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European banks for years have run the operations on much thinner capital buffers than their American rivals. Among the tactics under consideration, banks including the UK's Barclays PLC, Germany's Deutsche Bank AG and Switzerland's UBS AG could shore up their US subsidiaries by buying debt from them, according to people familiar with the banks' strategies. Other banks are selling assets or considering moving businesses into legal structures outside the purview of US regulators.
The ideas are triggering criticism from some banking experts who say they won't strengthen the overall health of the banks and could draw unfavourable scrutiny from regulators, including the Fed, which is responsible for overseeing US banks.
Bank executives say the steps they are considering are legitimate ways of adhering to increasingly onerous regulations, while minimising costs to shareholders. They note that any steps will need to win the support of regulators in both the US and the banks' home countries.
The Fed is expected to publish the rules in final form in coming weeks, but they won't go into effect until next year at the earliest. In addition to requiring banks to thicken their capital cushions and face yearly stress tests, the rules will subject banks to more-rigorous oversight from the Fed. The more-stringent capital rules, part of the Dodd-Frank financial-overhaul law, will apply to foreign banks with at least $50 billion in assets in their US units.
European banks have heavily lobbied the Fed to soften its approach, according to disclosure statements filed with the Fed following meetings with bank executives. That is because the new rules are likely to force major European banks to add billions of dollars of loss-absorbing capital to their US units, according to analysts and industry officials.
One idea gaining traction among some European banks is having the US subsidiaries sell bonds to their parents, according to the people familiar with the banks' strategies. As currently envisioned, the US units would issue to their parents a type of bond that converts into equity if the US business's capital falls below a certain level. Some European regulators have allowed this type of convertible bond to count as capital, although it is regarded as less helpful for absorbing losses than simple equity. The European parent companies would finance the purchases of their subsidiaries' debt by issuing bonds to investors, these people say. While the strategy isn't finalised, it is sufficiently advanced that some bank executives have given it the moniker of "internal convertibles".