The
Federal Reserve approved new standards for foreign banks that will
require the biggest to hold more capital in the U.S., joining other
countries in erecting walls around domestic financial systems. Banks with $50 billion of assets in the U.S. will ...
The Federal Reserve approved new
standards for foreign banks that will require the biggest to
hold more capital in the U.S., joining other countries in
erecting walls around domestic financial systems.
Banks with $50 billion of assets in the U.S. will have to
meet the standard under a revised rule approved yesterday, which
raised the threshold from $10 billion proposed in 2012. The
central bank left out two controversial elements of the original
proposal, saying those were still being developed.
Walling off U.S. units of foreign banks, designed to
protect taxpayers from having to bail them out in a crisis, may
increase borrowing costs for those companies and hurt their
profitability. The firms say it will also raise borrowing rates
for governments and consumers.
“This implies concern by policy makers in the U.S.
regarding the speed and robustness of the evolving European
framework for bank resolution,” said Barbara Matthews, managing
director of BCM International Regulatory Analytics LLC, a
Washington-based consulting firm. “It will put pressure on the
Europeans to push ahead with a strong resolution regime.”
The new standards take effect in July 2016, one year later
than originally proposed after the final approval of the
regulation was delayed. Part of the proposal that established
limits on banks’ exposures to single parties was held back
because the Fed is still working on how to define them for U.S.
firms. Another planned change, which would have set an
additional capital buffer above the standard requirements, also
was left out. The industry objected to both elements.
Photographer: Chris Ratcliffe/Bloomberg
The headquarters of Barclays Plc stand beyond a metal gate in the Canary Wharf business... Read More
Firms Affected
The new rules will force the largest foreign firms to
consolidate U.S. operations into one subsidiary and abide by the
same capital and liquidity minimums as domestic peers. The
change in the threshold will lower the number of firms that have
to set up such holding companies to about 17 from 25, a Fed
official estimated.
Banks have until January 2018 to comply with local leverage
requirements. The standards are minimum capital-to-assets ratios
calculated without taking risk of holdings into account. While
U.S. banks have had such a requirement for decades, it was just
introduced as part of global capital standards for other
countries and will go into effect in 2018 as well.
“It would be very onerous for European banks to comply
with leverage rules so fast when it’s completely new for them,”
said Deborah Bailey, a managing director at Deloitte LLP.
Lowering Returns
The U.K. is in the process of adopting U.S.-like rules,
forcing subsidiarization of local operations. The European
Union, which has criticized the U.S. plans, has considered
retaliation. Since the European debt crisis erupted, national
regulators in the EU have prevented cross-border fund transfers
among units of regional banks. The Fed is seeking to prevent a
repeat of the 2008 crisis when it provided $538 billion of
emergency loans to U.S. units of European banks.
The Balkanization of global finance will lower the
industry’s average return on equity by as much as 3 percentage
points, Morgan Stanley analyst Huw van Steenis estimated. The
Americas region accounted for half of global banks’ revenue in
2012 and about 60 percent of their profit, he said. Only 60
percent of those earnings were by U.S.-based banks. Deutsche
Bank AG (DBK) and Barclays Plc (BARC) will be hit hardest among European
banks, he said in a Feb. 13 report.
What’s Required
The foreign-lender rules may affect about 100 institutions.
The smallest have to do as little as set up a U.S. risk
committee. Bigger firms face multiple hurdles, including having
an umbrella structure that must comply with domestic capital and
liquidity standards. The largest banks also must pass Fed stress
tests.
Foreign firms currently can have dozens if not hundreds of
legal entities in the U.S., many of which aren’t required to
disclose financial information, making it difficult to glean
from public data the exact size of their operations. France’s Natixis (KN) and Rabobank Groep of the Netherlands may
benefit from the change in the threshold for the holding company
requirement, according to data compiled by Bloomberg.
Deutsche Bank, Barclays, Zurich-based Credit Suisse Group
AG (CSGN) and other foreign firms that engage mostly in securities
trading in the U.S. are the most affected by the new rules
because they rely on wholesale funding in the country for their
dollar needs. London-based HSBC Holdings Plc (HSBA), Spain’s Banco
Santander SA (SAN) and other lenders that focus on retail banking in
the U.S. depend on deposit funding more and already need to
abide by domestic regulations on capital and liquidity.
‘Disproportionate’ Assistance
The central bank made the 2012 proposal, championed by Fed
Governor Daniel Tarullo, after Deutsche Bank and Barclays
dismantled their umbrella holding-company structures, allowing
them to avoid tougher standards. The Institute of International
Bankers, a group that represents almost 100 foreign banks
including those two, lobbied against the rule, arguing that it
would restrict the movement of capital worldwide. In response to
such criticism, Tarullo said that gains from global capital
flows are reversed in periods of financial stress.
“The funding vulnerabilities of numerous foreign banks and
the absence of adequate support from their parents made them
disproportionate users of the emergency facilities established
by the Federal Reserve,” Tarullo said.
In an April comment letter, the IIB said member banks might
be forced to curtail business in the Treasury repo market. That
could drain $330 billion, or about 10 percent of the market,
leading to higher borrowing costs for the government, the group
said, citing an Oliver Wyman study it commissioned.
Disputed Layer
The IIB hailed the additional time given for compliance
while reiterating its opposition to the essence of the rule.
“We continue to have a fundamental disagreement with the
Fed about the appropriateness and necessity of applying an extra
layer of U.S. bank capital requirements to foreign-owned broker-dealer subsidiaries,” said Sally Miller, head of IIB.
Better Markets Inc., a consumer advocacy group, said the
new rules are a win for U.S. taxpayers and the global financial
system.
“No one should forget that it was the U.S., not the U.K.,
France, Germany or any other country, that bailed out and
prevented the collapse of the global financial system in 2008,”
said Dennis Kelleher, the group’s president.
Gap Narrows
Deutsche Bank, which would have faced a capital shortfall
of as much as $20 billion in its U.S. unit in 2010, has narrowed
that gap to about $2 billion after funneling some capital raised
at the parent level to its U.S. operations, restructuring some
of its businesses and retaining earnings since then, according
to Morgan Stanley’s van Steenis. The German firm still needs to
shrink its U.S. balance sheet by about $140 billion to comply
with new capital minimums though some of that could be done
through separating Latin America units on paper, he said.
Deutsche Bank would have to shrink its repo business to
comply, KBW’s Stimpson estimates. Replacing some parent company
funding with local funding for the U.S. unit could increase
costs by $600 million, about 5 percent of 2015 expected
earnings, according to Stimpson.
Barclays could have a capital shortfall of $10 billion,
according to van Steenis. Being based in London, Barclays is hit
from both sides. Because the U.K. has adopted similar rules,
requiring minimum capital for local units of banks operating in
that country, any equity transferred to the U.S. unit has to be
kept apart from the capital of the British subsidiary. That
means even if the consolidated business meets global capital
requirements, the U.S. and U.K. carve-outs could force the bank
to hold more capital in total.
Time Enough
“We’re confident that we have options that will allow us
to implement the new regulations in the prescribed time frame,”
the British bank said in a statement.
The Fed made clear that it wouldn’t apply bank capital
rules on insurance companies and other financial firms that
might be deemed systemically important. Although this was
“another positive sign” that regulators will come up with
industry-specific standards for insurance companies, it
shouldn’t be “cause for celebration” because it’s not clear
how those will turn out, said John Nadel, an analyst at Sterne
Agee & Leach Inc..
“The industry will have a chance to help guide” the
creation of new rules, Nadel said in a note published today.
“Until proposed rules are made publicly available for
evaluation and comment, we remain very much in the dark as to
how some of the more significant risks will be treated.”
To contact the reporter on this story:
Yalman Onaran in New York at
yonaran@bloomberg.net
To contact the editors responsible for this story:
Rick Green at
rgreen18@bloomberg.net;
David Scheer at
dscheer@bloomberg.net
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