Correction: An earlier version of this article incorrectly said that Deutsche Bank had given up its status as a U.S. bank holding company. Deutsche Bank’s U.S. subsidiary is still a bank holding company. The article has been updated.
When Deutsche Bank reorganized its U.S. operations this week in response to new banking rules, it was the latest manifestation of what both supporters and opponents of the Dodd-Frank regulatory overhaul predicted would happen: The law has pushed big banks to reorganize — to comply with the new rules on Wall Street, as well as to avoid their impact.
Many of the most dramatic changes under Dodd-Frank won’t take effect for months or years. But the biggest financial firms in the United States have already started overhauling and reshuffling their operations in anticipation of the new regulatory regime. Deutsche Bank and London-based Barclays have moved their commercial banks from their U.S. subsidiaries into their global firms to avoid new, more stringent capital requirements — even though they don’t go into effect until July 2015.
Domestic banks have been adapting to the new regulatory regime, as well, slimming down their operations in terms of “the sheer size and diversity of activities,” said Satish Kini, a partner at Debevoise & Plimpton, a law firm that represents financial clients. Some of the most visible changes have been in response to the Volcker Rule, which prohibits banks from conducting “proprietary trading” that allows firms to invest for their own benefit, rather than their clients’.
Over the past year and a half, J.P. Morgan Chase, Bank of America and Goldman Sachs have closed their stand-alone proprietary trading desks while Morgan Stanley and Citigroup have spun theirs off.
Such changes fall in line with what regulators had essentially intended with the new rule: “A backdoor way of trying to put a firewall between capital that investment banks play with and the ones insured by FDIC,” Moody’s economist Marisa DiNatale said.
The Volcker Rule, which is scheduled to take effect in July, also prohibits banks from providing more than 3 percent of capital in private-equity or hedge funds, prompting banks to spin off those operations as well. Other Dodd-Frank rules recently prompted insurance giant MetLife to sell its FDIC-insured banking unit, which would have subjected the firm to greater regulation and scrutiny by the Federal Reserve.
These moves could ultimately prompt the U.S. financial industry to become a relatively less interconnected system of smaller firms — another major goal for the supporters of Wall Street regulatory overhaul. But analysts caution that in complying with the new regulations banks may also spin off risky activities into darker, less regulated corners of the financial industry. “Activities moving to less supervision and regulatory control, to firms that are outside regulatory purview and that are highly leveraged, may present additional risks that may go undetected,” said Kini, of Debevoise & Plimpton.
Others say that these early, preemptive changes are a sign that Dodd-Frank could shrink banking and investment activity in the United States, to the detriment of customers as well as industry stakeholders. “It has a chilling effect on a corporation that wants to open a bank, or one that has a bank that’s not part of its core mission,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, an industry lobbying group.
Even as they’ve been reorganizing to comply with the new regulatory regime, banks have continued to lobby regulators over how the new rules will be implemented. Dodd-Frank left “a lot of wiggle room” when it came to some of its biggest changes, Moody’s DiNatale said. While there’s broad consensus that changes are inevitable, industry players and federal regulators have engaged in heated debate about how to finalize some of the rules.
“There is evidence that progress has been made, but it’s too soon to know how much progress,” said a senior Democratic aide, who was not authorized to speak publicly about the negotiations. “There is no doubt that banks will comply with the letter of the law, and then exploit every loophole to comply with the narrowest reading of the letter of the law,” the aide said.
One thing remains clear, however: Despite calls from Republicans to repeal parts of Dodd-Frank — or overturn it entirely — the financial firms most affected by the law are operating under the assumption that the biggest changes are here to stay. “This is the law of the land,” Talbott said. “The final details have yet to be hammered out, but the final rule to implement this will be substantially close to the original.”