Foreign banks bracing for tough U.S. Fed capital rules

Reuters - UK Focus

By Douwe Miedema

WASHINGTON, Feb 16 (Reuters) - Overseas banks look set towin only minor concessions when the Federal Reserve signs off onnew capital rules next week, as they become increasinglyresigned to the fact that the cost of doing business in theUnited States will go up.

The Fed, whose board of governors meets on Tuesday, willrequire overseas banks to hold as much capital in the UnitedStates as their local rivals.

The reform is designed to address concerns that U.S.taxpayers will need to foot the bill if European and Asianregulators treat U.S. subsidiaries with low priority if theyneed to rescue one of their banks.

Foreign banks with sizeable operations on Wall Street suchas Deutsche Bank (Xetra: DBK.DE - news) and Barclays (LSE: BARC.L - news) have pushedback hard against the plan because it means they will need totransfer costly capital from Europe.

Fed Governor Daniel Tarullo, in charge of financialregulation, has given little sign the Fed will relent, however,and the financial industry expects no wholesale change from whenthe proposed rule came out in December 2012.

"(He) certainly does not suggest that they're moving towardgreater leniency, at least for the largest institutions," saidGreg Lyons, a partner working on banking regulation at law firmDebevoise & Plimpton in New York (Frankfurt: HX6.F - news) .

The Fed declined to comment.

Europe and the United States have squabbled over how toapply their rules to overseas banking units, and the Fed's plan,as well as its tougher reading of globally agreed capital rules,have widened the rift.

The Fed proposal requires the largest overseas banks to setup an intermediate holding company in the United States thatwill be subject to the same capital, leverage and otherrequirements as U.S. bank holding companies.

This would give banks less flexibility to move money aroundthan under the current rules, which allow banks to use capitallegally allocated in their home country. In some cases, the U.S.rules are tougher than elsewhere.

TIT FOR TAT

One of the changes the Fed's five-member board may make whenit votes on the final rule is to lower the number of banks thatneed to comply with the strictest requirements, several peopleworking in the industry said.

"We believe ... that they ... carved it back to thoseforeign banks that have $50 billion in assets here in the U.S.,"said one industry source.

So far, the cutoff was for U.S. units with $10 billion inassets, and the tweak would mean only the largest 18 foreignbanks would fall under the final rule, a sharp drop from the 26under the proposal, this source said.

The United States used to rely on foreign supervisors towatch overseas banks, allowing them to hold less capital thantheir domestic counterparts, on the assumption that the parentcompany was sufficiently capitalized.

But that policy ended after the Fed extended hundreds ofbillions of dollars in emergency loans to overseas banks duringthe financial crisis, which sparked fears foreign banks were notsufficiently capitalized in the United States.

Deutsche could face a hefty capital shortfall because of theplans, bank analysts have said, though Germany's largest bankhas said it is sufficiently capitalized under "all scenarios"after a capital increase last year.

Morgan Stanley (Berlin: DWD.BE - news) in a recent research note said that fundingcosts would go up for foreign banks, with Deutsche most heavilyaffected, and that it would also be forced to reduce itsbusiness and see revenues and profits drop.

Now that the changes seem to have become inevitable, bankersare pushing for more time, because setting up a new legalstructure is not an easy task.

"Technically, (setting up) an intermediate holding companyis intensely difficult," said one senior banker, asking not tobe identified by name or affiliation.

Europe has warned of tit-for-tat action, with European Unionfinancial services commissioner Michel Barnier saying in Octoberthe bloc would draw up similar measures if the Fed pushed aheadwith its plans.

But Washington, worried that Europe's plans to shieldtaxpayers from having to bail out a bank when the next crisishappens aren't as far advanced as those in America, has taken anuncompromising stance on such issues.

And even some bankers see benefits in the new rule, giventhe often-acrimonious past problems when different countries hadto save a bank with operations across borders.

"It simplifies the U.S. part of the bank structure," said asecond senior investment banker, citing the example of thetroubled rescue of Franco-Belgian bank Dexia (Other OTC: DXBGY - news) .

"If it's implemented in a balanced way, it could improve therelationship between the home and host regulator, and strengthencross-border cooperation in resolution."

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