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European banks to shift U.S. assets to dodge new Fed rules
February 8, 2013 / 4:11 PM / 5 years ago

European banks to shift U.S. assets to dodge new Fed rules

* Foreign banks with global assets larger than USD50bn mull options

* 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 & Sterling.

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.

CUTS AHEAD

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 hold.

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 & Foerster.

In the past, market sources told IFR, banks have successfully dodged US regulations by reducing the size of their US portfolios.

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 hold.

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 the crisis.

“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 expand.

“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 & Overy.

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.

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