After the cliff

New regulations in 2013 could lead global banks to retreat to their home markets

December 5, 2012
December 5, 2012

A new round of legal statutes is coming in 2013 that could motivate global, multinational banks to retreat and focus on their home markets. Following up on the financial crises, governments in the US and Europe have been considering legislation that could pose hurdles for foreign banks.

Dodd-Frank in the US offers a prime example. Section 165 of the Dodd-Frank Act allows the Federal Reserve’s Board of Governors to impose capital requirements and liquidity provisions on US outlets of foreign banks. Recent statements from Fed governor Daniel Tarullo suggest that the US central bank will enforce the same liquidity provisions and contingency planning procedures on foreign banks as it does on US banks. If foreign banks want to stay in the US, this could force them to reshuffle loads of cash, or simply drop many of their banking operations altogether.

The still-to-be-enacted provisions of Dodd-Frank should come back into focus in 2013 after lawmakers resolve political gridlock around the so-called fiscal cliff and implement new goals stemming from the Basel III global regulatory framework for banks.

This isn’t just the case in the US. As Christine Harper and Yalman Onaran at Bloomberg report,

The UK and Switzerland also have proposed banking and capital rules designed to protect their national interests…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.”

To some extent, the “balkanization” of the global banking industry is already occurring organically. Spurred by rising capital requirements that are a feature of the Basel III agreements, banks have been divesting assets in foreign countries in an attempt to raise capital. That’s also the case in Europe, where a deteriorating economy and a push towards deleveraging have banks selling off foreign holdings left and right. Write Morgan Stanley European economists:

Our observations of the interbank market suggest that banks’ willingness to lend to each other within the Euro Area has fallen significantly this year, with peripheral and core systems alike behaving in unison on the whole. Only German and Netherlands interbank deposit taking has been marginally positive YTD.

We remain cautious that the ongoing stress in bank funding markets, notwithstanding OMT, financial protectionism and tougher regulations, will continue to drive the balkanisation of European banking markets. We think that this will have implications for the cost and availability of credit across the Euro Area, with the southern belt being the most acutely affected and thus further impacting economic growth.

In some cases, fewer instances of banks reaching across borders could cut down on the sums of cash dedicated to investment in specific countries. It could also spell the rise of non-bank financial institutions like private equity firms who can more easily avoid regulation. They’ve already been stepping into new roles, like funding European infrastructure. For better or worse, the winds of change are blowing for the banking sector.

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