The ranking minority member of the House Banking Committee's International Trade subcommittee yesterday proposed legislation mandating new controls to combat the "great instability" of the Euromarkets.
Rep. Jim Leach also said in a press conference that he wanted the Board of Governors of the Federal Reserve System to report on the role the international banks play within the foreign exchange markets.
The bill instructs the Fed to establish reserve requirements on Eurocurrency deposits, an action that would raise the cost of funds and limit the amount of credit available in the Eurocurrency market.
"The bill seeks to improve the conduct of monetary policy," Leach said, and "help control inflation," because the rapidly growing Euromarkets are "contributing to international inflation."
Leach said that the unregulated Euroccurrency market of more than $800 billion "produces great instability in foreign exchange markets," because it offers a readily available pool of liquidity.
His bill instructs the chairman of the Federal Reserve Board to meet with his counterparts in other major banking countries and encourage their adoption of similar reserve requirements on Eurocurrency deposits. The Euromarkets have been attractive to investors, like reserve requirements.
Leach said the Eurocurrency market instability has also increased banks, with a number reporting 12 percent to 19 percent in their last quarters' profits coming from currency transactions."
"Unfortunately," he said, "the very profitability of this activity give international banks a vested interest in increasing currency stability since currency profits are most apt to be made in a fluctuating market."
Leach also warned that "a large Eurocurrency market increases the temptation to seek profits in currency transactions and to move monies to appropriate tax shelters." He pointed to allegations by a former Citibank employe, David Edwards, that Citibank would regularly shift profits to tax havens in an effort to decrease it worldwide tax bite. CAPTION: Graph, no caption, The Washington Post