US lawyers have warned the Volcker Rule may prompt foreign banks to exit the US.
The Volcker Rule was originally proposed to prevent a repeat of 2008. At its heart is a rule banning US banks from proprietary trading, ensuring that US banks wouldn’t take excessive risks with US taxpayer money in the form of deposit insurance or other US government support.
All foreign banks with a branch in the US are subject to the Volcker Rule, resulting in onerous compliance issues. US lawyers have questioned the regulation's relevance to foreign banks and warned the Rule could foreshadow their exit from US markets.
At IFLR’s 2012 Asia Capital Markets Forum, Latham & Watkins’ New York partner Alan Avery said that although there was an exemption for foreign banks’ activity without a US nexus, the standards were still unclear.
Moreover Avery noted that US regulators seem reluctant to broaden exemptions for foreign banks because of complaints from large US banks: they may have a competitive disadvantage if non-US banks aren’t subject to the rules.
Living wills
Under Dodd-Frank section 165(d), all banks with $50 billion of assets worldwide and a US branch must write and submit living wills to US regulations.
The rule heavily impacts foreign banks: although only 30 US banks must write living wills, 90 to 100 foreign banks – many of which have limited operations in the US – must also submit living wills.
However the living will disclosures are difficult for foreign banks that may not be accustomed to the presumption of public disclosure under US law.
Avery explained that living wills involve a bank’s family secrets: what they would jettison first and what’s most important, among other things.
“This information is very valuable and if it’s not handled properly or is creatively pursued by lawyers for parties seeking public disclosure, it could result in a lot of issues,” he added.
But the living wills also don’t take into account government ownership in banks – a practice common outside the US.
Fulfilling the basic premise of the Volcker Rule, the rules prohibit banks from relying on bail-outs by their national government in their US living wills.
Avery said that banks from certain countries were finding this difficult to follow as some banks, such as those in China with significant state ownership, would presumably rely on some form of government support since the government is their largest shareholder.
Why some banks can’t leave the US
Avery said that he had never heard such a high level of discussion across such a large number of foreign banks about whether they should remain in the US, as he had done following the implementation of the Volcker Rule and the Dodd-Frank Act.
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Latham & Watkins’
Alan Avery |
“I doubt that Volcker alone will lead to a mass exodus, but banks are beginning to conduct cost-benefit analyses to determine whether it’s worth maintaining a presence in the US," he said.
However, echoing concerns from Asian counsel, Avery said that it might be difficult for banks from certain foreign jurisdictions to return to the US if they were to decide to leave.
Under the 1991 Foreign Bank Supervision Enhancement Act (FBSEA), a foreign bank’s home country must meet Comprehensive Consolidated Supervision (CCS) standards, as determined by the Federal Reserve. But banks whose home countries did not meet the CCS standards at the time were grandfathered in.
“If a country doesn’t have a CSS determination, it means that if it leaves the US, it’s likely not coming back – at least in the near term,” Avery said.
Although traditional players such as Australia, Taiwan, Hong Kong, Korea and Japan have long had CCS approval – and China received its CCS approval in early 2012 – banks from established Southeast Asian markets such as Singapore, Malaysia, Thailand and Indonesia would not be able to return to the US if they were to leave.
Another region that would suffer would be Latin America, which has few countries with CCS determinations. Of course countries can pursue a CCS determination, but the process is a lengthy one.
Related links:
Banking sector reform: a definitive guide to the latest developments www.iflr.com/Article/3107360/Search/Results/Banking-sector-reform-a-definitive-guide-to-the-latest.html?PageId=201730&Keywords=volcker&OrderType=1
How Basel III will limit Chinese bank financing http://www.iflr.com/Article/3113603/Lending/How-Basel-III-will-limit-Chinese-bank-financing.html
Why Dodd-Frank extraterritoriality is fundamentally flawed http://www.iflr.com/Article/3084114/Search/Results/Why-Dodd-Frank-extraterritoriality-is-fundamentally-flawed.html?PageId=201730&Keywords=volcker&OrderType=1&PageMove=2
What ICBC’s approval means for China-US banking http://www.iflr.com/Article/3029944/What-ICBCs-approval-means-for-China-US-banking.html