* Foreign banks with global assets larger than USD50bn mull
* Deutsche Bank plans to reduce size of US balance sheet
* Banks accuse Fed of "nationalistic" practices
By Aimee Donnellan
LONDON, Feb 8 (IFR) - Proposed new regulation from the
Federal Reserve has drawn the ire of European banks, which are
now opting to reduce their US assets in order to cut the onerous
extra costs of compliance.
Deutsche Bank is already looking to slash its US balance
sheet, according to a person with knowledge of the situation,
and other banks have also said they will make similar moves.
The new rules would require foreign banks with more than
USD10bn in US assets to group subsidiaries into a holding
company, and force that entity to be separately capitalised at
the same level as domestic US banks.
"These requirements overstep the intent of the Dodd-Frank
Act," said a senior executive at a European bank that would be
hit by the rule changes.
"They undermine other proposed international rules and
introduce confusing and duplicative reporting requirements."
The US has traditionally relied on foreign regulators to
watch overseas banks, and allowed their US entities to rely on
capital held by the parent institution.
But it began clamping down on foreign banks with the
introduction of Dodd-Frank financial regulation, and the latest
Fed proposals tighten the leash further still.
"The Fed's requirements will not let foreign banks get away
with having low levels of capital [held by their US entities]
anymore," said Brad Sabel, a bank regulatory partner at Shearman
European banks have begun lobbying the Fed to change the new
proposals, which were unveiled in December but are not expected
to come into effect until mid-2015.
They are concerned about the extra costs of raising capital
and restructuring to create a holding company, which are
substantial enough to prompt a re-think of their US operations.
Among other changes, the holding company requirements would
subject foreign banks to an additional leverage cap based on the
bank's total assets rather than on a risk-weighted basis.
"The cost of the holding company, transactional fees and
taxes all add up to quite a lot of additional costs for foreign
banks to have exposure to the US," said Sabel.
The person with knowledge of Deutsche's plans said the bank
will reduce the size of its US balance sheet and restructure its
US entity, but will not raise any new capital. By cutting US
assets, it will also cut the amount of capital it is required to
Meanwhile other European banks such as Barclays, BBVA and
Santander, which have significant US assets, would also be
affected by the changes.
Lawyers said that, in order to avoid costs, banks may be
able to restructure their operations so that commercial lending
takes place at a US branch or agency network, which do not fall
under the proposed regulations.
"With regard to US branches and agencies, in general foreign
banks only need to demonstrate to the Fed that they are
complying with Basel III requirements at home," said Charles
Horn, a partner in the Washington office of law firm Morrison &
In the past, market sources told IFR, banks have
successfully dodged US regulations by reducing the size of their
One bank in particular was said to have slashed its US
exposure when President Obama considered imposing a tax on large
financial institutions in 2010 to cover bailout losses. In the
end, the tax wasn't implemented.
AT ODDS WITH THE WORLD
But bankers and lawyers say it will be difficult to get
around the new changes, which the Fed insists will simply hold
foreign banks to the same standards as their US counterparts.
While foreign banks in the past had an advantage by not
having to hold as much capital in their US entities, the Fed
still ended up supporting a number of them - including Deutsche,
RBS, Societe Generale and UBS - when the financial crisis took
But many in the market see the Fed's move as putting it at
odds with the rest of the world, and a rebuff of the global
regulations spearheaded by the Basel Committee in the wake of
"We reject the assertion that this in any way creates a
level playing field," the senior European bank executive said.
Another banker told IFR: "The Fed is very nationalistic and
is not going to adhere to any harmonisation that does not serve
its interests first."
Those opposed to the changes say that, in addition to the
burden of costs, a possible knock-on effect will be that foreign
banks undertake less lending in the United States.
Meanwhile, smaller banks with less than USD10bn in US assets
- which are exempt from the changes - may be less likely to
"These proposals could prevent certain banks from growing
their businesses if they are currently below the Fed's
threshold," said Doug Landy, a regulatory partner at Allen &
Banks have until the end of March to make their case to the
regulator, although some in the market expect the consultation
period will be extended until the end of May.