Global banking, a model promoted for more than 30 years by financial conglomerates cobbled together through cross-border mergers, is colliding with the post-crisis reality of stricter national regulation.
Daniel K. Tarullo, the Federal Reserve governor responsible for bank supervision, announcedplans last week to impose the same capital and liquidity requirements on the U.S. operations of foreign lenders as on domestic companies. The U.K. and Switzerland also have proposed banking and capital rules designed to protect their national interests.
Regulators want to curtail risks exposed after global banks such as New York-based Citigroup Inc. (C), Edinburgh-basedRoyal Bank of Scotland Group Plc and Zurich-based UBS AG (UBSN) took bailouts in the biggest financial crisis since the Great Depression. Forcing lenders to dedicate capital and liquidity to multiple local subsidiaries, rather than a single parent, may undermine the business logic of a multinational structure.
“Being big and spread out all over the world isn’t what it used to be,” said Mayra Rodriguez Valladares, managing principal at New York-based MRV Associates, which trains bank examiners and executives at financial firms. “You’ll see global banks jettison divisions abroad and at home.”
UBS, Citigroup and RBS are among banks already doing just that, reversing decades of global expansion. UBS said in October that it plans to cut about 10,000 jobs and retreat from most fixed-income trading after Switzerland set capital rules for its biggest lenders that are almost double international minimums agreed to by the Basel Committee on Banking Supervision.
Citigroup and Bank of America Corp., the two U.S. lenders that received the most aid during the financial crisis, have been selling foreign operations and scaling back businesses. RBS, majority owned by the British government since being bailed out in 2008, said it will close or sell its cash-equities, mergers-advisory and equity-capital-markets divisions.
The Fed’s plan is part of a trend by national regulators since the crisis to ensure they can protect local depositors and creditors of global financial institutions in the event of a failure. Even organizations such as the International Monetary Fund and theBasel committee, which have sought to foster global finance, have had to adapt their approaches or have been overruled by national and regional interests.
“Globalization of financial markets took us decades to build, it doesn’t look like it’s going to take us decades to reverse the trend, does it?” Charles Dallara, managing director of theInstitute of International Finance, which represents more than 450 financial institutions, said at a meeting with journalists in New York the day after Tarullo’s speech.
Switzerland, whose banking system is five times the size of the nation’s economy, proposed in 2010 to give priority to the domestic units of its two largest lenders if they fail, indicating that overseas businesses might be left on their own. In the U.K., where banks’ assets are also five times gross domestic product, regulators have said they plan to require lenders based in Britain to insulate domestic consumer-banking businesses from investment-banking and foreign operations.
“The likelihood that some home-country governments of significant international firms will backstop their banks’ foreign operations in a crisis appears to have diminished,” Tarullo said on Nov. 28 at Yale University in New Haven, Connecticut. “It also appears that constraints have been placed on the ability of the home offices of some large international banks to provide support to their foreign operations.”
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