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, announced plans 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.
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.
“This new standard is going to be very costly for foreign banks,” Olson said. “Some will have to raise additional capital just to comply with U.S. rules. Moving it around from the parent company won’t be enough because they’ll discover they need more than what Basel requires overall.”
The failure or near-failure of banks in nations such as the U.S., U.K. and Switzerland, as well as smaller countries such as Iceland and Ireland, taught regulators that companies once seen as a source of national pride can lead to hand-wringing over how to protect taxpayers.
Shearman & Sterling’s Ali said that such structures probably will be favored by regulators, who are warier of the risks posed by branches not under local oversight.