Secretary Bentsen and Ambassador Kantor wrote to the Committee on January 26, 1994, explaining why the passage of the Fair Trade in Financial Service Act is needed to help complete a successful GATT agreement on financial services. In that letter they stated:

We agreed on a framework for trade in financial services but did not obtain the full commitments on market access we had sought. However, the financial services agreement provides for continuing negotiations within the GATT context to seek improved commitments. In the event we are not able to achieve sufficient progress in these negotiations, this legislation [Fair Trade in Financial Services] will help ensure that we will have incentives to encourage other countries to liberalize in the future. The success of this effort will provide increased competitive opportunities for U.S. financial services and enhance their ability to facilitate U.S. exports.

A copy of the letter is attached at Appendix A.

U.S.-JAPAN FRAMEWORK FOR A NEW ECONOMIC PARTNERSHIP President Clinton in a February 1993 speech announced the principles that would guide trade policy in his Administration. One such principle, he said:

** will say to our trade partners that we value their business, but none of us should expect something for nothing. We will continue to welcome foreign production and services into our markets, but insist that our products and services be able to enter theirs on equal terms.

That is precisely the guiding principle on which the Fair Trade in Financial Services Act is based.

On April 16, 1993, after his first meeting with then-Prime Minister Miyazawa, the President stated:

I stressed to the Prime Minister that I'm particularly concerned about Japan's growing global current account and trade surpluses and deeply concerned about the inadequate market access for American firms, products, and investors in Japan.

On July 10, 1993, U.S. and Japanese negotiators completed work on the U.S.-Japan Framework for a New Economic Partnership. The centerpiece of the framework is a set of five “baskets" or categories of issues: (1) government procurement; (2) regulatory reform and competitiveness, including financial services; (3) trade in autos and auto parts; (4) economic harmonization, such as foreign direct investment in Japan; and (5) implementation of existing agreements and measures. Among other things, the framework stipulates that objective criteria would be used to judge progress on negotiations and that the leaders of the two countries would meet at least twice a year to review progress on trade negotiations. At the Committee's October 1993 hearing, Chairperson of the Council of Economic Advisers Laura Tyson stressed the relationship between enactment of the Fair Trade in Financial Services Act and

the success of financial services negotiations under the auspices of both the U.S.-Japan Framework and the General Agreement on Tariffs and Trade.

It seems to me that, given the importance of financial services, given that it is being dealt with separately in the Uruguay Round as a special issue, it's being dealt with specifically as an issue of concern with the U.S. and Japan in its bilateral framework, it seems to me very useful to have this piece of legislation supporting those kinds of negotiations [financial services] specifically.

Secretary Bentsen and Ambassador Kantor made the same point in their January letter to the Committee asking for "swift enactment of the Fair Trade in Financial Services Act." The legislation, they wrote, "will complement our multilateral, bilateral and regional efforts to gain access to foreign markets on the basis of national treatment and equality of competitive opportunity." Secretary Bentsen, in an October 25, 1993, speech outlining the Administration's financial services policy, stated:

we will not assure countries that keep their markets closed the right to expand operations here, or to take advantages of new powers or benefit from future reforms.

The Fair Trade in Financial Services Act is needed to implement that policy statement.

CONCLUSION

This title adopts a reciprocal national treatment approach to trade in financial services. Members of the Banking Committee are convinced that the United States must be more insistent on fair treatment for our financial firms abroad. U.S. financial markets have historically been among the most open and accessible in the world. The same, unfortunately, cannot be said for some of our important trading partners.

This legislation will be a useful tool for U.S. negotiators seeking to open foreign markets to U.S. financial service firms in either bilateral or multilateral negotiations. This is a carefully constructed approach designed to give the Treasury and U.S. financial regulators maximum flexibility in applying the authority provided by the legislation. It is designed to give the U.S. greater leverage in international negotiations to expand trade and financial services, but does not obstruct existing trading relationships.

SECTION-BY-SECTION

SECTION 1. SHORT TITLE; TABLE OF CONTENTS

This section designates this Act as the "Fair Trade in Financial Services Act of 1994."

SECTION 2. EFFECTUATING THE PRINCIPLE OF NATIONAL TREATMENT FOR BANKING ORGANIZATIONS

This section adds a new section 18 to the International Banking Act of 1978, establishing a framework of negotiations, reports, and

discretionary sanctions designed to help end discrimination against U.S. banks and bank holding companies.

A. Purpose

Subsection (a) of new section 18 states that the purpose of section 18 is to encourage foreign countries to accord de facto national treatment, as defined in subsection (j), to U.S. banks (including their branches and subsidiaries) and bank holding companies that operate or seek to operate in those countries.

B. Identification of countries that deny national treatment

Subsection (b) requires the Secretary of the Treasury to identify the extent to which foreign countries deny national treatment to U.S. banking organizations based either on information contained in the most recent quadrennial report on that subject under the Omnibus Trade and Competitiveness Act of 1988 or more recent information, as the Secretary deems appropriate.

C. Determination of significant adverse effect

Subsection (c) requires the Secretary to determine whether the denial of national treatment to U.S. banking organizations by a foreign country identified under subsection (b) has a significant adverse effect on the organizations. In making this determination, the Secretary is required to consider appropriate factors, including: the size of the foreign country's market for the financial service and the extent to which U.S. banking organizations operate in the market, or seek to; the ability of U.S. banking organizations to participate in developing policies in the foreign country; the extent to which policies in the country are based on notice and comment, are made public and are based on objective standards that prevent arbitrariness; the ability of U.S. banking organizations to offer foreign exchange services in the country; and the effects of regulatory policies on central bank lending, capital requirements, deposit interest rates, branching and access to ATM networks.

D. Discretionary publication of determination; mandatory annual

review

1. Publication

Subsection (d)(1) authorizes the Secretary to publish in the Federal Register a determination of denial of national treatment that has a significant adverse effect on U.S. banking organizations. Prior to publication, the Secretary of Commerce, and the appropriate Federal banking agency; and initiate any negotiations required by the Act in subsection (g). If a determination is published, the Secretary is required to inform State bank supervisors.

2. Annual review

The Secretary is further required in subsection (d)(1) to review determinations annually and decide whether any such determinations should be rescinded. The objective is to avoid having a determination remain in effect through inertia when the reasons for the determination no longer exist. If a Federal banking agency denied an application (or disapproved a notice) as provided for in sub

section (e) and the Secretary of the Treasury subsequently rescinded the determination on which the denial was based, the rescission would not grant the application, but would clear the way for a new application.

3. Exception for existing agreements

An exception to the publication process is provided to the extent that it would be inconsistent with bilateral or multilateral agreement governing financial services approved by both Houses of Congress. Thus, for example, if application of the sanctions in the bill would violate the North American Free Trade Agreement, the country involved could not be listed in the Federal Register.

E. Sanctions

1. Action by Secretary of the Treasury

a. In general.-Once a determination has been published, and only after consultations with the Secretaries of State and Commerce, the U.S. Trade Representative, and the appropriate Federal banking agency, the Secretary of the Treasury may recommend to the appropriate Federal banking agency that it should deny an application or other authorization to a banking organization that is controlled by a "person" of a country whose identity has been published in the Federal Register. The Secretary must determine that such action would assist the U.S. in negotiations to eliminate discrimination against U.S. banking organizations, or that on-going negotiations are not likely to result in an agreement that eliminates the denial of national treatment, or that the country has not adequately adhered to an agreement to provide national treatment. b. Exercise of authority.-The sanction authority shall be exercised according to the specific direction (if any) of the President. The President could, for example, require consultation with the Assistant to the President for Economic Policy prior to listing a country in the Federal Register.

c. Compliance exception. The appropriate Federal banking agency must comply with the Secretary's recommendation unless the agency determines, in writing, that such recommendation would: (i) likely result in a serious impairment to the safe and sound operation of the U.S. banking system; or (ii) compromise the ability of the agency to resolve a failing or failed financial institution because the foreign institution represents the only bona fide reasonable offer available to the agency. Nothing in the legislation is meant to affect the authority of banking regulators to deny requests for authorization on grounds not related to this statute.

2. Application to existing entities

a. In general.-An existing banking entity that is controlled by a "person" of a foreign country, that has been identified as denying national treatment by publication in the Federal Register, may not, without approval by the appropriate Federal banking agency, commended any new line of business, or conduct business from any new location. This permits the Secretary to impose sanctions on existing institutions by restricting their ability to enter into new lines of business or open or move offices.

b. Exception.-Subsection (e)(2) specifically exempts companies described in section 2(h)(2) of the Bank Holding Company Act. Section 2(h)(2) permits a foreign bank or bank holding company principally engaged in banking outside the U.S. to acquire shares of a foreign company that also is principally engaged in business outside the U.S., and permits the foreign company to acquire shares of any company engaged in the same general line of business or a related line of business in the U.S. Section 2(h)(3), however, prevents section 2(h)(2) from being used to conduct financial services in the U.S. Therefore, affiliates that are companies described in section 2(h)(2) do not raise the concerns about national treatment in financial services to which the bill is directed.

F. Exemptions from sanctions

1. In general

Subsection (e) provides a general exemption from the possibility of sanctions for a subsidiary of a person of a country that has adopted in its banking laws and regulations and actually applies standards that meet or exceed the standards for treatment of subsidiaries of U.S. banking organizations in the European Community's Second Banking Directive, or a set of standards that, taken as a whole, is not less favorable to U.S. banking organizations than those in the Second Banking Directive. The Second Banking Directive contains a standard to provide national treatment to banking organizations from a third country.

The exemption refers to the standards in the Second Banking Directive of December 15, 1989, and any amendment thereto if the Secretary of the Treasury determines that the amendment does not restrict any subsidiary operation, activity, or authority to expand permitted under the standards or that the amendment is in accordance with national treatment of the subsidiaries.

2. Standards for exercise of discretion

In exercising discretion under this section, the Secretary is to consider the extent to which the foreign country is progressing toward according national treatment to U.S. banking organizations, and whether the foreign country permits U.S. banking organizations to expand their activities in that country, even if that country determined that the U.S. did not accord national treatment to its banks.

G. Negotiations

1. In general

Subsection (g)(1) requires the Secretary of the Treasury to initiate negotiations with any country that the Secretary has determined denies national treatment to U.S. banking organizations and that such denial has a significant adverse effect on such organizations. The objective of the negotiations is to ensure that the foreign country accords de facto national treatment to U.S. banks and bank holding companies.

The subsection provides the Secretary discretionary authority to initiate negotiations with any country that denies national treatment to U.S. banking organizations, without regard to whether the