Kenneth R. Szulczyk
bank’s activities in other countries. For example, Citibank has branches and subsidiaries in
many countries around the world. The U.S. government and Federal Reserve System have
trouble regulating and monitoring all the bank’s activities.
International banks are also located in offshore markets. An offshore market has little
regulations, low tax rates, and strict banker-customer confidentiality laws. Leading offshore
markets include the Bahamas, Cayman Islands, Dubai, Hong Kong, and Singapore. If the
regulatory agency believes a bank is participating in risky investments, the regulatory agency
has difficulty examining bank records for subsidiaries located in offshore markets.
Consequently, some wealthy people, businessmen, and criminals hide their money in offshore
accounts to evade taxes, to protect their wealth from countries with aggressive tax policies, or to
hide their profits from illegal business activities.
Becoming an International Bank Kenneth R. Szulczyk
Banks in the United States use four methods to become an international bank, which are:
Method 1: The U.S. bank opens a bank branch in a foreign country. These branches accept
deposits and make loans. U.S. banks open branches in financial centers around the world or
places where U.S. firms and corporations engage in business. Bank branches help the bank
transfer money across nations’ borders.
Method 2: The U.S. bank becomes a holding company. The U.S. bank buys and becomes a
majority shareholder of a foreign bank. The Federal Reserve System restricts U.S. banks to
invest in foreign firms that are “closely related to banking.”
Method 3: The U.S. bank becomes an Edge Act Corporation. The U.S. bank establishes a
subsidiary. Subsidiary can accept deposits from both U.S. residents and foreigners but can only
grant loans for international business activity. These international banks assist with international
trade and foreign-currency exchange. Furthermore, the Federal Reserve System exempts the
subsidiary from some U.S. banking regulations and has the authority to approve the Edge Act
Corporation.
Method 4: The U.S. bank creates an international banking facility (IBF). An international
banking facility, similar to an Edge Act corporation, accepts deposits from foreigners and makes
loans to foreigners. The IBFs cannot conduct any business within the United States except with
its parent company or with other IBFs. Government exempts IBFs from many regulations, and
they do not pay local and state taxes. The Fed encourages U.S. banks to use an IBF to engage in
the international markets.
Foreign banks can enter the banking market in the United States, using three methods.
Method 1: Foreign bank opens an agency office. Agency office cannot accept deposits
from U.S. residents, but it can lend to them. Moreover, the agency office is not subjected to U.S.
banking laws and does not carry FDIC deposit insurance. Agency office receives its funding
from foreign depositors and investors. Agency office is similar to a nonbank bank, and it
circumvents the numerous U.S. banking regulations because the legal definition of a bank is an
institution that accepts deposits and grants loans. If the institution stops granting loans or stops
accepting deposits, then legally the institution is no longer a bank.