SIFMA today submitted comments on proposals by the federal banking agencies to revise the enhanced prudential standards that apply to the U.S. operations of foreign banks, known as foreign banking organizations (FBOs). The letter expresses concern the proposals would create an unlevel playing field and reduce the diversity and depth of U.S. markets.
“Capital markets fuel the U.S. economy, providing 67 percent of funding for economic activity and facilitating the transfer of funds from those who seek a return on their assets to those who need capital and credit to grow,” the letter states. “FBOs play an important role in the U.S. capital markets. Yet, enhanced prudential standards have limited the extent to which FBOs are willing or able to serve these important functions in our capital markets and economy.”
Recent SIFMA research demonstrates the breadth of the problem, as the letter notes:
- FBO broker-dealer assets declined 52 percent in the aggregate from 2010 to 2018
- Over the same period, FBOs’ market share in investment banking activities decreased by nearly almost one-third, from 34 to 24 percent of top 10 fee revenues generated from underwriting and advisory work
“SIFMA acknowledges and appreciates that the proposals would tailor existing enhanced prudential standards in certain limited respects. The proposals would also, however, increase the stringency of liquidity, capital, and other prudential requirements for many FBOs, thereby undermining the regulatory relief the Agencies have sought to achieve.”
Fundamental flaws in the way the Agencies structured the proposals results in a broadening of enhanced prudential standards which would undercut the competitiveness of the U.S. capital markets to the detriment of the U.S. economy. Specifically:
- The proposals would apply enhanced prudential standards to FBOs using risk-based indicators that disproportionately capture the capital markets activities on which FBOs focus in the United States. The Proposals would put FBOs squarely at a competitive disadvantage, contrary to the Dodd-Frank Act’s requirement.
- The proposals would apply certain enhanced prudential standards to an FBO’s U.S. intermediate holding company (IHC) based on the footprint of the FBO’s entire combined U.S. operations. In this way, the proposals would impose more stringent enhanced prudential standards on IHCs than on comparably-sized domestic bank holding companies.
“As a result of these flaws, the proposals would provide significant incentives for FBOs to continue shrinking their U.S. capital markets businesses, thereby amplifying, rather than easing, the disincentives for FBOs to invest in the United States,” the letter continues. “The proposals would thus operate to the detriment of the U.S. capital markets and the U.S. economy more broadly. Additionally, the proposals’ broadening of prudential standards for FBOs would effectively ring fence liquidity and capital in the United States, risking fragmentation, retaliatory protectionism by home country regulators, and increased systemic risk.”
The letter also sets forth SIFMA’s specific recommendations for how to revise the proposals. The recommendations center around four goals aimed at alleviating the problem of FBOs decreasing their investment in the United States and exiting capital markets businesses:
- revising the risk-based indicators and their operation to avoid targeting capital markets and other common FBO activities and to better align the indicators with actual risk, such as by excluding interaffiliate transactions from each of the risk-based indicators;
- preventing global fragmentation by revising the proposed application of heightened liquidity and expanded capital requirements to IHCs, and not advancing a proposal to subject U.S. branch and agency networks to standardized liquidity requirements;
- applying enhanced prudential standards to an IHC based on its own footprint rather than the CUSO footprint; and
- reducing compliance obligations that do not serve specific purposes under the Proposals’ categorization framework and providing other transitional relief.
The letter further details these points and is available here.
Earlier this year SIFMA published research on the importance of FBOs to U.S. Capital Markets, which can be found here.
