When a Bank of Tokyo subsidiary completes its acquisition of Union Bank next week, Japanese banks will control more than 24% of the bank assets in California, according to a study released Wednesday.
In the last five years, Japanese institutions have doubled their share of the banking business in California and captured nearly a quarter of the market in commercial lending along with the same percentage of assets, said the study by the Federal Reserve Bank of San Francisco.
“The growth of Japanese banking institutions in California has been extraordinary, with dramatic increases recorded in assets, deposits and commercial loans of Japanese-owned banks, agencies and branches,” said the report by Gary C. Zimmerman, an economist at the San Francisco Fed.
The Japanese share of the banking market here is greater than in any other state, but experts are divided over the consequences.
Some play down the potential influence of the Japanese, while others view California as a beachhead for Japan on its way to gaining a bigger share of the U.S. financial services industry.
“It is old common sense, but money and power have an enormous commonality in this world,” said Daniel Burstein, author of a new book called “Yen!: Japan’s New Financial Empire and Its Threat to America.” He added, “I would be very concerned with the degree of penetration of a banking market as active and vital as California by any foreign entities.”
With the acquisition of Los Angeles-based Union Bank, the state’s fifth-largest, the Japanese will control five of California’s 10 largest banks and more than $85 billion in assets.
In addition, California is home to four other Japanese-owned, U.S.-chartered banks and 26 branches and agencies of Japan-based banks. The branches of the Japan-based banks account for a large share of the commercial lending because they have direct access to the huge capital strength of the home banks.
The study said the Japanese gains have come largely at the expense of British banks in California, but they are also making gains against domestic banks. A Bank of Tokyo subsidiary, California First Bank, is buying Union from Britain’s Standard Chartered; Sanwa Bank of California expanded largely by acquiring Lloyds Bank from its British owners in 1986.
Other foreign-based institutions operate banks in California, but their market share does not approach Japan’s. Among the others are South Korea, Italy and France.
Zimmerman said California is a natural market for Japanese banks because of the large number of Japanese-owned businesses here, the large potential customer base among Japanese nationals and Japanese-Americans and the Japanese exports passing through California to other U.S. markets.
The Japanese are in a strong position to expand their share of the California banking market because of the strength of their Japan-based parents, according to Zimmerman. But he said he does not expect growth to be as sharp as it has been in the past five years.
Some out-of-state U.S. banks, including giant Citicorp in New York, have complained that the Japanese expansion in California has given them an unfair advantage here. Most of the big out-of-state banks cannot operate here until 1991, when California is opened to full interstate banking.
The Fed study acknowledged that the Japanese have gotten a “head start” on the out-of-state banks in assembling and consolidating a statewide network, adding, “This will place them in an enviable position in 1991.”
Burstein said he expects the Japanese to use their strong base in California to expand their banking business across the country.
10 LARGEST BANKS IN CALIFORNIA In billions; ranked by assets as of June 30, 1988
Bank of America $81.9 Security Pacific 47.3 Wells Fargo Bank 42.5 First Interstate (Calif.) 20.0 Union Bank 15.0 * Sanwa Bank of Calif. 5.9 Bank of Calif. 4.9 City National Bank 3.6 Sumitomo Bank of Calif. 3.5 Tokai Bank of Calif. 2.2 * Assumes completion of Union ($8.7 billion)-California First ($6.3 billion) merger scheduled for Monday Source: Federal Reserve Bank of San Francisco; banks