between 2003 and 2007, much of it financed by the short - term, dollar - denominated liabilities of european banks. 13 meanwhile, commercial and industrial lending originated by u. s. branches and agencies as a share of their third - party liabilities fell significantly after 2003. 14 in contrast, u. s. broker - dealer assets of the top - 10 foreign banks increased rapidly during the past 15 years, rising from 13 percent of all foreign bank third - party assets in 1995 to 50 percent in 2011. 15 lessons from the recent financial crisis the 2007 – 2008 financial crisis and the continuing financial stress in europe have revealed financial stability risks associated with the foreign banking model as it has evolved in the united states. to some extent the concerns associated with foreign banking operations track the more general shortcomings of pre - crisis financial regulation. internationally agreed minimum capital levels were too low, the quality standards for required capital were too weak, the risk weights assigned to certain asset classes did not reflect their actual risk, and the potential for liquidity strains was seriously underappreciated. but some risks are more closely tied to the specifically international character of certain global banks, both here and in some other parts of the world. the location of capital and liquidity proved critical in the resolution of some firms that failed during the financial crisis. capital and liquidity were in some cases trapped at the home entity, as in the case of the icelandic banks and, in our own country, lehman brothers. actions by home - country authorities during this period showed that while a foreign bank regulatory regime designed to accommodate centralized management of capital and liquidity can promote efficiency during good times, it also increases the chances of ring - fencing by home and host jurisdictions at the moment of a crisis, as local operations come under severe strain and repayment of local creditors is called into question. resolution regimes and powers remain nationally based, complicating the resolution of firms with large cross - border operations. the large intra - firm, cross - border flows that grew rapidly in the years leading up to the crisis also created vulnerabilities. to be fair, the ability to move liquidity freely throughout a banking group may have provided some financial stability benefits during the crisis by enabling banks to respond to localized balance - sheet shocks and dysfunctional markets in some areas ( such as the interbank and foreign exchange swap markets ) and by transferring resources from healthier parts of the group. nevertheless, this model also created a degree of cross

and significantly equalized regulatory treatment of foreign and domestic firms. 5 congress maintained this approach of basic competitive equality in the 1999 gramm - leach - bliley act. 6 that law substantially removed restrictions on affiliations between commercial banks and other kinds of financial firms for both domestic and foreign institutions operating in the united states. moreover, in light of provisions in gramm - leach - bliley that permitted a foreign bank to be a financial holding company ( fhc ), the federal reserve announced in 2001 that a bank holding company ( bhc ) in the united states that was owned and controlled by a well - capitalized and well - managed foreign bank generally would not be required to meet the board ’ s capital requirements normally applicable to bhcs. 7 my second example relates to the massive fraud uncovered at the bank of credit and commerce international ( bcci ) and its subsequent collapse in 1991, which highlighted the need for more effective supervision of banks operating in multiple countries. the foreign cross - border branches of foreign banks operate in the united states as a direct branch of the foreign parent and are not separately capitalized entities. federal foreign branches and agencies are authorized by 12 u. s. c. § 3102, which recognizes that states may also authorize branches of foreign banks to operate within their territory. the board of governors of the federal reserve system must approve all foreign branches and agencies, whether state or federal ( see 12 u. s. c. § 3105 ( d ) ). a good survey of the considerations for both firms and policymakers in the choice between subsidiaries and branches for foreign banks is provided in jonathan fiechter, inci otker - robe, anna ilyina, michael hsu, andre santos, and jay surti ( 2011 ), “ subsidiaries or branches : does one size fit all? ” staff discussion note 11 / 04 ( washington : international monetary fund, march 7 ), www. imf. org / external / pubs / ft / sdn / 2011 / sdn1104. pdf. between 1972 and 1977, the number of foreign banking institutions in the united states roughly doubled, while the total assets of those institutions roughly tripled in absolute terms and doubled as a proportion of all banking assets in the united states, reaching nearly 13 percent. henry terrell and sydney key ( 1977 ), “ the growth of foreign banking in the united states : an analytical survey ”, in key issues in international banking, conference series no. 18