Related Organizations

Foreign Branches

It is common for U.S. banking organizations that operate abroad to conduct a sizable amount of their international banking activities through foreign branches. These branches are an integral part of the bank rather than separate entities.

Many banks prefer the foreign branch structure to the foreign subsidiary structure because they have direct control over the operations of a branch. Subsidiary ownership can be complex, especially if local law requires a subsidiary to have some percentage of local ownership and a board of directors. In addition, the branch structure may afford other benefits, e.g., the lending limit is usually based upon the consolidated capital of the parent bank rather than the much lower capital of a subsidiary. However, establishing a subsidiary may have advantages in terms of the parent bank protecting itself from the subsidiary’s legal liabilities. This may be an advantage particularly in certain emerging markets where the operating environment can be uncertain.

In addition to general banking powers, branches may make investments that are usual for banks in the local country. Subject to local law, branches may engage in activities that are not permissible for national banks in the United States, such as acting as an insurance agent or broker and providing certain types of guarantees.

Extending credit is a major activity of foreign branches. Typical borrowers tend to be foreign banks and multinational corporations of industrialized countries. Direct financing to foreign governments has become less common for U.S. banks, as most foreign governments can issue debt much less costly in the capital markets. Given this type of clientele, foreign branches in the major financial centers have been increasingly engaged in loan syndications, loan management, leasing, project financing, and other activities geared to the large, complex lending required for major industrial projects and general economic development.

Retail banking, especially deposit taking, has become an integral area of foreign bank business for internationally active U.S. banks, as host countries have liberalized their banking markets and removed most restrictions that once protected local banks. In some markets, foreign banks now are the most dominant players and offer full-scale banking products and services.

Previous: International Investments and Activities Next: Edge Act and Agreement Corporations