* Heads of BNP Paribas, Deutsche Bank met regulator
* Plan to toughen foreign bank oversight is main concern
* European banks face capital shortfall if plan goes ahead
By Lionel Laurent and Philipp Halstrick
PARIS/FRANKFURT, March 22 European bankers are
lobbying U.S. Federal Reserve board member Dan Tarullo in an
attempt to dilute curbs that would tighten oversight of foreign
banks in the United States and squeeze their profits in the
world's biggest financial market.
Tarullo's plan would force foreign banks to group all their
subsidiaries under a holding company, subject to the same
capital standards as U.S. holding companies. The biggest banks
would also need to hold liquidity buffers.
Bankers say the plan would worsen an already fragmented
regulatory landscape as the European Union pushes ahead with
plans to cap bankers' bonuses and to limit risky trading. Euro
zone banks believe the combination will make it tough to compete
for talent or for profits against U.S. rivals.
The heads of France's BNP Paribas and Germany's
Deutsche Bank recently met Tarullo following the
adoption of his foreign bank proposals in December, sources with
direct knowledge of the meetings said.
The Fed confirmed Tarullo met with Deutsche Bank on March 7.
It did not have an immediate comment on the meeting with BNP
Other lenders including Societe Generale are
putting pressure via representatives in lobbying hub Brussels,
the sources said.
"It's an outrageous plan that will further balkanise the
banking sector," said a French banking lobby source.
"Thank goodness we will have a banking union with the
European Central Bank as chief supervisor in place soon.
Tarullo's proposal will be the first issue to be addressed."
Fed records show that executives from Deutsche Bank and
Paribas, including Deutsche's co-CEO Anshu Jain and BNP's CEO
Jean-Laurent Bonnafe, as well as officials from Britain's
Barclays and representatives from the French Embassy
have met with Fed representatives in recent weeks.
The EU has already warned Tarullo that his plans will
fragment the world's capitals market and make it less efficient
in financing trade and help sluggish economies revive.
The Institute of International of Bankers (IIB) held a
conference call on Friday to prepare a letter the lobby group
plans to send to the Fed to complain about the rule, a source
who was on the call told Reuters.
"They are very upset at the change," and are urging "less
draconian" rules, said the source.
Deutsche's Jain warned this week of a regulatory arms race.
"The foreign bank capital requirements as outlined in the
Tarullo proposals will place a burden on foreign banks operating
in the U.S.," he said.
Antony Jenkins, the CEO of Barclays, told investors this
week that he expected the changes would be "manageable."
The United States has traditionally relied on foreign
supervisors to watch overseas banks, allowing them to hold less
capital than their domestic counterparts.
The 2010 Dodd-Frank overhaul of the U.S. financial landscape
put an end to that policy after the Fed was forced to extend
hundreds of billions of dollars in emergency loans to overseas
banks during the financial crisis.
Analysts say Tarullo's plan would force some European banks
to replenish their units' balance sheets with fresh capital,
hurting profits and making it even harder to compete against
local champions like JPMorgan.
The bloc's financial services chief, Michel Barnier, raised
these concerns when he met with Tarullo last month in Washington
to urge better cooperation between the United States and EU so
they could rely on each other's bank supervisors without the
need for "ring fencing."
"If we choose to part ways, this will send the wrong signal
to markets and to the rest of the world. It would increase the
cost of capital, and reduce growth prospects," Barnier said
during his visit.
Deutsche Bank is cited as one case that could need more
capital for its U.S. business, with French banks not far behind,
though their lack of disclosure makes it difficult to calculate
how big the shortfall is, a London-based bank analyst said.
"Most European banks have been subsidising their U.S. units
with capital from their European franchises," the analyst said.
"The French do not give any real disclosure for their U.S.
units, but knowing their style one can imagine that the level of
capital is not going to be that great."
Analysts at Morgan Stanley estimated this month that
Tarullo's plan could leave Deutsche Bank with a $7-9 billion
capital deficit in its U.S. business by 2015.
Deutsche Bank has said it is unclear how much additional
capital it would have to shift into its U.S. operations to meet
the proposals. To avoid having to tap investors, it is looking
at a number of options, including issuing contingent capital
bonds or slightly reducing its U.S. business.
Both BNP Paribas and SocGen are banking on the United States
as a growth opportunity as the eurozone remains mired in
recession and debt woes.
The French banks have made tactical hires and have begun
looking at a selective return to growth in areas like private
banking, fixed income, equity derivatives or mortgage
securitisations, according to bankers.
"SocGen and BNP have in the past pushed to get access to
U.S. dollar business to diversify away from Europe. ...
Tarullo's plan is going to be a problem," the analyst said.