Patterns in the Foreign Ownership of U.S. Banking Assets


Jose A. Lopez

FRBSF Economic Letter 2000-35 | November 24, 2000

During the 1990s, the global economy experienced a major increase in trade and cross-border business activity, which created a greater demand for international financial services. Consequently, many commercial banks increased their cross-border activities, both to service their domestic customers and to gain new foreign customers.

During the 1990s, the global economy experienced a major increase in trade and cross-border business activity, which created a greater demand for international financial services. Consequently, many commercial banks increased their cross-border activities, both to service their domestic customers and to gain new foreign customers. From 1995 through mid-2000, foreign banks increased their share of U.S. banking assets such as commercial loans by 26%, while U.S. banks increased their share of foreign banking assets by a similar amount. These measures of financial integration are in line with the growth of the foreign direct investment position in the U.S., which was about 75% from 1995 to 1999.

This Economic Letter examines the patterns of foreign ownership of banking assets in the U.S. and California from 1995 through mid-2000. The analysis shows that most of the increase in assets occurred in foreign branches and foreign-owned banks, which operate with fewer restrictions than foreign agencies. This pattern suggests that foreign banks have tried to expand their U.S. customer base, rather than simply serve their home-country borrowers with U.S. operations. By contrast, Japanese banks experienced a significant decline in U.S. bank asset holdings, especially in California. This decline was related to Japanese banks’ weakened capital positions. Overall, foreign bank assets in California decreased by 24% over the period.

Participation in foreign banking markets

The increased level of foreign direct investment observed during the 1990s increased the demand for international banking services and thus contributed to banks’ increasing international presence and ownership of foreign assets. To put this into context, consider the increases in the level of foreign direct investment into the U.S. and in the foreign holdings of U.S. banks.

The foreign direct investment position in the U.S. increased by 75% to $987 billion over the period 1995 through year-end 1999. This increase was mainly due to European investors, who increased their U.S. holdings by 90% to $686 billion; a similar pattern was observed for European banks. Japanese investors increased their U.S. holdings by a relatively modest 37% over this period to $149 billion, although Japanese bank holdings decreased.

U.S. commercial banks also actively increased their foreign operations during the latter part of the 1990s. The assets of the overseas branches of U.S. commercial banks increased by about 30% to $770 billion in 1998, as reported by Houpt (1999); the increase in their European assets was 20% for a total $336 billion, and the increase in their Japanese assets was 23% to $38 billion. In the next section, we examine more closely the increase in the foreign ownership of U.S. banking assets.

Foreign ownership of banking assets within the U.S.

A commercial bank can use a variety of methods to provide financial services to customers in a foreign country, and the choice will be heavily influenced by the bank’s current and intended customer base. For example, a bank could easily provide financing to its domestic customers with overseas operations from within its home country. A bank without an international presence could provide financing to new foreign customers by participating in loan syndications originated by other banks. However, for a bank to increase direct relationships with customers in foreign countries, a physical presence seems to be quite beneficial.

Foreign banks can use a number of organizational vehicles to establish a physical presence and hold banking assets in the U.S. In this analysis, we focus on the two main categories: branches and agencies of foreign banks and foreign-owned commercial banks.

Foreign branches and agencies can conduct a full range of banking operations, including accepting international deposits; however, branches and agencies established since 1991 are not permitted to accept domestic retail deposits or to obtain FDIC insurance, although a small number of foreign branches established before 1991 may accept FDIC-insured deposits. Foreign branches and agencies are units of their parent banks and are not separately capitalized; that is, their assets are on the balance sheet of their parent banks and count towards the parent banks’ regulatory capital requirements.

Overall, foreign branches and agencies provide foreign banks with a relatively low-cost method of entry into the U.S. banking market, but they are limited in the nature of customers that they can access. The limitations placed on U.S. foreign branches and agencies directly influence the nature of the banking assets they hold. For example, they hold more commercial and real estate loans relative to consumer loans than do commercial banks.

Foreign-owned commercial banks are U.S. banks more than 25% owned by foreign banks. The 25% threshold is defined to be a controlling interest by the U.S. bank regulatory agencies. Foreign banks may choose to purchase a controlling interest in a domestic bank in order to quickly acquire the necessary personnel and expertise for their U.S. operations. A prominent example is the 1999 purchase by Deutsche Bank, a German bank, of Bankers Trust, a U.S. bank holding company with over $50 billion in assets that provided them with access to a larger number of U.S. banking clients and markets.

Unlike foreign branches and agencies, foreign-owned commercial banks do not face additional regulatory restrictions on deposits. This difference in restrictions is reflected in the kinds of banking assets each of these forms hold. For example, foreign branches and agencies hold a relatively high proportion of commercial and real estate loans, while foreign-owned commercial banks hold assets more in line with those of domestically owned commercial banks.

As shown in Figures 1 and 2, foreign banking assets in the U.S. increased by 26% (or $254 billion) to a total of about $1.24 trillion from 1995 through mid-year 2000. The organizational composition remained relatively constant with 75% of the assets being held within branches and agencies and 25% held by foreign-owned banks. Foreign branches and agencies increased their assets by $191 billion to a total of $952 billion. However, the increase for foreign branches alone was actually $202 billion to a total of $883 billion, while foreign agencies’ assets declined to $69 billion. This divergence indicates a shift away from the more restrictive organizational structure of foreign agencies, although not directly to ownership of domestic banks, whose assets increased by 28% (or $63 billion) to about $284 billion by mid-year 2000.

European countries increased their U.S. bank assets by 77% to $807 billion from 1995. Again, the bulk of this increase (about 70%) was in branches and agencies; foreign branch assets made up the entire increase, while agency assets actually declined. In percentage terms, the greatest increase was by German banks, which quadrupled their U.S. assets to about $233 billion. German branches and agencies accounted for 75% of this $175 billion increase, and the $46 billion increase in German-owned banks was almost entirely due to the 1999 Bankers Trust purchase.

Most countries’ banks increased their total U.S. bank assets, but as shown in Figure 2, Japanese banks were the exception. Continuing a trend started in the early 1990s, Japanese banks decreased their U.S. banking assets over this period; their holdings dropped by 40% (or $155 billion) to $229 billion. The decrease occurred almost entirely in Japanese branches and agencies, whose assets declined to $172 billion. Though not shown in the figure, other Asian banks also decreased their assets due to domestic banking problems over the period.

As discussed by Peek and Rosengren (1997, 2000), the sharp declines in the Japanese equity and commercial real estate markets during the late 1980s and throughout the 1990s caused the capital positions of Japanese banks to decline markedly. To address these adverse developments, Japanese banks decreased their overseas lending via their foreign branches and agencies, which are not separately capitalized. Peek and Rosengren (1997) show that this decline in funding sources had material effects on U.S. commercial real estate markets. However, these actions by Japanese banks were not representative of Japanese investors as whole, who increased their level of foreign direct investment in the U.S. by about 40% from 1995 to 1999.

Foreign ownership of banking assets within California

Foreign banking operations in the U.S. are highly concentrated in the New York, Chicago and San Francisco Federal Reserve Districts; for mid-year 2000, these three districts accounted for 96% of the total. The New York and Chicago Districts experienced increases in foreign bank assets of more than 24% from 1995 through mid-2000. However, the San Francisco District, which accounted for less than 10% of the national total, experienced a 17% decline (or $21 billion) in foreign banking assets to $104 billion. California, with over 80% of the District’s foreign banking assets, clearly is the state most affected by this decline. Foreign bank assets in California declined by 24% to $90 billion over this period. Foreign bank assets accounted for about 27% of California’s bank assets, only a slight decrease from previous years due to the 1998 Bank of America-Nationsbank merger that moved the bank headquarters to the Richmond Federal Reserve District.

As noted by Laderman (1999), this decline was primarily due to the withdrawal of Japanese branches and agencies from California. As shown in Figure 2, they decreased their assets by almost 75% to $11 billion, accounting for all of the Japanese banks’ total California decrease and about 20% of their national decrease. In fact, the organizational composition of foreign bank assets in California changed markedly from 60% held by foreign branches and agencies in 1995 to just 33% in mid-year 2000.

The total holdings by Japanese banks in California decreased by 33% to $58 billion by mid-year 2000 (see Figure 1). In contrast to the national figures, the increase in European foreign bank assets in California did not make up for the Japanese decrease. The total European increase to $20 billion was quite small, since the increase due to foreign-owned banks ($7.5 billion) is mostly offset by a decrease in branch and agency assets ($5 billion).


The steady increase in international trade and cross-border business activity has led commercial banks to increase their overseas operations. Within the U.S. banking market, foreign ownership of banking assets increased by 26% over the period from 1995 to mid-2000. The increase was mainly in foreign branches and in direct ownership of domestic banks, both of which permit rather broad banking powers. This increase was in line with U.S. banks’ expansion overseas and with changes in the level of foreign direct investment in the U.S. Within California, the level of foreign bank assets declined markedly due to the withdrawal of Japanese branches and agencies.

Jose A Lopez


Houpt, J.V. 1999. “International Activities of U.S. Banks and in U.S. Banking Markets.” Federal Reserve Bulletin (September) pp. 599-615.

Laderman, E. 1999. “The Shrinking of Japanese Branch Business Lending in California.” FRBSF Economic Letter 99-14 (April 23).

Peek, J., and E.S. Rosengren. 1997. “The International Transmission of Financial Shocks: The Case of Japan.” American Economic Review 87, pp. 495-519.

Peek, J., and E.S. Rosengren. 2000. “Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States.” American Economic Review 90, pp. 30-45

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