Traditionally, the U.S. banking system espouses the global nature of financial markets. On Wall Street, competing alongside the biggest U.S. companies are some of the biggest names in foreign banking, too. In America, there is a definitely a home team, but as long as you play by the rules, all players are welcome.

But recent years have seen several foreign banks taking their lumps here, perhaps to a larger degree than domestic banking powers. Some of the largest legal and regulatory fines in the U.S. — for sanctions violations, lax anti-money-laundering controls and other issues — have gone against foreign banks. Sure, international firms are particularly exposed to AML risk for their U.S. correspondent banking business. But foreign banks have taken hits too in their performance on recent Federal Reserve stress tests. Indeed, certain U.S. regulatory initiatives in the years since the crisis were specifically tailored for foreign institutions.

It bears asking: How do foreign banks deal with a potentially ingrained disadvantage of not being on the home team?

Businessman showing red card
Most sports fans may think a higher amount of penalties called against the visiting team is due to referees being cowed by the home crowd. But maybe, in overcompensating for their opponent's home-field advantage, the visiting team actually breaks rules more often. Adobe Stock

Readers of my past writings on this blog know that I like sports analogies. In sports, differences between playing at home and playing on someone else’s turf could not be more pronounced. The first and most important challenge is the intense level of support of most fans in the stadium for the home team. In addition to the confidence this gives to the home players, the referees may also potentially be influenced by the home crowd. In October 2014, an article on the FiveThirtyEight blog dug into the issue of home-team bias. It noted a mysterious decline in home field advantage for soccer teams in the English Premier League, but signs of home bias were still undeniable. For example, in the previous two decades-plus, 63% of the more than 1,600 penalties were called against visiting teams.

Most fans, certainly the away contingent, likely conclude that this disparity is due to referees cowed by the screams of an angry home crowd. Alternatively, could it be a response from an away team’s players and coach eager to skirt the rules of the game in search of a compensating advantage?

In banking, the pursuit — sometimes perilous — of a compensating advantage can also be driven by a bank for its branches or subsidiaries on foreign soil. Seeking to overcome the challenges inherent in playing away from home has its own challenges. Inevitably, there may be a conflict between the need for foreign staff to have local autonomy to be successful in a foreign marketplace, and the control that the head office needs to impose for the venture to be economically beneficial and safely managed.

Let’s step back a bit and consider how the home team has an advantage in banking. Local banks would appear to enjoy an advantage in understanding the “local rules of the game” better than their foreign competitors. Not only will they have built their compliance and legal departments’ expertise to match the regulatory and legal environment, they also enjoy long-term relationships with local regulators, relationships that may be sometimes be very close, especially when ex-regulators are in their employ. Familiarity breeds successful skirting of rules and regulations to optimize business success and minimize regulatory failures.

One possible measure in how this advantage plays out is the payment of fines to U.S regulators by foreign banks. While there have been huge penalties assessed on both local and foreign banks since the financial crisis, the fines in the AML space levied on foreign banks have been particularly significant. Whether this has been simply due to foreign banks’ lack of familiarity with the local regulatory environment cannot be easily determined. At best, foreign banks have a deficit of trust and familiarity with the local referees to overcome.

But there may be other factors at play. Foreign banks could be motivated to break the rules more than their domestic counterparts.

When playing away from home, a bank’s head office has no choice but to loosen some of its control of a foreign branch or subsidiary. The head office has too much to worry about than to become an expert on dynamic regulatory and marketplace trends unique to an overseas office. In many cases, different rules apply differently to a foreign office versus the home office, including in data privacy and sanctions regimes. Foreign compliance procedures, therefore, may deviate from home-country rules. Foreign branches would generally seek to hire local talent, fluent in the local language and with a better understanding of local market opportunities.

But this brings into a crucial advantage for the home team, and a disadvantage for the foreign bank. Local incumbents tend to be able to pick from the top talent in a way that a foreign player may not. As the incumbents’ top talent grows into leadership positions, they probably enjoy close relationships with peers who are in leadership roles in industry, venture and private capital.

With the cards stacked against it, a foreign banking branch may be forced to target business from clients that have been overlooked by the local incumbent, become a “scrappy” player if you will. This search for both talent and opportunity may in fact lead to clients that the local firms would not choose to do business with. Gradually, the foreign office may find itself stretching or even breaking the rules in an aim simply to compete.

The right balance needs to be found when playing away from home. A bank’s head office should avoid holding too tight a control over the foreign office, which can lead to losing out on local opportunities or not addressing local regulatory requirements. Likewise, controls that are too weak can lead to problems of rogue employees and branches skirting rules in pursuit of neutralizing home players’ advantage.

The relative success of U.S. banks in Europe and Asia demonstrate that it is possible to succeed when playing away from home. Some control can be ceded to the local branch but within a framework that emphasizes the culture of the mother ship and a local respect for regulations. With the right balance, banks can surely become almost as strong playing away from home as in front of their home crowd.

Andrew Waxman

Andrew Waxman

Andrew Waxman is an associate partner in IBM Global Business Services' financial markets risk and compliance practice. He is the author of the book "Rogues of Wall Street: How to Manage Risk in the Cognitive Era."

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