Europe’s four biggest investment banks cut $280bn of assets from their main US holding companies in the past three years as they withdrew from Wall Street and moved business away from the glare of regulators.
The dramatic reshaping of the US operations of Deutsche Bank, Credit Suisse, UBS and Barclays shows how the banks are tackling their chronic profitability challenges in the country.
Since 2016, large foreign banks have been forced to move most of their US operations into intermediate holding companies (IHCs) that are independently capitalised and stress-tested against their ability to withstand future crises.
The four European banks have reduced assets in their IHCs by more than 34 per cent in the three years since they first began publishing accounts. At the same time, the amount of capital in the IHCs has increased by almost 12 per cent on average. The combination of higher equity capital and fewer assets further depresses banks’ returns.
Some of the reduction is from the banks shrinking their presence in the US, but much of it is the result of shifting assets into other entities. Assets held in US branches, which rely on their parents’ capital and are subjected to lighter US regulation, increased over the same period.
The trend is particularly stark at Deutsche, which cut assets in the IHC from $203bn to $116.7bn but still had to increase equity in its IHC from $10.9bn in September 2016 to $13.5bn. Assets at Deutsche’s main US branch increased by $45bn, to $175bn, over the same period.
Before the IHC regime, Deutsche was heavily criticised for using complex US structures to run its Wall Street business without any capital cushion.
The bank declined to comment on the changes but a person familiar with the situation said the movement in assets partly reflected “capital optimisation”.
Dennis Kelleher, head of lobby group Better Markets, said: “The issues . . . are very concerning and classic regulatory arbitrage that will once again place US taxpayers and Fed facilities at much greater risk.”
He added that the US regulations “put US taxpayers at risk of bailing out foreign banks”.
The Federal Reserve, which has to approve the movement of most assets from IHC to branches, declined to comment. Its rules specify that some trading activities must be done in the IHC, but gives banks discretion over others, including primary dealing in government bonds.
Assets at Credit Suisse’s IHC are down 47 per cent, or $105bn, since 2016. Credit Suisse has so far been able to reduce equity at its US IHC by just $2.5bn, but a person familiar with the situation said the bank was “working to reduce equity going forward” and hoped to do so primarily by paying dividends to its Swiss parent.
At Barclays, IHC assets have fallen by $61bn in the last three years. The UK bank is more committed to the US than some foreign rivals, partly thanks to its acquisition of the Lehman Brothers business after the 2008 crisis.
Joe McGrath, head of Barclays global banking business, said there was a “very coherent strategy” for growth.
“We have a higher percentage of our business in the US than some of our US competitors do. So the US is critically important to us. It’s almost as if it’s dual-headquartered,” he added.
UBS, which had already made big cuts to its US trading businesses before the new structures were introduced, reported the smallest reduction in its IHC balance sheet between 2016 and 2019, shedding just $25bn.