Around The World In 8,379 Foreign Entities

Around The World In 8,379 Foreign Entities by Preston Mui and Friederike Niepmann, Liberty Street Economics

H/T Barry Ritholtz

The largest U.S. financial institutions conduct business around the world, maintaining a strong presence through branches and subsidiaries in foreign countries. This blog post highlights trends in their foreign ownership over the past twenty-five years, complementing recent research from the New York Fed on large and complex banks. We document a constant decline in the importance of foreign branches for U.S. financial institutions, an increase in the complexity of foreign subsidiary networks, and a shift of activity from Latin America and the Caribbean to Europe and other regions.

The main data source for this blog post is the National Information Center (NIC), a depository of financial data and institutional characteristics of entities regulated by the Federal Reserve. With information from NIC, we can trace the organizational structure of all U.S. banking organizations over time, including the location of their foreign branches and subsidiaries. The database covers a broad range of institutions, including foreign banks, securities broker-dealers, and insurance companies. As of the end of 2014, we were able to link a total of 8,379 foreign entities, including 628 branches and 1,683 banking subsidiaries, to U.S. firms.

Foreign ownership is highly concentrated in a few firms

Of the roughly 4,800 topholders in our data set (U.S. entities that are not owned by another entity) only 2.8 percent operate one or more foreign affiliates. The high degree of concentration is illustrated in the chart below, which shows the number of foreign branches, bank subsidiaries, and nonbank subsidiaries owned by the most significant ten topholders in our data set. Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM) Chase, and Bank of America possess 75 percent of all foreign branches; Morgan Stanley (NYSE:MS), General Electric Company (NYSE:GE), and Goldman Sachs Group Inc (NYSE:GS) own 63 percent of all foreign bank subsidiaries.

Internationally active institutions have become more global over time

The next chart summarizes the evolution of U.S. banks’ foreign ownership of branches and bank subsidiaries from 1990 to 2014. To make the numbers comparable over time, we did not include entities that were only recently put under the Fed’s supervision as a result of regulatory changes. These are firms that converted to bank holding companies (BHCs) during the financial crisis as well as savings and loan holding companies (SLHCs), which the Dodd-Frank Act put under Fed supervisory authority in 2011. (The BHCs excluded from the chart are General Electric, American Express Company (NYSE:AXP), General Motors Company (NYSE:GM) Acceptance Corporation/Ally, Goldman Sachs, Morgan Stanley, Discover, CIT, and Metlife.) Similarly, entities that J.P. Morgan and Bank of America acquired from Bear Stearns and Merrill Lynch, respectively, are left out, since data for these entities are only available since 2008.

Focus first on the solid lines in the chart, which trace the number of foreign branches in blue and foreign bank subsidiaries in red. The scale associated with these lines is on the right. As indicated by the solid blue line, the importance of foreign branches has been decreasing over time. Today, only around 6 percent of NIC foreign entities are branches, down from 32 percent in 1995. By contrast, the U.S. banks have expanded their bank subsidiary networks. Bank subsidiaries as a share of foreign entities have increased from 15 percent to 20 percent over the same period.

The dashed lines depict the number of U.S. topholders with foreign branches in blue and bank subsidiaries in red. The corresponding scale is on the left. The increase in the solid lines relative to the dashed lines indicates that internationally active firms have become more global in the past twenty-five years. In fact, the concentration of foreign ownership has increased since 1990, especially during the precrisis period as smaller banks closed their foreign branches while the biggest institutions acquired additional foreign branches and bank subsidiaries. Since the financial crisis, foreign office closures have been shared more equally by larger and smaller banks, and the concentration of foreign branches and banking subsidiaries have leveled off and fallen slightly, respectively.

The structure of foreign ownership has become increasingly complex

So far we have focused on foreign branches and bank subsidiaries, but U.S. financial institutions have also stepped up their ownership of foreign nonbank subsidiaries. In 1990, there were 1,300 foreign nonbank subsidiaries in our database; at the end of 2014, there were over 6,000 such entities. Much of this increase is due to the inclusion of new institutions since the financial crisis. (For example, Goldman Sachs and Morgan Stanley together own a total of over 2,000 foreign nonbank subsidiaries.) However, even if we set aside entities owned by newly regulated BHCs and SLHCs, there are still over 2,000 foreign nonbank subsidiaries owned by U.S. topholders today, an increase of more than 50 percent from the 1990 level. This surge is overwhelmingly due to the addition of foreign nonbank institutions that are not securities broker-dealers or insurance companies.

Another way to examine the increasing complexity of U.S. banks’ foreign operations is to look at the ownership structure. The chart below shows the average number of layers of control between topholders and their foreign subsidiaries from 1990 to the present. (Two layers of control, for example, would mean that the foreign entity is a subsidiary of another subsidiary of the topholder.) Today, the average bank subsidiary has over five layers of control between itself and its topholder, up from an average of just over three in 1990. The maximum number of layers of control for any entity in the NIC data set today is sixteen for bank subsidiaries and nineteen for nonbank subsidiaries, up from six and nine in 1990, respectively.

Some Substantial Changes in the Geographic Distribution

The interactive charts below show the number of branches, bank subsidiaries, and nonbank subsidiaries across countries and over time. The darker-shaded a country is, the larger the number of entities that U.S. financial institutions operate there. The bar at the top of each chart can be used to explore the geographic distribution of entities over time.

The next pair of charts summarizes information from above, depicting the number of foreign branches and bank subsidiaries by region over time (ignoring entities that entered our sample only recently). The first chart reveals that the decline in total foreign branches since the early 1990s has been driven largely