In order to give all national banks, little as well as big, an opportunity for sharing in the benefits of foreign trade, the Federal Reserve Act was amended September 7, 1916, to permit any national bank to subscribe an amount not exceeding io per cent of its capital and surplus to stock of banks organized to transact a foreign banking business. These banks are authorized to receive only such deposits in this country as may be incidental to or connected with their foreign business. They are authorized to establish branches abroad or they may operate through agencies there, and they may have either state or federal charters. Before the board authorizes them to operate they are obliged to enter an agreement to restrict their operations according to the limitations set by the board; failure to comply with these regulations, or failure of the parent or branch, may lead to the revocation of their right to do business. Under this scheme of co operative ownership several institutions have been opened by groups of national banks and foreign branches or connections have been established; for example, the American Foreign Bank ing Corporation, owned by banks all over the United States and Canada, and the International Acceptance Bank, Inc., owned by banking houses of theUnited States, Switzerland, Holland, Sweden, and England, and closely co-operating with the French-American Banking Corporation of New York, the American International Corporation of New York, and other foreign banking institutions.
Ownership and Management of Foreign Branches A committee of government experts in foreign trade recently considered the question of the character of the agencies most desirable for banks to maintain in foreign countries—whether they should be branches in the strict sense of the term, or in dependent banks affiliated with American banks the capital of which would be supplied wholly or partly by the American banks, or, finally, whether they should be local banks already in opera tion, control being secured through the purchase of the majority of their stock. The committee did not formulate any definite conclusions; it did recognize, however, the advantages resulting from the association of local capital with a foreign branch bank undertaking, and from securing the co-operation of natives through their representation on the board of directors or in the management of the branches. It also urged the importance of foreign branches of American banks being, so far as practicable, under the management of American citizens, and the importance of employing American banking methods. As banks are con stantly in receipt of valuable information regarding investment and trade opportunities, it was thought highly desirable that the officers to whom this information came should, as a result of their nationality, be interested in the promotion of the interests of the United States rather than those of a third country.
Growth and Functions of Foreign Branches The growth of foreign branch banking has been promoted by the war and the consequent increase of our foreign trade, and, on the other hand, it has been a leading factor in developing that trade. Branch banks push the financing of foreign trade in their areas, through the parent bank and in dollar exchange; and through its branches the parent bank obtains an accurate knowl edge of the standing and credit of foreign merchants, so that it can act as adviser of American exporters. The branches are ready to negotiate drafts on foreign acceptors and to act as agents for the collection and transmission of proceeds of items. They also perform other financial functions in the payment of debts between the countries (covering imports, exports, travel, interest, loans, etc.), and also the ordinary local banking services in their areas, such as receiving deposits, making loans, and granting discounts.
In addition the branches may be used by the parent bank to gather special information and make daily reports on the trade, industrial, and commercial conditions of their areas.
Federal Foreign Banking Associations In 1919, after the "peg" was removed from sterling, franc, and lire exchange, rates declined to hitherto unknown levels and speculation in exchange became excessive. American exporters suffered, and a wide demand arose to have the exchange situation " corrected." The needs of "suffering Europe" also played a prominent retie in the plea for action. Various private and public proposals were presented, and some were adopted. Among these was the plan of Senator Edge of New Jersey, who advocated the federal incorporation of companies engaged in foreign banking and finance, with the multiplex object of remedying the exchange situation, extending quick credits to European purchasers, and thus increasing the demand for our exports, stimulating our foreign trade, and developing our new merchant marine. The general purpose was "to provide for the establishment of a federal system of international banking or financial corporations operat ing under federal supervision with powers sufficiently broad to compete with similar foreign institutions and to afford to the American exporter and importer at all times a possible means of financing his foreign business." This act logically follows previous legislation to promote foreign trade. The Federal Reserve Act of 1913 enabled national banks with a capital and surplus of at least $1,000,000 to estab lish branches abroad. An amendment in 1916 permitted banks of this size jointly to establish and own such American banks or corporations as were principally engaged in foreign banking, by investing up to I° per cent of their capital and surplus in such institutions "incorporated under the laws of the United States or of any state thereof"; but no provision existed at that time for federal incorporation of such institutions in which it authorized national banks to invest. And in 1919 the McLean Act was passed providing that national banks, without regard to the amount of their capital and surplus, might subscribe up to 5 per cent of their capital and surplus in stocks of federal or state cor porations principally engaged in such phases of international financial operations as might be necessary to facilitate exports from the United States. The McLean Act enabled national banks to invest in the stocks of corporations whose business was more in the nature of an investment company's than that of a commercial banking institution.' Before the passage of the Edge Act certain foreign banking cor porations had been established under state law; for instance, the Asia Banking Corporation, the Foreign Discount Corporation, the Mercantile Bank of the Americas, Inc., etc. Some of these cor porations were operated partially under control of the Federal Reserve Board in cases when national banks contributed to their capital, since they were then required to restrict their business according to rules and limitations set by the board. In the pas sage of the Edge Act, however, it was thought that control through agreement with the board was not as satisfactory as that exercised through incorporation under federal law. It was felt that the time would come when the conflict of dual control by the board and the state banking departments might prove embarrass ing or might operate to restrict the activities of the corporation, and that a banking corporation, being essentially a national enterprise with some of its stock owned by national banks, should have the protection of a federal charter and enjoy the prestige of such charter in foreign trade competition.