Journal of Banking and Finance 5 (198 1) 17-32. North-Holland Publishing Company THE DETERMINANTS OF FOREIGN BANKING ACTIVITY IN THE UNITED STATES Lawrence G. GOLDBERG and Anthony SAUNDERS New York Uniuersity, New York, N.Y, 10006, CSA The recent rapid growth of foreign banking activity in the United States has led to major changes in the regulation of foreign banks. This paper seeks to determine the factors causmg this growth of foreign banks. Empirical tests were conducted employing quarterly time series data from 1972 through 1979. It is shown that the most important factors determining foreign bank growth were (i) the size of interest differentials between U.S. and foreign deposits and loans, (ii) the falling P,‘E ratios for U.S. bank stocks, (iii) the increased size of (net) foreign direct investment in the U.S., (iv) the persistent depreciation in the dollar, and (v) expectations that the International Banking Act of 1978 would have a restrictive affect on foreign bank activity in the U.S. 1. Introduction Foreign banking activity in the United States has increased dramatically in recent years. This growth has alarmed many observers and has led to major changes in the regulation of foreign banks. In addition, more restrictive measures have been proposed. Before evaluating these regulatory changes and assessing future developments, it is necessary to understand the factors which have affected the growth of foreign banks in the United States. Indeed, there has been little effort to assess empirically the various influences on foreign bank expansion. This paper attempts to remedy this deficiency by evaluating the evidence obtained from aggregated time series data. At the end of 1972 the total assets of all foreign banking offices in the United States stood at less than $27 billion, but by the end of 1978 total assets had grown to over $129 billion. The number of foreign banking offices almost tripled in this time period from 110 to 305. Moreover, foreign banks grew faster than domestic banks with their share of total banking assets increasing from 3.0”4 in 1972 to 7.7% in 1978. As can be seen from table 1, foreign banking activity has increased in each year between 1972 and 1978. Although these banking assets are still considerably less than the $306 billion in assets held by U.S. banks in their overseas offices at year-end 1978,’ their rapid growth and absolute size have made foreign banks in the U.S. an important policy issue. ‘American Banker, March 23. 1979