How do you explain an International Banking Facility (IBF)?
An international banking facility lets U.S. depository institutions give deposits, loans, and other banking services to people and institutions from other countries. These institutions don’t have to meet the Federal Reserve’s reserve requirements and don’t have to pay some state and local income taxes.1
How International Banking Facilities Work
Banks can do business with the International Banking Facility (IBF) from their regular offices, but they must keep separate books for IBF work. In 1981, the Federal Reserve permitted IBFs to be formed and let them off the hook when meeting its reserve standards. The government reserve and other state regulators will still oversee the IBF’s operations. The Federal Deposit Insurance Corporation (FDIC) does not cover them.
Some states have given IBF more tax breaks to compete for their businesses. For example, in Florida, IBFs don’t have to pay state income tax, intangible personal property tax, or documentary stamp tax.
IBFs help U.S. banks and other U.S.-based financial institutions compete better for savings and loans made in foreign currencies because they don’t have to follow the same rules.
Rules for the International Banking Facility
IBFs let U.S. banks use their U.S. offices to offer deposit and loan services to foreign customers that could only be done cheaply from foreign offices before.
The following types of deposit-taking companies can set up an IBF: U.S. commercial banks, Edge Act corporations, foreign commercial banks with branches and agencies in the U.S., savings and loan associations, and mutual savings banks. An Edge Act company (EAC) is a U.S. or foreign bank branch that does business in other countries. These branches are named after the 1919 Edge Act, which made them possible. The Edge Act was an addition to the Federal Reserve Act of 1913 meant to make American financial companies more competitive on the world stage. It was named after the U.S. senator who supported it.
An agreement company is a similar type of business that is a state-chartered Edge Act corporation. In the United States, banks can work nationally as part of the National Association (NA) or as state-chartered banks. An agreement company is a license that a state gives to a bank so that it can do business and do banking across borders. Congress passed the Agreement Corporation Act in 1916. This new law lets American banks put up to 10% of their capital into state-chartered banks and companies allowed to fund projects worldwide. The state-chartered bank must agree to abide by the Act’s regulations and laws. These deals are where the term “agreement corporation” came from.
Conclusion
- International banking facilities (IBFs) let U.S. financial institutions serve foreigners and institutions without following Federal Reserve rules or paying state and local income taxes.
- IBFs help U.S. banks compete better for savings and loans from people in other countries.
- The IBF tasks can be done in the U.S. offices of banks, but the banks must keep separate IBF accounting books.
