Published March 22, 2013
PARIS/FRANKFURT – European bankers are lobbying U.S. Federal Reserve board member Dan Tarullo in an attempt to dilute curbs that would tighten oversight of foreign banks in the United States and squeeze their profits in the world's biggest financial market.
Tarullo's plan would force foreign banks to group all their subsidiaries under a holding company, subject to the same capital standards as U.S. holding companies. The biggest banks would also need to hold liquidity buffers.
Bankers say the plan will worsen an already fragmented regulatory landscape as the European Union pushes ahead with plans to cap bankers' bonuses and to limit risky trading. Euro zone banks believe the combination will make it tough to compete for talent or for profits against U.S. rivals.
The heads of France's BNP Paribas and Germany's Deutsche Bank
The Fed confirmed Tarullo met with Deutsche Bank on March 7.
Other lenders including Societe Generale are putting pressure via representatives in lobbying hub Brussels, they said.
"It's an outrageous plan that will further balkanize the banking sector," said a French banking lobby source.
"Thank goodness we will have a banking union with the European Central Bank as chief supervisor in place soon. Tarullo's proposal will be the first issue to be addressed."
The Fed had no immediate comment.
Fed records show that executives from Deutsche Bank and Paribas, including Deutsche's co-CEO Anshu Jain and BNP's CEO Jean-Laurent Bonnafe, as well as officials from Britain's Barclays and representatives from the French Embassy have met with Fed representatives in recent weeks.
The EU has already warned Tarullo that his plans will fragment the world's capital market and make it less efficient in financing trade, which is key to helping sluggish economies revive.
Jain, who one of the sources said met Tarullo at the end of February, warned this week of a regulatory arms race.
"The foreign bank capital requirements as outlined in the Tarullo proposals will place a burden on foreign banks operating in the U.S."
Antony Jenkins, the CEO of Barclays, told investors this week that he expected the changes would be "manageable" for Barclays.
"We recognize what the U.S. authorities are seeking to achieve and have an open and constructive dialogue with them to understand how this rule will be implemented."
The United States has traditionally relied on foreign supervisors to watch overseas banks, allowing them to hold less capital than their domestic counterparts.
The 2010 Dodd-Frank overhaul of the U.S. financial landscape put an end to that policy after the Fed was forced to extend hundreds of billions of dollars in emergency loans to overseas banks during the financial crisis.
Analysts say Tarullo's plan would force some European banks to replenish their units' balance sheets with fresh capital, hurting profits and making it even harder to compete against local champions like JPMorgan .
The bloc's financial services chief, Michel Barnier, raised these concerns when he met with Tarullo last month in Washington to urge better cooperation between the United States and EU so they could rely on each other's bank supervisors without the need for "ring fencing".
"If we choose to part ways, this will send the wrong signal to markets and to the rest of the world. It would increase the cost of capital, and reduce growth prospects," Barnier said during his visit.
Deutsche Bank is cited as one case that could need more capital for its U.S. business, with French banks not far behind, though their lack of disclosure makes it difficult to calculate how big the shortfall is, a London-based bank analyst said.
"Most European banks have been subsidizing their U.S. units with capital from their European franchises," the analyst said. "The French do not give any real disclosure for their U.S. units, but knowing their style one can imagine that the level of capital is not going to be that great."
Analysts at Morgan Stanley estimated this month that Tarullo's plan could leave Deutsche Bank with a $7-9 billion capital deficit in its U.S. business by 2015.
Deutsche Bank has said it is unclear how much additional capital it would have to shift into its U.S. operations to meet the proposals. To avoid having to tap investors, it is looking at a number of options, including issuing contingent capital bonds or slightly reducing its U.S. business.
Both BNP Paribas and SocGen are banking on the United States as a growth opportunity as the eurozone remains mired in recession and debt woes.
The French banks have made tactical hires and have begun looking at a selective return to growth in areas like private banking, fixed income, equity derivatives or mortgage securitizations, according to bankers.
"SocGen and BNP have in the past pushed to get access to U.S. dollar business to diversify away from Europe ... Tarullo's plan is going to be a problem," the analyst said.
(Additional reporting by Douwe Miedema in Washington and Huw Jones in London. Writing by Carmel Crimmins; Editing by Alexander Smith and Will Waterman)