Domesticating foreign finance

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 in the mid-twentieth century, they provided much-needed credit to U.S. borrowers. Over time, however, foreign banks shifted away from their traditional lending focus to a riskier, capital markets-oriented strategy. This business model—fueled by volatile short-term debt—created vulnerabilities for the U.S. financial system, as became clear when foreign banks including Deutsche Bank, Barclays, and UBS accelerated the 2008 crisis.

Professor Kress 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 supervisors. 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. Professor Kress asserts that foreign banks continue to pose risks to the U.S. financial system, threatening a recurrence of the Great Recession. Accordingly, Professor Kress 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.

• Economics and finance
• International Policy
• Jeremy Kress