Federal Reserve Okays Chinese Buyout of U.S. Bank

Federal Reserve Okays Chinese Buyout of U.S. Bank
May 18, 2012

The Federal Reserve Board made history this past week, for the first time giving approval for a Chinese bank to purchase a U.S. bank.

The Fed approved applications by China’s largest bank, the $2.5 trillion Industrial and Commercial Bank of China Ltd., as well as China Investment Corp. and Central Huijin Investment Ltd. to become bank holding companies after jointly acquiring up to 80 percent of the voting shares of New York-based The Bank of East Asia (U.S.A.) National. Bank of East Asia has 13 branches in New York and California and about $621 million in deposits.

Not coincidentally, the Fed also approved applications by Agricultural Bank of China Ltd. and Bank of China Ltd. to open bank branches in New York and Chicago, respectively. The applications had been pending for as long as two years.

Followed Government Talks

As reported by USA Today, the approvals followed “high-level talks last week between the United States and China.” The newspaper noted:

    “In those talks, which were overshadowed by a dispute involving a Chinese dissident, China agreed to let foreigners including U.S. companies have bigger stakes in its securities firms and make other concessions designed to give foreign firms greater access to the U.S. market.

   “Treasury Secretary Timothy Geithner, who along with Secretary of State Hillary Clinton headed up the U.S. side for the annual discussions, said at the conclusion of the talks Friday that China had made ‘important steps’ that would translate ‘into greater opportunities for U.S. workers and companies.’”

There is, of course, no especially compelling reason to bar Chinese firms from accessing the U.S. financial services market, including through mergers and acquisitions.

Indeed, economist Patrick Barron teaches bank management at the University of Wisconsin–Madison and runs his own banking consulting firm. He said the news does not bother him.

“If Americans don't want to do business with Chinese banks, they do not have to patronize them,” Barron said. “I assume Americans will patronize Chinese banks because they see an advantage to doing so. I do not want the US government making these decisions.”

Controlled by Chinese State

But there is a certain irony in federal priorities here. Sabre rattling aside, China does remain a strategic rival of the United States. And these aren’t simply banks headquartered in China: They are, like most of that nation’s major firms, state-controlled. The Chinese government owns 71 percent of Industrial and Commerce Bank, for instance.

And yet, while these state-controlled foreign banks will be permitted to expand their operations in the United States and free to make loans to U.S. small businesses, community-oriented, nonprofit credit unions are still constrained by regulations that don’t allow them to devote more than 12.25 percent of their assets to business lending. That is a striking disparity.