American banks have been slow to establish foreign branches. The National Banking Act gave the national banks no such right and in this respect most of the state banking laws followed the national law. Although some states permitted the establishment of branches abroad, the privilege was little used and the field was left to private banking houses, which did open some branches. The one notable success was the International Banking Corporation, which maintained a chain of banks, chiefly in the Orient. As a result of this abstention from the establishment of branches our banking system remained provincial, and we were obliged to depend upon foreign banking houses for accommodation to our traders. In contrast with this, the number of European banks having branches in foreign countries exceeds 100, and the number of branches exceeds 2,000. Of these about 100 are in South America, 300 in Asia, 400 in Africa, and 700 in Oceania.
The chief argument against domestic branch banking in the United States - that it is undemocratic and places powerful control over money in the hands of a few institutions - is not thought to apply in the case of foreign branches. Although it is a premise of American polity that it is dangerous to allow combinations in domestic trade and finance, the objections are not regarded as valid when applied to combinations for foreign trade, as witness the Webb-Pomerene Act for combinations to conduct foreign trade, and the Federal Reserve Act in its provisions for foreign branch banking. The fact is that the American banks have to face a fact and not a theory if they wish to develop international finance, and as the banks of foreign countries do own and operate numerous branches abroad, in order to meet the foreign competition it is necessary that the American banks establish branches likewise.
A fundamental purpose of the Federal Reserve Act was to provide for the extension of American banks into the foreign field, and one of the many provisions to this end was that which authorized national banks possessing a capital and surplus of $1,000,000 or more to establish branches in foreign countries or possessions of the United States. Applications to establish such branches must first be approved by the Federal Reserve Board, which has power to reject an application if it regards as inadequate the amount of capital proposed to be set aside for foreign business, or if for other reasons it deems the establishment of the branch inexpedient. These branches are calculated to further foreign commerce and to act, if so required, as fiscal agents of the United States. The parent bank is required at all times to furnish information concerning the condition of such branches to the Comptroller of the Currency upon demand, and the Federal Reserve Board may order special examinations at its will. The accounts of each branch are conducted independently of the accounts of the other branches and of the parent, and at the end of each fiscal period the profit or loss from each branch is transferred separately to the general ledger of the parent. The question of reserves of foreign branches is left by the board entirely to the discretion of the parent institution.