CS Credit Suisse Group

WASHINGTON—Big European banks have made no secret of their efforts to slim down, but little-noticed regulatory filings show just how deep their cuts on Wall Street have been.

Barclays PLC reduced assets at its U.S. brokerage, Barclays Capital, by 43% between the end of 2013 and the beginning of this year, according to filings with the Securities and Exchange Commission. Assets at Deutsche Bank's U.S. broker-dealer, Deutsche Bank Securities, were down 30% during that period, while Credit Suisse Group AG's U.S. brokerage shrank by 26%.

The banks have all said they remain committed to the U.S. and are seeking to expand parts of their American businesses. But they are slimming down overall, thanks to tougher business conditions and stricter regulations unfolding in the U.S.

Their American rivals also shrank, but by thinner margins. Brokerage businesses owned by J.P. Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley cut assets by an average of 8% over the past two years.

The filings show that securities financing, the business of providing short-term loans to financial clients such as hedge funds, was among those hardest hit by the cutbacks.

Banks globally have cut thousands of investment-banking jobs, part of a broader retreat from riskier business lines as a result of new rules that make such operations more burdensome and adverse economic conditions that shrink the pie of profits.

In some ways, the European banks are playing catch-up with American counterparts that adapted to strictures put in place after the 2008 financial crisis and got their balance sheets in order years earlier.

"You are not seeing full-blown retrenchment" by European banks, but "it's pretty clear to me that the big U.S. banks are certainly taking share from the Europeans," said Steven Chubak, an analyst with Japanese brokerage Nomura Holdings Inc.

New Federal Reserve rules on foreign banks kicked in July 1 with the requirement that banks form a single, Fed-regulated U.S. holding company. Until recently, many foreign-owned banks had kept brokerage businesses legally separate from their U.S. bank subsidiaries, insulating the brokerage businesses from leverage and capital rules imposed on U.S. banks after the financial crisis, even though the foreign-owned brokerages are among the largest players on Wall Street.

"A few foreign banks would prefer the old system, under which they held relatively little capital in their very extensive U.S. operations," Daniel Tarullo, the Fed's regulatory czar, said in a 2014 speech explaining the new rules. "But that was neither safe for the financial system nor particularly fair to their competitors."

Foreign-owned banks have said the U.S. rules discriminate against them by imposing an additional layer of regulation on top of what their parent companies face at home.

U.S. regulators have created "some real competitive challenges for the foreign banks," said Richard Coffman, general counsel at the trade group Institute of International Bankers.

U.S. banks face some similar rules abroad, such as capital requirements—but aspects of the U.S. rules are tougher. The Bank of England isn't stress-testing U.S. banks operating in the U.K. even though U.K. firms are subject to the U.S. stress tests.

Under the new Fed rules, to be phased in through 2018, large foreign-owned banks will have to pass the Fed's annual stress tests, satisfy regulators that they have credible "living will" bankruptcy plans, and meet minimum capital requirements.

Building a stress-testing program can cost a bank $150 million to $250 million. The banks must produce reliable data on risk exposures across millions of loans and investments.

Deutsche Bank is one of several non-U.S. banks to have taken the stress tests already, since it owns a U.S. banking subsidiary with more than $50 billion in assets. Deutsche Bank Trust Corp. has failed the test each of the past two years. By 2018, the entirety of the bank's U.S. operations will be subject to the test—as will those of other foreign banks whose new U.S. holding companies have assets greater than $50 billion, a group likely to include Barclays, Credit Suisse, and UBS Group AG.

Banks that fail the test face restrictions on returning profits to their parents.

Foreign banks also have until July 2017 to show U.S. regulators that they have credible plans to dismantle their newly formed holding companies without government assistance if they become insolvent.

The new capital rules kick in by 2018 and will require foreign banks' U.S. operations to meet minimum levels of equity. They can raise it from investors, retain more profits or shrink.

Barclays has shrunk. Its U.S. brokerage, Barclays Capital, had about $172 billion in assets at the end of 2015, compared with $304 billion two years earlier. Still, the company's U.S. business is strong, Barclays Chief Executive Jes Staley said last week, accounting for 60% of investment-bank revenue in the first half of 2016.

(END) Dow Jones Newswires

August 03, 2016 18:35 ET (22:35 GMT)

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