Friday, March 04, 2011

Foreign Banks Seek Ways to Avoid U.S. Federal Reserve Regulations on Capital Requirements


Some overseas banks have decided to restructure their U.S. operations to avoid the burdensome requirements of the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The Dodd-Frank Act, which President Obama signed into law on July 21, 2010, is named after the two congressmen who sponsored it—Senator Chris Dodd and Representative Barney Frank. The legislation introduces sweeping changes to U.S. financial regulations to prevent future financial meltdowns.

One of the most important provisions of the Dodd-Frank Act is section 171, or the so-called “Collins” Amendment, which carries the name of its author Senator Susan Collins. The provision subjects all U.S. bank holding companies owned by foreign banks to the same stringent capital requirements applicable to domestic bank holding companies not owned by foreign banks. It is common for foreign banks to use bank holding companies as a way to structure their U.S. operations. Since January 5, 2001, all foreign-owned bank holding companies in the U.S. have enjoyed an exemption from the Federal Reserve’s capital adequacy guidelines. The “Collins” Amendment, however, will effectively end this exemption regime when it takes effect in July 2015.

 Bank executives object to the Dodd-Frank Act, arguing that it forces banks to unnecessarily increase their capital reserves which will lead to a decline in profits without making the financial system safer. United States regulators, however, believe that an increase in the banks’ capital levels will help prevent a repeat of the most recent economic crisis. According to FDIC Chairman Sheila Bair, the Dodd-Frank Act, and particularly the “Collins” Amendment, will ensure that banks maintain sufficient amounts of capital to be able to withstand financial crises without government aid. 

Believing that the “Collins” Amendment is not in its best interest, Barclays PLC, the U.K.-based financial firm, has found a way to circumvent the new capital requirements. The Amendment’s provisions leave Barclays with two choices: (1) inject $12 billion into its U.S. bank holding company to comply with the new capital adequacy requirements; or (2) reduce the bank holding company’s assets to ensure that the current capital reserves are sufficient. Barclays has done neither. Instead, the firm deregistered its U.S. bank holding company and created two new entities. Barclays now conducts its credit card operations in the U.S. under an entity regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and, therefore, needs no additional capital. The other new entity, which operates Barclays’s investment bank business in the U.S., is now regulated by the Securities and Exchange Commission. Through this recent reorganization, Barclays has completely sidestepped the “Collins” Amendment’s capital adequacy provisions. A spokesperson for the company, however, declined to characterize the reorganization as a direct response to the Dodd-Frank Act. Some commentators believe that many other foreign banks, such as Rabobank Groep NV and HSBC Holdings PLC, may follow Barclays’s example.

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