Long time ago

by Russ Roberts on February 18, 2011

in Financial Markets

I am shocked to discover that banks are finding ways to avoid provisions in the Dodd-Frank bill (HT: Tim Townsend)

Some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank’s main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

“It’s just not worth it to have all that capital trapped” in the holding company, said a New York lawyer who is advising banks on how to restructure.

The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world.

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.

The last six words of that last sentence are what make this even funnier. Sure, if it wouldn’t make the financial system safer, why crimp those lovely profits. But usually there’s a tradeoff between profits and safety–more leverage means more profits and LESS safety. I know it’s awkward to point out but I think there was a period in US history where leverage led to really high profits but eventually the whole system got in big trouble. Oh yeah, I remember, the financial crisis of 2008. But that was a long time ago. So no reason to keep capital just sitting around that could make profits.

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