[Text/Observer Network Long Yue]
European banking giants once occupied almost half of the banking industry on Wall Street and were the best on this street. However, after the subprime mortgage crisis, their ambitious era seems to have gone. As the regulatory environment in the United States becomes increasingly strict and negative interest rates in Europe emerge, the dilemma of European banks has also come. The gap between them and Bank of America is gradually setting a "gaps".
In recent years, many European banking giants in dilemma have begun to adjust their businesses and cut costs. At the same time, they are also bypassing the supervision of Wall Street . In the past three years, the four major European investment banks have withdrawn US$280 billion from Wall Street on a large scale.
US Wall Street, New York Stock Exchange Photo: IC photo
html withdraws US$280 billion in 53 to bypass US regulation
According to the Financial Times on the 25th, since 2016, the four major European investment banks - Deutsche Bank (Deutsche Bank), Credit Suisse, UBS Group (UBS) and Barclays (Barclays), have withdrawn US$280 billion from major U.S. holding companies to get their businesses out of US regulation and respond to long-term profit challenges.
In the past three years, these banks have been forced to place some of their business and funds in the United States Intermediate Holding Companies (hereinafter referred to as IHC), which refers to the United States establishing intermediate holding companies for foreign financial institutions. The threshold is that the total assets in the United States exceed US$50 billion and branches are not included in the calculation scope) to comply with US financial supervision.
After the subprime mortgage crisis, the Dodd-Frank Act implemented by Obama stipulates that according to the principle of "national treatment", the Federal Reserve requires foreign banking institutions (FBOs) with US subsidiaries (i.e., Non-Branch, non-branch) in the United States must include their U.S. subsidiaries into an IHC by July 1, 2016. These IHCs must accept strict prudent standards, including passing stress testing, capital planning, etc.
U.S. President Trump After taking office in early 2017, he has vigorously promoted the comprehensive revision of the Dodd-Frank Act, aiming to relax supervision of the finance and banking industries to stimulate the economy, and has started the largest regulatory reshuffle in six years. The amendment bill was passed in May 2018, with one of the amendments raising the $50 billion regulatory threshold to $250 billion. But the bill has not been completely repealed, and restrictions on foreign banking institutions remain.
To bypass regulation, Royal Bank of Scotland even stated that regardless of the threshold for IHC, the scale will be reduced. The IHC system also seems to have caused trouble to the four European banking giants, Deutsche Bank, Credit Suisse UBS and Barclays.
The Financial Times reported that in order to get rid of US regulations, the four banks have reduced their assets in IHC by more than 34% in the three years since the first IHC disclosures were announced.
Among them, this trend is particularly prominent at Deutsche Bank, which cuts its IHC assets from $203 billion to $116.7 billion. Credit Suisse's IHC assets have also dropped significantly by 47%, down $105 billion since 2016. Barclays’ IHC assets have been reduced by relatively small, down $61 billion in the past three years, while UBS’s IHC balance sheet has been reduced by the smallest, at just $25 billion.
The asset changes of the four major European investment banks IHC Figure: Financial Times
It is worth noting that these four major banks are withdrawing IHC assets and reducing their business in the United States while increasing their assets held in their U.S. branches. These assets rely on the capital of their parent companies and are subject to looser supervision in the United States. During the same period, these four major banks generally increased IHC equity, which overall increased their IHC capital by nearly 12%, while higher equity capital and fewer assets combined further lowered banks' returns.
For example, Deutsche Bank increased IHC's equity from US$10.9 billion in September 2016 to US$13.5 billion. During the same period, the bank's major U.S. branches increased assets by $45 billion to $175 billion.
US regulation has become a major obstacle to European banks' business in the United States. An article in the Financial Times analyzed that European banks' efforts to enter Wall Street through "small scale and the use of highly leveraged capital" have been hindered by stricter banking supervision in the United States.
However, regarding this "draft", the latest report from the Financial Times mentioned that critics pointed out that European investment banks' transfer of assets from IHC to branches is a typical "regulatory arbitrage" that will once again put U.S. taxpayers and Fed's facilities at greater risks. Furthermore, European banks should be subject to stricter regulation than their U.S. counterparts, as they have a greater demand for dollar liquidity. After the subprime mortgage crisis, Wall Street financial markets began to change. At the beginning of this century, the "ambition" of European banks such as Deutsche Bank in the United States has gradually shrunk.
"Super pressure" European banks
Reducing their business and funds in the United States may be just one of the microcosms of the dilemma faced by European banks. In addition to the regulatory pressure in the United States, the arrival of the era of negative interest rates in Europe and the uncertain political situation have caused troubles to European banks on multiple fronts.
In the 1980s, European banking giants were the "most beautiful boys" on this street. The first batch of European banks began to launch "attacks" on Wall Street, hoping to become the world's new financial center - Wall Street. They are coming fiercely, almost once evenly matched US investment banks such as Goldman Sachs and Morgan Stanley, but at the time when the subprime mortgage crisis fermented, these European banks began to get into a dilemma.
Data from Dealogic, a financial industry research firm, showed that in 2007, banks in the United States accounted for 46% of global investment banking revenue, while European banks accounted for 39%. But since then, Bank of America's advantages are gradually emerging. By 2018, U.S. investment banks had grown to 52%, while European banks accounted for only 26%.
European investment bank market share declined, Bank of America reversed picture: CNN
European Central Bank's negative interest rate hit European banks' "lifeline business" - deposit business, weakening one of the banks' core profitability. According to the " Wall Street Journal " report on October 31, European banks facing these difficulties are forced to take actions such as cutting costs and adjusting capital, which may make them further lag behind Bank of America.
The report said that Deutsche Bank is arguably the most troubled bank in the world and is undergoing profound changes, it abandoned many of its overseas businesses and focused more on German companies. The bank also announced in July this year that it would lay off about 18,000 employees by 2022, accounting for about one-fifth of its full-time employees. UBS, on the other hand, is committed to reducing costs and comprehensively reforming its structure.
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