The Economic Impact of International Banking in Florida and Industry Survey by FIBA

THE ECONOMIC

IMPACT OF INTERNATIONAL BANKING

IN FLORIDA AND INDUSTRY SURVEY | 2013 PREPARED BY:

By Daniel O Murgo, PhD Professor of Economics Florida International University December 31, 2013

TABLE OF CONTENTS

Key Findings in Brief

Executive Summary

II.

Background

III.

Estimating the Macroeconomic Impact of International Banking

Direct Economic Impact

Indirect, Induced and Total Economic Impacts

Survey of Current Conditions and Industry Expectations

Perceived Threats

Perceived Opportunities

IV.

Brief Glossary

About Florida International Bankers Association (FIBA)

About the Author

LIST OF TABLES

Table ES. Economic Impact of International Banking in Florida: 2005 and 2012

Table 1. The Economic Impact of International Banking in Florida, 2012: Economic Output (Gross Profits and Rents)

Table 2. Economic Impact of International Banking in Florida, 2012: Economic Output

Table 3. Economic Impact of International Banking in Florida, 2012: Employment Positions

Table 4. Distribution of Total Employment Impact by Occupation

Table 5. Economic Impact of International Banking in Florida, 2012: Gross State Product (Value Added)

Table 6. Economic Impact of International Banking in Florida, 2012: Labor Compensations

Table 7. Economic Impact of International Banking in Florida, 2012: Capital Income (Gross Profits and Rents)

Table 8. Economic Impact of International Banking in Florida, 2012: Government Revenues

Table 9. Perceived Threats to International Banking in Florida

Table 10. Perceived Opportunities to International Banking in Florida

iii

The Economic Impact of International Banking in Florida and Industry Survey: 2013 KEY FINDINGS IN BRIEF THE INDUSTRY’S MAJOR CONCERNS: 



The top concern is the increasing regulatory requirements, especially regulations enacted after the 2008 financial crisis (Dodd-Frank Act). A little over 87% of the industry survey respondents signaled that increasing regulatory requirements is the single most significant threat to the future of international banking in Florida. A second and close concern is the higher costs of compliance that have the potential to undermine competitiveness, and result in loss of international wealth management and private banking clients to overseas banking centers. Institutional risks associated with a potential enforcement action were also mentioned. This threat was selected by 69% of the respondents. Another potential threat mentioned by banks is the unstable geopolitical situation in some Latin American countries and its potential for increased regulatory concerns.

THE INDUSTRY’S MAJOR OPPORTUNITIES: 



The most important perceived opportunity is the geographical and cultural proximity of South Florida to Latin America. Almost 86% of survey respondents see South Florida, and especially Miami, as a seasoned international banking center with highly trained bilingual people that is the natural gateway into the United States for trade and finance. A second perceived opportunity mentioned by survey respondent is financial investment and especially wealth management and retirement solutions for Non-Resident Aliens (“NRA’s”). The U.S. financial system, with its consistently enforced regulations, is perceived by foreign clients as more secure than their local ones that often subject banks to capricious and unstable regulations. A third opportunity mentioned is the resurgence of the domestic real estate market. This recovery is creating investment opportunities not only for domestic investors but for foreign firms and individuals as well.

INTERNATIONAL BANKING’S ECONOMIC CONTRIBUTIONS AS OF 2012:      

$2.1 billion in terms of gross business revenues (see Table 2) 16,774 direct and indirect employment positions (see Tables 3 and 4) $1.3 billion in Gross State Product (see Table 5) $672 million in terms of labor compensation (see Table 6) $571 million in profits, interest earnings and rents (see Table 7), and $101 million in state and local revenue. (see Table 8

I. EXECUTIVE SUMMARY International banking has played an important role in Florida's economy and represents an important component of the State's international trade cluster. The banks engaged in international banking and finance hold deposits from domestic and foreign individuals and enterprises, manage private investments, participate in international trade financing, and provide loans. International correspondent banking is also an important international banking service, providing foreign banks with the ability to offer services to their foreign customers, including trade finance, without the expense of establishing an office in the U.S. This report provides estimates of the macroeconomic impact of international banking in the State of Florida in 2012. This report also summarizes the findings of a survey of foreign and domestic international bank managers regarding current industry conditions, and their outlook based on perceived threats and opportunities in an environment with more competitive pressures associated with new national-security-related financial record keeping, monitoring and reporting. This report is an update of another study produced by The Washington Economics Group, Inc. in 2005. This report draws on it, and great care has been taken to make the models consistent so that the results of both can be compared meaningfully. International financial transactions through U.S. banks have been a special concern of federal banking regulators since the early 1970s. The monitoring of international transactions reached a new level of significance after September 11, 2001. With the passing of the USA PATRIOT Act of 2001, the U.S. adopted one of the toughest anti-money laundering (AML) laws in the world, providing for severe penalties that include stiff fines and potential forfeiture of assets. Further regulations were introduced with the passing of the Dodd-Frank Act. The laws that comprise the federal anti-money laundering/anti-terrorism financing efforts and associated regulations require strict compliance with financial record keeping, monitoring and reporting procedures. Since 2001, banks operating in the U.S. have been challenged with enhancing their compliance systems to meet the demands of the law and satisfy federal banking examiners. Adequate compliance systems have been expensive in terms of manpower, information technology and other operating costs. The AML provisions of the Patriot Act also exposed financial institutions to considerable regulatory risks and fines. International banking operations of domestic banks and foreign banks authorized in Florida directly employed 3,835 workers in 2012. International banking clients visiting Florida spent an estimated $460 million within the State, directly supporting another 1,077 jobs. International banking, therefore, directly supported approximately 4,912 jobs in 2012, with a direct economic impact of $1,133 million. The direct economic impacts, however, are only part of the total economic impact. As firms respond to the direct economic impact they in turn purchase goods and services from suppliers and the employees they hire to produce economic output spend some of their labor income within the State. The direct impacts, therefore, set in motion a series of economic interactions among firms and consumers that lead to additional indirect and induced economic impacts, standard economic impact models and methodology were used estimate the direct, indirect and induced economic impacts supported by international banking activity in Florida. A summary of the results follows. The analysis indicates that international banking and related activity contributed over $2.1 billion in economic output to Florida's economy, supporting a little over $1.3 billion in Gross State 2

Product, 16,774 employment positions and $672 million in compensation to Florida workers. In addition, to these impacts, international banking and related activity generated $101 million in revenues to state and local governments. For the purpose of comparison, the following table compares the results of the 2005 and 2012 studies.

AXIS TITLE

ECONOMIC INDICATORS IMPACTS 2005 VS 2012 35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 Employment Positions

Gross State Product (millions of dollars)

Labor Compensation (millions of dollars)

Capital Income (millions of dollars)

State and Local Government Revenue (millions of dollars)

2,097.90

16,774

1,323.20

671.7

570.7

101.1

1,838.90

13,634

1,159.90

588.8

500.2

88.6

Economic Output (millions of dollars) 2012 2005

Table ES. Economic Impact of International Banking in Florida - Executive Summary Table Impacts 2005 2012

Economic Indicator Economic Output (millions of dollars) Employment Positions Gross State Product (millions of dollars) Labor Compensation (millions of dollars) Capital Income (millions of dollars) State and Local Government Revenue (millions of dollars)

1,838.9 13,634 1,159.9 588.8 500.2 88.6

2,097.9 16,774 1,323.2 671.7 570.7 101.1

The increased regulatory burdens associated with the new global realities of international crime and terrorism have coincided with a contraction and restructuring of international banking in Florida. Between 2000 and 2005, direct employment in international banking declined from 4,834 employment positions at the end of 1999 to 3,027 by 2005, and local spending by international banking clients declined by 16 percent after adjusting for price inflation over this same period. The survey of international banks found that AML compliance systems and other regulatory requirements had increased associated costs by 13 percent between 2010 and 2012. Staffing resources (measured in full-time equivalent employment positions) devoted to AML compliance represented approximately 10 percent of the international banking workforce in 2010. Based on a survey of banks significantly engaged in international banking it was possible to estimate the staffing cost of AML compliance at nearly $32 million in 2012. The study also concluded that the financial burden of compliance per dollar of deposits was greater for smaller banks than for larger banks, and this could give further impetus to industry consolidation and contraction. The industry survey also revealed that the most significant threats to the future of international banking in Florida are: 1) Increasing regulatory requirements, and 2) Higher costs of compliance with regulations. In addition, many in the industry expressed the concern that potential exposure of the institution to the regulatory risks associated with enforcement actions was having a negative impact on the industry. More sophisticated money laundering schemes, that put more burdens on banks, and an unstable geopolitical environment in Latin America that increases the risk associated with operations with the region were also mentioned as important threats. Correspondent banking relationships increased by 10 percent between 2010 and 2012 but the absolute values are small relative to deposits and loans. The industry survey also showed that assets under management, a significant source of revenues for banks, increased between 2010 and 2012. The information provided by the respondents was for the most part incomplete. Most banks only reported figures for 2012. Using the information provided by the major operators that reported figures for both years, it was possible to estimate a growth of assets under management of 22 percent in the period indicated. Additionally, industry executives estimate the volume of assets under management to be between $400 and $500 billion.

The most important perceived opportunities by the banks are: 1) The geographical and cultural proximity of South Florida to Latin America that makes South Florida, and specially Miami, the natural gateway to the United States, and 2) The growth in many Latin American countries, and paradoxically, the internal problems in others, predict an inflow of funds to international banks to seek professional wealth management, retirement options or simply a safe haven for savings. 4

The recovery of the real estate market and the possibility of renewed lending to buyers and developers, and diversification of assets were also mentioned as opportunities. Conclusion The financial crisis had a significant impact in the Stateâ&#x20AC;&#x2122;s GSP, which decreased 9.2% between 2007 and 2009. The financial sector as a whole decreased by 3.1% in the same period. If we consider the period between 2005 and 2012 we observe that even though the number of financial institutions, both foreign and domestic have been reduced significantly due to mergers, consolidations and outright failures, the banking industry still managed to grow 3.6% in said period and represented 7% of Floridaâ&#x20AC;&#x2122;s real GSP in 2012. By contrast, in 2012 Floridaâ&#x20AC;&#x2122;s GSP was still 1.3% below the 2005 level. International banking represents $2.1 billion in economic output for the State and there are 4,912 positions directly involved in international banking. From these numbers we can safely conclude that international banking is a vibrant and hugely important industry in our State and in South Florida in particular.

II. BACKGROUND International business and international banking have been synonymous with Miami and South Florida for at least 85 years. Along that time Miami has become the financial capital and trade hub for business between the United States and Latin America and the Caribbean. The catalyst of this change was the transformation of Cuba into a communist state. Hundreds of major American companies that had their Latin American Headquarters in Havana transferred them to Miami. These companies and their skilled multilingual executives and staff required homes, schools, lawyers, translators and a host of other services, including an effective international banking system to handle international payments and trade transactions, which were increasing exponentially as local businessmen sought new markets in Central and South America, and the Caribbean. Local domestic banks, like Pan American Bank, started selling services to Cuba and other islands as far back as 1945. But it was not until 1965 that a proper international division was established within the bank, and international business began to grow in earnest. This was followed in 1969 by the establishment of an Edge Act subsidiary of Citizens & Southern bank from Atlanta. This was the first bank solely dedicated to international banking and trade finance. It was soon followed by Chase, Citibank, JPMorgan and others who numbered 32 at the highest point. In the meantime, the State of Florida passed its own International Banking Act in 1977. This Act opened the gates to foreign banks to establish their own Agencies and Representative Offices. Small and medium sized domestic banks joined the trend by seeking affiliations with foreign banks. Since the enactment of the International Banking Act, Florida has had a significant presence of domestic and foreign banks engaged in international banking activity within the State, primarily in the areas of private wealth management and international correspondent banking. These financial institutions hold deposits from foreign individuals and enterprises, manage private investments, engage in international trade financing, and provide loans. International correspondent banking relationships provide important services to foreign banks, and allow for the efficient settlement of international transactions that are necessary for the conduct of international trade and commerce. Financial transactions through U.S. banks involving foreign individuals and/or institutions have received special attention by U.S. banking regulators since the early 1970s. The attention of banking regulators increased through the 1980s and 1990s, and particularly after September 11, 2001. The aftermath of the 2008 Financial Crisis brought additional regulations. Congress passed the "Bank Secrecy Act" (BSA) in 1970 for the purpose of identifying source, volume and movement of cash and monetary instruments into and out of the U.S. The BSA set requirements for financial record keeping and reporting by private individuals, banks and other financial institutions. The BSA was intended to assist law enforcement and regulatory agencies in their investigations and provide evidence useful to prosecuting money laundering and other financial crimes. A series of additional acts were passed by Congress in the 1980s and 1990s to strengthen the anti-money laundering (AML) efforts of the federal government. In 1986 laws were passed imposing criminal liability on persons and institutions that assist money laundering or structure transactions to avoid reporting requirements. In 1992 Congress stiffened the sanctions for non-compliance with BSA and gave the U.S. Treasury Department a greater role in the AML effort. The single most significant AML law since the passage of the BSA, however, is the Title III of the USA PATRIOT Act of 2001. The AML laws of the U.S. are considered among the toughest in the world, allowing for severe penalties that include stiff fines and forfeiture of assets. While general guidelines for 6

compliance with AML laws and regulations exist, no compliance system is foolproof. Each system relies on judgment calls, the gathering of highly detailed information (even on long time clients and routine transactions) with significant uncertainty over whether or not regulators will consider the efforts to represent sufficient due diligence. All these activities have a direct impact on a bankâ&#x20AC;&#x2122;s costs of operation. Since 2001 banks operating in the U.S. have struggled to develop compliance systems that will meet the requirements of the law and satisfy bank examiners. The cost of operating within this new regulatory environment has been great in terms of staff resources, IT resources and other operating costs. The competitive environment of international banking makes it difficult to pass the higher costs of regulatory compliance on to customers in the form of higher fees. Banks had to look for strategies to find efficiencies or keep their more profitable clients and release the others. Consolidation and downsizing are obvious strategies to pursue in a competitive industry faced with increasing costs. The international banking industry in Florida has been characterized by consolidation and contraction since 2000. The number of foreign bank agencies, branches and Representative Offices operating in Florida fell from 38 in 2000 to 31 in 2005 to 22 in December 2012. There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005 and 2 currently. The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005. The number of full-time equivalent (FTE) staff devoted to compliance represented 9 percent of the workforce in 2005. Staff resources devoted to compliance increased by 160 percent between 2002 and 2005. It further increased by 30 percent from 2010 to 2012. Although, a definitive conclusion cannot be reached from the data at hand, there are factors that suggest that the financial burdens and institutional risks associated with AML compliance may have played some role in the industry contraction and consolidation experienced in Florida. Since the crisis, important changes have been made to strengthen international regulatory standards. The Basel III capital and liquidity frameworks and the proposed risk-weighted capital ratios can be cited as the most important. In the absence of any revisions, FIBA believes these higher ratios could have a significant impact on trade financing and correspondent banking business. Congress included in the Dodd-Frank Act a number of changes directed at the financial stability risk posed by foreign banks. Sections 165 and 166 instruct the Federal Reserve to implement enhanced prudential standards for large foreign banks as well as for large domestic bank holding companies (BHCs) and nonbank systemically important financial institutions. Dodd-Frank also bolstered capital requirements for financial holding companies (FHCs), including foreign FHCs, by extending the wellcapitalized and well-managed requirements beyond U.S. bank subsidiaries to the top-tier holding company. International banking is important to Florida's economy, as illustrated in the next section of this report, but the contraction in international banking that occurred between 2000 and 2005 represents a lost economic opportunity.

III. ESTIMATION OF THE MACROECONOMIC IMPACT OF INTERNATIONAL BANKING International banking directly impacts Florida's economy mainly in two ways: 1) The direct employment and expenditures associated with international banking and asset management operations, including payroll, and 2) The local expenditures of international banking clients when they visit the Florida offices of their financial services providers. Data from Florida's Office of Financial Regulation, Division of Financial Institutions, and information gathered from the survey of Florida International Bankers Association (FIBA) members was used to estimate the direct economic impacts from international banking. The estimates of local expenditures by visiting clients were derived from a previous survey. The direct economic impacts are the catalysts for initiating additional economic impacts from inter-industry transactions and consumer expenditures from changes in labor income. The direct expenditures resulting from international banking operations and spending by international private banking clients lead to increases in production, income and employment throughout the State's economy. These economic impacts are estimated with a social accounting matrix economic multiplier model constructed specifically for the State of Florida. The model was constructed using IMPLAN economic modeling software and data. The methodology and software used to estimate the regional economic impacts have been employed extensively by regional economists and policymakers. This is the same methodology used in the 2005 Economic Impact Study. In this way the results of this update can be meaningfully compared with those of the previous study. Social accounting matrix models consider the inter-industry linkages that characterize an economy. As a firm or industry experiences an increase in the demand for its product or services, it needs to purchase goods and services from its suppliers. Some of those supplies will be purchased from other firms within Florida's economy. The suppliers will, in turn, need goods and services from other firms. The effect on regional production resulting from successive rounds of inter-industry linkages is called the indirect effect. It is important to note that the indirect economic impacts are based only on those inter-firm purchases made within Florida, and, therefore, the estimated impacts recognize that firms will also purchase goods and services from outside of Florida. Only those purchases from Florida firms create positive economic impacts. Increases in production within Florida also lead to expansions in employment and labor income, and the increases in labor income lead to increases in consumer spending, further expanding sales and production throughout the State. The impact from consumer spending by workers on products and services produced in Florida is referred to as the induced effect. The successive waves of production, spending and more production result in economic multiplier effects, where the final increase in State production, income and employment is larger than the initial (or direct) increase in production, income and employment. Therefore, the total economic impact is the sum of the direct, indirect and induced impact.

DIRECT ECONOMIC IMPACTS

It is estimated that 4,912 employees were directly involved in providing international banking services in 2012 (Table 3), with approximately 1,297 of these jobs representing positions within international bank agencies and the rest in domestic banks. The payroll total compensation associated with direct employment in international banking was estimated at $306 million. The banking institutions that responded to the survey indicated that 13,500 international banking clients visited Florida in 2012. The banks surveyed did not have information about the average expenditure of international clients. We have used the estimates of the previous survey and adjusted the figure to account for domestic inflation. Assuming that each client visited an average of 10 nights in Florida, spending on average was $1,038 per party per night. Using the survey data and statistical regression analysis, the previous study estimated that each additional $1,000,000 of international deposits resulted in $6,782 in visitor expenditures. Total local spending by international private banking clients based on previous survey information adjusted for inflation and on regression analysis is estimated at $460 million in 2012. Local spending by international banking clients directly supported 3,778 jobs. International banking and related activities, therefore, directly supported 7,265 jobs. International banking operations and local spending by international clients had a significant direct economic impact in 2012 (Table 1). International banking generated a direct economic impact (measured in terms of "economic output" representing business and state and local government revenues) of $1,133 million, of which $823 million resulted from international banking operations and $310 million from spending by international banking clients. The direct economic impacts are concentrated in the finance industry and in those industries that capture a large share of consumer expenditures (e.g., retail, accommodation and food service, health services and nonbusiness services).

Table 1 - The Economic Impact of International Banking in Florida, 2012 Economic Output (Gross Profits and Rents), Thousands of Dollars Direct Economic Impact from International International Total Direct Banking Client Operations Spending Impact

Industry Finance & Insurance

823,006.00

24,439.00

847,445.00

Government & non NAICS services

0.00

62,696.00

Health & Social Services

0.00

59,256.00

Retail trade

0.00

42,583.00

Accommodation & food services

0.00

22,059.00

Other private services

0.00

20,903.00

Wholesale trade

0.00

15,491.00

Manufacturing

0.00

11,586.00

Educational services

0.00

8,702.00

Information

0.00

8,124.00

Arts, entertainment & recreation

0.00

7,148.00

Real Estate & Rental

0.00

6,874.00

Transportation & Warehousing Retail trade

0.00

6,843.00

Professional, scientific & technical services

0.00

5,372.00

Utilities

0.00

5,284.00

Administrative & waste services Educational services

0.00

1,751.00

Ag, Forestry, Fishing & Hunting Mining

0.00

673.00

Mining

0.00

31.00

Construction

0.00

Managements of companies

0.00

823,006.00

309,815.00

1,132,821.00

Total Direct Economic Impact

INDIRECT, INDUCED AND TOTAL ECONOMIC IMPACTS The direct economic impacts lead to significant indirect and induced economic impacts through supply-chain relationships among industries and through the demand for locally produced goods and services resulting from the increase in labor income. The total economic impacts on output, employment, labor income, capital income, Gross State Product and state and local government tax and fee revenues are provided in the tables below. The total economic impact of international banking and related activity in 2012 is estimated at $2.1 billion in terms of economic output, of which approximately $1.9 billion represents revenues to Florida private enterprises. The $2.1 billion of economic impact is comprised of $1.1 billion of direct economic impact and $1 billion of indirect and induced economic impacts. Although 50 percent of the total impact on economic output occurs in the finance and insurance industry group, as would be expected, nearly 30 percent of the total impact appears in private, non-financial services. The economic activity supported either directly or indirectly by international banking is felt across a wide number of non-financial industries, and its future growth is therefore important to many different industries and their work force (Table 2). In addition to the direct employment impact of 7,265 jobs, the indirect and induced economic effects of international banking support nearly 9,509 employment positions and result in total impact of 16,774 employment positions (Table 3). Due to significant variation in labor productivity (output per employee) across industries, the distribution of the employment impact from international banking is measurably different from the distribution of economic output. Employment in the finance and insurance industry accounts for 30 percent of the total employment impact (reflecting the. high value added content of this industry), while 49 percent of the total employment impact occurs within a broad range of non-financial, private services. Employment in retail activity accounts for 12 percent of the total jobs supported by international banking, although the retail industry accounted for just 5 percent of the economic output.

Total Direct Economic Impact Direct Economic Impact from International Client Spending

$309,815

Direct Economic Impact from International Banking Operations

$823,006

Total Direct Economic Impact

$1,132,821

$500,000

$1,000,000

$1,500,000

The model also allows separating the total employment impact into major occupational groups (Table 4). The occupational distribution of employment impacts from international banking activity cuts across a broad spectrum of skill levels and wage levels. Approximately 28 percent of the employment positions are to be found in relatively high wage occupations including managerial positions, legal and finance, professionals (e.g., architects and engineers) and educators, and healthcare practitioners and technicians. Thirty percent (30) of the employment positions are found in lower wage occupations such as sales, food service industry workers, and building maintenance workers. The remaining 42 percent of the jobs supported directly or indirectly by international banking are found in the mid-level wage occupations such as administrative and office support staff, construction and production workers, and transport workers. The level of occupational diversity in the employment impact results in additional social benefits beyond those associated with simply more jobs and labor income. Gross State Product (GSP) is the broadest measure of aggregate economic performance, and its definition is analogous to Gross Domestic Product by which we measure the performance of the economy at the national level. GSP represents the value added generated by Florida's industries and the source of revenues that are ultimately distributed to labor, investors and creditors, and provides the indirect taxes that help fund government services and capital spending at the federal, state and local levels. The model simulations indicate that international banking and related activity in Florida generated $1.32 billion in GSP in 2012. Approximately 55 percent of that impact directly resulted from international banking operations (40 percent) and the local expenditures from visiting clients (15 percent), and the remaining 45 percent was generated via indirect and induced economic impacts. The distribution of economic impact in terms of Gross State Product is presented in Table 5. International banking and related activity in Florida also make a significant contribution to the compensation of workers in Florida. Our analysis indicates that international banking supported $672 million in labor compensation in 2012 ($309 million in direct impact and $363 million in indirect and induced impacts). Table 6 reveals the estimated compensation impact by industry. High levels of capital income (profits, interest and rents) are also generated by international banking and related activity. The modelâ&#x20AC;&#x2122;s simulations estimate that international banking and related activities generated $571 million of capital income in 2012 (Table 7). The analysis indicates that international banking and related activity led to $213 million in publicsector revenues. The largest share of these revenues accrued to the federal government ($112 million), primarily from payroll taxes (64 percent) and corporate income taxes (27 percent). State and local government revenues were positively affected by nearly $102 million. Approximately 36 percent of state and local government revenues were generated through sales taxes, while 28 percent were generated via property taxes. The remaining balance of state and local revenues was distributed across a variety of fees and charges for services.

Table 2 - Economic Impact of International Banking in Florida, 2012 Economic Output, Thousands of Dollars

Table 2a - Economic Impact of International Banking in Florida, 2012 Economic Output, Thousands of Dollars

Economic Impact of International Banking in Florida, 2012 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Total Direct Impact Induced Impact International Client Spending International Banking Operations

Table 3 â&#x20AC;&#x201C; Economic Impact of International Banking in Florida, 2012. Employment Position

Table 4 - Distribution of Total Employment Impact by Occupation Occupation Administrative and Office Support Managerial, Legal, Business and Financial Operations Sales and Related Food Preparation, Serving and Related Installation, Repair, Building Cleaning and Maintenance Healthcare Practitioners, Technical and Support Transportation and Materials Moving Construction and Production Workers Life, Physical and Social Sciences, Education and Training Personal Care and Service Computer, Mathematical Sciences, Architecture, Engineering Arts, Entertainment, Sports and Media Protective Services and Miscellaneous Total

Table 4a - Distribution of Total Employment Impact by Occupation

Jobs 5,241.00 2,492.00 1,792.00 1,369.00 1,204.00 1,105.00 891.00 721.00 590.00 483.00 448.00 223.00 215.00 16,774.00

Table 5 - Economic Impact of International Banking in Florida, 2012 Gross State Product (Value Added), Thousands of Dollars

Table 6 - Economic Impact of International Banking in Florida, 2012 Labor Compensations, Thousands of Dollars

Table 7 - Economic Impact of International Banking in Florida, 2012 Capital Income (Gross Profits and Rents), Thousands of Dollars

Table 8 - Economic Impact of International Banking in Florida, 2012 - Government Revenues, Thousands of Dollars Level of Government

Total

Federal Corporate Income Taxes Personal Income Taxes Payroll Taxes Indirect business taxes Total

27,574.00 1,727.00 72,889.00 9,791.00 111,981.00

State and Local Sales taxes Property taxes Other taxes, fees and permits Total

36,170.00 27,955.00 36,984.00 101,109.00

Economic Impact of International Banking in Florida, 2012 Government Revenues State and Local

$36,984

$36,170

$27,955

Sales taxes

Property taxes

Other taxes, fees and permits

Table 8a & b - Economic Impact of International Banking in Florida, 2012 - Government Revenues, Thousands of Dollars 20

IV. SURVEY OF CURRENT CONDITIONS AND INDUSTRY EXPECTATIONS Members of the Florida International Bankers Association (FIBA) were presented with a questionnaire to provide information about the volume of their activities and the impact of regulations on their business. They also provided information necessary to assess the extent of regulatory compliance costs associated with the BSA, the added implications of the Foreign Account Tax Compliance Act (FATCA), the new NRA reporting requirements as well as those associated with DoddFrank Wall Street Reform and new rules enacted by the Consumer Protection Act (specially rules enforced by the Consumer Financial Protection Bureau (CFPB) recently created. The financial institutions surveyed were also able to identify key industry threats and opportunities perceived by senior management in international banking. PERCEIVED THREATS The top concern is the increasing regulatory requirements, especially regulations enacted after the 2008 financial crisis (Dodd-Frank Act). A second and close concern is the higher costs of compliance that have the potential to undermine competitiveness, and result in loss of international wealth management and private banking clients to overseas banking centers. Institutional risks associated with a potential enforcement action were also mentioned. A little over 87% of the survey respondents signaled that increasing regulatory requirements is the single most significant threat to the future of international banking in Florida (Table 9). This problem was also the most cited first cause of concern (46.2%). The second perceived threat, higher cost of compliance, was mentioned by 69.2% of the respondents. This is the second most cited first cause of concern (30.8%). The survey provides information about changes in the number of employees devoted to regulatory compliance and the associated costs. In 2010 an average of 12.6 employees were assigned to compliance related activities. That number grew to 16.5 employees in 2012, an increase of 31%. If we project these averages to the total number of FIBA members we have 868 employees working on compliance in 2010 and 1136 in 2012. In terms of compliance related expenses, $200 million were spent in 2010 and $224 million in 2012. Another potential threat mentioned by banks is the unstable geopolitical situation in some Latin American countries and its potential to increase regulatory compliance. Table 9 - Perceived Threats to International Banking in Florida Listed within the top 3

Threat 1. Increasing regulatory requirements

87.2%

2. Higher cost of compliance with regulations

69.2%

3. Geopolitical environment in Latin America

39.8%

4. Sophisticated money laundering schemes

26.8%

5. Fragility of international banks, especially those of medium size

14.8%

PERCEIVED OPPORTUNITIES The single most important perceived opportunity is the geographical and cultural proximity of South Florida to Latin America. Almost 86% of survey respondents see South Florida, and especially Miami, as a seasoned international banking location with highly trained bilingual people that is the natural gateway into the United States (Table 10). Economic growth in many Latin American countries creates opportunities for increasing trade and South Florida is perceived as the natural entry point for goods and financial resources. The United States is also considered the natural investment destination for Latin Americans. A second perceived opportunity mentioned by survey respondents is financial investment and especially wealth management and retirement solutions (42.9%). Even though banks see more stringent regulations as a burden, potential investors see it as a benefit. A system with consistently enforced regulations is perceived as more secure than one where local banks are often times subjected to capricious and unstable regulations. A third opportunity mentioned is the resurgence of the domestic real estate market. This is consistent with the evolution of the domestic economy. This real estate market shows signs of recovery in the form of higher prices, increased sales of existing homes, and new construction. This revival is also creating investment opportunities for foreign firms and individuals. Anecdotal evidence suggests an increasing interest and participation of Latin American citizens in local construction projects. Paradoxically, countries in Latin American with an unstable political and economic situation also provide opportunities for international banks. The United States, and specially South Florida, is perceived as a safe haven for the savings of citizens of these troubled countries.

Table 10 - Perceived Opportunities to International Banking in Florida

Opportunities 1. South Florida geographical and cultural proximity to Latin America. Promotion of trade and international banking 2. Retirement and wealth management; investment opportunities for NRA

Listed within the top 3

85.7% 42.9%

3. Resurgence of residential mortgage lending and financing of construction projects

35.7%

4. Seasoned international banking center with highly trained and experienced bilingual professionals

21.4%

5. Trade financing

21.4%

6. Foreign investment in the US and perception of higher security and stronger supervision of the financial system

21.4%

7. Recovering financial system and increasing business opportunities

21.4%

BRIEF GLOSSARY AML: Anti money laundering.

Basel III: A global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. BHC: Bank Holding Companies.

BSA: Bank Secrecy Act of 1970. (Formally known as 31 CFR Chapter X) CFPB: Consumer Financial Protection Bureau, created by the Dodd-Frank Act.

Dodd-Frank: Doddâ&#x20AC;&#x201C;Frank Wall Street Reform and Consumer Protection Act of 2010. FATCA: Foreign Account Tax Compliance Act.

GSP: Gross State Product. An economic measure similar to Gross Domestic Product (GDP) used to calculate product and income at the state rather than the national level. NRA: Non Resident Alien. USA PATRIOT Act: Is an acronym that stands for the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.

ABOUT FLORIDA INTERNATIONAL BANKERS ASSOCIATION (FIBA) The Florida International Bankers Association (“FIBA”) was created on July 6, 1979 and today has 71 bank members from 18 different countries. FIBA also has 60 supporting member organizations, which include most of the prominent law firms, accounting firms, investment banks and consultants based in South Florida. FIBA has always worked closely with the State Office of Financial Regulation, Enterprise Florida, the Greater Miami Chamber of Commerce, the Florida Chamber of Commerce, the Beacon Council, and with the Governor's office in all matters pertaining to economic development and expansion of trade. For example in 1980, working hand-in-hand with the Governor, the State amended the tax code allowing for the creation and expansion of International Banking Facilities in Florida thereby providing competitive equality with 10 other States that had passed similar legislation. This service dedicated exclusively to offshore clients and offshore loans has been instrumental in the growth of foreign bank agencies and branches that would otherwise had transferred the business to their branches in New York and elsewhere. As of the date of this report, there are 23 foreign bank agencies and/or branches in Miami with combined assets of $15.2 billion and 900 employees. In addition, there are 4 international banking subsidiaries (commonly called "Edge Act Subsidiaries”) of major financial institutions. These subsidiaries have total assets in Miami of about $15 billion and they employ an additional 1,395 persons. More significantly, these Edge Acts are estimated to handle about $45 billion" assets under management" from their private banking groups. It should be noted that at least 22 of the 100 largest Florida-based banks have a significant component of foreign shareholders. These 100 banks had total deposits of $ 411 billion as of June 30, 2012. These numbers do not include assets under management handled by the Private Wealth units of these institutions and do not include the 345 broker-dealers registered in the State of Florida and many “Family Offices” and investment advisors. For the last 14 years, FIBA has sponsored and organized the largest and best attended Conference on Anti Money Laundering anywhere in the United States. This event alone attracts over 1,300 participants from every country in the Hemisphere and from different parts of the country. It is usually a 2-day conference with important keynote speakers from Congress and from the different State and federal baking agencies. In addition, every other year, FIBA sponsors jointly with FELABAN a 2 -day conference in Miami that attracts an average of 1,500 participants representing banks from Latin America, Europe, Asia and Africa. This is a unique event that allows banks from the region to interact and establish new relationships with counterparts from all over the globe.

ABOUT THE AUTHOR

Dr. Daniel O Murgo is a professional economist who teaches Public Finance and Political Economy at Florida International University. He also has a teaching appointment at Miami Dade College where he teaches Economics and Statistics. For the last eight years he has been producing specialized reports about the economy of Florida, especially South Florida, for a variety of corporations, especially financial institutions. His research interest includes Political Economy, Public Finance, Computable General Equilibrium Models, Economic History and History of Economic Thought.