"Trapped capital" sounds like a medical condition you get after eating too much Thanksgiving turkey.
In fact, it's the jargon for what happens when regulators carve up global banks across national and regional lines to protect taxpayers. Business is fragmented, cash is kept within borders and the benefits of being big are further eroded.
Get ready, then, for yet another re-think of banks' business models -- and headcount -- as Brexit and Trump push regulators to think local rather than global.
Once, being a big bank meant using your domestically-regulated parent as a springboard to conquer the world. Your home regulator and cost of funding would decide where you took your global business, with intra-company transactions smoothing the flow of capital.
The crisis showed up the frailty of this model, when U.S. taxpayers effectively bailed out French and German banks by rescuing insurer American International Group Inc. The later euro-zone debt crisis also forced banks to shrink and reduce dependence on foreign funds.
Today, almost ten years on from the financial crisis, the cost of being global is set to go up again. The U.S. is forcing big foreign banks to create subsidiaries that abide by minimum capital and liquidity ratios. Last week, the European Commission proposed a similar move of its own. And banks with a big deposit base in the U.K. must also "ring-fence" their consumer operations.
All of which means trapping capital in more jurisdictions that, once upon a time, was able to be used elsewhere.
Imagine being a bank with global ambitions that's headquartered outside of the U.S. and outside the EU. Imagine you're called Credit Suisse. Recently published figures show that 61 percent of the lender's group equity capital is tied up in its U.S. holding company, according to CreditSights.
If banks have to start planning for a separately capitalized EU subsidiary, that could put yet more pressure on group balance sheets. The domino effect could lead to national regulators asking for more capital in turn.
Brexit is yet another headache: Banco Santander SA is re-thinking its U.K. ring-fencing plans, according to the Financial Times, because of the complexity of creating two stand-alone banks in a country on track to exit the EU.
Globalized banks have facilitated the growth of trading in everything from currencies to derivatives across the world -- without having to set up multiple balance sheets in different countries. The business can then follow the sun, with each region handing on trading to the next with minimal friction.
Region or country-specific capital and liquidity requirements will make it harder and costlier to do the kind of intra-company transactions that bring benefits of scale. That may trigger the kind of restructuring many banks have resisted: spin-offs, mergers or whole-scale exits from particular lines of business.
The banking industry is struggling to meet its cost of equity even under the current rules. European banks are preparing a fresh round of bloodletting with some 20,000 jobs set to go.
That was in a world of global rules primarily designed to make the system safer while still protecting the free flow of capital. Now the tone has changed -- and capital threatens to flow less freely globally.
That may be good for the taxpayer and good local markets. But it spells pain for banks seeking to protect old ways of doing business by keeping a truly global footprint.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Lionel Laurent in London at firstname.lastname@example.org
To contact the editor responsible for this story:
Edward Evans at email@example.com