The Securities Industry and Financial Markets Association (SIFMA) expressed concerns about proposals by the federal regulators to revise the prudential standards for U.S. operations of foreign banks.
In a comment letter, SIFMA officials said the proposals would create an unlevel playing field and reduce the diversity and depth of U.S. markets.
“Capital markets fuel the U.S. economy, providing 67 percent of funding for economic activity and facilitating the transfer of funds from those who seek a return on their assets to those who need capital and credit to grow,” the letter stated. “FBOs play an important role in the U.S. capital markets. Yet, enhanced prudential standards have limited the extent to which FBOs are willing or able to serve these important functions in our capital markets and economy.”
SIFMA cited research that said that broker-dealer assets of these foreign banking organizations (FBOs) have declined 52 percent in from 2010 to 2018. Also, FBOs’ market share in investment banking activities decreased from 34 to 24 percent of the top 10 fee revenues generated from underwriting and advisory work over this same period.
“SIFMA acknowledges and appreciates that the proposals would tailor existing enhanced prudential standards in certain limited respects. The proposals would also, however, increase the stringency of liquidity, capital, and other prudential requirements for many FBOs, thereby undermining the regulatory relief the Agencies have sought to achieve,” the letter stated.
SIFMA said the proposals would apply enhanced prudential standards to FBOs using risk-based indicators that disproportionately capture the capital markets activities on which FBOs focus. Further, they would put FBOs at a competitive disadvantage by imposing more stringent enhanced prudential standards on intermediate holding companies (IHCs) of the FBOs.
“As a result of these flaws, the proposals would provide significant incentives for FBOs to continue shrinking their U.S. capital markets businesses, thereby amplifying, rather than easing, the disincentives for FBOs to invest in the United States,” the letter continued. “The proposals would thus operate to the detriment of the U.S. capital markets and the U.S. economy more broadly. Additionally, the proposals’ broadening of prudential standards for FBOs would effectively ring fence liquidity and capital in the United States, risking fragmentation, retaliatory protectionism by home country regulators, and increased systemic risk.”
SIFMA recommends revising the risk-based indicators and their operation to avoid targeting capital markets and other common FBO activities and to better align the indicators with actual risk. They also suggest applying enhanced prudential standards to the IHCs based on its own footprint and reducing compliance obligations that do not serve specific purposes under the proposals’ framework.
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