Meet the Author

Kristle Romero Cortés |

Research Economist

Kristle Romero Cortés

Kristle Cortés is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. Her research interests include empirical corporate finance, entrepreneurial finance, and the structure, optimization, and regulatory practices of the financial services industry.

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Meet the Author

Sara Millington |

Research Analyst

Sara Millington

Sara Millington is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. Her primary interests include macroeconomics, monetary policy, and public finance.

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12.14.12

Economic Trends

Foreign Banks in the United States

Kristle Romero Cortes and Sara Millington

Currently, banks from 57 countries have offices in the United States. Up until the beginning of the financial crisis, the liability and asset holdings of these foreign bank offices had been increasing. But in 2008, their holdings fell by $357 billion (a seasonally adjusted annual decline of 28 percent). Following the crisis, liability and asset holdings returned to pre-crisis levels and surpassed them within two years. Most analysts think this resurgence reflects a continuous improvement of these banks’ balance sheets overall.

While the total financial assets and total liabilities have both been increasing, liabilities have been increasing at a faster rate. From 2006 to 2010 the average gap between liabilities and financial assets held by foreign bank offices in the U.S. was $16.7 billion dollars. This gap increased $5.2 billion between 2011 and 2012 (a 23 percent increase).

Displaying total financial assets and total liability holdings in percent change shows the overall trend that the banks are experiencing from one year to another. In 2008 foreign bank offices increased their asset and liability holdings by 35 percent. In 2009 they decreased both by 28 percent. Since 2010, they have been adding to their holdings of both year over year. The shift downward observed in 2012 may in part reflect having just two quarters of data for this year.

Banks’ balance sheets have not fully recovered from the recent financial crisis, most notably some euro-zone banks. One indicator of how the balance sheets are faring is interbank lending rates. The interbank lending market is where banks that need to cover daily shortfalls of liquidity borrow from those that have excess liquid assets. The majority of the net interbank liabilities of foreign bank offices are made up of foreign bank liabilities, while domestics account only for a small portion. (Liabilities are funds due to any other bank, foreign or domestic; assets are the funds due to the foreign bank’s U.S. office.) Foreign bank liabilities transition from a negative to a positive balance for their net interbank and foreign bank account balances starting in the first quarter of 2011. This means that foreign banks are lending funds to their U.S. offices, typically overnight, in greater proportions than the U.S. offices are posting funds at those foreign banks. The overall trend is for the U.S. offices to manage their funds with the foreign banks rather than domestic banks.

In all the data on foreign bank offices we’ve observed thus far there is a dramatic shift during the U.S. financial crisis in 2008-09. Each indicator is affected during that time period, undergoing a change in its direction or pace. This change is even more evident in the ratio of Treasury and GSE securities in foreign banks’ portfolios. Government-sponsored enterprises (GSEs) are privately held corporations with public purposes created by Congress to reduce the cost of capital for certain borrowing sectors. In September 2008 the U.S. government took conservatorship of Fannie Mae and Freddie Mac, two GSEs that play a critical role in the mortgage market. At that time, foreign banks increased their Treasury holdings by 38.3 percent while decreasing their GSE holdings by 61.7 percent. Since then, foreign banks’ share of GSE-backed securities remains much lower than their share of Treasury securities.

However, a slight shift began to emerge in the first quarter of 2012. Foreign banks started to increase their share of GSE-backed bonds. This trend continues in the second quarter as well. This increase in GSE-backed securities and the decrease in Treasury securities signal the banks’ renewed interest in these securities while the housing market slowly improves.