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Overseas banks set to face higher capital
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Overseas banks look set to win only minor concessions when the Federal Reserve signs off on new capital rules this week, as they become increasingly resigned to the fact that the cost of doing business in the United States will go up.
The Fed, whose board of governors meets tomorrow, 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 US taxpayers will need to foot the bill if European and Asian regulators treat US 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 US 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 US that will be subject to the same capital, leverage and other requirements as US 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 US rules are tougher than elsewhere.
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 US$50 billion in assets here in the US,” said one industry source.
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