The chief argument against domestic branch banking in the United States—that it is undemocratic and places powerful control over money in the hands of a few institutions—is not thought to apply in the case of foreign branches. Although it is a premise of American polity that it is dangerous to allow combina tions in domestic trade and finance, the objections are not re garded as valid when applied to combinations for foreign trade, as witness the Webb-Pomerene Act for combinations to conduct foreign trade, and the Federal Reserve Act in its provisions for foreign branch banking. The fact is that the American banks have to face a fact and not a theory if they wish to develop inter national finance, and as the banks of foreign countries do own and operate numerous branches abroad, in order to meet the foreign competition it is necessary that the American banks establish branches likewise.
A fundamental purpose of the Federal Reserve Act was to provide for the extension of American banks into the foreign field, and one of the many provisions to this end was that which authorized national banks possessing a capital and surplus of $1,000,000 or more to establish branches in foreign countries or possessions of the United States. Applications to establish such branches must first be approved by the Federal Reserve Board, which has power to reject an application if it regards as inade quate the amount of capital proposed to be set aside for foreign business, or if for other reasons it deems the establishment of the branch inexpedient. These branches are calculated to further foreign commerce and to act, if so required, as fiscal agents of the United States. The parent bank is required at all times to furnish information concerning the condition of such branches to the Comptroller of the Currency upon demand, and the Federal Reserve Board may order special examinations at its will. The accounts of each branch are conducted independently of the accounts of the other branches and of the parent, and at the end of each fiscal period the profit or loss from each branch is trans ferred separately to the general ledger of the parent. The ques tion of reserves of foreign branches is left by the board entirely to the discretion of the parent institution.
Foreign Branch Banks Established As a result of this provision of the Federal Reserve Act two national banks have opened foreign branches. The National City Bank of New York in 192o operated a chain of 55 branches, located in Hispanic America, Europe, and South Africa. The First National Bank of Boston has one branch in Buenos Aires. Another method of operating foreign branch banks is for a national or state bank to organize under state charter a subsidiary corporation, which in turn opens and operates the foreign branches.
Control of the subsidiary is retained by several means, such as making the stock of the subsidiary transferable only along with an equivalent number of shares of the parent bank, or having the shares of the subsidiary owned by the officers of the parent company, or making use of the legal privilege to invest io per cent of the parent company's capital and surplus in the sub sidiary. Thus the International Banking Corporation is affiliated with the National City Bank of New York and operates 29 branches in the Far East, England, France, the Dominican Re public, and Panama. The Mercantile Bank of the Americas, affiliated with Brown Brothers and Company, J. and W. Selig man and Company, Guaranty Trust Company of New York, the National Shawmut Bank of Boston, the Anglo-London Paris National Bank of San Francisco, and the Hibernian Bank and Trust Company of New Orleans, has branches in Paris, Barcelona, and Madrid, and operates 31 other branches through affiliated chartered companies in Colombia, Peru, Venezuela, Brazil, Nicaragua, Cuba, and Costa Rica. The Asia Banking Corpora tion, closely affiliated with the Guaranty Trust Company of New York, operates eight branches in Manila and China. The Park Union Foreign Banking Corporatick, affiliated with the National Park Bank of New York and the Union Bank of Canada, operates five branches in Paris, China, and Japan. On the other hand, the First National Corporation of Boston (affiliated with the First National Bank of Boston), the Shawmut Corporation (affiliated with the Shawmut National Bank of Boston), the French-Ameri can Banking Corporation of New York (affiliated with the Na tional Bank of Commerce of New York, the First National Bank of Boston, and the Comptoir National d'Escompte de Paris), and the Foreign Credit Corporation of New York, have not as yet opened foreign branches.
All the above have one or two branches each within the United States and are carrying on business under an agreement with the Federal Reserve Board. The charters of these subsi diary corporations are liberal indeed; for instance, that of the International Banking Corporation, chartered in Connecticut, after specifying a long list of activities in which the corporation may engage, allows it "to transact and engage in any other law ful business whatsoever." For the most part, however, these corporations actually engage in nothing but purely banking business. Exceptions in this respect are the Mercantile Bank of the Americas—which operates a subsidiary, the Mercantile Over seas Corporation, for trade and development work in foreign countries—and the Foreign Commerce Corporation of America established by the Morgan interest to engage in foreign trade.