Federal Reserve Board Chairman Paul A. Volcker said yesterday there is no need to ban foreign takeovers of U.S. banks, because the problems feared from foreign bank ownership "have not materialized."
In a report to the Senate Banking Committee, Volcker said a Federal Reserve study "has provided no evidence at this point that foreign ownership in itself has led, or is likely to lead, to bank supervisory problems. Nor have the banks involved, or the communities they serve, been harmed."
Volcker said the Fed "does not believe that a moratorium on foreign entry [into U.S. banking] would be in the national interest" and might harm the banking system "by closing off a potential source of additional capital for our banks."
The Federal Reserve's recommendation conflicts with a report from the General Accounting Office which suggested that at least some foreign bank takeovers ought to be prohibited.
Foreign investment in U.S. banks has increased rapidly in recent years, the Fed study noted. The number of foreign-owned banks has jumped from 32 to 84 since 1972.
Foreign-owned banks have assets of more than $44.6 billion, about 4 percent of the total assets of all the banks, and almost seven times as big as their share of the market eight years ago. Counting U.S. branches of foreign banks, about 12 percent of all bank assets are controlled form outside the country.
Most of the foreign-owned banks are small and medium-sized institutions with assets of less than $100 million, the Fed study noted, but foreign investors now control five billion-dollar banks. The biggest foreign-controlled bank is New York's Marine Midland. The Hongkong Shangai Banking Corp. is Marine Midland's biggest stockholder and will acquire complete control later this year.
Also pending is a plan for Middle Eastern investors to buy Financial General Bankshares Inc. of Washington, with assets of $2.2 billion.
Opponents of foreign ownership of banks have said they fear the banks will neglect local customers and reduce services to consumers. Volcker assured the Senate committee that the Federal Reserve has found "no indication of a tendency for foreign acquired banks to withdraw from consumer lending."
Admitting it is more difficult to supervise banks whose owners are beyond the reach of U.S. law enforcement officials, Volker said the Federal Reserve has started a new program for monitoring foreign-owned banks and is convinced the new system is "sufficient to meet these problems."
Many of the banks that have been taken over by foreign investors were banks with serious financial troubles, the Fed study noted.