US wants others to give up needs test in banking
by Chakravarthi Raghavan
GENEVA: The US which is pressing developing countries in the WTO negotiations on financial services to give up their power to apply an "economic needs test" before allowing entry of foreign suppliers into their markets, is itself required under its laws to apply this test.
The next round of bilateral and multilateral talks here on financial services sectoral negotiations are to resume in mid-September and many developing countries are being pressured by the US and EC to come up with new and improved offers by then.
Collapse of talks in 1995
After the collapse of these talks in 1995, an interim accord was signed (with the US filing an MFN-exemption clause), but subject to a renewal of the negotiations this year, to be concluded by 12 December, at which time all those who have financial services schedules will have an opportunity to revise it - take back their entire schedule of commitments, revise the commitments upwards or downwards in terms of market access openings, or follow the earlier US example of assuring only existing access, and filing Most-Favoured-Nation (MFN) exemptions for the future.
In 1995, the US would not join a WTO MFN-based agreement, with its financial services suppliers thinking they would be able to get better access to emerging country markets through bilateral/reciprocity accords. But this offer to open up on a reciprocal basis, its own "liberalized" financial services sector carried even less attraction to developing countries than in other areas.
The US has now come back to the multilateral process, with the EC joining hands to pry open other markets.
The talks were resumed in April, and the US, EC, Japan and several other industrialized nations have filed revised offers on an MFN basis. These "offers" are all confidential, and objective independent assessment is not easy. But some participants who have seen, and studied the US offers, suggest that as worded, the US offer may not necessarily preclude the US Congress from changing the laws - and affecting the liberalized regime - particularly since some jurisdictional conflicts (between Federal and State authorities) are still unresolved, and could be affected through judicial decisions (as has been the case in the telecoms sector)
The US has again repeated that its ability to join the pact, would depend upon market access openings to be provided by the emerging markets of developing countries, particularly of Asia and Latin America. Both the US and EC, which are playing a "good-cop-bad-cop" joint strategy to attack the Asian and Latin American markets, have also said that there should be a commitment for phased full liberalisation of these markets for financial services providers. The EC has said that more than five years would be too long.
In the bilateral talks with developing countries, the US has pressed them to remove any condition they have put into their schedules on the application of what is called the "economic needs test" - by which the national regulators, in giving a license to a foreign supplier (bank, insurance company or security trader) to operate in their markets, looks at the number of suppliers and level of competition, the size of the market and whether there would be far too many competitors chasing limited demand, and apply these tests from the point of how the local community would benefit.
However, analysis done since then, shows that the US itself has laws that require regulators to apply these tests, and one such law, "The Community Reinvestment Act" was put on the statute book only this year.
The economic needs test or analogous requirements are features of regulations of several countries in regard to authorization of banking activities - the requirements which vary across countries itself is an outcome of historical circumstances and evolution.
They rest on the view that the interaction between competition and economic incentives cannot be relied upon to ensure avoidance of over-banking - and the inevitable banking failures that may result - and the meeting of needs (of communities) which are not reflected in a bank's profitability.
The EC in its latest offer would appear to have withdrawn the application of these tests in a number of its member- states, but not in Portugal. The US does not appear to have given any indication in its offers that it would also give up this "right" and that as part of implementation legislation of the accord that would emerge, it would ask Congress to repeal provisions on economic needs tests in various laws.
It seems extremely unlikely that Congress would oblige the administration and the US Trade Representative Barshevsky in repealing these provisions from the statute book.
Regulatory provisions in several OECD countries
A number of OECD countries have regulatory provisions for application of such tests. Within the EU, the Austrian law provides that before licensing branches and subsidiaries of foreign banks (presumably from outside the EC), an "economic interest test" may be applied.
In Portugal, the authorization of foreign banks (other than from banks of the EU countries) must meet the requirements of national or regional economic or financial justification.
In Canada, the incorporation of the subsidiary of a foreign bank is subject to its ability to demonstrate its potential to make a contribution to competitive banking.
And in the Ontario province of Canada, the incorporation of trust and loan companies can be refused "unless the authorities are satisfied that there exists a public benefit and advantage for an additional corporation."
Other countries have regulations that not resembling a needs test on the face of it, could be used for similar purposes.
In France, the application of a foreign firm wanting to operate a branch or subsidiary must provide information on its objectives - including those going beyond profitability, such as new employment.
This would imply that the manner of response could permit a rejection of the application.
The authorization procedures of many other countries (such as in UK) implicitly assume that a new banking entity's profitability is a sufficient indication of meeting the economic needs.
The convenience and needs of the community to be served is a feature in various parts of the US banking law where federal and state jurisdictions may be involved.
In exercising discretion to grant or deny charters to national banks, or in determining a bank's eligibility for Federal Deposit Insurance, the Comptroller of Currency must take this factor into account.
Under the Bank Holding Company Act, the Federal Reserve Bank, in deciding whether or not to permit a particular acquisition, has to weigh the convenience and needs of the community to be served, as also any possible anti-competitive effects on a market, and the financial condition and managerial resources of both the acquiring company and the prospective subsidiary.
Similarly, before permitting a bank holding company to engage in activities other than banking, the Federal Reserve Board has to consider whether its performance by an affiliate of the holding company can reasonably be expected to produce benefits for the public - such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Under the Foreign Bank Supervision Enhancement Act of 1991 (designed to reinforce the regulation and supervision of foreign banks in the US), the Federal Reserve Bank is required to approve the establishment of both state licenses and federally licensed branches and agencies of foreign banks and, in doing so, may take into account the needs of the community.
The Federal Reserve presumably exercises this jurisdiction in conjunction with the Comptroller of Currency for national banks and state supervisors for state chartered banks.
And the 1997 Community Reinvestment Act provisions are used to vet a bank's performance in meeting community needs. Local community groups, organized labour and so on, can use this - and in these days of rising hostility in the US to "globalization" it will find increasing use in the future - to ensure that before grant of permission for a purchase or acquisition, the community needs and benefits are assessed.
The way US regulators have used these powers has depended on the overall climate within the country, but the powers themselves have not been given up (as would happen if developing countries remove from their schedules any such condition, and bind no new regulations).
In recent times the test (and the purported community benefit) has been used to allow mergers and acquisitions that might or ought otherwise to have been held up or disapproved. (TWE 166, 1-15 August 1997)
Chakravarthi Raghavan is Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.