The Federal Reserve plans to narrow the number of foreign banks that will have to consolidate their U.S. operations and hold more capital.
The central bank will raise the threshold to $50 billion of assets in the U.S. from $10 billion proposed in 2012 for firms that must have local holding companies, according to three people with knowledge of the decision. The change means about one-third of the two dozen companies originally affected won’t have to comply with harsher capital standards. A final version of the new rules governing foreign lenders is scheduled to be approved by the Fed next week and go into effect next year.
The revised holding-company requirement covers 17 lenders with headquarters outside the U.S., said one of the people, who asked not to be identified because the decision hasn’t been announced. The standard, which has been criticized by European regulators and banks, was designed to prevent a repeat of what happened during the 2008 crisis when the Fed provided $538 billion of emergency loans to U.S. units of European banks.
“The holding company ring-fence provides crucial safeguards for the U.S. regulators,” said Deborah Bailey, a managing director of Deloitte LLP’s banking and securities regulatory practice in New York and a former deputy director of the Fed’s bank-supervision unit. “On the other hand, it will pose challenges for the foreign banks, many of whom have to set up these new structures and shift capital to the U.S.”
The foreign-lender rules will affect 107 institutions based in other countries and doing business in the U.S. The smallest firms have to do as little as set up a U.S. risk committee. Bigger institutions face multiple hurdles, including having an umbrella structure that must comply with domestic capital and liquidity standards. A requirement in the original proposal that all banks with assets greater than $50 billion be subject to Fed stress tests won’t be changed, the people said.
Foreign firms currently can have dozens if not hundreds of legal entities in the U.S., many of which aren’t required to disclose financial information, making it difficult to glean from public data the exact size of their operations.
Banks such as Barclays Plc and Credit Suisse Group AG, each with single U.S. entities that have almost $300 billion of assets, are well above the Fed’s new threshold.
It’s harder to tell whether firms with smaller U.S. operations make the cutoff. The assets of Paris-based Natixis’s U.S. securities units were about $27 billion at the end of 2012, according to the most recent filings with the Securities and Exchange Commission. While the bank’s branch assets, about $73 billion according to Fed data, are excluded under the new rules, the company may have other units that don’t disclose assets.
A spokesman for the bank, whose emergency borrowing from the Fed during the 2008 financial crisis peaked at $15.5 billion, didn’t respond to e-mails or phone calls. The company’s shares rose 2 percent to 4.72 euros at 4:10 p.m. in Paris, outperforming the CAC 40 index.
Rabobank Groep, which borrowed as much as $9.1 billion from the central bank in January 2009, has a holding company that consolidates its non-branch U.S. operations under one roof. The assets of that unit fell below $50 billion at the end of December from $52 billion in September, according to Lynne Burns, a spokeswoman for the Dutch bank. Rabobank expects the holding company to stay below the threshold, she said.
The central bank made the 2012 proposal, championed by Fed Governor Daniel Tarullo, after Deutsche Bank AG, Germany’s biggest lender, and Barclays, the U.K.’s second-largest, dismantled their umbrella holding-company structures, allowing them to avoid tougher standards. The firms say the rule is tantamount to restricting the movement of capital around the world and will impair the availability of financing where and when it’s needed.
The Institute of International Bankers, a group that represents almost 100 foreign banks, lobbied against the holding-company requirement. In an April comment letter about the proposed rule, the group said member banks might be forced to curtail business in the Treasury repo market. That could drain $330 billion, or about 10 percent of the market, leading to higher borrowing costs for the government, the group said, citing an Oliver Wyman study it commissioned.
The rule will have the greatest impact on foreign banks that engage mostly in securities trading in the U.S. London-based HSBC Holdings Plc, Spain’s Banco Santander SA and other lenders that focus on retail banking in the U.S. already need to abide by domestic regulations on capital and liquidity.
Broker-dealer units can rely on their parent companies for backup cash under existing rules. That allowed foreign banks to borrow from U.S. money-market funds and transfer the cash to other countries. During the credit crisis, when the funds were facing a run and wanted their money back, it wasn’t immediately available. That’s when the Fed stepped in.
Deutsche Bank, which would have faced a capital shortfall of as much as $20 billion in its U.S. unit in 2010, has funneled some capital raised at the parent level to its U.S. business and is on track to meet the new requirements, executives have said. The Frankfurt-based bank could convert some of the parent’s loans to the subsidiary into equity to meet capital levels.
For London-based Barclays, such a conversion has additional costs. Because the U.K. has adopted similar rules, requiring minimum capital for local units of banks operating in that country, any equity transferred to the U.S. unit has to be kept apart from the capital of the British subsidiary. That means even if the consolidated business meets global capital requirements, the U.S. and U.K. carve-outs could force the bank to hold more capital in total.
Spokesmen for Deutsche Bank and Barclays declined to comment on the rules.
Foreign banks also lobbied to ease the triggers for when the Fed would demand “remedial action” from a bank considered to be in trouble. In the draft rule, the central bank said it would set an additional capital buffer above the standard requirements in considering when to ask for measures such as reining in some U.S. activities.
While there’s already a buffer for the largest global banks under risk-based capital rules, there isn’t one for a simpler leverage standard where riskiness of assets isn’t part of the calculation. The 1.25 percentage-point buffer included in the new rules will in effect raise the 3 percent global leverage ratio to 4.25 percent for the largest foreign banks operating in the U.S., some firms complained in meetings with Fed officials, the people said. The central bank refused to waver, according to one of the people.
The U.S. has gone beyond the international requirement and asked eight of its largest lenders to meet a 5 percent leverage minimum. Domestic banks have said that their ability to compete in global markets will be hurt if overseas peers have to comply with a smaller figure. The Fed and other U.S. regulators also have pushed for a higher global minimum. Opposition by their European peers has blocked that.