Face to Face:
Why Foreign Banks Still Love New York

Some of the information presented in this article was prepared with financial support from the New York State Urban Development Corporation (UDC) on behalf of the Governor's Advisory Panel on Financial Services. However, points of view and opinions expressed in this article are solely those of the authors and do not represent the position or policies of either UDC or the Advisory Panel.

During the past twenty-five years, most large cities in the United States have suffered substantial losses of people and jobs. The movement out of the central city has been attributed to a long list of causes - the rise of the automobile and the interstate highway system, the preference for low-density housing, the search for better schools, racial conflict and increasing crime and congestion in the city. The process of emptying out seemed so irreversible during the 1970's that in the final days of the Carter Administration a presidential commission issued a report that seemed to seal the city's casket:

. . . the nation can no longer assume that cities will perform the full range of their traditional functions for the larger society. They are no longer the most desirable settings for living, working or producing. They should be allowed to transform into more specialized service and consumption centers within the larger urban economic system.(1)

Many large-city loyalists rejected this analysis. They pointed to the boom in financial and business services then getting under way in many metropolitan centers as evidence that while the city's economic functions might be transformed, they were not really being diminished. But the pessimists were not convinced; they argued in turn that innovations in telecommunications would inevitably lead to the decentralization of financial services. They pointed to the growth of decentralized office complexes, such as Tyson's Corner, Virginia, Walnut Creek, California, and Perimeter Center just north of Atlanta as examples of the attractiveness of suburban locations for what were once considered central-city business functions. Telecommunications even made it possible to leapfrog the suburbs altogether, as Citicorp did when it moved its credit card processing operations to Sioux Falls, South Dakota.

Representative of this thinking is a study published in 1985 by the Rand Corporation, which suggests:

The newly emerging technologies will soon begin to provide excellent substitutes for face-to-face contact, the chief remaining raison d'être of the traditional city. Development of the electronic briefcase and the refinements of the cellular telephone promise even more disengagement between workers and fixed, centralized facilities, in the future, then, many will be able to work virtually anywhere. Given a preference for low-density residence in amenity-rich areas, which a large fraction of the population expresses, further depopulation of cities seems inevitable.(2)

But despite the remarkable growth of suburban and even rural office centers in the past decade, large cities like New York are still vital elements in America's economic landscape. Indeed, advances in communications technology have in many ways reinforced, rather than weakened, the most important competitive edge that large central cities enjoy in the growth of finance and business services - the advantage of being able to conduct a wide range of business with large numbers of people face-to-face. This strength is clearly illustrated in the rapid expansion of foreign banking activity in New York and other major American cities.

The Growth of Foreign Banking

Foreign banks first began to establish offices in the United States in the decades after the Civil War, to facilitate European investment in America's rapidly expanding industrial economy. British institutions were generally the first to set up shop in New York City, although others soon followed - including one Hong Kong bank that opened an office in Manhattan in 1880. Foreign banking activity increased gradually in subsequent years, with New York still serving as its hub. By 1970, there were about 70 foreign banks located in Manhattan.

Since 1970, foreign banks have dramatically increased their presence in the United States. They have entered virtually every phase of the business, from large-scale corporate finance to small business export loans to neighborhood consumer banking. In 1987, they processed about 16 percent of all commercial and industrial loans transacted in the United States, with Japanese institutions accounting for more than half this total.

Foreign banks have come here for a variety of reasons. Just as American commercial banks followed American multinational companies overseas in the 1960's, some foreign banks have followed their corporate customers into the American market. They serve their customers' local banking needs in the U.S., and also process payment of billions of dollars for U.S. imports from their home countries. These services to corporate clients probably explain, for example, the growth in Korean banking activity in New York in recent years.

Foreign banks also come to the United States seeking outlets for their surplus capital. A record of economic and political stability, a chronic payments deficit, and most recently, exchange rates that effectively lower the price of U.S. assets have all contributed to making America, in the words of Flavian Zeugin of Swiss Bank, "a good resting place for capital." Japanese banks in particular have begun to emerge as major players in the U.S. capital markets, and in financing Japanese purchases of American real estate and other assets.

Finally, as economist Charles Kindleberger notes,

... a bank may wish to establish a branch in a foreign country ... to have a presence there. This is called "defensive investment," investment designed not so much to make a profit in that place as to prevent a loss somewhere else, or in the system as a whole.(3)

Deregulation has also helped make the U.S. market more attractive for foreign banks; and advances in telecommunications have greatly increased the ability of foreign banks to manage the activities of their U.S. branches.

Foreign banking activity in the U.S. is highly concentrated. Of the 644 branches of foreign banks operating in the U.S. in 1988, more than 95 percent were located in just ten cities. New York and Los Angeles alone accounted for more than half the total number. Particularly notable in the past decade has been the emergence of several regional centers for foreign banking, such as Atlanta, Dallas, Houston and most especially Miami, which serves as the nation's financial gateway to Latin America.

 

The growth of foreign banking is especially visible in Manhattan. Since 1970, the number of foreign banking establishments has more than tripled,(4) and their total employment has grown to more than 36,000 people. Not surprisingly, this surge has been paced by Japanese banks. In the 1960's, there were 13 Japanese branches in Manhattan; in 1988, there were 51. Banks from the United Kingdom and Italy ranked second and third last year, with 25 and 23 branches respectively. (European banks continued to dominate in terms of total employment, however, largely due to their greater involvement in retail banking.)

They'll Take Manhattan

Why, despite the availability of new technologies that would make it easy for them to locate elsewhere, does Manhattan remain a magnet for foreign banks? The likely answers to that question offer a glimpse into the complex ways that new technologies and more traditional face-to-face communications together influence the city's competitive position in the financial service industries.

The first reason for New York's continued attractiveness has been the emergence in the last two decades of a highly integrated global financial market that depends on new communications technologies to transfer hundreds of billions of dollars, and billions of bits of information, around the world each day. The Economist estimates, for example, that one-third of the world's foreign exchange trading is done simply at the touch of a key.(5) Not surprisingly, the speed at which this transformation has occurred has reinforced the dominant position of leading financial centers, such as London, Tokyo and New York. One recent study found that "from 1974 to 1986, the amount of worldwide capitalization concentrated in the three leading centers grew from 73 percent to 89 percent."(6)

New technology has been critical in helping the major financial centers retain their dominant position. Without the extraordinary advances that have occurred in information processing since the 1960's, it would have been physically impossible for geographically concentrated central business districts like Manhattan to handle the unprecedented volume and value of transactions that the global market demands. Computers and high-speed telecommunications have in effect increased Manhattan's 'holding capacity.(7)

The development of a highly competitive, deregulated telecommunications market has further reinforced the position of New York and a few other large cities. Decisions on where to invest in new telecommunications infrastructure are now based on market demand, rather than on government policies designed to foster uniform, universal service. As a result, the largest, most information-intensive cities are the first to be equipped with the latest transmission and switching equipment, such as fiber optic networks, cellular phone systems, and "smart buildings."

The same tendency to favor highly concentrated large-city markets is also evident in the rapidly growing air courier industry. In 1985, for example, New York, Los Angeles and San Francisco accounted for almost 50 percent of the total traffic between the United States and Japan logged by DHL, the leading international air courier.

Finally, even with all the technological advances of the past decade, there is still no substitute for face-to-face contact in the conduct of important business transactions, and in transmitting timely information from trusted sources reliably and confidentially. Large central cities have always provided the greatest opportunity for face-to-face contact for large numbers of people with similar interests. All of the communications advances described above have served to heighten, rather than undermine, the importance of such contact.

Nothing illustrates this interdependence more clearly than the operations of electronic payment systems. While traditional methods of payment (cash, checks, credit cards, etc.) still account for the largest number of transactions, electronic systems handle most of the dollar volume. In the banking industry, two such systems dominate the scene: Fedwire, a network operated by the Federal Reserve Bank for clearing domestic transactions among about 7,000 participating banks; and the Clearing House Interbank Payment System (CHIPS), a private system established by New York's twelve clearing house banks, primarily for the processing of international payments. CHIPS has 140 member banks, which in turn can provide clearing services to several thousand correspondent banks here and abroad. The system handles foreign exchange transactions, Euro-dollar loans, sale of certificates of deposit and an ever-growing variety of other payments.

CHIPS is among the most important elements of the emerging electronic infrastructure of international banking. It would seem at first glance to be precisely the kind of innovation that would lessen the dominance of major centers like New York City. Yet in practice the enormous speed, volume and value of CHIPS transactions demand that the system be backed by a cadre of expert, responsible bank officers who can quickly meet face-to-face to resolve any issues that might arise in the course of any transaction. Thus the rules governing the system require that all member banks have offices in New York City, headed by officers who can make decisions on CHIPS transactions.

Staying Close Together

The importance that foreign banks attach to ease of face-to-face contact is also evident from their choice of location within the city. That choice may to some extent be influenced by the type of business in which a particular institution is involved, with midtown providing proximity to multinational corporations, while downtown is still the center of capital market activity in New York City. But it seems clear that foreign banks also choose to locate close to other banks from the same country or region.

For example, of the 51 Japanese banks located in Manhattan, 35 are located in the downtown area. Sixteen are in fact located in a single building - One World Trade Center. Other Asian institutions in lower Manhattan follow the same pattern of concentration; banks from Singapore, Hong Kong, Taiwan, the Philippines, Pakistan and Indonesia are clustered at and around the World Trade Center, on Broadway and on Wall Street.

 

Tokyo to the Twin Towers During the past few years, Japanese financial institutions have become the fastest-growing group of tenants in the World Trade Center. They range from large institutions with substantial operations in the complex - such as the Fuji, Sumitomo, and Mitsubishi banks - to much smaller firms that rent a few thousand square feet of space for their representatives in New York. Most of these firms chose the World Trade Center because it is conveniently located in the lower Manhattan financial district. They wanted to stay close to Wall Street, and to important downtown institutions such as the . Federal Reserve Bank. Proximity to the Bank of Japan and the Japanese Finance Ministry, both located at One Chase Plaza, was also an important consideration for many. For some of the smaller firms, location in the Trade Center was determined by their close working relationships with larger institutions that had already established their operations in the building. The importance of physical proximity arid convenient face-to-face interaction is reflected in statements by many executives that they keep their operations in the World Trade Center despite midtown's being more desirable in many ways. Most of them live in Westchester or in northern New Jersey areas from which commutation to midtown would be much easier. Most of their visitors from Japan stay at midtown hotels, and most of their after-hours entertaining is also done in the midtown area. Nevertheless, the World Trade Center is considered by most an especially desirable location; some even say that it is easier to get young Japanese executives to transfer to New York if they can be offered an office in the Twin Towers.

There are many Asian banks in the midtown area as well, concentrated along Park Avenue between 42nd and 59th Streets. The clustering in this corridor of Korean banks - none of which have located downtown - is particularly notable.

European banks also tend to locate together. In lower Manhattan, they are concentrated on the east side of the Wall Street district, especially on Water Street. There are fourteen European banks, mostly British, in this area, including National Westminster, Barclays and Standard Chartered Bank. In contrast to Asian banks, only one European bank - Swiss Bank - is located in or near the World Trade Center; and it is planning to move out. The great majority of European banks, however, are located in the midtown area. In 1988 there were 57 British, Italian, French, German and Swiss institutions concentrated in the corridor between Fifth and Park Avenues.

 

Top Ten Foreign Banks in New York Ranked by Number or Employees

Rank Name of Bank Nationality No. of Employees 1 National Westimister Bank United Kingdom 4,432 2 European-American Bank (EAB) Consortium of 5 foreign banks 2,800 3 Bank Leumi Trust Co. of NY Israel 1,200 4 Barclays Bank United Kingdom 1,100 5 Industrial Bank of Japan Japan 1,072 6 Swiss Bank Corp. Switzerland 1,015 7 IBJ Schroder Bank & Trust Japan 688 8 Lloyd's Bank United Kingdom 553 9 Hong Kong& Shanghai Banking Corp. Jong Kong 504 10 Royal Bank of Canada Canada 500

Source: The Banker, March 1988

The city's Latin American banks also congregate in the midtown area. Only four - all Mexican - are located in lower Manhattan. The same pattern applies to Middle Eastern banks, only one of which has a downtown office. These locational decisions reflect not only the desire of many foreign banks to be close to their corporate clients, but also the high value that these firms place on proximity to other firms engaged in similar work - especially to banks from the same nation.

Still the Global Capital

Despite the fact that technology makes it possible to locate office activities at remote sites, near beaches, on mountaintops and at desert resorts, New York City continues to attract and retain international banking business. The attraction of New York lies in its capacity to link the world via advanced telecommunications to the highly specialized face-to-face transactions that occur each day in the office towers of midtown and lower Manhattan. Essential as the new electronic networks may be to a globally integrated capital market, international banks still attach great value to information gained and business conducted via personal contact.

We cannot of course assume that the competitive edge New York now enjoys is permanent. The city's position is being contested not only by London and Tokyo, but also by Los Angeles, Hong Kong and Singapore. Technological innovation will continually reshape the context in which that competition is played out - but as the growth of New York's foreign banking business demonstrates, it need not work to the city's disadvantage.

 

Footnotes

1. President's Commission for a National Agenda for the Eighties, Urban America in the Eighties: Perspectives and Prospects (Washington. D.C.: U.S. Government Printing Office, 1980), p. 4.

2. Anthony Pascal, The Vanishing City: How Technology Induces Urban Entropy, and What's to Be Done About it (Santa Monica: The Rand Corporation, 1985).

3. Charles P. Kindleberger, "International Banks as Leaders or Followers of International Business: A Historical Perspective," (North Holland: Elsevier Science Publishers, 1983).

4. The precise number is hard to pin down, because of the differing definitions of banking establishments used by different sources. Rand McNally puts the number at 234 in 1988. The Banker, an industry magazine, published in 1988 a more inclusive list of 353 foreign banks, banking agencies and U.S.-incorporated subsidiaries of foreign banks operating in Manhattan.

5. The Economist, July 23, 1988.

6. Regional Plan Association. The Region in the Global Economy (New York City: RPA, 1988).

7. Benjamin Chinits, "The Influence of Communications and Data Processing on Urban Form," Research in Urban Economics (Vol. 4, 1984), p. 67-77.

 

Originally published in Portfolio, Spring 1989
Volume 2, Number 1
The Port Authority of NY and NJ. New York, 1989