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 The Fed, whose board of governors meets on Tuesday, will require
overseas banks to hold as much capital in the United States as their
local rivals.
The reform is designed to address concerns that U.S. taxpayers will
need to foot the bill if European and Asian regulators treat U.S.
subsidiaries with low priority if they need to rescue one of their
banks.
Foreign banks with sizeable operations on Wall Street such as
Deutsche Bank and Barclays have pushed back hard against the plan
because it means they will need to transfer costly capital from
Europe.
Fed Governor Daniel Tarullo, in charge of financial regulation, has
given little sign the Fed will relent, however, and the financial
industry expects no wholesale change from when the proposed rule
came out in December 2012.
"(He) certainly does not suggest that they're moving toward greater
leniency, at least for the largest institutions," said Greg Lyons, a
partner working on banking regulation at law firm Debevoise &
Plimpton in New York.
The Fed declined to comment.
Europe and the United States have squabbled over how to apply 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 set up an
intermediate holding company in the United States that will be
subject to the same capital, leverage and other requirements as U.S.
bank holding companies.
This would give banks less flexibility to move money around than
under the current rules, which allow banks to use capital legally
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 when it
votes on the final rule is to lower the number of banks that need to
comply with the strictest requirements, several people working in
the industry said.
"We believe ... that they ... carved it back to those foreign 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 in assets,
and the tweak would mean only the largest 18 foreign banks would
fall under the final rule, a sharp drop from the 26 under the
proposal, this source said.
The United States used to rely on foreign supervisors to watch
overseas banks, allowing them to hold less capital than their
domestic counterparts, on the assumption that the parent company was
sufficiently capitalized.
But that policy ended after the Fed extended hundreds of billions of
dollars in emergency loans to overseas banks during the financial
crisis, which sparked fears foreign banks were not sufficiently
capitalized in the United States.
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Deutsche could face a hefty capital shortfall because of the plans,
bank analysts have said, though Germany's largest bank has said it
is sufficiently capitalized under "all scenarios" after a capital
increase last year.
Morgan Stanley in a recent research note said that funding costs
would go up for foreign banks, with Deutsche most heavily affected,
and that it would also be forced to reduce its business and see
revenues and profits drop.
Now that the changes seem to have become inevitable, bankers are
pushing for more time, because setting up a new legal structure is
not an easy task.
"Technically, (setting up) an intermediate holding company is
intensely difficult," said one senior banker, asking not to be
identified by name or affiliation.
Europe has warned of tit-for-tat action, with European Union
financial services commissioner Michel Barnier saying in October the
bloc would draw up similar measures if the Fed pushed ahead with its
plans.
But Washington, worried that Europe's plans to shield taxpayers from
having to bail out a bank when the next crisis happens aren't as far
advanced as those in America, has taken an uncompromising stance on
such issues.
And even some bankers see benefits in the new rule, given the
often-acrimonious past problems when different countries had to save
a bank with operations across borders.
"It simplifies the U.S. part of the bank structure," said a second
senior investment banker, citing the example of the troubled rescue
of Franco-Belgian bank Dexia.
"If it's implemented in a balanced way, it could improve the
relationship between the home and host regulator, and strengthen
cross-border cooperation in resolution."
(Additional reporting by Emily
Stephenson; editing by Karey Van Hall and Jonathan Oatis)
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