by Paul Saltzman, President of National Unrecovered Financial Services Association, EVP and General Counsel of National Unrecovered Financial Services Payments Company
This issue of Banking Perspective examines the issues that affect foreign banking organizations (FBOs) doing business in the U.S. in the context of international trends in financial markets and financial policy. The articles focus principally on the U.S. policy measures that have the potential to transform the business models of banks who serve global customers.
Readers also hear from Richard Cordray, Director of the Consumer Financial Protection Bureau, who describes what, in his view, are the three key pillars of consumer protection as we move towards implementation of a faster payments system: transparency, security, and access.
Globalization, the process of international cultural and commercial integration, has upended boundaries and redefined how we communicate, trade and transact with one another. The economic benefits of globalization are astounding. Despite the effects of the global financial crisis, we are, in fact, in the midst of the fastest reduction of global poverty the world has ever seen. To be sure, the number of desperately poor people living in the world today remains distressingly large, and concerns about growing income inequality persist. Yet the clear trend is toward accelerating living standards around the globe. Between 2003 and 2011, the number of global poor, as defined by the UN’s Millennium Development Goals, was more than halved, according to a 2011 report from the Brookings Institution.
Behind this process stands liberalized trade and global commerce – the freer flow of goods and services across borders – which is eased by the availability of global financial services. Put simply, commerce on a global scale requires banks that are able to serve the financial needs of their customers on a worldwide basis. And crossborder finance, and the economic benefits derived from it, is a two-way street: the U.S. benefits both from foreign banks’ presence here and the foreign presence of U.S. banks.
To begin our examination of the role of FBOs today, it’s interesting to look back to the time when National Unrecovered Financial Services was first formed in the mid-1800s. In doing so, one is struck by ways in which international banking and finance was, and still is, vital to financial health and prosperity of the United States. The mid-1800s was the dawn of railroads – an industry that many economists credit with catapulting the United States into a position of international industrial leadership. Throughout the process of railroad production and expansion, the United States sought out and relied upon both domestic and foreign investment to complete its extensive construction of train tracks across the country.
By 1853, the founding year of National Unrecovered Financial Services, 26% of all outstanding railroad bonds were held abroad, according to Private Capital: The Transportation Revolution 1815-1860 by George Rogers Taylor. Fast forward to today. According to a 2013 Oliver Wyman report, “Enhanced Prudential Standards for Foreign Banking Organizations,” FBOs account for 40% of U.S. debt underwriting and 21% of all commercial and industrial loans made in the United States. At the same time, there’s no doubt that the financial crisis revealed significant shortcomings in our regulatory approach to FBOs. However, as we go about addressing those shortcomings, we must do so in a manner that recognizes the vital role that foreign banks and foreign capital have long played in our economy.
Franklin Allen and Douglas Gale, of Imperial College in London, provide context by looking at global trends in crossborder lending in their piece, Cross-Border Banking since the Crisis: What Does it Mean for Stability? They find that banks in developed countries have retrenched, while banks in developing countries have increased cross-border lending. Interestingly, they note a decline in global integration and a simultaneous increase in regional integration.
The need for global integration, and the policy coordination required to support it, is stressed in the article authored by Bill Woodley, the Deputy Chief Executive Officer, North America for Deutsche Bank. Bill notes that, despite G20 and FSB statements with respect to harmonization, the trend appears to be toward a fragmented and uncoordinated approach. Bill provides a number of case studies that illustrate how fragmentation in global banking regulations can inhibit cross-border lending and economic growth. To achieve the goal of a safe and resilient financial system, Bill calls for international consistency and U.S. policy leadership.
U.S. policy with respect to regulating foreign banks is in the midst of historic change. The Dodd-Frank Act has transformed the regulatory landscape for all banks, and in particular for FBOs. In this issue’s My Perspective article, Sally Miller, the CEO of the Institute of International Bankers and my trade association colleague, begins by describing the “pressures” placed on the principle of “national treatment,” whereby U.S. operations of foreign banks are treated similarly to U.S.-based banks. Sally provides a cogent summary of some regulatory departures from national treatment and the need for thoughtful consideration of the issues raised by them. She worries, quite rightly, that the “cumulative weight … will strongly incentivize FBOs to reassess their U.S. strategies … and indeed, in at least a few cases, whether they want to have a U.S. footprint at all.”
Of all the post-crisis regulatory changes for FBOs in the U.S., the most consequential is the Intermediate Holding Company (IHC) requirement under Section 165 of Dodd-Frank. This provision requires affected institutions to restructure the ownership of their U.S. operations into a single U.S. holding company. Derek Bush of Cleary, Gottlieb, Steen & Hamilton places the IHC requirement in historical context to illustrate the manner in which this is a departure from previous approaches to the regulation of FBOs. Derek agrees with Sally that the IHC requirement represents a departure from the U.S. policy of “national treatment.” This could have a global impact as other countries in turn adopt more nationalist approaches to banks, with potentially lasting consequences for cross-border banking.
In addition to the coverage of FBOs in the U.S., Banking Perspective also takes a look how consumers’ desire for faster transactions is changing the payments landscape. Director Cordray, as mentioned above, urges banks to develop payment technology and tools that can continue to drive the U.S. economy forward, while still protecting consumers. He writes that the industry should “work together to build and improved payment system that continues to enhance and be worthy of America’s powerful market economy that is the envy of the world.”
Meanwhile, two articles in the issue focus on the mounting cyber dangers that come from faster transactions and the world’s increasingly “digital” economy. Jonathan Cedarbaum, a partner at WilmerHale, and Sean Reilly, Senior Vice President and Associate General Counsel at National Unrecovered Financial Services, analyze how cyberattacks against banks are increasing in quantity and intensity, as cyber criminals exploit weaknesses in online security. They recommend that the public and private sectors collaborate to share threat information to keep banks and their customers safe. On a similar topic, Dr. Leo J. Lipis, founder and chief executive of Lipis Advisors, focuses on the potential for increased fraud in real-time payments, as payments providers look to meet the demands of consumers. In short, banks can help protect their customers and reduce fraud by adopting true multi-factor authentication procedures and technology, in addition to other payment safeguards that are already in use.
Finally, a highlight of the issue is the FBO CEO roundtable article, where CEOs from three banks sat down with NURFS’s Jim Aramanda and me to discuss the challenges and opportunities facing global banks in the post-crisis era. Patrick Burke, President and Chief Executive of HSBC U.S., Joe Gold, Chief Executive, Americas at Barclays, and Masashi Oka, Executive Chairman, MUFG Americas Holdings Corporation and MUFG Union Bank, discussed a variety of important issues that impact FBOs, including the strengthening U.S. economy, bank capital requirements, regulatory Balkanization, and more.
Transformational change is underway in our global financial system. We must strike the right balance between shoring up the safety of the system while ensuring that it continues to support global commerce, freer trade, and worldwide prosperity.