Let me preface my remarks by asking you a loaded question: What city would I be describing if I said: It has more foreign banks than any financial center. It has the largest network of overseas bank branches. It accounts for the largest share of the worldwide Eurodollar market. It has created more jobs in the financial sector and it has more U.S. banks than any other city.

The answer, of course is not New York-- but London. This raises the perfectly reasonable question: Why should there be a larger international market in U.S. dollars in London than in New York? And why should American banks have to go to London, or anywhere else, to carry out so many financial transactions in their own currency? I can tell you how this anomaly came about. But I can't think of any good reason why it should be allowed to continue when the situation can be remedied by domestic international banking units.

On the off chance that someone in this room is hearing about this proposal for the first time, I'll tackle the subject in three stages. First, I'll outline what is in the proposal. Then I 'll bring you up to date on its progress through various legislative and regulatory steps. After that, I'll review some of the arguments--pro and con--then take your questions.

This proposal has been known variously as , , , , and . As the idea developed, so did a more-or-less standard nomenclature--it is now referred to as domestic international banking units, DIBs for short.

Conceptually, DIBs are comparable to "free trade zones" which have long existed in the United States and many other countries around the world. Foreign goods enter, and are stored in, and then leave the country through these zones without legally entering the domestic marketplace. These trans-shipment areas are thus free of tariffs, duties and other controls over domestic commerce. In DIBs, foreign-owned money would enter, be stored in, and leave the country without entering the domestic banking system. These funds would thus be free of restrictions that control the domestic banking system.

Let me stress that the DIBs proposal does involve a change in banking practice, but a change in geographic location of an existing market. This kind of international banking is already being done by U.S. banks abroad in various financial centers--most notably Nassau, Bahrain, the Cayman Islands, Singapore, Hong Kong, and--of course--London. Most of these transactions are denominated in what have now come to be called Eurodollars.

The Eurodollar was the result of the combination of U.S. ceilings on interest rates which held down what a depositor could earn, and a private bank cartel in Italy which put a floor under bank lending rates. Since there was a lot of daylight between zero percent on U.S. demand deposits and 7 or 8 percent Italian lending rates, the market soon came up with the idea of placing dollars in Italian banks at say, 4 percent, which dollars could be turned to lira to lend. Both parties, as in any good business transaction made a profit. From this modest beginning about 20 years ago has grown a global capital market of great depth and strength. The irony is that our own American regulations forced this enormous market in our own currency to move out of the continental United States. DIBs is designed to get part of the market, and the jobs that go with it back to New York.

Specifically, DIBs would accept deposits only from foreigners and lend only to foreigners. These units would also be empowered to place and receive interbank funds among themselves and banks abroad. Market rates of interest would be paid on deposits, and market developments would determine the costs of funds and rates charged to borrowers, undistorted by Federal Reserve interest ceilings or reserve requirements. Thus, insulated from ongoing domestic banking, international banking in DIBs could take place in American cities, employing Americans, without affecting our domestic banking system. To be competitive with most foreign money centers, state and local, tax authorities would have to establish competitive tax environments as New York has done.

That is, essentially, what the DIBs proposal contains. Now, let's look at how it has fared and where it stands at this hour.

Long after we launched the idea and were doing research on all aspects of the proposal, we found that a precursor of the DIBs proposal, called the , was aired in congressional hearings in the early 1970s. Unfortunately this idea fell on fallow ground and developed no political constituency. Although little hard evidence was produced, some felt there was enough to worry about at that time without testing a banking innovation that might complicate balance-of-payments problems and make it more difficult to enforce monetary and credit policy. Governor George Mitchell put the earlier DIBs proposal on the Fed's back burner by testifying that "The freedoms of 'foreign window' from monetary regulations would encourage its employment, directly or indirectly, for assets and liabilities related to U.S. domestic uses."

The effort to rebuild New York as a financial center and to create more jobs caused some of us to reexamine how our markets could be improved and enlarged. As part of this process of rejuvenation, the New York Clearing House Association researched the desirability of a Domestic International Banking Unit and addressed the old concerns expressed by Governor Mitchell.

The completed proposal received so many comprehensive, high-level endorsements from New York City and State officials and economic development organizations that the State Legislature passed the necessary adjustments in state banking laws and tax relief measures with only a single dissenting vote in April, 1978. The bill, as passed and signed by Governor Carey, accommodated a number of reservations raised during the hearings. For example, it prevents any abrupt loss of state revenues from business that might shift to DIBs, by creating a tax floor based on a bank's prior international business, then phasing out the tax floor over a ten-year period.

The New York State Superintendent of Banks (as you well know) needs no help from me or anyone else in making her position clear and persuasive. Specifically, she has served notice that, when implementing DIBs, the interests of foreign banks will be safeguarded on a reciprocal basis and whatever mechanism is needed to monitor the separation of DIBs business from domestic business will be installed. And so it should.

Last July 14, a delegation headed by Governor Carey presented a formal request to the Federal Reserve Board to lift the interest rate ceiling on deposits and the reserve requirements respecting DIBs.

All indications are that the Federal Reserve Board is giving the proposal serious and open-minded consideration. The Board dropped one shoe in mid-December by releasing a thoughtful and detailed staff study of the DIBs proposal and inviting public comment particularly on the candid reservations felt by some governors.

So much for DIBs is and it is. Let's consider now it is--why it was proposed and should or shouldn't be implemented. Most people say they like change as a general proposition, but many oppose it if it may affect them. And so this proposal generated opposition. What troubles some critics of the concept is that domestic deposits might "leak" into the DIBs, or funds lent by DIBs might "leak" back into the United States, making it more difficult to monitor and regulate the domestic money supply. There is specific concern that U.S. corporations might shift their domestic balances to DIBs or borrow from DIBs indirectly, through their foreign subsidiaries. Governor Mitchell, for one, envisioned the need for "an extensive and cumbersome system of regulation" to prevent this.

A close study of the way markets function indicates that no such elaborate precautions are needed. Adequate constraints are already in place and working effectively. Any U.S. corporation that transferred funds from a domestic to a foreign unit in order to be eligible to deposit these funds in a DIBs would incur administrative costs, foreign tax obligations, and risks of various exchange restrictions sufficiently onerous to offset any interest rate advantage which might exist.

The same is true for any U.S. corporation that borrowed from a DIBs through a foreign unit with the intention of using those funds in the United States.

That these off-setting factors actually operate in the real world of international finance is demonstrated every day by the continuing differential between dollar rate at home and abroad. U.S. companies take that differential into account each time they send funds to foreign units for deposit or borrow from banks abroad for use here.

U.S. companies with substantial international business already know the related costs and risks of participating in Eurocurrency markets. Their needs will continue to be met by foreign banks and foreign branches of U.S. banks.

The Federal Reserve staff study took cognizance of these concerns and explored various ways to regulate against potential leakage. The Fed concluded that any restrictions beyond those already in the proposal would be "ineffective," "burdensome," or would reduce the ability of DIBs "to serve as efficient, viable banking organizations." In short, leakage was found to be a non-issue.

Questions were also raised about possible disruptive effects if all the foreign-owned deposits now at U.S. banking offices were shifted to DIBs, insofar as they were authorized to do so.

To use the Fed's own mid-1978 figures, these deposits include about $17 billion in demand accounts. However, around 60 percent of these are owned by foreign banks and are used mainly for immediate clearing and settling of transactions. DIBs would not offer active transaction accounts, so these deposits would remain in regular domestic offices to meet settlement requirements.

Foreign-owned, non-negotiable time deposits in U.S. banks at mid-year came to over $12 billion. Whether depositors would move these funds into DIBs depends on their investment motives, available Euro-rates elsewhere, and sensitivity to cross-border risk. No one really knows if a shift would occur, but it is worth noting that many Central Banks abroad have rules requiring their deposits to be held only in the head offices of commercial banks. Obviously, these would not move.

Foreigners also hold about $8 billion in negotiable certificates of deposit issued by U.S. banks. Foreigners who want their funds to remain in negotiable CDs won't be able to shift to DIBs since the units will not issue them.

In any event, foreign-owned demand deposits represent only about 5 percent of the U.S. total and foreign-owned time deposits are barely 1 1/2 percent of the broadly defined U.S. money supply. So, in the words of the Fed study, "the potential impact of any shifts in time deposits is relatively small." Shifts of demand deposits not owned by foreign banks, some $4 billion, according to the Fed staff "would have a modest impact on the monetary aggregates."

It has also been suggested that if foreign-owned deposits shift from U.S. banks to DIBs, there would be less credit available for domestic borrowers. However, foreign would also be attracted to DIBs, leaving credit available at U.S. banks for domestic borrowers. While there is no way to anticipate the exact behavior of customers, there is no reason to expect a net loss in the amount of credit available to domestic borrowers. All that would happen is that existing markets could move to the United States, so no new situation would be created.

Some critics have wondered aloud if DIBs would have any impact on the value of the dollar in exchange markets.

Since the value of the dollar is determined by marketplace judgments of a number of fundamental factors, such as inflation rates, budget deficits, payments balances, investment patterns, and productivity trends, the geographic relocation of ongoing international banking business from one financial center to another should have no impact on currency exchange markets. This view is basically endorsed by the Fed staff which thinks if obligations offered by DIBs became sufficiently attractive, it might induce foreign investors to switch from foreign currency to dollar-denominated instruments, and results in "some modest strengthening in the exchange rate for the dollar." On balance, however, the Fed staff "does not expect the exchange rate effects to be significant over the longer term."

The Fed study also raises, and then dismisses, the possibility that increased foreign lending through DIBs might include loans of lower quality and higher risk. This argument falls of its own weight, since sound credit evaluation does not become unsound merely because lending is transacted in a less costly way at a more convenient location.

The Fed staff concludes, "On balance, it would seem that credit risk associated with U.S. banks would be little affected by (DIBs)."

Some critics of the DIBs proposal fear a net loss of general revenues from the local tax waiving provisions. Their fears are groundless according to responsible tax officials at each level of government.

The New York City Controller formally endorsed the DIBs proposal. After noting that DIBs would create from 4,000 to 6,000 new jobs, he concluded that "the income and sales tax generated by these payrolls would largely offset the direct loss of tax revenue resulting from the DIBs exemption."

The New York State Commissioner of Taxation and Finance testified that the DIBs proposal would "improve the business climate and economic development of our state," and would do so without altering anticipated tax revenues or disrupting the State's financial plan.

On behalf of the Treasury Department, Deputy Secretary Robert Carswell stated, "The proposed (DIBs) structure is a constructive one. We do not anticipate that this proposal will have any material effect on Federal tax revenues."

I would go further and say that any effect would be an increase. The business that DIBs would bring back from foreign money centers is now being taxed abroad. Foreign tax credits are then applied to reduce the bank's U.S. tax liability. As this business shifted to the United States, the tax payments would shift from foreign governments to the U.S. Treasury.

I have left till last the worry that DIBs might alter the competitive balance among U.S. commercial banks, because it is a less tangible--though very real--concern. The suggestion is made that New York banks would gain a significant edge over non-New York banks if DIBs were not subsequently established in other cities by other banks.

That is certainly true. On the other hand, it would be far simpler to create a DIBs in certain states--like Texas, where there are no state taxes on bank earnings to be waived, or in Florida where state taxes are minimal. The banks in other states have the same chance to make their case to their state governments as the New York banks did to theirs.

If any question of fairness arises, it is this: Is it fair to withhold from the banks of one state an opportunity to improve operational efficiency and compete more effectively in international financial markets, on the grounds that banks in other states, given the same opportunity, have not taken the initiative to do the same? In America, the system is supposed to reward enterprise, not penalize it.

A corollary objection has been raised that, even if every bank in every state created a DIBs, New York banks would have an edge because New York is already a major center for international banking. It is a geographic and historical fact that markets tend to prosper at crossroads. That's true whether it is a vegetable stand or a large international bank. New York has clearly benefited from accidents of geography and geology that find it with a deep water port at a major world crossroad: Nevertheless, among other cities with like advantages, New York went on to become the nation's largest financial center by seizing opportunities--not by denying them to others.

Many non-New York banks are eager to compete directly with New York banks in the New York marketplace by placing their DIBs units here. I think that's fine. However, because they cannot branch in New York, it must be done under their Edge Act Corporations with smaller lending limits and other man made technical restrictions.

Though banks can now guarantee the obligations of their Edge Act Corporations, ideally, all restrictions on interstate branching should be lifted so that banks would have their full faith and credit behind them wherever they go. Pending that more comprehensive and long overdue change, however, Citibank has endorsed changes in Regulation K by the Federal Reserve. We believe that Edge Acts in the United States should be allowed to branch and that a bank should not have to incorporate separately each Edge Act location. The Federal Reserve, itself, has now proposed such a change and also recommends that the lending limits of Edge Acts be combined with the controlling bank. Such changes would make Edge Acts far more competitive.

To whatever extent remaining competitive distinctions between Edge Acts and full branches actually impede the ability non-New York banks to compete in international financial markets, those inequities could and should be removed.

The growth of branches of regional banks Nassau and the Cayman Islands has converted part of the large Eurocurrency market to a "North American Market." There is nothing to prevent these and other U.S. banks anywhere in the country from creating DIBs to conduct similar business. After all, it doesn't require a deep water port or a long history as a financial center to telex funds. And New York is nearer the money markets in Hong Kong and Singapore than is Atlanta--and somewhat further from them than is San Francisco or Hawaii.

In today's world, transactions in the international financial markets are conducted almost instantaneously around the globe by sophisticated communications technologies which can be as easily tapped in Dallas or Denver as in New York. Banks can create a crossroad for this market anywhere. It would increase their flexibility to be able to choose among a New York Edge Act operation, with or without a DIBs, a booking center branch overseas, a head office DIBs--or any combination.

The DIBs proposal would not revolutionize the face of American banking, but it would allow U.S. banks to compete more effectively for their rightful share of international business, It would benefit the public by generating more jobs, incomes and tax revenues. In short, the benefits are overwhelming and it is hard to find a downside risk to our country, our state, city or our banking system.