US plan to increase foreign banks’ holdings could backfire

A US plan to force foreign banks to hold far more capital could sow discord among supervisors and lead to retaliation from abroad, EU financial services czar Michel Barnier said last night.

It was the second time in less than a week that EU misgivings about Washington’s aggressive stance in applying domestic rules on foreign banks became public.

“The (rule) would seem to represent a radical departure from the existing US policy on consolidated supervision of (foreign banks),” Barnier said in a letter to Federal Reserve chairman Ben Bernanke, dated Apr 18.

“(It) may frustrate the efforts to ensure a consistent implementation of the Basel III standards across jurisdictions,” Barnier also said, referring to a global accord on the maximum amount of money banks can borrow.

Politicians across the world cracked down on risky bank practices in 2009 after the financial crisis, but many of the rules are still not complete years later.

The Fed in December launched a plan that would force foreign banks to hold as much capital as US banks, regardless of how their overseas parent companies are funded. The Fed did not respond to a request for comment.

The measure could be particularly costly for Deutsche Bank, Germany’s flagship lender, and to a lesser degree for the UK’s Barclays, because of the corporate structure of these two European banks.

The plan, authored by Fed Governor Daniel Tarullo, would be a breach with a US tradition of relying on foreign supervisors to watch overseas banks and allowing them to hold less equity in the US than their domestic counterparts.

In a separate Apr 18 letter, Barnier and a host of other international regulators have also complained about US rules for derivatives regulation to US Treasury Secretary Jack Lew. The US derivatives regulator wants foreign banks to stick to the same rules for trading swaps as US firms, but other countries are urging it to rely more on the rules abroad, with international negotiations ongoing.