Protectionism in the banking industry

At the broadest level, control of international banking transactions involves limitations on the acceptance of foreign-owned deposits, on lending by resident banks to non-resident customers and on borrowing by residents from banks which operate outside the country. Measures affecting foreign-owned deposits and foreign lending and borrowing are part of the broader framework applied by countries to international capital movements through which their markets communicate with each other and with the Euro-markets. The measures may not, therefore, be specifically aimed at influencing bank lending, but more generally at controlling inward and outward movements of capital by residents and controlling the scope for speculation in the local currency. Frequently, a more liberal attitude is taken towards capital inflows, as long as they do not threaten domestic monetary stability. Government involvement can take the form of a variety of measures, such as fixing maximum - even negative - interest rates on foreign-owned deposits and placing ceilings on the amounts of funds which domestic banks may lend to foreign clients, or residents may borrow from abroad. Export credits, that is, financing related to manufactured exports, are normally exempt from such measures. A further measure, frequently encountered, is the prohibition of branch banking under the direct control of the parent bank overseas. Such prohibitions also involve, to some extent, constraints on 'across-frontier' operations.

Some countries with private banking sectors, among them small developing economies, do not permit the entry of foreign banks or only allow them to establish representative offices which cannot extend loans or accept deposits. A number of developed and developing countries have prohibited the further expansion of foreign banks in their domestic banking sectors; new foreign banks may not enter and established foreign banks are not permitted to set up new branch offices. A less prohibitive approach chosen by some other countries stipulates that the opening of any additional branch by a foreign bank, already maintaining one or more branches in the host country, requires a new licence. Many countries apply limitations on the extent of foreign equity in a banking institution, often limiting foreign participation to a minority holding. Branch banking under the direct control of the overseas parent bank is frequently prohibited, making the establishment of capitalized - fully or partially owned - subsidiaries obligatory.

On account of limitations on the scope of operations, foreign banks may not be in a position to offer customers the same services that 'full service' commercial banks can offer. They may not be permitted to accept certain types of deposits, such as demand and savings deposits, or to enter more widely into retail banking and instalment credit business. Moreover, access to Central Bank rediscount facilities can be excluded or more limited than for domestic banks. Operations may also be limited to transactions related to international trade and to foreign currency project lending. The acceptance of local currency deposits and the extension of local currency loans are, then, prohibited. Such limited access is, for instance, encountered in some socialist countries of eastern Europe, which do not normally allow the entry of Western banks. Foreign financial institutions are, in these cases, considered as vehicles to facilitate international trade. Foreign banks may be subject to stricter capital and reserve requirements and liquidity ratios than locally-owned banks. Branches of non-national banks must often be capitalized as if they were independent banks, thus excluding from consideration the capital of the parent bank. They may also be required to invest a larger proportion of their portfolios in government bonds, long-term securities of development banks or other government financial institutions, or to invest specified portions of earnings in long-term loans to local industry. Furthermore, foreign banks may be required to maintain fixed amounts in foreign currency deposits with the Central Bank. Sometimes a certain amount has to be deposited for each branch office established. Ceilings on the volume of credits which the bank may extend may also be made dependent upon the bank's foreign currency deposit with the Central Bank.