The German banking association, BdB, said on Monday that a push by U.S. regulators to tighten oversight of foreign banks would put European banks at a competitive disadvantage internationally.
In December, Federal Reserve Board Governor Daniel Tarullo said foreign banks should be required to hold as much capital as their U.S. counterparts, regardless of how their overseas parent companies are funded - a move that could trigger competition among regulators requiring banks to hold different levels of capital.
"If other countries followed the U.S. example, it would result in a dangerous fragmentation of financial markets. Different rules and standards would make markets more unstable and inefficient," BdB managing director Michael Kemmer said in a statement.
"These new rules amount to a clear disadvantage when it comes to competing with U.S. banks on a global level."
The United States has traditionally relied on foreign supervisors to regulate overseas banks and specify appropriate levels of capital, just as U.S. banks operating in the euro zone are judged on their worldwide capital.
The Fed's measure could be particularly costly for Deutsche Bank, Germany's flagship lender, and to a lesser degree for Britain's Barclays Plc, because of their corporate structure.
European Union Internal Market Commissioner Michel Barnier, the EU's top financial regulator, has said the U.S. plan could lead to retaliation from other regulators.
As a governor on the Fed Board in Washington, Tarullo is a point person for financial regulation, but also votes at every policy-setting meeting of the U.S. central bank.
(Reporting by Edward Taylor; Editing by Kevin Liffey)