Over the past several years, banks have been branching out their lending offshore. As they deleverage, will banks be forced to bring their lending home?

Royal Bank of Scotland, for example, had over 70% of its loans outside the United Kingdom, and now, nationalized by the British government at a rate of 70% (odd coincidence, huh), the Brown government is asking, should RBS come back to Britain with its loan portfolio?  Mr. Brown seems to believe it should.

Similarly, here in the U.S., large commercial banks… the super banks are collapsing under the weight of their own infrastructure and the massive volume of loans badly generated over the past decade. This begs the question… when Treasury gives TARP money as a capital injection for these banks to lend, do they require that the loans be exclusively domestic or is a bank free to lend the money internationally? 

So too, we ask whether the U.S. taxpayer is being asked to fund bad loans on the books of commercial banks that were made offshore?  In a brief, unscientific poll we undertook, more than 88% of respondents reported they believed banks should be responsible for their foreign portfolios, not American taxpayers. Conversely, 76% believed it was appropriate for American taxpayers to inject capital into banks to offset bad U.S. based residential loans and small business loans. Only 22% believed taxpayers should inject capital into banks to offset bad commercial or large business loans.

When queried about international transactions, poll participants believed that the banks should be separate institutions and that governments where bad loans were made should help recapitalize the banking divisions in their own countries. More than 91% believed that super banks should be broken apart into separate entities.

Asked if commercial banks are capable of making sound business or mortgage loans in future, 97.2% replied “no”.

To the question “should U.S. commercial banks be mandated to maintain loan portfolios exclusively in the U.S., 90.4% replied in the affirmative. Comments indicated the general sentiment of those polled to be favorable to specific legislation requiring domestic banking only for our large commercial institutions, with more than one commentator noting that the large commercial institutions are too large and thus unsafe. One likened the international banks to “a house of cards in a wind storm”.

Overall, sentiment was in favor of breaking apart the international divisions of banks and maintaining domestic banks that had specific functions. When asked if they believe banks should fill specific niche markets, 84.2% said “yes”, while only 3.6% said “no”, the remainder being undecided.

One of the questions our poll raises is whether Congress has foreseen the need to require that TARP/Capital Injection funds be used solely for domestic lending or only to offset domestic liabilities? 

According to sources close to the House Financial Services Committee, TARP funds may not be moved from the bank that receives them to an off-shore entity, but there’s no provision that would prohibit any bank from making a loan to an off-shore business, bank, government or individual.

Without any ability to trace or track the TARP funds being invested into banks, management of those banks is essentially “free to loan the money anywhere they choose”. 

Economists we brought this issue to believe it is not an issue of protectionism, nor anti-globalization. Rather, this is simply a matter of domestic investment and the use of taxpayer funds. As one London economist put it, “this issue is not one suggesting that banks be prohibited from international operations or trade. We simply believe that taxpayer funds should solely be utilized for purposes within the country funding the bank’s operations.” That economist continued “If a bank has operations outside the country, those operations should be free to lend the money circulating within that operation in the country where it operates.”

We concur, believing that global superbanks, whose operations go generally unregulated on an international scale, should be separated, with the holding company unable to control lending decisions or loan operations from a central, international point. In plain terms, if XYZ Bank has headquarters in New York, they shouldn’t be lending TARP money to a business headquartered in Mexico, but if they have an office and operation in Mexico, then their Mexican branch should be free to lend money circulated within that operation only, without US based TARP money going offshore.

In Britain, steps are being taken to prohibit nationalized, or partially nationalized banks from making offshore loans. 

The US lags behind, without sufficient regulation to control this matter, effectively.