The U.S. operations of foreign banks have become both more resilient and more integral to U.S. economic activity during the past decade. In this article, we report the current size of capital buffers of foreign banks operating in the U.S., their holdings of high-quality liquid assets, trends in the degree of resilience of U.S. broker-dealer subsidiaries of foreign banks, and the amount of net borrowing of branches and agencies of foreign banks from their parent companies. Our results indicate that U.S. operations of foreign banks are extremely resilient, have sizable capital buffers, and provide a key source of funding for U.S. economic growth.1
Figure 1 below shows that foreign banks operating in the U.S. are extremely well capitalized.
The two bars in the chart depict the amount of excess capital of foreign-owned subsidiary banks in the U.S. and domestic banks relative to risk-weighted assets. The amount of excess capital is defined as the maximum amount of capital those banks could pay out without breaching any of the existing capital requirements.2 It is equivalent to banks’ own capital buffers above regulatory requirements. The bar on the left shows the capital buffer of foreign banks under the current set of capital requirements, and the bar on the right shows the capital buffer of domestic banks. The capital buffer of foreign-owned subsidiary banks operating in the U.S. and subject to the U.S. stress tests is equal to 2.8% of risk-weighted assets, while the capital buffer of domestic-owned U.S. banks is 0.6% of risk-weighted assets.
On the liquidity front, the U.S. operations of foreign banks also hold a sizable stock of high-quality liquid assets (HQLA). As a result of Basel III liquidity requirements, banks are required to hold liquid assets that can be easily liquidated if a financial crisis were to occur. These large stockpiles of highly liquid assets make fire sales of illiquid assets much less likely to occur, thereby decreasing the potential magnitude of bank losses during a crisis. Although data on holdings of HQLA are not directly available on regulatory disclosures (except for the largest U.S. banks), we constructed a proxy for HQLA using data from the regulatory FR Y-9C forms.3 The HQLA proxy is defined as the sum of level 1 and level 2A assets. Level 1 assets include reserve balances, Treasury securities, mortgage-backed securities (MBS) guaranteed by Ginnie Mae, and agency debt that is explicitly guaranteed by the full faith and credit of the U.S. government. Level 2A assets comprise government-sponsored enterprise (GSE) debt, GSE MBS, and GSE commercial MBS. Level 2A assets are subject to a haircut. As shown in Figure 2, the ratio of HQLA to total assets is about 16% for foreign-owned subsidiary banks operating in the U.S.
It is difficult to assess how current capital and liquidity levels compare with the period before the 2007–2009 financial crisis. The concept of U.S. intermediate holding companies (IHCs) is relatively new, so it is a cumbersome task to estimate a consistent time series for capital and HQLA levels of IHCs prior to 2016. However, there is some historical data that is readily accessible on the levels of capital and liquidity of U.S. broker-dealer subsidiaries of foreign banks.4 As shown in Figure 3, U.S. broker-dealers of foreign banks increased their resilience significantly during the past 11 years. Specifically, the broker-dealers have roughly tripled their capital relative to total assets and approximately doubled their cash holdings as a proportion of total assets.
Finally, the operations of foreign banks in the U.S. also include the branches and agencies of foreign banks.5 These entities play an important role in the U.S. economy because they hold approximately 20% of all domestic commercial and industrial loans. In the post-crisis period, the assets and liabilities of the branches and agencies have also experienced profound changes. As shown in Figure 4, branches and agencies were borrowing funds in the U.S. and using those funds to lend to their foreign parents until early 2011. Beginning in early 2011, this pattern reversed, and branches and agencies now raise funds abroad to fund loans and other investments in the United States.
In summary, our analysis shows that the U.S. operations of foreign banks are resilient and well positioned to weather the next significant economic downturn. At the same time, the branches and agencies of foreign banks play an important role in funding U.S. businesses.
Disclaimer: The views expressed in this article are those of the authors and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind. n
1 Generally speaking, our analysis focuses on the U.S. operations of the 12 foreign banks that are required by Federal Reserve regulation to maintain a U.S. intermediate holding company. These foreign bank-owned IHCs are: Barclays US LLC; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; BNP Paribas USA, Inc.; Credit Suisse Holdings (USA), Inc; DB USA Corporation; HSBC North America Holdings Inc.; MUFG Americas Holdings Corporation; RBC USA Holdco Corporation; Santander Holdings USA, Inc.; TD Group US Holdings LLC; UBS Americas Holding LLC.
4 We included the following 11 broker-dealers in our sample: Barclays Capital, Inc.; BMO Capital Markets Corporation; BNP Paribas Securities Corporation; Credit Suisse Securities (USA), LLC; Deutsche Bank Securities, Inc.; HSBC Securities (USA), Inc.; MUFG Securities Americas, Inc.; RBC Capital Markets, LLC; RBS Securities, Inc.; UBS Securities, LLC.
5 The sample includes all branches and agencies of foreign banks that are included in the H.8, “Assets and Liabilities of Commercial Banks in the United States.”
Francisco Covas is currently Senior Vice President, Head of Research, at the Bank Policy Institute. Prior to joining BPI, he served as Senior Vice President and Deputy Head of Research at The Clearing House Association, where he helped oversee research and analysis to support the advocacy of the association on behalf of the owner banks.
Prior to joining The Clearing House in 2016, Covas was an assistant director of the Division of Monetary Affairs at the Federal Reserve Board, where he supervised a team focused on the effects of changes in bank regulation on monetary policy, the role of banks in the transmission of monetary policy, and the development and validation of stress-testing models. Prior to that, he was an economist in the Division of Banking Supervision & Regulation and focused on a range of capital, liquidity, and other regulatory initiatives.
Covas earned a Ph.D. in economics from University of California, San Diego, in 2004 and a B.A. from the Universidade Nova de Lisboa, Portugal, in 1997. He has written extensively on liquidity rules, capital regulation, and stress testing and has published research in a wide range of journals, including American Economic Review, Journal of Money Credit and Banking, and International Journal of Forecasting.
Robert Lindgren is an Assistant Vice President and Research Analyst at BPI, where he contributes to economic research on banking policy and regulation. Prior to joining BPI, Lindgren served as a research assistant in areas including asset pricing, education policy, and microeconomic theory. He earned B.A. degrees in mathematical economics and philosophy from Temple University.
Myya McGregory is an Assistant Vice President and Research Analyst at BPI, where she supports research on the economic implications of banking regulations. Prior to joining BPI and after obtaining her B.A. in economics and chemistry from Williams College, McGregory worked in a variety of roles on custom research projects encompassing topics that ranged from global economic development to local government policy.