The Federal Reserve will respond to moves by foreign banks such as Deutsche Bank to restructure to avoid higher capital requirements, the Fed’s top regulatory official has said.
Germany’s biggest bank disclosed in its annualreport this week that it had restructured its US subsidiary to separate its bank and its broker-dealer. The move allows the bank to avoid having to commit billions of dollars in additional capital to back up its US operations.
Daniel Tarullo, the Fed governor in charge of regulation, told the Senate banking committee on Thursday that Deutsche’s move would inform a review of foreign bank supervision in the US that will affect banks ranging from Barclays to BNP Paribas.
“As I think about the appropriate modes of regulation and supervision of foreign banking organisations in the United States … [Deutsche’s reorganisation] has certainly affected my thinking about how we do structure regulation of foreign bank organisations, and I think we will need to respond to that,” Mr Tarullo said.
Deutsche’s move was designed to avoid a provision in Dodd-Frank, the US financial reform law, which forces new capital standards on US bank holding companies. Deutsche joined Barclays, which in 2010 became the first to restructure its US operations in response to the new regulations.
The Fed is already reviewing its supervision of foreign banks in line with a separate provision of Dodd-Frank. If the central bank decides to impose higher capital levels on overseas banks in response to the moves from Deutsche and Barclays, it will be a significant policy reversal.
In 2001 the Fed told overseas banks that they would be assessed according to their consolidated capital levels rather than on a US level. That policy allowed Deutsche to maintain a negative US capital ratio balanced by higher levels in Germany.
Deutsche said on Wednesday that it “always had and will continue to have appropriate capital levels in all our US-regulated entities”.
The Dodd-Frank capital requirement that Deutsche successfully avoided calls for large bank holding companies to be as well capitalised as US banks. Sheila Bair, former chairman of the Federal Deposit Insurance Corp, was its most ardent champion and helped get it enacted into law.
The legislation would have forced Deutsche to pour billions of dollars into Taunus, its US subsidiary. During the legislative fight over her measure, Ms Bair pointed to Deutsche’s perceived capital deficit as an example of why it was necessary.
“The only capital that matters is that which is here in the US and can be accessed,” said Ms Bair, now an adviser at the Pew Charitable Trusts. “That is the real issue that needs to be addressed.”
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