A recent announcement by the Federal Reserve may now mean foreign banks could begin considering cutting their exposure in the U.S. -- which could have wide ranging impacts to both consumers and investors.
Source: Flickr / cliff1066™.
On February 18th, the Federal Reserve announced it approved a rule that would strengthen the supervision and regulation of banks with more than $50 billion in assets. Yet it made the critical distinction by noting it would not limit these rules to banks headquartered in the U.S., but its latest regulation would include any foreign banks -- like Toronto-Dominion Bank (TD 0.22%), Mitsubishi UFJ Financial (NYSE: MTU), Bank of Montreal (BMO +0.28%) and others.
The release highlighted "for foreign financial institutions, the final rule recognizes that the U.S. operations of foreign banking organizations have become more complex, interconnected, and concentrated in recent years."
And as a result of these increasingly complex operations, the Federal Reserve will now require foreign banks to establish separate holding companies to ensure in the event of a financial crisis, the operations of the foreign banks in the U.S. would be well insulated.
The big players
According to the latest data from the FDIC, the banks with the largest presence in the U.S. in the form of deposits that aren't headquartered in the United States are available in the table below:
|
Bank |
2013 Deposits ($billions) |
|---|---|
|
TD Bank |
$192.8 |
|
HSBC |
$101.5 |
|
Mitsubishi UFJ Financial |
$77.6 |
|
Bank Of Montreal |
$69.8 |
|
BNP Paribas |
$58.7 |
Source: Federal Deposit Insurance Corporation
Mitsubishi actually announced it would be actively working to change the underlying legal structure of its banking operations by the beginning of July. This move would in turn allow it to be within the parameters of the new regulations by the beginning of well before the January 1, 2015 deadline.
Source: Flickr / 401(K) 2013.
The rising costs
Yet as SNL Financial reports, the actions of Mitsubishi are seemingly unique. SNL noted the newest standards required by the Federal Reserve "could force foreign banks with U.S. operations to reconsider their American footprints."
The reason behind this shift is the new regulations by the Federal Reserve requiring a new holding company would result in added costs in the form of additional administrative and regulatory expenses. Yet the problems extend beyond just the costs, as the new entity will in turn have to simply hold capital and funds that cannot be used in operations to earn profits.
It is widely speculated this move will not hurt the banks with the large retail and deposit bases mentioned earlier -- but instead have a greater impact on those with significant investment banking and trading operations like Barclays and Deutsche Bank. Questions have begun to circulate about whether or not some of these larger banks will in turn look to shift their operations over to areas in Asia or the Eurozone, where the regulatory burdens will be less strict.
The remaining question
Although the banks mentioned earlier have a significant presence in the less risky retail banking landscape, they too will be subject to these heightened regulations. And while it is still many months away, Bank of Montreal and TD Bank fall well behind the others from a capital standpoint:
Source: SNL Financial / FDIC.
It will be curious if this heightened regulation results in these two -- or perhaps any of the 17 others that would be subject to the regulation -- to in turn trim their U.S. banking operations. This could result in opportunities for banks in the U.S. to swoop in and either buy, or simply take the market share of the banks that decide to exit the U.S.
While Federal regulation is not the most riveting thing in the banking industry, this is one that could have wide ranging impacts across the globe.
