Royal Bank of Scotland has become the latest overseas bank to shrink its business in the US after announcing it would cut its mortgage trading business by two-thirds.
The London-based bank will eliminate hundreds of jobs over the course of two years as part of an effort to reduce its assets ahead of new rules set out by the Federal Reserve, according to people familiar with an internal announcement made by RBS on Tuesday.
The move by RBS is the most dramatic effort by a foreign bank to escape new regulations from the Fed. It also follows similar announcements at Barclays and UBS, both of which are shrinking or exiting businesses such as fixed income trading and commodities.
The RBS cuts primarily affect the non-agency mortgage business, and the British bank is expected to retain its securitisation and agency mortgage business.
The Fed has told each foreign broker-dealer with more than $50 billion in assets to set up a separately-capitalized holding company, with its own capital and liquidity requirements, subject to stress tests.
Instead of complying, which a person familiar with the matter would amount to $50 million-$100 million in upfront costs alone, RBS has decided to shrink below the $50 billion threshold.
"As the financial services industry continues to evolve so must RBS's US Corporate & Institutional Banking business," a spokesperson for the bank said in a statement.
"Our ultimate goals are to enhance our client focus and connectivity, simplify our operating model, mitigate risk and reduce cost. We are focused on providing our corporate and institutional clients with world-class capabilities in the sectors and asset classes that are core to our go-forward strategy."
Deutsche Bank and Barclays, as the two biggest foreign investment banks in the US, have been fighting the proposed rule for years. Their operations are likely to be too large to consider shrinking below the Fed's threshold.
Barclays made 11 visits to the Fed since the 2010 US regulatory reforms. In a meeting in October, Barclays produced a presentation, warning that the capital rules for foreign banks were unfair and would have "a significant impact on the effectiveness of US monetary policy." It added that "Europe [was] poised to respond in kind to the US proposal" with retaliatory measures against US banks.
In spite of the entreaties from Barclays and some officials such as Michel Barnier, the European commissioner, the US central bank pushed ahead in March with rules that require higher capital for foreign investment banks, including a stricter "leverage ratio." Barclays argued the application of such a blunt measure of capital was unfair. In one concession that cheered foreign banks, the Fed did grant more time to comply.
Under pressure from these rules and others, Barclays last week announced plans to restructure its investment bank, with 7,000 job losses and the creation of a "bad bank" for assets that are no longer core.
Tushar Morzaria, its chief financial officer, said the slimmed-down core business would be "much better placed" to cope with the US regulator's demands for the bank to establish a separately capitalized holding company for its US business.
He added that the extra capital expected to be freed up by the restructuring would "future-proof the bank against any changes in regulation."
Typically, banks have been able to measure their capital on a global basis, with equity in one country counting against assets in another.
But the Fed is concerned that US subsidiaries of banks with a large trading operation—particularly Barclays and Deutsche—could come unstuck and might come looking for US government support.