Less regulation not the answer for foreign banks in US

Less regulation not the answer for foreign banks in US

A reduction in regulatory complexity under a Trump administration won’t compensate for below par returns for foreign banks operating in the US.

On average, Deutsche Bank analysts say major foreign lenders have 20% of their capital ($160bn) invested in the US with sub-par mid-single digit returns.

And a Trump administration, which has stated its desire to roll back financial regulations including Dodd Frank, may not be the answer to their problems. 

“There’s a need to optimise foreign banks' US franchises,” analyst Kinner Lakhani wrote in a note to clients.

“We see the likely paths as right-sizing of US ambitions, 'self-help' or an 'opportunistic' strategy of partnerships or bolt-on acquisitions.”

Credit Suisse and HSBC's US operations were loss-making in the first nine months of 2016 while UBS' stronger returns were based on tax writebacks.

The relatively more profitable FBO franchises were the likes of Barclays, BBVA, BNP Paribas and MUFG albeit still sub-scale and making sub-par returns.

Deutsche Bank’s operations in the US have also been profitable this year.

Lakhani’s insights are based on the financial statements of the banks' intermediate holding companies (IHCs).

Under the new IHC structure, foreign banking organisations (FBOs) are reporting the capitalization and profitability of their US operations for the first time.

“While too early to say, we believe that the FBO regulation is likely to remain intact implying a shift from home to host (ie US) regulation," Lakhani added.

"Moreover, we expect upward pressure on ‘go to’ leverage ratio requirements which could result in further capital ‘trapped’ in the US, notably for the likes of Barclays, UBS and Credit Suisse.

"The quid pro quo of this could be a reduction in regulatory complexity although we believe that this is likely to be a necessary but insufficient offset against the sub-par returns."


Thought Leaders

Inventory mobility can deliver funding flexibility

Global Collateral’s IMS helps major banks and brokers take a further step toward...

SmartStream at forefront of reconciliations evolution

Tech firm said role of reconciliations is changing and now provides a...

Citi: Stepping up to the global challenge

Sanjiv Sawhney, Global Head of Custody and Fund Services at Citi, explains how...