* U.S. Fed objects to capital plans of RBS, HSBC, Santander
* All three banks say will resubmit plans
* Fed objections around processes, not capital strength
* Timing of Citizens IPO could slip
(Adds details of Fed objections)
By Steve Slater
LONDON, March 27 Royal Bank of Scotland's
separation and flotation of its U.S. business Citizens
could be delayed after it was one of three foreign banks which
had their plans for dealing with a financial crisis rejected by
the U.S. Federal Reserve.
The U.S. central bank started scrutinising foreign banks'
emergency plans only this year but its tough verdict on RBS,
HSBC and Santander - three of Europe's largest
banks - as well as U.S. giant Citigroup throws down a
gauntlet to the European Central Bank (ECB) as it readies its
own bank stress tests this year.
It also serves as a warning shot for Deutsche Bank
and Barclays as they will have to
participate in future U.S. stress tests due to their large
RBS, HSBC and Santander said they would resubmit their plans
for how to deal with rising losses under a stressed financial
Banks are not allowed to discuss what changes are needed,
although the Fed said its objections on the three European banks
were not to do with capital levels, but rather the process of
how they plan for capital, such as their risk modelling.
"The bottom line is that these banks will have to improve
internal controls," said Joseph Dickerson, analyst at Jefferies.
RBS said it was too early to say if it would delay the
flotation of Citizens, which it wants to take place in the
second half of this year with the sale of between 20 percent and
33 percent of the bank.
RBS, 81-percent owned by the British government after a
bailout during the financial crisis, is under pressure from
local regulators to drum up capital. An initial public offering
(IPO) to sell part of Citizens, which has been valued at between
$9 billion and $15 billion, is a major part of its
Resubmitting plans can take several months. Last year the
Fed did not approve revised capital plans for U.S. bank BB&T
Corp until months after it had objected.
"Because it is hard to ascertain the magnitude of change in
internal controls necessary to please the Fed, we therefore have
limited visibility on how the IPO process of Citizens may be
impacted by the rejection of the capital plan," Dickerson said.
Several banks are also casting an eye on Citizens, including
Japan's Sumitomo Mitsui Financial Group and Mitsubishi
UFJ Financial Group and Canada's TD Bank,
industry sources have said.
RBS has said it is planning for an IPO but was open to
approaches from potential buyers.
The Fed's stance is further evidence of how regulators
across the world have intensified scrutiny of multinational
banks since the crisis, forcing more stringent liquidity and
capital requirements on their local operations rather than
relying on the banks' home regulator to do so.
This shift to "balkanisation" of rules has increased capital
and funding for banks.
HSBC has been unable to repatriate some of the excess
capital it holds in the United States to its parent group in
London since selling its U.S. credit card business three years
Analysts said the prospect of that changing looked slim. "It
will be harder to argue this case when regulators lock up
capital in subsidiaries," said Arun Melmane, analyst at
NEW TO U.S. TESTS
Lenders in Europe face a range of stress tests this year
with the ECB and the Bank of England, in conjunction with the
pan-EU European Banking Authority, preparing to test the
region's banks in an attempt to draw a line under the crisis.
It will be the ECB's first time to oversee the tests and the
Frankfurt-based central bank will be under pressure to prove
that it has flushed out any nasty surprises before it takes over
as supervisor of the currency bloc's banks in November.
The Bank of England said on Thursday that the risk of a
sharp rise in interest rates and a big fall in house prices
would be a part of this year's stress tests.
The Fed said the three foreign banks were all new to its
process, and HSBC and RBS had "significant deficiencies" in
their planning, including "inadequate governance and weak
internal controls around the processes".
The Fed's objection over Santander's plans for its U.S. arm
Sovereign were more severe, saying it was due to "widespread and
significant deficiencies" across its capital planning processes,
including specific problems in governance, internal controls,
risk management and its assumptions and analysis that support
Last year, Citizens returned $1.2 billion of capital to its
parent group. RBS said the Fed did not object to such a payout
again this year.
"We clearly have more work to do to meet the Fed's
standards, and we're fully committed to doing that," said Bruce
Van Saun, the chairman and CEO of Citizens who used to be
finance director at RBS.
(Additional reporting by Sarah White in Madrid. Editing by
Carmel Crimmins and David Stamp)