Deutsche Bank AG and other foreign banks with major U.S. operations say a Federal Reserve effort to force them to meet local capital standards puts them at greater risk of failure, and their regulators warn of reprisals.
The Fed is preparing to require that such banks establish intermediate holding companies atop their U.S. subsidiaries, as directed by the 2010 Dodd-Frank Act. Like U.S. banks, the Fed-regulated holding companies would have to meet capital standards and submit to stress tests. The rule, for which a public comment period ended yesterday, would take effect July 1, 2015.
Deutsche Bank, continental Europe’s biggest bank, said the proposal would reverse international progress on global regulations and could “increase the potential for failure” of a U.S. subsidiary because it hampers the foreign parent company from supporting it in times of stress.
“The daisy-chain effect would create systemic harm to the U.S. financial system as well as lead to global financial instability,” said Jacques Brand, chief executive officer of Deutsche Bank North America, and Bill Woodley, deputy CEO, in a letter to the agency.
Deutsche Bank announced on April 29 that it would raise as much as 4.8 billion euros ($6.3 billion) to bolster capital as regulators heighten requirements. Deutsche Bank’s U.S. arm would need a $13 billion infusion of capital if the Fed’s rule goes through, Goldman Sachs analysts said in a March 1 note, adding that the German firm would be the hardest-hit European bank under the rule.
An internal transfer of capital of that scale would drop the Frankfurt-based lender’s capitalization elsewhere, “which could increase pressure for an external recap, in our view,” the analysts wrote. “We downgrade our rating to sell.”
The Fed’s proposal would require foreign lenders with more than $50 billion in global consolidated assets and U.S. subsidiaries with more than $10 billion to set up intermediate holding companies. Each new holding company would gather all the bank’s subsidiaries into one place, subjecting them to U.S. capital, liquidity and stress-test standards.
The Institute of International Bankers said more than two dozen banks would have to comply, and the change would “profoundly disrupt” their U.S. operations. Sarah A. Miller, the group’s chief executive officer, said in a comment letter yesterday that the proposal is “virtually certain” to keep some foreign banks from U.S. markets and creates a “risk that other countries will adopt reciprocal measures in response.”
Disregarding the strengths of home-country oversight for the big banks is also “contrary to congressional intent,” according to Miller, who said her group represents banks with $5 trillion in U.S.-based assets and provide a quarter of the country’s commercial and industrial bank loans.
The proposal is meant to make sure U.S. taxpayers don’t have to bail out foreign banks again. In the 2008 financial crisis, the Fed provided $538 billion of emergency loans to the U.S. units of European banks, almost as much as it did to domestic firms.
“The proposal is directly responsive to the vulnerabilities in foreign bank activities observed during and after the financial crisis,” Fed Governor Daniel Tarullo said when the agency approved it in December. “Many large foreign banking organizations came to rely heavily on short-term, wholesale U.S. dollar funding and thereby became subject to destabilizing runs.”
In an April 18 letter to Fed Chairman Ben Bernanke, Michel Barnier, the European Union’s financial services chief, called the proposal “a radical departure from the existing U.S. policy” that he thinks “could spark a protectionist reaction from other jurisdictions.” He encouraged consideration of “equivalent” supervision by the home countries as provided in the EU.
“We strongly believe that the global financial markets can only be supervised globally,” Bundesbank vice president Sabine Lautenschlaeger and BaFin president Elke Koenig, top German banking regulators, said in an April 26 letter to the Fed that called the proposal a “go it alone” effort. “The proposed rule will have a negative impact on international cooperation.”
The German regulators said that banks in Europe “could be forced to reduce their activities in the U.S., as waivers for group-wide capital requirements would be under threat.”
Japan’s central bank also argued that U.S. regulators should acknowledge when foreign-bank units’ “home countries’ authorities and central banks, including the Bank of Japan, are scrupulous in liquidity monitoring on a global basis,” Hiroki Tanaka, executive director of the Bank of Japan, wrote in a comment letter. He criticized the inconsistency of the proposal with “the efforts made at international forums.”
The Dodd-Frank mandate was developed separately from the so-called Basel III global capital accords. The law had also required that foreign banks’ existing U.S. holding companies to meet new capital rules. Deutsche Bank and Barclays Plc reorganized U.S. units to sidestep that provision.
The Fed’s pending rule, which would apply to those banks, doesn’t go far enough, according to nonprofit advocacy group Better Markets. The Washington-based group called for a rule with “stricter” leverage limits in a letter from Dennis Kelleher, its president, and Marc Jarsulic, its chief economist.
“If such modest regulations are not adopted, then foreign banking organizations operating in the U.S. will continue to expose U.S. taxpayers to the risk of having to bail them out, while allowing foreign banking organizations the competitive advantages that flow from evading soundness and stability regulations,” they said in the letter.
Foreign banks in the U.S. own half of the 10 largest broker-dealers, according to the Fed, and they are heavily involved in underwriting U.S. securities. Their commercial-banking operations are generally smaller, and the proposed rule still allows cross-border branches of non-U.S. banks -- a group more numerous than bank subsidiaries -- to operate without the holding-company umbrella.
Though the U.K. also has similar rules for the local operations of foreign banks, the IIB said those regulations are more flexible, including offering waivers from liquidity rules for firms already required to maintain acceptable easy-access funding back home.