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October 3, 2022

Credit Suisse’s Deterioration Highlights the Failure of the Federal Reserve to Properly Regulate Foreign Banks Operating in the US

WASHINGTON, D.C.—Dennis Kelleher, President and CEO of Better Markets, issued the following statement upon the significant deterioration of the financial condition of Credit Suisse that has brought it close to failure:

“As the financial condition of Credit Suisse continues to deteriorate, raising questions of whether it will collapse, the world and U.S. taxpayers should be deeply worried as multiple, simultaneous shocks shake the foundations of economies worldwide.  Credit Suisse is a global, systemically significant, too-big-to-fail bank that operates in the U.S. and is deeply interconnected throughout the global financial system.  Its failure would have widespread and largely unknown repercussions from the inconvenient to the possibly catastrophic.

“That is due, in part, to the failure of the Federal Reserve to properly regulate the activities of foreign banks that have U.S.-based operations.  The U.S. has a largely ineffective regulatory framework with gaping loopholes that fail to include some of even the most basic safety and soundness requirements, which incentivizes regulatory arbitrage. As a result, the U.S. financial system and economy are needlessly threatened.

“An effective and appropriate regulatory framework for large foreign banks that covers all of their U.S.-based affiliates should have been established when the Fed set up so-called U.S.-based intermediate holding companies (‘IHCs’) that they regulate. Instead, U.S.-based branches of foreign banks (which are not consolidated within the IHC) face significantly weaker standards than the IHC, remarkably including no specific capital requirements in the U.S. Furthermore, the branches have significantly weaker liquidity requirements. This has resulted in many foreign banks – including in particular Credit Suisse – engaging in regulatory arbitrage by shifting large amounts of assets from their IHCs to their branches, entities that are entirely reliant on the resources of their foreign-based parent companies. The 2008 financial collapse proved that these resources are not available in periods of stress, which is why the U.S. bailed out so many foreign banks operating in the U.S. The Fed should have stopped that long ago.

“As is well-known, risks in the global financial system that materialize elsewhere easily end up becoming risks here in the U.S. and threaten our financial system and economy. Those risks are amplified by the unprecedented fiscal and monetary policies attempting to address the many unexpected shocks from the pandemic and war.  The Fed must see Credit Suisse as a warning sign and improve the regulatory framework for large foreign banks and all banks to ensure that the American financial system and economy are properly protected.”

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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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