The U.S. operations of foreign banks have become both more resilient and more integral to U.S. economic activity over the past decade. In this blog post, 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 parents. 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.
The figure 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 (see here for details). It is equivalent to banks’ own capital buffers above regulatory requirements. The bar to the left shows the capital buffer of foreign banks under the current set of capital requirements and the bar to 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 percent of risk-weighted assets, while the capital buffer of domestic-owned U.S. banks is 0.6 percent 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 (see herefor a definition). 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 the chart below, the ratio of HQLA to total assets is about 16 percent for foreign-owned subsidiary banks operating in the U.S.
It is difficult to assess how current capital and liquidity levels compare to the period prior to 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. As shown in the chart below, U.S. broker-dealers of foreign banks increased their resilience significantly over 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.
Lastly, the operations of foreign banks in the U.S. also include the branches and agencies of foreign banks. These entities play an important role in the U.S. economy as they hold approximately 20 percent 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 the chart below, 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.
Generally speaking, our analysis focuses on the U.S. operations of the twelve foreign banks that are required by Federal Reserve regulation to maintain a U.S. intermediate holding company (IHC). 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.
We included the following eleven 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.
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.”