Bernanke Warned by Barnier That Bank Unit Rules Risk Retaliation
The European Union intensified its campaign against U.S. Federal Reserve proposals to toughen oversight of bank units belonging to overseas lenders, warning of “potential retaliation” against the plans because they will drive up costs.
Michel Barnier, the EU’s financial services chief, last week sent a three-page critique of the draft measures to Fed Chairman Ben S. Bernanke, saying that they risk leaving EU banks at a competitive disadvantage. The move follows a meeting this month between Barnier and U.S. Treasury Secretary Jacob J. Lew, where the Frenchman pressed for a change of course.
The proposals are “a radical departure from the existing U.S. policy,” and may undermine efforts to ensure that large banks can be safely wound down if they fail, Barnier wrote in his April 18 letter to Bernanke, obtained by Bloomberg News. The standards “could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery.”
Under the draft Fed plans, published in December, foreign lenders would be forced to organize their U.S. subsidiaries under a locally regulated holding company, with its own reserves of capital and easy-to-sell assets that could be tapped in crises. Bernanke has said the measure would be an “important step” in addressing “the risks that large, interconnected financial institutions pose to U.S. financial stability.”
The Fed standards shouldn’t apply to banks that are already subject to rigorous regulation in the country where their headquarters are based, according to Barnier’s letter.
As they stand, the measures would have “relevant economic consequences” for EU banks, arising from the costs of meeting extra capital and liquidity requirements, reporting rules, and risk management standards, Barnier wrote.
Banks would be required to comply with the new Fed rules if they have consolidated assets of $50 billion, with U.S. subsidiaries accounting for $10 billion.
“The U.S. operations of large foreign institutions have changed in recent years -- marked in part by significantly greater reliance on potentially unstable, short-term wholesale funding and rapid growth in their capital markets activities,” said Barbara Hagenbaugh, a Fed spokeswoman.
The “targeted adjustments” to the Fed’s supervision “create a more consistent regulatory structure for all firms operating in the United States,” Hagenbaugh said. The U.K., “the most comparable host country to the United States, has already required that subsidiaries of large foreign financial firms in London meet local capital and liquidity requirements.”
The proposals would allow overseas-based banks to maintain branches in the U.S. without setting up the holding company structure. Branches allow banks to carry out some activities overseas, with regulatory oversight still largely conducted by the lender’s home country.
The measures, which are open for comment until the end of April, would take effect from July 1, 2015.
The U.S. proposals contradict international agreements on how regulators should co-operate cross-border to handle the failure of a large international bank, and may undermine the implementation of Basel bank capital rules, Barnier said in the letter.
The plans would have “a ringfencing effect, which, besides fragmenting the global banking activity, also affects cooperation among regulators in the resolution of cross-border institutions,” Barnier wrote.
The Fed rules are one of two main battles Barnier is waging to change proposed U.S. financial requirements.
Barnier was among nine overseas finance officials that signed a separate letter last week urging Lew to limit the cross-border reach of swaps rules they say are fragmenting the market for over-the-counter derivatives.
That letter, signed by ministers including U.K. Chancellor of the Exchequer George Osborne and Taro Aso, Japan’s deputy prime minister, follows complaints by JPMorgan Chase & Co., Goldman Sachs Group Inc. and overseas officials about the planned reach of U.S. Commodity Futures Trading Commission rules.
“We fully understand the American concern to safeguard financial stability, but we would like to ensure that there is a fair, level playing field for European banks operating in the U.S., and that the regulatory approach to them is proportionate,” Chantal Hughes, Barnier’s spokeswoman, said by e-mail.
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