In December 1981, the Federal Reserve permitted U.S. banks to engage
in Eurobanking activity on U.S. soil. Prior to this time, U.S. banks
engaged in international banking by processing loans and deposits through
their offshore branches. Many “shell” bank branches in places like the Cayman Islands or the Bahamas really amounted to nothing more
than a small office and a telephone. Yet by using these locations for book-
ing loans and deposits, U.S. banks could avoid the reserve requirements
and interest rate regulations that applied to normal U.S. banking.
In Figure 5.2 the country of Cayman Islands had $1,656 billion in exter-
nal position bank assets in June, 2011. However, most of those are banks
owned by another country than Cayman Islands. If one looks at external
assets in banks that are owned by Cayman Islands corporations, then the
assets are only $2.4 billion. Thus, most of the bank assets in Cayman
Island are foreign banks setting up local offices in Cayman Islands.