The policy of the several states has been to restrict the opera tions of the branches and agencies of foreign banks in New York and other American cities. The two powers generally denied such institutions are to receive deposits and to make loans freely. Legal restrictions narrowly limit the business of these foreign agencies to foreign exchange and a few minor banking functions. The New York banking law provides that the superintendent of banks may license such a foreign bank with power to do the "business of buying, selling, or collecting bills of exchange, or of issuing letters of credit, or of receiving money for transmission or transmitting the same by draft, check, cable, or otherwise, or of making sterling or other loans, or transacting any part of such business." These agencies are among those which are not per mitted to employ any part of their "property or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money." Foreign trust companies are similarly prohibited from doing a trust business in the United States.
This prohibitive attitude of New York State has recently made it difficult for American banks to establish branches abroad, for the reason that foreign countries naturally look for reciprocity in the granting of powers to such, branches and agen c:es. The restrictions are rightfully regarded as provincial and retard the growth of New York as the financial center of the world. It seems fit and proper that our laws be relaxed in this matter, so long as the safeguards of sound banking are not im paired and no advantage is given to foreign agencies over our own banks. Such an extension of powers would probably not seriously affect the interests of our banks, and foreign agencies could serve better the special trade or financial interests which they represent.
The Nature and Development of the Foreign Division In practically every bank of the United States what is here named "foreign division" is called "foreign department." This nomenclature is confusing because the foreign department of a large metropolitan bank is composed of departments which are in all essentials co-ordinate with the departments of the domestic division. What in its beginning was properly a department of the bank created to handle its foreign business has so grown in many banks as to constitute a parallel and co-ordinate division, composed of departments similar and co-ordinate with those of the domestic division.
The " foreign division," as here used, therefore, embraces the numerous departments of a bank that handle all financial items and transactions to which a foreign state or a firm, association, corporation, or citizen of a foreign state, is party. These opera
tions are many in number and diverse in kind. A considerable number performed in the domestic or general division of the bank are similar to those carried on in the foreign division; and the foreign division performs many additional operations occasioned by the peculiarities of international business. The result is that the foreign division is practically a bank in itself, more or less distinct from the domestic or general division.
The relation of the two divisions in many banks is undergoing a change. When a foreign division was first organized, the com mon practice was to import a foreign exchange expert manager from England or Germany to organize and operate it. American bankers were without experience or training in this field and had to recruit the division abroad. The directors of the bank then voted to loan to the foreign division a certain amount of money at the same rate as on other loans. The foreign division was regarded as a borrowing customer of the domestic division, pay ing to the domestic division interest and rent, and reimburs ing it for the light, stationery, and other materials used, the expenses other than interest—including the overhead and run ning expenses of the division—being allocated on some suitable basis between the two divisions.
The managers of the foreign division were then responsible for its financial success, and the degree of its success could be defi nitely deterrnined by its net profits. This debtor-creditor rela tion between the divisions led the credit men of the bank to rate the credit title of the foreign division much as they would that of a private borrower; its assets were regarded as excellent, being self-liquidating and convertible into cash; its rate of turnover of foreign exchange was high, so that large profits could be made on small capital; its funds were available in emergencies, and foreign clients would accommodate it. An investment of funds in a foreign division was, therefore, regarded as "practically analogous to an investment in the highest class of securities," provided the foreign division was conservatively managed.
After American bankers had gained experience in these foreign operations, and junior officers and clerks had learned the business under the tuition of foreigners, and when the foreign business had grown until it constituted a goodly fraction of the total business of the bank, and domestic clients began to use the foreign services extensively, it became less necessary and even awkward to manage the foreign division as a separate debtor institu tion. Therefore, the departments of the foreign division be came and are now largely co-ordinate with those of the domestic division.