Why are we not surprised at the fact, as reported by the WSJ, that Deutsche Bank AG changed the legal structure of its huge U.S. subsidiary to shield it from new regulations that would have required the German bank to pump new capital into the U.S. arm. The bank on Feb. 1 reorganized its U.S. subsidiary, known as Taunus Corp., so that it is no longer classified as a 'bank-holding company'. The technical change has important consequences. Taunus—which at the end of last year had about $354 billion of assets and 8,652 employees, making it one of the largest U.S. banking companies—won't have to comply with a provision of the U.S. Dodd-Frank regulatory-overhaul law that essentially forces the local arms of non-U.S. banks to meet the same capital requirements that American banks fact. A provision of the Dodd-Frank Act was going to require Deutsche Bank to infuse Taunus, which for years operated with thin capital cushions, with what executives feared could be as much as $20 billion. Taunus is no longer a bank-holding company and won't have to comply with the tougher capital rules, even though Taunus still houses Deutsche Bank's U.S. investment bank.

While U.S. regulators haven't objected, the maneuvers by European banks to sidestep elements of Dodd-Frank have generated controversy. Some experts worry the tactics will allow the U.S. arms of the European banks to continue operating with thin capital cushions and that their overseas parents won't come to their rescue if they get into trouble. "When an institution becomes stressed, long experience has shown that foreign banks and their regulators are reluctant to send capital abroad to support U.S. operations," said Sheila Bair, the recently departed chairman of the Federal Deposit Insurance Corp. "The only capital that matters is that which is here in the U.S. and can be accessed." But because Taunus is no longer a bank-holding company, it is unclear what jurisdiction the Fed will have to intervene in the investment-banking arm if it has concerns about how the unit is being run or whether it has adequate capital buffers.”