Many foreign banks with large U.S. operations have reduced their U.S.-held assets as a result of stricter capital requirements imposed by the national regulator but this has not hurt their market-making capacity, the Bank for International Settlements said in its quarterly review March 11.
The recent spike in volatility in the U.S. bond market drew attention to large banks' role in corporate bond trading. "Any shrinkage of trading books by foreign-owned primary dealers could worsen the perceived disproportion between the huge stock of U.S. corporate bonds outstanding and dealer inventory," the BIS said.
However, the BIS review found while non-U.S. banks with large broker/dealer operations in the U.S. have indeed cut back on local trading assets, they have kept their agency and corporate bond holdings almost unchanged.
In early 2014, the Federal Reserve required foreign banks with U.S. non-branch or agency units with more than $50 billion of assets to bundle all of their U.S. operations into one U.S.-based intermediate holding company, or IHC. The IHC rule was the final part of the Dodd-Frank Act, a regulatory framework aimed to enhance prudential standards for banks operating in the U.S.
In February 2014, the Federal Reserve issued an "illustrative list" of 17 foreign banks which may fall under the new rule and would have to set up an IHC by July 1, 2016. Among the European lenders on the list were Banco Santander SA, Barclays Plc, Banco Bilbao Vizcaya Argentaria SA, BNP Paribas SA, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Natixis, Rabobank, Royal Bank of Scotland Group Plc, Société Générale SA and UBS Group AG.
Five banks, including RBS and SocGen, reduced their total U.S.-held assets before July 1, 2015, the date the Federal Reserve used as a reference to determine if banks fall under the new IHC rule.
Deutsche Bank established an IHC after substantially reducing its U.S.-held assets to $203 billion as of Sept. 30, 2016, compared to $355 billion at 2011-end, according to BIS data. Other banks may have done the same but the data to establish whether they did is insufficient, the BIS said.
All of the banks which had to establish IHCs in the U.S. have subsequently reduced their local assets by either transferring them offshore or shifting them to U.S. branches, the BIS found.
Newly established IHCs reduced their total assets by some $100 billion to about $850 billion on average between the third quarter of 2016 and the third quarter of 2017. In comparison, foreign banks which did not need to establish new IHCs kept their assets stable at some $1.3 billion in the same period, the BIS said.
Although the cut in trading assets by new IHCs reached some $50 billion, it left the banks' agency and corporate bond holdings almost untouched, the BIS said.
