Banking in North America: The Triumph of Public Choice Over Public Policy

Abstract

This Article examines the state of cross-border banking in the NAFTA countries and the question of whether member country banks should be permitted to branch freely throughout North America. Under present law, the United States permits foreign banks to branch into its territory subject to extensive restrictions, Canada has indicated that it plans to eliminate many restrictions on foreign branching, and Mexico continues to permit access to its banking markets only by investment in or establishment of an institution chartered in Mexico. Article 1403(3) of the NAFTA left the issue of cross-border branching open to subsequent negotiation. If the decision to organize the North American banking market were made by a hypothetical disinterested "expert" the legal regime would permit banking organizations to branch freely across borders, or, alternatively, to establish either a branch or a subsidiary in their own discretion. Of course, the decision will not be made by an impartial expert, but rather will be the result of international bargaining. One way to explain the bargaining would be to say that the member countries will do everything in their control to maximize their respective "national interests." A more realistic way to examine the process, however, is through the lens of public choice theory. Industry groups and regulators will compete for government action to maximize the value of their respective enterprises. The member countries may each find that the existing banking structure provides their banks with certain non-tariff barriers to trade that they may be reluctant to surrender. Finally, the regulators in each of the countries will be reluctant to give up regulatory authority without getting something in return.

Note: This is a description of the paper and is not the actual abstract.

Keywords: cross-border banking, NAFTA, foreign branching