, president of the New York Federal Reserve Bank. Said Solomon: "I would prefer to see foreign-based deposit and loan business serviced from U.S. shores."

New York bankers enthusiastically greeted the Fed's announcement. Said Norborne Berkeley Jr., president of Chemical Bank: "It's a significant step in closing the gap between London and New York." Said Willard Butcher, chairman of Chase Manhattan: "It's a plus for New York." Bankers looked forward to all the new business that should be coming their way from tropical climates. Said Chase Banker James Connelly: "A lot of sheiks may not know about Nassau, but they sure know about New York." qed

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