Deutsche Bank, HSBC fight Fed's too-big-to-fail plans

The Pak Banker - - COMPANIES/BOSS -

For­eign banks in­clud­ing HSBC Hold­ings Plc and Deutsche Bank AG are push­ing back against the Fed­eral Re­serve's pro­pos­als on im­ple­ment­ing rules de­signed to end too-big-to-fail, say­ing they are bur­den­some and un­fair to the U.S. units of the world's big­gest lenders. Un­der the Fed's pro­pos­als, U.S. units of for­eign banks af­fected would need an ex­tra layer of debt avail­able to be wiped out in a cri­sis, on top of se­cu­ri­ties qual­i­fy­ing as to­tal loss-ab­sorb­ing ca­pac­ity, or TLAC. Both lay­ers of debt deemed "read­ily avail­able for bail-in" would have to be sold to the par­ent com­pa­nies, rather than third-party in­vestors, ac­cord­ing to the draft rules, which were re­leased for com­ment Oct. 30.

The rules are un­fair be­cause sim­i­lar­sized do­mes­tic U.S. lenders aren't sub­ject to the same re­quire­ments, banks and lobby groups in­clud­ing Banco San­tander SA and the In­sti­tute of In­ter­na­tional Bankers say in their com­ments. In ad­di­tion, the re­quire­ment to push losses up to par­ents runs counter to res­o­lu­tion plans de­signed to stop con­ta­gion.

"In our view, the pro­posed rules would im­pose ex­ces­sive costs" on the af­fected banks' U.S. units and "lead to com­pet­i­tive dis­par­i­ties and un­fair treat­ment in in­ter­na­tional bank­ing with­out com­men­su­rate ben­e­fits to re­solv­abil­ity or U.S. fi­nan­cial sta­bil­ity," the IIB said in its re­sponse to the Fed's pro­pos­als.

The Fed is im­ple­ment­ing rules agreed by the Fi­nan­cial Sta­bil­ity Board that aim to en­sure the world's 30 big­gest lenders can be wound down and re­cap­i­tal­ized in an or­derly way: with­out tax­payer bailouts, with­out in­ter­rupt­ing "crit­i­cal func­tions," and with­out pos­ing a risk to fi­nan­cial sta­bil­ity. The im­por­tance of the U.S. mar­ket to the big­gest global banks means the fall­out from U.S. rule-mak­ing has an im­pact far be­yond that coun­try's bor­ders.

The Fed's pro­pos­als af­fect not only do­mes­tic gi­ants like JPMor­gan Chase & Co. or Wells Fargo & Co., but also the U.S. units of glob­ally sys­tem­i­cally im­por­tant banks, or G-SIBs. On top of sell­ing TLAC-el­i­gi­ble debt to their par­ents, they will also have to is­sue long-term debt that's con­trac­tu­ally sub­or­di­nated to all of their third-party li­a­bil­i­ties and in­cludes a trig­ger al­low­ing the Fed to can­cel it or con­vert it into equity.

Those re­quire­ments are "oner­ous" and put the firms af­fected "at a sig­nif­i­cant com­pet­i­tive dis­ad­van­tage com­pared with com­pa­ra­bly sized non-G-SIB U.S. bank hold­ing com­pa­nies, many of which are di­rect com­peti­tors," the IIB said.

"I have sym­pa­thy with the banks on some of this," said Sharon Bowles, the for­mer chair of the Eco­nomic and Mon­e­tary Affairs Com­mit­tee of the Euro­pean Par­lia­ment. "I am not sure what the point is of forc­ing the ex­pense of a U.S. hold­ing com­pany and then not al­low­ing it to op­er­ate as such."

Fed spokesman Dar­ren de­clined to com­ment on the re­sponses.

The Fed's plan forced HSBC to is­sue TLAC-el­i­gi­ble debt out of its hold­ing com­pany, rather than from its ma­jor op­er­at­ing units, Iain Mackay, HSBC's group fi­nance di­rec­tor, said on an earn­ings call last month. The pro­ceeds will be "down­streamed" to the U.S. unit as "in­ter­nal TLAC" through intra-group debt pur­chases. The con­se­quence is that losses will be borne by HSBC's U.K. hold­ing com­pany, rather than out­side in­vestors.

As a re­sult, the res­o­lu­tion plans of HSBC, Deutsche Bank and San­tander would be un­der­cut. All three plan to adopt a "mul­ti­ple point of en­try" res­o­lu­tion strat­egy, which means lo­cal units would be re­solved by host coun­try au­thor­i­ties if the trou­ble is caused by the lo­cal busi­ness. Con­versely, where it's the par­ent that's in trou­ble, the for­eign unit would be un­af­fected. That doesn't work if losses at the U.S. unit would be pushed up to the par­ent, San­tander said in its sub­mis­sion to the Fed. San­tander's "res­o­lu­tion strat­egy that is de­signed to re­duce sys­temic risk and fa­cil­i­tate res­o­lu­tion at the host level," would be un­der­mined by the Fed's rules, the Span­ish bank's U.S. unit said in its re­sponse. Gersh banks'

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