The Federal Reserve Board has adopted the final version of tight new capital rules for foreign banks. The reform is designed to address concerns that US taxpayers will need to foot the bill if European and Asian regulators treat US subsidiaries with low priority when rescuing one of their banks.
“We have to recognise that – notwithstanding all the international co-operation – we do retain the responsibility of maintaining the stability of the US financial system, as do our brethren maintain that responsibility for their own country", said Daniel Tarullo, the Fed governor in charge of regulation.
The new rules will require the largest foreign banks with at least $50 billion in global consolidated assets to follow enhanced capital and liquidity standards, which also apply to US bank holding companies of that size. About 100 foreign banks, in addition to 24 US bank holding companies, would be subject to some of the measures. About 17 of them with at least $50 billion in US assets, including Barclays, Deutsche Bank and Credit Suisse, would have to set up a separately capitalised intermediate holding company (IHC) for its US subsidiaries.
The new rules largely mirror the Fed’s initial proposal, despite massive lobbying efforts by foreign banks. The companies and bank trade groups complained that the measure would create an uneven playing field compared to US competitors because the new holding companies would be assessed on their capital and liquidity requirements based on their US assets. European officials have also threatened retaliation against US banks there.
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Fed press release
BdB - Association of German Banks
"The final rule regulating foreign banks approved by the US Federal Reserve Board means undue deterioration of the operating conditions for European banks in the US", said General Manager Michael Kemmer. Particularly the requirement to set up an intermediate holding company in the US and to meet additional capital and liquidity standards at this level would make it more difficult and more expensive for the big European banks to operate in the US, he said.
“This is a considerable competitive handicap for European banks, as their US competitors are not subject to any equivalent requirements in the EU", Mr Kemmer added. Even though the Fed cited pressure for supervision and financial crisis experience in its defence, the rule remained unreasonable. Better cross-border cooperation with foreign banks’ home authorities would be much more helpful.
After all, one of the crucial lessons from the financial crisis was that supervisors should respond in an internationally coordinated manner whenever an international bank gets into trouble. “For this, we need agreements and mechanisms that work. Instead, all foreign banks whose US operations exceed a certain threshold will now be squeezed into a straitjacket that puts them at a disadvantage in global competition and fails to make the financial markets more stable", Mr Kemmer stressed.
Press release
EBF
“We appreciate the fact that the threshold for the Intermediate Holding Company (IHC) requirement has been raised from $10 billion to $50 billion of US non-branch assets”, explained Guido Ravoet, Chief Executive of the EBF. The EBF also supports the need for further and better assessment of early remediation requirements for FBOs (Sec. 166). Furthermore, the extension of the compliance date for FBOs to 1 July 2016, and the compliance of foreign operations with leverage ratio rules to 2018 are also seen as positive moves.
“We however remain concerned with the negative impact the final rule will have on the presence in the US of European banks and in particular of the IHC capital requirements on the US capital markets”, added Ravoet. Indeed the obligation to establish an intermediate holding and to fulfil additional capital and liquidity requirements at this level will make the presence of European banks in the US more difficult and more expensive, and place them in a competitive disadvantage since US banks are not subject to comparable requirements in the EU.
“Continuous and in-depth cross-border cooperation with home regulators of FBOs would have been a better approach, more respectful of the international standards – all the more so that we are moving in Europe towards a more integrated supervision”, concluded Ravoet.
Press release
"The most important contribution we can make to the global financial system is to ensure the stability of the US financial system", Tarullo said in a speech.
Commissioner Barnier said that Europe wouldn't allow its banks to be "discriminated against", but the Commission avoided directly raising the threat of retaliation on US banks. A spokeswoman noted only that the US's "unilateral" approach "conflicts with the international standards on cross-border cooperation in bank resolution adopted by the Financial Stability Board and endorsed by the G20".
Speaking at a conference in Brussels on 20 February, Barnier said he would seek talks with US authorities in a bid to prevent a planned rule for overseas-based banks from placing EU lenders at a competitive disadvantage. “These US measures are not a good signal", Barnier said. “If we see unilateral measures in one direction there will be measures in the other direction. But I want to avoid that.”
Further reporting:
© Bundesverband deutscher Banken
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