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Abstract

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 fifty years ago, they specialized in traditional banking products like loans and deposit accounts. Over time, however, many foreign banks shifted to a riskier strategy focused on speculative capital markets investments and fueled by volatile short-term debt. This novel business model created vulnerabilities for the U.S. financial system, as became clear when Deutsche Bank, Barclays, UBS, and other foreign banks accelerated the 2008 crisis. This Article contends that while foreign banks’ role in the U.S. financial system has evolved 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 authorities. Some foreign banks, however, have evaded these reforms by shifting billions of dollars in assets to lightly regulated U.S. branches—a classic case of regulatory arbitrage. This Article asserts that foreign banks continue to pose risks to the U.S. financial system, threatening a recurrence of the Great Recession. Accordingly, this Article recommends an alternative regulatory approach—namely, mandatory subsidiarization of large foreign bank branches—that would better safeguard foreign banks’ U.S. operations while remaining consistent with longstanding international regulatory norms.

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