16.1. “EURO” DEPOSITS AND LOANS 603
deposits),^3 and local monetary authorities tended to be far more lenient as far as
credit restraints are concerned when borrowing did not involve their home currency.^4
Universal banking In theuk, like in much of continental Europe, there was no
equivalent of theusGlass Steagall Act that separated commercial banking (sight and
time deposits; overdrafts and loans) from investment banking (placing, underwriting,
and holding securities). Although, by definition, you do not need universal banks
for deposits and loans, companies still liked institutions that could both offer loans
and help place their paper: both are very close substitutes. Nor was there anything,
in theuk, like theus’ ban on interstate banking, a rule that imposed a cap onus
banks’ growth (except for a handful of international players).
Lower TaxesEurobanks were often located in tax havens or are part of a financial
network involving tax havens. Also in mainstreamOECDcountries, international
transactions often received beneficial tax treatment when compared with domestic
businesses (for example, a waiver of stamp duties or withholding taxes; in this
respect, manyOECDcountries have now followed the lead of tax-haven countries).^5
Furthermore, many investors with undeclared income—the “Swiss dentist” or the
“Belgian dentist”, asThe EconomistorEuromoneyfondly call them—appreciated
the opportunities for tax avoidance or tax evasion available in euromoney markets.
Foreign deposits were often fiscally anonymous (that is, the bank cannot be forced
to reveal their identity to a foreign tax authority), or are often in the form of bearer
securities.
16.1.3 Where we are now: a Truly International Market
As Merton Miller beautifully put it, silly regulation provided the grain of sand—
the thing that starts as an irritant to an oyster but ultimately grows into a pearl.^6
The market survived the abolishment of the currency controls and excessive regu-
lation; these had speeded up the growth of the market, but even without them a
(^3) A 5 percent reserve requirement would mean that a bank, when receiving a customer deposit
for 100, has to redeposit 5 in a non-interest-earning account with the central bank. Thus, only 95
can be re-lent. This increases the effective cost of accepting the deposit.
(^4) It is true that eurobanks are subject, like any other banks, to the so-called Bank of International
Settlements (BIS) rules. However, these are not reserve requirements. Rather, the BIS rules set the
minimum amount of equity a bank should have, in light of its balance-sheet and off-balance-sheet
positions.
(^5) A stamp duty is a tax on transactions in securities. A withholding tax is a tax levied on interest
or dividends, withheld when the interest or dividend is paid out (rather than collected afterwards,
on the basis of a tax return).
(^6) Actually, pearls do not grow in oysters (ostreida) but in two species closer to mussels,pterida
andmeleagrina(akapintada); and they do not start from grains of sand but from indigestible food
residues. But otherwise the image is accurate.