Wednesday, May 27, 2020

US Dodd-Frank rules likely to apply to foreign banks

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One of the biggest advantages foreign banks with operations in America have enjoyed since the implementation of the Dodd-Frank Act may be about to be taken away.

The sweeping overhaul passed by Congress to address the ‘untouched’ banks of its financial system has so far only had limited impact on over half of the big banks operating in America – simply because they are foreign.

Among them is Barclays, Credit Suisse and Deutsche Bank, and specifically, these banks have not had to strengthen the financial buffer that America banks must maintain to insure against potential losses.

Now it looks as if that advantage may be stripped away.

Sea change

It is predicted that the Federal Reserve will soon finish rules which state the need for foreign banks to comply with similar rules to their American counterparts.

The proposal was first aired in late 2012 and after an invitation to give feedback, it transpired that the foreign banks are not happy with the sea change; with the Fed receiving strongly worded letters from foreign banks and even overseas financial regulators.

Whilst they may soften the rules, any changes to the legislation are likely to be minimal, and will signal the end of a period of foreign bank’s extravagant evasion tactics to avoid the storing of capital.

Capital lock-up

Yet the foreign banks’ stipulation that some specific rules are unfair are not unfounded.

In particular, the fact American banks are not required to lock up capital at their American operations – as they generally get freely distribute capital across their firms as a whole – puts European banks at a significant disadvantage.

The American banks also don’t have to launch a holding company for their domestic activities, theoretically avoiding the associated restructuring costs.

Supporters of the Dodd-Frank-based rules however, respond that by having to hold roughly the same amount of capital as their American counterparts, it will remove a massive advantage the foreign banks have too long enjoyed.

One looming question however is if – and how – European banks will respond to the new rules.

This could potentially take the form of legislation requiring American banks to store capital at their overseas operations.

Yet it is likely the Americans, with their generally higher levels of capital, will be able to handle such a change.

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