f. *3 ,. B 76? 280 Washingfflni University V? .'.-‘_ . V E‘: ,2 NOV161989 ‘LlT':5”F€1ii\%E'~€n:;:$ E ST. LOUIS, MO. CONGRESSIONAL RESEARCH SERVICE Assam tmlMifmEmMIg“]{§}WI@iflj@g]1@1ijwiIiflJM\ IRANIAN GOVEBNHENT FINANCIAL ASSETS IN THE U.S.:o ECONOHIC ASPECTS or was 253323 .(ARcaIvED——11/15/79) MINI BRIEF nunaaa HB79280 AUTHOR: White, Roger S. Ebonomics Division Jackson, William :Economics‘Div1sion Wilson, Arlene Economics Division THE LIBRARY 0? consanss COHGRESSIONAL RESEARCH ssavxcz EAJOB ISSUES SYSTEM IDATE ORIGINATED glgjggzg DATE UPDATED 3 V _ FOR ADDITIONAL INEORHATIOH CALL 287-5700 &o1o3 cns- 1 us‘) 9280 UPDATE-11/15/79 £§§§§-2§§£££2£Q! on Nov. 14, 1979, the Iranian government announced its intention to withdraw financial. assets from the United States and its chartered institutions. President Carter, on the same day, invoked the International Emergency Economic Powers Act to block the withdrawal. This Act conveys broad authority to the President to deal with “any unusual and extraordinary threats to the national security, foreign policy or economy of the United States." The freeze imposed extends to all assets, financial and physical, of the Iranian government held in the 0.5. It does not apply to assets of private Iranian businesses or Iranian citizens. The circumstances underlying the freeze are not "most directly related to economic considerations. Nevertheless, the nature of‘ economic consequences of freezing Iranian government assets in the 0.3. is a matter of interest. it is generally accepted that an overwhelming portion of official Iranian assets in the 0.3. consists of financial assets rather than physical assets such as real estate. The financial assets are predominantly held in the form of deposits with 0.5. banks and their foreign branches. Additional financial assets include stocks and 0.5. Treasury securities. This brief discusses the following three principal areas relating to affected. financial assets: estimates of the actual size of frozen financial assets; implications for the S. banking community; and implications for the foreign exchange value of the dollar. an initial estimate by the Federal Reserve Board of the amount of official Iranian financial assets subjected to the freeze was about $5 billion- A revised, but yet preliminary estimate by the Treasury Department announced on the evening of Nov. 14, 1979, was an amount in excess of $6 billion. These estimates include Iranian government deposits held in foreign branches of 0.5. banks. The largest identifiable frozen asset, to date, is $1.3 billion of marketable Treasury securities held by the Federal Reserve Bank of New York in custody for Iran. . No statistics are published shoving the Iranian government deposits in American banks. Confidentiality requirements -+ especially ,the desires of niddle East countries to maintain secrecy on their finances -- prevent the disclosure of Iranian government deposits to the public. Data on foreign deposits in 0.3. banks, as compiled by the Treasury and published by them Federal Reserve Board, include Iranian deposits in aggregated atea reported ‘for eight middle East oil-exporting countries (Bahrain, Iran, Iraq, Oman, Qatar, Saudi Arabis, and the United Arab Emirates). These data do not break k L the deposits of governments, central banks, and private sectors. Published data show that the deposits of all sectors of the eight middle East oil-exporting countries were $11.1 billion in domestic offices of 0.3. banks (as of August 1979). The corresponding liabilities of foreign branches of n0.S. banks were $19.2 billion (as of June 1979). one private—sector analyst believes that the portion of official Iranian assets held on ldeposit with 0.3. banks may be less than $4.5 billion. ‘ CBS- 2 MB7928O upnamr-11/15/79 on the other side of the ledger, according to the federal bank regulators, llanian borrowers ——- including government entities, banks, and private borrowers -- owe about $4.0 billion to American banks. Private-sector analysts believe that the government portion of this sum is at least $2 billion. According to a report in the ge;;_§egeee_geegee; on Nov. 15, 1979, the largest loans to Iran have been extended by the Bank of America, Chase Manhattan Bank, and Citibank. Citibank immediately settled its loans to Iran by crediting the frozen deposits against loans. Such a process of “offsetting” loans against frozen deposits is the first step toward settling claims of 0.5. banks against Iran. _ - ;_§é!§;§§-§Q!!Q!;El In freezing Iranian government assets in the 0.5., the President stated that “the purpose of this order is to assure that claims on Iran by the united States and its citizens are provided for in an orderly manner.“ He made no reference ito the implications that withdrawal of the funds, consisting largely of deposits in U.S. banks, might have on the 0.5. banking system. There are several reasons why a large withdrawal of funds from 0.5. banks might not precipitate a banking crisis or cause a major disturbance to financing activities relating to the domestic economy. The frozen deposits, estimated to be about $5 billion, can be compared with the total assets of mestically chartered banks and their foreign subsidiaries and branches of over $1,b00 billion. Had the Iranian government deposits been withdrawn, a reduction in U.S. banks‘ loan'and investment assets of an equal amount would not have been likely. A_principal alternative source of funds for 0.3. banks, aside from the possibility of some increased shorteterm borrowing from the Federal Reserve System, is the Eurodollar market. Banks would ‘face figher interest rates in this market and would be expected to pass this cost on in the form of higher interest charges on loans. ;e_eee_ee§egee” e§_ e_ fgeeee, the impact of, withdrawal of funds on individual banks, presumably, would have been somewhat limited. Sound banking practices coupled with efforts of bankt supervisory agencies work toward limiting the percent of total deposits a bank might hold for a single ycountry as a depositor and assuring that banks maintain sufficient liquid assets to offset potentially highly volatile deposits. tfurthermore, most of the deposits in question are probably held in the form of time deposits with portions of the total having different maturity dates -—- dates on“ which withdrawal could take place. A staggering of withdrawals would tend to ease pressures on individual banks. gee_legg:ee;g_eegeeggeeeee for the U.S.' banking community of a freeze could be troublesome. hconomic relationships between‘ the two countries require substantial flows of funds through banking facilities. U.S. banks face the prospect of losing a major share oft both this -activity and the financing’ business arising from other countries who have trading and - vesting relationships with Iran. This prospect, presumably, would be as great had the Iranian government withdrawn its deposits in the absence of a freeze. There is, moreover, the ppossibility that other countries with substantial dollar holdings may regard the 0.5. action as a precedent, and may be more inclined to consider moving liquid assets out of the 0.5. if economic incentive to keep them here were reduced or lthe'h political uncertainties were to give reason for such a movement. c3s- 3 HB79280 0PDA1‘E-11/ 15/79 the President‘s action assures that loans payable to the 0.5. and its citizens by the Iranian government and other possible 0.5. claims on Iran could be offset by the frozen assets. The amount of the loans to the Iranian government from 0.3. banrs is estimated to be about $2 billion. with regard to total U.S. claims, the Secretary of the Treasury stated on Nov. 14 that the frozen Iranian assets “would be adequate to cover any American claims we now Know about.“ In general, the only direct way in which withdrawal of deposits in 0.5. banks or the sale of 0.3. assets (such as U.S. Treasury bills) by Iran could affect the exchange rate of the dollar is if the proceeds of these withdrawals were invested in non-dollar assets, such as bonds or bank deposits denominated in other currencies. In this case, the supply of dollars on the foreign.exchange market would be greater than it otherwise would be. If the demand for dollars remains the same or decreases, the foreign exhange rate of the dollar will fall. To the extent that the 0.3. freeze on official Iranian assets prevents a transfer of dollars to other currencies, the effect on the dollar*s exchange rate should be limited. It should be noted, however, that _the uncertainty caused by the Iranian situation may cause other holders of U.S. dollars to sell and therefore ithe exchange rate of the dollar may be adversely affected, at least temporarily. while the underlying economic conditions do not argue for a reduced dollar change rate, any temporary decline will probably increase the demand for dollars, which would have the effect of restabilizing the rate. Currently, most international transactions are denominated in dollars. It is possible that Iran will require payment for the oil it exports in currencies other than dollars. If so, then countries usually paying in dollars will be required to exchange their dollars for other currencies. To the extent that this changes the current procedures of settlement, this might increase the supply of dolars on the foreign exchange marxets and thus cause some decline in the dollar's exchange rate. -in=~fw'v" L!BP;AF§"Y' OF WASHWGTON ] UNIVERSITY ST. LES - M0.