Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

International banking activities of Canadian and American banks : experience and prospects Bruce, Barry Douglas 1969

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1969_A4_5 B78.pdf [ 16.31MB ]
Metadata
JSON: 831-1.0102350.json
JSON-LD: 831-1.0102350-ld.json
RDF/XML (Pretty): 831-1.0102350-rdf.xml
RDF/JSON: 831-1.0102350-rdf.json
Turtle: 831-1.0102350-turtle.txt
N-Triples: 831-1.0102350-rdf-ntriples.txt
Original Record: 831-1.0102350-source.json
Full Text
831-1.0102350-fulltext.txt
Citation
831-1.0102350.ris

Full Text

INTERNATIONAL BANKING ACTIVITIES OF CANADIAN AND AMERICAN BANKS: EXPERIENCE AND PROSPECTS by BARRY DOUGLAS BRUCE B. Comm., U n i v e r s i t y of B r i t i s h Columbia, 1968 A Thesis Submitted i n P a r t i a l F u l f i l m e n t of the Requirements f o r the Degree of Master of Business A d m i n i s t r a t i o n i n the Department of Commerce and Business A d m i n i s t r a t i o n We accept t h i s t h e s i s as conforming to the re q u i r e d standard The U n i v e r s i t y of B r i t i s h Columbia A p r i l 1969 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r an a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l m a k e i t f r e e l y a v a i l a b l e f o r r e f e r e n c e a n d S t u d y . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may b e g r a n t e d b y t h e Head o f my D e p a r t m e n t o r b y h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s . i s f o r f i n a n c i a l g a i n s h a l l n o t b e a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . D e p a r t m e n t o f C o m m e r c e a n d B u s i n e s s A d m i n i s t r a t i o n The U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8, C a n a d a D a t e A p r i l 28, 1969 ABSTRACT The objective of this study was to explore the h i s tor ica l ex-pansion of the international operations of the Canadian chartered banks; to compare and contrast the exhibited growth pattern with that of the major commercial banks of the United States; to draw implications for the future pattern of world banking; and to see the role' of the Canadian banks in that pattern. The analysis was limited largely to the post-World War .IT era and was conducted primarily in terms of the operating forms employed in other countries by the banks. The foreign-based vehicles described were the representative office, agency, branch, wholly-owned subsidiary, a f f i l i a t e and multinational jo int venture. The.approach was essentially qualitative in character with a number of hypotheses introduced to explain the findings but with no effort made to s ta t i s t i ca l ly test these hypotheses. Speci f ical ly , hypotheses were tendered to account for the exhibited increasing inter-nationalization of the banks; to explain why they go abroad to set up foreign "offices"; to explain why they might choose a particular coun-try or area; and to account for the selection of a particular operating form for this location. The study rel ied upon several principal sources of informa-tion in order to develop the hypotheses offered. Standard governmental publications and the annual reports of the selected Canadian and U.S. banks were significant data sources and a number of art ic les from various - i i -i p e r i o d i c a l s were found to be e s p e c i a l l y r e l e v a n t . V i t a l i n f o r m a t i o n was acquired by correspondence w i t h the se l e c t e d banks of each country and through personal i n t e r v i e w s w i t h executives i n the I n t e r n a t i o n a l D i v i s i o n s of these i n s t i t u t i o n s . To f a c i l i t a t e the i n v e s t i g a t i o n of overseas involvement, and to enable more e f f e c t i v e comparisons and c o n t r a s t s to be developed the world was d i v i d e d i n t o seven geographic regions. I t was found that the banks of both co u n t r i e s have experienced i n c r e a s i n g i n t e r n a t i o n a l i z a t i o n of a c t i v i t y d u r i ng the past 25 years w i t h the U.S. banks enjoying more extensive " o f f i c e " r e p r e s e n t a t i o n i n other c o u n t r i e s . The f i n d i n g s i n d i c a t e d that the greater number of U.S. customers abroad, measured i n terms of U.S. f o r e i g n d i r e c t investment abroad, may be the most impor-ta n t c o n t r i b u t o r y f a c t o r . (The chartered banks, on the other hand, gen-e r a l l y appeared to be motivated more by the volume and d i r e c t i o n of Canadian e x t e r n a l trade and the value and sources of f o r e i g n investment i n Canada]as the prime fo r c e s behind t h e i r i n c r e a s i n g l y " i n t e r n a t i o n a l f l a v o u r " and movement i n t o c e r t a i n c o u n t r i e s or areas. The study i n d i c a t e d t h a t bank p o l i c y was a pervasive, univer-s a l f o r c e i n f l u e n c i n g the e x h i b i t e d extent of i n t e r n a t i o n a l i z a t i o n of the number and v a r i e t y of " o f f i c e s " abroad of the i n d i v i d u a l banks, par-t i c u l a r l y i n terms of the v a r i e t y of v e h i c l e s employed and the l o c a t i o n s s e l e c t e d as a base of operations. On the other hand, i t was i n d i c a t e d that r e s t r i c t i v e Canadian banking l e g i s l a t i o n may be a f o r c e l i m i t i n g the banking a c t i v i t y of the chartered banks i n c e r t a i n areas w h i l e New York and C a l i f o r n i a s t a t e l e g i s l a t i o n has f a c i l i t a t e d the overseas ex-pansion of the U.S. banks. The respondents were asked to name the principal persistent problems which their banks experienced during the conduct of their international operations. On the basis of these perceived d i f f i cu l t i e s and from the findings of the study to that stage implications were drawn concerning the future pattern of international banking particu-lar ly as i t pertained to the chartered banks. The findings indicated that the trend toward increasing internationalization could be expected to continue for the banks of both countries with the U.S. institutions continuing to be more intensively represented on a wider scale geogra-phical ly . The range of operating vehicles is not expected to increase but i t appears that the a f f i l i a t e and multinational joint venture may become relat ively more important. Significant changes in international operating methods and management techniques are expected to be forth-coming from the increased application of computer technology, especially through the centralization of information. On the other hand, the fu-ture can be expected to bring greater decentralization of authority through expanded regional organization. - iv -TABLE OF CONTENTS Chapter Page I OBJECTIVE AND IMPORTANCE AND WORK TO BE UNDERTAKEN 1 II AN EXAMINATION OF THE POST-WAR GROWTH OF WORLD TRADE AND INTERNATIONAL PRIVATE CAPITAL MOVEMENTS. . 22 III AN EXAMINATION OF THE ROLE OF THE RANKS IN TRADE AND CAPITAL MOVEMENTS 34 IV A DESCRIPTION OF THE INTERNATIONAL OPERATING FORMS EMPLOYED AND THE APPROACH OF THIS STUDY 54 V THE DECISION TO GO ABROAD 98 VI MAJOR PHASES AND THE FORCES LEADING TO THE MOVEMENT ABROAD 121 VII THE INITIATING FORCES BEHIND THE SELECTION OF A PARTICULAR LOCATION AND VEHICLE 150 VIII THE CONTRIBUTIONS OF THE CHARTERED BANKS TO DEVELOPING COUNTRIES 218 IX A HINT OF THE FUTURE OF INTERNATIONAL BUSINESS . . . 231 FOOTNOTES 294 BIBLIOGRAPHY 306 APPENDIX I 310 APPENDIX II 345 APPENDIX III 349 APPENDIX IV 351 APPENDIX V 358 ACKNOWLEDGEMENT I sincerely appreciate the indispensable assistance of Dr. Whata Winiata in the preparation of this study. His untiring enthu-siasm was most inspirational and his constructive cr i t i c i sm was a valuable tool in i t s preparation and completion. I also wish to express my sincere thanks to the officers and executives of the chartered banks and their American counterparts for the v i t a l information which they contributed. Without their gracious co-operation the study could not have been conducted. I would also l ike to give specific recognition to the Cana-dian and U.S. banking institutions involved. They were as follows: I would also l ike to acknowledge the efforts and excellent work of the typist , Gale LePitre . CANADA UNITED STATES Bank of Montreal Canadian Imperial Bank of Commerce The Bank of Nova Scotia The Royal Bank of Canada The Toronto-Dominion Bank Bank of America Chase Manhattan Bank F i r s t National City Bank Manufacturers Hanover Trust Morgan Guaranty Trust Company CHAPTER I OBJECTIVES AND IMPORTANCE AND WORK TO BE UNDERTAKEN OBJECTIVES AND IMPORTANCE The principal objective of this study of the international operations of Canadian chartered banks is to explore the h i s tor ica l ex-pansion of this facet of their ac t iv i t i e s ; to compare and contrast the exhibited growth pattern with that of the major commercial banks of the United States; to draw implications for the future pattern of world banking; and to see the role of Canadian banks in that pattern. The h i s tor i ca l analysis w i l l be largely limited to the years since World War I I , nevertheless, this should not inhibi t the va l id i ty of the study for i t has been during the post-war era that the greatest mult i -nationalization of f inancial and general business has occurred. The international operations of Canadian banks is a phenomenon that has experienced rapid growth in recent years and few, i f any, sys-tematic efforts have been made to describe i t . This effort w i l l describe this phenomenon in terms of "when, where and how much" and offer a num-ber of hypotheses to explain i t s occurrence. World trade and capital movements are large, and r i s i n g , as shown in Tables I and I I , and concomitant demands on the banks exist . Therefore, we should discover how the banks have and might meet these demands. The business and personal sectors of the economy, in p a r t i -cular, rely substantially upon the commercial banking system. In - 2 -either, or both, of their dual role as f inancial intermediaries, pro-viding the mechanism by which international payments are made, or as just plain service institutions supplying information or giving advice, banks fac i l i t a t e the completion of f inancial transactions with foreign ent i t ies . For example, a domestic corporation may request a credit l ine to finance the creation of a foreign subsidiary in the United Kingdom or an I ta l ian businessman interested in investing funds in Canada may, as a preparatory step, consult the office of a Canadian bank resident representative in Europe with the objective of becoming better acquainted with the general investment climate and the alterna-t ives, means of financing, restr ict ions , etc. present. Whereas the foregoing examples are i l lus tra t ive of overseas services provided by domestic banks, probably the most significant international service furnished by them is the financing of Canada's 1 ever-increasing volume of foreign trade. As stated by the Canadian Bankers Association in i t s submission to the Porter Commission, "The active participation of Canadian chartered banks in foreign currency operations of a l l sorts is a natural corollary of the great importance 2 to Canada of foreign trade." As one of the world's premier trading' nations, then, i t i s v i t a l to Canadian businessmen that a highly dev-eloped banking system, sk i l led in the techniques of financing the country's substantial export and import trade, is in existence. Devel-opments in the banking f i e l d , affecting this area of the Canadian eco-nomy, should be of particular concern, not only to Canadian businessmen, - 3 -but also to every individual who wishes to witness Canada's continued economic growth. Hence, a study of the. h i s tor i ca l , current and possi-ble future course of international banking takes an added lustre. In terms of assets the banks are Canada's largest group of f inancial inst i tut ions. At October 31, 1968 the assets of Canada's nine chartered banks totalled some $35,893 mi l l ion or more than half the nation's Gross National Product for 1967. Thus i t is apparent that the banks occupy a significant position in the economy. To give an idea of the significance of the foreign currency operations of these institutions Tables III and IV have been prepared. Because balance sheet data are presented the figures represent a stock of funds at a particular point of time, October 31, 1968. This , of course, tends to underestimate, probably substantially, the volume of foreign currency business conducted by the chartered banks. The de-posits are v i r tua l ly a l l demand deposits and the loans are substan-t i a l l y short-term. Consequently, a significant turnover occurs so that a presentation of the flows of these funds would offer a more appropriate measure of the size of their foreign currency ac t iv i t i e s . Nevertheless, in representing almost one-quarter of either side of the balance sheet foreign operations rank high in bank operations. Addi-t ional comments upon the significance of this data w i l l be made at later points in the study. The position of the country's balance of international pay-ments receives considerable attention. Although no figures are pub-- 4 -lished i t is l ike ly that revenue from banking services is a .significant item in the current account non-merchandise invis ible receipts in the balance of payments. On the other hand, investment by chartered banks in foreign securities, or branches, subsidiaries or agencies in for-eign countries, or in the purchase of equities in foreign banks, rep-resents an outflow of funds which acts to enlarge the de f i c i t entries in the capital account. Nevertheless, without this outflow which, generally speaking, tends to exert a downward pressure upon the price of the Canadian $ in terms of foreign currencies the counter-balancing revenue inflows are l ike ly to be correspondingly reduced. .Therefore, i t is the relative magnitude of these opposite flows over time which is crucial to Canada's payments position and, in turn, may i n -fluence her economic growth as either more or less dollars are made available for domestic investment. Thus any developments which have taken place, or are expected to occur, in the foreign sphere of Cana-dian banking may well be factors influencing this country's future. The direction of the flow of these funds, alluded to in the foregoing paragraph, in terms of economic areas, may have notable im-plications for the economic progress of developing nations. As this study intends both to survey the locations of Canadian bank "offices" abroad and describe their overseas lending act iv i t ies one should learn whether Canadian banks are directing resources to the underdeveloped economies or whether they prefer to l imit their overseas lending and other resource commitments essentially to the advanced countries. - 5 -One might put f o r t h the t h e s i s that the need to compete e f f e c t i v e l y w i t h f o r e i g n banks i s a prominent motivator underlying the c u l t i v a t i n g of t h e i r overseas investments and techniques. I f one ac-cepts t h i s hypothesis, and reappraises the e a r l i e r comments regarding the importance of trade to the Canadian economy and the p a r t i c i p a t i o n of domestic banks i n i t s f i n a n c i n g , the growing m u l t i - n a t i o n a l i s m of business and the s i g n i f i c a n c e of banking revenues i n the country's payments p o s i t i o n , i t becomes evident that t h e i r success i n meeting t h i s competition may hold noteworthy meaning f o r the economy. For i n t e r n a t i o n a l bankers a very s u b s t a n t i a l degree of competition i n the i n t e r n a t i o n a l arena emanates from the United States f o r a number of l a r g e American banks have been very a c t i v e i n t e r n a t i o n a l l y d u r i ng the post-war p e r i o d and t h e i r overseas operations continue to expand. I t f o l l o w s that i t i s most appropriate that a comparison be made of the i n i t i a t i n g f o r c e s behind the movement abroad, the l o c a t i o n s and types of f o r e i g n operations of U.S. and Canadian banks, together w i t h a comparison of the f a c t o r s considered i n the d e c i s i o n to e s t a b l i s h a p a r t i c u l a r type of f o r e i g n " o f f i c e " i n a c e r t a i n l o c a t i o n . There can be l i t t l e doubt that there i s much to be learned from the American ex-ample. Once the comparable and c o n t r a s t i n g s t y l e s of these compe-t i t o r s have been discussed one w i l l be b e t t e r equipped to o f f e r pre-d i c t i o n s of the f u t u r e world banking scene. C e r t a i n l y p u t t i n g f o r t h a p r o g n o s t i c a t i o n based s o l e l y upon an a n a l y s i s of the Canadian banks, - 6 -without relating their act iv i t ies to those of their American counter-parts, is l ike ly to be burdened with a very low probability of occur-rence, i f for no other reason than from a fai lure to consider currently available and relevant information. In summary then an h i s tor ica l analysis is important to fac-i l i t a t e a better understanding of the operations in the world envir-onment of a v i t a l sector of the Canadian economy. This knowledge is especially useful in a world where multi-national institutions are becoming an increasingly more common phenomena and in a country where international trade constitutes such a significant place in the economy's structure and growth. I t was also proposed that the revenue from banking services abroad constituted a noteworthy component of the country's non-merchan-dise inflows in i ts international balance of payments transactions. Although, overseas investments and expenditures represent a counter-va i l ing flow of funds i t was suggested that the relative magnitude of these flows over time was material. While some idea of the magnitude of these flows is useful to an appreciation of their importance to the economy, and the banking system i t s e l f , i t was also suggested that i t was useful to study the direction of the flow of the funds for invest-ment. That i s , are Canadian banks contributing to the economic progress of developing nations by making loanable funds available there, or are they chiefly interested in operating in already advanced economies? The answer, i t was suggested, has implications for the progress of developing countries. - 7 -The tremendous s i z e of the system i t s e l f was put f o r t h as a f a c t o r supporting the t o p i c ' s importance based upon the su p p o s i t i o n that due to the sheer magnitude of the assets c o n t r o l l e d by these i n -s t i t u t i o n s a movement i n any d i r e c t i o n would be l i k e l y to have an ap-p r e c i a b l e impact upon the economy. The importance of the comparison w i t h the operations abroad of major American banks by i n i t i a t i n g f o r c e s , technique and l o c a t i o n , i t was s a i d , r e s t s upon the knowledge to be gained from the American experience. Experience which can be expected to a s s i s t immensely i n the development of i m p l i c a t i o n s f o r the f u t u r e of world banking. WORK TO BE UNDERTAKEN AND TECHNIQUES TO BE USED Data w i l l be assembled evidencing the banking a c t i v i t y abroad by the Canadian banks and se l e c t e d major United States banks. The data c o l l e c t e d w i l l be r e s t r i c t e d p r i m a r i l y to the post-World War I I e r a , and hypotheses w i l l be presented i n an e f f o r t to o f f e r explana-t i o n s f o r any s i m i l a r i t i e s or d i f f e r e n c e s i n t h e i r behaviour. These hypotheses w i l l be presented as p o s s i b l e explanations based substan-t i a l l y upon i n f o r m a t i o n obtained from f i e l d research conducted by the w r i t e r and w i l l not be f u r t h e r t e s t e d . That work remains f o r another t r e a t i s e . The h i s t o r i c a l a n a l y s i s of the growth of the i n t e r n a t i o n a l operations of Canadian banks w i l l i n v o l v e the p r e s e n t a t i o n , f o r s e l e c -ted years, of s t a t i s t i c s covering the f o r e i g n currency assets and l i a -b i l i t i e s of the chartered banks, as an i n d i c a t i o n of t h e i r i n c r e a s i n g - 8 -foreign act iv i ty . These data, of course, may only serve as a crude barometer for there may be l i t t l e apparent correlation between the opening of new f a c i l i t i e s abroad and the growth pattern exhibited by the figures. At this introductory stage no conclusions can be drawn and i t remains to be seen whether or not an acceptable inference can be drawn once the study has been completed. Similar s ta t i s t i ca l infor-mation w i l l be offered for the American system although i t is not the purpose of this study to analyze the post-war growth of the American banking system in terms of the volume of foreign currency assets and l i a b i l i t i e s . The comparisons with the American system w i l l be more concerned with the kinds of f a c i l i t i e s employed by those banks in relat ion to those used by the Canadian banks abroad. Therefore, in addition to the tendering of data, a descrip-tion of the "modus operandi" of the two systems, with the qual i f ica-tions outlined below, w i l l be chronicled. I t is the information sup-pl ied by this narrative which can be expected to form the foundation for future implications for world banking. Although, as already stated, s tat is t ics w i l l be presented which involve the entire foreign assets and l i a b i l i t i e s of the Canadian banks together (e.g. Tables III and IV, which together with a l l other Tables are included in Appendix I following the text), the analysis of individual operations w i l l be limited to the five largest banks in terms of total assets. These are The Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Montreal, The Bank of Nova Scotia and The Tor-onto-Dominion Bank. These same five institutions account for 98.9 per cent of the total foreign currency assets of the chartered banks and 98.7 - 9 -3 per cent of the t o t a l l i a b i l i t i e s . A t the same time t h e i r branch system outside Canada embraced a l l but one of the 179 overseas branches 4 of Canadian banks at December 31, 1967. The P a r i s o f f i c e of the. hanque Canadienne N a t i o n a l e accounted f o r the remaining one. C l e a r l y , the f i v e banks s e l e c t e d f o r a n a l y s i s dominate i n t e r n a t i o n a l movements among domestic banks. As f o r the American banks i t has been decided to s e l e c t the f i v e l a r g e s t U.S. banks i n terms of t o t a l assets. Theii: f o r e i g n oper-a t i o n s w i l l be subjected to i n d i v i d u a l s c r u t i n y . The American banks to be studied i n d i v i d u a l l y w i l l be The Bank of America (San F r a n c i s c o ) , which i s the world's l a r g e s t bank i n terms of t o t a l a s s e t s , F i r s t Na-t i o n a l C i t y Bank (New Y o r k ) , (a wholly-owned s u b s i d i a r y being the Mer-c a n t i l e Bank of Canada), The Chase Manhattan Bank (New Y o r k ) , Manufac-t u r e r s Hanover Trust (New York) and Morgan Guaranty Trust Company of New York. S i g n i f i c a n t l y , only B a r c l a y s Bank L i m i t e d of London, England w i t h t o t a l assets of 1:4,534,012,730 (U.S. $11,652,606,475) at December 5 31, 1967 prevents these f i v e American banking giants from occupying 6 the top f i v e rungs on the ladder of world banks. The member banks of the New York C l e a r i n g House A s s o c i a t i o n are the only U.S. (or Canadian) banks which r e l e a s e data p e r t a i n i n g to de p o s i t s i n f o r e i g n branches. A recounting of these d e p o s i t l i a b i l i t i e s i s an e f f e c t i v e means of i l l u s t r a t i n g the s i g n i f i c a n t p a r t which i n t e r -n a t i o n a l business pla y s i n t h e i r operations. Among the ten member banks at December 31, 1967 the above-mentioned four ranked as the l a r g e s t i n 10 -this area with deposit l i a b i l i t i e s tota l l ing some $8.3 b i l l i o n in their 7 foreign branches. F i r s t National City Bank (Citibank) led the way with $3.4 b i l l i o n followed by Chase with $2.86, Morgan Guaranty with $1.46 and Manufacturers Hanover with $745 mi l l i on . The deposits abroad comprised 15 per cent of the total l i a b i l i t i e s of these inst i tut ions, and 17 per cent of their entire deposit l i a b i l i t i e s , at that date. Similar information concerning the Bank of America is not available, however, at June 30, 1968 this bank has 72 branches abroad, second only to Citibank's 163 among U.S. banks, an indication of the important place of international business in i ts operations. The five aforementioned banks also dominate the international scene as far as American banks are concerned. At June 30, 1968 they possessed 291, or 5 per cent, of the total of 344 overseas branches 8 maintained by the member banks of the Federal Reserve system. Combined with the Canadian banks, then, these institutions operated an impres-9 sive sum of at least 469 overseas branches as at June 30, 1968. The strength displayed internationally by the ten banks selected for analysis in relation to their domestic counterparts means that the act iv i t ies abroad of these banks are truly representative of those operations of the banks in their respective countries. Indeed i t i s appropriate,when analyzing their ac t iv i t i e s , to consider their ac-tions and motivations to be those of the Canadian or American banking systems as a whole and that is the course which w i l l be followed. An important basis for comparison w i l l be to divide the world into seven regions and count the number and variety of operations which - 11 -each of the ten banks under p e r u s a l conduct i n these regions. The areas f o r Canadian banks w i l l be the United S t a t e s , the United K i n g -dom, C o n t i n e n t a l Europe, the Caribbean, L a t i n America (South and C e n t r a l America), A f r i c a and the Middle East, and the Far East. Each r e g i o n w i l l be the same f o r the American banks except, of course, that Canada w i l l be s u b s t i t u t e d f o r the United S t a t e s . This p a r t i c u l a r form of g l o b a l d i v i s i o n was chosen because i t would appear best s u i t e d to the e x h i b i t e d p a t t e r n s of the i n t e r n a t i o n a l banking networks of the two systems and a l s o because i t s u b s t a n t i a l l y r e f l e c t s the d i v i s i o n employed by most data sources thereby f a c i l i t a t i n g data c o l l e c t i o n . Neverthe-l e s s should any more i n t e r e s t i n g patterns emerge they too w i l l be e l a -borated upon. A good example here would be the d i s t i n c t i o n between "developed" and "developing" economies and the extent of each system's operations i n these regions. U n f o r t u n a t e l y , however, the Bank of Canada publishes only gross data f o r f o r e i g n currency assets and l i a -b i l i t i e s , i n c l u d i n g the f o r e i g n agencies and branches of the chartered banks i n the c l a s s i f i c a t i o n of " f o r e i g n banks", so that i t w i l l not be p o s s i b l e to compare the r e g i o n a l or t o t a l operations by volume. The number and types of f a c i l i t i e s f u n c t i o n i n g w i l l n e vertheless provide an i n t e r e s t i n g and i n f o r m a t i v e foundation f o r d i s c u s s i o n and, as c i t e d e a r l i e r , w i l l be v i t a l to any prophecy f o r the time to come. One d i f f i c u l t y to be r e s o l v e d i n a d i s c u s s i o n of overseas operations i s the d e f i n i t i o n a l problem. I t w i l l be necessary to d e f i n e and d e s c r i b e what c o n s t i t u t e s a f o r e i g n branch, agency, r e p r e s e n t a t i v e , - 12 -and correspondent, for example. I t w i l l also be essential to discuss the relat ive advantages and disadvantages of the entire spectrum of -international operating forms, including an evaluation of the suita-b i l i t y of minority as opposed to a majority equity investment in a foreign bank or multinational joint venture. In summary the study w i l l include the accumulation of histor-i c a l data both quantitative and qualitative to exhibit the expected trend toward growing international operations of the chartered banks with the h i s tor ica l qualitative information compared to the progress of the selected American banks, h i s tor ica l ly and in specified regions of the globe. In addition, problems of def init ion of terms w i l l be dealt with and resolved. COMPARABLE EFFORTS Surprisingly enough, despite the fact that a host of books have been written dealing with the general f i e ld of international business, including those confined primarily to functional areas such as international finance or international marketing, few books per-used to date contain a section dealing with international banking per se. Furthermore, these texts make only passing reference to the opera-tions of Canadian banks overseas, choosing instead to concentrate largely upon the act iv i t ies abroad of U.S. banks. Although there appears to be a notable absence of any effort , systematic or otherwise, to outline the h i s tor ica l or current overseas - 13 -operations of Canadian banks, s p e c i f i c a l l y , a recent book e d i t e d by Lee C. Nehrt contains a chapter e n t i t l e d "Commerical Banking and M u l t i -n a t i o n a l Business" which brings together a s e r i e s of a r t i c l e s concern-i n g i n t e r n a t i o n a l banking r e p r i n t e d from a well-known p u b l i c a t i o n , 10 "The Economist," along w i t h a number from l e s s e r known magazines. I n Nehrt's words these readings have been c o l l e c t e d w i t h the o b j e c t i v e that they "provide the reader w i t h a sense, of the d i r e c t i o n which com-m e r c i a l banking i s t a k i n g i n d i f f e r e n t areas of the wo r l d , and the 11 f o r c e s which are determining these d i r e c t i o i t s . " W i t h i n the chapter there are some b r i e f references to Canadian banking abroad. However, of major relevance to the study now underway are the hypotheses o f f e r e d as to why U.S. banks have expanded, and continue to m u l t i p l y t h e i r oper-a t i o n s overseas and why they choose a p a r t i c u l a r means of representa-t i o n , i . e . d i r e c t branches, correspondent banks, e t c . A l s o of relevance i s the s u c c i n c t accounting of the h i s t o r i c a l growth of t h e i r i n t e r n a -t i o n a l banking a c t i v i t y . The Nehrt p u b l i c a t i o n , then may be regarded as a comparable e f f o r t i n s e v e r a l r e s p e c t s , f o r although i t makes no attempt to compare the a c t i v i t i e s abroad of Canadian and U.S. banks, i t does present p e r t i n e n t hypotheses, some h i s t o r i c a l i n f o r m a t i o n , plus a u s e f u l , d i s c u s s i o n of the vast f i e l d of i n t e r n a t i o n a l banking. A p u b l i c a t i o n r eleased i n 1963 contained a s e r i e s of research st u d i e s prepared f o r the Commission on Money and C r e d i t i n the U.S., one of which bears n o t i n g f o r i t s study of i n t e r n a t i o n a l banking. The research study performed by Fred H. Klo p s t o c k of the F e d e r a l Reserve - 14 -Bank of New York had as i t s major purpose "to explore whether commer-c i a l banks and similar f inancial intermediaries adequately meet the requirements of foreign traders and of those engaged in international 12 finance. In the course of resolving his thesis that, "on the whole, United States f inancial institutions have l ived up to their new res-ponsibi l i t ies" Klopstock touches upon several areas of relevance to the current topic. I n i t i a l l y he puts forth a number of hypotheses to explain the growth of foreign loan operations, then describes several types of lending programs, including participation in loans of inter-national f inancial concerns such as the International Bank for Recon-struction and Development (World Bank), stand-by credits for foreign governments and "developmental loans." In a section called "The In-st i tut ional Pattern" Klopstock presents an informative survey of dom-estic banks overseas, subsidiaries of foreign banks in New York and San Francisco, and,most importantly, the agencies of foreign banks in these c i t ies with particular reference to Canadian agencies. Reasons to explain this growth of their operations, an outline of the range of their ac t iv i t i e s , including their active participation in "street loans" and an account of their legal powers are offered. A brief nar-ration of the act iv i t ies of representatives of foreign banks is presen-ted. This is followed by an informative discussion of what are known as Edge Act and Agreement corporations, including an account of exist-ing corporations of these types and their prospects for future expan-sion. Overall , then, this study can be expected to provide a very useful reference. - 15 -Beyond the aforementioned t e x t s , one must t u r n to the p e r u s a l of a r t i c l e s from a v a r i e t y of newspapers and magazines to unearth r e l a t i v e l y s c a t t e r e d pieces of germane in f o r m a t i o n . These s t o r i e s and r e p o r t s , nonetheless, cannot be regarded, i n themselves, as being com-parable e f f o r t s , although one soon to be mentioned embodies much to be expressed of the U.S. banks.. A well-known Canadian p e r i o d i c a l , "The Canadian Banker", i n a r e g u l a r column, e n t i t l e d "Notes on f o r e i g n bank-i n g " , presented, i n a recent e d i t i o n , a synopsis of the "expansion of the U.S. f o r e i g n branch network" f o r s e l e c t e d years up u n t i l June, 13 1966. An e a r l i e r e d i t i o n o f f e r e d a very b r i e f accounting of the i n -crease i n number of Canadian and U.S. banks " o f f i c e s abroad" together w i t h three hypotheses s a i d to be "the main impetus i n the recent growth 14 of f o r e i g n banking operations." "Fortune" magazine i s another p e r i o d i c a l which has presented i n t e r e s t i n g a r t i c l e s which r e f e r , at l e a s t , to a p a r t of the area which t h i s study i s expected to encompass. I n a most recent i s s u e an a r t i c l e e n t i t l e d "The Worldly Banks" not only o f f e r e d hypotheses f o r the post-war growth and success of U.S. banks abroad but a l s o gave s e v e r a l examples of what they expect i s "perhaps the most promising form of a l l i a n c e " among banks of other c o u n t r i e s i n an e f f o r t to meet "the combination of American competition and the world's growing hunger 15 f o r c a p i t a l . " T his i s the " m u l t i n a t i o n a l j o i n t venture" which they described as "harbingers of a world banking community operating i n a f r e e c a p i t a l market." Thus the f e a t u r e entered the realm of f o r e s e e i n g the f u t u r e . - 16 -A most useful essay is one which appeared in the December, 16 1967 issue of "Fortune". Enti t led "The F i r s t Real International Bankers" i t presents a most informative discussion of the expansion of U.S. banking abroad. The caption beneath the t i t l e aptly describes the theme of the ar t i c l e : "American banks original ly moved abroad only to serve their corporate customers. They have ended by shaking up the banking business." The ar t i c l e expresses several hypotheses behind the movement of American banks abroad including that mentioned above and, among several others,"the predominant role of the dollar in finan-cing the world's trade," to "improve the bank's overall earnings and the U.S. balance of payments def ic i t which has engendered controls on the outflow of capital from this country." The ar t i c l e goes on to por-tray the aggressiveness displayed in the overseas lending f i e l d , as well as recounting the formation of several "international consortia" involving U.S. banks. The report closes by broaching several hypothe-ses to explain the selection of particular banking forms. Over-al l then the story expounds upon a number of areas which i t is intended that this study should cover. I t must be emphasized nevertheless, that although i t is an especially f r u i t f u l ar t i c l e , i t describes the actions of U.S. banks alone, without any allusion to the Canadian scene. Perhaps the most comparable effort uncovered to date is a report which appeared in the November 1966 issue of "The Banker" under 17 the t i t l e , "Why American Banks Go Abroad." The purpose of the report is to examine the significant changes surounding the rapid expansion - 17 -of New York banks "who have been adding to their overseas network of branches and contacts; they have also been attracting growing deposits round the world." Specif ical ly answers to these questions were sought: "What forces have shaped the international development of U.S. banks? When did i t get underway? What are the problems these banks now face abroad and what are their long-term aims?" The reporter begins by suggesting explanations behind the re lat ive ly recent move internationally by American banks to the extent "that their native strength would long seem to have warranted." He then proposes that a turning point came in 1961 after foundations had been la id from the mid-f i f t ies . Three reasons are given for this con-tention including 1961 New York State legis lat ion which eased some of the restr ict ions upon branches of foreign banks, and a table i l l u s -trating the growth of a foreign branch network in terms of number of banks, location, and total branches which lend substantial credence to the proposal. The reporter contends that the two "main forms" of American banking act iv i ty in the "push outwards", "the acquisition of a stake (or occasionally complete ownership) in an existing foreign bank" and "direct branching." He then debates the advantage and dis -advantages of employing either of these forms of overseas expansion. At the same time, tables are presented showing "links abroad" of the U.S. banks, These "links" are banks in which an equity investment is held; the tables display the U.S. banks in Europe and the rest of the world in terms of branches, representative offices and Edge Act a f f i l -- 18 -iates. In dealing with the mushrooming of U.S. branches in Europe the statement is made that "a l l American bankers are agreed on one point: any bank that considers i t s e l f international must be in London." Grounds for this consensus are then put forth. The report closes with a very brief look into the future. From the foregoing summary i t is apparent that the reporter has touched upon many of the areas to be covered by the current study. However, once again, i t must be remembered that no mention was made of Canadian banking abroad. I t is clear then, from the brief resumes presented of work uncovered to date which might be construed as comparable efforts that there exists a noticeable lack of investigation of Canadian foreign banking. T h i s , i s a void which this study hopes to f i l l . MAJOR SOURCES OF AUTHORITY AND/OR DATA In an effort to add vapor, in the form of information, to this vacuum, considerable reliance w i l l be placed upon responses re-ceived from correspondence and personal interviews with the Interna-tional Divisions of the ten banks to be analyzed. The Annual Reports of these same inst i tut ions , were quite helpful . Quantitative data on the Canadian banking system as a whole comes primarily from the monthly Bank of Canada "Statistics" and the annual "Supplement", together with "The Financial Post", the "Bank Directory of Canada" and the "Canada Year Book". - 19 -For the U.S. banks, i n a d d i t i o n to the aforementioned c o r r e s -pondence and i n t e r v i e w s plus t h e i r Annual Reports, correspondence w i t h the F e d e r a l Reserve Bank of New York and s t a t i s t i c s reported i n the U.S. Department of Commerce p u b l i c a t i o n "Survey of Current Business" and the Annual Reports of the U.S. Comptroller of the Currency w i l l be very u s e f u l . Of course, the r e p o r t prepared by a s t a f f member of "The Banker" which discussed the a c t i o n s abroad of U.S. banks and was r e f e r r e d to i n an e a r l i e r s e c t i o n w i l l be b e n e f i c i a l to support any hypotheses or supplement i n f o r m a t i o n presented i n t h i s study. For r e l e v a n t data concerning the Canadian economy the p u b l i c a -t i o n s of the Dominion Bureau of S t a t i s t i c s d e a l i n g w i t h Canada's balance of i n t e r n a t i o n a l payments w i l l be most u s e f u l . S i m i l a r s t a t i s t i c s f o r the U.S. economy are to be s u b s t a n t i a l l y found i n the aforementioned "Survey of Current Business". P e r t i n e n t data p e r t a i n i n g to the world economy should p r i n c i p a l l y be forthcoming from " I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s " published monthly by the I n t e r n a t i o n a l Monetary Fund. EXPECTED FINDINGS An i n v e s t i g a t i o n of the data sources c i t e d above w i l l r e v e a l a c l e a r growth trend i n Canadian i n t e r n a t i o n a l banking a c t i v i t i e s i n the post-war era. This trend w i l l be one of uninterrupted expansion i n terms of f o r e i g n currency assets and l i a b i l i t i e s , i f not i n terms of the number of banking "connections" abroad, as business e n t e r p r i s e s have become i n c r e a s i n g l y m u l t i - n a t i o n a l i n character, through both trade expansion and overseas investments. A v a r i e t y of other a p p r o p r i -ii - 20 -ate hypotheses w i l l be developed in an effort to account for these bur-geoning operations. According to the Canadian Bankers Association, "if Canadian banks were not in a pos i t ion to provide the whole range of banking services necessary for carrying on an extensive export and import trade, Canadians requiring these services would have to obtain them 18 from foreign bankers. . . ." This quotation, no doubt, expresses a sa l -ient explanation for the "increasingly international flavour" of Cana-dian banks, apart from the implications of the strongly trade-oriented economy in which they function; the reason being to cope with foreign banks. Thus we can expect to see Canadian banks growing in the face of intensive competition from foreign banks, not only in financing trade, but in providing any type of banking service where funds must cross international boundaries. A prime source of competition on the international scene w i l l , no doubt, turn out to be the major American banks and i t is also l ike ly that these institutions w i l l exhibit a much greater cult ivation of over-seas operations in terms of numbers, types, locations and techniques employed. I t is probable that the chartered banks can learn much from their American counterparts, although their relative small size in terms of assets, may force them to emphasize methods of overseas ex-posure which differ from those of the major U.S. banks as volume of existing or anticipated business in various trading areas abroad is a probable factor influencing the choice of type of connection (or none) to establish. - 21 -Turning now to what can be predicted concerning implications for the future of world banking, part icularly as i t affects Canadian banks, i t is probable that the future w i l l see the refining of exist-ing forms and techniques, their application on a wider scale geogra-phica l ly , and no doubt the activation of new ideas in operating methods and management which may, or may not, now loom on the horizon. - 22 -CHAPTER I I AN EXAMINATION OF THE POST-WAR GROWTH OF WORLD TRADE AND' INTERNATIONAL PRIVATE CAPITAL MOVEMENTS INTRODUCTION This chapter w i l l present a d i s c u s s i o n of post-war world trade and i n t e r n a t i o n a l p r i v a t e c a p i t a l movements seen as the major determining f o r c e s of i n t e r n a t i o n a l banking a c t i v i t y . An h i s t o r i c a l survey of the volume and d i r e c t i o n of the i n t e r n a t i o n a l flows of goods and s e r v i c e s and funds w i l l be o f f e r e d . I n the f o l l o w i n g chapter a number of hypotheses w i l l be ten-dered as explanations.as to why commercial banks choose to become i n -volved i n these a c t i v i t i e s . A s e c t i o n of t h i s chapter w i l l be devoted to a d i s c u s s i o n of the f o r e i g n a c t i v i t y which the banks conduct from a domestic base, p r i n c i p a l l y i n terms of the s p e c i f i c instruments and techniques employed. Next, an important chapter w i l l d e f i n e and d i s -cuss the types of overseas operating forms u t i l i z e d , i n c l u d i n g some hyp o t h e s i z i n g concerning the appropriate type of " o f f i c e " to apply i n var i o u s circumstances. I n the penultimate s e c t i o n , a l t e r n a t i v e mea-sures of the i n t e r n a t i o n a l involvement of the p r i v a t e banks w i l l be debated w i t h a statement and defense of the approaches s e l e c t e d by t h i s study. I n c l o s i n g , the contents of what can be regarded as comparable stu d i e s w i l l be summarized and placed i n the context of t h i s t r e a t i s e . The e l a b o r a t i o n upon the foregoing elements of i n t e r n a t i o n a l a c t i v i t y which i s to f o l l o w i s designed to place i n p e r s p e c t i v e the 23 study of the h i s tor ica l expansion of the international operations of both Canadian and American commercial banks. FACTORS TO EXPLAIN THE POST-WAR GROWTH OF WORLD TRADE AND INTERNATIONAL PRIVATE CAPITAL MOVEMENTS The tremendous increase in the volume of international trade and international private capital movements has been a significant fea-ture of the post-war world economy. This upsurge has been fac i l i ta ted by several factors according to the views expressed by those interna-19 t ional bankers interviewed by the writer. What follows is an elabor-ation upon their responses. Probably the most significant force behind trade expansion in the immediate post-war period was the Marshall Plan, the European Recovery Program in i t iated in 1948 by the United States under which that country provided substantial f inancial assistance, about $13 b i l -l ion during i t s four years of operation, to reconstruct the productive capacity of the war-ravaged economies of Western Europe and make pos-20 sible the importation of goods required to sustain the population. The Plan proved to be very successful in restoring Europe's economic health by rel ieving the unbalanced condition in European trade and pro-duction. At the same time rationing and, in general, the shortages which war-time conditions had imposed upon the populations of North America had created a deep reservoir of pent-up demand which was readily transformed into a buying splurge once the war ended. The large volume - 24 -of savings accumulated by Canadians and Americans fac i l i ta ted this surge which not only placed additional demands on the domestic productive sector but also led to increased imports of goods and services. The consequence was a sizable r ise in trade volume between Canada and the U.S. Meanwhile, the international monetary system was undergoing a transformation which has proved to be a v i t a l factor in the expansion of world trade and capital movements. The Bretton Woods agreement of 1944 led to the creation of the International Monetary Fund (IMF). The Fund was designed to be a source of short-term funds to bolster foreign exchange reserves of countries undergoing severe temporary balance of payments pressures. Under A r t i c l e I of the Art ic les of Agreement the member countries, which now number 107, undertake to keep their exchange rates as stable as possible, confining fluctuations within narrow l i -mits, which are specified as one per cent of par either side of par, and to make no adjustment in rates unless the change is essential to cor-rect a fundamental disequilibrium. The Fund must be consulted prior to implementing any change and i t s concurrence is required for any adjust-ment in excess of 10 per cent of established par value. Although recently the adequacy of i t s resources have been questioned i t is quite probable that i t has fac i l i ta ted international trade, especially between the developed and developing economies. At the same time, the exchange s tab i l i ty promoted and, conversely, the avoidance of competitive exchange depreciation has removed a serious psychological barrier to international capital movements. - 25 -The Bretton Woods conference recognized that the objective of "the expansion and balanced growth of international trade" would be made d i f f i c u l t by existing tar i f f s and other restr ict ions . Accord-ingly the conference adopted a resolution which recommended that the member countries agree on ways and means to "reduce obstacles to inter-national trade and in other ways promote mutually advantageous inter-national commercial relat ions." The resolution ultimately led to the i n i t i a t i o n of the General Agreement on Tar i f f s and Trade (GATT) in 1948. The negotiations fostered by the Agreement led not only to a general lowering of tar i f f s but also to greater s tab i l i ty in t a r i f f schedules. GATT and the IMF together created a climate conducive to a general reduction in barriers to mult i - lateral trade. Of special sig-nificance was the widespread elimination of import quotas. While t a r i f f barriers can be overcome by cheaper:, more e f f ic ic ient production, volume restr ict ions were real obstacles in the way of trade expansion since no amount of improved technology could expand the market beyond the phy-s ica l l imits imposed by quotas. Improving technology, i t s e l f , has been an important factor behind the stimulation of world trade. In the United States, Canada and Western Europe in part icular , the tremendous advances in.technical know-how giving native corporations the ab i l i t y to compete effectively in world markets has led them to look increasingly beyond the domestic market for buyers. At the same time better communication links were . being established around the world f a c i l i t a t i n g the flow of information - 26 -concerning such matters as market or investment opportunities. Greater knowledge of other countries and augmented ab i l i t y to compete on world markets then, in no small way, contributed to growing world trade. We have noted that improved communication and information flows between countries enabled potential foreign investors to acquire knowledge of investment opportunities beyond national boundaries, and that the exchange s tab i l i ty prompted by adherence to IMF agreements removed a weighty psychology barrier however, these factors alone could not account for the tremendous increase in private international capi-ta l movements which has taken place since World War I I . There were real barriers which had to be removed. One contributory factor, behind growing private capital flows, bridges the gap between the provision of a conducive atmosphere and the removal of an effective barrier; that was the work of the Foreign Bondholders Protection Council. This U.S. non-profit organization was charged with the duty of negotiating debt settlements between nations. Noteworthy success was experienced in removing the overhang of defaulted government debts brought about by the huge, flotations of the Depression years and the subsequent ravages of war. The image of investment bank-ing had been severely tarnished by the frequency of defaults and the "tieing up of broken threads", largely through the efforts of the. Coun-c i l , contributed much to the resumption of bond f lotation on world money markets. The flow of public and, in turn, private capital to developing economies was also fac i l i ta ted since the World Bank would not lend new funds for development projects unt i l old debts were o f f i c i a l l y recog-nized with provision for servicing, or completely settled. - 27 -However, the most significant event leading to increasing private international capital flows occurred in 1958 with the return to convert ibi l i ty on non-resident account of the principal Western European 21 currencies. The fear that funds could not be repatriated, a fear which hitherto seriously inhibited the flow of private funds, was effec-tively, removed. An outcome of World War II was the emergence of the U.S. dol lar as the world's "key" currency i l lustrated by the fact that the par values of the currencies of IMF members are stated in terms of gold (or U.S. dollars of the weight and fineness as of July 1, 1944). Although i t s role is debated the continued current account def ic i ts on the U.S. balance of payments has made available considerable sums of U.S. dollars to be employed as a widely accepted means of inter-national debt settlement. The continued ava i lab i l i ty of dollars in international money markets, combined with the return to convert ibi l i ty of the major Euro-pean currencies, were important factors behind the burgeoning of the Euro-dollar market. Euro-dollars are d i f f i c u l t to define succinctly, however, a description offered by the Bank for International Settle-ments i s quite suitable. A Euro-dollar is "a dollar that has been acquired by a bank outside the United States and used d irect ly , or after conversion into another currency, for lending to a non-bank customer, 22 perhaps after one or more redeposits from one bank to another." The Euro-bond market is i ts counterpart in the medium- and long-term end - 28 -of this international capital market. The international bankers inter-viewed were unanimous in the view that Euro-dollars have become probab-ly the most significant element in world capital movements today. The writer strongly supports the view that this market has been most instrumental in the growth of international capital flows during the past ten years. More w i l l be said about the market as an in i t i a t ing 23 force behind the movement abroad of U.S. banks. A number of elements which together have contributed in no small way to the burgeoning of international trade and capital movements have been elaborated upon. While some attempt was made to distinguish' between factors which were trade stimuli and others which were confined to capital flow motivation in practice the linkage effects should not be overlooked. Trade and capital in general move together when one contracts the other grows smaller and vice-versa. Thus while the Mar-shall Plan ostensibly aided trade the recovery i t generated fac i l i ta ted the relaxation of res tr ic t ive controls, and hastened the restoration of currency convertibi l i ty which in turn, greatly stimulated international capital flows. As was stated the adherence to the Art ic les of Agreement of the IMF fostered both ac t iv i t i e s . GATT, an outgrowth of the same con-ference, by creating an improvised environment for mult i - lateral trade brought many nations into closer contact with one another. This improved communication permitted potential foreign investors to become aware of overseas investment opportunities. Continued technical advances, par-- 29 t i c u l a r l y i n North America and Europe have stimulated both the a b i l i t y and w i l l to trade and a l s o to t r a n s f e r t h i s technology to other coun-t r i e s i n the form of d i r e c t investments or l i c e n s i n g arrangements. We are a l l f u l l y acquainted, of course, w i t h the large i n f l o w s of U.S. investment c a p i t a l , which accompanied the trade expansion between Canada and the U.S. f o l l o w i n g the war. The e f f o r t s of the F o r e i g n Bondholders P r o t e c t i o n C o u n c i l were r e f e r r e d to as f a c i l i t a t i n g c a p i t a l f l o w s , how-ever, the c r e d i t worthiness of the n a t i o n does i n f l u e n c e the volume of trade i t conducts, p a r t i c u l a r l y i n the case of developing n a t i o n s which r e q u i r e f o r e i g n a i d or loans i n an e f f o r t to develop surpluses f o r i n -creased exports. The emergence of the U.S. d o l l a r as the key currency and that country's continued balance of payments d e f i c i t s were discussed i n the i c ontext of the s t i m u l a t i o n which these occurrances have given to i n t e r -n a t i o n a l c a p i t a l flows and, i n p a r t i c u l a r , p o s s i b l y h i s t o r y ' s most s i g -n i f i c a n t c a p i t a l market, the E u r o - d o l l a r market. However, at the same time, a l a r g e supply of d o l l a r s , a r e a d i l y accepted means of payment outside the Communist b l o c , have been made a v a i l a b l e to f i n a n c e growing trade t r a n s a c t i o n s . AN HISTORICAL SURVEY OF THE FLOW OF INTERNATIONAL TRADE AND CAPITAL The foregoing s e c t i o n tendered s e v e r a l f a c t o r s which c o n t r i -buted to the increased volume of i n t e r n a t i o n a l trade and c a p i t a l move-ments. I n t h i s s e c t i o n an h i s t o r i c a l p i c t u r e t r a c i n g the growth of these a c t i v i t i e s w i l l be presented. Table I ,al luded to ear l i er , offers data in U.S. dollars, for selected years which exhibits the post-war in trade volume which has occurred for the world as a whole as well as for the world's six fore-most trading nations. I t can be seen that total world trade, exports plus imports, is over five times as large in 1967 as i t was in 1946. The same is true, of course, of exports or imports viewed separately as on a worldwide basis each tends to move hand in hand. I f we look speci f ical ly at Canada i t is noted that during the same period gross Canadian trade v i r tua l ly quintrupled increasing from $4.4 to $22.0 b i l l i o n . Thus Canada's trade expansion has kept pace with the world. At the same time, the total trade of the United States i n -creased only 3.8 times. This low multiple was occasioned primarily by a re lat ive ly small expansion of exports which just tr ipled in the period while imports were growing s l ightly more than five times. Evidence of the phenomenal growth of trade in some countries is c learly provided by reference to the experience of Germany and Japan, vanquished nations in World War I I . Since 1946 German trade has multi-pl ied twenty-five times while Japanese trade has increased by f i f ty times i t s 1946 level. 1 Turning now to Table I I , we are able to obtain an indication of the magnitude of private international capital movements in the per-iod from 1958 to 1967. Ear l i er data from the International Monetary Fund was unavailable as accounting methods were not revamped to provide a breakdown for capital flows unt i l 1958. - 31 -The net p o s i t i o n a t t a i n e d i n the t a b l e i s achieved by combin-i n g the net annual flows of d i r e c t investment, the r e s u l t s of i n v e s t -ment i n new and outstanding issues of Canadian s e c u r i t i e s by f o r e i g n e r s and the re t i r e m e n t of s e c u r i t i e s h e l d by them, plus the net outcome of other long- and short-term p r i v a t e c a p i t a l f l o w s . Not included are p r i v a t e t r a n s f e r s , t r a v e l r e c e i p t s and payments, net investment income p o s i t i o n , or the p o s i t i o n of income from other s e r v i c e s . U n f o r t u n a t e l y , the data represent net flows only. I n an e f f o r t to present a r e l a t i v e l y r e a l i s t i c p i c t u r e infor-mation from s i x t e e n c o u n t r i e s which have p a r t i c i p a t e d s u b s t a n t i a l l y i n w o r l d c a p i t a l movements has been compiled i n the t a b l e . I t w i l l be noted t h a t among these c o u n t r i e s many experienced p o s i t i v e net flows w h i l e others were encountering a d e f i c i t p o s i t i o n . I n balance of payments accounting a minus s i g n i n d i c a t e s an outflow of c a p i t a l from the country i n question and a corresponding increase i n that n a t i o n ' s e x t e r n a l a s s e t s . For example, i n 1967 the Un i t e d States sustained a net outflow of p r i v a t e c a p i t a l t o t a l l i n g $4,565 b i l l i o n r e s u l t i n g i n an in c r e a s e i n U.S. claims on f o r e i g n e r s of the same amount, c o n s i d e r i n g only t h i s one s e c t i o n of the country's i n t e r n a t i o n a l payments p o s i t i o n . The opposite, of course, i s tr u e of a p o s i t i v e net flow. Canada, f o r example, has c o n t i n u a l l y encountered an increase i n claims by f o r e i g n e r s on Canadians, a net c a p i t a l i n f l o w , by v i r t u e of p o s i t i v e net c a p i t a l flows s i n c e 1958. - 32 -Thus i t can be seen from a perusal of the table that some of the countries selected have h i s tor ica l ly been net suppliers of capital to foreigners, such as the United States or United Kingdom, while others have continually been net recipients, such as Canada or Spain, and s t i l l others have shown both positions. The important point which emerges is that i f we sum the negative positions, or positive positions, obtained for a particular year for the selected countries we may obtain a crude indication of the magnitude of annual gross capital flows. For example, in 1967 the outflow of capital among those countries with def ic i t posi-tions totalled $6.3 b i l l i o n , whereas in 1958 the corresponding sum was $3.9. The fact that their "positive" counterparts totalled $2.5 and $3.0 b i l l i o n respectively may be taken to indicate that a greater flow of funds to those lesser developed nations not included in the table has been occurring recently. Thus, we may conclude that the capital flows, of which we speak, have almost doubled in the past decade. An interpretation which should have important implications for foreign banking operations. At the outset of this chapter we stated that foreign trade and international capital movements are significant factors in deciding the course of international banking act iv i ty . Referring to Table VT, i f we agree that the growth of foreign currency assets and l i a b i l i t i e s of the chartered banks is one indication of the volume of their inter-national business, i t i s apparent that the foreign act iv i ty of these institutions has grown tremendously in the post-war years. Part icularly note that since 1958, while the capital movements above were t r i p l i n g , - 33 -these balance sheet items have undergone a three-fold increase as,well . In the same period world trade doubled. Therefore, there would appear to be a definite and close relationship among these variables. I t would seem reasonable to conclude that world trade and private investment capital movements are significant to the international operations of the banks. What would be the source of their foreign oper-ations without these flows? The scope, of their act iv i t ies would be not-ably reduced and restricted largely to private transfers and remittances plus transactions arising out of foreign travel . In 1967 this would have involved a total volume of about $2.7 b i l l i o n in fund flows or just s l ightly more than 12 per cent of Canada's world merchandise trade 24 alone, without reference to capital movements.' Thus i t can be seen that the range and volume of their foreign act iv i ty would become re la -t ively small. The following chapter w i l l tender a number of hypotheses to explain why the banks have chosen rather to play a role in the wide range of private capital flows as well as actively fac i l i t a t ing the import-export trade of Canada. - 34 -CHAPTER I I I AN EXAMINATION OF THE ROLE OF THE BANKS IN TRADE AND CAPITAL MOVEMENTS SOME HYPOTHESES TO EXPLAIN ROLE IN TRADE AND CAPITAL MOVEMENTS Although i t would appear from.the data presented i n the pre-ceeding s e c t i o n that trade and p r i v a t e c a p i t a l movements are v i t a l as-pects of chartered, bank i n t e r n a t i o n a l ^ operations, no s p e c i f i c explana-t i o n s have been o f f e r e d as to why these i n s t i t u t i o n s have made these a c t i v i t i e s important. I n other words, what hypotheses may be tendered to account f o r Canadian banks assuming a s i g n i f i c a n t r o l e i n two areas which have become of p a r t i c u l a r consequence, not only to themselves but, to the Canadian economy? Besides, the apparent reason t h a t there must be noteworthy p r o f i t s to be gained due to the sheer magnitude of the funds i n v o l v e d , a number of other explanations must be p r o f f e r r e d f o r i t does not neces-s a r i l y f o l l o w that l a r g e movements of goods and s e r v i c e s or money means s u b s t a n t i a l or immediate p r o f i t s . Greater r i s k s than accrue to an en-t i r e l y domestic t r a n s a c t i o n are l i k e l y to be i n v o l v e d when d e a l i n g w i t h i n t e r n a t i o n a l t r a d e r s or i n v e s t o r s . Although trade t r a n s a c t i o n s i n which they p a r t i c i p a t e l a r g e l y o r i g i n a t e w i t h domestic corporations the t h i r d p a r ty i s most o f t e n a f o r e i g n concern about which the bank, and the Canadian company, f o r that matter, may know very l i t t l e . A l s o , f o r e i g n c u r r e n c i e s t r a n s a c t i o n s are common w i t h f o r e i g n trade or i n v e s t -ment a c t i v i t i e s . These are but two f a c t o r s which r e q u i r e d the banks to - 35 -invest what must have been sizable sums of money into the development of an expertise which they anticipated would y ie ld them a satisfactory return. One of the principal explanations given is the need to meet strong competition in the form of foreign banking concerns. According to the Canadian Bankers Association: "If Canadian banks were not in a position to provide the whole range of banking services necessary for carrying on an extensive, export and import trade, Canadians requiring 25 these services would have to obtain them from foreign bankers . . . ." In other words, protection against the loss of opportunities for prof i t may be said to be a factor encouraging their international act iv i ty . An additional common answer is implied in the above quotation. That i s , the desire to retain old, and acquire new, customers. This too may be tendered as an expl ic i t reason why banks have established and are expanding their "offices" and banking connections abroad. This aspect w i l l be extensively elaborated upon later in this study. Table VI presents a picture of long-term investments abroad of Canadian business enterprises for selected year-ends from 1945 to 1965 which indicates both the magnitude and rate of growth of this stock of funds. Before proceeding, i t is suitable to c lar i fy the dis-t inction between direct and portfol io investment, although the definitions and their significance w i l l be referred to again. Canada, and the Uni-ted States, define direct investment as the acquisition of assets in a foreign enterprise in which the domestic resident holds controll ing - 36 -interest. For balance of payments purposes i t is assumed that the ownership of 25 per cent or more of the voting shares constitutes a controll ing interest. On the. other hand, portfol io investment repre-sents the. purchase of stocks or bonds of a corporation in which the pur-chaser does not hold or gain a controll ing interest as defined. I t can be seen from Table V I that direct investment in branches, subsidiaries and controlled companies enjoyed almost a f ive-fold increase from 1945 to 1965. At the same time, portfol io invest-ment in foreign securities increased three and one-half times for an overall quadrupling of total private long-term investment abroad as i t moved from a sum of $1.3 b i l l i o n in 1945 to $5.6 b i l l i o n in 1965. Clearly, the magnitude of the funds involved should attract Canadian banks to the international scene. The des irabi l i ty of "internationalization" is l ike ly to be accentuated when i t is noted that at the end of 1963 the total book value of direct investment outside Canada of but 13 Canadian corpora-tions aggregated $50 mi l l ion or more accounting for $2,197 b i l l i o n , or 70 per cent of the to ta l . An additional 8 were between $20 and $50 mi l l ion and their direct investments amounted to $224 mi l l ion or another 7 per cent of the tota l . A further 38 companies whose individual d i -rect investments were between $5 and $20 mi l l ion accounted for another $358 mi l l ion or 12 per cent of the tota l . Thus, just 59 companies, embracing $2,779 b i l l i o n in foreign direct investments, comprised 89 per cent of the $3,356 b i l l i o n tota l , an indication that i t is a number 26 of the banks' largest customers who are operating in other countries. - 37 -In terms both of developing service and lending expertise, as well as establishing banking connections overseas, the banks then are l ike ly to be encouraged in an effort to cement relations with these existing customers, to acquire new domestic cl ients who have, or are becoming international in scope and to obtain the business of foreign enterprises who have dealings with Canadians. Table VII presents, for purposes of comparison s imi l iar , but somewhat more comprehensive data for the United States covering selec-ted years from 1945 to 1967. I t w i l l be noted that private direct investment abroad by U.S. residents increased s l ightly more than f ive-fold from 1945.to 1965, similar to the growth experience for Canadians while from 1945 to 1967 inclusive a greater than seven-fold expansion took place. Meanwhile, portfol io investment almost quadrupled from 1950 to 1965. for an overall quadrupling of long-term investments from $17.5 b i l l i o n to $70.9 b i l l i o n , again very similar to the Canadian case. While long-term private investment was undergoing an impressive r i se the short-term sector also was experiencing noteworthy growth. Short-term assets and claims are of less than one year's duration, often arranged on a demand basis. When unchecked by exchange, or other forms of direct or indirect , control short-term funds tend'to be highly sen-s i t ive to international interest rate differentials moving spontaneously in search of better returns. In addition, short-term funds tend often to be highly speculative moving in and out of various currencies or into gold depending upon economic and/or p o l i t i c a l conditions in d i f - • - 38 -ferent countries or the general piecemeal state of international mone-tary conditions. The gold rush of 1968 when speculators believed an increase in i t s price was imminent is a case in point. A very recent example was the heavy movement out of French francs into Deutsche marks and gold when labour and student demands seriously threatened the stab-i l i t y of the franc in late 1968. I t follows that these funds are highly vo lat i l e and therefore the monetary authorities are much concerned about their country's short term position at any given time. For example, when short term claims are substantially greater than short term assets there may be the real danger that a sudden outflow occasioned by some uncertainty within the economy w i l l seriously endanger the currency's par value, or precipitate a serious drain of gold in the case of the U.S. where gold may be deman-ded in exchange for dol lars . I t can be seen from Table VTI that this form has experienced an eight-fold increase between 1950 and 1967. However, despite this impressive growth i t must be noted that this expansion rate is based upon comparisons of a stock position at a given point of time. The rapid turnover of these funds makes a comparison of fund flows over time more appropriate. Nevertheless, although understated, probably substantially due to the foregoing, total private investment increased from $19 to $93.3 b i l l i o n between 1950 and 1967, a notable f ive-fold expansion. I t follows that American banks, l ike their Canadian counter-parts, should be similarly attracted to internationalization. - 39 -Another thesis which encompasses both the themes of meeting competition and customer acquisition arises from the fact that the banks are private profit-seeking enterprises and, therefore, are inter-ested in profitable growth opportunities. Such exist through direct or portfol io investment of their own funds or indirect participation via the financing of foreign trade or fac i l i t a t ing the flows of private capital to other countries. Walter B. Wriston, President of the F i r s t National City Bank lends credence to the va l id i ty of this view in a recent statement which follows. The potential for U.S. industry abroad is just enormous. The overseas market is growing twice as fast as the domestic and i t should double or t r ip l e in the years just ahead. With some 3 b i l l i o n people in the world and only 200 mi l l ion in the United States, i t i s most important that every corpor-ation structure i t s e l f to get on that escalator.27 This statement has particular significance to U.S. banks whose domestic expansion is constrained by that country's unit banking system which in most,states does not allow branching. In a few such as New York limited branching is allowed, for example the New York banks re-ferred to earl ier are restricted to branching within Manhattan and two or three other burroughs. In a small number, notably Cal i fornia , Ore-gon and Washington state-wide branch systems are permitted. However, banks are not allowed nation-wide branch networks as is the case in Canada, therefore, the opportunity for growth by internationalizing is especially attractive to U.S. banks. Although Wriston is speaking of the U.S. scene what he said can be readily transferred to a Canadian context where, despite the - 40 -existence of nation-wide branch networks, the o p p o r t u n i t i e s f o r expan-sion may be magnified since Canada has a pop u l a t i o n of only some 21 mil l ion . This r a p i d growth of the "overseas market" which Wriston pre-dicts means that there i s l i k e l y to be a growing number of Canadian cor-p o r a t i o n s e i t h e r becoming or increasing their international marketing e f f o r t s and /or locating subsidiaries in other countries. I f this should occur the chartered banks, no doubt, w i l l be increasingly called upon to supply the varied international services they offer from the remit-tance of funds, to guidance, to lending. To retain established customers and to take advantage of the anticipated growing opportunities f o r new international business the banks are l ike ly to be encouraged to widen their foreign act iv i t ies both by refining or broadening techniques as well as overseas "offices". In this growing internationalization we should emphasize that for Canadian banks the U . S . , i t s e l f , w i l l probably be a significant "escalator". In summary then the need to meet competition from f o r e i g n banks to prevent the loss of prof i t opportunities, i f not f o r immediate prof i t , the desire to retain established, or obtain new customers and the opportunity for growth have in the past and, no .doubt, continue to-day to inspire the chartered banks to increasingly " i n t e r n a t i o n a l i z e " their ac t iv i t i e s . We have i l lustrated the immense growth of world trade and capital movements, and the factors to explain their expansion during - 41 -the post-war era, in the opening sections of this chapter. In this section we have broached the aforementioned hypotheses to explain the participation of the banks in these expanding fields at the same time suggesting that the techniques employed and the number of overseas "offices" may increase or be improved. In this discussion an attempt has been made to distinguish between motives for internationalization from a domestic base and motives for going abroad to operate from a foreign base which w i l l be elaborated upon later. The dis t inct ion is most d i f f i c u l t to make and as a result we have obtained an inkling of why banks go abroad. Nevertheless, i t remains that the banks do con-duct a significant portion of their international business from a domestic base. What are the forms of this involvement? This question can best be answered by a description of the operating forms employed by the chartered banks to fac i l i t a t e the international movement of merchandise and funds. We shall now turn to canvass br ief ly the impor-tant instruments used and functions performed, including some com-ments upon what are judged to be the significant contributions of the banks to these international flows. FOREIGN ACTIVITY FROM A DOMESTIC BASE The direct involvement of the chartered banks in internation-al transactions without physically locating in another country, may be c lass i f ied into four principal categories. F i r s t l y , the col lect ion - 42 -function, that i s , acting as the intermediary for transactions between residents and foreigners, primarily importers and exporters. Secondly, the financing of Canadian import and export trade and international capital movements through several types of lending arrangements. Thirdly , the buying and sel l ing of foreign exchange. A fourth act iv i ty may be added and that is the provision of information, advice and gui-dance, but since these services are often granted in conjunction with the lending function they w i l l be discussed in that context. In practice i t is v i r tua l l y impossible to rank these a c t i v i -ties according to their relative importance to the banks due to their extreme interdependence. I t is useful here to outline the sequence of events which might occur in concert with the lending function in order to c lar i fy this statement. Assume that a Canadian furniture manufac-turer has the opportunity to export his product to the United States, however, the prospective importer is unknown to him except by corres-pondence between the two firms. Before committing himself to the trans-action he asks his bank to obtain information concerning the American firm's credit worthiness and general reputation. The bank is able to comply with his request by contacting a correspondent bank in that area. Assuming the importer's r e l i a b i l i t y is confirmed the transaction pro-ceeds. To provide the additional working capital needed to meet the contract the manufacturer arranges a loan with the bank to be repaid when the proceeds of the sale are received. A b i l l of exchange is drawn up and sent by the Canadian bank to i ts American correspondent - 43 -f o r c o l l e c t i o n , the intermediary f u n c t i o n . The terms are payment in' U.S. d o l l a r s i n s i x t y days. I n two months time, the U.S. funds.are rem i t t e d . However, a f o r e i g n exchange t r a n s a c t i o n i s r e q u i r e d as the U.S. d o l l a r s must be converted to Canadian d o l l a r s before the funds are deposited i n the account of the manufacturer. I n other words, the U.S. $ must be s o l d and Canadian d o l l a r s bought i n the f o r e i g n exchange mar-k e t . Thus i t i s q u i t e p o s s i b l e to have each one of the aforementioned s e r v i c e s i n v o l v e d , depending upon the needs of the customer. The opposite side of the c o l l e c t i o n f u n c t i o n , w i t h i n the bank's intermediary r o l e , i s the remittance f u n c t i o n . Had our example per-t a i n e d to a Canadian importer the sequence of events could have been s i m i l a r but instead of sending a b i l l f o r c o l l e c t i o n , the bank would , have forwarded the necessary funds to the f o r e i g n exporter on behalf of the importer. A l t e r n a t i v e l y , i n d i f f e r e n t circumstances, such as i n an open account t r a n s a c t i o n , the importer might purchase a d r a f t from the bank and forward i t to the exporter. I n e i t h e r way a f o r e i g n r e -mittance would take p l a c e . The bank d r a f t i s a w i d e l y employed means of e f f e c t i n g f o r -e i g n remittances. I n Canada each of the branches of Canada's nine chartered banks are equipped to o f f e r t h i s s e r v i c e to i t s customers. When issued by a Canadian bank the d r a f t i n s t r u c t s a bank i n a f o r e i g n country to make payment to the holder of the d r a f t on demand. Although cheques dominate domestic t r a n s a c t i o n s i n the i n t e r n a t i o n a l sphere t h e i r r o l e i s r e l a t i v e l y minor because of the d i f f i c u l t i e s of cheque clearance - 44 -and currency exchange. Their f u n c t i o n i s c a r r i e d out through d r a f t s . The bank d r a f t can be handled i n a s i n g l e currency, or i t may be pur-chased i n one currency w h i l e i n s t r u c t i n g payment i n another currency. I n the l a t t e r s i t u a t i o n the chartered banks are executing simultaneously both the c o l l e c t i o n f u n c t i o n and the f o r e i g n exchange f u n c t i o n . A f o r -eign t r a n s a c t i o n , however, need not always i n v o l v e a f o r e i g n currency. Even i f the d r a f t c a l l s f o r payment i n d o l l a r s , i t i s a f o r e i g n trans-a c t i o n i f i t c a l l s f o r payment outside Canada. This i s i n agreement a l s o w i t h balance of payments usage. An increase i n l i a b i l i t i e s to f o r e i g n e r s i s a c a p i t a l inflow even i f the l i a b i l i t y i s i n Canadian d o l l a r s , without i n c l u s i o n of f o r e i g n exchange. The commercial b i l l of exchange or trade b i l l used i n i n t e r -n a t i o n a l trade i s very s i m i l a r i n form to the bank d r a f t except the drawer i s commonly an exporter, not a bank. The order d i r e c t s the drawee, the importer or h i s bank, to pay a s p e c i f i e d amount of money to a t h i r d p a r t y , the payee, e i t h e r the exporter or h i s bank, at a c e r t a i n f u t u r e date. S i g h t b i l l s are those payable immediately upon presenta-t i o n to the drawee. Time d r a f t s run f o r va r i o u s periods of time. I n i n t e r n a t i o n a l trade c l e a n or documentary d r a f t s are used to e f f e c t payment. As the name i m p l i e s c l e a n d r a f t s are those unac-companied by documents. Documentary d r a f t s are used almost e x c l u s i v e l y however since p r o p e r l y executed documents give c o n t r o l over the sh i p -ment and make p o s s i b l e ready t r a n s f e r of t i t l e to the goods. - 45 -When an exporter draws a d r a f t on a bank the d r a f t , a f t e r being accepted by the bank, i s known as a bankers' acceptance. The instrument becomes an o b l i g a t i o n of high q u a l i t y , since i t r e f l e c t s the c r e d i t standing of the bank i n v o l v e d , and can be r e a d i l y s o l d i n the money market. Thus the exporter i s able to obt a i n the funds due him sooner than would be the case i f he hel d the d r a f t u n t i l i t s due date. I n Canada i t i s more common f o r the chartered bank to act s o l e l y as c o l l e c t i n g agent r a t h e r than buying or d i s c o u n t i n g an expor-28 t e r ' s b i l l of exchange. The b i l l i s forwarded to a f o r e i g n c o r r e s -pondent bank, whose r e l a t i o n s h i p w i t h Canadian banks w i l l be discussed below, which presents i t to the importer f o r payment or acceptance, whichever the arrangement d i r e c t s . The commercial b i l l of exchange i s f r e q u e n t l y drawn by an ex-p o r t e r on the bank of the importer under a l e t t e r of c r e d i t provided by the importer. The ordinary commercial d r a f t discussed above o f f e r s no assurance that the importer w i l l accept or pay the d r a f t , or that he w i l l take the goods sent to him, thus the exporter i s l i k e l y to pre-f e r the p r o t e c t i o n a f f o r d e d by the commercial l e t t e r of c r e d i t . I n Canada the l e t t e r of c r e d i t i s a commonly used instrument i n the f i n a n -c i n g of f o r e i g n trade t r a n s a c t i o n s . T h i s statement deserves some qual-i f i c a t i o n however since a very s u b s t a n t i a l p r o p o r t i o n of trade between Canada and the U.S. i s conducted on an open account b a s i s w i t h the fund flows represented by inter-bank c l e a r i n g s , i n c l u d i n g inter-company t r a n s f e r s between U.S. parents and t h e i r Canadian s u b s i d i a r i e s . Outside - 46 -of trade between these countries, and particularly in trade with the developing countries, the letter of credit i s the most frequently employed instrument although i t s use is undergoing a relative decline as greater knowledge of foreign clients is gained through repeat business. One might, in fact, develop a continuum of trade financing techniques. Moving from the polar of greatest protection to that offering the least assurance of payment one would begin with pre-paid transactions, the letter of credit would occupy the next position followed by the documentary draft, next the clean b i l l and, fi n a l l y , open account transactions. A letter of credit is a document carrying the guarantee of a bank to honour drafts drawn on i t by an exporter up to the maximum amount stipulated and under certain conditions. For example, i f the letter covers the purchase of lumber, the importer cannot use i t to buy industrial equipment, unless the bank agrees to such a m o d i f i c a t i o n . And as protection, the bank normally requires certain documents such as the b i l l of lading and warehouse receipts to be f i l e d with i t so that i t knows the correct items were actually shipped. Instead of being drawn on the importer, the draft is drawn on the importers' bank, which has agreed to act for him. The credit standing of a bank' i s o r d i n a r i l y much higher than that of the importer, particularly for Canadian banks, and the letter of credit is a means of substituting the bank's c r e d i t for that of the importer. - 47 -Thus, by eliminating much of the r i sk for the exporter, since i t guarantees that he w i l l be paid for his shipment, provided of course, he follows instructions and i f exchange controls do not delay matters, the bank is contributing much to the f a c i l i t a t i o n of foreign trade. In addition to the contingent form of lending provided by the guarantees embodied in letters of credit the banks also engage in notable amounts of direct lending to Canadian exporters and importers through negotiations of lines of credit . At the same time the same technique is employed as they devote substantial sums to the financing of international long-term capital movements. While, as we i l lustrated at the outset, i t i s most d i f f i c u l t to rank their principal forms of act iv i ty in terms of importance to themselves the banks interviewed a l l agree that probably the major contribution these institutions have made to fac i l i t a t e the tremendous growth in world trade and capital movements has been the granting of credit . In addition the banks have been adept at patterning lending act iv i t ies to the needs of different industries. In part icular , the widespread application of cash flow lending, instead of the tradit ional practice of lending solely on the strength of the pledge of real assets, has substantially broadened the lending base. Overal l , there is l i t t l e doubt that the flows of trade and capital would be seriously circumscribed i f self-financing was required. According to those bankers interviewed, the largest share of foreign trade financing l ies in the short-term sphere. Loans of less - 48 -than one-year maturity are most common for two probable reasons. One, the banks have t r a d i t i o n a l l y tended to regard themselves p r i m a r i l y as sources of short-term c r e d i t . Second, the loans may have been accorded to exporters to finance export receivables normally due i n less than 180 days or granted to importers to ensure adequacy of funds to meet drawings under a l e t t e r of c r e d i t or other forms of overseas accounts payable. D i r e c t lending f o r the financing of i n t e r n a t i o n a l long-term c a p i t a l movements i s also dominated by short-term loans. Medium term lending i s a secondary but inc r e a s i n g l y important part. By e s t a b l i s h -ing a l i n e of c r e d i t i n Canadian d o l l a r s with a domestic corporation which u t i l i z e s the funds for d i r e c t or p o r t f o l i o investment i n another country the banks are i n e f f e c t , p a r t i c i p a t i n g i n an i n t e r n a t i o n a l transaction. By granting a s i m i l a r l i n e i n U.S. d o l l a r s to a U.S. corporation or subsidiary f o r the purpose of investment i n Canada the banks are d i r e c t l y engaging i n foreign c a p i t a l movements as a foreign currency i s involved. In the former case a contrast between the Cana-dian and American s i t u a t i o n may be noted. In Canada, since there i s v i r t u a l l y complete freedom of c a p i t a l movement out of the country, i t i s common p r a c t i c e f o r the chartered banks to grant domestic l i n e s of c r e d i t to t h e i r larger customers operating i n t e r n a t i o n a l l y without being informed s p e c i f i c a l l y of the sums to be absorbed by manufacture f o r the domestic or export markets or f o r the financing of overseas sub-s i d i a r i e s . The company, i t s e l f , a l l o c a t e s the funds. On the other - 49 -hand, in the U.S. the mandatory controls which have been imposed on U.S. direct investment abroad means that both the company and the banks must establish clearly at the outset the funds which are to be employed abroad. These same controls limit the holdings of liquid foreign as-sets by U.S. direct investors thus the banks must be f u l l y acquainted 29 with the short-term capital movements as well. What the banks also agree has been a significant contribution which they have made to the f a c i l i t a t i o n of international trade and capital movements is often carried on in conjunction with the lending function. That i s providing information, advice and guidance to indi-viduals and corporations trading or investing internationally. As w i l l be expanded on below the vast network of correspondent banks maintained enables the banks to acquire and transmit varied and r e l i -able information concerning, for example, trade and investment oppor-tunities in a certain country as the credit worthiness of a prospective importer. The same may be said of their overseas representatives, branches, subsidiaries and a f f i l i a t e s . At the same time their years of specialization in lending has seen the banks build up an expertise which has equipped them to offer constructive advice in organizing for and operating internationally. And too, they are able to counsel and guide traders and investors to assist them in recognizing and in over-coming any contingencies which develop. In the foregoing paragraphs we have confined our discussion to the most significant assets of the banks, loans. However, the l i a -- 50 -b i l i t y side of the balanced sheet also involves the Canadian banks substantially in short-term foreign investment through the fu l ly -hedged swap deposit business. "Swaps" are created in the following manner: The banks purchase the C$ of the depositer for the foreign cur-rency in question, normally U.S. $ but occassionaly sterl ing, under an agreement to reverse the transaction at a pre-determined future date. In the meantime, the depositor carries his foreign currency balance on deposit with the bank, receiving a return made up o f interest on the time deposit and any prof i t on the foreign currency swap. These transactions were fostered partly due to intense competition within Canada between banks, trust companies, investment dealers and finance companies for deposits and partly due to competition from a number of foreign banks active in the international money markets who were pre-30 pared to offer this f a c i l i t y to Canadian depositors. Thus, we might say that strong domestic competition inspried the banks to become i n -creasingly international. Thus, we have seen that bank drafts, commercial b i l l s of exchange, letters of credit , "swaps", and, in some instances, even bank loans originating in Canada may embody transactions in foreign currencies. The presence of a foreign currency means that' the banks, at some stage, have had to engage in foreign exchange trading to ac-quire the U.S. dollars or other currency involved. Thus, the buying and se l l ing of foreign currencies is a requisite for participation in foreign trade and capital flows. - 51 -The aspect of the foreign exchange market which i s most s ig-nif icant to merchandise trade and short-term capital flows i s forward exchange trading. A forward exchange contract between a bank and a customer, or between two banks, cal ls for delivery at a future date of a specified sum of foreign currency against dol lar payment, with the exchange rate fixed at the time the contract i s made. The forward exchange market enables individuals or companies, who anticipate either the receipt of foreign exchange, or the need to pay i t out at a future date, to hedge against the r isk of loss from exchange rate fluctuations. An exporter who arranges a sale in France for example, may protect himself against the r isk of franc deprecia-tion by arranging to s e l l his francs in the forward exchange market at the same time he makes his sales contract abroad. On the other hand, the importer must guard against the r i sk of currency appreciation, as he would be i f now importing from Germany, between the time he acquires an obligation to make a payment in Deutsche marks and the time payment is made. His hedging procedure is opposite that of the exporter. The commercial banks, themselves, consistently hedge their foreign currency positions. In other words, they are arbitragers who, as far as possible cover exchange risks by operating in the forward exchange market. As one international banker responded to the question whether or not the bank balanced i t s assets and l i a b i l i t i e s denomina-ted in particular currency, "Yes, every night everywhere we do not take "long" positions".' In other words, rather than to carry a surplus - 52 -of any one currency they attempt to keep an even balance between pur- . chases and sales of a l l currencies. Arbitrage transactions involve e i -ther the purchase of domestic currency via a foreign country or the purchase of a foreign currency through a third or fourth country. Generally speaking, commercial banks do very l i t t l e trading on their own account as investors in foreign exchange, by far the lar -gest part of their trading is conducted on behalf of their customers. However, covered interest arbitrage may occur not only on the basis of comparative rates available to the prospective investor but also on the basis of comparative rates for exporters or importers i n need of trade financing and borrowers in general. I t i s this comparison of relative borrowing costs, known as the process of "trader arbitrage" i n which the banks frequently engage and their actions i n concert with similar act iv i t i es by professional arbitragers tend to keep exchange rates 31 in a l l centres in l ine with each other. Over-a l l , the process of covering exchange risks through the forward exchange market is fundamentally a means for individuals, firms and banks to eliminate the uncertainties of the foreign exchange element from international transactions. The poss ib i l i t i e s of arbitrage in the exchange market represents a sound explanation as to why the individual trading departments of a l l chartered banks maintain constant communica-tion with the principal foreign exchange markets of the world located in New York, London, Paris , Frankfurt and Zurich. - 53 -A c t i v i t i e s of the type discussed in this section may be con-, ducted by the banks from a domestic base without the necessity of loca-ting abroad. However, as we have seen, sound communication links are a requisite for this approach. One of these connections, alluded to above, is the correspondent bank. Its relationship to the chartered bank w i l l be elaborated upon in the following chapter, together with a description of the other types of foreign operations banks have established. From an outline of the tasks these "offices" perform we are li k e l y to receive some indications as to why Canadian banks go abroad. - 54 -CHAPTER IV A DESCRIPTION OF THE INTERNATIONAL OPERATING FORMS EMPLOYED AND THE APPROACH OF THIS STUDY The international operating forms of the chartered banks are correspondent banks, resident representatives, agencies, branches, sub-s id iar ies , equity investment in an established foreign bank ( a f f i l i -ates) or the multinational jo int venture. Each of these types of foreign "office" is expected to perform certain services. This chapter w i l l examine these "offices" in terms of the services they provide and their relative advantages and disadvantages. CORRESPONDENT BANKING Over the years the chartered banks have established a vast network of correspondent banks, numbering approximately 7,500, which span the globe from Abu Dhabi to Zambia. They are located in such un-familiar c i t ies as Aaru, Doha, Suva, Tegucigolpa and Uppsala although more familiar c i t ies such as Chicago, London, Paris , and Tokyo also are sites of several correspondent offices. Although Bank of Canada clearings have replaced the intricate mechanism of interbank balances for domestic purposes, internationally banks continue to complete clearings by this means. To fac i l i ta te this i t i s usual for the Canadian and foreign banks to have deposit balances with each other shown on the balance sheet in the currency of the bank holding the deposit as a l i a b i l i t y . For example, the Canadian Imperial - 55 -Bank of Commerce may hold a deposit in Australian dollars with the Aus-t r a l i a and New Zealand Bank Limited in Melbourne while that bank, at the same time, holds a Canadian $ deposit with the Commerce. These bal-ances are carried on a demand rather than time basis and constitute a significant proportion of the foreign currency assets and l i a b i l i t i e s of the chartered banks. For example, at October 31, 1968 "Deposits with other banks in Currencies other than Canadian" totalled Canadian $3.1 b i l l i o n equal to 38.9 per cent of total foreign currency assets. At the same date "Deposits by other banks in Currency other than Cana-dian" ammounted to Canadian $2.2 b i l l i o n , or 29.1 per cent of total 32 for currency l i a b i l i t i e s . In addition the correspondent banks also 33 carried $243.7 mi l l ion in deposits denominated in Canadian dol lars . Although deposits with other banks are exhibited in Canadian dollars on the balance sheets of the chartered banks they actually com-prise several different currencies and constitute the chartered banks' immediate supply of foreign exchange. On the other hand, the foreign currency deposits of the foreign banks are primarily denominated in U.S. do l lars , with a re lat ive ly small amount made up of pound sterl ing. This situation is not unusual since the U.S. $ and sterl ing are the "languages" of international transactions. As key currencies they are most in demand, consequently to reduce exchange risks and avoid conver-sion costs, i t is quite normal for the foreign correspondent banks to hold a material proportion (90.2 per cent at October 31, 1968) of their deposit balances i n these currencies, despite the fact that these assets are situated in Canada. - 56 -The re lat ive ly small amount of deposits in Canadian dollars are also useful to the foreign banks, however, for they constitute the correspondents' supply of our currency. Since the demand for Canadian dollars to settle international transactions is re lat ive ly limited these balances are comparatively small. However, as some demand exists the foreign banks find i t suitable to carry Canadian dollar accounts for the same reasons that they maintain U.S. $ and sterl ing balances. I t is thus quite normal that banks w i l l hold reciprocal bal-ances with each other. When a Canadian bank purchases foreign currency, i t augments i t s balances with i ts foreign correspondents. When the for-eign correspondents buy Canadian dollars (or U.S. or sterl ing) , they bui ld up their balances in Canadian dol lars . Suppose that a customer wishes to remit 100,000 Dutch g u i l -ders. He buys a draft from his bank, paying $30,000 for i t . He for-wards the draft to The Netherlands where i t is deposited in a Dutch bank. The Dutch bank may obtain settlement by debiting the account which the Canadian bank maintains with i t . The banks' balance sheet changes would be as follows: Canadian Bank A L Deposits with other banks -$30,000 Domestic deposits -$30,000 Dutch Bank A L No change - Domestic Deposits + 100,000 Guilders Deposits by foreign banks - 100,000 Guilders - 57 -Maintenance of deposits, while the most significant, is by ' no means the only role of correspondent banking. Banks perform a num-ber of services on a reciprocal basis. ' They supply information on eco nomic and business conditions, assist in credit checks, serve each oth er's travel l ing customers, and generally act as each other's foreign office. In addition, the correspondent bank also provides a certain amount of exposure for the Canadian bank in i t s service area since i t w i l l direct any "Canadian" business emanating there through or to i t s Canadian counterpart. The advantages and disadvantages of this form of international operation w i l l be discussed later when we look at direct branching in foreign countries. RESIDENT REPRESENTATIVES The resident representative operating form may be described as being mid-way between correspondent banking and a foreign branch network. In contrast to the operation of a correspondent system, wher representation is by local bankers the Canadian bank is "represented" abroad by members of i t s own personnel. However, the representative position differs from a foreign branch in that i t does not offer the complete range of banking services. The resident representative off ice, however, performs a variety of important tasks for the chartered bank in i t s role as the marketing section of a chartered bank's International Region. The location of these offices is carefully chosen with regard to the poten t i a l market value of the region, the ease of communications and travel - 58 -to nearby centres and to the cost of operation. The cost involved in operating an office of this kind is l ike ly to vary signif icantly de-pending upon the size of the terri tory i t is designed to serve since transportation expenditures are a substantial part of the operating budget. Where the potential of area is not considered sufficient to warrant the cost of establishing a resident representative's office, the chartered banks employ International Region Representatives. These bank officers are based at the Canadian head office and make several trips annually to the particular geographic area to which they are assigned. Essential ly their role is the same as that of a resident representative. A principal function of the representative is to maintain close l ia ison between the head office of the chartered bank and i ts correspondent banks to assure reasonable reciprocity in the exchange of business and acquire leads to potential customers for his employer. Since the representative, in effect, serves as a "floating" foreign branch for the chartered bank he makes frequent cal ls on exis-ting customers with foreign operations in areas where no permanent branch is located. Since, in the performance of this task, he is l ike ly to represent the only personal contact the international corporation has with i t s "home" bank he must ascertain that the relationship be-tween the customer and the correspondent bank recommended by the chartered bank to i t s customer is satisfactory. - 59 -A primary f u n c t i o n of the r e p r e s e n t a t i v e o f f i c e i s to a i d businessmen i n t e r e s t e d i n e s t a b l i s h i n g a venture i n Canada or i n t r a -d i ng w i t h or i n v e s t i n g i n Canada. This a s s i s t a n c e ranges from f u r n i s h i n g general i n f o r m a t i o n about Canada to compiling copious s t a t i s t i c a l data e v a l u a t i n g the market p o t e n t i a l of the f i r m i n d i f f e r e n t , sections of Canada. The London r e p r e s e n t a t i v e s of at l e a s t one Canadian bank have become experts i n a p p l y i n g to the Bank of England f o r approval on 34 behalf of B r i t i s h companies who plan a Canadian s u b s i d i a r y . The r e p r e s e n t a t i v e s are not only concerned w i t h marketing the s e r v i c e s of t h e i r employer to business f i r m s , but to i n d i v i d u a l s a w e l l . Emigrants are encouraged to deal w i t h t h i s bank upon s e t t l i n g i n Canada. Although they are not investment c o u n s e l l o r s the represen-t a t i v e s a l s o a i d c l i e n t s i n p l a c i n g funds i n Canada and recommend r e l i able investment d e a l e r s . A s u b s t a n t i a l p o r t i o n of the r e p r e s e n t a t i v e ' s time i s spent seeking new business and f o l l o w i n g up p o s s i b l e business development. leads which may o r i g i n a t e w i t h the Canadian f e d e r a l and p r o v i n c i a l governments or from correspondent banks. I n f a c t a r e p r e s e n t a t i v e has been known to "wear out four p a i r s of shoes each year pounding the 3 5 pavement l o o k i n g f o r business." The f o r e i g n r e p r e s e n t a t i v e s of the chartered banks thus per-form the v i t a l f u n c t i o n of marketing the i n t e r n a t i o n a l s e r v i c e s of the chartered banks i n areas where the banks e i t h e r cannot or do not consi. der i t economical to e s t a b l i s h a f o r e i g n branch. Perhaps t h e i r most important task i s to cement r e l a t i o n s w i t h e x i s t i n g correspondent bank: - 60 -AGENCIES While r e s i d e n t r e p r e s e n t a t i v e o f f i c e s are a comparatively re-cent phenomena, the e a r l i e s t e s t a b l i s h e d by the Royal Bank of Canada i n Chicago i n 1945, agencies are the o l d e s t form of i n t e r n a t i o n a l opera-t i o n conducted by the chartered banks. Each of the p r i n c i p a l Canadian banks operate an agency i n New York c i t y . These o f f i c e s were opened p r i o r to 1900. The reasons f o r the concentration of agency operations i n New York w i l l be discussed s p e c i f i c a l l y l a t e r i n t h i s t r e a t i s e , how-ever, s e v e r a l w i l l become apparent as we d i s c u s s the a c t i v i t i e s of these, agencies. Agencies d i f f e r from branches i n one important respect. Under the Banking Law of the State of New York they may issue l e t t e r s of c r e d i t , buy, s e l l , pay and c o l l e c t b i l l s of exchange, accept money f o r remittance and remit same, and c a r r y , f o r the account of others, d e p o s i t balances i n c i d e n t i a l t o , or a r i s i n g out of, t h e i r l e g a l power. However, and here i s the s i g n i f i c a n t d i s t i n c t i o n , agencies may not ac-cept deposits subject to withdrawal by checks. Agencies, however, do conduct an a c t i v e f o r e i g n and i n t e r -n a t i o n a l banking business s i m i l a r to that of a f o r e i g n branch. They look a f t e r the needs, o r i g i n a t i n g i n the U.S., of t h e i r head o f f i c e s and branches both i n Canada and elsewhere. Canadian agencies a c t i v e l y buy and s e l l s e c u r i t i e s on behalf of the Head O f f i c e . Evidence of t h i s i s the $794 m i l l i o n i n f o r e i g n currency denominated s e c u r i t i e s i n the 36 p o r t f o l i o s of the chartered banks at October 31, 1968. These are l a r g e l y assets of the New York agencies. - 61 -Canadian agencies do not t r y to compete w i t h U.S. banks i n the f i n a n c i n g of commercial and i n d u s t r i a l borrowers i n the U.S. a l -though they perform a r e l a t i v e l y small lending business f o r s u b s i d i a r i e s , a f f i l i a t e s and branch o f f i c e s of Canadian c l i e n t s i n the U.S. Neverthe-l e s s a s u b s t a n t i a l p r o p o r t i o n of t h e i r assets are employed f o r loans. S p e c i f i c a l l y , i n advances to brokers and investment dealers -- s o - c a l l e d " s t r e e t loans". Table IV shows that at October 31, 1968 the secured day-to-day c a l l and short loans i n c u r r e n c i e s other than Canadian amoun-37 ted to $1,077 m i l l i o n , compared to $347 m i l l i o n at the end of 1956. A s i z a b l e p r o p o r t i o n of these loans are advanced by the New York agen-c i e s of the chartered banks which have accounted f o r as much as 60 per 38 cent of a l l s t r e e t l o a n s outstanding. A r e l a t i v e l y minor p r o p o r t i o n of the l i a b i l i t i e s of these agencies are i n the form of d e p o s i t s by correspondent banks the l a r g e s t p o r t i o n are due to t h e i r Canadian o f f i c e s . T his p o s i t i o n i s the source of an advantage of agency status over a f o r e i g n branch, as out-l i n e d below. Although agencies are not permitted to r e c e i v e d e p o s i t s on t h e i r own, and branches are allowed a wider range of a c t i v i t i e s , agen-c i e s do have more freedom from r e g u l a t i o n . This may be i l l u s t r a t e d by a t r a n s a c t i o n i n which an agency accepts a d o l l a r d e p o s i t on behalf of i t s Head O f f i c e . Suppose a U.S. c o r p o r a t i o n deposits $1 m i l l i o n i n a Canadian bank through the bank's New York Agency. The chartered bank may, i f - 62 -/ i t d e s i r e s , leave the funds f o r employment by the agency, which may then lend the money. Balance sheets would be a l t e r e d as f o l l o w s : Canadian Bank New York Agency A L A L Due from New York United States Loans: Due to head o f f i c e : agency: d e p o s i t s : +$1 m i l l i o n +$1 m i l l i o n + $1 m i l l i o n + $1 m i l l i o n The d e p o s i t i s denominated i n U.S. d o l l a r s , and the Canadian bank has the. same. t o t a l of U.S. d o l l a r assets when i t places the funds w i t h the New York agency. Since the agency acquires i t s funds as an advance from the head o f f i c e , the funds are not a deposit l i a b i l i t y and reserves are not r e q u i r e d . Had the agency been a branch accepting the deposit d i r e c t l y , i t would have to carry the same reserves as any other s t a t e bank i n New York. Canadian agencies i n New York are thus involved s u b s t a n t i a l l y i n i n t e r n a t i o n a l c a p i t a l movements, and it's f i n a n c i n g , r a t h e r than i n the f i n a n c i n g of f o r e i g n trade. More w i l l be s a i d of agency operations when t h e i r h i s t o r i c a l development i s analyzed. We s h a l l now t u r n to a d i s c u s s i o n of the agency's more d i v e r s i f i e d brother, the f o r e i g n branch. FOREIGN BRANCHES A bank becomes t r u l y i n t e r n a t i o n a l i n scope when i t estab-l i s h e s f o r e i g n branches. The branch has an important advantage over correspondent banks and r e s i d e n t r e p r e s e n t a t i v e s as, i n c o n t r a s t to these l a t t e r forms, the branch i s able to accept and s e r v i c e deposits of r e s i d e n t s of the f o r e i g n country whereas a correspondent bank enables - 63 -a chartered bank to provide only the i n t e r n a t i o n a l needs of i t s Canadian customers. Meanwhile the r e p r e s e n t a t i v e e s s e n t i a l l y i s l i m i t e d to a mar-k e t i n g r o l e . At the same time, the branch i s i n an e x c e l l e n t p o s i t i o n to acquire the. business of domestic concerns operating abroad. I d e n t i t y i s c r u c i a l to operating s u c c e s s f u l l y i n the i n t e r -n a t i o n a l arena. A r e s i d e n t o f f i c e i s considered by at l e a s t one i n t e r -n a t i o n a l banker interviewed as "the l e a s t t h i n g you can do". To be recognized as a member of the i n t e r n a t i o n a l banking f r a t e r n i t y one's "name above the door" of a f o r e i g n branch o f f i c e i s a v i t a l component. The branch method of overseas operation i s to be p r e f e r r e d i n many instances because the home o f f i c e holds complete c o n t r o l of manage-ment p o l i c y aud p r a c t i c e s and obtains " u n d i l u t e d v i s i b i l i t y i n a f o r e i g n market." Operating i n another country v i a s u b s i d i a r i e s or correspondents \7hleh are not c o n t r o l l e d one must be prepared to " l i v e w i t h l o c a l manage-ment d e c i s i o n s . " A t the same time one's p e r s p e c t i v e of the l o c a l scene, may be clouded since i n f o r m a t i o n flows through an intermediary, the l o c a l bank. On the other hand, a l a r g e system of branches o f f e r s s u b s t a n t i a l ! v more a d m i n i s t r a t i v e problems than any number of correspondent banks be-cause of the need f o r day-to-day management. Branches, too, are c o s t l y to set up and operate and may not y i e l d quick p r o f i t s . The s t a r t - u p costs of a. f o r e i g n branch o f f i c e vary, however, depending upon s e v e r a l f a c t o r s . Most important i s the type of operation, t h a t i s , i s p r i n c i p a l l y a "wholesale" or " r e t a i l " banking a c t i v i t y to be conducted? "Wholesale." banking r e f e r s to opera-- 64 -Lions c a r r i e d on i n an inter-bank market where banks w i t h surplus loan-able resources "lend" money to other banks which are experiencing l i q u i d i t y pressures. Commonly these "loans" are made w i t h the i n v e s t -i n g bank purchasing c e r t i f i c a t e s of deposit of the borrowing i n s t i t u -t i o n . These c e r t i f i c a t e s are t r a n s f e r a b l e i n t e r e s t - b e a r i n g instruments w i t h a d e f i n i t e m a t u r i t y date. The most prominent wholesale banking operation today i s the E u r o - d o l l a r market. " R e t a i l " banking, on the other hand, e n t a i l s the usual banking a c t i v i t i e s of d e p o s i t - t a k i n g and l e n d i n g . During the i n t e r v i e w s of i n t e r n a t i o n a l bankers, r e f e r r e d to e a r l i e r , evidence was obtained concerning the costs concomitant with s e t t i n g up a f o r e i g n branch. The standard r e t a i l banking o f f i c e i s g e n e r a l l y much l e s s expensive to set up c o s t i n g somewhere i n excess of $100,000 i n c l u d i n g r e n t , wages, equipment and s u p p l i e s and, transpor-t a t i o n . I t i s common f o r s t a r t - u p costs to be amortized over a period of 4 to 5 years w i t h from 2 to 3 years r e q u i r e d before the branch be-comes p r o f i t a b l e . One i n t e r n a t i o n a l banker interviewed estimated that a r e t a i l banking o f f i c e of 3 to 4 persons i n the Caribbean i s expected to show a p r o f i t w i t h i n 3 years during which time r e n t , wages and oper-a t i n g costs are l i k e l y to be w e l l i n excess of $200,000. The i n i t i a l i n ventory of equipment and s u p p l i e s f o r a small branch of t h i s type approximates $25,000 i n c l u d i n g a minimum of $10,000 f o r a v a u l t . Sup-p l i e s , and equipment, when a v a i l a b l e , are g e n e r a l l y purchased l o c a l l y which increases u n i t costs i n many i n s t a n c e s , however t h i s i s l a r g e l y - 65 -offset by the avoidance of transportation expenses. Commonly buildings are leased thereby reducing the i n i t i a l capital commitment. The start-up costs of a prestige wholesale banking outlet in a c i ty such as London is l ike ly to be more than double those, of the standard r e t a i l branch, a minimum of $200 to $250,000. Significant expenses are the transportation and moving expenses concomitant with the relocation of people internationally. While the set-up costs of a wholesale banking operation are in general "very high", part icularly in contrast to the normal r e t a i l outlet, the costs of both are l ike ly to vary significantly depending upon the geographic location of the branch. The overhead of a whole-sale outlet in Nassau, for example, is much cheapter than a similar outlet in London. A primarily r e t a i l branch in Athens is l ikely to be more costly to start up and operate than one in Tunapuna, Trinidad. At the same time, the significant prestige element is an important determinant of i n i t i a l costs. To obtain the desired exposure, in a city such as Athens w i l l require a more impressive office than is necessary to make the desired impression in Tunapuna. Foreign branches may also be "costly" in another sense. It i s frequently d i f f i c u l t in many areas to attract an adequate deposit base. This problem of deposit acquisition means that the resources of Head Office or other branches in the area must be rel ied upon to f i l l the gap so that the loan demands upon the branch may be met. Funds which might more profitably be. employed elsewhere thus may have to be - 66 -"loaned" to certain branches in the international area to make their operation viable. The banks are fu l ly aware of the added costs i n v o l v e d as evidenced by a recent statement by Rudolph A. Peterson, the presi-dent of the Bank of America: "The bank has served notice to i ts over-seas managers that they are to stand on their own feet, the days of 39 heavy reliance upon Head Office for funds is past." There are also a certain number of risks involved in operating foreign branches not the least of which is the poss ib i l i ty of expropri-ation. This is a real danger in many of the developing nations and a re lat ive ly recent example is afforded by the experience of foreign banks in Cuba in 1960. The F i r s t National City Bank of New York, for example, lost a total of eleven branches there while The F i r s t National Bank of 40 Boston lost six for which they received no compensation. However, although expropriation means a loss of assets to the bank, at the same time, the branch is relieved of i t s deposit l i a b i l i t i e s . As an Ameri-can banker described the situation in Cuba, "Cubans owed Cubans," therefore, in most cases, the loss of invested capital is l ike ly to be but a small percentage of total assets. The more prevalent risks are the dangers which may be con-comitant with a policy of aggressive competition with local banks for local business after the foreign branch is established. I t is custo-mary practice when a foreign branch is opened for the parent bank to transfer to i t the business and deposits which hitherto went to i t s local correspondent banks. This longstanding practice is l ike ly to be - 67 -accepted by the correspondents, however, they, and their local counter-parts, may become rather unfriendly when these same branches a c t i v e l y and successfully s o l i c i t customers from the l o c a l banks. As s u c c i n c t l y described by "The Economist"; Here is a rude, unprecedented breach of hallowed banking cus-tom. The i n v a s i o n of sacred domestic preserves by f o r e i g n interlopers, .is; a heresy offending the protectionist banker's deepest i n s t i n c t s . ^ 1 The "feathers which begin to f ly" as a consequence may be u n i -la tera l restrict ions against foreign branches or enforcement of s t r i c -ter compliance with established local r u l e s . The safest route from the point of view of long-run profits might be to adopt the more "gentlemanly behaviour" of Br i t i sh banks abroad and not s o l i c i t local deposits but 4 2 accept, them when offered. An American banker questioned by the writer in this regard responded that that bank, which has an extensive overseas network of branches, is "Cautious about aggressive competition for local deposits. Instead they emphasize service to multinational corporations, the area in which their expertise l i e s ." At the same time, they "observe local protocol to the extent fe l t necessary" although probably due to their firmly established position internationally, the bank is "not now as concerned about damage to relationships with correspondents." Al t er -natively, overseas operations might be largely restricted to a number of carefully situated branches and representative offices to supplement a widespread network of correspondent banks. As one American banker - 68 -interviewed described that bank's policy of limited overseas branching, "We are not interested in stepping on our correspondents' toes in any w a y . " We have debated some of the advantages and disadvantages of operating a system of foreign branches. However, we have not yet ans-wered the question, "What are the principal act iv i t ies of these branche As might be expected they are the same as those performed by domestic branches — deposit-taking and lending. Data i s available showing the volume of deposits of non-bank customers and foreign currency loans outside Canada for the period 1 9 5 4 43 to 1963. This data w i l l be referred to again when we discuss alter-nate approaches to measuring the international involvement of Canadian banks. At this stage we shall peruse only the respective positions at September 30, 1963. On the l i a b i l i t y side of the balance sheet "Deposits of Non-Bank Customers" outside Canada equalled $874 mi l l ion or almost one-f i f t h of total foreign currency l i a b i l i t i e s both inside and outside 44 Canada. Unfortunately, no data is available to determine for this period total assets or l i a b i l i t i e s outside Canada. On the asset side "Foreign Currency Loans" outside Canada amounted to $1,843 mi l l ion or 42.4 per cent of combined total foreign currency assets. However, $1,150 mi l l ion of these loans were "Call Loans", a principal act iv i ty of agencies as discussed above. - 69 -F o r e i g n branches, then, conduct a c t i v i t i e s very s i m i l a r to t h e i r domestic counterparts. They a l s o possess c e r t a i n advantages and disadvantages over other operating forms. However, there may be occa-sions when market p o t e n t i a l appears to warrant the establishment of a branch but c e r t a i n other c o n d i t i o n s render t h i s course i n a p p r o p r i a t e . SUBSIDIARY CORPORATIONS AND AFFILIATES The chartered banks have not made, extensive use of wholly-owned s u b s i d i a r i e s . Two have r e c e n t l y , however, begun to employ the a f f i l i a t e form of i n t e r n a t i o n a l operation more e x t e n s i v e l y , that i s , a l e s s than wholly-owned, but a c o n t r o l l i n g investment, or m i n o r i t y equity p a r t i c i p a t i o n , i n a f o r e i g n bank as a means of e s t a b l i s h i n g c l o s e r banking connections i n c e r t a i n areas. Where r e g u l a t i o n does not per-mit the establishment of f o r e i g n branches, but allows f o r e i g n equity p a r t i c i p a t i o n , investment i n a s u b s i d i a r y or a f f i l i a t e may be the only s u i t a b l e a l t e r n a t i v e that i s acceptable, to l o c a l a u t h o r i t i e s . An e x c e l l e n t example i s provided by the establishment of wholly-owned s u b s i d i a r i e s i n C a l i f o r n i a by two Canadian chartered banks. These are separate s t a t e - c h a r t e r e d corporations and as such are permit-ted to accept deposits and conduct a f u l l banking s e r v i c e . However, t h e i r p o l i c y may be c o n t r o l l e d d i r e c t l y by the parent bank, as i s the case w i t h f o r e i g n branches, while the s u b s i d i a r i e s have the opportunity to p a r t i c i p a t e f u l l y i n C a l i f o r n i a ' s rapid•growth. - 70 -An additional significant advantage of a wholly-owned or con-tro l led subsidiary form of operation is that i t s use permits the char-tered banks to invest in non-banking interests in other countries. Th major Canadian banks each have ut i l i zed this technique to create t r u s t companies in New York, the United Kingdom and the Caribbean. The New York companies were incorporated since New York agencies, who a c t i v e l y engage in securities dealings, are not permitted to exercise f i d u c i a r y powers. The stated objective of the companies established in New York and the U.K. is to "provide fiduciary services for the Bank's c l ients . ' The Caribbean corporations have as their stated purpose "to provide a f u l l range of personal and corporate trust services." Where the formation of a wholly-owned subsidiary is not ac-ceptable or pract ica l the purchase of controll ing or minority i n t e r e s t , in a foreign bank offers several advantages. Importantly, i t may o f f e i a re lat ive ly inexpensive means of in i t i a t ing a branch system abroad since the unprofitable i n i t i a l stages of new branches may be avoided fo} the acquisition of a going concern. At the same time, a deposit base, i s concurrently acquired, therefore the a f f i l ia ted operation is better-equipped to "stand on i t s own feet" than a branch. In other words, the tenuous problem of deposit acquisition may be largely overcome. The a f f i l i a t e route can also serve as a means of developing quickly a branch network in a foreign country. As one American banker responded, "If you want to be big in a certain country i t ' s better to be a partner." An outstanding example in this sphere was the Bank of - 71 -America's acquisition of an I ta l ian bank in 1957 which in one f e l l swoop endowed i t with a network of 85 branches throughout the country. An a f f i l ia ted foreign bank can also be of substantial value because of the expertise i t is l ike ly to have in the conducting of banking business within the borders of i ts country. In other words, an a f f i l i t a t e compared to a branch offers the. advantage of a local staff familiar with local conditions. This advantage may be somewhat i l lusory however i f that staff is poorly trained. However, given that good local people are available, or readily trained, the branch operation can largely overcome this apparent disadvantage by substantially employing local people. Another possible advantage of the a f f i l i a t e form of operation might be to mitigate possible legis lat ive repercussions which may emerge from a policy of aggressive competition for local business with local banks. The quandary between disregarding opportunities abroad and of-fending foreign banking friends may be overcome since domestic opera-tions and those overseas are more clearly divided, being maintained at least at "half an arm's length". At the same time nat ional is t ic fervour amongst the population is not l ike ly to be as readily aroused since i t is the name of an established local bank which appears "above the door", despite i t s foreign t ies . Overall banking is a very sensitive business, p o l i t i c a l l y speaking, and there may be instances where a minority position in a foreign bank is most suitable to avoid the implementation of restr ict ive - 72 -leg is lat ion. However, such a country is not to be avoided since an avenue of acceptance is available and once "inside" the investing bank may partake of any col lateral benefits which accrue and are unavailable to competitors on the "outside". Thus far only possible advantages of the subsidiary form have been presented. Its disadvantages include some of those present in branches - - greater administrative, problems and risks of expropria-t ion. However in direct contrast to a branch where you are "able to do things your own way" there is the very real danger that the inter-ests of the directors of the local bank may not at a l l times coincide with those of the foreign bank. At the same time, the foreign bank may be subjected to considerable local pressures through this connec-tion to increase loans beyond acceptable levels to local corporations or government agencies, part icularly in a developing nation and espec-i a l l y i f the local bank is a f i s ca l agent of the government or closely a l l i e d with i ts interests. As stated at the outset of this section the chartered banks to date have made relat ively l i t t l e use of a f f i l ia t ions as a method of establishing a banking connection abroad, although their employment is expanding. Nevertheless, in concert with other investors,. some Cana-dian banks have recently become engaged in a small number of joint ventures in which they are not the principal participant. - 73 -11ULTINATIONAL JOINT VENTURE The multinational joint venture is largely a product of the 1960's and represents a new type of f inancial inst i tut ion. A new com-pany is created in which each participant may have equal equity hold-ings or the all iance may have one or two major shareholders. The com-pany incorporated does not represent a merger and is separate from the other operations of the participants. Thus the institutions retain their individual identity elsewhere. Commonly i t is a consortium of three to six f inancial inst i tut ions . However, there is no restr ict ion on the numbers involved and where the venture is created to engage in private development finance as many as f i f ty have participated. I t is necessary to emphasize the use of the term financial inst i tut ion as opposed to banks since the alliances are not always exclusively between commercial banks but may involve, for example, in-surance companies, investment banks and commercial banks as does a joint venture which has only recently been formed. This corporation, known as Manufacturers Hanover Limited, involves Manufacturers Hanover Trust Company of New York, N.M. Rothschild and Sons of London, an investment banking concern, and an I ta l ian insurance company, Riunione Adriat ica di Sicurta. The elaboration upon the nature of the multinational joint venture which follows w i l l be in terms of outlining the general nature of the arrangements, some of the objectives of a commercial bank as a - 74 -partner, the evaluation of a prospective partner and some views on minority as opposed to majority equity participation. The relative ad-vantages and disadvantages of the joint venture w i l l be interspersed throughout the analysis. Before outlining a number of objectives which the individual bank may seek to realize through a multinational joint venture i t i s useful to sketch the general nature of the arrangements concomitant with i t s creation. Signif icantly , the venture is a separate corpora-tion established under the laws of one country. Thus, i t has an impor-tant advantage over a merger since i t avoids the hurdles of currency differences that render cross-border mergers impractical. The common procedure is for the individual participants to contribute capita l , man-agement talent and directors to the venture at the same time leaving the door open for future participants. The relative proportion of cap-i t a l contributed is the basis for determining the number of members the individual participants is allowed on the board of directors. As in other corporations the board is the policy-making arm of the venture. Capital contributions too are the basis used in allocating any prof i ts . The resources available to the consortium in addition to i ts own paid-up capital w i l l usually consist of medium- and long-term bonds issued on national and international capital markets, plus c e r t i f i c a t e s of deposit and other forms of time deposits. In addition, the corpora-tion generally has ready access to the f inancial resources of i ts mem-bers often in the form of a standby credit of a specified amount. - 75 -The. fundamental o b j e c t i v e behind the c r e a t i o n of a m u l t i n a -t i o n a l j o i n t venture i s the a c q u i s i t i o n of the a b i l i t y to m o b i l i z e c a p i t a l i n the most e f f i c i e n t way to meet demands i n c e r t a i n areas. The. needs, p o t e n t i a l p r o f i t a b i l i t y and the c o l l a t e r a l b e n e f i t s present i n new banking markets may be recognized by the i n d i v i d u a l commercial bank. However f o r a v a r i e t y of reasons, i n c l u d i n g the resources re-quired or the degree of r i s k i n v o l v e d , one bank may e i t h e r be u n w i l l i n g or unable to take advantage of the opportunity. But i f s u i t a b l e p a r t -ners can be found i n order to "spread the r i s k s around" the i n d i v i d u a l bank may be q u i t e w i l l i n g to p a r t i c i p a t e . Because the venture represents a p o o l i n g of assets from a number of f i n a n c i a l i n s t i t u t i o n s i t i s analagous to the p o o l i n g arrange-ment employed by f i r e and c a s u a l t y insurance companies when i n s u r i n g l a r g e a s s e t s . Since no one company wishes to accept the p o s s i b i l i t y of being faced w i t h a s u b s t a n t i a l c l a i m which could exert serious pres-sures on the company's l i q u i d p o s i t i o n the r i s k s to the i n d i v i d u a l f i r m are reduced by t h e j o i n t p a r t i c i p a t i o n of s e v e r a l f i r m s i n the con-t r a c t . So too w i t h the j o i n t venture. The j o i n t p a r t i c i p a t i o n enables the member banks to engage i n l e n d i n g a c t i v i t i e s i n circumstances not s u i t a b l e f o r normal commercial l e n d i n g . S p e c i f i c a l l y , they are able to depart from t h e i r customary emphasis upon short term loans and p a r t i -c i p a t e i n such types of l e n d i n g as medium- term export f i n a n c i n g and long-term loans f o r l a r g e - s c a l e development p r o j e c t s throughout the world through the m o b i l i z a t i o n of s i z a b l e resources. While no one com-- 76 -mercial bank may desire to engage, by i t s e l f , in these forms of lend i n g where attendant risks are higher a consortium of a number of banks i s l ike ly to be much more amenable since the r isk is divided among the participants. I t may not be divided equally, of course, i f the c a p i t a l contribution to the venture is not equal, however, i t is the fact that the r isk i s divided which is most significant i n t h i s instance. A description of the r o l e which one of the major m u l t i n a t i o n -al joint ventures is designed to f i l l should outline succinctly the. departures from tradit ional international banking which may be. taken by-adopting this operating form. The Societe Financiere European i s an equal partnership of one American and five of Europe's foremost banking 46 houses. Total deposits of these institutions are over $ U.S. 40 b i l l i o n . SFE extends medium- and long-term loans by i t s e l f or i n asso-ciat ion with member banks or with other banks. I t participates i n equity financing with the objective of providing additional c a p i t a l without acquiring control. At the same time i t offers important other varied services in addition to lending. SFE assists corporations seek-ing international or multinational mergers or consolidations by an a l y z i n g requirements of the companies, locating suitable partners, proposing solutions to technical, commercial, f i s c a l , legal , administrative and f inancial problems and conducting necessary negotiations. Thus i t be-comes readily apparent that the jo int venture o f f e r s an i n d i v i d u a l com-mercial bank the opportunity to develop a greater expertise i n the complex arena of international finance. - 77 -At the same time the commercial bank is obtaining added know-ledge of international f inancial operations i t w i l l be real iz ing another important objective. Participation in a joint venture is evidence of a bank's desire to play an international role . As pointed out when discussing the merits of foreign branching, exposure on the internation-a l scene is an essential ingredient for success. A co l lateral benefit may accrue to participation in a jo int venture which is not present through branching and that is "identif ication with good people". The individual bank may achieve desirable prestige from association with prominent international f inancial inst i tut ions. Other important col lateral benefits may accrue to the i n d i -vidual bank involved in a multinational jo int venture. The adjective "multinational" is the key. There are many situations around the world in which a commercial bank, acting alone, might have i t s operations notably circumscribed. The venture often involves banks from several nations and, therefore, may di lute the strength of nat ional is t ic senti-ments in a particular country or countries. Since the corporation is owned and managed by the citizens of more than one nation this multi-national approach to banking may mitigate the dangers of expropriation, res tr ic t ive legis lat ion or forced financing of questionable enterprises favoured by the local government. In other words, the jo int venture may be the only available acceptance vehicle in a particular country and i f a bank wishes to establish a l ink there i t must be done on a joint basis. At the same time, participation in a venture designed to - 78 -make loanable funds available for development projects may eventually lead to an individual participant being allowed to operate independently in a developing country where i t has been seeking an outlet. In summary, the objectives which may lead an individual bank to participate in a multinational joint venture are varied. The de-s ire for international exposure, identif icat ion with good people to ac-quire prestige, participation in profitable medium-- and long-term lend-ing and acceptance in particular countries are the principal objectives which may be served v ia the venture route. How does a commercial bank evaluate the prospective partners in. order to fac i l i ta te the real iza-tion of these objectives? Essent ia l ly , the evaluation is conducted in the same manner that one would weigh the merits of any prospective partners. In the words of one banker interviewed i t must be established that the "person, family or group which controls and/or manages the firm or bank are honest people of good fa i th who w i l l become active, hard-working partners." In addition to the character of the organization i ts charac-ter i s t i cs must also be distinguished. Here the expertise of the pros-pective partner, i t s f inancial resources and i ts importance on the i n -ternational scene are features which must be investigated. Are these characteristics complementary, confl ict ing or excessively similar to those of your institution? A specific example should provide a useful i l lu s t ra t ion of the outcome of this evaluation process. - 79 -Once again we shall u t i l i z e Manufacturers Hanover Limited as an example. This multinational jo int venture "combines the banking s k i l l s of a large U.S. commercial bank with the sophistication and more specialized knowledge of a private investment bank using the resources 47 and placement power of a large insurance company." Since i t s objec-tives are to develop sources of funds for short, medium and long-term lending, along with arranging private placements and underwriting sec-ur i t ies issues in the Euro-dollar and Euro-bond markets, i t would ap-pear that three complementary institutions have pooled resources in this instance. A similar situation may apply in the contemplation of a jo int venture solely involving commercial banks since i t is common for a bank of another, and sometimes even the same, country to have developed an expertise in different functional and/or geographic areas. For example, a European bank may acquire notable expertise in the conduct of invest-ment banking operations in contrast to a Canadian bank which is preclu-ded by legis lat ion from this act iv i ty . Or, in the United States, a New York bank with a large number of overseas "offices" w i l l , no doubt, have acquired greater knowledge of the appropriate techniques of oper-ation in areas v i r tua l ly total ly unfamiliar to a basically domestically oriented regional bank. The same may be said of the access to finan-c i a l resources and the prestige attached to the larger banks of the world. A relat ively small bank on the international scene, other things - 80 -being equal, is l ike ly to look favourably upon an association with a large and renowned international bank with substantial resources un-der i t s control. Such an association may be most beneficial in terms of the mirror image effect provided for the smaller hitherto less known bank. In general, i t is identif icat ion not only with good but with useful people which is the crux of the evaluation of prospective part-ners. However, the evaluative process does not end with the selection of suitable partners. The bank which is contemplating participation in a jo int venture must also weigh the relative merits of a minority as opposed to a majority equity posit ion. Where the partnership is not equal and there are one or two major participants there may be d i f f i -cul t ies . I t is natural that the thinking of those institutions should govern the pol icies and practices of the venture since i t is they who have contributed a major proportion of the i n i t i a l capital and thus are exposed to proportionately greater r i sks . Therefore, a bank con-sidering minor equity participation must be wi l l ing to accede to the wishes of the majority holders in many instances. Nevertheless the majority par t i c ipant s ) although exercising control must not attempt to dominate the other members or the v i a b i l i t y of the venture is l ike ly to be endangered. The same d i f f i cu l t i e s may arise in a jo int venture where each partner enjoys equal equity part ic ipation. However since each maintains equal footing the dangers of unwarranted domination are mi t i -- 81 -gated. There remains the p o s s i b i l i t y though that i n c e r t a i n tenuous s i t u a t i o n s matters may be permitted to s l i d e as none f e e l s p r i m a r i l y r e s p o n s i b l e . O v e r a l l a commercial bank must enter any consortium w i t h i t s eyes open to the f a c t that i t w i l l be unable to pursue the independent course to which i t i s normally accustomed. This a p p l i e s whether the par-t i c i p a t i o n i s to be as a m a j o r i t y or a m i n o r i t y partner. Of course, even w i t h equal p a r t i c i p a t i o n compromise and co-operation i s a r e q u i s i t e to overcome p o s s i b l e c o n f l i c t s of i n t e r e s t . G e n e r a l l y speaking, the m u l t i n a t i o n a l j o i n t venture approach to overseas operations appears to o f f e r r e l a t i v e l y greater advantages to the smaller banks on or e n t e r i n g the i n t e r n a t i o n a l scene, d e s p i t e the strong l i k e l i h o o d that t h e i r p a r t i c i p a t i o j i w i l l be by way of a m i n o r i t y equity p o s i t i o n . The venture route i s a r e l a t i v e l y inexpensive way f o r a bank to o b t a i n d e s i r a b l e exposure abroad. A s s o c i a t i o n w i t h an i n s t i t u t i o n or i n s t i t u t i o n s which have acquired prominence i n t e r n a -t i o n a l l y i s a u s e f u l means of b u i l d i n g p r e s t i g e f o r oneself. By work-ing w i t h capable and experienced partners those banks which are new to the i n t e r n a t i o n a l scene or have l a r g e l y operated from a domestic base may develop necessary e x p e r t i s e f o r f u t u r e independent or j o i n t opera-t i o n s . N a t u r a l l y those commercial banks w i t h already r e l a t i v e l y l a r g e i n t e r n a t i o n a l operations can augment t h e i r i d e n t i t y and p r e s t i g e abroad through p a r t i c i p a t i o n w i t h renowned f o r e i g n banks. However, the gain i s - 82 -p r o p o r t i o n a t e l y l e s s than t h a t f o r the smaller bank which begins from a narrower base. I t i s a l s o true that the l a r g e r commercial banks on the i n t e r n a t i o n a l scene can acquire valuable knowledge through an a s s o c i a t i o n w i t h other f i n a n c i a l i n s t i t u t i o n s , p a r t i c u l a r l y merchant or investment bankers, but we are p r i m a r i l y concerneli here w i t h j o i n t ventures between commercial banks only. Indeed there i s not a remote i p o s s i b i l i t y that the j o i n t venture route may be i n a p p r o p r i a t e simply because the bank already has developed a l a r g e network of overseas, " o f f i c e s " . P a r t i c u l a r l y where a bank has expanded abroad p r i m a r i l y v i a equity investments i n f o r e i g n banks a notable c o n s t r a i n t i s placed upon p a r t i c i p a t i o n i n a j o i n t venture. Since the bank does not wish to d i s t u r b i t s working r e l a t i o n s h i p w i t h these a f f i l i a t e s i t i s l i k e l y not to use the venture v e h i c l e except on a very l i m i t e d s c a l e . There are, however, very few banks i n t h i s p o s i t i o n today. A t t h i s stage, then, the. m u l t i n a t i o n a l j o i n t , venture would appear to o f f e r s u b s t a n t i a l net advantages to i t s members and seems, t h e r e f o r e , l i k e l y to become an i n c r e a s i n g l y common phenomenon on the i n t e r n a t i o n a l scene. I t a l s o i s important to note, at. the same time, t h a t as more banks are able to obtain wider i n t e r n a t i o n a l exposure, the sharing of lending r i s k s concomitant w i t h t h i s form of o r g a n i z a t i o n means that the f i n a n c i a l resources a v a i l a b l e f o r the purposes of i n t e r -n a t i o n a l finance are notably expanded. We s h a l l have more to say on t h i s form of i n t e r n a t i o n a l co-operation l a t e r i n t h i s study. i - 83 -WHAT IS THE MOST APPROPRIATE INTERNATIONAL OPERATING FORM? As a consequence of the foregoing d i s c u s s i o n one might ask whether there i s one "best" i n t e r n a t i o n a l operating form which might be employed by a commercial bank w i s h i n g to expand i t s range of opera-t i o n beyond n a t i o n a l boundaries. A b r i e f excerpt from a recent address by the chairman to shareholders of Ba r c l a y s Bank L i m i t e d (U.K.) ans-48 wers t h i s question s u c c i n c t l y : Our p o l i c y f o r i n t e r n a t i o n a l banking r e l a t i o n s must be the despair of t i d y minds, but apart from the r e s t r i c t i o n s of n a t i o n a l l e g i s l a t i o n , we b e l i e v e that what i s r i g h t f o r us f o r one t e r r i t o r y could be wrong f o r another. We t h e r e f o r e vary between operating s u b s i d i a r i e s , a f f i l i a t i o n s w i t h banks i n which we have a m i n o r i t y h o l d i n g , and correspondent r e l a -t i o n s accompanied i n c e r t a i n cases by a l o c a l r e p r e s e n t a t i v e our obj e c t being to provide economically a f i r s t c l a s s over-seas s e r v i c e f o r our customers .... I f p r o f i t s were immater-i a l i t would be easy enough t o invent new o r g a n i z a t i o n s and a l l i a n c e s . Thus, there i s no one form which may s u i t a b l y be u n i v e r s a l l y employed and i n t e r n a t i o n a l involvement by commercial banks should, and does, take many forms. How may the degree of t h i s involvement be mea-sured? Since the answer to t h i s question i s fundamental to ,this study we s h a l l now o f f e r f i v e p o s s i b l e approaches. MEASURES OF INTERNATIONAL INVOLVEMENT AND THE APPROACH OF THIS STUDY The degree of i n t e r n a t i o n a l involvement of commercial banks might be measured by perusing the gross revenue flows of operations conducted i n other c o u n t r i e s by these i n s t i t u t i o n s , a c o m p i l a t i o n of the number of personnel each bank employs overseas or the t o t a l num-ber of customers abroad, a study of the r e l a t i v e s i z e of assets and 84 -l i a b i l i t i e s s i t u a t e d i n f o r e i g n c o u n t r i e s or. by.gathering data con-, c e r n i n g the number and v a r i e t y of i n t e r n a t i o n a l operating forms. I t would be. most u s e f u l i f we were able to present data covering the annual gross revenue earned by the operations abroad of the chartered banks d u r i n g the post-war p e r i o d . Since they are p r i -vate p r o f i t - o r i e n t e d i n s t i t u t i o n s the performance, of t h i s p o r t i o n of t h e i r c o n s o l i d a t e d income statements might' o f f e r s u i t a b l e data to sup-p o r t a contention a r r i v e d at v i a employment of any of the aforementioned a l t e r n a t e approaches. I t would provide a. very i n t e r e s t i n g comparison i f a v a i l a b l e f o r i n d i v i d u a l banks as. w e l l . U n f o r t u n a t e l y , not only i s data u n a v a i l a b l e f o r the i n d i v i d u a l banks, s t a t i s t i c s covering consol-idated revenue flows f o r Canadian banks i s not a v a i l a b l e e i t h e r . There-f o r e , i t w i l l not be p o s s i b l e to use t h i s approach i n t h i s study. A second approach might be to compile the number of per-sonnel employed i n other c o u n t r i e s by the banks since the. amount of a c t i v i t y could be expected to r e f l e c t f a i r l y d i r e c t l y i n the number of overseas s t a f f . This technique, however, s u f f e r s from one major d i s a d -vantage which l a r g e l y destroys i t s usefulness f o r t h i s study at l e a s t . That i s , the considerable d i f f i c u l t y concomitant w i t h an attempt to gather the r e l e v a n t data, from the i n s t i t u t i o n s . While at t h i s stage we might be able to o b t a i n current data f o r each of the post-war years, no doubt, only an estimate could be given which would serve to substan-t i a l l y weaken the v a l i d i t y of the data. However, i f complete informa-t i o n were a v a i l a b l e t h i s approach could, as the former, serve as an - 85 -effective contrast between the act iv i t ies of the chartered banks and their American counterparts. One might also accumulate data on the number of accounts which each bank services in their foreign "offices" as an indication of the number of customers served. This could be considered a measure of overseas involvement. However this approach has two important draw-backs which render i t inappropriate as an "accurate" measure. One is the d i f f i c u l t y which would be experienced in accumulating complete data from branches, representative offices and foreign banks in which the dom-estic inst i tut ion holds an equity interest. Indeed the information i s l ike ly bo be confidential and therefore unavailable. Secondly, as-suming satisfactory data could be gathered, by i t s e l f , i t is not a use-fu l indicator of international involvement since there is no indication of the size of the accounts. I t would be necessary to combine this i n -formation with the dollar size of deposit balances abroad. What i s obtained from this procedure, however, is not a real measure of involve-ment but merely the average balance per account. Thus for the purposes of this study the information gained by this approach would not be f r u i t f u l . A fourth measure of involvement might be the total assets and l i a b i l i t i e s abroad of the private banks. Tracing the h i s tor ica l growth of these assets would provide a clear indication of the expanding over-seas act iv i ty of these institutions and would be especially effective in comparing the degree of involvement of Canadian and U.S. banks abroad. - 86 -Table VIII presents data concerning the h i s tor ica l growth of total foreign currency assets and l i a b i l i t i e s of the chartered banks in the post-war period. Due to the revision in the method of c lass i -f icat ion of data, as noted at the foot of Table VIII, figures for 1955 and subsequent dates are not direct ly comparable with those of earl ier dates. This, is unfortunate but, nevertheless, the almost s ix-fold increase in total foreign currency assets and l i a b i l i t i e s which has occurred between 1955 and 1967 is quite impressive and a useful indica-tion of the growing international act iv i ty of the Canadian private banking system. However, this data does not reveal the total assets or l i a b i l i t i e s which are situated in other countries. Unfortunately, only limited data is available to i l lus trate the change which has ta-ken place in this sector. Table IX offers data pertaining to foreign currency loans and deposits outside Canada for the period 1954 to 1963. Although f i g -ures for total foreign currency assets and l i a b i l i t i e s outside Canada are not available for this period the data missing largely pertains to securities and loans of the New York agencies and deposits by and with foreign correspondent banks. We may thus consider the data available to relate primarily to the act iv i ty of foreign branches. I t w i l l be noted that total foreign currency loans rose from $488 to $2,551 mi l l i on , a f ive-fo ld increase and s l ight ly under an effective compound annual growth rate of 24 per cent. Meanwhile, total deposits of non-bank customers underwent an almost four-fold r i se , - 87 -s l ight ly less than a 16 per cent annual rate of increase. One may hypo-thesize that the growing popularity of "swap" deposits described earl ier was an important force behind the decline in the relative proportion of deposits of non-bank customers outside Canada. Table X reveals that the situation has stabil ized since 1965 possibly due to the U.S. balance of payments guidelines implemented in that year. Table X presents data comparing the total foreign currency assets and l i a b i l i t i e s of the chartered banks and those booked in and outside Canada for the period 1963-1967. I t w i l l be noted that total foreign currency assets rose from $4.2 to $6.3 b i l l i o n during this time, an increase of 40 per cent. At the same time, however, foreign currency assets situated outside Canada grew from $866 to $1,572 m i l -l i o n , an increase of 58 per cent. At the same time, foreign currency assets booked in Canada rose from $3.4 to $4.8 b i l l i o n , a gain of 34 per cent. The strong relative performance of those assets situated abroad is evidenced also by the fact that they moved from one-fifth of total foreign currency assets at the end of 1963 to one-quarter of these assets at December 31, 1967. Thus, i t can be seen that overseas assets are becoming an increasingly important part of the foreign cur-rency position of the chartered banks, although albeit s t i l l a re lat ive ly minor proportion of total'assets. Table XI presents s imilar, but more comprehensive, data for the United States in the form of consolidated statements of the assets - 8 8 -and l i a b i l i t i e s of the foreign branches of national banks f o r s e l e c t e d years from 1945 to 1965. The tremendous growth of these a s s e t s , an e i g h t y - f o l d expansion in twenty years, is apparent, d e s p i t e the account-i n g change in 1965 which saw gross figures for amount, due from and to head office and branches, rather than net, used for the f i r s t t i m e . I t should be emphasized here that the data e x h i b i t e d i n Table XI p e r t a i n s only to national banks, that is those in possession of federal charters, and does not include relevant figures f o r the s t a t e -chartered banks who also hold assets outside the U . S . A . , a l t h o u g h they have recently declined in relative importance. By way of explanation, in 1955 when the Chase N a t i o n a l Bank of New York merged with and into the Bank of the Manhattan Company, a state-chartered inst i tut ion , their overseas assets, p r e v i o u s l y i n c l u -ded w i t h those of their counterparts, were dropped from c o n s i d e r a t i o n . This not only effectively reduced the total assets abroad of n a t i o n a l banks, a f a c t which is noted below Table XI, i t also e f f e c t i v e l y i n -creased the number of foreign branches of state-chartered banks. Thus at the end of 1955 the number of foreign branches operated by n a t i o n a l banks equalled 85 which was 76.6 per cent of total foreign branches of 49 U.S. banks. In 1965 the Chase Manhattan Bank acquired a n a t i o n a l c h a r t e r and, as a consequence, 196 branches, or 93.5 per cent of t o t a l f o r e i g n branches of U.S. banks, were then operated by n a t i o n a l banks. Although complete information regarding the entire U.S. banking system is not presented the contrast with the size of the assets - 89 -of Canadian banks abroad i s obvious. By 1960 the n a t i o n a l banks of the U.S. h e l d assets outside the country t o t a l l i n g $1.6 b i l l i o n . T h i s f i g u r e had not been reached by the chartered banks by December 31, 1967. I n f a c t , before the change i n c l a s s i f i c a t i o n of the Chase N a t i o n a l Bank i n 1955, w i t h i t s s i z a b l e overseas investments, the U.S. n a t i o n a l bank assets had exceeded $1.6 b i l l i o n . For example i n 1950 a f i g u r e of $1.7 b i l l i o n was reached. Such dat a , of course, may l a r g e l y r e f l e c t the greater resources a t the d i s p o s a l of the U.S. banks. However, these funds could a l s o have been invested i n the U.S. and one may reasonably conclude t h a t the S t a t i s t i c s a l s o are an i n d i c a t i o n of the greater i n t e r n a t i o n a l a c t i v i t y of American commercial banks. One of the objects of t h i s study i s to determine whether or not t h i s i s so. This leads us to the f i n a l a l t e r -n a t i v e . The f i f t h approach i s to analyse data p e r t a i n i n g to the num-ber and k i n d of operating forms employed by the banks i n conducting t h e i r i n t e r n a t i o n a l a c t i v i t i e s . T his i s the approach which t h i s study w i l l use to i n v e s t i g a t e the p a t t e r n of growth of the i n t e r n a t i o n a l oper-a t i o n s of the Canadian chartered banks and t h e i r American counterparts i n the post-war era. S p e c i f i c a l l y , h i s t o r i c a l and cur r e n t i n f o r m a t i o n w i l l be accumulated concerning, as f a r as p o s s i b l e , when and where the f o r e i g n " o f f i c e s " of the f i v e p r i n c i p a l Canadian and U.S. banks were opened. A t the same time, hypotheses w i l l be tendered i n an e f f o r t to e x p l a i n - 90 -why a particular form was selected for a specific location at a cer-tain time. I t is possible that the motivations of the ten institutions canvassed w i l l be v i r tua l ly ident ica l , however, i t is more l ike ly that different banks w i l l emphasize different factors. The several different international operating forms have been defined in terms of the services they are expected to perform and their relative advantages and disadvantages have been discussed. This discussion has supplied a foundation to explain, at least, the fundamen-ta l reasons why a certain type of operational form might be selected in a particular instance. None of the alternate approaches mentioned above would be l ike ly to generate a number of hypotheses for these events, an aim of this treatise. Therefore i t is advantageous to u t i l i z e the method chosen. In addition, i t follows that as the number and variety of "offices" established overseas increases so too does international involvement. This approach also offers other advantages to support i t s use in this study. A significant advantage stems from the fact that v i r t u a l l y complete information may be accumulated as to when and where particular "offices" were established, by correspondence with the banks involved, whereas the other approaches suggested suffer either from a total absence of data or the ava i lab i l i ty of crude or, at best, limited s tat i s t ics for the post-war period. I t may be argued that the dollar value of assets abroad i s the best measure of international involvement. However, aside from - 91 -the unfortunate f a c t that only l i m i t e d Canadian data i s a v a i l a b l e , and even when i t i s recognized that comprehensive annual data i s a v a i l a b l e f o r the U.S. n a t i o n a l banks, as e x h i b i t e d i n Table X I , t h i s approach i s d e c i d e d l y more i n f l e x i b l e than the one adopted by t h i s study. T o t a l assets overseas f o r the banks of e i t h e r country are not broken down, only world-wide f i g u r e s are a v a i l a b l e . I n c o n t r a s t by examining the o p e r a t i o n a l forms we may be q u i t e f l e x i b l e as the a n a l y s i s may proceed country by country and/or by va r i o u s r e g i o n a l groupings, i n c l u d i n g a d i s t i n c t i o n between the developed and developing n a t i o n s . I n s h o r t , the b a s i c a l l y q u a l i t a t i v e approach s e l e c t e d , sup-ported of course by r e l e v a n t data, should enable us not only to o f f e r more meaningful hypotheses to e x p l a i n growing i n t e r n a t i o n a l i z a t i o n but to develop a much more i n t e r e s t i n g and i n f o r m a t i v e p i c t u r e of the pat-t e r n of i n t e r n a t i o n a l operations of both Canadian and U.S. banks than would be the case i f the s t a t i s t i c a l a n a l y s i s concomitant w i t h u t i l i -z a t i o n of the a l t e r n a t e methods were r e l i e d upon e n t i r e l y . COMPARABLE EFFORTS The o b j e c t i v e of t h i s chapter has been to place the study i n p e r s p e c t i v e . We t r u s t the foregoing p r e s e n t a t i o n has accomplished t h i s purpose. However, there are a number of u s e f u l works which may be r e -garded as comparable e f f o r t s and i l l u m i n a t i n g references s i n c e each d i s c u s s a t l e a s t some area which we have canvassed above. - 92 -A part icular ly relevant treatise to which the reader may re-fer to as a supplement to the information presented here i s Richard 50 Ward's "International Finance". Says,Ward in the preface, "When money became the f ia t issue of separate states, the finance of inter-national transactions assumed a complexity a l l i t s own. I t is this complexity that is the subject matter of this book." In his ensuing analysis of "existing mechanisms" and "alter-native interactional monetary systems" he looks at a number of the top-ics discussed in this chapter. One is international investment. Here Ward defines and elaborates upon direct investment abroad — i ts forms, i ts motives, i ts effect upon United States balance of payments and his-tor ica l pattern. The same technique is employed in his treatment of portfol io investment overseas. The contingency of government capital controls is also canvassed. In a later chapter the forward exchange market is surveyed as wel l . The forward contract is defined and the functions of the forward market outlined — commercial coverage, hedg-ing, speculation and interest arbitrage. The mechanics of forward rate determination and arbitrage operations are discussed. The policy of o f f i c i a l intervention in the forward market is debated. Of special relevance to this study is Ward's chapter which canvasses commercial banking institutions in the international arena. The "activit ies of commercial banks direct ly associated with interna-tional transactions" are presented. Foreign exchange trading by these banks is reviewed and importantly several overseas banking forms are - 93 -examined. Specif ical ly the functions of a correspondent banking net-work are elaborated upon, the motivation and deterrents to United States foreign branching are discussed together with the major purposes of foreign banking subsidiaries for U.S. banks. The chapter closes with a survey of foreign banking act iv i ty in the United States. A l -though in some areas factors specific to the U.S. scene are discussed, most of what is said in the chapter on banking institutions has uni-versal application, hence i t s value as a reference for this study. A text with the same t i t l e as Ward's book written by Wasser-man, Hultman and Zsoldos contains a brief discussion of the organiza-tion and services offered by the international department of a commer-51 c i a l bank. I t also examines two of the principal instruments employed to fac i l i ta te international commerce. The b i l l of exchange is defined and i t s varied uses described. A similar approach is followed.in a comprehensive examination of the letter of credit with the addition of an informative inspection of this instrument's advantages and disad-vantages for international traders. Yet another work entit led "International Finance", this one 52 by Charles N. Henning offers material relevant to this study. Hen-ning br ie f ly describes some of the functions performed by banks in international finance, classifying them under three headings similar to those of this treatise — transfer, credit and hedging. A later section contains a comprehensive examination of letters of credit - -nature, basic forms, mechanics and advantages to the trader and par t i -- 94 -cipating banks. Henning also presents a description of the functions and organization of the foreign department of a U.S. commercial bank, its sources of income and expenses together with a very brief reference to some of the advantages and disadvantages of foreign branches. An interesting text by John Parke Young contains a chapter which discusses the financing of foreign trade and the principal me-53 thods of payment, including the letter of credit. Immediately f o l l o w -ing this foreign exchange and the foreign exchange market are surveyed. Later in the book an informative chapter describes the nature of f o r -eign investment, distinguishes between direct and portfolio investments and relates the meaning of capital transfer before offering a number of deterrents to foreign investment in the less developed countries. The i n i t i a l article in a particularly interesting work edi-ted by Lee C. Nehrt, referred to earlier, is of relevance to this chap-54 ter of the study. It describes, in much more depth than Young, "one of the most important and least understood markets ... the foreign ex-change market." The essay is "devoted to a study of the interrelation-ships among the participants" in this market and specifically examines the functions of the foreign exchange market, the methods of operation of professional risk-bearers and interest-arbitrageurs i n today's mar-ket and the reactions of the foreign exchange market to current and to expected disturbances. Young proposed several factors which discourage foreign i n -vestment especially in developing economies. An informative, work pub-- 95 -l i s h e d by The Brooking I n s t i t u t e tenders a number of elements which , have been s i g n i f i c a n t i n f l u e n c e s upon f o r e i g n investment i n the post-55 war p e r i o d . The f u t u r e prospects of these general f a c t o r s are de-bated. The chapter goes on to present s t a t i s t i c s f o r the United States and d i s c u s s p o r t f o l i o investment i n terms of the m o t i v a t i o n behind these investments and prospects f o r bond flows and equity s e c u r i t i e s . A f t e r g i v i n g data on term loans and d e s c r i b i n g t h e i r d i r e c t i o n and sources, d i r e c t investment i s examined on a s i m i l a r b a s i s to p o r t f o l i o i n v e s t -ment, i n c l u d i n g , as w e l l , s p e c i f i c reference to the reasons behind the growth of d i r e c t investment i n manufacturing and the i m p l i c a t i o n s f o r the U.S. balance of payments. Young, Ward and the a r t i c l e reproduced i n Nehrt's book each o f f e r e d accounts of the f o r e i g n exchange, market i n v a r i e d degrees of i n t e n s i t y . There are, however, two other p a r t i c u l a r l y i n f o r m a t i v e pub-l i c a t i o n s which o f f e r e x c e l l e n t d e s c r i p t i o n s of the general workings of t h i s important market. One o s t e n s i b l y i s devoted to a d e s c r i p t i o n of the New York f o r e i g n exchange market but what i t says l a r g e l y a p p l i e s to any developed " t r a d i n g c e n t r e " such as London or P a r i s . The second i s w r i t t e n i n the context of the Canadian f o r e i g n exchange market but i t too has " u n i v e r s a l " a p p l i c a t i o n . The F e d e r a l Reserve Bank of New York has published a booklet which f u r n i s h e s a most comprehensive examination of the. New York for^-56 eign exchange market. The foreward a p t l y stuns up the s i g n i f i c a n c e of g a i n i n g an understanding of the workings of the f o r e i g n exchange mar-- 96 -ket for international traders and investors in part icular: "The New York foreign exchange market has always been important because i t is a mirror of the complex of economic, p o l i t i c a l and psychological forces that affect the f inancial transactions of the United States with the outside world." The booklet describes the organization of the market, the market for individual currencies, the instruments used, the deter-mination of exchange rates and importantly, for this study, the mechan-ics and techniques of commercial bank exchange trading, the forward exchange market and f ina l ly the relationship of spot and forward rates, including the opportunities for and obstacles to covered interest arbitrage. The Canadian counterpart of the Federal Reserve Bank of New York publication may be found in the Porter Commission report. A chapter of the report which canvasses the entire spectrum of f inancial systems in Canada offers an informative analysis of the Canadian for-eign exchange market "the l ink between the Canadian f inancial system 57 and those of other countries." The Commission states that "in Can-ada, the chartered banks are the main f inancial institutions in this market, at i t s outer rim are their branches serving the exchange needs of their customers, and at i t s core is the highly centralized interbank market where the batiks meet their own exchange needs in dealings with each other and with the authorities." I t goes on to elaborate upon the banks' dealings with customers, the interbank market and specialized transactions in the market - - those involving the trading departments of the banks, speculative transactions and short-term capital flows. - 97 -A submission to the Porter Commission by the Canadian Bankers Association offers a re lat ively brief section which discusses the for-58 eign currency business of the chartered banks. The sources of a c t i -vity and organization of the foreign exchange market are described to-gether with a discussion of the mechanics and the motives behind the growth of short-term deposits on the banks of Canadian banks denomina-ted mainly in U . S . $. The objective of this chapter has been to place the interna-tional operations of the banks in the context of the world in which they conduct their varied ac t iv i t i e s . I t is hoped that the foregoing discussion, in concert with what may be regarded as comparable efforts, w i l l have served this purpose. We now turn to an analysis of the objec-t ives, the planning and the economic and p o l i t i c a l factors considered during the decision whether or not to make a resource commitment.in a particular country. - 98 -CHAPTER V THE DECISION TO GO ABROAD This chapter w i l l present what those Canadian and American bankers interviewed see as the principal long-term objectives of their banks in establishing "offices" abroad. Following this , separate sec-tions w i l l be devoted to discussions of the extent of formalized plan-ning involved and the economic and p o l i t i c a l factors weighed prior to reaching a decision to establish a foreign "office". This approach is designed to place in perspective the hypotheses which w i l l be intro-duced in the following chapters to explain why the banks go abroad, why they choose a particular location and why they select a particular type of "office" for that location. OBJECTIVES IN "GOING INTERNATIONAL" This section w i l l present a brief outline of what are seen by the international bankers interviewed as the principal long-term objec-tives which guide their banks in the process of "going international", including locating abroad. I t is possible that the expressed objectives and motives may be inescapably intertwined in more than one instance. An excerpt from a recent annual report sets the tone for the responses received from the Canadian bankers interviewed. "Since the inception of our overseas business 60 years ago, our policy has been to have representation in any area which.offers real opportunities to pro-mote the interests of the bank with the added prospect of opening new 59 trade outlets for Canada." - 99 -In response to a query as to what comparisons are made with -domestic opportunities before f inancial commitments are made to inter-national ac t iv i t i es one Canadian banker replied that comparisons are made in terms of "profits, growth and exposure". Two others empha-sized prof i t s . Two also cited competition. We can reasonably conclude then that the "interests of the bank" alluded to in the quotation above are l ike ly to encompass the aforementioned considerations. We have thus introduced what are considered to be four impor-tant long-term objectives behind the internationalization of Canadian banks. Pro f i tab i l i t y in terms both of gaining access to profitable business opportunities and maintaining a profitable operation must rank as the most significant of the four since i t was cited either direct ly or indirect ly by each of the bankers interviewed. The objective of pro-f i t a b i l i t y was introduced indirect ly by one banker who responded that "adequate compensation is sought" for the added risks of international resource commitment. A recent statement by the Chief General Manager of the Cana-dian Imperial Bank of Commerce lends further credence to the view that 60 profits are a significant objective. In response to a question as to why i t s (the Commerce) foreign assets and l i a b i l i t i e s grew proportion-ately less than was the case with many banks Mr. Sharwood explained that i t was "because margins in foreign operations were not wide enough to make us seek to expand these operations substantially." - 100 -This statement connotes a second objective, growth. How-ever, i t i s not growth for growth's sake but profitable growth oppor-tunities which are primarily sought. Participation in the large and rapidly growing "overseas market" referred to in Chapter II may take several forms but two principal means of achieving profitable growth in this area may be loans.to exporters and importers or the setting up of r e t a i l banking operations in foreign countries. The latter action is an important means of gaining interna-tional exposure in terms both of identity abroad and executive train-ing, which are complementary objectives. As earl ier mentioned in the discussion of international operating forms, identity abroad is consi-dered v i t a l to a bank wishing to establish i t s e l f and expand interna-t ional ly . Domestic, foreign and multi-national corporations must be made aware of a bank's "international flavour" i f greater profits and growth opportunities are to emerge. Importantly too, at the same time, that the bank, i t s e l f , is gaining international exposure members of i t s domestic personnel may acquire greater knowledge of the international scene thus equipping future executives with a firmer basis for decision-making than the predominantly intuit ive "seat of the pants operation" which has prevailed due to lack of executive exposure overseas. The fourth factor mentioned above was competition. In terms of an objective one banker's response was "it is basic to be where your competitors are". In other words, the goal is to retain established customers and acquire new ones and generally protest against the loss - 101 -of opportunities for prof i t . To fac i l i ta te the achievement of this on-going objective leads the banks to commit resources both at home and abroad in order to meet, and possibly beat, competition whether i t be domestic or foreign. We have expanded upon four important objectives which guide resource commitments to international act iv i t ies — prof i t s , growth, exposure and meeting competition. However, perhaps the overriding ob-jective which, in varying degrees, encompasses each of the aforemen-tioned objectives emerges from the ultimate phrase in the quotation presented near the outset of the chapter. "The prospect of opening new trade outlets for Canada" is an important segment of a pattern of thought which permeates the sections devoted to international operations in the annual reports of the chartered banks. I t was emphasized by more than one Canadian banker interviewed but was summed up best by one who replied that the principal long-term objective internationally of that bank is "essentially to fac i l i ta te trade between Canada and for-eign countries". The primary goal abroad is "looking after Canadian interests" which might entai l aid to Canadian exporters or to companies who wish to invest in this country. Canada's position as a leading tra-ding nation makes this a worthy working objective but is probable that the banks at a l l times w i l l be cognizant of the pro f i tab i l i ty , or lack of i t , in f u l f i l l i n g this objective since they are, after a l l , private profit-seeking enterprises. - 102 -The foregoing has presented a view of the long-term objec-tives internationally of Canadian banks. To provide somewhat of a contrast we shall now turn to br ie f ly recount the responses of the Amer-ican bankers. Over-all the five U.S. banks interviewed are more firmly established on a wider scale internationally than are the Canadian banks. This is evidenced by two responses which give the impression that at least these bankers consider their banks to have reached a "treadmill" position where they must keep running just to keep up. One banker res-ponded that his bank was primarily "interested in maintaining i t s estab-lished position in world markets"; another replied that his bank wished to maintain i t s position as "a strong and leading international bank". However, the former executive went on to say that growth was an impor-tant objective. Thus a state of dynamic equilibrium is implied since the growth i s expected only to enable them to retain their existing relative posit ion. Another American banker whose bank is not as firmly established as a number of i t s counterparts expressed the view that i t was that bank's short-run aim to undergo "definite expansion" with an eye to meeting the long-term objective of establishing a "completely integrated banking operation" offering a wide range of f inancial services with sound communication l inks to fac i l i t a t e the eff ic ient flow of information internationally. This is a normative goal but nonetheless an effective working objective. - 103 -Despite the fact that profits were not specif ical ly mentioned there is l i t t l e doubt that that object was implic i t throughout, as sug-gested by the quotation cited below. One may be le f t with the impres-sion that the world's largest banks have scaled the heights so success-fu l ly that their primary concern is with remaining at or near the peak. I t is true, that the objectives regarding the maintenance of one's i n -ternational position are an effective contrast to those of the Canadian banks, however, an excerpt from a recent annual report of one of the U.S. banks should correct any mistaken impression that these banks do not maintain working objectives. I t should be emphasized here that choosing a quotation from the report of one bank is not designed to re-f lect poorly on the others. There is l i t t l e doubt that each of the American banks interviewed has a set of working objectives which, but for the pressures of time, would have been expressly transmitted to the writer . What follows then is designed to provide a succinct accounting of a comprehensive set of normative, but working, objectives of an inter-61 nationally established U S. bank. Our objectives overseas are clear: We want to aid the host countries and their business; we want to share our technology in co-operative efforts with the local banking communities; we want to develop greater co-operation within the world banking community; we want to further the cause of multina-tionalism; we want to play a role in the great task of ra i s -ing l i v i n g standards in the lesser developed countries; we want to further the course of free world trade; we want to assist U.S. business in i t s overseas operations. Because we believe each of these objectives f u l f i l l s a manifestly clear need we are confident our international banking a c t i v i -ties w i l l grow in scope and pro f i tab i l i ty in the years ahead. - 104 -This indeed is an impressive set of objectives and we shall comment upon them further in other contexts throughout the remainder of the study. At the outset of this discussion we suggested that i t might be d i f f i c u l t to separate expressed objectives from in i t i a t ing forces behind a move overseas. This has proved to be so, part icular ly in the Canadian case. I t might have been more precise to treat prof i t s , growth, exposure and meeting competition solely as in i t i a t ing forces and this w i l l be done later in the study. What this treatment does show, how-ever, is that to the banks involved objectives can be strong in i t ia t ing forces and vice-versa. The writer also recognizes that the aforementioned objectives are freely and easily said since their va l id i ty is d i f f i c u l t to ques-tion and, therefore, might suggest superf ic ia l i ty . However, each is fundamental to the v i a b i l i t y of any business and what is most i n t r i -guing are the implic i t assumptions which appear to have been made re-garding their individual a b i l i t i e s to make an overseas operation prof i t -able. In addition, while we have found them to be probable motivating forces as well we have yet to gain knowledge of how they interact in the decision process. Before turning to the presentation of hypotheses to explain why the banks go abroad while introducing motives for locating in cer-tain countries or areas, i t is useful to expand upon two processes which bridge the gap between the establishment of objectives and the decision - 105 -to locate abroad. We are referring to the practices of planning and research. FORMAL PLANNING PRIOR TO THE DECISION TO "GO ABROAD" In this section we shall comment upon the extent of formaliz planning which is conducted by the banks prior to reaching a decision to commit resources in a particular location abroad. The process ap-pl ies equally to a bank making i t s i n i t i a l commitment abroad or to an established international bank looking to a country in which i t is not yet located other than through a possible correspondent relationship with a local bank. The resource commitments referred to may take a variety of forms — people, start-up costs or equipment and supplies for an over-seas off ice , deposit balances with correspondents, equity investment in a foreign subsidiary or a f f i l i a t e or, loans to foreign customers or branches. However, since each factor involves either d irect ly or indirect ly the outlay of funds, except where specific reference is mad to one factor or another, we shall consider them to be "one big ba l l of wax" in the form of "resource commitments". Surprisingly, l i t t l e evidence of the existence of a master plan behind the commitment of resources in particular locations was discovered. In fact , the immediate response by an American banker was "I wish we had one!" The lone exception to this statement appears to be one Canadian bank which has been aggressive and independent inter-- 106 -nationally throughout i t s history. As relayed to the writer the gen-eral procedure is for senior management to nominate a number of coun-tries "where we would l ike to be". A"l i s t of up to ten countries is drawn up and a study of the individual countries is conducted u t i l i z i n g the information available in Canada and importantly employing data ob-tained and impressions developed from on-the-spot surveys carried out from the office of a Resident Representative in the area and from per-sonal v i s i t s by senior management. The experience and knowledge of international branch managers i s also re l ied upon. The investigation process pays particular attention to supplying accurate information con-cerning three c r i t e r i a . These standards are profitabil i ty,growth and acceptance. The prospective office must exhibit the potential for immediate profits or possibly the strong probability of becoming pro-f i table in the near future with evidence of useful col lateral benefits, such as domestic business generated through exposure in the country. The importance of profitable growth opportunities have been discussed ear l i er . Senior management must carefully weight the risks of apply-ing to enter a country and being turned down since a refusal is usually irrevocable in the short-run and i t is possible that a mistake in tim-ing could give a competitor the advantage. Thus, i t must' be determined as far as possible before hand whether or not i t is suitable to apply for entry now or delay. The lat ter choice too could allow a competitor to gain access and important exposure before, or instead of, you. - 107 -The foregoing planning program does not connote unnecessary, r i g i d i t y but what the writer regards as independent thinking with due cognizance of competitors. However, i t is the writer's impression that, generally, the bankers f e l t that too much i n f l e x i b i l i t y is bui l t into a master plan in a world of rapid change and coincidence where opportunities to do business can l i t e r a l l y "spring up overnight". This i t i s rendered a v ir tua l ly ineffective instrument. This impres-sion applies, in part icular , to the American banks. However, despite the foregoing there is considerable evidence of what might be described as "ad hoc" planning which reacts to oppor-tunities as they present themselves. As one Canadian banker des-cribed his bank's planning process: "Primary demands are domestic, therefore, Canadian content is sought i n i t i a l l y " . Next, "we consider where we want to be". This essentially involves "birddogging major foreign corporations looking for those who might enter Canada" with the choice of location abroad "played by ear in the framework of policy". Also of some significance, the same banker responded that i t is "basic to be where your competitors are". Thus i t is reasonable to conclude that this bank "follows" a process of "reactionary" planning. In other words, i t reacts to the moves of both customers and competitors. We shall elaborate upon the significance of bank policy in the context of the decision to establish a certain type of office in a certain location. - 108 -For American banks operating internationally the customer is clearly omnipotent. Although much more w i l l be said concerning the influence multi-national corporations have upon the decision-making of U.S. banks abroad, at this stage we shall concentrate on the effect which they have upon the planning process. The attempt to adopt a for-mal planning program is made part icularly tenuous and, by and large, ineffectual through their presence on the international scene. The key element in any planning program is "f lex ib i l i ty" . One American banker described that bank's planning program as a "system of pr ior i t i e s which are adapted to opportunities". Two others agreed that "multi-national corporations impose part of the direction of overseas expan-sion" but that our "specific aims are not imposed upon us by clients or competitors." In fact one of these executives asserted that his bank "very rarely follows anyone." Generally speaking, their appears to be more room for inde-pendent planning of overseas operations by Canadian banks because of the relative lack of domestic clients operating abroad in contrast to the American situation where multi-national corporations based in the U.S. operate on a wide scale (facts which w i l l be elaborated upon shortly). The writer's impression, however, is that the room is by no means crowded. THE ECONOMIC AND POLITICAL FACTORS CONSIDERED In describing the formal planning process of one Canadian bank above we introduced two economic factors, pro f i tab i l i ty and growth, and one p o l i t i c a l factor, acceptance, as being c r i t i c a l standards of judge-- 109 -ment for that bank. However, there are other significant economic and ' p o l i t i c a l factors, both at home and abroad, which must be weighed in an evaluation of the su i tab i l i ty of committing resources abroad. A pervasive element is r i sk and the role i t plays w i l l be commented upon specif ical ly in this section. To the extent that the banks are able to control their ind i -vidual commitments to international ac t iv i t i e s , and the consensus from the foregoing discussion of planning is that to a notable extent they "can", although they "do" in varying degrees, some comparisons are commonly made with domestic opportunities. To be expected, the p r i n c i -pal comparison said to be made between foreign and domestic opportuni-ties is in terms of relative prof i t s . Primarily emphasized are the re la -tive direct monetary rewards, however, the extent of anticipated col la-teral benefits to be gained are additional important considerations. A common example would be the opportunity to acquire new domestic business v i a an overseas branch, in addition to the direct deposits obtained. One American banker stated, with regard to relat ive pro f i t -a b i l i t y , that they "think in bank-wide terms. Every part of the organ-ization is scrutinized for earnings." The review is conducted "care-fu l ly and frequently" with attention not only to direct returns but indirect returns as wel l , "being of service to ourselves and to our customers." One of the significant "services" which the bank may perform for i t s e l f by making certain resource commitments is to be-stow added "prestige" upon the bank's name. The relative degree of - 110 -prestige to be gained was expressed to be an important element in the. decision to make a resource commitment at home or abroad. Another American bank adapts a similar global perspective. "Cost analysis may reveal service to be breaking even in a particular area but customer service is approached on a global basis and we may be making money elsewhere." These international banks then do not direct ly make a domestic-foreign comparison but use an a l l - inc lus ive base. An American banker, whose bank has an extensive network of overseas "offices" stated that our foreign operations are "generally more profitable overall than the domestic." The prime reason — "risk-return ratios are higher internationally." More w i l l be said about r i sk below, however, i t is important to note that more compensation for a r i sk can be, and i s , often gained from foreign act iv i ty . A note of caution to this conclusion must be added, however, for the same banker added that although an "elaborate accounting system" is employed to determine whether or not an international commitment is beneficial to the bank there are "many intangibles in the evaluation" and the upshot i s that frequently i t is an "intuitive 'seat of the pants' decision" which is f ina l ly reached. An example of an intangible, he suggested might be "how many customers do you attract to Buenos Aires because you have branches in Chile?" He also stated that "a project is current-ly underway to determine as far as practicable the return from our i n -ternational business." A Canadian banker asserted "that our interna-tional operations are the highest profit-making facet of our banking - I l l -operations," although we must caution that foreign act iv i ty from a dom-estic base was included as part of their "international operations". One may reasonably conclude, however, that profitable opportunities in the international sphere may often be more profitable than domestic commitments. A second significant comparison is conducted in terms of the relative growth opportunities offered.. Here the writer would l ike to comment that Canada's urban areas appear to be fast becoming saturated with bank branches while, at the same time, more and more Canadian bus-inessmen are adopting an international outlook. These factors combined with the freedom of capital flows into and out of the country, other things being equal, should create more attractive growth opportunities through a foreign location than those of solely domestic orientation. As one American banker said of the international arena "there is much room today for growth." A factor weighed which is related to growth is competition since i t s presence is l ike ly to reduce the real izat ion of available growth opportunities or, i f part icular ly strong, v i r tua l l y res tr i c t growth completely. The competition alluded to here is that between banks who are working towards a decision whether to make either an i n i t i a l or an increased commitment abroad in a certain area and/or ac-t i v i t y or alternatively concentrating the available resources more upon domestic opportunities. An ideal example with respect to Canadian banks is provided by the Caribbean area. Here they are well repre-- 112 -sented and conduct a r e t a i l banking business similar to that performed in Canada in competition largely with other Canadian, B r i t i s h and, more recently, American banks. The competitive situation between banks in Canada is strong and the situation is similar in the Caribbean, thus i t is conceivable that competitive circumstances could arise where i t was considered preferable to open additional branches in Canada rather than the Caribbean. As one American banker described i t , i t has occurred that domestic competitors have "saturated a country" making i t unattrac-tive for that bank to commit resources there. International act iv i t ies may bring desirable "exposure" to a bank seeking to strengthen i t s "identity" as an "international bank" exposure which could not be obtained through a concentration upon en-t i r e l y domestic opportunities. At the same time, however, foreign operations commonly carry a significant element of undesirable exposure in the form of additional r i sks . These risks may be either economic or p o l i t i c a l in nature. We noted earl ier the frequent use of the forward exchange market by the banks as a means of reducing exchange r isks . There are situations, however, where the bank w i l l be unable to u t i l i z e forward contracts to cover their exchange positions. One of these situations emerges f a i r l y frequently especially i f branch operations are being con-ducted in developing countries. I t is not uncommon in these countries for loan demands to exceed the deposit base of the branch or branches in the country. However i f the objective of deposit acquisition is to - 113 -be served loans are often a requisite that savings may be generated in-the economy. The result is that "money must be brought in from outside." A Canadian bank operating a branch system in the Barbados, for example, may have to supply loans from head office to keep "money on the shelf." The absence of an adequate forward exchange market in the currency of the country usually renders i t necessary to accept exposure to devalu-ation. As one American banker described i t , the objective is "to operate each area on i t s own soap." However, as we have suggested, an adequate supply of the currency of the foreign country may not always be available. When head office funds are supplied the bank is exposed to an additional r i s k which may be significant in some instances. The risks of expropriation normally may be discounted since the loss of i n -vested capital is l ike ly to be but a small percentage of total assets. Using the nationalization in Cuba as an example, the reason is because "Cubans owed Cubans". However when the "soap" is supplied from head office "Cubans no longer owe Cubans" since the bank has, in effect, increased i t s capital commitment in the country and these loans w i l l become uncollectable should expropriation occur. Loans to foreign branches are in a sense direct investments in a foreign country. This represents another important instance where a hedging operation to cover exchange risks is not possible. Conse- -quently the banks must carefully appraise the currency s tabi l i ty of a country and keep i t s monetary commitment to a minimum in cases where - 114 -devaluation appears imminent. An important indicator here is the bal -ance of payments position of the country. However, economic conditions are not the prime concern when a commitment in a foreign country is contemplated. In the words of a Canadian banker, "Until a very few years ago every f inancial inter-country transaction was based upon an economic appraisal, now a p o l i -t i c a l appraisal is most important." The p o l i t i c a l r i sk is omnipoteat in the "game" of international banking since rule changes are common." The current situation in Peru is a case in point where nat ional is t ic fervour is creating strong pressures upon foreign banks present. For example, the Peruvian government is demanding that a Canadian bank increase i t s capital commitment there but w i l l not allow i t to open additional branches. An unstable p o l i t i c a l environment is l ike ly to lead to a decision not to enter a country. I t is interesting here to note a Canadian banker's comment concerning Czechoslovakia in this regard. "There is much room for additional banking business in the Eastern bloc countries and unt i l the Russian invasion the p o l i t i c a l environment was increasingly conducive for foreign banks." However, i f the bank has already made a f inancial commitment in the country i t may not leave 62 but w i l l attempt to reduce i t s dol lar commitment to a minimum. A current example arises out of the tense Middle East situation. At the time the Canadian bank and American banks entered Beirut, Lebanon i t was the thriving money market center of the area. However, the po l i t -- 115 -i c a l situation has not only reduced this act iv i ty , but increased the risks of loss of capi ta l . Therefore, the decision has been made to keep dollar commitments at a minimum unt i l the situation improves. Addit ional ly , there are three economico-political factors which may be important considerations. One is inf lat ion which is par-t i cu lar ly strong in a number of Lat in American republics where the gov-ernments have chosen continued expansion of the money supply as the prime means of financing progress. Inf lat ion of this variety is often a pre-lude to devaluation, however, as one Canadian banker responded "we are not overly concerned with inf la t ion , assuming repatriation of profits is possible." This introduces a second significant consideration the presence of exchange controls. Rapid inf lat ion combined with excessive exchange restrict ions which make i t d i f f i c u l t or impossible to withdraw profits are l ike ly to render a country unsuitable as a candidate for an "office". However, any country desirous of foreign investment is not l ike ly to res tr i c t the operations of foreign enterprises in this manner. The frequent resort to an expansionary monetary policy as an instrument of growth in a number of developing economies is often the outgrowth of the lack of adequate f i s c a l tools. Speci f ical ly , an i n -adequate tax system. Among other factors, this situation commonly re-sults from low taxpayer morality and poor col lect ion machinery. These conditions may lead to discriminatory taxes being levied against for-eign enterprises in the country. Thus, the taxation policy of a country must be noted. The significance of high taxation of profits earned by - 116 -the banks in these countries is mitigated in many instances, however, since in the words of a Canadian banker, "local borrowers often cooper-ate to minimize the tax." The means were not disclosed but one might surmise that one method could be for the borrower to agree to pay a higher "service charge" for the conduct of his account as compensation. The effective rate of interest on a loan would be increased, however, since the charge was levied for another "purpose" the apparent rate charged would be normal to the country and the credit worthiness of the borrower. Nevertheless, the banks must take measures to compensate for the additional risks concomitant with foreign operations. We have cited the use of the foreign exchange market, the rapid repatriation of pro-f i t s , and "arrangement to minimize taxation." There are a variety of other measures. One of these is to "allocate exposure within a coun-try ." Loans are not concentrated in one type of business despite i ts importance to the economy. For example, the Royal Bank of Canada is "not entirely in the f i sh meal business in Peru." Another means is by l imit ing the range of lending conducted. For instance, one American banker cited the fact that i t was not that bank's policy to make loans secured by real estate in the less developed countries, a practice com-mon in the U . S . , because of the d i f f i cu l t i e s in ascertaining ownership. The methods cited here as operational techniques employed by the banks to reduce risks is not intended to be exhaustive but merely to provide some significant examples of this aspect of their ac t iv i t i e s . - 117 -However, d e s p i t e the added r i s k s , i n c l u d i n g frequent " r u l e " changes which may render a comprehensive p r i o r a p p r a i s a l of a country obsolete i n a short time, Canadian and American banks continue to be a c t i v e p a r t i c i p a n t s i n the "game". One reason can be drawn out of an i n c i d e n t which happened w h i l e one of the Canadian bankers interviewed was a t r a v e l l i n g I n t e r n a t i o n a l Representative. As the bank's Middle East r e p r e s e n t a t i v e he c a l l e d upon the head of the c e n t r a l bank of I r a q . The executive who was a p o l i t i c a l appointment of the government of the day, conferred w i t h the r e p r e s e n t a t i v e i n a w e l l appointed of-f i c e bespeaking of h i s p o s i t i o n . What was unusual, e s p e c i a l l y when we envisage a " t y p i c a l " c h i e f executive of a country's c e n t r a l bank, was not the f a c t that he wore Moslem a t t i r e but that h i s a t t i r e was embel-l i s h e d by a brown l e a t h e r gun b e l t and a s i z a b l e p i s t o l which j u t t e d out of the h o l s t e r at h i s s i d e . Despite frequent p o l i t i c a l upheavals which r e s u l t i n the j u s t as frequent appointment of a new c h i e f execu-t i v e the operations of the I r a q i bank have not been i n t e r f e r r e d w i t h thus f a r . Even insecure governments thus recognize the importance of a v i a b l e banking system to a country. The lesson to be learned i s that " d e s p i t e p o l i t i c a l upheavals banking business has a way of going on." One question asked of the banks during the Interviews con-ducted by the w r i t e r was, "What, would you say, have been the p r i n c i p a l disadvantages i n your involvement i n overseas a c t i v i t i e s ? " Three banks c i t e d p o l i t i c a l c o m plications already discussed at length above. Two c i t e d the higher costs of r e c r u i t i n g and t r a i n i n g personnel f o r i n t e r -- 118 -national positions, an aspect which will be discussed in another con-text later in the study. One banker suggested that for a bank with a "domestic preoccupation international problems taking up more than say 5 per cent of executive time might be a time-consuming disadvan-tage. Interestingly enough i t is the writer's impression, a l l things considered, that this bank was the least internationally-oriented of a l l those interviewed. Despite the foregoing remarks, however, even the banks cit-ing those complications, considered "disadvantages" to be a poor choice of words. An apt consensus would be one banker's response, "I do not buy the word "disadvantages".'" A Canadian banker said there are "cer-tain problems linked with any endeavour we enter a project to advance something at home." Another responded that the "marginal concept is taken so there is no loss of profit opportunities." One American ban-ker replied that there are "additional risks and work but i f one is willing to become involved there are no disadvantages. In fact we consider i t an opportunity rather than risk." This position was strongly supported by another who expressed the view that although "operations are complicated, the risks of devaluation, exchange restrictions, etc. become less significant when a country is entered on a long-term basis." It is interesting to note here the effect which contrasting "philoso-phies" of two Canadian banks had had upon their actions abroad in .the face of increasing risks and declining business. A "basic philosophy" maintained by one with regard to entering a country has been that they - 119 -are "going today with 50 year thoughts." This "philosophy" led them to retain their offices in Lat in America during the Depression while other Canadian banks were leaving. The view of one of the bankers whose bank closed a number of foreign branches in this period was that "the bank needed money at home", the implication being that this inst i tut ion was domestically oriented. This position was supported by another execu-tive of the same bank whose personal view was that "there was a great deal of apprehension by the bank concerning international operations because of the risks of lending currency devaluation and p o l i t i c a l s i t -uations. In addition, the international operations were direct ly un-der the administration of head office and policy and practices in each country were very oriented to the Canadian banking situation." This "philosophy" meant, then, that commitments, when made, were not necessar-i l y for the long-term but were subject to the vagaries of the domestic scene. Consequently overseas operations were deliberately contracted and i t has only been very recently that an apparent philosophy of ex-pansion has emerged. This example provides us with an indication of why different banks behave differently abroad than others. We shall have much more to say on this subject when we elaborate upon why a particu-lar type of "office" is selected for a particular country. The same international banker who stated that a long term com-mitment can be viewed as a "risk-reducer" stressed that overseas involve-ment was considered by that bank as "a challenge and an opportunity" and rather than being a disadvantage was actually f e l t to be an advan-- 120 -tage a "learning experience" in that the bank is provided with a "glo-bal perspective". These factors can be held out as important i n i t i a -ting forces behind the movement abroad of Canadian and American banks, however, there are more concrete forces at work which w i l l be put forth in the following chapters. - 121 -CHAPTER VT MAJOR PHASES AND THE FORCES LEADING TO THE MOVEMENT ABROAD The principal objectives of this chapter are to offer hypo-theses to explain why the banks go abroad to carry on operations from a foreign base. Concurrently forthcoming w i l l be an indication as to why particular c i t i e s , countries or areas abroad are selected for the opening of an "office". The hypotheses w i l l be supported, as far as possible, by appropriate quotes from annual reports of the banks i n -volved, responses received during the conduct of f i e ld research by writer and other primary and secondary sources. We might add, at this stage, that the same sources of support w i l l be rel ied upon in the following chapter to substantiate hypotheses tendered to explain why particular operating forms are chosen for a certain area. Also in order to avoid repetit ion, as stated in the opening chapter, no quan-t i ta t ive testing of any of these hypotheses w i l l be carried out. As a means of introducing the investigation the major phases of development of the international ac t iv i t i es of the Canadian banks w i l l be sketched and compared with the U.S. experience. The outline w i l l proceed chronologically, essentially in terms of the operating forms employed but with important references to the principal forms of direct involvement as wel l . - 122 -MAJOR PHASES OF DEVELOPMENT OF INTERNATIONAL ACTIVITY The chartered banks, whose operations we have selected for analysis have, in general, been international in outlook from their very beginnings. Substantial differences appear to have existed among these banks, however, in the amount of aggressiveness with which they pursued the establishment of "offices" in foreign countries. I t is the writer's impression that differences in the degree of aggressive-ness and domestic versus international emphasis continue today. More w i l l be said on this subject when we discuss in i t ia t ing forces. Prior to the turn of the century there were four primary areas of interest outside Canada for the chartered banks. They were New York, Cal i fornia , London and the Caribbean. In 1817, the year in which i t was formed, the Bank of Montreal appointed a private agent in New York. The primary purpose of this office was to fac i l i t a t e money transfers for the Br i t i sh government which was not permitted to operate direct ly in the New York acceptance market. The bank bought b i l l s of exchange from the Br i t i sh and sold them, through their agents, in this market. I t was not unt i l 1859 that the bank established a permanent agency office of i t s own in New York. Nevertheless i t was the f i r s t agency of a chartered bank in the U.S. I t was subsequently followed by The Canadian Bank of Commerce (now the Canadian Imperial Bank of Commerce) in 1872, The Royal Bank of Canada in 1899, The Bank of Nova Scotia in 1907 and The Dominion Bank (now The Toronto-Dominion Bank) in 1919. - 123 -Cal i fornia was also early attractive to the Bank of Montreal which opened a branch in San Francisco in 1864. The Canadian Bank of Commerce was the next chartered bank to follow but i ts San Francisco office was not opened unt i l May of 1929. Two years later i t established i t s i n i t i a l branch in Los Angeles. Ear l i er this inst i tut ion had opened branches in Seattle, Washington in 1900 and Portland, Oregon in 1901. The latter office actually represents the take-over of an existing branch of the original Bank of Br i t i sh Columbia which became part of the Com-merce system in that year. The Commerce remains today as the only chartered bank with branches in the Pacif ic Northwest of the U.S.A. The early heritage of this bank on the U.S. west coast is reflected today by the fact that i t s wholly-owned subsidiary the Cal i fornia Canadian Bank operates more branches in that state than a l l of the i"offices" of the other chartered banks together. The Canadian banks were not long in traversing the At lant ic to open a branch in London. The Bank of Montreal again led the way in 1870 with the other major Canadian banks following one by one unt i l The Bank of Nova Scotia opened in 1920. The latter bank, however, had been concentrating i t s efforts elsewhere for by 1920 i t had established 20 branches in the Caribbean. The f i r s t foreign branch established by a Canadian bank out-side the U.S. and the U.K. was opened by The Royal Bank of Canada in Bermuda in 1882. However, due to enactment of res tr ic t ive leg is lat ion 63 then enacted this office was closed in 1889. Credit for the opening - 124 -of the f i r s t permanent branch must go to The Bank of Nova Scotia which established an office in Kingston, Jamaica in 1889. The international outlook of this bank i s emphasized by the fact that this office was opened before i t had opened i t s i n i t i a l branch in Toronto. The Royal Bank of Canada followed shortly thereafter by opening a branch in Havana, Cuba in 1899 and by 1920 this inst i tut ion was operating 15 branches on the Caribbean is lands. ' The Royal Bank of Canada was also devoting considerable at-tention to the establishment of an extensive branch network throughout Lat in America at this time. In Central America a branch, i t s f i r s t and only branch prior to 1963 ( i t now has 3), was opened in Belize, B r i t i s h Honduras in 1912. The i n i t i a l South American branch was established in B r i t i s h Guiana (now Guyana) in 1914. By 1920 the bank operated 10 branches in the area. Today i t continues to be the only chartered bank with direct branches in the area possibly a reflection of i ts early beginnings there. Prior to World War I the principal international act iv i ty for the Canadian banks was the financing of the famous "Triangle Trade" be-tween Canada, the United States and Br i ta in i l lustrated by their early representation in New York, London and the Caribbean. At the same time, extensive trade between :the Caribbean area, the seaboard states of the U.S. and the Maritimes required financing thereby strengthening the 64 attraction of the Caribbean. - 125 -As expanded upon above, during World War I and immediately, following The Royal Bank of Canada concentrated its expansionary ef-forts upon South America. At the same time, The Bank of Nova Scotia was opening thirteen branches in the Caribbean. Meanwhile, The Cana-dian Bank of Commerce set up i ts i n i t i a l branches in the Caribbean entering Kingston, Jamaica and Bridgetown, Barbados in late 1920. During the international business buoyancy which prevailed during the late 1920's this bank established a branch in Havana, Rio de Janiero and, along with the Bank of Montreal, in Mexico City . Thus the 1920's was overall a period of expansion abroad for the chartered banks, a l -beit within a re lat ive ly small area. The 1930's brought a complete reversal. The world-wide de-pression which led to a severe contraction of international intercourse also occasioned a reduction in the number of overseas branches of the Canadian banks. In fact, only one overseas branch was opened in the decade and that was by The Bank of Nova Scotia on May 5, 1930 in Chris-tiana, Jamaica. Meanwhile, this same bank closed 3 branches in the Caribbean while the Montreal and Commerce were "pulling out" of Mexico. The Commerce also l e f t Rio de Janiero in 1934. The reason given for the two closures at the time — "it was found that changing conditions 65 no longer permitted their operation at a fa i r margin of pro f i t ." Sig-n i f i cant ly , The Royal Bank of Canada maintained i t s Lat in American net-work intact . - 126 -The post-World War II era, which w i l l be extensively invest i -gated in subsequent sections, has thus far been one of continued ex-pansion in overseas representation with the variety of operating forms employed increasing. For those chartered banks already represented the immediate post-war period, up unt i l the early 1960's, has been characterized by intensified branch representation in the Caribbean. The Bank of Montreal, previously lacking outlets in the area, entered Lat in America in 1958 via a partnership with an established foreign bank, a new approach for Canadian banks. This decade has witnessed a general departure from a process of international expansion in tradit ional areas with a view more to continental Europe and As ia , although the number of branches in the Caribbean continues to be augmented. Significantly too, the last of the major chartered banks established "offices" in the Caribbean. The special significance of The Toronto-Dominion Bank's entry into the Caribbean is the route taken, the multinational jo int venture another new mode of representation for the chartered banks. The foregoing paragraphs have brief ly sketched the h i s t o r i -cal growth of Canadian banks abroad in terms of where, when and what. I f one were to summarize the international operations h i s tor ica l ly in terms of "what", that is with regard to the type of "office" employed, i t would be d i f f i c u l t to distinguish dis t inct phases from 1817 to 1960. Essent ia l ly , this period was characterized by growing branch represen-tation in the Caribbean, and the use of the branch technique elsewhere - 127 -wherever an overseas "office" was established, with the notable excep-tion of New York where the agency made of operation was employed ex-clusively. At the same time, except for the Caribbean, each bank bu i l t up an extensive world-wide network of correspondent banks to "represent" them abroad. The 1960's has seen a relative departure from the branch and correspondent bank system of overseas operations. While both these types of operation continue to be of utmost importance they are now being supplemented, with varying degrees of emphasis from bank to bank, by the whole range of international operating forms discussed in the previous chapters. I f , on the other hand, we were to look at the development of the international operations of the Canadian banks from the point of view of the principal forms of their direct involvement the same date structure appears to apply. From their early beginnings at least unt i l 1958, which brought the restoration of currency convert ibi l i ty in Eur-ope, the financing of trade clearly dominated the international a c t i v i -ties of the chartered banks. However, since that time, the substantially augmented flow of capital around the world, both short- and long-term, has notably increased the importance of foreign exchange trading and the financing of capital movements in their international ac t iv i t i e s . During the past ten years, alone, with the emergence of new types of operation and changes in the relative importance of forms of involvement we have also seen a relat ive decline in emphasis upon ex-- 128 -pansion in tradit ion geographic areas of operation replaced by greater stress upon on-the-spot representation elsewhere in the world. Any causal l inks between the changing importance of act iv i t ies and areas should become clear as the study proceeds. At this stage, reference to Tables XII , XLII, XIV, XV, and XVI which w i l l be referred to again, w i l l i l lus tra te these changes of emphasis. Before turning to an elaboration upon what are seen as the primary in i t i a t ing forces behind establishment of "offices" in other countries, i t is useful to sketch the h i s tor i ca l phases of the overseas act iv i t i es of the U.S. banks. Useful especially in terms of the com-parisons and contrasts provided with the phases of act iv i t ies of Cana-dian banks. I t is somewhat surprising to note that the U.S. commercial banks are relat ive newcomers to the arena of international banking and finance. Despite their native strength the U.S. national banks did not appear on the international scene unt i l The National City Bank of New York (now the F i r s t National City Bank) opened a branch in Buenos Aires in 1914. I t has been primarily legis lat ion, both U.S. and foreign, which allows us to distinguish the major phases of the operations abroad of U.S. banks. Not unt i l the enactment of the Federal Reserve Act in 1913 could national banks (those with Federal charters) establish branches abroad. In 1916 Section 25 of the Act was amended to fac i l i ta te the participation of smaller national banks in overseas branching oper-ations through special foreign banking corporations. E l i g i b l e banks - 129 -could invest up to 10 per cent of their capital and surplus in the stock of corporations chartered under the laws of the United States or any state thereof, and principally engaged in foreign banking. Since these corporations were required to agree to conduct their business under limitations prescribed by the Federal Reserve Board they became known as "agreement corporations". Section 25(a), enacted in 1919, authorizes the Federal Reserve board to charter corporations "for the purpose of engaging in international or foreign banking or other international or foreign financial operations ... either directly or through the agency, ownership, or control of local institutions in foreign coun-tries ...." Those corporations chartered under Section 25 (a) are known as Edge Act subsidiaries after Senator Edge of New Jersey, the sponsor of the section. The passage of this legislation led to a swift growth of for-eign banking and financing corporations in the ten years following World War I. Between 1919 and 1929, 18 corporations were organized, 66 made up of 15 agreement and 3 Edge corporations. However, this expan-sionary phase was quickly reversed by the worldwide depression of the 1930's and the widespread system of trade and exchange controls which seriously diminished foreign trade. By 1940 only one Edge corporation and four widespread systems of trade and exchange controls which seriously diminished foreign trade. By 1950 only one Edge corporation and four Agreement corporations were in operation. I t was not until the late - 130 -1950's that the conduct of foreign banking through the use of these corporations emerged from a twenty year hiatus. By 1959 there were a total of only 6 Edge Act and 3 agree-ment corporations in operation, however, by June:30, 1968 the numbers 67 had increased to exactly f i f t y Edge Act and five agreement corporations. Clearly the late 1950's brought with them an expansionary phase in the overseas representation of U.S. banks. Once again the key was legis-lat ion , specif ical ly the return to currency convert ibi l i ty by the ma-jor nations of Western Europe which, as already mentioned, greatly aug-mented the volume of international capital flows. The implementation of the Interest Equalization Tax in 1963, and the imposition of voluntary balance of payments restraints in 1966, transformed into a system of mandatory controls in 1968, have more re-cently led to increases both in the number of overseas "offices" estab-lished and the number of U.S. banks "going abroad". We have thus far possibly created the impression that the American banks have moved overseas almost entirely by the use of a do-mestically chartered corporation designed to acquire equity interest, or outright ownership, of foreign banking or other f inancial ins t i tu -tions. While the banking corporation and financing a f f i l i a t e have been important instruments direct branching has also been a frequently employed route. At June 30, 1968 there were 21 member banks of the Federal Re-serve System operating 351 branches abroad. This is to be contrasted with the four national banks which maintained a total of but 66 branches - 131 -at the end of 1945, two-thirds of which were branches of the National City Bank of New York. Even as late as 1964 only eleven banks main-tained the 180 branches of U.S. banks abroad so i t becomes readily apparent that the prol i ferat ion of American banks and branches abroad 68 has been a very recent phenomena. Essential ly American banks, following the enactment of con-senting legis lat ion, have experienced the same phases of development as have the Canadian banks. A general expansion occurred during the 1920's, followed by a significant contraction in the 1930's and a period of steady growth in the post-war era characterized by rapid and varied expansion in the 1960's. At the same time, the type of operating forms employed have been basical ly the same with overseas correspondent banks continuing to be important links abroad for the U.S. banks as wel l , despite increasing on-the-spot representation. Direct branches have also dominated the American movement abroad although a qual i f ica-tion of this statement is necessary. Prior to 1925 more foreign branches 69 were maintained by banking corporations than by banks. However, to-day, by far the largest number is represented by direct branches of commercial banks. Reference to Table XII i l lustrates that the American banks early concentrated upon the establishment of a branch network in the Caribbean and Lat in America as did the Canadian banks. A similar trend can be seen to continue through 1960 although the relative im-portance of the two areas to the two banking systems is reversed. How-ever, a d is t inct contrast is to be found in the Far East where the U.S. - 132 -national banks exhibited early interest while the chartered banks as yet do not operate a single branch in that global region. We shall elaborate upon this contrast when we look at the Far East in Chapter VTI. In terms of the principal forms of direct involvement in international transactions trade financing clearly dominated unt i l after World War II as was the case with the chartered banks. However, since the restoration of convert ibi l i ty the financing of capital move-ments has at least gained equal status apparently fostering increased representation abroad, again similar to the Canadian experience. However, despite the basic s imilarity in the phases of dev-elopment of overseas act iv i ty at least one noteworthy contrast emerges from the foregoing discussion and that is the much greater weight which may be attached to domestic legis lat ion as a contributory factor be-hind the move of U.S. banks abroad. Indeed, Canadian legis lat ion has not been apparent as a force direct ly f a c i l i t a t i n g or fostering the movement of the chartered banks into foreign countries, although as w i l l be expanded upon later , Canada's banking legis lat ion may be a hindrance. Legislat ion of the type mentioned above may, by i t s e l f , be an in i t i a t ing force behind a movement abroad as evidenced by the U.S. experience. However, i t is by no means the only one. What may be looked upon as the primary in i t i a t ing forces behind the movement abroad of the" chartered banks and what motivates a move into a particular coun-- 133 -try or area? The following two sections w i l l offer answers to these ' questions. WHY THE BANKS GO ABROAD In Chapter III we broached several hypothese to explain why the chartered banks have increasingly "internationalized" their a c t i -v i t i e s through growing participation in world trade and private capital movements. Our emphasis at that time was directed towards furnishing motives behind greater foreign act iv i ty emanating from a domestic base. In this section a number of hypotheses w i l l be tendered to demonstrate why the chartered banks "go abroad" to conduct banking act iv i ty from a foreign base. We noted earl ier the immense d i f f i cu l ty concomitant with the attempt to distinguish between motives for increased foreign act iv i ty from a domestic base and those inducing the banks to locate abroad. Nevertheless, the repetit ion of reasons w i l l be l imited. An added objective of this section is to introduce the i n i t i a -ting forces which may lead to the opening of an "office" in a particular country or area. While the terms of reference of the hypotheses put forth w i l l be the world stage they w i l l act as harbingers of specific country motives. This w i l l become apparent as the section proceeds. In Chapter V we noted that the expressed objectives guiding the moves abroad might be identical to several in i t ia t ing forces be-hind this movement since the objectives, themselves, could be looked upon as motivators. This statement proved to be correct from the res-ponses received to the question concerning in i t ia t ing forces asked - 134 -during the interviews conducted by the writer. At the same time, there was notable overlap with hypotheses offered in Chapter III concerning growing "internationalization". Therefore, we w i l l only outline these motives and anyone wishing to refresh his memory may refer to the rele-vant sections of Chapters III and V. These inducements included prof i t -a b i l i t y , co l la tera l benefits, growth opportunities, prestige and, ex-posure in the sense of establishing one's identity as an international banker. In Chapter III another important in i t i a t ing force was pro-posed — "the desire to retain established, or obtain new customers". We may focus upon this consideration and break i t down into three types of customers. One, the Canadian exporter or importer. Second, the Canadian corporation with direct investments in other countries. Third, the foreign direct investor in Canada. They may be looked upon as the "Canadian interests" which the chartered banks are most.desirous of serving. Canada is the sixth largest trading nation in the world. In 1967 her total trade (exports plus imports) totalled $28.34 mi l l i on , 70 46 per cent of G.N.P. Per capita exports alone amounted to $702 thus placing Canada second only to the Netherlands in terms of relative importance of trade to the economy. I t is not surprising, then that the "nature of the flow of trade" should be stressed by Canadian bankers as a force directing them abroad and into certain areas. The strength of this cr i ter ion of expansion for at least one chartered bank is to be - 135 -found in i t s annual reports. In 1948 the general manager of The Royal Bank of Canada stated, "We have expanded (our act iv i ty in foreign coun-tries) in keeping with the progress of the foreign country and the 71 development of Canada's external trade." In 1960 the statement was repeated, "The overseas development of this bank which dates back more than 60 years followed established or prospective trade channels in areas with sufficient potential to develop a profitable business for 72 the bank." In 1964 the importance of trading patterns to the direc-tion of i ts expansion was made unmistakably clear. "About three-quarters of Canada's foreign trade is with Great Bri ta in and the United States where we have our banking offices and representatives, of the remaining one-quarter about one-third is also with countries where we have direct representation and in other countries who trade with Canada our corres-73 pondents are the foremost local banks." While the above excerpts were drawn from the annual reports of just one chartered bank i t is reasonable to assume that the pattern of expansion abroad has been similar for the other major Canadian banks although the form and intensity, no doubt, vary. Reference to Table XX which provides a geographical breakdown of Canada's foreign trade for selected years w i l l indicate both increasing volume of trade and the growing importance of certain countries in the movement of goods. The impressive 2.5-fold increase in the 15 years from 1951 to 1966 repre-sents a 6.5 per cent compound annual rate of growth. Table XXIV pre-sents similar data for the U.S. I t w i l l be noted that U.S. merchandise - 136 -trade alone has only s l ight ly more than doubled during a similar 17-year' period. The effective annual growth rate of s l ight ly over 5 per cent is notably less than the corresponding figure for Canada. Data from these tables w i l l be ut i l i zed to support hypotheses as to why banks choose certain locations abroad for an "office". A second group of customers which the chartered banks desire to serve abroad are the Canadian corporations with direct investments in foreign countries. We have selected the cr i ter ion of direct invest-ment which we earl ier defined as a greater than 25 per cent ownership of shares in a "foreign" corporation, since we consider i t to be the most appropriate indicator of a permanent commitment in a certain coun-try . I t is reasonable to assume that in the absence of other forces, notable investments of a long-term nature by Canadians rather than sub-stant ia l ly vo lat i le short-term capital investment would be a requisite i f the banks were to commit valuable resources to the country. We should note that wholly-owned subsidiaries and branches of Canadian corporations are forms of direct investment abroad. Table XXI i l lustrates Canadian direct investment abroad by country or area. One w i l l promptly notice that the dollar position quad-rupled between 1949 and 1966. This represents an effective 9.5 per cent compound annual rate of growth, about one-half of one per cent greater than the rate of growth of merchandise trade. Table XXV offers similar U.S. data. Two differences with the Canadian data are immediately appar-ent. One, the value of U.S. direct investment abroad has v i r tua l l y quin-- 137 -trupled in the 17-year period thus representing an effective compound annual growth rate of almost 13 per cent, or 3% per cent greater than the Canadian experience. Secondly, U.S. direct investment abroad is about 16 times that for Canada. Since the U.S. population is approxi-mately 10 times the size, per capita direct investment abroad by U.S. cit izens is greater than that for Canadians. I t follows, pr inc ipal ly from the absolute magnitude, but also from the larger per capita value, that these customers should provide a greater in i t ia t ing force to the establishment of "offices" abroad for U.S. banks than their Canadian counterparts do for the chartered banks. This is borne out by the res-ponses of the bankers interviewed. Three U.S. bankers stressed the imp- " ortance of U.S. direct investment abroad as a motivating force behind both their movement abroad and their selection of countries for a commit-ment. The consensus of the position of the Canadian bankers was aptly expressed by one who stated that "there are not enough coat-tai ls for Canadian banks abroad at this time" and compared to the American situa-tion the "loss of customers (by not being abroad in certain locations) is not as important a consideration." Canadian bankers also asserted that their banks were motiva-ted by the desire to obtain early access to corporations and individuals interested in investing in Canada. We, therefore, might hypothesize that the volume and source of direct investment in Canada is an i n i t i a -ting force behind both the movement abroad and the particular location selected. Table XXII offers data concerning foreign direct investment - 138 -in Canada at selected year-ends from 1949 to 1965. The almost f ive-fold expansion in the period represents an effective compound annual growth rate of almost 14 per cent. Similar data is shown in Table XXVT for.the U.S. The contrast i s immediately apparent. The value of foreign direct investment in the U.S. in 1965 was only one-half that in Canada. I t is also important to net e that about one-quarter of these funds have h i s tor i ca l ly originated in Canada where legis lat ion prohibits entry of a l l foreign banks and restr icts the growth of the only U . S . -74 owned chartered bank. The relat ive insignificance of the value of the remainder indicates that the flow of these funds should not be an impor-tant motivation to the movement abroad and into certain countries for U.S. banks. This contention is supported by the fact that no American banker mentioned them as an in i t i a t ing force. We have noted one notable difference in forces behind the movement to other countries by Canadian and U.S. banks in the foregoing paragraph. Another salient contrast exists in the relative importance of domestic legis lat ion as a motivating force. Canadian legis lat ion has not been a direct influence on the behaviour of the chartered banks but U.S. leg is lat ion, as suggested in our discussion of the phases of ac t iv i ty , has been a prominent force behind the increasing overseas representation of U.S. banks. Recent leg is lat ion, in part icular, has precipitated a prol i ferat ion of U.S. banks setting up "offices" abroad in certain.locations although each piece of legis lat ion to be introduced - 139 -has had an important bearing on both the direction and intensity of overseas act iv i ty of the already internationally established U.S. banks. U.S. banking legis lat ion has proven to be a notable force. In Chapter III we noted that the unit banking system of that country has been inf luent ia l since i t prohibits banks from maintaining a na-tional branch network, and except in a few states precludes a state-wide system of branches. Thus several U.S. banks may have been led abroad by the growth opportunities present there. We also noted at that time that in contrast Canadian banks are permitted to have a nation-wide system of branches which might mitigate somewhat the urgency of going . abroad. The va l id i ty of the foregoing hypothesis may be questioned due to the relat ive small size of the Canadian market which must be shared between five major chartered banks which is l i t t l e more than twice the size of the market available to the seven largest New York banks. However, one cannot doubt the importance of the amendments to the Federal Reserve Act in 1913, 1916 and 1919 introduced in this chapter in our discussion of the major phases of act iv i ty of U.S. banks internationally. I t was not unt i l the 1913 amendment that national banks were allowed abroad and the amendments shortly after provided the banks with suitable vehicles to go abroad. In contrast Canadian banks have never been prohibited from going abroad by legis lat ion. - 140 -Our emphasis in this study, however, is on the post-war per-iod and, here too, U.S. banking legislation has been a significant influence. In 1961 the stage was set for a big push internationally. One, U.S. banks found themselves with "ample liquidity" through the slight recession in the domestic economy in 1960 combined with an "easy money" policy of the Federal Reserve which created a build-up in re-serves. The banks were encouraged to seek new ways to employ their funds. Lower interest rates attracted overseas borrowers, including Japanese bankers who proceeded from "city to city ... requesting ... 75 acceptance financing." The result was "many U.S. bankers for the fi r s t time established personal contact with a country that was to become one of their largest overseas customers — Japan." This latter phenomenon encouraged several U.S. bankers to look to establishing an "office" in Japan, however, an important bar-rier remained and that was effectively removed by legislation in the same year. Banking is highly "reciprocity conscious" and Japan was one country which demanded reciprocal rights in New York. The general atti-tude of foreign bankers: " i f New York bankers want to shop my territory, 76 I want the same right in New York." Under the sponsorship of the First National City Bank the New York State banking law was amended. The new law permitted branches of foreign banks to accept deposits and to participate in a wide range of banking activity. It is important to note that permission to maintain a branch is granted on a reciprocal ba-sis only, thus Canadian banks, at this time, are precluded from a branch - 141 -operation in New York. A significant hindrance to increased act iv i ty ' abroad remained. Prior to 1962 under regulation "Q" of the Federal Reserve Act interest rate ceil ings were imposed on time deposits of U.S. com-mercial banks. After 1958 rates in the Euro-dollar market rose s igni-f icantly above the maximum that U.S. banks were allowed to pay. This contributed to the growth of the Euro-dollar market at the expense of the New York banks in part icular, as U.S. dol lar deposits of foreign banks were placed elsewhere for greater return. F i n a l l y , in October, 1962 the Act was amended to exempt foreign o f f i c i a l time deposits from the interest rate provisions of Regulation "Q". This meant that higher interest rates could be paid to lure deposits to foreign branches. At the same time, these deposits are also exempt from reserve requirements imposed on domestic deposits and from assessments of the Federal De~ 77 posit Insurance Corporation. Thus notable changes in Federal and state banking legis lat ion la id the important groundwork for an increased intensity 'of act iv i ty abroad. This phenomenon was also fac i l i ta ted by Federal leg is lat ion other than changes in banking laws. One of these was the Interest Equal-ization Tax Act of 1963. The tax, levied against foreign interest and dividend income, had the effect of substantially increasing interest costs for foreign borrowers in the New York market. The outcome (as described in the Appendix) was the creation of the Euro-bond market. The U.S. banks, in 1963 and 1964, "became the largest external source - 142 -of medium and long-term funds f o r a l l i n d u s t r i a l c o u n t r i e s except Can-78 ada." "In the year to mid-1964 p o s s i b l y as much as two-thirds of the increase i n commercial and i n d u s t r i a l term loans of New York banks re-presented lending to f o r e i g n e r s . " Importantly, E u r o - d o l l a r lending by overseas branches of U.S. commercial banks i n the ordinary course of t h e i r commercial banking business i s exempt from the I n t e r e s t E q u a l i z a -79 t i o n Tax. This enables overseas branches to compete w i t h f o r e i g n E u r o - d o l l a r lenders. However, u n t i l 1965 much f o r e i g n l e n d i n g was car-r i e d out from a domestic base and i t was not u n t i l that year, and again i n 1968, that the r e a l i n c e n t i v e s to increased r e p r e s e n t a t i o n abroad were provided.• P r e s i d e n t Johnson's v o l u n t a r y balance of payment g u i d e l i n e s implemented i n 1965 to curb the U.S. balance of payments d e f i c i t , to which f o r e i g n lending was making a c r i t i c a l c o n t r i b u t i o n , included mea-80 • sures to r e s t r a i n bank c r e d i t to f o r e i g n e r s . At. the same time, U.S. c o r p o r a t i o n s were requested to r e s t r i c t d i r e c t investment i n f o r e i g n p r o j e c t s . This v o l u n t a r y program was transformed i n t o a system of man-datory c o n t r o l s January 31, 1968. Thus i t became o b l i g a t o r y that much corporate borrowing f o r t h i s purpose be conducted overseas. The p r i n -c i p a l source of medium- and long-term funds became the Euro-bond market. "Since 1965 U n i t e d States c o r p o r a t i o n s or t h e i r overseas a f f i l i a t e s have 81 become the most important s i n g l e group of borrowers." This phenomenon encouraged s e v e r a l U.S. banks to become in v o l v e d i n investment or mer-chant banking c o r p o r a t i o n s abroad. - 143 -The expansion of U.S. commercial banking operations abroad have been magnified by the presence of the Euro-dollar market as a source of short-term funds to be re-lent to overseas commercial custo-mers, especially U.S. corporations operating abroad, to other banks and for overnight transfer to U.S. head offices to ease l iqu id i ty pressures at home. The importance of the latter act ivi ty is exemplified by the fact that the Chase Manhattan Bank estimates that during the severe credit crunch of 1966 U.S. banks were borrowing 32 per cent of total 82 Euro-dollar loans outstanding. However, most significant has been lending to U.S. corporations requiring funds to continue increasing operations abroad. This most recent legis lat ion has also contributed to the spe-c i f i c locations selected abroad by the U.S. banks and more w i l l be said on this subject when the area studies are made. Concurrent Federal Reserve Board (FRB) curbs on foreign investment by banks has affected the general direction of their overseas commitments. The Board now re-quires that specific approval of the FRB must be obtained before any equity investment in a foreign business i s made by an Edge Act or Agree-ment corporation. The design is to discourage new investment in the developed countries while encouraging those destined for the develop-ing economies. Speci f ical ly , "equity investment in developed countries of continental Western Europe w i l l not, while the new provisions re-main in effect be approved by the Board, unless circumstances clearly demonstrate that the transaction w i l l not be detrimental to the U . S . - 144 -balance of payments. But, applications to make equity investments els'e-83 where w i l l be considered on their m e r i t s . . . . " This rather extensive elaboration upon U.S. legis lat ion which has d irec t ly , or indirect ly , encouraged increased U.S. commercial bank act ivi ty abroad was presented to emphasize-the contrast between the Canadian and U.S. banking situation. The relative lack of significance of Canadian legis lat ion encouraging the movement abroad of the chartered banks is to be noted. However, before moving on to other forces, we alluded to the important role of reciprocity in international banking, and to Canadian legis lat ion prohibiting the entry of foreign banks into Canada. One can hpothesize that the existence of such leg is lat ion, in some instances, may be an impediment to operations in certain foreign countries. Further w i l l be said on this subject as the study proceeds. '.'! The recent U.S. balance of payments guidelines have augmented the significance of the "bandwagon" effect as an impetus behind the movement abroad of the U.S. commercial banks. This imitation of the commitments of a leader is of special importance to the regional banks in the U.S. (those outside of New York and the Bank of America) who are learning that a direct source of Euro-dollars is needed to serve the requirements of multi-national corporations or, alternatively, r i sk loss of these valued customers to firmly entrenched multi-national bank-84 ing giants. These "giants" include the Bank of America and the New York banks selected for analysis by this study. - 145 -Nevertheless, the actions of competitors do have an important influence on these "giants". These U.S. bankers have s l ight ly varying views as to the relat ive importance of their principal competitors in the international arena. One New York banker with a large number of a f f i l i a te s abroad f e l t that their chief competitors overseas were domes-1 - ! t ic banks i n countries where they are represented. However, the consen-sus i s that the actions of other New York banks and the Bank of America are most significant to the New York banks interviewed. The Bank of America considered the New York banks as their major competition. Other banks mentioned as ranking behind these leading r ivals were the European banks, and the Canadian banks especially in the Caribbean. One American banker whose bank is re lat ive ly less extensively established abroad noted that U.S. regional banks were "moving into the picture". The U.S. bankers interviewed stressed that the action of com-petitors was "by no means the most important" influence on their d e c i s i o n to go or not to go into international situations. One asserted that, h i s bank "largely lead others" and that their "worries" are "creative pro-blems". Two suggested that they "may not enter certain areas because a competitor has pre-empted the desirable business". The consensus, how-ever, although stated in different words was that the "bandwagon" i n f l u -ence is a not unimportant factor. Only one banker said bluntly that they "may follow competitors". Another suggested that there was a " s i g n i f i -cant amount of "monkey see, monkey do". In the same vein another s a i d "everybody is watching what everybody else is doing." - 146 -Canadian bankers, meanwhile were f a i r l y evenly divided as to who they considered to be their primary competitors in the international sphere. One carefully sat on the fence and said "everyone". One, which the writer considers to be the least aggressive internationally at this time, f e l t that other Canadian banks were their chief r i v a l s . Another, with an aggressive attitude internationally f e l t that "other Canadian banks are not necessarily competitors" although one with an "excellent name provides strong competition in areas where represented." The chartered bank which has the largest foreign branch network rated the largest New York banks as i t s chief r i v a l s . This contention reflects i t s view that i t - i s an "international bank". These bankers were also divided on the degree of influence which competitors have upon their decision to make commitments abroad in certain areas. Not surprisingly, the bank which maintained that other Canadian banks were i t s principal competitors considered i t "basic to be where your competitors are" and that their actions "can help shape policy". This banker was supported by another who stated that "since we must be competitive with the other chartered banks in the domestic f i e ld i t stands to reason we must be competitive with them in the in -ternational f i e l d . " One, whose banks has displayed recent aggressive expansion abroad, asserted that although we are "cognizant" of our com-petitors we are "going our own way, not pushed". Another, whose bank the writer feels has exhibited a notably independent attitude domesti-cal ly since the 1967 Bank Act revis ion, stressed that we "follow our own - 147 -independent course to meet the needs of Canadian customers in overseas areas". The remaining bank which did not respond directly to this ques-tion has displayed i t s independence by i t s early leadership in estab-ii ii l i shing a re lat ive ly extensive overseas branch network. Over-al l then, on balance i t seems that the Respondents do not perceive themselves as following the "bandwagon". Nevertheless i t is I significant that each are very cognizant of their competitors action which J to the writer, implies that imitation of the commitments of a leader in terms of location, i f not operating form, is not a remote poss ib i l i ty . A notable influence which may lead a bank to "jump onto the bandwagon" but is more apt to see i t "pulling the wagon" is the presence of enthusiastic "internationalists" within the senior management of the bank. Two Canadian bankers stressed the existence of these executives as the guiding force behind their act iv i ty abroad. One of these banks has been part icularly aggressive internationally in the past three years the other had within that time, pioneered the use by the chartered banks of a new international vehicle, the multinational jo int venture. The importance of "internationlists" within the management hierarchy i s more decisive among the U.S. banks as the four largest each stressed the significance of these executives in the achievement of their noteworthy international status today and their continued aggressive expansion abroad. ! • i , Whether or not there are "internationalists" within the senior I management of a bank may have an important influence upon the organiza-- 148 -t ional structure of the ins t i tut ion . In other words, the stature of the "international region" within the structure is probably a. reflection of the attitude of management toward this sphere of business. The inter-national leader, in terms of overseas "offices" at least, among the chartered banks has divided the Caribbean area into four sub-regions headed by D i s t r i c t General Managers of similar status to those executives who head up the geographic regions within Canada. This, no doubt, re-f lects the importance of the international region to that bank. Ano-ther, which stressed the importance of "internationalists" in their overseas growth has an Assistant General Manager responsible for the United Kingdom, continental Europe and the Middle East resident in Lon-don. His status within the hierarchy is again similar to those execu-tives leading the domestic divis ions. This same bank also has an Assis-tant General Manager for the Caribbean region resident in Toronto. The recent re-organization of the international divis ion of the Bank of Montreal recounted in the Financial Post would appear to ref lect an increased emphasis upon the significance of international 85 business to that inst i tut ion. The major change at this stage, accord-ing to the a r t i c l e , is the sp l i t t ing up of the divis ion on a geographi-cal basis. This structure is identical to that employed by the U.S. banks interviewed, possibly a ref lect ion of the fact that the divis ion's 8 new executive vice-president has been brought in from the United States. This reorganization and the existing organizational structures of the aforementioned banks can be contrasted with that which existed unt i l - 149 -recently for one Canadian bank which has exhibited re lat ive ly l i t t l e aggressiveness abroad to date. According to an officer interviewed, "the emphasis has been upon expanding in Canada" and "the international operations were direct ly under the administration of Head O f f i c e and policy and practices in each country were very oriented to the Canadian banking situation." The writer concurs with this banker's view that "this in i t s e l f has inhibited growth over the years." In this section we have concentrated upon offering a number of hypotheses concerning in i t ia t ing forces which direct the chartered banks abroad. Motivating forces mentioned included foreign trade, d i -rect investment abroad by domestic corporations and direct investment in Canada by foreigners. Legis lat ion was held out to be uniquely s i g -nif icant for U.S. banks. The "bandwagon" effect was discovered to have, valuable influence upon behaviour. A significant force was found to be. the presence of enthusiastic "internationalists" among senior manage-ment. In closing, i t was hypothesized that the existence or absence of these "internationalists" could be viewed as a v i t a l factor i n the de-termination of the organizational structure which, i n t u r n , could i n -fluence the international expansion of the particular bank. This section also has provided us w i t h a good perception of why banks select particular areas. The following chapter w i l l adopt essentially a case study approach to elaborate upon t h i s f a c e t of their expansion abroad and concurrently offer hypotheses as to why a p a r t i -cular vehicle was chosen. Prior to the case studies an a l l - p e r v a s i v e force w i l l be presented. - 150 -CHAPTER VII THE INITIATING FORCES BEHIND THE SELECTION OF A PARTICULAR LOCATION AND VEHICLE This chapter w i l l offer an analysis of the operations of Canadian banks in foreign countries in terms of operating forms and geographic locations. Importantly, the study, limited largely to the post-war era, w i l l tender a number of hypotheses to explain why these banks choose particular countries or areas and why.a certain vehicle is selected as an operating form in these locations. Comparisons w i l l be made concurrently with the "modus operandi" of the selected major Amer-ican banks abroad. In the process of this analysis Tables XII through XIX which i l lus trate the h i s tor ica l and current overseas representation of the Canadian and U.S. banks by country and area w i l l be referred to frequently. In the preceding chapter we introduced important hypotheses as to why a particular location might be selected. We also provided quotations and other evidence that were generally consistent with these hypotheses. This chapter w i l l make extensive use of Tables XX through XXVI which exhibit h i s tor ica l trade and investment patterns of the two countries to lend credence to our contentions in specific cases. With regard to the hypotheses to be put forward to explain why a particular operating form was chosen for a certain location what was said.earl ier in Chapter IV is of significant value. I t w i l l be re-called that there are six d is t inct vehicles which may be employed as a -.,151 -means of entering and operating in foreign countries, aside from cor-respondent banking which is conducted from a domestic base. They are resident representatives, agencies, branches, subsidiaries, a f f i l ia tes of the multinational jo int venture. Following an extensive examination of what may be regarded as a pervasive force, and concomitant practices, the subsequent section w i l l be sub-divided geographically into seven countries or regions — the United States, United Kingdom, continental Europe, the Caribbean, South and Central America (Latin America), the Middle East and Afr ica and, the Far East, including Australasia. A further breakdown within these areas in terms of city and country, where appropriate, w i l l also be carried out. At the same time, the Canadian forms of representation are to be compared with those of the selected U.S. banks in terms, not only of "where, why and what" but "how much" as wel l . Essent ial ly , then, a case study approach is to be adopted. I t should be emphasized at the outset that no attempt w i l l be made to cover each and a l l of the possible cases, but a sampling from each geo-graphic location is to be analyzed. POLICIES AND PRACTICES The pervasive force which we alluded to above is bank policy. The importance of a plan of action is exemplified by the fact that v i r -tually a l l the bankers interviewed contended that policy perhaps was the most significant force behind the choice of vehicle. Also , using - 152 -our def ini t ion, policy can be looked upon as a determinant of the choice of a particular country. Before turning to canvass information pertaining to policy gathered in the interviews conducted i t is most useful, as a support mechanism, to present excerpts from the annual reports of three of the chartered banks. These quotations clearly indicate the importance of policy to the choice of vehicle. I n i t i a l l y , we offer an excerpt from an early post-war Annual 87 Report of The Royal Bank of Canada: Regarding our branches abroad . . . i t is our belief that there is no adequate substitute for direct representation by our own trained organization, experienced in Canadian ways and fu l ly informed by close l ia i son of the needs and offerings of Canadian businessmen. I t is not surprising, then, that this bank has strongly re l ied upon the use of the branch vehicle and has bui l t up the largest overseas branch network of any chartered bank. At about the same time the Bank of Montreal expressed i ts 88 pol icy: I t is our policy to develop our foreign business by expand-ing relations with banks already established in foreign countries, rather than by way of direct branch representa-t ion. . . . This bank has but five branches in other countries, three in the U.S. and two in the U . K . , excluding the branches in Canadian Armed Forces 89 bases in Germany. However, i t has recently purchased equity interest in two European banks after earl ier entering the Caribbean and Lat in America simultaneously v ia a similar vehicle. - 153 -More recently p o l i c y of The Toronto-Dominion bank was es-90 poused: I t has long been the p o l i c y of t h i s Bank to work c l o s e l y with our correspondent connections throughout the world and we have found that business entrusted to them i n the areas i n which they are native and most experienced has been handled i n a very expeditious manner. We value highly these r e l a -tionships and would wish them to know we greatly appreciate the opportunities we have to work with them i n t h i s manner. This bank today has but two overseas branches, both i n London. During the interviews conducted another banker stressed the importance of correspondent r e l a t i o n s i n the d e c i s i o n whether or not to open an " o f f i c e " i n a p a r t i c u l a r country. The " r e l a t i o n s h i p i s cher-ished h i g h l y " and a not unimportant reason i s because they "carry important balances with us." S t i l l another stated that " d i r e c t branching as f a r as p o s s i b l e " was the p o l i c y of that bank but the "most p r o f i t a b l e course" was a mat-e r i a l consideration as w e l l . Timing was put f o r t h as a s i g n i f i c a n t strategy component since " r e f u s a l i s irrevocable i n the short-run." The American bankers offered a v a r i e t y of views as to p o l i c y but there was unanimity as to i t s supreme importance. One which also stressed the s i g n i f i c a n c e of timing of entry responded that the bank's strategy i s to "get i n while the door i s s t i l l open." In other words, to enter while a banking l i c e n s e i s a v a i l a b l e . Regarding the choice of v e h i c l e , he added that a "branch i s preferred as long as i t i s v i a b l e , comfortable and p r o f i t a b l e since i t means absolute control of p o l i c y and undiluted v i s i b i l i t y i n a foreign market." However, he observed - 154 -that the practice is to employ "whatever local conditions dictate is the optimum vehicle." Consequently, this bank has run the gamut employ-ing each of the seven possible vehicles. Another U.S. banker whose bank is firmly established inter-nationally stated that while there is "usually an American thread" we have on occasion deliberately "established connections while we could." The policy of the bank is to establish "wholly-owned branches" abroad making i t "di f f i cu l t for others to follow" and "forcing competitors to buy equity." The bank has exhibited considerable aggressiveness in seeking suitable branch sites abroad and has bu i l t up the largest net-work of foreign branches, almost one-half the total of a l l other U.S. banks combined. An interesting strategy has evolved out of this exten-sive representation. "We look at the world map and say, 'Where aren't we'?" and proceed from there. A bank which has made wide use of the a f f i l i a t e route and re lat ive ly nominal use of branches impressed the writer with i ts con-servative approach to foreign banking operations. The executive inter-viewed responded that there are "no fixed rules" while stressing that "banking is a p o l i t i c a l l y sensitive business" and we consider ourselves to be a "guest in a foreign country." Thus, "we look at each country" in terms of "opportunities" and the "expense" of alternate approaches. The procedure was outlined by him as follows: "What do we want? What is permitted? Who is there to work with?" - 155 -In contrast another U.S. bank interviewed which also has made extensive use of the affiliate mode of operation abroad displayed a much more aggressive attitude. Its expressed policy was to "acquire a substantial equity position in an established foreign bank." The ap-proach was held to be most profitable because "something to work with is acquired immediately." Specifically a deposit base and a "good local staff familiar with local conditions." Although, i t conducted an "active relationship with correspondent banks" i t was the banker's view that they were "not now as concerned about damage to relationships with correspondents" but were nonetheless "cautious about aggressive compe-tition for local deposits." In contrast, the remaining bankers interviewed stressed the significance of correspondent relationships, a la The Toronto-Dominion Bank, and asserted that in their foreign activity that bank is "not interested in stepping on their correspondents' toes in any way." At the same time, the bank is also strongly motivated by profits and does not desire unprofitable "gas stations". The outcome of these policies has been similar to that of its "Canadian counterpart". It has only two overseas branches, both in London. Its principal overseas vehicle has been the representative office. The foregoing discussion of policy and practices clearly ex-hibits the importance of the former as a permeating force behind vehicle employment, in particular, and to a slightly lesser extent country sel-ection. We shall now commence the consideration of specific cases. - 156 -THE COUNTRY OR AREA AND THE VEHICLE Before turning to the analysis by geographic area i t i s use-ful to quickly sketch some of the specific in i t i a t ing forces cited by the bankers interviewed which w i l l be applied to particular situations. Some of these have already been discussed in other contexts, others have not been mentioned and several not l i s ted here are applicable. The l i s t includes the "amount of overseas Canadian business (trade and investment patterns), pol icy, p o l i t i c a l s tab i l i ty , r i sk , avenue of acceptance (foreign banking legis lat ion) , expense (prof i ts ) , exposure, a desire to be "big" in some markets, ava i lab i l i ty of suitable partners, correspondent relations the existence of an international money market 91 centre, and an approach by foreign governments or foreign banks." , Individual cases of approaches by foreign governments or foreign banks are considered to be confidential information, therefore, we are unable to reveal the particular instances where i t is known to have occurred. However, i t can be mentioned that i t was cited as s ig-nif icant by the four largest U.S. banks and was not put forth as a factor by any of the Canadian bankers. And too, i t can be noted that the invitations are received from foreign banks operating primarily in the less developed countries although their head offices may be in one of the advanced nations. We are now prepared to commence the case ana-ly s i s . - 157 -The United States We have already noted during our discussion of the major phases of their international act iv i ty that the U.S. was early entered by the Canadian banks. Three factors appear to have contributed to this early attraction; the nature of trade, the presence of an impor-tant money market centre and the opportunity to participate in the economic growth of the Paci f ic coast. Since World War II as revealed in Tables XII and XV representation has been notably expanded. Impor-tant contributory factors here have been the direction of trade and capital flows. The U.S. for some time has been Canada's principal trading partner. As early as 1886 i t accounted for 44.4 per cent of our total 92 exports plus imports. By 1926 the proportion was about 50 per cent. Table XX reveals that in merchandise trade alone the U.S. i s the source or destination of almost 70 per cent of these commodities a r ise from 60 per cent in 1949. The dollar volume has experienced a four-fold expansion in the period about a 9 per cent compound annual rate of growth. What has occurred to the pattern of direct investment is even more impressive. Reference to Table XXI w i l l show that, despite a f a l l in relative importance from 78 to 56 per cent, Canadian direct investment in the U.S. tr ip led in dol lar value between 1949 and 1966 approximately a 7.5 per cent annual rate of growth. Of utmost s igni-ficance is the trend of U.S. direct investment in Canada. Table XXII - 158 -reveals that i t has experienced an uninterrupted expansion in value since 1949 although as a proportion of total non-resident direct i n -vestment i t has declined steadily, but over-al l s l ight ly , from 86 to 51 per cent. I t w i l l be noted that i t s value has increased four and one-half times between 1949 and 1965 an effective annual rate of growth of s l ight ly above 11 per cent. From the foregoing i t is readily apparent that "the amount of Canadian business" with our neighbour has been steadily increasing. I t follows that the chartered banks could be expected to augment their representation in the U.S. since the war. Table XV i l lustrates that they have indeed by opening 13 representative offices in four different c i t i e s . Before turning to the motives behind the selection of this vehicle and the location i t is proper to brief ly account for the empha-sis upon New York and Cal i fornia as "office" sites. New York's attrac-tion i s evident. I t has for some time been one of the world's foremost international money market centres. The exclusive employment of the agency vehicle, whose act iv i t ies have been elaborated upon in Chapter IV, was occasioned in large part by New York state banking legis lat ion which unt i l 1961 prohibited branches of foreign banks in New York. The 1961 amendment permits foreign branching on a s t r i c t reciprocal basis only, however, and since Canadian banking legis lat ion does not allow U . S . , or any other foreign banks, to operate branches in Canada the chartered banks cannot operate branches there. The agency form has re-- 159 -mained attractive nevertheless for several reasons including the con-tinued expansion of Ganadian-U.S. trade; the large bond flotations of Canadian provincial and municipal authorities which frequently yie ld notable deposit balances for extended periods and an active U.S. $ "swap" deposit business in Canada which require a large supply of U.S. 93 funds. Part icularly from 1958 to 1962 before the amendment of Regu-lat ion Q discussed earl ier these agencies x/ere in an excellent position to capture Euro-dollar funds by offering attractive interest rates. Nevertheless they continue to be active in this sphere. We must not for-get to mention the important "street" lending segment of their business, and note again that "Call and Short Loans outside Canada", substantially 94 agency assets total led some $1.1 b i l l i o n at October 31, 1968. Meanwhile, on the Paci f ic Coast, a l l but one of the chartered banks selected for analysis have established "offices" in Cal i fornia . Unt i l 1964, Cal i fornia State banking law provided for the licensing of foreign bank branches. The branch was a suitable "avenue of acceptance" since i t allowed the chartered banks to participate direct ly in the tremendous economic boom which the state did and has continued to ex-perience. Thus "retai l" banking opportunities were a major attraction in Cal i fornia in contrast to the desirable "wholesale" opportunities in New York. The change in the state banking law in 1964 required that a l l branches be insured under the Federal Deposit Insurance Corporation 95 (FDIC). However, since FDIC insurance is unavailable to foreign banks, - 160 -those wanting to do business in Cal i fornia have had to form subsidiaries chartered in the state. Consequently, the branches of the Bank of Mon-treal there were transferred to the Bank of Montreal (California) and the Canadian Imperial Bank of Commerce created the Cal i fornia Canadian Bank as i t s wholly-owned subsidiary. The Bank of Nova Scotia has recent-ly opened agencies in Los Angeles and San Francisco. I t is possible that a motivating factor was the desire to be represented there but to avoid the FDIC levies by conducting solely a "wholesale" business. San Francisco is the trade and f inancial capital of the Paci-f i c Coast and this , no doubt, accounts for i t s attraction. Sacremento is the state capital and one chartered bank has a branch there. Los Angeles is one of America's largest c i t i e s . Three banks have selected the resident representative route as an "inexpensive" means of direct access to the latter area. We should also note, before leaving the Paci f ic Coast that, as shown in Table XIV, one chartered bank early entered Washington and Oregon. These are two of a few U.S. states which allow foreign bank branches. This plus the close links between the American and Canadian Paci f ic Northwest has been the attraction of this area. We noted earl ier that the chartered banks have made extensive use of representative offices in different c i t ies within the U.S. Ref-erence to Table XV shows that each of the major chartered banks have entered Chicago and Texas in this way. The attraction of Chicago is appropriately summed up by this brief excerpt from one bank's annual - 161 -96 report at the time its office was opened there. The Chicago office will be "an important addition to our Business Development (Foreign) Department" as i t gives the bank "on-the-spot representation in the heart of the great Mid-Western States' industrial area." Between Dallas and Houston each of the banks are "represented" in the heart of "o i l country". One bank aptly described the motivating 97 force which, no doubt, moved the others to the area. The representa-tive office in Houston "covering the States of Kansas, Louisiana, New Mexico, Oklahoma and Texas will strengthen our close connections with the petroleum industry, which has such an important influence on our economy." The foregoing quotations remind us that the representative offices are conveniently located to be responsible for a particular geographic region of the U.S. For example, in addition to those men-tioned above, at least two chartered banks have Special Representatives situated in New York who are assigned particular sections of the Eastern seaboard, including New York city. An important task of those who act in a representative capacity is to cultivate harmonious relations with the extensive network of correspondent banks in the country. According to the latest information available as shown in Table XIII, the chartered banks have in the neighbourhood of 2,000 correspondents in the U.S. It is quite possible that a number of these correspondents would hasten to set up branch offices in Canada i f permitted to do so. This contention is supported by U.S. trade and investment patterns. - 162 -From Table XXIV we note that the volume of U.S. merchandise trade wi.th Canada has not only increased in relat ive importance from one-fifth to one-quarter total trade but also absolutely. The 3.5 times expan-sion in the period represents a s l ight ly greater than 7.5 per cent annual rate of growth. Table XXVI reveals that Canadian direct investment in the U.S. ranks only behind the U.K. in value. However, i t s relative importance has dropped from 30 to 26 per cent while the value has increased but 2.5 times in the interim representing only a 6 per cent annual growth rate. However, as shown in Table XXV, v ir tua l ly an opposite experience has occurred with U.S. direct investment in Canada and here l ies the great attraction of this country to U.S. bankers. Since 1950, the proportion has been almost constant at 30 per cent of the total U.S. direct investment abroad. Meanwhile, however, an almost s ix-fold ex-pansion has taken place. Over the seventeen years this represents an impressive compound annual growth rate of almost 13 per cent or greater than any calculated to date. Unfortunately, for the U.S. banks they are not able to take advantage of this tantalizing opportunity. Even The Mercantile Bank of Canada, wholly-owned by the F i r s t National City Bank of New York has had an effective ce i l ing placed upon i t s growth as we noted ear l ier . However, there are many countries of the world where U.S. bankers are welcomed. One of these is England and, in part icular , London. We now turn to an analysis of the attractions of that country. - 163 -United Kingdom As we noted in our discussion the chartered banks early en-tered England by setting up branches in London. Next to the U . S . , the U.K. has h i s tor ica l ly been Canada's most important trading partner. As early as 1886 i t accounted for 43.5 per cent of our total trade com-98 pared to 44.4 per cent for the U.S. By 1926, while the U.S. propor-tion had risen to near 50 per cent the U.K. proportion had fal len to 27 per cent. Nevertheless a nine-fold increase in volume occurred. Thus trade flows are l ike ly to have been an early in i t ia t ing force. An additional force of less significance was to keep "in touch with the Commonwealth" since.other Commonwealth countries accounted for no more than 6 per cent of total Canadian trade during the period 1886-1926. Another force of notable importance, no doubt, was London's pre-eminence as an entrepot. An international centre of finance, foreign exchange and world trade and the home of world-wide insurance and shipping i n -terests. In addition, substantial amounts of capital flowed from the U.K. to Canada up unt i l World War I in part icular . Since the war the chartered banks have augmented their branch representation in London. Trade has continued as an important force although U.K.-Canada trade is becoming re lat ive ly less important to Canada. Its proportion of the total merchandise trade has halved since 1949 to 8 per cent in 1967. Meanwhile, according to Table XX, total volume has only doubled. I t appears that direct investment flows may be of greater importance in this period. Although U.K. direct invest-- 164 -raent in Canada has proportionately remained constant at 11 per cent of the total throughout the entire period, as i l lustrated in Table XXII, the dol lar value has quintrupled between 1949 and 1965. This represents almost a 17 per cent annual growth rate, a more impressive performance than i t s U.S. counterpart of 13 per cent. Turning to Table XXI we note that Canadian direct investment in the U.K. is about one-quarter the size of the counter-vailing value. Starting from a small base in 1949 the value increased ten-fold by 1966 or just over 15 per cent per annum. Also noteworthy is the fact that i ts proportion of total direct investment abroad more than doubled from 6 to 15 per cent. I t is pos-sible that the added branches, each opened in the c i ty 's West End have been opened as a response to increased travel abroad by Canadians. As one chartered bank described i t s second office in London, i t i s "in a location most convenient for customers and friends of The Bank v i s i t ing 99 the U.K." We must not overlook the tremendous significance of the Euro-dollar market during the past ten years. London is the hub of this mar-ket and i t s focal role "is reflected in the $8.4 b i l l i o n of short-term dollar assets held . . . by banks and foreign branches operating in B r i -100 tain v is -a-v is non-residents" in late 1967. This amounted to "a l -most one-half of a l l /U.S^/ dollar assets held by banks in Europe. This market may not have been a significant force behind the opening of new branches of the chartered banks but i t has led their established offices there to greater act iv i ty and has been an important source of new custo-- 165 -, mers. Its importance with regard to the latter was summed up recently 101 in the annual report of one of the chartered banks. In playing our part in this developing market, we have un-covered many new areas of business potential and established relationships with more and more overseas concerns. These connections not only broaden our base of service, they often add very direct ly to our domestic banking business and, in addition, put us in a position to find new business for our Canadian or international customers. With regard to the former "Canadian banks from the f i r s t have played a significant role in the Euro-dollar market" and have usually been net suppliers of funds to the market but the "possibi l i t ies for further net growth are now d i s t inc t ly limited by the foreign currency guidelines adopted by Canada to prevent pass-throughs of U.S. dollars 102 to countries overseas." At the same time, "the greater part of Canadian lending to 103 Europe . . . i s transacted through the United Kingdom." The principal reason is that "London's f inancial f a c i l i t i e s provide the media par excellence through which funds can be drawn off or poured into the for-eign currency market." Those U.S. national banks interviewed have also found Lon-don and the Euro-dollar market to be immensely attractive and, as des-cribed ear l i er , in concert with U.S. balance of payments guidelines has been the major impetus behind the movement of smaller regional banks into London. Table XII and XVIII combine to i l lus tra te the noteworthy expansion of U.S. bank branches in.London; i t w i l l be noted that the num-ber has quintrupled since 1950 and more than doubled since 1960. Table - 166 -XVTI reveals that those banks selected for analysis by the writer have 12 U.K. branches, 10 of these are in London, or more than one-third of the London tota l . In contrast to the Canadian position the Bank of England encourages the opening of foreign branches in London since i t believes new arrivals aid in expanding the range of f inancial services already in existence; to further refine them, and to "keep Br i t i sh banks - 104 - . \, keen on their competition." U.S. banks have responded to the "in-vitation" with such a prol i ferat ion of branches that Moorgate Street has become known as "Yankee Alley". The importance of the Euro-dollar market as "the" factor behind the conducive atmosphere is attested by the fact that at the end of 1967 among the London banks American branches were the "single most important market participants, accounting for over one-half of a l l external short-term dol lar assets reported by banks and foreign branches operating in 105 B r i t a i n . " Before turning to discuss the selection of vehicles by the banks of both countries i t is important to note the U.S . -U .K. trade and investment picture as a probable in i t i a t ing force as wel l . In 1950, U.S . -U .K. merchandise trade amounted to only $855 mi l l ion and as shown in Table XXIV the volume had quadrupled by the end of 1967. Table XXV i l lustrates the significant post-war r ise in U.S direct investment in the U . K . , not only has i t s relat ive importance r isen, although stable since 1962, but the dollar value has increased almost 7.5 times in the period or about 14 per cent.per year. Of lesser importance, as revealed - 167 -by Table XXVT, i s U.K. direct investment in the U.S. Although the U.'K. ranks as the largest single country source of these funds, accounting for about one-third of the total throughout the period, the value has risen l i t t l e more than 2.5 times. I t has been consistently less than the countervailing position since convert ibi l i ty restoration in 1958 and by 1967 was v i r tua l ly one-half that value. The aforementioned elements — the Euro-dollar, trade and direct investment trends and value contribute substantially to the choice of the branch vehicle or the prime method of operating in London. We have i l lus trated that good opportunities exist for the building up of an attractive "retai l" banking business and the Euro-dollar market represents probably the most significant 'Vholesale" inter-bank lending market today. In this regard since the recent balance of payments guidelines were implemented "the main business of the American branch banks seems to be lending money to their head offices in the form of 106 Euro-dol lars ." The branch represents the most effective vehicle to obtain the "best of both worlds". Signif icantly , however, the Euro-dollar market has given r ise to the emergence of an important new banking form, the multi-national jo int venture. As one U.S. banker described i t s effect, "it has done much towards the establishing of multi-national enterprises." Notably, the U.S. regional bank influx into London in the past three years has 107 been increasingly v ia this vehicle. The jo int venture route appar-ently has been more attractive than the direct branch mode for several - 168 -reasons; the relative lack of resources of the smaller regional banks in contrast to the big international New York and San Francisco banks combined with the high start-up costs of a branch; the shortage of truly qualified international banking talent which, when available comes at a very high price; the already intense and entrenched competition from existing domestic and foreign institutions in London; the reluctance of the European f inancial fraternity to do business with these previous-ly little-known regional American banks. For the already internationally established U.S. banks the Euro-dollar market has stimulated the creation of new multinational wholesale intermediaries. In Chapter IV we described the objectives of Manufacturers Hanover Limited which is headquartered in London. This is but one example. We shal l note later when we turn to look at con-tinental Europe that several other jo int ventures designed exclusively to top the Euro-dollar market have been created. Only one chartered bank to date has employed a jo int venture vehicle which has been active in the Euro-dollar market. In 1964, The Toronto-Dominion Bank, in partnership with the Midland Bank Limited (London), Standard Bank Limited (headquartered in London but operating over 1,200 branches in 15 countries in sub-Sahara Africa) and the Com-mercial Bank of Austral ia Limited, formed Midland and International Banks Limited (MAIBL) "for the purpose of providing finance in circum-stances not suitable for normal commercial lending. This includes med-ium-term export financing and loans for large-scale development projects - 169 -108 throughout the world." Midland Bank Limited is the principal share-holder acquiring 45 per cent of the issued capital of felO mi l l ion pounds. The Toronto-Dominion Bank holds an equity interest of 26 per cent. Its assets in 1964 totalled h 70 mill ions,by late 1967 i ts deposits were "in excess of fe225 mi l l ions ." The venture secures "most of i t s funds" by "quoting competitive rates for deposits at notice or on fixed terms in substantial mounts." I t is headquartered in London and according to one U.S. banking executive interviewed i t is today "the biggest single 109 operating factor in the Euro-dollar market." Reference to Table XIV w i l l reveal that the chartered banks have very recently established branches outside of London in the U.K. Actually i t has been the action of but one, The Bank of Nova Scotia, which opened branches in Glasgow and Dublin in 1964 and 1966. The ve-hicle is in keeping with their exhibited practice of undertaking "an 110 aggressive branch expansion program." Since Irish-Canadian trade has remained near an annual level of $21 mi l l ion between 1951 and 1966 and Ireland is not among Canada's leading trading partners, the direc-tion of trade may not be a significant force. We do not have figures for the direct investment.flows between the two countries but they are l ike ly to be nominal. However, we can reasonably hypothesize that close cultural relations and growing tourist travel were contributing factors. Dublin, too is the capital c i ty . Similar hypotheses can be applied to the Scottish case, except that Glasgow is an important port c i ty but not the capi ta l . - 170 -The 1968 entry into Ireland by The Chase Manhattan Bank v ia an association with the Bank of Ireland was defended in terms of a "long range view of the future." The executive interviewed replied that "Ireland is a reasonably attractive prospect as far as expansion of U.S. business over the next 10 to 20 years and is thus very opportune to be there at this time in keeping with our desire to offer service capabil ity wherever our customers are going to go." In the foregoing section we have canvassed the motives behind the lure of London and the United Kingdom for the Canadian and American banks we shall now turn to investigate why continental Europe has be-come increasingly attractive to these inst i tut ions. Continental Europe Reference to Table XII shows that the branch vehicle has been an infrequently employed vehicle in Europe. Table XLII reveals that representative offices are the prime method of direct access to comple-ment a network of over 3,000 correspondents and Table XVI i l lustrates that the banking a f f i l i a t e is a very recent innovation for Canadian banks in Europe. At this stage we may contrast the intensity of representa-tion of the U.S. banks with that of their Canadian counterparts. The selected U.S. national banks maintain a l l of the 38 branches of U.S. banks in Europe (see Table XVTI). They also operate 16 representative offices. These compare to three and six respectively for the chartered 111 banks. In terms of a f f i l ia tes in Europe these U.S. institutions - 171 -possess equity investments in six different commercial banks, the char-tered banks only two. What is the attraction of Europe for these banks and what accounts for the greater number of "offices" of U.S. banks on this continent? Two possible answers are trade and investment patterns. I t is most appropriate that the analysis be conducted in terms of individual countries or economic areas due to the wide variety of s i t -uations involved. Nevertheless, at the outset,'we shall offer a con-glomerate view. Between 1951 and 1966 Canada-Western Europe (excluding U.K. and Ireland) trade has expanded from a level of $268 mi l l ion to a sum of $1,552 mi l l i on , almost a s ix-fold increase for an attractive annual growth rate of 13.5 per cent (see Table XX). Table XXIV i l l u s -trates that U.S.-Western European trade during a similar period has i n -creased only 2.8 times (about 7 per cent per annum) but has consistently accounted for about one-quarter of i t s merchandise trade volume. Not surprisingly, in view of the relative population size, this sector of Canadian trade is but one-tenth the U.S. Volume. The effective contrast is to be found in the value of direct investment. According to Table XXI although Canada's direct investment in Europe has increased twelve-fold since 1949 i t s inconsequential begin-ning meant that by 1966 the value reached only $223 mi l l ion or 7 per cent of Canada's to ta l . I t becomes f a i r l y clear that there are not enough "coat-tails" in Europe for the chartered banks at this time. At the same time, Table XXV shows that in contrast the U.S. banks have a consi-derable number of "coat-tails" to grasp. Total U.S. direct investment - 172 -has multiplied exactly ten-fold since 1950, a most impressive 17.5 per cent annual growth rate. One should also note that a very substantial portion of this growth has occurred since convert ibi l i ty restoration i n 1958. In fact,the total value has doubled since 1962, a 15 per cent effective annual rate of growth. Table XXVI reveals European d i r -ect investment to be almost 40 per cent of the total value but the value is but one-third of i ts outgoing counterpart. Thus to be "where the customers are or where they are going" may be regarded as Europe's primary attraction to the U.S. banks. This may account for the re la-t ively large number of U.S. bank branches in E urope while Canadian banks have concentrated upon the less costly representative route. Before turning to peruse the individual cases the European Economic Community (EEC), better known as the European Common Market, deserves special treatment. I t was formed in 1957 and i t s members are Belgium, France, Germany, I ta ly , Luxembourg and the Netherlands. I t w i l l be recalled that the chartered banks have an "office" or "offices" in each of these countries and at the close of 1968 were represented elsewhere in Europe solely by correspondents. As for the U.S. banks i t w i l l be noted from Tables XVIII and XIX that 30 of their 38 branches, 9 of 16 representative offices and 4 of six commercial banking af f i l ia tes i n Europe are located in the Common Market countries. What has attrac-ted the banks of both countries to this economic area? Once again i t may be the "nature of the flow of trade" and investment patterns. - 173 -By reference to Table XX we note that trade with the EEC -countries totalled $639 mi l l ion in 1957 by 1966 i t had almost doubled to equal $1,187 mi l l ion about an 8 per cent annual growth rate. In 1957 i t represented 88 per cent, and by 1966 i t s t i l l was 70 per cent, of total Canadian trade with continental Western Europe. Meanwhile, Table XXIV reveals that in 1967 U.S.-EEC trade accounted for 69 per cent of total U.S. trade with that continent. The volume was also eight times that for Canada although as i l lustrated in Table XX Canada-EEC trade accounted for 70 per cent of Canadian trade with continental Europe in 1966. Turning to Table XXI, i t i s significant to note that the EEC countries accounted for 64 per cent of Canadian direct investment in Europe in 1966 while Table XXIII shows that, without including I ta ly , the EEC countries contributed 77 per cent of European direct investment in Canada. The corresponding proportion for the U . S . , as can be seen from Table XXVI, is 60 per cent, however, as we have suggested above the re lat ive ly small value renders access to the origin of these funds a re la t ive ly minor force. Once again, i t is U.S. direct investment abroad which can be viewed as the pr inc ipal attraction. In 1958 the value of these investments in the EEC countries equalled 41 per cent of the total for Western Europe according to Table XXV. The proportion had increased to 47 per cent by the end of 1967 with the value more than doubling. At the same time i t s value was 60 times the corresponding sum for Canada. - 174 -I t should be f a i r l y c l e a r from the foregoing a n a l y s i s t h a t the representation of U.S. banks i n Europe should be and i s , much grea-ter than that of the Canadian banks. I t i s a l s o not surprising that the branch system of the chartered banks should be much smaller than that of their American counterparts due to the r e l a t i v e l a c k of Canadian cus-tomers abroad in contrast to the apparent l a r g e and growing number of American cl ients with "permanent" commitments in Europe. The shortage of opportunities for notable "retai l" banking business short of aggres-sive competition for indigenous customers thus makes the representa-tive office a suitable vehicle for the existing circumstances. We shall now turn to analyze specific cases, beginning with France since the branch established in Paris by a wholly-owned subsi-diary of The Royal Bank of Canada in 1919 represented the i n i t i a l Euro-pean entry by the chartered banks. This early entry may be attributed to trade and investment flows but also is l ike ly to ref lect the close cultural relations between France and Quebec where the chartered bank has i ts head office. In 1956 the Bank of Montreal established a repr e s e i \ t a t i v e of-f ice in Paris . Its-function, stated at the. time, was "to maintain a close l ia i son with our banking correspondents on the continent of Europe, and to assist , in any way possible, those firms and individuals in Europe 112 who are looking to Canada as a f i e ld of business expansion." The pr in -c ipal i n i t i a t i n g force was thus to se l l the bank's services to prospec-tive foreign investors. In 1968 the same inst i tut ion acquired an equity - 175 -interest in the Banque Transatlantique of Paris . The a f f i l i a t e form is in,keeping with the bank's pol icy , noted earl ier , of preferring cementing relations with established banks rather than employing direct branches. An in i t i a t ing force might have been Canada's growing trade with France which in 1966 ranked as our ninth largest trading partner. (See Table XX). Morgan Guaranty Trust Company which has been "100 years in France" noted recently that "after the war, France's remarkable econo-mic recovery and American interest in doing business there opened impor-113 tant new opportunities for banking." Table XXV reveals that U.S. direct investment in France increased ten-fold between 1950 and 1967 attesting to the existence of increasing "opportunities". Another of these opportunities has been the emergence of Paris as a leading inter-national money market centre. Speci f ical ly , since 1958 i t has become the scene of a significant volume of Euro-dollar transactions. While the U.S. national banks were already "there" when i t started, as in London, the presence of the market gave r i se to the creation of multi-national joint ventures headquartered in Paris "to mobilize capital in the most eff ic ient way to meet demands in certain areas" as one American banker described i t . The Societe Financiere Europeene is a "wholesale intermediary" whose objectives and act iv i t ies were elaborated upon in Chapter IV is an important example. The Bank of America entered this venture in keeping with two of i t s objectives. They are firm believers in the multi-national approach to banking and business, one because i t - 176 -is "helpful in protecting p r o f i t a b i l i t y in a p o l i t i c a l and nat ional is t ic world"; secondly, because they seek "greater international cooperation 114 in the future." We now turn to look at chartered bank operations in Germany which i s now Canada's third largest trading partner (see Table XX). This factor, then, is l ike ly to have been an important force behind the opening of an "office" in Germany. For U.S. banks, however, the principal attraction is l ike ly to have been the notable and growing volume of U.S. direct investment there. At the end of 1958 the value of these funds in Germany were 34 per cent of the EEC to ta l , this pro-portion increased to 41.5 per cent at the close of 1967. Concurrently, as shown in Table XXV, the value quintrupled thus experiencing an impres-sive annual growth rate of 20 per cent. I t w i l l be noted from Tables XEV, XV and XVIII that in con-trast to the U.S. banks which presently maintain ten branches in Ger-many the limited entrance of the chartered banks has been by way of the representative office. In addition to the expense of a branch and the shortage of "coat-tails" for a profitable branch operation there are more unique factors which apply. One of these was explained by a Cana-dian banker interviewed in terms of inhibit ing leg is lat ion. Canadian banking legislation. 1 "It is our policy that branches should never be opened in certain parts of the world." He cited Germany as an impor-tant example saying that "Germans do not welcome competition with Ger-many's "Big Three" banks. At the same time they are highly reciprocity - 177 -conscious and "U.S. banks can get in because New York is open "through the 1961 legis lat ion discussed ear l i er . Thus, even i f a Canadian bank wis hed to set up a branch in Germany i t would probably prove most d i f -f i c u l t to obtain a banking license since the German banks are not per-mitted to operate in Canada. Another Canadian banker explained why that particular bank had selected the representative as opposed to the branch route in terms of correspondent relations. "Correspondent banking is an important factor in considering whether or not to open an office. They carry important balances with this bank and the relationships are cherished highly. Germany is a case in point. We do a substantial good business with German banks and although there is no actual German law against opening a branch we are opening a representative office there as a compromise. A representative can work with the correspondent banks and service the business of German subsidiaries in Canada without trampling on our correspondents' toes." We shall now brief ly canvass some specific cases. In 1962 The Bank of Nova Scotia opened a representative office in Munich. In 1960 the bank's President had said: "Growing confidence in Western Europe is reflected in the sizable flow of investment capital to London, Paris and Munich in the last few years. I t is not just short-term in 115 character; i t includes serious long-term investment." According to a U.S. banker similar motives existed when i t opened i ts branch there. - 178 -In 1962 the Bank of Montreal opened i t s representative office in Dusseldorf. I t explained, at the time, that i t was to be "an addition-a l point of l ia ison for our European business with special reference 116 to West Germany, Switzerland, Austria and Denmark." Noting the area i t is to serve, the particular site was probably selected having in mind the potential market value of the area, the ease of communica-tions to adjacent c i t i es and the cost of operation. Since the beginning of 1969 The Royal Bank of Canada has es-117 tablished a representative office in Frankfurt. "It w i l l enable us to offer a better service to our customers who have dealings with West Germany, and to our German banking friends and their cl ients interested in trade and investment in Canada, the Caribbean and Lat in America," according to the bank's chairman. Thus, i t was trade and investment patterns which precipitated the choice of this country for an office. Not mentioned above, but possibly a decisive factor behind the selection of Frankfurt as a site has been that c i ty 's emergence as a money market centre i n concert with the growing importance of the Deutsche Mark. One American banker offered that i t was "the need to deal in Deutsche Marks directly" which had occasioned the recent open-ing of i t s branch there to replace a previously existing representative off ice. The annual report of that bank explained the opening in terms 118 of i t s policy regarding the choice of vehicles and location. "The Frankfurt branch w i l l complement the Bank's representa-tive offices on the Continent. MHT has not developed a network of over-- 179 -seas branches, nor does i t intend to do so. But as new money centers evolve, in the way Frankfurt has, new branches to serve customers as Manufacturers Hanover now does in London will be opened." We have now completed our case study of Germany and have learned that trade and investment patterns, legislation, correspondent relations, a central location and an international money market centre each have played roles in initiating entrance into Germany by certain vehicles. We shall now turn to investigate the operations of the banks in Belgium. From Tables XIV and XVI i t will be noted that the chartered banks limited representation in this country consist of one branch and one banking affiliate. Meanwhile, the national banks maintain two repre-sentative offices, one affiliate and eight branches according to Tables XVIII and XIX. One attraction for the chartered banks might have been Canada's growing trade with Belgium and Luxembourg which as illustrated in Table XX ranks as this country's tenth ranking trade partner. These countries also ranked second to Holland a source of foreign direct in-vestment in Canada in 1965 but were the destination of but a nominal amount of Canadian overseas direct investment (See Tables XXI and XXLTI). Thus investment ties are not strong. For the national banks, once again U.S. direct investment overseas is likely to be a motivating force since the value has tripled since 1962. However, a more significant force ap-pears to exist for the selection of Belgium, and specifically Brussels as a site for overseas operations. - 180 -Except for three U.S. bank branches in Antwerp, Belgium's bustling port centre, each of the aforementioned "offices" are in Brus-sels. Why? To present and support an hypothesis we offer an excerpt 119 from "The Economist" followed by two recent cases. "One of the things that makes banking interesting here is that you are dealing with businessmen whose decisions affect a l l Europe." This remark from a foreign banker in Brussels goes far to explain the rash of foreign banks that have come into this c i ty over the past half-dozen years. Top businessmen are expected to attach growing importance to being at the ex-ecutive and administrative centre of the EEC; and as top management of international companies move into Brussels they w i l l want their own banks on the spot. The ar t i c le goes on to say that "investment incentives in Belgium are attracting big American business (especially when combined with the Common Market's t a r i f f walls) ." Thus i t is the EEC and U.S. direct investment which is the significant attraction for the U.S. banks. For the chartered banks EEC-Canada trade may be a greater attraction than capi ta l . The Bank of Nova Scotia stated that "we opened an important new office with f u l l branch status in Brussels, Belgium which i s increasingly becoming a focal point within the European Common 120 Market." The branch vehicle is in keeping with their expressed policy of "aggressive branch expansion", as noted ear l i er . The Royal Bank of Canada clearly expressed the importance of EEC trade and defended the selection of the a f f i l i a t e vehicle in i t s 1968 121 Annual Report. - 181 -Canada's role as a leading trading nation continues to expand and . . . our bank has endeavoured to enlarge i t s international representation by way of imaginative and profitable expansion. In some areas, this i s pract ica l by way of additional branches and, in others, by ways of association with well established national banks. As an example . . . we purchased an interest in Banque Beige pour 1'Industrie of Brussels. This is an old and highly regarded Belgian bank and we believe that our par-t ic ipat ion is an excellent means of strengthening our banking ties within the Common Market. We have completed our canvass of the forces behind the move to Belgium and have hypothesized that the existence of the EEC is an important attraction. We now turn br ie f ly to look at the banks in I ta ly , the Netherlands, Switzerland and Greece. The representative office of the Bank of Montreal opened in 1968 in Milan is the only office of a Canadian bank in I ta ly . Accord-ing to "The Financial Post", "the bank's move reflects a tremendous ex-122 pansion recently in Italian-Canadian trade." The ar t ic le notes that in 1967 Canada's trade with Italy amounted to $250 mi l l i on , a 2.5 times mult ipl ication since 1957 (see Table XX). I t also notes that "the number of Canadian companies investing in Italy has increased," however reference to Table XXI reveals that total value in 1966 was only $27 but no doubt notable in terms of Canadian direct investment in i n -dividual countries i f a complete breakdown was provided. Apparently too, "several major I ta l ian firms have extensive interests in Canada" although we do not have data at hand to support this assertion. In contrast the selected U.S. banks have three representatives, one a f f i l i a t e and two branches in I ta ly . This , no doubt, partly reflects the trend and value of U.S. direct investment there since, as Table XXV - 182 -i l lus tra tes , the value has increased 4.5 times since 1958, although .only 2 per cent of the U.S. world to ta l . One must not overlook, however, the fact that U .S . - I ta l i an trade in 1966 had reached $1.7 b i l l i o n or about one-tenth of the total unadjusted merchandise trade of $17.9 b i l -123 l i o n . The I ta l ian figure represents a v i r tua l doubling since 1957. Thus trade and investment may be booked up as forces attracting U.S. banks to Europe as well . The choice of Milan as the site for the office of the Bank of Montreal is consistent with the hypotheses that trade and investment flows are important motivating forces since i t ' s the centre of the i n -dustr ia l north where most foreign investment act iv i ty occurs. The U.S. banks are evenly divided between Milan and Rome, the capital to the south as locations for their "offices". Before turning to the Netherlands i t is~interesting to note the case of the Bank of America's acquisition of i ts a f f i l i a t e , Banca d'America e d ' l t a l i a with 85 offices throughout I ta ly . This U.S. bank has a strong I ta l ian heritage as i t was founded in 1904 by A . P . Giannini in the I ta l ian d i s t r i c t of San Francisco. Thus one could reasonably attribute this bank's interest in Italy to "cultural ties". According to an executive of the Bank of America interviewed the Bank was early a controll ing investor in the I ta l ian bank but due to Federal anti-trust action in the late th irt ies i t was required to divest i t s e l f of i t s interest. - 183 -Only one Canadian bank, operates an office in Holland and that i s a branch of The Bank of Nova Scotia in Rotterdam. U.S. banks mean-while have four branches and two a f f i l i a t e s . Canadian direct invest-ment in the Netherlands, although s t i l l re lat ively nominal, doubled between 1965 and 1966 and that country in 1965 was continental Europe's largest single source of foreign direct investment in Canada although i t was but one-quarter the value of i t s U.S. counterpart. (See Tables XXI, XXIII and XXVI). U.S. banks can be expected to be re lat ive ly more attracted by U.S. direct investment there since as shown'j1 in Table XXV i'v the value has not only more than quadrupled since 1958 but is $900 mi l l ion larger than the Canadian commitment there. Most important for the chartered banks is Canada-Hoiland trade which Table XX shows to have multiplied 2.5 times since 1957. S ign i f i -cantly too, the Netherlands in 1966 was Canada's seventh largest trad-ing partner. The selection of Rotterdam as the branch site reflects this contention since i t is the major port city of Holland and a lea-der in Europe. The branch vehicle once again reflects the expressed policy of the ins t i tut ion . In 1959 the Canadian Imperial Bank of Commerce established i t s only l ink in Europe, except for correspondents of course, by opening a European representative office in Zurich, Switzerland. The bank stated, at the time, that the "office w i l l provide information f a c i l i t i e s and assistance for European interests now doing business in Canada or wish-124 ing to establish new operations h e r e . . . . " A consideration behind - 184 -the selection of Zurich as a base for European operations was , no doubt, the ease of communication and travel to adjacent c i t i e s . How-ever, perhaps even more significant is the renown of Switzerland as a centre of international banking and Zurich as an international money market centre. The selection of Athens, Greece by The Bank of Nova Scotia is interesting since Canada's trade with that country has h i s tor ica l ly 125 been meagre and in 1966 totalled only $11.5 mi l l ion . However, according to the executive interviewed The Bank expects to combine a profitable "retai l and good element of wholesaling banking" operation. He also noted candidly that there are "many wealthy Greeks" to lend sup-port to his statement, implying as well that the i n i t i a l Canadian expo-sure there might attract a flow of investment funds from that country to Canada. One special interest might be the large shipping interests in Greece, part icularly considering the importance of trade to Canada's economy. Addit ional ly , he asserted that they were "fully welcomed by local bankers" and since, outside Athens, they "want to work closely with correspondents they anticipate no harm to come to important cor-respondent relations." The choice of Athens enables us to offer another hypothesis concerning the forces leading to a decision to set up a banking office in a particular area. I t is possible that some are confident that "We can compete! We can develop ties!" Indeed one could say that i t re-f lects an aggressive approach to international banking. - 185 -Our extensive examination of the operations of the Canadian and U.S. banks in Europe has ended and we are now prepared to traverse the At lant ic to the sunny shores of the Caribbean. Here we shall find that the chartered banks are firmly established and more widely repre-sented than their U.S. counterparts. The Caribbean Table XII reveals that the chartered banks at the beginning of 1969 were operating a total of 154 branches in the Caribbean islands, (Ant i l l es ) . They represented almost three-quarters of the world total and the number has doubled, and the proportion increased from 61 per cent, in 1960. The Canadian bankers interviewed were asked to explain the origin of this phenomenon. Trading.patterns, Commonwealth t ies , p o l i t i c a l s tabi l i ty and an obligation was the gist of their response. We have already noted the importance of Canadian-Caribbean trade as the significant early in i t ia t ing force when we outlined the major phases of international act iv i ty of the chartered banks. How-ever, Canadian banks also possessed what may be termed a natural advan-tage there since both Canada and a substantial part of the Ant i l l es were Br i t i sh possessions. At the same time, since many of these islands were B r i t i s h colonies the p o l i t i c a l climate was controlled and, as we emphasized ear l ier , p o l i t i c a l s tab i l i ty is a significant plus factor. One may question why, with a "natural advantage", the chartered banks do not have branches in a l l existing, or former, Commonwealth countries. - 186 -One important determining f a c t o r must be mentioned and that i s l e g i s - -l a t i o n . For example, A u s t r a l i a p r o h i b i t s f o r e i g n ownership of banking f a c i l i t i e s , w h i l e I n d i a demands r e c i p r o c a l treatment i n an a p p l i c a n t ' s 126 home country. I t i s appropriate here to u t i l i z e a case study of Cuba to f u r t h e r s t r e s s the importance of p o l i t i c a l s t a b i l i t y , trade and accep-tance and introduce an a d d i t i o n a l i n i t i a t i n g f o r c e . I n 1898 an execu-t i v e of The Royal Bank of Canada v i s i t e d Cuba to make a general survey of c o n d i t i o n s there. What f o l l o w s are h i s impressions as recorded i n 1 2 7 the bank's Annual Report of 1952. He was favourably impressed w i t h the p o t e n t i a l i t i e s of the f i e l d and h i s conclusions were that the country, which was about to enjoy s t a b l e government a f t e r a long period of c i v i l commotion, o f f e r e d e x c e l l e n t prospects to tr a d e r s , and that banking f a c i l i t i e s then a v a i l a b l e were t o t a l l y inade-quate f o r the needs of the country. He was encouraged by re p r e s e n t a t i v e Cuban groups, ... a p p l i c a t i o n was made to the competent a u t h o r i t i e s ; approval was granted and we opened our doors i n Havana e a r l y i n 1899. The s t o r y continues: To keep pace w i t h the banking needs of a young and r a p i d l y developing country and as _/the/ bank was then regarded as an i n t e g r a l p a r t of t h i s development, we opened branches throughout the I s l a n d as the need arose. I t i s i r o n i c that 60 years l a t e r changed p o l i t i c a l circumstances were t o f o r c e a l l f o r e i g n banks out of Cuba. The foregoing case has served a l s o to i l l u s t r a t e that the Canadian banks helped to " f i l l a vacuum" since e i t h e r a " t o t a l l y inade-quate" or no l o c a l banking system e x i s t e d on these i s l a n d s . I n Jamaica, f o r example, the f i r s t l o c a l bank was The Bank of Nova S c o t i a (Jamaica) - 187 -Limited was formed in 1967 with 25 per cent local ownership. The chartered banks, thus became "the banking system and an obligation was acquired to grow with the islands." The chartered banks, then, have conducted essentially a normal r e t a i l banking business in the Caribbean, the range of services offered being very similar to those transacted in Canada. This fact, combined with the aforementioned elements ex-plains why the branch vehicle has been used exclusively unt i l very re-cently. In the following investigation of chartered banks in the Carib-bean, following an investigation of the trend and volume of Canada-Ant i l l e s and Canada-West Indies trade, we shall res tr ic t our analysis of individual island situations to Jamaica. Table XIV i l lustrates that 107, or 70 per cent of chartered bank branches in the Ant i l l e s are located within the West Indies Federation and 46 or 43 per cent of this total are in Jamaica. Concurrently, Jamaican branches account for 30 per cent of the Caribbean tota l . We shall also look at a num-ber of the new vehicles employed in the Ant i l l e s recently by the char-tered banks in terms of objectives and motives and also comment upon the U.S. banking act iv i ty in the area. From Table XX i t w i l l be noted that Canada-Caribbean trade in 1966 totalled $265 mi l l ion dol lars . The same table w i l l show that, as a group, these islands ranked as Canada's sixth largest trading partners. At the same time, the West Indies portion of this trade equalled $130 mi l l ion or about one-half the Caribbean total and a per-- 188 -usal of the figures reveals that this has h i s tor ica l ly been the case. Thus the nature of the flow of trade l ike ly remains an area attraction. I t w i l l also be seen by reference to Table XX that Canada-Jamaica trade was equal to more than one-half the West Indies trade total in 1966. And too, the Jamaican trade has been expanding at a greater rate than West Indies or Caribbean trade by more than t r ip l ing since 1951. This performance may largely account for increasing Canadian bank interest in Jamaica exhibited by the opening of 30 branches there since 1951. In 1967 The Bank of Nova Scotia departed from the tradit ional direct branch system of operation by transferring i t s Jamaican banking business to The Bank of Nova Scotia (Jamaica) Limited. The bank sold to the public 25 per cent of the capital stock and retained a 75 per cent interest. As mentioned above i t represented the f i r s t "local" bank in Jamaican history. I t is "banker to the government and handles 128 some 42 per cent of a l l Jamaica's banking business." This move may have been precipitated by the news that another "local" bank was in the process of formation for at the same time that this subsidiary was created a U.S. bank was moving towards the creation of the Jamaica C i t i -zen Bank. Its shares were to be 51 per cent local ly owned with the maj-ority shareholder, Citizens and Southern National Bank of Atlanta hold-129 ing 49 per cent of the stock. According to the 1967 annual statement of the bank i t may have overcome a problem which, according to bankers interviewed,has sometimes plagued the banks operating in the Caribbean area — the - 189 -di f f i cu l ty encountered in generating a deposit base adequate to meet 130 loan demands, necessitating inter-area or head office loans. At October 31, 1967J deposits equalled £39 Jamaica sterl ing while loans amounted to fe33.i This "statement" is supported by the executive inter-viewed who said that "deposit acquisition was no longer a problem." The Bank of Nova Scotia early established a branch network in Jamaica and the Caribbean. We noted in our discussion of the major phases of international act iv i ty of the banks that The Royal Bank of Canada and The Canadian /Imperial/ Bank of Commerce were also active in setting up Caribbean branches prior to World War I I . Each has con-tinued to expand i t s network of branches, however, the remaining two major chartered banks as "late-comers" selected different vehicles to enter the area. The Bank of Montreal chose the a f f i l i a t e route in keeping with i t s policy which we have noted. The Toronto-Dominion Bank selected the multi-national joint venture. In 1958 the Bank of London and Montreal Limited (BOLAM) was formed " i n i t i a l l y bringing together the specialized experience and a number of established offices of the Bank of London and South America, Limited (BOLSA), i ts London parent, and the f inancial resources of i t s Montreal parent, the new bank w i l l develop as a joint enterprise in every way, growing with, and fac i l i t a t ing the expanding economy and trade of the Caribbean area and providing the Bank of Montreal with 131 direct representation there." - 190 -Signif icantly , B01AM technically became a multinational jo int venture in 1964 "when i t issued capital was increased . . . to enable Bar-132 clays Bank DCO to jo in . . . becoming a one-third /equal / partner." The association with Barclays Bank DCO was termed advantageous because of "that bank's international network of some 1,400 offices in 40 coun-tries outside the U.K." and the international renown of i t s parent Bar-clays Bank Limited. Thus profits and prestige may be said to have com-bined to precipitate the acceptance of this partner. BOLAM is headquartered in Nassau and has six branches in the A n t i l l e s . However, i t s most extensive representation is in Lat in Amer-ica where i t now maintains 38 branches. Thus in one f e l l swoop the Bank of Montreal gained i n i t i a l direct access to two important areas. We shall comment further upon the latter area below. Prestige could be considered a force behind the association of The Toronto-Dominion Bank (T-D) World Banking Corporation Limited (WOBACO) a multi-national joint venture which was formed in 1966 to act as a ful l -service bank. The T-D together with the Bank of America holds 133 about 2/3 of the issued capital of 500,000 shares. (The T-D main-tains a 28 per cent part ic ipation) . The bank reported, at the time, that WOBACO "provides us a significant entry into the Caribbean area." Later the President of the bank said that participation in WOBACO would "enable the bank to extend complete banking service to i ts c l ien-tele and Canadian interests in the Bahamas ( i t is headquartered in Nas-sau) as well as offer the advantages of direct association with the - 191 -134 i n t e r n a t i o n a l owner group of WOBACO." Thus a s s o c i a t i o n with "use-f u l p a r t n e r s " appears to have been a s i g n i f i c a n t f o r c e behind the s e l e c -t i o n of t h i s v e h i c l e . Another f a c t o r , which a p p l i e s e q u a l l y to BOLAM, i s that the bank may have f e l t that competitors had saturated the area soaking up most of the o p p o r t u n i t i e s f o r b u i l d i n g up a p r o f i t a b l e r e -t a i l banking business from s c r a t c h . I t i s i n t e r e s t i n g to note the forces which motivated the Bank of America to enter WOBACO, according to the executives i n t e r v i e w e d . Most important was a c q u i s i t i o n of an " o u t l e t to the Bahamas market and easy access to E u r o - d o l l a r s . " Nassau has become a favoured expansion area f o r U.S. banks, he suggested, because i t i s " p o s s i b l y the most economical l o c a t i o n from which a U.S. bank branch may p a r t i c i p a t e d i r e c t -l y i n the E u r o - d o l l a r market." The Bahamas are a noted tax haven thus "tax advantages are i m p l i c i t . " A l s o , a " s u b s t a n t i a l number of American t o u r i s t s t r a v e l to the Caribbean," he added. I t was f u r t h e r s t r e s s e d t h a t there i s "considerable p r e s t i g e i n the Bahamas i n having a Cana-di a n bank as a p a r t n e r . " One executive c a n d i d l y admitted that "Amer-icans are not t o t a l l y accepted i n the Bahamas since i t i s a bl a c k gov-ernment which now governs, not the l o c a l establishment, and the brute f o r c e of America i s d i l u t e d by having other p a r t n e r s , e s p e c i a l l y Cana-d i a n . " The i m p l i c a t i o n here i s t h a t p o l i t i c a l n a t i o n a l i s m i n the form of "Anti-Americanism" i s a fo r c e which U.S. banks must face and consider i n the choice of v e h i c l e s to employ i n c e r t a i n areas. - 192 -In closing, i t is interesting to note the contrast between the number of chartered bank branches and those of their U.S. counter-parts. Table XII shows that U.S. bank' branches in the Caribbean have quadrupled since 1960 while those of the chartered banks have doubled. Nevertheless, the total U.S. branch representation is but one-third of the Canadian tota l . The difference is even more pronounced when i t is noted that 28 of these branches are located in the U.S. overseas terr i tor ies of Puerto Rico and the Virg in Islands. (See Table XVIII). We now turn to study chartered bank act iv i ty in South and Central Amer-ica where the positions are reversed. South and Central (Latin) America We noted in our discussion of the major phases of international act iv i ty that The Royal Bank of Canada early set out to build an ex-tensive branch system in Lat in America. We can only hypothesize that the promise of expanding trade with these countries, since their pro-ducts are complementary to our own, was an important in i t i a t ing force behind this move. Today, of the 24 direct branches maintained by char-tered banks in the country, 21 were opened prior to World War I I . Only two chartered banks employ the branch vehicle, to this date, on the continent is The Bank of Nova Scotia which opened an office in Cuyana in 1968. We may reasonably hypothesize that the p o l i t i c a l in -s tabi l i ty and frequent exchange devaluation which have characterized many of these republics have been forces inhibit ing additional branch - 193 -openings. The c r e d i b i l i t y of t h i s c o n t e n t i o n i s enhanced when we note from Table XIV that ten of the 24 branches are concentrated i n B r i t i s h Honduras and the former B r i t i s h Guiana (now u n i f i e d w i t h French Guiana to form Guyana). Trade w i t h these c o u n t r i e s i n 1966 amounted to but 135 $41 m i l l i o n . I n the past i t has been l e s s than t h i s , thus trade r e l a t i o n s seem not to o f f e r a complete explanation. What i s important about these c o u n t r i e s i s that h i s t o r i c a l l y t h e i r p o l i t i c a l c limate has been c o n t r o l l e d by the B r i t i s h . Thus p o l i t i c a l s t a b i l i t y may have been a s i g n i f i c a n t a t t r a c t i o n of these c o u n t r i e s . Another major problem i n these developing c o u n t r i e s which are s t r i v i n g , i n v a r y i n g degrees, f o r s e l f - s u s t a i n i n g economic growth i s l i k e l y to be the d i f f i c u l t y i n generating an adequate deposit, base and the r e l u c t a n c e , f o r the aforementioned reasons, to b r i n g i n more than the minimum c a p i t a l r e q u i r e d . Since a bank which expects to grow and gain p r o f i t s i n a f o r e i g n country, indeed any country, must have "money on the s h e l f " i t may be p r e f e r a b l e to s a c r i f i c e complete manage-ment independence and seek out an e s t a b l i s h e d bank i n the area as a pa r t n e r . This we i n t i m a t e d above to be a p o s s i b l y s i g n i f i c a n t motive behind BOLAM, the Bank of Montreal a f f i l i a t e which now operates 38 branches i n L a t i n America. BOLAM represented the v e h i c l e of entry to L a t i n America f o r the Bank of Montreal and i t now has " o f f i c e s " i n Colombia, Ecuador, E l Salvador, Guatemala, Honduras, Nicaragua and Pan-ama and i n Venezuela the bank i s represented through i t s shareholdings - 194 -in Banco La Guaira International C.A. What might have been the impor-tant in i t i a t ing force behind this banks' commitment? Table XXI reveals that Canadian direct investment in Latin America was only $137 mi l l i on , or 6 per cent of the to ta l , in 1958 when the investment was made although the value had almost doubled since 1954. Thus the "coat-tails" for a new branch system appear to have been re lat ive ly "short". However, Canada-Latin America trade figures are f a i r l y impressive, as shown in Table XX the volume has multiplied 1.5 times since 1951 and totalled $730 mi l l ion in 1966. The area thus ranked as Canada's fourth largest trading partner. One may have noted the concentration of BOLAM's offices in Central America. Significantly perhaps, Canada's trade with that area had expanded 1.75 times between 1951 and 1957 to reach a total of $161 mi l l ion . I t is interesting , at this stage, before investigating sev-eral other recent cases to contrast the commitments of the U.S. banks in the area with those of the chartered banks. The Federal Reserve banks as shown in Table XII maintained 130 branches in the area, f ive-fold more than their Canadian counterparts. At the same time the num-ber has quadrupled since 1955. Table XIX reveals that they have also made extensive use of representative offices (16) and af f i l ia tes (10). Two probably significant attractions may account largely for the difference in intensity of representation. These are the volume of trade and the size of U.S. direct investment in Lat in America. Ref-erence to Table XXIV reveals U.S. trade with this area to be 13 times - 195 -i t s Canadian counterpart. I t i s a l s o r e l a t i v e l y more important, r e -c e n t l y comprising between 15 to 18 per cent of t o t a l U.S. trade whereas Canada-Latin America trade has r e c e n t l y been from 4 to 6 per cent of the t o t a l d e s p i t e the f a c t t h a t f o r both c o u n t r i e s the p r o p o r t i o n has shown a steady d e c l i n e although t o t a l d o l l a r volume has increased. What may be i n t e r p r e t e d as a more s i g n i f i c a n t i n i t i a t i n g f o r c e f o r U.S. banks i s the amount of U.S. d i r e c t investment i n the area which gives them much longer " c o a t - t a i l s " to hang onto. Not only has the value been about f i f t y times the Canadian counterpart, meaning t h a t there are l i k e l y to be many more U.S. customers i n the area, according to Table XXV i t s value more than doubled between 1950 and 1965, which means a steady i n f l u x of U.S. customers i n t o the area has been t a k i n g p l a c e . The r e l a t i v e p r o p o r t i o n has e x h i b i t e d a d e c l i n -i n g t r end, however, h a l v i n g between 1955 and 1967. (One might reason-ably hypothesize that t h i s d e c l i n e has been p r e c i p i t a t e d by the growing a t t r a c t i o n of Europe since U.S. d i r e c t investment there as a percentage of the world t o t a l doubled i n the same period.) Nevertheless, i t r e -mains 17 per cent of the U.S. t o t a l compared to an h i s t o r i c a l l y con-s t a n t Canadian-Latin American p r o p o r t i o n of 5 to 6 per cent. The greater number of " c o a t - t a i l s " f o r the U.S. banks ren-ders the operation of a branch system more v i a b l e . But, as noted, the U.S. banks employ r e p r e s e n t a t i v e o f f i c e s e x t e n s i v e l y as w e l l , an i n d i -c a t i o n t h a t f o r some banks although the " t i e s " are there the " t a i l s " have been taken by a competitor. The U.S. banks have a l s o employed - 196 -the a f f i l i a t e vehicle. One of the factors to explain this phenomenon may have been the desire to overcome nat ional is t ic sentiments, preva-lent in many of these republics, by retaining an established local bank's name "above the door" or by becoming associated with local in -terests to create a new inst i tut ion. In the two cases which follow we shall see that these same pressures may have ini t iated specific ac-tion by two of the chartered banks. In 1965 "The Board of Directors of BOLAM decided that i t would be advantageous for the bank to associate i t s operations in Venezuela 136 with local interests." To this end a new bank known as Banco la Guaira International C . A . , was formed in which BOLAM has "a substan-t i a l , but minority interest." One year later , The Royal Bank of Canada "for a variety of reasons" incorporated in B r a z i l , Banco Real do Canada, S.A. to take 137 over operation of i t s branches there. A number of reasons are of possible significance. One might have been that there are tax advan-tages to be gained from incorporation. Another, that should expropria-tion of assets occur, exposure on the l i a b i l i t y side is c learly limited since any deposits of foreigners would be held, not by a Canadian bank operating a branch abroad but in a separate vehicle, a foreign-incorpor-ated subsidiary. Thus any claims arising could not be directed at the Canadian bank but against the Brazi l ian government. Of special s igni-ficance, as w i l l become clear shortly, the formation of the subsidiary may have taken place in preparation for bringing local funds into the operation. - 197 -In 1968 The Royal Bank accepted the Bank of America as an equal partner in i t s Brazi l ian subsidiary. I t was announced that "the world-wide association of the Bank of America w i l l complement our own 138 resources in a most useful way." According to an executive of the U.S. bank interviewed that bank had been actively seeking a ful l -service Brazi l ian banking outlet. He. explained that "Brazil is a particular problem area, one cannot expand on local resources because of the i n -flationary situation." He added that there are "thousands of banks" thus implying that deposit generation would be d i f f i c u l t for that rea-son alone and, in view of the rapid inf lat ion taking place in Braz i l with the constant danger of exchange devaluation, the bank would be subject to undesirable currency exposure by bringing in outside funds 139 in order to keep "money on the shelf" to meet loan demands. The implication which arises out of the foregoing is that equity invest-ment in an established bank was a preferred entrance vehicle in these circumstances. Thus the partnership was mutually advantageous. An unstated additional, but important, force behind the i n i t i a l incorpor-ation and subsequent acquisition of a U.S. partner may have been Bra-z i l i a n xenophobia. I t is known that in Braz i l and Venezuela prior to 1961 and the amendment in New York State banking laws which subsequently allowed foreign bank branching recurrent proposals were made for legis lat ion that would have prevented American branches in these countries from 140 receiving deposits. The probable reluctance of their headquarters - 198 -to transfer substantial dollar balances to these countries, for reasons cited above, might well have forced the closure of certain branches. Since Canadian banking law continues to prohibit foreign bank entry into this country i t is reasonable to hypothesize that some pressure was brought to bear against BOLAM and The Royal Bank of Canada to i n i -t iate the aforementioned actions. We shall offer one more indication of the effect which p o l i t i -cal and economic nationalism may have upon the selection of suitable ve-hicles for operations in Latin America. In 1963 The Bank of Montreal "re-established a connection which existed prior to 1934"by opening a representative office in Mexico City "designed to serve as an information and l ia ison bureau to assist Canadian businessmen in developing their interests in Mexico and to provide on-the-spot information about this 141 rapidly growing market." Table XX reveals that Canada-Mexico trade has doubled since 1951 and represents one-half the total for Central America. The statement also implies that Canadian investment in Mexico is growing. Unfortunately for the future Mexico has subsequently passed leg is lat ion, similar to Canada's , which prohibits the further use of the branch vehicle as a means of entrance by foreign banks. A more optimistic note for the future of the chartered banks is to be found in a statement issued by The Bank of Nova Scotia follow-ing the opening of i t s Buenos Aires representative office to "develop 142 connections in South America." The General Manager stated that the bank was "keenly interested in Lat in America . . . Canada is more and more. - 199 -looking toward the south and we believe that our economic as well as p o l i t i c a l relations with the countries of the Caribbean and South Amer-ica w i l l develop notably in the years to come." On this note of opti-mism we leave Lat in America and travel to the Middle East (and Africa) where the Arab-Isra l i confl ict gives r ise to notes of pessimism. The Middle East and A f r i c a One is immediately impressed, upon reference to Table XIII, that the chartered banks have but one branch in the entire Middle East and Afr ica combined. The single branch belongs to The Bank of Nova Sco-t i a . I t opened in 1965 in Beirut, Lebanon. Table XVT reveals that The. Royal Bank of Canada acquired an equity interest in a Lebanese bank in 1966 to account for the only other "office", excluding correspondents, in the wide geographic area. This limited representation is not surprising when one becomes aware of the re lat ive ly nominal Canadian ties in this area of the globe. Reference to Table XX shows the small volume of Canadian trade with the area. Although total trade with Afr i ca and the Middle East has doubled in absolute value since 1951 i t s proportion of total world trade by 144 Canada has remained static at a low level of about 2 per cent. Table XXI reveals that investment ties are lacking as well . Despite a four-fold increase since 1950, Canadian direct investment in Afr i ca remained at but 2 per cent of the world tota l . We do not have similar data for the Middle East, however, the combined Asian total in 1966 was but 2 per cent of the gross as wel l . Canadian direct investment in Asia has, - 200 -however, undergone an impressive expansion; i t doubled between I960' and 1965, effectively a 15 per cent annual rate of growth. I t seems reasonable to assume, however, that the bulk of this growth has been concentrated elsewhere, part icularly India and Japan where our trade ties are expanding, due to the increasing nat ional ist ic forces at work in the Middle East during the 1960's. The branch vehicle employed by The Bank of Nova Scotia in Beirut is in keeping with their policy of "aggressive branch expan-sion" and The Royal Bank of Canada's investment i n La Banque Des A c t i -v i t i e s Economiques, S . A . L . , follows from t h e i r f l e x i b l e p o l i c y r e g a r d i n vehicle selection which we noted in commenting upon t h e i r recent i n v e s t ment in a Belgian a f f i l i a t e . But why Beirut? P r i o r to the recent Middle East c r i s i s Lebanon enjoyed a re lat ive ly stable economic and p o l i t i c a l environment and due to the country's central geographic location Beirut was the money centre of the Middle East and very sub-stantial sums of money flowed out from this city seeking profitable investment opportunities in the advanced nations. Thus those Canadian banks which established direct representation in Beirut may have been motivated by the desire to steal a march on their Canadian counterparts by setting up shop, so to speak, at the source in an effort to gain ear access to any funds which might be destined for Canada. An added attra tion could have been the poss ib i l i ty of acquiring impressive deposit balances. - 201 -The entry of these banks into Beirut where perceptible Canadian connections would appear to be lacking may reflect a motivation which we introduced when looking at a chartered bank branch in Greece. The force is the confidence of these institutions that they can compete with other banks in the city and develop a "successful" business with-in the terms of the objectives the "office" is designed to serve which might include profitable deposit acquisition as an example. The U.S. banks with offices there were no doubt similarly attracted although the U.S. investment funds flowing into the Middle East are likely to have been an extra attraction for these institutions. Table XXV shows that U.S. direct investment in the Middle East has mul-ti p l i e d 2.5 times since 1950 and accounts for 3 per cent of the global total. However, it s expansion has been unimpressive, and proportionately, ithas exhibited a decline since the Suez c r i s i s of the late f i f t i e s and the subsequent nationalistic sentiments which have dominated the p o l i t i c a l scenery of the region. The most recent Arab-Israli tension apparently has had serious repercussions on the activities of the Amer-ican banks there, and one can reasonably assume the Canadian banks have been similarly affected although on a smaller scale. In the words of one American bank executive the "recent p o l i t i c a l instability has oc-casioned the substantial reduction of a large and profitable commitment." It is reasonable to assume that as long as existing conditions prevail these commitments w i l l not be restored and no new U.S. or Canadian bank commitments w i l l be made in the area. - 202 -As for A f r i c a U.S. direct investment on that continent t r i -pled between 1958 and 1967, a compound annual growth rate of almost 14 per cent, although i t has remained near 4 per cent of global investments since 1962 according to Table XXV. Meanwhile, U.S. -Afr ican trade less than doubled in the period and i t too has accounted for a re lat ively 145 static 4 per cent of the U.S. world tota l . Nevertheless, we find from Tables XVII, XVIII and XIX that the U.S. banks have 19 a f f i l ia ted commercial banks throughout A f r i c a accounted for in total by those banks interviewed, but only three branches. What has been the attrac-tion of Africa? Without revealing specific cases, the writer learned that invitat ion from African governments and from other foreign banks operating there have each been contributing factors. The basis for the invitat ion apparently to instal the American-way of banking in a num-ber of these countries. Thus the existence of inadequate local banking f a c i l i t i e s and the desire on the part of the parties concerned appears to have been an important force. Another contributory factor, we might hypothesize is the in -terest which the American banks expressed in participating in the f i n -ancing of international trade, rather than solely trade with direct U.S. involvement. Afr ica ' s trade volume expanded from $10 to 15 b i l -146 l i o n , between 1960 and 1967, excluding South Afr i ca and Egypt. This sum combined with possibly inadequate trade financing f a c i l i t i e s may have provided the impetus for U.S. banks to accept any invitations, or act themselves, when combined with the aforementioned U.S. trade with and direct investment on the continent. - 203 -What accounts for the prevalence of the a f f i l i a t e vehicle in A f r i c a , aside from invitation? According to one U.S. banker whose bank is active on the continent in many countries, i t is p o l i t i c a l l y important that "the American bankls name not appear on the door." Also , "an acute lack of capable local nationals to staff branches." This has led the U.S. banks to "rely on previous German, French, Belgian, and English bank expertise in these areas." We have shown that A f r i c a , in part icular , provides clear examples of the contrasting forces which may motivate the U.S. or Cana-dian banks to establish an "office" in a particular area. I t was noted that U.S. banks have on occasion received invitations from foreign gov-ernments or banks as a means of effectively entering a country. These forces were not expressed as present by any of the Canadian bankers in -terviewed. Another especially significant contrast arises from the willingness of the large U.S. banks to participate extensively in inter-national, as opposed to U . S . , trade. The Canadian bankers meanwhile were, in general, strongly interested in Canadian, as opposed to inter-national, trade as the majority.of their motivations expressed thus far have tended to reveal. These sentiments have been supported by seveia I of the excerpts drawn from annual reports and possibly by their exhibited relative lack of interest in Afr ica as wel l . We are now prepared to leave Afr ica and the Middle East and travel to the exotic Far East where, despite the controversial Viet-Nam conf l ic t , important attractions exist for Canadian and U.S. banks. - 204 -Far East Upon reference to Table XII one is immediately made aware of the contrast in the number of branches operated by the Canadian and U . S . banks in the Far East, including for our purposes, Australia. While, the chartered banks have none their American counterparts maintain 74 branches or almost one-quarter of their global total. At the same time, Table XV shows that five representative offices, a l l opened since 1957, are maintained by the chartered banks compared to nine by the U.S. banks (see Table XIX). Also i t will be noted that neither has utilized the affiliate vehicle. What accounts for the notable diversity in the degree of direct representation and the vehicles employed? We can account substantially for the difference in the exhibited extent of physical location in the area in terms of "ties" and "tails" once we offer explanations for the move of the chartered banks into the Orient. Table XXI, as we noted earlier, reveals that Canadian direct investment on the entire Asian continent doubled between 1960 and 1966 but at the latter date i t s t i l l accounted for but 2 per cent of the. g l o -bal sum and only amounted to $66 million. Thus the chartered banks ap-pear to have been relatively short of "coat-tails" at the time their offices were opened in Hong Kong and Japan. On the other hand, the "ties" appear to have been strong. Table XX shows that the value of Canada-Far East trade, excluding Aus-tralia, expanded 3.5 times from 1951 to 1966, a 9 per cent annual rate of growth, to become 5 per cent of Canada's world trade. Had i t not - 205 -been for the termendous trade boom which occurred with one country. Be-tween 1951 and 1957, or prior to the opening of the i n i t i a l representa-tive office by a chartered bank, Canada-Japan trade multiplied 2.5 times, an annual growth rate of 16.5 per cent. Between 1957 and 1966, the period in which the two offices were established, the rate of growth slowed somewhat, as the volume increased, to 14 per cent per annum. Never-theless, a most impressive 7.5-fold expansion took place over the entire period yielding an equally impressive growth irate of 14.75 per cent per year. In 1951, Japan had accounted for 28 per cent of Canada-Far East trade by 1957 this proportion had doubled to 59 per cent and by 1966 i t had climbed to two-thirds of the tota l . Meanwhile, Japan rapidly climbed the ranks of Canada's leading trade partners, r i s ing to number five by 1957 and passing Germany and Venezuela to achieve posi-t ion number three by 1966. Thus i t seems reasonable to conclude that expanding Japanese trading relations with Canada was an inf luential factor behind the move of the two chartered banks to set up an "office" in Japan. Although each of these offices were designed to be the base of operations of the banks' Far Eastern Representative the selection of Japan as the site was based largely upon relations with Japan. For ex-ample, The Bank of Nova Scotia declared that the purpose of the office was to 'help foster the growing trading and financial relations of Canada 147 with Japan." Meanwhile, the Bank of Montreal asserted that their of-- 206 -fice would provide "a valuable l ink between our Canadian customers an'd the important markets of the Far East, exemplified by the tremendous 148 industrial growth of Japan." Why a representative office rather than a branch since The Bank of Nova Scotia has customarily followed the branch route wherever i t goes? The reason is not the shortage of "coat-tails" as implied by our look at Canadian direct investment in the Far East, but legis lat ion. Speci f ical ly , Canadian legis lat ion. As was the case with Braz i l and Venezuela, Japan requires "demonstration of reciprocity oh the part of 149 the applicant's home country" before a banking license w i l l be granted. Thus even i f a branch operation had been considered suitable, Canadian banking legis lat ion which prohibits foreign branch banks in this country effectively closed the door to a branch of a chartered bank in Japan. According to one Canadian banker interviewed, Japan is "stringent in granting the privi lege to operate a foreign bank office of any kind." One i s then led to conjecture that since the entry of the Canadian banks in 1962 followed "hard on the heels" of the reciprocity-granting New York State legis lat ion of 1961, these offices might be a l l that are desired by the Japanese at this time. Meanwhile, three of the chartered banks chose a representative office in Hong Kong as their vehicle of entry into the Far East. The Royal Bank of Canada which was f i r s t to enter in 1958 based their selec-tion of this site as the headquarters of their Far Eastern representative upon policy and trade. - 207 -I n i t s Annual Report of that year i t was declared that "our p o l i c y has been to have r e p r e s e n t a t i o n i n any area which o f f e r s r e a l o p p o r t u n i t i e s to promote the i n t e r e s t s of the bank w i t h the added pros-150 pect of opening new trade o u t l e t s f o r Canada." A f t e r n o t i n g the s p e c i a l s i g n i f i c a n c e of China and Japan the r e p o r t f u r t h e r states that " i t i s our f i r m b e l i e f that o p p o r t u n i t i e s e x i s t f o r f u r t h e r important expansion of trade between Canada and Far Eastern c o u n t r i e s . " Thus the "nature of the f l o w of trade" can be seen as a p r i n c i p a l m o t i v a t i n g f o r c e . The o f f i c e was a l s o termed " s t E a t e g i c a l l y placed to keep abreast of trends i n the area at l a r g e " and here we can say t h a t , not only i s Hong Kong g e o g r a p h i c a l l y c e n t r a l to the area thereby f a c i l i t a t i n g t r a -v e l to other centres, i t i s a l s o the f i n a n c i a l centre of the Far East b o a s t i n g a network of h i g h l y developed banking, insurance and brokerage f a c i l i t i e s . " The Canadian I m p e r i a l Bank of Commerce asserted that the de-c i s i o n to open i t s o f f i c e there i n 1968 followed "the expansion i n trade ... between Canada and Southeast A s i a " and was " a l s o prompted by the dynamic commercial, i n d u s t r i a l and t o u r i s t a c t i v i t y i n the area and, i n p a r t i c u l a r , the i n c r e a s i n g l y c l o s e ; t i e s between the r e s i d e n t s 151 of Hong Kong and Canada." Thus w i t h the important a d d i t i o n of tour-ism and the " c l o s e t i e s " the motivations of t h i s bank appear s i m i l a r to those of t h e i r predecessor. The "close t i e s " deserve s p e c i a l comment. I n 1967 a f i n a n -c i a l panic occurred i n Hong Kong which p r e c i p i t a t e d a s u b s t a n t i a l move-- 208 -ment of local funds out of the country. According to the above i n s t i -tution, "a substantial investment from Hong Kong is going into fixed 152 U.S. and Canadian dollar deposits." A recent ar t i c le in the "Van-couver Sun" noted that "the wealthiest Chinese are s t i l l not happy and are looking for investments in Canada which offers tax advantages over 153 the United States." I t added that "as a result the top two or three per cent are slowly pul l ing out." One must conjecture that the panic and the consequent notable outflow of funds was the key force behind Hong Kong's selection for this bank at least i f not for The Toronto-Dominion which opened in late 1967. An executive of the former bank stated frankly that "the bank needed a man on the spot to get a good share of the money moving out." We have now canvassed the motives behind the move of the char-tered banks into the Orient. What explains the greater U.S. represen-tation in the area and the preponderance of the branch vehicle? The former can be explained largely in terms of the "ties and ta i l s" argu-ment which w i l l provide us with a basis for offering some answers to the la t ter . You w i l l reca l l from Table XII the tremendous growth in the number of branches of U.S. banks in the Far East. Between 1955 and 1968 the number quadrupled an annual rate of increase of some 11.75 per cent. Since we do not have figures for total Far East trade, l e t us concentrate upon Japan as a "leading indicator" of the trend of trade, leading in the sense that i ts performance is l ike ly to be above the av-erage for the region. From 1956 to 1967, a similar period to that used - 209 -for the branches U.S.-Japanese trade grew at an annual rate of about 13.75 per cent, and from 1965 accounted for more than 9 per cent of glo-bal U.S. trade. Meanwhile, Table XXV reveals that U.S. direct invest-ment in Japan grew at an effective rate of 16.75 per cent from 1955 to 1967. A similar relationship exists for a later period. Between I960 and 1968 U.S. branches in the Far East showed a 16 per cent annual growth rate. Meanwhile, from 1962 to 1967 U.S.-Japanese trade had slowed to a 15 per cent expansion rate but U.S. direct investment there had picked up velocity to achieve a rate of growth of 18 per cent. It can be seen that in both instances the growth of trade l i t t l e more than kept pace overall with the increase in branches but that in both per-iods direct investment was expanding at a faster rate. Thus, we may reasonably conclude, i f the Japanese experience is accepted as a suitable indicator, that "the desire to serve U.S. customers abroad 154 is indeed an initiating factor." It will have been observed from reference to the relevant tables above that U.S. direct investment in Japan alone is 13 times as great as Canadian direct investment on the entire continent of Asia! Also, U.S.-Japanese trade has historically been about seven times lar-ger than its Canadian counterpart. Thus U.S. banks have substantially more "ties and tails" to lead them to the Far East than are present for the chartered banks. This fact alone may account notably for the rela-tively large number of branches in the Far East. Another factor of - 210 -some significance may be that the nature of business in much of the area is of the kind usually conducted in a standard r e t a i l banking operation for which the branch is the most suitable vehicle. This is in contrast to Europe where wholesale banking is of prime importance requiring less branches in selected key areas. Thus we have a possible explanation for the fact that Europe has but one-half the complement of U.S. foreign bank branches that are present in the Far East. How-ever, this does not explain xtfhy a f f i l ia tes have not been used. There are at least six possible reasons for the absence of a f f i l i a t e s . One, the F i r s t National City Bank accounts for 29, or almost 40 per cent of the total number. This bank has clearly exhi-bited i t s policy of employing the branch vehicle wherever possible since at June 30, 1968 i ts 163 foreign branches comprised 50 per cent of the total number for a l l U.S. banks. In the words of the respondent at Citibank the "branch is best because you have complete control and complete responsibi l i ty ." In other words, independence of operation within the banking laws of the country. This desire for independence in i t s e l f may be offered to explain the dominance of the branch rather than an a f f i l i a t e in the area. A third factor might be that i t is p o l i t i c a l l y acceptable and preferred from the point of view o£ obtain-ing desirable exposure to have one's "name above the door" in the trade, commercial and f inancial entrepots of Hong Kong and Singapore where as shown in Table XVIII these banks maintained 24, or about one-third, of the Far Eastern complement. In Japan the nature of i t s banking system - 211 -where a very few giants account for a l l of the Japanese banks, the a f f i l i a t e route i s unavailable. A f i f t h f a c t o r , r e l a t e d to the second, may be the lack of s u i t a b l e partners i n the area. This i s l i k e l y to be true e s p e c i a l l y where an otherwise acceptable partner might be c l o s e l y connected with the l o c a l government, thus possibly leading to contin-uing pressures upon the U.S. bank to serve vested i n t e r e s t s or to unduly increase i t s commitment. S i x t h l y , and as an adjunct to the previous f a c t o r , l o c a l a u t h o r i t i e s may welcome U.S. branch banking to augment an otherwise inadequate domestic banking system. An example to support the l a t t e r contention i s to be found i n Indonesia. Here the Chase Manhattan Bank, under a program of guarantees administered by the U.S. Agency for Internatonal Development, obtained for i t s branch i n Djarkarta insurance against loss due to currency i n c o n v e r t i b i l i t y , expropriation or n a t i o n a l i z a t i o n , or war, revolution 155 or i n s u r r e c t i o n . In order to obtain a guarantee of t h i s nature, the government of the host country must also approve i t , which means that the investment must contribute to economic growth and development of the country. Thus not only may the insurance be looked upon as a de-c i s i v e factor i n i t i a t i n g Chase's move into Indonesia i t also reveals that the Indonesian a u t h o r i t i e s welcomed i t s entry. Before leaving the Far East i t i s i n t e r e s t i n g to look at a country where foreign banks are not welcome. Table XXV reveals the U.S. d i r e c t investment i n A u s t r a l i a i n 1967 accounted for 4 per cent of the global t o t a l more than the en t i r e Middle East or a l l of A f r i c a . - 212 -I t has achieved this position by expanding at an impressive annual rate of 16 per cent, per annum between 1950 and 1967 with the pace quickening to achieve a 20 per cent annual rate of growth since 1962. Yet you w i l l reca l l from Table XIX that the only commercial banking connection the U.S. banks maintain there are three representative of-f ices . The explanation is simple. Legis lat ion. Austral ia prohibits the conduct of commercial banking business by foreign banks. Thus i t s legis lat ion is similar to Canada's which precludes the further en-try of foreign banks. Two U.S. banks as a consequence have used other f inancial ve-hicles to gain entrance to the country. In 1966 the F i r s t National City Bank acquired 50 per cent interest in a leading finance company 156 there. Meanwhile, in 1968 as related to the writer during the interview the Bank of America, "after years of effort to gain some en-try" succeeded through the creation of Partnership Pacif ic Limited, a development bank in which they are equal partners with the Bank of Tokyo and the Bank of New South Wales. The joint venture w i l l act as an investment bank supplying medium-term funds and equity capital to the corporation extracting Austral ia 's natural resources, pr incipal ly for processing in Japan. Entry was achieved once "the Australians were per-suaded of the advantages to them". However, the vehicle can also be ex-pected to be advantageous to the Bank of America, since the majority of the extractive corporations are American-owned. - 213 -The Canadian banks too are shut out by the legis lat ion. How-ever, despite the fact that Austral ia in 1966 was Canada's eleventh ranking trading partner and each are Commonwealth members thus creating close cultural and trade ties no chartered bank maintains even a repre-sentative office there. One might reasonably conjecture that i t is a s i te being considered. One cannot bid adieu to the Far East without some comment upon how U.S. overseas involvement can become indirectly an in i t ia t ing force for a U.S. bank move into a particular country. War time condi-tions are very unlikely to lead the chartered banks to open offices in a certain area but the Viet-Nam confl ict has done just that for two U.S. banks. As an executive of a bank concerned described the situation, "the U.S. troop commitment there has created an attractive r e t a i l bank-ing business." And too, "there is considerable construction and com-mercial shipping act iv i ty taking place. He went on to say that Viet-Nam is an obvious example of the dollar drain and the U.S. government nat-ural ly prefers the retention of dollars in the U.S. One means was through American bank branches in Viet-Nam thus the authorities encour-157 aged U.S. banks to set up a branch there. Thus the Viet-Nam branches can be seen as serving a variety of "American interests" abroad. We have now completed our investigation of some of the i n i t i a -ting forces at work in the Far East. Indeed, our trip around the world has almost ended and we are prepared to embark upon a tour of the future. Before we do we would l ike to make a brief closing comment to this imp-ortant chapter and introduce that which follows. - 214 -SUMMARY COMMENTS I t has been the objective of this chapter to present the heart of the study, the tendering and examination of hypotheses to explain why the commercial banks select a particular country and/or particular vehicle. By and large a case study approach was taken although the l i s t of individual cases which might have been covered was by no means exhausted. In each geographical area we attempted as far as possible to vary our format in order to arouse the feeling that differences in motivation do exist between areas. We have also earnestly attempted, without becoming repetitious, to indicate that different forces are often at work behind the actions of the banks. In other words, the chartered banks individually are often motivated differently as are each of the U.S. banks. At the same time, important diversity exists between the in i t i a t ing forces of the U.S. and Canadian banks, although simi-l a r i t i e s do exist. i We shall not recount here a l l of the various forces seen to be at work, however, some which the writer regards as most important bear repeating. A basic s imilari ty exists in the all-pervasive force of policy which we elaborated upon in a separate section. Policy would appear to substantially determine the reaction of each bank to a par-t icular situation and for the banks of each country the shaping of pol -icy as i t affects foreign operations appears to be closely related to the presence or absence of "internationalists" in senior management. Each of the banks are attracted to international money market centres. - 2 15 -The difference in the intensity of the overseas involvement of the banks of each country in terms of vehicles of entry i t appears can be largely explained by the "ties and t a i l s " argument we have em-ployed throughout the chapter. The U.S. banks i t appears are strongly motivated, by the desire to serve domestic customers 'with "permanent" commitments abroad as reflected in the direction and volume of U.S. direct investment overseas. The relative smallness of foreign direct investment in the U.S. means that this is an inconsequential force for the U.S. banks, supported by the fact that none of the American bankers interviewed made specific reference to i t . I t appears also largely due to the size of U.S. overseas direct investment that U.S. trading patterns are a secondary force behind physical location abroad as well. On the other hand, the chartered banks lacking the "coat-tails" available to the U.S. banks throughout the world have, in general, been forced to look more closely at the nature of the flow of Canadian trade. Bank policy, of course, plays a significant role here in determining the amount of overseas Canadian business considered necessary for entry into a particular location but over-all i t would appear that trade "ties" are one of the strongest motivating forces for the chartered banks actions abroad. The other, i t appears, is access to the origin of the flow of foreign investment into Canada. Indeed, one may say that over-all in terms of "ties and t a i l s " the U.S. banks are better dressed leading them to become wider world travellers. - 216 -We also have noted, on more than one occasion, the apparent impediment which restr ic t ive Canadian banking legis lat ion places upon the operations of the chartered banks in certain areas. The existence of state banking legis lat ion in New York and Cal i fornia , on the other hand, which allows the entry of foreign banks has in several instances enabled the New York and San Francisco banks to exercise more freedom of choice of country and vehicle. Thus the Bank Act of 1967 may have important implications for the future conduct of banking act iv i ty abroad by the chartered banks. In closing, we must emphasize that we have by no means covered a l l the cases nor a l l the contributory forces in those cases analyzed but we believe we have selected a sufficient number and variety, and canvassed each adequately, to give the reader a clear indication of the various in i t i a t ing forces involved. Before turning to look specif ical ly at the implications and reflections which may be drawn out of the study i t is appropriate to discuss br ief ly the act iv i ty of the Canadian and U.S. banks which relates to the developing countries. In other words, what contributions are these banks making to the economic development of the less advanced na-tions? Some discussion is important because of the stress placed upon the achievement of self-sustaining economic growth in these countries by local authorities, foreign governments, international agencies and the United Nations. The Canadian and U.S. banks, as a part of the p r i -vate sector of advanced nations, have an important role to play in this - 217 -process, part icular ly in terms of funds and expertise supplied. Thus -we may effectively bridge the gap between the past, present and future by supplying some comments upon the "assistance" which the banks pro-vide to these developing economies. - 218 -CHAPTER VIII THE CONTRIBUTIONS OF THE CHARTERED BANKS TO DEVELOPING COUNTRIES A significant problem in today's world is how to reverse the widening gap between the standards of l iv ing enjoyed by the peoples of the developed and developing nations. The solution is to generate a process of uninterrupted growth in these countries. But prior to eco-nomic growth comes economic development. The latter may be defined as a clearly definable change in the attitudes of the people and the i n -stitutions of a country which are intended to stimulate economic growth. Thus development is the explanatory process leading to economic growth which i s commonly measured by the increase of per capita national i n -come and is thus a reflection of a r i s ing standard of l i v ing within 158 the country. What contributions are the chartered banks making to the progress of economic development of the developing countries and how do their contributions compare with those of the U.S. national banks the writer interviewed? We shall measure this "assistance" in terms of expertise, technology and funds either direct ly or indirect ly provided. EXPERTISE AND TECHNOLOGY The developing nations of the world, in general, are to be found throughout South and Central America, the Caribbean, the Middle East, A f r i c a and the Far East. Japan, Austral ia and New Zealand are notable exceptions which must be mentioned specif ical ly since, in this - 219 -study, we have assigned each to the Far East. The provision of improved banking f a c i l i t i e s is an important means of improving the inst i tut ional arrangements of many of these countries. From Tables XIV and XVIII i t can be seen that in terms of sheer numbers of branches maintained in these countries in 1968, the U.S. banks are making a larger contribution. At the same time, the direction of this form of "aid" is by the char-tered banks is highly concentrated since 154 of their 179 branches in developing economies are situated in the Caribbean. Meanwhile, the U.S. banks have 250 branches in the developing areas and, although about one-half are located in Latin America, each of the other regions receives varying degrees of benefit from the application of American banking techniques. The contrast of numbers is magnified when i t is observed from Tables XVI and XIX that while the chartered banks have but three, the selected U.S. banks have acquired equity in 33 commercial banking af f i l ia tes in these regions. Signif icantly, both the Canadian and U.S. banks employ from "95 to 99 per cent" local nationals in their foreign branches and the expressed objective is to, as far as possible, "employ a l l locals ." To this end, each of the banks engage in extensive training programs to upgrade the calibre of employees available in these countries. Much of this training is accomplished local ly through training schools es-tablished in the area but the New York bankers, in part icular, made mention of the large numbers of personnel from abroad that are brought to New York for training. The training is an expensive process, espe-- 220 -c i a l l y when the nationals are flown in from overseas. I t also can be, costly as an executive at The Royal Bank of Canada explained; "foreign bankers are brought to Canada for training and a continuing problem is that the extended family system prevalent in Latin America causes con-siderable a t t r i t i on as the individual leave to become the 'f inancial manager' for the family." Thus the process is often "train and lose." However, the an.ployment of local people can also be very ad-\> ' 159 vantageous as described in an Annual Report of the same inst i tut ion. "Since the inception of operations abroad . . . local staff has been en-couraged to aspire to senior positions." The statement went on to say that "we believe that our policy with regard to employment of local staff has been a factor in our being accorded equal treatment with national institutions under the governing banking laws." According to several of the respondents the banks have been under general nat ional is t ic pressures to employ, and continue to increase the proportion of, local nationals among their branch personnel. I t is also becoming more and more d i f f i c u l t to obtain work permits required before domestic staff can be transferred to the Caribbean. Neverthe-less what is important is that they "do" employ substantially local peo-ple thereby making a notable direct contribution to the incomes and sk i l l s of these nationals. We noted that the U.S. banks have made notable use of the af-f i l i a t e vehicle in the developing countries. One national bank makes i t a policy to employ the a f f i l i a t e method as far as possible wherever i t operates overseas. I t is interesting to look at i ts apparent attitude - 221 -as i t affects the developing economies. According to an executive of the bank interviewed "we generally desire a substantial base in an associated bank acquired; they are not looked upon as just an invest-ment because of the contributions made by ourselves." The "active con-tributions" made is the "application of American management sk i l l s and operational ab i l i t i e s through such devices computer technology and staff services, including counsel, management training and forward planning." Another basis for contribution arises from their frequent choice of partners who are "strong domestically, but spotty internation-a l l y . " The partner obtains "access to a world-wide network of a f f i l ia tes and branches" with a l l of the concomitant advantages. In concise terms the bank "actively participates in the management- and modernization assistance" of i t s acquired a f f i l i a t e s . The foregoing bank, however, is not the only inst i tut ion to actively engage in the "transfer of technology" between countries. The part played by the banks in this process was best described by two U.S. executives who suggested that the banks essentially "acted in the role of a catalyst." This role , of course, is d is t inct from their direct action taken regarding the personnel and practices of their own branches and banking a f f i l i a t e s . The Canadian banks are very interested and, with the expanding internationalization of business in general, are becoming increasingly active in the sphere of stimulation of licensing arrangements. Unfor-tunately, re lat ively l i t t l e direct benefit appears to accrue to the dev-- 222 -oping countries out of this act iv i ty by these institutions at this time. One Canadian executive outlined the process which often occurs. A commonly followed course is for branches or resident representatives to make contact with a foreign corporation in the U.S. or Europe which wishes to license a suitable Canadian firm to produce and market i t s product in Canada. The Head Office marketing department is informed of this interest and, in turn, a l l branches in Canada are advised of the situation. The branch managers are asked to contact customers who they regard as suitable licensees and to advise Head Office of any who are receptive. The counter-flow of Canadian corporations seeking l i -censees in foreign countries was said to be relat ively small and again primarily affects the developed countries. Naturally the banks have an important interest in playing this intermediary role since, as one executive said, "we expect to prof i t from the resulting business." Over-all the position of the chartered banks concerning their role in the transfer of management know-how (as dis t inct from the technology which may accompany licensing) between countries, ap-pears to be relat ively minor. I t was best summed up by one Canadian banker who said the practice was "largely undeveloped in Canada, largely due to a question of demand." This might be interpreted as an implication that Canadian management and production techniques are not widely sought abroad since foreigners consider that much of this technology entering Canada comes direct ly from the U.S. to business af f i l ia tes and subsidiaries operating in this country. He also added, - 223 -signif icantly, that "people competent in this role are generally not available in the chartered banks; we have much more to learn than to advise; the U.S. banks are much better qualif ied." In general, the U.S. banks interviewed appear to play a much more significant catalytic role in both the stimulation of licensing arrangements as they affect the developing countries and in the provi-sion of direct technological assistance. The "better qualifications" , of the U.S. "international" banks, undoubtedly, in large part arise from their wider experience in the f i e l d . "We play a very active role in the stimulation of licensing arrangements, both ways" was the res-ponse of one U.S. executive to a question regarding this facet of their act iv i ty . This experience seems concomitant with a greater demand for American management and production techniques abroad and the larger number of U.S. corporations investing or seeking outlets abroad. The latter is reflected in the tremendous expansion of U.S. direct invest-ment abroad since World War I I . Meanwhile, Canadian capital investment abroad has been growing rapidly but, as we observed in the preceding chapter, i t is s ignif icantly smaller in value than i t s U.S. counterpart. A fine example of the former case is provided by the relat ively numer-ous number of invitations which the large U.S. banks are said to have received to enter a developing country v ia the a f f i l i a te or branch ve-hic le . One American executive described a significant role which that bank has played in some developing countries. "Our partners l ike a lot - 224 -of s k i l l from us; f o r example, we have set up f o r e i g n exchange, short-term money and bond markets i n c o u n t r i e s where they are l a c k i n g . " He then added what may be regarded as a not i n s i g n i f i c a n t m o t i v a t i o n be-hind t h i s a c t i o n ; "we are most welcome when we give t h i s h e lp." Another U.S. banker described how management technology often accompanies or precedes p r o j e c t loans which are made i n , developing c o u n t r i e s . He described i t i n the context of a loan a p p l i c a t i o n from a p o u l t r y farmer i n Nicaragua then under c o n s i d e r a t i o n . The a p p l i c a t i o n had been d i r e c t e d through the branch of the bank i n that country by the l o c a l government-supported finance company which considered the p r o j e c t too large to handle i t s e l f and wished the U.S. bank to p a r t i c i p a t e . Im-p o r t a n t l y , the finance company had been set up w i t h the a i d of U.S. experts i n consumer lending and equity funds s u p p l i e d by the U.S. i n -s t i t u t i o n , thereby c r e a t i n g a c l o s e r e l a t i o n s h i p between i t and the American bank and p r o v i d i n g them w i t h the opportunity to p a r t i c i p a t e i n t h i s and other p r o j e c t s . I n order to o b t a i n i n f o r m a t i o n concerning the l a t e s t methods employed i n p o u l t r y farming i n the U.S. an a g r i c u l t u r a l o f f i c e r of the bank contacted a u n i v e r s i t y i n the area and a tour of the large p o u l t r y farms of the s t a t e was conducted. The consensus was t h a t , since the best i n t e c h n i c a l know-how was needed f o r an operation of t h i s s c a l e the Nicaraguan a p p l i c a n t should b r i n g i n a partner. The next, step would be to inform the a p p l i c a n t of t h i s d e c i s i o n and o f f e r him t h e i r s e r v i c e s i n o b t a i n i n g a s u i t a b l e American p a r t n e r , i f p o s s i b l e , lie candidly described the l a t t e r approach as a r i s i n g from a " s e l f i s h - 225 -interest", since "it is our desire to have the best technical management, available to manage a project, especially an American partner in whom the bank has confidence." This "selfish interest" then may be implied as a possibly significant factor to account for a notable involvement of U.S. banks in this type of technology transfer, together with the desire of the banks to act as "good corporate citizens" by part ic ipa-ting