International Finance Discussion Papers

International Banking Facilities Sydney J. Key and Henry S. Terrell 1988-333  (September 1988)

Abstract:  The Federal Reserve Board permitted banking offices located in the United States to establish International Banking Facilities (IBFs) beginning in December 1981. The purpose was to allow these banking offices to conduct a deposit and loan business with foreign residents, including foreign banks, without being subject to reserve requirements or to the interest rate ceilings then in effect. IBFs are also exempt from the insurance coverage and assessments imposed by the Federal Deposit Insurance Corporation. In addition, a number of states have encouraged banking institutions to establish IBFs by granting favorable tax treatment under state or local law for IBF operations.

This paper summarizes the history of the IBF proposal and discusses Federal Reserve Board regulations for IBFs and the treatment of IBFs under state and local tax law. The paper analyzes IBF activities and the use of IBFs in comparison with domestic offices and with foreign branches. The growth of IBFs is evaluated in relation to activities in other international banking centers. The paper concludes that IBFs have not turned out to be the dramatic innovation that some had predicted and that IBFs simply provide another center for booking transactions with foreign residents in a regulatory environment broadly similar to that of the Euromarket. In particular, IBFs appear to be used for a large proportion of transactions with foreign residents that were, or would otherwise have been, booked at Caribbean branches of U.S. banks. To date, the operation of IBFs has not presented a problem either for the conduct of domestic monetary policy or for bank supervision.

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