This week, the Federal Reserve passed new rules that could make large foreign banks increase their capital by billions of dollars. Per the regulations, Credit Suisse Group AG (CS), Deutsche Bank AG (DB), UBS AG (UBS), and Barclays PLC (BCS), and other lenders based overseas that have units in the US will have to meet requirements having to do with debt levels and capital, as well as satisfy yearly “stress tests.”
With the new rules, 20 banks will now be required to set up US holding companies. Foreign banks with more than $50 billion in US assets will need to keep up more loss-absorbing capital than what is required by other nations. This could compel them to raise more debt or equity for their units in this country. For example, reports the Wall Street Journal, Citigroup (C) analysts say that Deutsche Bank’s unit that has been running with essentially zero capital. Under the new rules, however, it will have to deal with a shortfall of about $7 billion.
Also, foreign banks with assets greater than $10 billion will have to take the Fed’s yearly stress-test process, which would necessitate stringent review of capital levels and assets. Foreign banks that fail to pass the test could find their business activities in the US restricted. Banks with assets of at least $50 billion would have to satisfy enhanced leveraged ratios (By January 2018), risk-management, and liquidity requirements.
The foreign banks likely to be most impacted by the new rules are those with the biggest brokerage firm operations in the US. This is why firms, such as Barclays, are considering having their US operations give subordinated debt to parent firms as potentially loss-absorbing capital.
The Fed’s new rules, however, will not help relations with the European Union, to which most of the banks affected belong. Issuing a statement, European internal market commissioner Michel Barnier said that the EU would not accept “discriminatory measures” that would allow European banks to be treated “worse than US ones.” He has implied that US banks could be subject to retaliatory measures in Europe.
The Fed’s new rules were mandated under the 2010 Dodd Frank Act. Their main purpose is to provide greater protection to the global financial system by making sure big banks are doing an adequate job of controlling, measuring, and protecting themselves from risk. (During the 2008 financial meltdown, a lot of foreign banks went to the Fed for emergency loans, causing it to wonder whether these institutions would always bankstop their US units during a crisis.)
Foreign banks are complaining that the Fed’s rules are a way to export US rules abroad and that this could create conflict with regulations in their home country, which might make them pull out of the US. Banks in Europe have been trying to figure out how to mitigate or circumvent the rules, including shrinking under the asset threshold set by the Fed or moving sections of their US operations. Some foreign are complaining that the rules slant competition in favor of US banks.
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Fed Sets Rules for Foreign Banks, The Wall Street Journal, February 18, 2014
Read the Board of Governors of the Federal Reserve System's Press Release, February 18, 2014
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Foreign Banks Soon Expected to Abide by US Rules, Institutional Investor Securities Blog, January 27, 2014
$13B MBS Fraud Settlement Between JPMorgan and the US is Under Dispute in New Securities Lawsuit, Institutional Investor Securities Blog, February 10, 2014
J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles, Stockbroker Fraud Blog, October 28, 2013