 Well, welcome, everyone. This is I am Christy bear and I'm the assistant executive director of the center on finance law and policy. Welcome to our first virtual blue bag lunch talk. These are monthly lunch talks that are given by you have them faculty and grad students from multiple schools. One of the really great things about the University of Michigan is that pretty much every sidewalk brings you to a top 10 school. And so this is in some ways a grand experiment for us I feel like we learned the most valuable lesson already which is that we probably need music or something when people are joining. I'm delighted the two are here. The format of this is going to be a little bit different. As I said, usually this is an in house kind of thing with faculty students staff and alumni gathered in a room at the law school. I am delighted that the covert prevents an opportunity presents an opportunity for us to open it up to all of you. So we are doing this in a meeting format so if you want to keep your cameras on your welcome to if you are over it you are definitely not required to. We are going to ask you to hold questions until the end. I have, I do have to do a little promo because this is just what I do. So the set on finance law and policy we have a conference that's coming up November 16 through 18 for our central bank of the future project this is going to be co sponsored with the San Francisco Fed. The registration is not quite available yet, but we'll be coming up soon. It will be a virtual conference over three days and if you're not already part of our mailing list then I hope that you will sign up. So maybe you could in the chat if you wouldn't mind to drop in the address on our website for them to sign up. In the meantime, I want to introduce you to Jeremy Cress. Oh, one last thing you should have gotten a notice already this meeting is going to be recorded so if that's not cool with you you need to bail right now. Cress is a an assistant professor at the Michigan Ross School of Business. He's a senior research fellow with the center on finance law and policy. He studies financial regulation he has lots of feelings about bank mergers and large banks merging with other banks. And so, and he is going to tell you about some of those today. So, with that, I am think what we'll do is go ahead and turn this over to Jeremy. I'm going to be monitoring the chat. And so, at the end, we'll pause and you'll have a chance to be called on and unmute yourself and ask questions. Or if you're not sure if your question is good or not then you should feel free to just put it in the chat to me and ask it for you. So, anyway, with that we'll go ahead and turn it over to Jeremy Cress. Thank you, Christie and thank you, everybody for being here just want to confirm you can see my slides about the case. I hope so if not please drop a note in the chat and I'll figure out what's going on. I'm very excited to be here. I'm so excited in fact that I shaved my covert beard for the first time so thank you for motivating me to want to look like a human being. Once again for the first time in six months. Thank you to Christie and Tracy for helping to organize and coordinate today. Thank you also to the center on finance law and policy for helping to sponsor this research, one of the CFL P's excellent research assistants, Sam heard help me throughout the course of the past academic year to get this research off the ground. So, this is truly a project that's been helped along the way by the CFL P and I'm excited to debut it here with you today. So is Christie mentioned I write about financial regulation and I typically focus on us banks, but I felt compelled to spend my summer thinking about and writing about foreign banks, because I think foreign banks are one of the big unsolved issues in financial regulation. So in the next few slides, foreign banks were a key cause of the 2008 financial crisis. And I don't think that US policymakers have adequately addressed the risks that foreign banks pose to the US financial system. However, which is still very much in draft form and I look forward to your feedback. In this paper I recommend alternative regulatory approaches that I think would better safeguard foreign banks and remain consistent with long standing international regulatory. So, let me start by briefly describing the foreign bank landscape. We'll be seeing a chart right now that depicts some of the most significant foreign banks and how they compare to the biggest US banks in terms of asset size. The focus of this paper is on these blue segments. The US operations of foreign banking organizations or FBOs. In other words, how foreign banks like MUFG and HSBC and BNP Paribas and Deutsche Bank and Barclays operate when they decide to operate in the United States. As you can see, this is a significant issue. Some of these foreign banks have blue segments they have blue operations that are equivalent in size to some major US banks like US Bank Corp and PNC and Capital One. Collectively, foreign banks today control about $4 trillion in US banking assets. About 20% of the entire US bank sector is comprised of foreign banks. So this is a significant issue and that's part of what motivated me to take a look at it. Let's establish some important background on how these banks do business when they operate in the United States. Generally speaking, there are two basic business models that a foreign bank can use when it operates in the US. The first business model is called the subsidiary model. So in this subsidiary model, a foreign bank like Deutsche Bank from Germany would come in and establish legal subsidiaries in the United States. So Deutsche Bank might have a US broker dealer subsidiary, otherwise known as an investment bank subsidiary. And it might have a US bank subsidiary. This is a separately capitalized depository institution that is incorporated in the United States. It has its own balance sheet. It has local management in the United States. It can accept retail deposits. It's insured by the Federal Deposit Insurance Corporation, and it is regulated just like any US bank is regulated. It just happens to be owned by a foreign company. So that's the subsidiary model. The alternative model is called the branch model. So in this case, the foreign banking organization doesn't have a standalone banking presence in the United States. It doesn't own a US bank. Instead, it comes in and it just opens a branch of the parent bank in the United States. So if Deutsche opens a branch in the United States, that branch is not allowed to accept retail deposits. And I cannot go put our checking account at Deutsche Bank's branch. That branch is not insured by the FDIC, but there are some regulatory advantages to Deutsche Bank in operating in this way with a branch. Most significantly, that branch of Deutsche Bank is not required to maintain capital in the United States. So there are some limitations to the branch model, but there are also some significant advantages to foreign banks of establishing branches rather than subsidiaries. I should note that these two models are not mutually exclusive. So many foreign banks, including Deutsche Bank, use both the subsidiary and the branch model simultaneously. So today Deutsche Bank has a US broker dealer subsidiary, US investment bank subsidiary. Deutsche Bank has a US bank subsidiary and it's got a US branch all at the same time. So it can pick and choose between these different models. Let me just pause for a moment having established that background, see if there are any preliminary questions before I move on. Okay, if you've got questions, feel free to drop them in the chat and or jump in. I'm happy to take questions as we go. All right, foreign banks have been operating in the United States for about 50 years. They began entering in earnest in the early 1970s. But their business strategies have changed very dramatically in the five decades that they've been operating here. I'm going to talk briefly about how foreign banks have evolved in the United States over time. When foreign banks first entered in the 1970s, they were very small, and they were subject only to state level regulation. As foreign banks began to grow, US banks began to complain that foreign banks weren't really being regulated and therefore they had an unfair competitive advantage over US banks. And as US banks complained, Congress paid attention and Congress reacted by passing the International Banking Act of 1978, which instituted some federal oversight of foreign banks, US operations, trying to equalize the regulatory treatment between foreign banks, US operations and US banks. In the 1980s and 1990s, foreign banking in the US was pretty boring. Foreign banks really focused just on traditional lending activities, lending to US customers, usually commercial and industrial type loans. And foreign banks got their funding for these lending activities, usually from their foreign parent companies. The Deutsche Bank parent company back in Germany would send a lot of financial resources to its US operations, and the Deutsche Bank US operations would then lend that money out to US customers. Very boring run of the mill business model. For a few instances of foreign bank misconduct in this period, a few high profile instances of fraud or money laundering by foreign bank operations. Congress reacted by passing the FIBSI, the Foreign Bank Supervision Enhancement Act in 1991 to try to crack down on that misconduct. But by and large, foreign banking in the 80s and 90s was very run of the mill, vanilla and boring. That all changed, though, in the early 2000s. In the early 2000s, foreign banks US operations shifted to a much riskier capital markets oriented strategy. So foreign banks would borrow in short term wholesale funding markets like the repo market and securities financing arrangements. And it would then invest that money, they would invest that money in capital markets instruments, mortgage backed securities derivatives. So that combination of volatile funding combined with speculative capital markets instruments created a bunch of problems for foreign banks starting in 2007 when short term funding markets began to seize up. Debt markets crashed. Foreign bank parent companies refused to shore up their US operations by contributing more capital to their US subsidiaries. And as a result, foreign banks ended up relying extensively on the Federal Reserve for emergency funding during the 2008 crisis. Foreign banks borrowed disproportionately more from the Federal Reserve compared to domestic banks during 2008. So big problems. And I think underappreciated problems in the foreign banking sector. Usually when people think about the 2008 crisis, right, the names that come to mind are AIG and Wacovia and countrywide right US financial institutions Lehman Brothers Bear Stearns. The stories that don't really get told told are the problems that Deutsche Bank UBS and Credit Suisse and other foreign banks cost. And we didn't see those high profile foreign bank failures in large part because foreign banks took advantage of that lending to try to weather the crisis. So big problems in 2008 with foreign bank US operations. The Federal Reserve responded post crisis by creating a rule called the intermediate holding company or IHC. The IHC rule says that a foreign bank with more than $50 billion in combined US assets has to create an intermediate holding company for its non branch assets. So that means that any US broker dealer subsidiary, any US bank subsidiary, any other non bank subsidiary that a large foreign bank has in the United States has to go underneath an intermediate holding company. And that intermediate holding company is then supervised and regulated just like a US bank holding company. So this intermediate holding company is now subject to capital requirements in the United States. It's subject to liquidity requirements in the United States. It's subject to risk management requirements in the United States. And the rationale for this rule, I think was twofold, right? This rule tried to do two things. One is it created a focal point for management and supervision of a foreign banks risks in the United States. Pre-crisis, you had foreign banks that had dozens of US subsidiaries and they were all kind of managed in silos. There was no nexus for the bank's management or for US supervisors to oversee the foreign banks US risks on an aggregate consolidated basis. The US holding company intermediate holding company requirement tries to change that by giving a focal point, one entity that consolidates all of the activities that the foreign bank is doing in the United States. And that allows the bank to manage those risks in US supervisors to oversee those risks on a consolidated basis. Right, so that was one rationale improves management and supervision. The other rationale has to do with requiring capital in the United States. Pre-crisis, this US bank subsidiary would have to maintain capital in the United States. But this broker dealer subsidiary and other non-bank subsidiaries of foreign banks really weren't subject to any meaningful prudential or safety and soundness regulation in the United States. By forcing these non-bank subsidiaries underneath an intermediate holding company and then subjecting this IHC to capital requirements, that forced foreign banks now to bring those non-bank subsidiaries within the prudential oversight regime to have to maintain capital against those risks. So, in theory, this IHC requirement very well intentioned aimed to solve some of the problems that plagued foreign banks leading up to 2008. However, there was a critical omission, I think, in the IHC requirement. The Federal Reserve decided to allow foreign branches to remain outside of the intermediate holding company. So, if a large foreign bank establishes a subsidiary in the United States, that subsidiary has to be placed underneath an intermediate holding company that's then subject to capital and liquidity requirements. If a foreign bank wants to establish a branch in the U.S. and be subject to lighter branch level regulation, it can still do that, even after the IHC requirement. So, foreign banks responded to this new IHC rule, which went into effect in 2016, exactly as you would have expected. Foreign banks responded by shifting assets out of their U.S. intermediate holding companies, which were subject to new regulations, and into their U.S. branches, which were generally exempt from those new rules. This is a classic case of what we call regulatory arbitrage. Foreign banks using that IHC branch distinction to their advantage. So, you can see here I pulled some data on some of the largest foreign banks, Deutsche Bank, Credit Suisse, and Barclays. You can see in the solid lines representing their IHC assets post 2016 going down very dramatically as they shifted assets out of their IHCs. You can see with the dotted lines, their branch assets went up by almost the same amount as these firms were shifting assets just straight out of IHCs and into branches. Collectively, I mean, I've given you three data points here, just collectively aggregating across the entire foreign banks sector. Foreign banks overall have cut 33% of their U.S. IHC assets since this rule went into effect, and a large proportion of those assets shifted directly into their branches. So, as we sit here today, foreign bank branches have $2.9 trillion in U.S. assets that is an all-time high for foreign bank branches. So, just to summarize where we are, we've got foreign banks that in an effort to evade new regulations have really changed their business models to be much more reliant on branches as opposed to their IHCs. I contend, though, that U.S. policymakers really haven't adapted to this new landscape. So, I mean, to say a little bit more about why I think foreign banks continue to pose risks to the U.S. financial sector, but let me just pause there for a moment to see if there's any questions up to this point. Okay. Like I said, feel free to jump in, put any questions in the chat if you've got them. But for now, let me talk about why I think this is a problem. So, the lack of attention to foreign banks is problematic because foreign banks pose some unique risks to the United States. The domestic banks don't pose. I divide these risks up into two different categories. I think there's financial stability risks that foreign banks pose, and national security risks. I'll identify each of these briefly. So, in terms of financial stability risks, I would start with liquidity. As I mentioned, foreign bank branches generally can't accept retail deposits. So, instead, they rely overwhelmingly on vulnerable forms of short-term wholesale financing, repo, commercial paper, securities lending, arrangements. It means that foreign banks' U.S. operations are unusually prone to liquidity strains that can jeopardize their stability and spread to other market participants. So, I think one of the major problems with foreign banks' U.S. operations is they're much more vulnerable to liquidity strains than U.S. banks are. There's also the problem of information asymmetries. U.S. supervisors only oversee a portion of a foreign bank's operations, only the foreign banks' U.S. operations. But we know that a foreign bank's parent company can transmit risks to its U.S. operations. U.S. supervisors, though, may be unaware of those risks developing at the parent company until it's too late. It's very likely that the parent bank's home country supervisor will have some incentives to withhold important information from U.S. authorities. They might not want to share detrimental information if they think that U.S. authorities are going to take punitive action against the bank's U.S. operations. The issue of prosyclicality. Prosyclicality means that foreign banks contribute more to credit bubbles than domestic banks do. Foreign bank lending increases more rapidly during expansionary periods and then falls more rapidly during contractions compared to domestic banks. Foreign banks really amplify fluctuations in U.S. business cycles. For as good as the upsides are, the upsides are higher because of foreign banks. But then critically, the low points, right, are recessions and our financial crises are worse because foreign banks pull back more rapidly when the going gets tough. And the final point on prosyclicality, or excuse me, on financial stability is externalities. Because foreign banks generally don't pay into the FDIC's deposit insurance fund, they don't help to offset the financial stability risks that they create. So foreign banks propagate risks throughout the United States financial system. Some banks may fail, some U.S. banks may fail, and the FDIC may have to pay out claims to depositors. When the FDIC does that, it's out of funds that foreign banks didn't contribute to. And so foreign banks in some sense get a free ride. They have to pay deposit insurance assessments that could help to offset their financial stability risks. So that's financial stability risks. In addition to threatening financial stability, foreign banks also pose some national security risks. Given their cross-border operations, foreign banks are potential conduits for activities like money laundering and terrorist financing and other illicit activity. Nonetheless, any money laundering controls remain inadequate at a lot of foreign banks as evidenced by numerous any money laundering enforcement actions that U.S. authorities have taken against foreign banks over the past decade or so. So lots of foreign banking risks. Critically, I contend that most if not all of these risks are most pronounced with respect to foreign bank branches as opposed to foreign bank subsidiaries. So foreign bank branches have more liquidity risks. They're more reliant on short-term funding than foreign banks subsidiaries. Information asymmetries are more pronounced because branches tend to rely on management at the parent company, overseas management as opposed to local management. Procyclicality is more pronounced. There is empirical evidence showing that foreign bank branches are more procyclical. They increase lending more rapidly during good times and decrease lending more rapidly during bad times, then do foreign bank subsidiaries. And national security risks are more pronounced almost all, if not all, of the enforcement actions taken against foreign banks with respect to money laundering have been with respect to branches and not foreign bank subsidiaries. All right, I see we've got a couple of questions that came in. Let me pause here for a moment to address these questions. I see Robert asks, are U.S. banks providing this capital to foreign branches or are they sourcing this globally? Good question. So where does a foreign banks funding come from? They're sourcing funds in largely U.S. short-term markets. So foreign banks want dollars. That's what they're after. And so it's largely coming from U.S. counterparties. But there are other providers of U.S. dollars as well who play in U.S. dollar funding markets. So I don't know the exact breakdown of whether it's coming from U.S. banks or U.S. non-banks or non-U.S. providers, but these markets tend to be predominantly U.S.-based for what that's worth. Okay. So as you can see, I think there are some lingering weaknesses in U.S. oversight of foreign banks that expose the U.S. to potential risks. In the paper, I propose two strategies for addressing these risks. The first strategy is mandatory subsidization. By mandatory subsidization, I mean effectively eliminating foreign banks' ability to operate in the United States through branches. Saying to foreign banks, if you want to operate in the United States, that's great. You are welcome to. You just have to do so through a subsidiary that may be underneath an intermediate holding company. I think there are a lot of reasons to favor mandatory subsidization, a lot of reasons why the U.S. should seriously consider doing this. For one, I think mandatory subsidization would enhance management and supervision of foreign banks' U.S. risks. This is taking the IHC requirement to the logical extreme. In 2016, the U.S. implemented an IHC requirement to create one nexus for all of their subsidiaries. But we still have dual structures where a foreign bank like Deutsche may have a U.S. IHC and one or more branches. The U.S. IHC is managed locally, the branch managed overseas in Germany, and that creates complications for both management and supervision of Deutsche banks' risks. If you've got complicated management silos, it's difficult for U.S. supervisors to get a complete understanding of the foreign banks' U.S. risks, better that we should mandate subsidization and create a single nexus for all of the firm's U.S. risks. Mandatory subsidization would also facilitate resolution if a foreign bank were to get into trouble. The U.S. lacks a satisfactory mechanism for resolving a failed foreign bank branch in a way that limits the fallout to U.S. counterparties into the broader U.S. financial system. The failure of a foreign bank branch would be very messy with different federal and state authorities claiming jurisdiction and the inability to impose counterparties stays. It could get very messy, but if we mandate subsidization, then upon a foreign bank's failure you could resolve its U.S. banking activities through the traditional FDIC bank resolution process. It could be a lot cleaner. Mandating subsidization would also reduce prosyclicality in the transmission of macroeconomic shocks. As I mentioned, the empirical evidence on this demonstrates that foreign banks' subsidiaries in the United States are much less prosyclical than foreign bank branches. They don't contribute as much to the creation of credit bubbles, nor do they contribute to financial crises as much as foreign bank branches. And finally, I think that mandating subsidization would be good because it would bring foreign banks into the deposit insurance system. Foreign banks would be required to pay assessments to the FDIC's Deposit Insurance Fund that would help offset the financial stability risks that foreign banks create. And critically, by giving foreign banks the opportunity to take retail deposits, that could create some much needed competition for retail deposits. That's relative to the too big to fail banks like JP Morgan and Citi, which have grown dramatically since the 2008 crisis. So I think it'd be great to have new competitors in the retail banking market. And foreign banks might be inclined to compete there if we subject them to deposit insurance assessments anyway. So that's my case for mandatory subsidization. There are a lot of myths floating around about the potential negative consequences if the US were to require subsidization. I aim to dispel those myths in this project. But probably the most pervasive myth is that mandatory subsidization would lead to a harmful de-globalization or balkanization, right? It would cause foreign banks to retrench or pull back from US banking markets. I think very little evidence that foreign banks would in fact pull out if the US were to subsidize. And even if the US were to mandate subsidization, and foreign banks were to curtail some of their cross-border activities in response to the subsidization, I think they would likely reduce their short-term capital markets activities, but preserve their socially beneficial long-term lending activities. Derek Turner, who was the chair of the UK Financial Services Authority, gave a speech in which he referred to foreign bank activity in the United States as the wrong sort of capital flows, right? All these short-term capital markets transactions, capital markets investments, relying on short-term wholesale funding is the wrong kind of capital flows. I think if we mandate subsidization, you may see a decline in those wrong kinds of capital flows, but I think that's a feature, not a bug, right? Some balkanization in short-term debt markets may not be a bad thing. And I think there's very little reason to believe that foreign banks would pull back on their traditional banking activities that we would like to preserve. There's also a contention that subsidization would mandate or would violate the principle of national treatment. There's a long-standing norm in international financial regulation of national treatment. This is a norm of non-discrimination. National treatment says that host country supervisors should treat foreign banks no less favorably than they treat domestic banks, right? Competitive equity. But I think it's very easy to square mandatory subsidization with national treatment. U.S. bank holding companies, in order to engage in banking in the United States, have to establish U.S. depository institution subsidiaries. So I think it is perfectly consistent with national treatment to say to a foreign bank that in order to engage in banking activities in the United States, a foreign bank has to establish a U.S. bank subsidiary. That seems to me fully consistent with the idea of national treatment and competitive equity. And the final claim that you hear anytime the U.S. makes any movement toward regulating foreign banks more strictly is people say, no, you can't do that because other countries are going to retaliate against U.S. banks, right? Other countries are going to crack down on JP Morgan and Citi and God forbid JP Morgan and Citi to be subject to stronger regulation overseas. As you can probably tell from my tone, I'm not terribly bothered by that response. But one, U.S. banks are significantly less internationally focused than many foreign banks are. So for systemically important U.S. banks, they have an aggregate about a third of their assets overseas. Compare that to systemically important European banks, which have about two thirds of their assets in overseas affiliates. So even if the world were to move to a widespread subsidization model, that's going to affect European banks a lot more than it affects U.S. banks. So I think that's one reason not to worry so much. And the other reason not to worry so much is that a lot of jurisdictions have already moved to a subsidiary model. So still Argentina, Chile, India, Korea already have subsidization requirements or their equivalent. So this fear of retaliation may be overblown. So I want to reserve the last 20 to 15 to 20 minutes for questions. Let me just mention there is an alternative, right? If we don't want to move to mandatory subsidization for some reason. I should mention, by the way, I think mandatory subsidization would require an act of Congress. I don't think that the Federal Reserve or any other U.S. Authority has the ability under existing law to mandate subsidization. It would require Congress to get interested and pass new legislation. We all know of course how rare acts of Congress are, especially in the banking space. So we may need to think creatively about other ways to regulate foreign banks U.S. operations if mandatory subsidization is not possible. I think there are other ways to enhance oversight of foreign bank branches. If we're going to keep foreign bank branches in operation, we need to do a better job of overseeing them. First, foreign banks have to be subject to better prudential regulation by prudential regulation, I mean safety and soundness oversight. And since foreign branches don't maintain capital in the United States, better prudential regulation probably means stronger liquidity requirements. It's a requirement that they maintain more highly liquid assets in the United States to offset their potential for liquidity runs, the potential for their financing evaporating very quickly. The Federal Reserve has been making noise for the past few years about imposing stronger liquidity rules on foreign bank branches, but they have consistently found excuses not to. Most recently at the end of last year, the Fed said, we know we've been talking about imposing these rules for a while, but we need to have more conversations with our international regulatory counterparts before we're ready to do this. I think the time for discussion is over and the Fed needs to get on and ultimately adopt these standardized liquidity rules. The other thing that I think we could do to improve branch oversight is to cut down on regulatory arbitrage by mandating federal chartering of foreign bank branches. We didn't talk about this earlier in the discussion, but today when a foreign banking organization wants to establish a branch in the United States, it has a choice. It can go to the federal government and get a charter from the Office of the Comptroller of the Currency or the OCC, or it can get a charter by a state, usually New York. So I think this dual system of state and federal chartering creates some problems that we ought to avoid and we could avoid by mandating federal chartering only of foreign bank branches. Let me wrap up my part of the talk there. I'll just recap and note that foreign banks role in the US financial system has changed pretty dramatically in the 50 years that they've been operating here, and US policy hasn't kept pace with those changes. The OCC requirement in 2016 was very well intentioned, but it had the unintended consequence of shifting assets from relatively well regulated foreign bank subsidiaries into pretty lightly regulated foreign bank branches. Branches, I think, continue to pose risks to the US financial system. So I think we should seriously consider mandating subsidiarization, doing away with those foreign bank branches and failing that doing a much better job of prudentially overseeing foreign bank branches and perhaps mandating federal chartering if we continue to permit branches. So let me, for real, wind up there. I'd be happy to take questions, comments. I'm eager to hear your feedback. Jeremy. Yes, Paul, how are you? Paul Lee. Thank you. This is a great presentation. As you know, I have represented foreign banks for quite a long time in private practice. And I just want to say I admire your courage, because you're stepping on the toes of virtually every constituency, the US banks, the foreign banks, the state regulators, the state government, and parts of the federal government. So you're a very brave person, and I applaud. A couple of small points and then I'd be very interested in looking at your draft article. One counterpoint among the large banks, and this is just kind of the historical curiosity, HSBC gave up its last branch in the United States and I think 2001. So since 2001, it is operated under your model. I don't know that there are many other foreign banks that have given up their branch but kept a bank subsidiary. And I suspect the challenge will be that many of the smaller and medium sized foreign banks that currently have a branch or agency in the United States will find it very difficult economically and financially to convert that operation into a full-fledged FDIC insurance bank. I suspect that their hurdles, hurdle returns for them will be very, very substantial. So one of the things you might give some thought to is how to deal with that problem that, that there will in effect be assuming, assuming you get over the political issues there'll be pretty significant economic and financial issues that will segment the foreign banks. And I think all the foreign banks will oppose it, but certainly the big foreign banks can afford in a way to deal with it in a way that's a smaller and medium sized foreign bank. Yeah. And as you, as you point out, this debate about having a branch or agency or a required bank subsidiary has been one that's been going on for years, including the International Banking Act and the study on affiliation department like that and the Institute of International Bankers, as you probably know, over the years has done studies about the treatment both in the United States and in other countries of the subsidization department. So I think that will be important to address in your article. But I think it is, I think it's absolutely fair question to pose. Yeah, as I say, I think it does will require a rethinking of what has been accepted practice sort of internationally for a long time, at least among the largest institution book. I think the US banks will feel compelled to oppose this because the foreign banks, the large foreign banks will feel compelled to oppose it. You have a constituency of all the large US and foreign banks in opposition to a subsidization requirement. Yeah, absolutely. Thank you Paul for those comments. I appreciate your point about, I don't know if I'm brave or stupid, but I recognize the likely opposition here I'll note Paul, my last article before this was about community bank regulation and the claim that we don't regulate community banks strongly enough so I made the community banks mad with that one if there's another lobby that is as strong as the community banks it's the foreign banks. So I'm just, I'm an equal opportunity offender, I think I'm just collecting enemies right and left. You know Paul noted that subsidization is not a new idea. Paul, I think you said it was in the IBA I think it was in the in Fibse in 1991. Congress made some noise about mandating subsidization in the early 90s couldn't get congressional approval so instead they mandated study. Treasury and the Fed hashed it out. Treasury was in favor of mandatory subsidization. The Fed under Greenspan's leadership was opposed. The Fed won that battle and this report in 1992 came out against mandatory subsidization. Actually my, my wonderful CFLP research assistant Sam Herd tracked down what must be one of the last remaining hard copies of that Fed Treasury report it was sitting in some library at Duke Law School, and they shipped it up here and you know we made hard copies of it. It's interesting to go back and read those debates between the Fed and Treasury about subsidization 30 years ago. You know who was one of the biggest proponents of mandatory subsidization of foreign bank branches at the time. Jay Powell, who was at the time assistant secretary under secretary at the Treasury Department, and he was carrying the Treasury Department's water, promoting this idea of mandatory subsidization. I haven't heard him asked about it now I'd imagine that he's probably changed his tune. Paul, you're right. You know the domestic banks will oppose this, as they did in the early 90s, just as vehemently as they would oppose, as foreign banks would oppose it. So yeah, I don't envision anybody in the financial sector clamoring for this but I think that's part of the reason why we need to take it seriously because I think it's an underappreciated risk. So I take your point about HSBC being the lone bank, HSBC is the only one of the 13 largest, only one of the 13 banks with the largest US operations to get rid of their branches. And I grant that this may, subsidization requirement may cause some foreign banks to rethink how or if they do business in the United States. Paul, to your point of the smaller foreign banks, you know, as I noted in my last article, community banks are really get light touch regulation in the United States. So if a foreign bank has less than $10 billion in banking assets here, I'm not sure how much more onerous that regulation would be than the bank is receiving now with the branch model. For, you know, the medium sized banks, I think it's, you know, a public policy trade off question of what sorts of services the bank is providing do we think they're socially beneficial and are we willing to accept their financial stability and national security risks that those companies pose, or would we rather err on the other side of the trade off, and favor more financial stability, potentially at the expense of some financial integration, just question how worthwhile that financial integration is. Thank you Paul I appreciate the question I'd be happy to send you the full draft of the paper. Thank you. Robert, do you want to unmute and ask your question. Sure. Thanks Jeremy. Good presentation. I'm enjoying it. Thank you. I was just thinking, just trying to tie this back to your somebody suggested solutions. They're a systemic issue with the lending process so I was thinking if, if a foreign branch is going out for capital to say a US bank or other source, they're providing some sort of collateral be it a letter of credit or a grant, whatever, which I'm guessing is backed by the parent. Is it that the, the US source was inexperienced at dealing with the credit risk they were facing and couldn't measure it, or was it that the parents actually defaulted, or maybe a little bit. Great question Robert. I'm hypothesizing here because I'm interpreting the empirical data on pro cyclicality. But Robert you hit on, I think what is probably the strongest explanation for why branches are so much more pro cyclical than foreign bank subsidiaries. I think it has to do with the underwriting process and the presence of local management in the United States. When you have a foreign bank subsidiary that has local management in the United States has, you know, a sense of US credit markets. They probably make better underwriting decisions than foreign bank branches that are managed primarily overseas with managers who aren't as connected to US credit markets and may not make as strong underwriting decisions. I think your question gets to that point, one of the reasons why we see so much pro cyclicality in the branches may be the absence of local management. Does that answer your question is somewhat relevant to your question. Yes, that is relevant on the on the branch side on the other side was the people are here who are providing them the capital. Are they also lacking the experience to assess the risk of that foreign branch effectively. So when when I provide you're saying that the funders of foreign branches. Yeah, that's the process. That's interesting. I hadn't considered that part part of this is short term debt markets. They're generally thought to be risk free because they're overnight funding and in some cases they're anonymous. So there's not a big underwriting process that goes on in a lot of these short term debt markets. So I think that the creditors aren't really thinking about it in that way and that's in part why short term funding can evaporate so quickly because when people get scared as they did in 2007 2008, you just stopped lending everybody because you don't know what your county parties risk exposure. So I don't think that process happens in a very systematized way. Oh, great. Thank you. Okay, you can take one more Jeremy. Sure. Drew wants to know, do you think you maybe underestimating the effect of broad retrenchment by your European banks due to weakness, rather than regulatory arbitrage on reduction of IHC assets. I think the graph on slide six might be off. Yeah, if you want to chime in more. That is a good point. European banks have been struggling over the past decade and the reduction in IHC assets could in some cases be considered shoring up the parent bank. I don't think that that explains the simultaneous growth in branch assets. These firms are still doing business in the United States. They're just choosing to do it in a way that's subject to less US oversight. So it's not so much, I think that they're shoring up their domestic operations so much as they're just reorganizing their US operations. But I take the point and I can go back and reconsider whether there's some sort of underlying weakness that the parent company that may explain some of this movement. Okay, I think we need to stop here. If everyone would kindly acknowledge Professor Kress for his talk today, either with your cameras on or you can do the little simple thing if you're really good at it. I also want to thank Tracy Van Dusen from the Center on Finance, Law and Policy and Liz Smith from the Ford School for doing the behind the scenes work to get this to get this up. So next month, our next Blue Bag Lunch Talk will be on Thursday, October 1. We will have from the School of Information, Professor Tawana Dilla Hunt and Julie Hua, and they are going to talk about entrepreneurship. Thank you again very much for coming, for participating, and we look forward to seeing you next month. Thanks. Thanks everybody. Oh my gosh, Jeremy. I don't know how you do that with nobody watching you. Oh, hey, Paul. Jeremy, that was great. That was great. Thank you, Paul. Thank you. Thank you so much for your thoughtful thoughts. Look at the stuff the IIB has been publishing over the years, because I think you just need to be prepared to deal with it. My impression is the number of branches and agencies in the United States over the last 10 years have been substantially reduced. I think a number of banks found the environment too dangerous because of anti-money laundering and other things, or they couldn't afford the expense of all the stuff they needed to do. So I think at least a reference to the fact that if my recollection is correct, that quite a number of foreign banks have either consolidated their branches and thereby reduced their number. Or in some cases, in some cases, close their branches. Okay. So there is a fair point.