Domesticating Foreign Finance

Abstract

More than a decade after the 2008 financial crisis, U.S. policymakers still have not adequately addressed one of the primary causes of the crash: foreign banks. When foreign banks first entered the United States fifty years ago, they specialized in traditional banking products like loans and deposit accounts. Over time, however, foreign banks shifted to a riskier strategy focused on speculative capital markets investments and fueled by volatile short-term debt. This novel business model created vulnerabilities for the U.S. financial system, as became clear when Deutsche Bank, Barclays, UBS, and other foreign banks accelerated the 2008 crisis.

This Article contends that while foreign banks’ role in the U.S. financial system has changed dramatically over time, the U.S. regulatory framework has not kept pace. After the financial crisis, policymakers tried to rein in foreign banks by regulating some of their U.S. offices directly, rather than deferring to home country authorities. Foreign banks, however, have largely evaded these reforms by shifting billions of dollars in assets to lightly-regulated U.S. branches — a classic case of regulatory arbitrage. This Article asserts that foreign banks continue to pose risks to the U.S. financial system, threatening a recurrence of the Great Recession. Accordingly, this Article recommends an alternative regulatory approach — namely, mandatory subsidiarization of foreign bank branches — that would better safeguard foreign banks’ U.S. operations, consistent with longstanding international regulatory norms.

Keywords: Foreign Banks, Foreign Branches, Intermediate Holding Companies, Financial Regulation, Financial Crises, International Banking Act, Foreign Bank Supervision Enhancement Act, Dodd-Frank Act