February 19, 2014 7:19 pm

European banks eye a shift in US capital ratios

European banks are looking to swell their US capital ratios by converting intercompany loans and by booking more business outside the US, according to the lenders and their advisers.

The Federal Reserve on Tuesday published its final rule requiring higher capital levels from non-US banks, including Deutsche Bank, Barclays and Credit Suisse, with the aim of avoiding a US government bailout if their New York operations run into trouble.

European bank executives welcomed concessions by the Fed, which came after a massive lobbying effort that enlisted the support of some US banks worried about retaliation from European regulators.

In particular, several bankers and lawyers said that they were relieved by a delay in the implementation allowing more time for banks to increase their capital levels by retaining profits.

However, they are also planning to seek Fed approval for less clear cut ways of complying with the new rules designed to make their US assets look smaller and their capital look bigger. “We don’t know what the Fed will permit us to do in terms of advancing our structure,” said one.

For years banks have taken advantage of the fact that capital is measured on a global basis. Deutsche went so far as to have negative capital levels at its main US subsidiary.

The Fed’s rule ends that practice and requires banks to hold more capital locally, providing a bigger cushion against losses and making the prospect of a US rescue more remote. European regulators and banks around the world have criticised the move as creating a Balkanised system that puts non-US banks at a disadvantage.

European banks are already working on submissions to the Fed, due by January 2015, and plan to include a variety of methods of boosting their US capital levels beyond simply retaining earnings.

One option involves retiring intercompany debt that is currently issued to the parent from the US subsidiary and reissuing preferred shares which would qualify as capital. The Fed is set to scrutinise the various ways in which banks are trying to improve their capital requirements.

“No institution is going to say, ‘Gee I’m going to try to come up with the most expensive approach possible,” said Don Lamson, partner at Shearman & Sterling in New York.

Huw van Steenis, analyst at Morgan Stanley, said: “Nothing that we have seen changes the fact that some of the big banks will have to diet – although they will have longer to do it. As they adjust, we think Barclays and Deutsche Bank will continue to lose share to US competitors”

Daniel Davies, analyst at Exane BNP Paribas, said it was “very favourable” for the big European banks to have three years extra to comply with US leverage ratio rules.

“Allowing time for local earnings to be retained and deferred tax assets to be run down makes it unlikely that external capital will need to be issued,” he said.

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