Since December 3, 1981, banks in the USA have been allowed to establish international banking facilities at their offices in the USA. International banking facilities (IBFs) are vehicles that enable bank offices in the USA to accept time deposits in either dollars or foreign currency from foreign customers, free of reserve requirements and of other limitations. Foreigners can also borrow funds from IBFs to finance their foreign investment projects. IBFs have been further strengthened by legislation in New York, California, and other states that exempt them from state and local income taxes. IBFs are located in the USA, but in many respects they function like foreign branch offices of US banks. In other words, the creation of IBFs means the establishment of offshore banking facilities in the USA similar to other Eurocurrency market centers.
In order to qualify for IBFs, institutions must be depository institutions, Edge Act or agreement corporations, or US branch offices of foreign banks that are legally authorized to do business in the USA. These institutions do not require the approval of the Federal Reserve Board to establish IBFs; a simple notification is sufficient. In addition, they are not required to establish a separate organizational structure for IBFs, but they must maintain separate books that distinguish their offshore business from their domestic business.
IBFs have a number of advantages over bank operations through foreign locations. First, small banks can enter into the Eurocurrency market easily, because they no longer need to establish a foreign office or a domestic subsidiary exclusively for international banking operations. Second, US banks can reduce operating costs, because they have more direct control and can use existing support services such as personnel and facilities.
IBFs also have several disadvantages when we compare them to offshore banking centers, caused mostly by regulations that IBFs serve only nonresidents. First, IBFs must receive written acknowledgment from their customers that deposits do not support activities within the USA and that IBF loans finance only operations outside the USA. Second, IBFs are prohibited from offering demand deposits or transaction accounts that could possibly substitute for such accounts now held by nonresidents in US banks. Third, IBFs are also prevented from issuing negotiable certificates of deposits or bankers' acceptances, although they can issue letters of credit and undertake repurchase agreements. Fourth, time deposits offered to nonbank foreign residents require minimum deposits and the withdrawal of $100,000 to preserve the wholesale nature of the business; they also require a minimum maturity or two business days' notification prior to withdrawal.
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