Royal Bank of Scotland

Banking giants find big is no longer beautiful

Stricter capital rules mean that it will cost them more to have operations in different countries

PUBLISHED : Thursday, 06 December, 2012, 12:00am
UPDATED : Thursday, 06 December, 2012, 3:16am

Global banking, a model promoted for more than 30 years by financial conglomerates cobbled together through cross-border mergers, is colliding with the post-crisis reality of stricter national regulation.

Daniel Tarullo, the Federal Reserve governor responsible for bank supervision, announced plans last week to impose the same capital and liquidity requirements on the US operations of foreign lenders as on domestic companies.

Britain and Switzerland also have proposed banking and capital rules designed to protect their national interests.

Regulators want to curtail risks exposed after global banks such as New York-based Citigroup, Edinburgh-based Royal Bank of Scotland and Zurich-based UBS took bailouts in the biggest financial crisis since the Great Depression.

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.

"You'll see global banks jettison divisions abroad and at home."

UBS, Citigroup and RBS are among banks doing just that, reversing decades of expansion throughout the world.

UBS said in October that it plans to cut about 10,000 jobs and retreat from most fixed-income trading after Switzerland set capital rules for its biggest lenders that are almost double minimums agreed to by the Basel Committee on Banking Supervision.

Citigroup and Bank of America, the two US lenders that received the most aid during the financial crisis, have been selling foreign operations and scaling back businesses.

RBS, majority owned by the British government since being bailed out in 2008, said it would close or sell its cash-equities, mergers-advisory and equity-capital-markets divisions.

The Fed's plan is part of a trend by national regulators since the crisis to ensure they can protect local depositors and creditors of global financial institutions in the event of a failure.

Even organisations such as the International Monetary Fund and the Basel committee, which have sought to foster global finance, have had to adapt their approaches or have been overruled by national interests.

"Globalisation of financial markets took us decades to build, it doesn't look like it's going to take us decades to reverse the trend, does it?" Charles Dallara, managing director of the Institute of International Finance, which represents more than 450 financial institutions, said in New York the day after Tarullo's speech.

Switzerland, whose banking system is five times the size of the nation's economy, proposed in 2010 to give priority to the domestic units of its two largest lenders if they failed, indicating that overseas businesses might be left on their own.

In Britain, where banks' assets are also five times gross domestic product, regulators have said they plan to require lenders based in Britain to insulate domestic consumer-banking businesses from investment-banking and foreign operations.

"The likelihood that some home-country governments of significant international firms will backstop their banks' foreign operations in a crisis appears to have diminished," Tarullo said.

"It also appears that constraints have been placed on the ability of the home offices of some large international banks to provide support to their foreign operations." Tarullo's plan follows moves by Frankfurt-based Deutsche Bank and London-based Barclays to discard their status as US bank holding companies, thereby evading local capital rules.

Meeting multiple local requirements could mean global banks will have to maintain more capital than currently dictated by their home countries, according to Kim Olson, a principal at Deloitte & Touche in New York and a former bank supervisor.

"This new standard is going to be very costly for foreign banks," Olson said. "Some will have to raise additional capital just to comply with US rules."