German Regulators Oppose Fed Rule on Foreign Bank Oversight

Germany’s top two banking regulators oppose a proposed Federal Reserve rule aimed at compelling large foreign bank holding companies to hold more capital and liquidity in their U.S. subsidiaries.

Bundesbank vice president Sabine Lautenschlaeger and Bafin president Elke Koenig said in an April 26 letter to the Fed board that “‘go it alone’ national initiatives can tend to weaken the global setup and stability” of global systemically important banks “instead of stabilizing them.”

The Fed’s proposal would affect Deutsche Bank AG, Germany’s biggest lender, which last year dropped its bank holding company status so that it could meet U.S. requirements without assigning additional capital and liquidity to its unit in the country. The German regulators’ letter is available on the Fed’s website.

Fed officials have signaled they are unlikely to back down in the face of opposition because their experience in the financial crisis showed that some of the biggest borrowers from their emergency facilities were foreign banking groups in need of dollar funding.

“The proposal is directly responsive to the vulnerabilities in foreign bank activities observed during and after the financial crisis,” Daniel Tarullo, the Fed governor in charge of bank supervision and regulation said Dec. 14 when the rule was proposed. “Many large foreign banking organizations came to rely heavily on short-term, wholesale U.S. dollar funding and thereby became subject to destabilizing runs.”

Coordinated Supervision

The German regulators listed five points in opposing the Fed’s proposed rule. They said international banking accords call for coordinated supervision of internationally active banks. The Fed rule puts that approach at risk and tends toward “‘renationalizing’ supervision, which, in fact, harbors real potential for supervisory arbitrage and global imbalances,” the regulators said in their letter.

The rule will also have a “negative impact on international cooperation since it does not take appropriate account of consolidated supervision following comparable home country standards,” the German regulators said.

“Solo approaches will not appropriately mirror the complex risks taken by internationally active banks and will create a conglomerate of fragmented supervisory approaches,” the letter said, adding that European banks may have to reduce their activity in the U.S. as a result of the rule.

Fed’s Proposal

The Fed’s proposal would require foreign banking operations with global consolidated assets of $50 billion or more, and U.S. subsidiaries with $10 billion or more in total assets, to create an intermediate holding company, which would be required to maintain the capital and liquidity standards applied to U.S. bank holding companies.

The units would also be under supervision by the Federal Reserve, the nation’s bank holding company regulator, face stress tests, and be required to hold a 30-day buffer of “highly liquid assets.”

Foreign banking organizations with global consolidated assets of $50 billion or more would be required to meet the standards on July 1, 2015.

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