Foreign banks in the US are stepping up a fight for regulatory relief, complaining they have been unfairly hit by supercharged standards on capital developed under the Obama administration.
Industry groups say they have put the push for reduced capital requirements at the banks’ US holding companies at the top of their agenda for the remainder of the year, after signals the Federal Reserve is open to relaxing the rules.
At issue is the topic of “ringfencing”, or the requirement that non-US banks operating in America set up standalone subsidiaries with dedicated capital and liquidity inside them.
The idea is that such structures would make a troubled bank easier to wind down without burdening the taxpayer, while preventing contagion spilling over into the rest of the financial system. Since the Federal Reserve sketched out rules four years ago the European Union has proposed similar regulations, in what critics said was a tit-for-tat response.
The likes of Credit Suisse, Deutsche Bank, UBS and Barclays complain that the Fed, the most powerful of the US bank regulators, has set the capital requirements too high. One New York-based executive at a European bank calculates that his US holding company is operating with about one-quarter more capital, as a proportion of risk-weighted assets, than Wall Street giants such as JPMorgan Chase.
“We need to have a strong presence [in the US] but also seek regulatory consistency globally,” said Yann Gérardin, global head of corporate and institutional banking at BNP Paribas.
The push by the foreign banks is part of a broader, industry-wide effort to reconsider post-crisis constraints, which Republicans say have gone too far by choking the supply of credit to the world’s largest economy.
Lobbyists for the foreign banks are arguing that after last month’s relaxation of laws governing some of the smallest banks in the country, it is high time to loosen conditions for some of the biggest. The Institute of International Bankers has argued publicly for a level playing field, noting that foreign banks provide about one-third of all business loans in the US and hold about one-fifth of all banking assets across the system.
The Basel-based Financial Stability Board has long recommended banks have total loss-absorbing capital (TLAC) in their overseas holding companies of at least 75 per cent of what is required in their home country.
In December 2016 the Fed finalised its rule that foreign banks’ US business should operate with TLAC of at least 90 per cent of the TLAC held outside the US — a significantly higher requirement. In addition, the Fed demanded an extra layer of long-term debt for the big foreign banks, bringing total “internal TLAC” to about 140 per cent of external TLAC.
Randal Quarles, the Fed vice-chair in charge of banking supervision, hinted at concessions last month in a speech last month entitled Trust Everyone: But Brand Your Cattle. He said that the Fed could be open to moving away from a 90 per cent TLAC requirement for foreign banks to a range of 75 to 90 per cent.
Without more flexibility from the US, he said, foreign regulators might be tempted to retaliate. “We are operating under a veil of ignorance, as we don’t know whether the next firm in distress will be a US firm operating globally or a foreign firm with US operations,” he said. “This provides us with strong incentives to view the risks from both sides.”
Bankers at foreign lenders welcomed the remarks as evidence of a change in regime from the Obama-era Fed, which was known for “gold-plating” global standards handed down from Basel.
One lobbyist described the ructions over ringfencing as “basically a trade war in financial regulation”, noting that the UK has threatened counter-measures against EU banks, post-Brexit.
Many jurisdictions require some form of standalone support for foreign banks “but the US is perhaps the most public”, said the senior executive at a European bank. “And they’re at the egregious end.”
