The Federal Reserve will soon likely finish the rules that would force big foreign banks to follow the same requirements as their US counterparts are have been abiding by ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act. A number of these overseas banks are reportedly not happy with the crackdown.
Dodd-Frank was written so its rules regarding capital would also be applicable to foreign banks. But when the legislation became active, some of these foreign banks changed their American outfits’ legal status so that portions of the act no longer applied to them. This let them get out of having to put huge quantities of capital into their US units to meet the requirements of the law.
Since Congress made its huge overhaul of the financial system, Deutsche Bank (DB), Barclays, Credit Suisse (CS) and others haven’t had to comply with Dodd-Frank, which was supposed to enhance the financial buffer that banks have to keep up in the event of potential losses. (Because raising more capital may require selling new shares, can may weaken profitability measures.) Also, because certain banks have changed their legal status, it is now impossible for outsiders to obtain a clear understanding of their operations in the US.
The Fed initially proposed rules for foreign banks in 2012. Responding to its request for feedback, however, a number of foreign lenders and foreign bank regulators voice strong opposition.
European banks said the Fed’s proposed rules are not fair. For example, while European banks will have to lock up capital at their US operations, American banks don’t have to meet this requirement. Generally, American banks are allowed to establish capital for their firms as a whole, which grants them greater liberty to move capital throughout their different operations. Also, American banks haven’t been ordered to set up a new holding company for their US units—a move that will likely be costly for European banks.
That said, those that support the proposed rules for foreign banks believe they will take away the competitive edge that the institutions in Europe have been benefiting from for years to create a more even playing field in the US. Still, even with the new rules, the biggest US banks could end up holding more capital because of new regulations that could compel them to keep up higher company wide leveraged ratios.
Last month, the Federal Reserve completed a rule giving foreign banks an opportunity to delay a Dodd-Frank Act requirement ordering them to wall off derivatives trades away from their branches in the US. The rule, which goes into effect on January 31, will consider foreign banks’ US branches that are uninsured the same way as branches that are backed by the government. Already, Deutsche Bank, Societe Generale SA (GLE), and Standard Chartered PLC (STAN), which are based in Frankfurt, London, and France respectively, have been granted until July 2015 to comply. Also getting two-year transition periods are US-based Goldman Sachs Group (Inc.), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC).
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Exporting U.S. Rules for Banks, New York Times, January 23, 2014
Fed Releases Final Swaps Push-Out Rule for Foreign Banks, Bloomberg, December 24, 2013
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