Tarullo says Fed seeks more cap­i­tal at for­eign banks’ units

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Fed­eral Re­serve Gov­er­nor Daniel Tarullo said the cen­tral bank is plan­ning tougher cap­i­tal and lever­age rules for US units of for­eign banks, which some firms have sought to skirt. “We need to ad­just the reg­u­la­tory re­quire­ments for for­eign banks in re­sponse to changes in the na­ture of their ac­tiv­i­ties in the United States, the risks at­ten­dant to those changes, and in­struc­tions from Congress,” Tarullo said to­day in a speech at Yale Univer­sity in New Haven, Con­necti­cut.

Fed­eral Re­serve Gov­er­nor Daniel Tarullo said the cen­tral bank is plan­ning tougher cap­i­tal and lever­age rules for U.S. units of for­eign banks, which some firms have sought to skirt.

The Fed will force non-U.S. firms to house all of their U.S. busi­nesses, in­clud­ing se­cu­ri­ties trad­ing, within reg­u­lated hold­ing com­pa­nies, Tarullo said. Those hold­ing com­pa­nies also must abide by cap­i­tal and liq­uid­ity rules that al­ready ap­ply to U.S. coun­ter­parts, he said. That means for­eign banks’ lo­cal units would have to bol­ster cap­i­tal in the U.S. to guard against losses re­gard­less of their par­ents’ re­sources.

Deutsche Bank and Lon­don­based Bar­clays Plc (BARC) have changed their U.S. le­gal sta­tus in the past two years to dis­card the hold­ing­com­pany struc­ture. The treat­ment could force for­eign banks to in­ject cap­i­tal into their U.S. units and limit their abil­ity to move funds across bor­ders, said Luigi De Ghenghi, a part­ner at law firm Davis Polk & Ward­well LLP in New York.

“Frag­ment­ing cap­i­tal along re­gional lines will im­pose real costs on do­ing cross-bor­der bank­ing,” said De Ghenghi, a mem­ber of the firm’s fi­nan­cial-in­sti­tu­tions group. “Global banks will risk end­ing up with over­cap­i­tal­ized units all around the world be­cause reg­u­la­tors are re­luc­tant to al­low the repa­tri­a­tion of cap­i­tal once it’s moved to their ju­ris­dic­tion.”

Tarullo, who leads the Fed’s com­mit­tee on bank su­per­vi­sion, said in re­sponse to au­di­ence ques­tions that the reg­u­la­tor is en­ter­ing the “home­stretch” of com­plet­ing the pro­posal that would in­clude th­ese new re­quire­ments.

While Tarullo didn’t in­di­cate which banks would be cov­ered by the new rules, he said 23 for­eign lenders have at least $50 bil­lion in as­sets in the U.S., the thresh­old es­tab­lished by the 2010 Dodd-Frank Act for treat­ing U.S. firms with “spe­cial pru­den­tial mea­sures.”

The Fed’s move fits with a world­wide trend of in­creas­ing lo­cal su­per­vi­sion pow­ers, ac­cord­ing to Bar­bara Matthews, man­ag­ing di­rec­tor of BCM In­ter­na­tional Reg­u­la­tory An­a­lyt­ics LLC, a Washington-based con­sult­ing firm. Reg­u­la­tors are mov­ing in that di­rec­tion be­cause of the fail­ure to agree on a cross-bor­der res­o­lu­tion frame­work for glob­ally ac­tive banks, she said.

“So when the next cri­sis hits, you can seize the as­sets of the lo­cal unit and pre­vent its liq­uid­ity from flee­ing your ju­ris­dic­tion,” Matthews said.

Tarullo also pointed in his speech to ob­sta­cles fac­ing an in­ter­na­tional res­o­lu­tion frame­work. He said other coun­tries were mov­ing to­ward tougher rules for for­eign banks func­tion­ing in their ju­ris­dic­tion and re­ferred to the 2008 cri­sis when the Fed came to the aid of for­eign lenders op­er­at­ing in the U.S. as a rea­son why a new reg­u­la­tory ap­proach was needed.

The Fed pro­vided $538 bil­lion of emer­gency loans to the U.S. units of Euro­pean banks dur­ing the fi­nan- cial cri­sis, al­most as much as it did to domestic firms. That in­creased po­lit­i­cal pres­sure on law­mak­ers and reg­u­la­tors to tighten rules for all. For­eign lenders cur­rently can choose whether to cre­ate U.S. bank hold­ing com­pa­nies. Those units were ex­empt from cap­i­tal stan­dards as long as their par­ent firms were well-cap­i­tal­ized. Dodd-Frank re­moved that ex­emp­tion. Some nonU.S. lenders then al­tered their le­gal struc­tures to re­main out­side the scope of lo­cal cap­i­tal rules.

Deutsche Bank, Ger­many’s big­gest lender, es­ti­mated in 2010 that it might need to in­ject al­most $20 bil­lion into its U.S. unit to com­ply with the same rules as domestic banks, the Wall Street Jour­nal re­ported last year, cit­ing an in­ter­nal com­pany doc­u­ment. The di­vi­sion, known as Taunus Corp., dropped its sta­tus as a bank hold­ing com­pany in Fe­bru­ary.

Bar­clays, the U.K.’s sec­ond- big­gest bank, said in Fe­bru­ary 2011 that it dereg­is­tered Bar­clays Group U.S. as a bank hold­ing com­pany, partly to side­step the cap­i­tal re­quire­ments.

UBS and Credit Suisse Group AG (CSGN), Switzer­land’s largest lenders, were among firms that didn’t have hold­ing com­pa­nies to start with. Most of the largest for­eign in­sti­tu­tions have small com­mer­cial-bank­ing units in the U.S., where their op­er­a­tions are largely cen­tered on se­cu­ri­ties trad­ing. Toronto- Do­min­ion Bank (TD) al­ready has a hold­ing com­pany in the U.S. that will have to add about $5 bil­lion in cap­i­tal to com­ply with Dodd-Frank, ac­cord­ing to Brad Smith, an an­a­lyst at Stonecap Se­cu­ri­ties Inc. A re­quire­ment to con­sol­i­date all U.S. busi­nesses into the hold­ing struc­ture would boost the cap­i­tal need by bil­lions of dol­lars, Smith said in a note to­day.

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