Last updated: April 22, 2013 7:12 pm

EU warns US on bank ‘protectionism’

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Michel Barnier©Bloomberg

Michel Barnier, EU commissioner responsible for internal market and services

US plans to force foreign banks to hold more capital are a threat to harmonious global regulation and risk “a protectionist reaction”, the EU commissioner in charge of financial services has warned.

Michel Barnier told Ben Bernanke, Federal Reserve chairman, that plans to force higher capital requirements on the US subsidiaries of European banks could lead to retaliation against US banks.

In a pointed letter seen by the Financial Times, Mr Barnier argued that the Fed plans are a “radical departure” from past US policy and could hamper the international economic recovery.

He warned that retaliation could “end up with a fragmentation of global banking markets”.

The transatlantic rift highlights the growing levels of discord between global regulators, whose efforts to protect local taxpayers are raising fears that international finance will be forced to retreat behind national borders.

A senior US official rebuffed the letter, saying that Brussels sometimes appeared more concerned about protecting the competitiveness of its banks than the safety of the financial system.

The Fed said in response that it was proposing “targeted adjustments” to regulations to account for “new risks” stemming from foreign banks having, over recent years, a “significantly greater reliance on potentially unstable, short-term wholesale funding”.

A Fed spokesperson added: “The United Kingdom, the most comparable host country to the United States, has already required that subsidiaries of large foreign financial firms in London meet local capital and liquidity requirements. As always, the Federal Reserve will consider carefully the comments received on its proposals before issuing regulations in final form.”

In testimony to Congress last week, Scott Alvarez, the Fed’s general counsel, said of foreign banks: “If they’re allowed to compete in the United States without the same capital requirements and without the same prudential limits that apply to other US organisations in the United States, that could give the foreign entities a competitive advantage here, as well as exposing our system to more financial risk.”

Under the Fed’s proposal, which could come into force later this year, large foreign banks would have to ensure that their subsidiaries met a new international minimum level of 7 per cent core capital to risk-weighted assets.

The proposal is aimed squarely at Deutsche Bank, whose US subsidiary maintains negative equity capital, with banks such as Barclays and BNP Paribas a second-order concern.

At the moment, large banks are usually judged on their aggregate international level of capital, allowing Deutsche to offset its more weakly capitalised US business against its stronger German operations.

Mr Barnier is urging Mr Bernanke to adjust the implementation so that jurisdictions with “equivalent” prudential rules, such as the EU, are exempt and can supervise a bank’s consolidated global operations from its home country.

But US officials are concerned that they would be left to stabilise Deutsche’s US operations in a market panic, noting that the bank tapped the Fed’s emergency lending facilities in the last crisis. They also point out that the UK has already required US banks to set up separate subsidiaries with separate capital and liquidity.

Both Deutsche and Barclays have already attempted restructurings to evade similar proposals. The Fed’s plan would negate those moves.

Deutsche – which started working on a plan to combat the measure more than three years ago codenamed “Project Rewind” – has attempted to rally US executives to the cause, according to people familiar with those conversations.

But several senior US bank executives have told the Financial Times that most of their own foreign operations would already meet international minimum levels, and they think Deutsche should be forced to hold more capital in the US.

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