EU’s Barnier Warns U.S. Over ‘Radical’ New Bank Rule

April 23, 2013 by Douwe Miedema

A U.S. plan to force foreign banks to hold far more capital could sow discord among supervisors and lead to retaliation from abroad, European Union financial services czar Michel Barnier said on Monday.

It was the second time in less than a week that EU misgivings about Washington’s aggressive stance in applying domestic rules on foreign banks became public.

“The [rule] would seem to represent a radical departure from the existing U.S. policy on consolidated supervision of [foreign banks],” Barnier said in a letter to Federal Reserve Chairman Ben Bernanke, dated April 18.

“[It] may frustrate the efforts to ensure a consistent implementation of the Basel III standards across jurisdictions,” Barnier also said, referring to a global accord on the maximum amount of money banks can borrow.

Politicians across the world cracked down on risky bank practices in 2009 after the financial crisis, but many of the rules are still not complete years later, and countries are haggling about a rising number of issues.

Asked about Barnier’s letter, the Fed defended the plan it launched in December, which would force foreign banks to hold as much capital as their U.S. counterparts regardless of how their overseas parent companies are funded.

The U.S. operations of overseas banks had become more risky in recent years as they relied more on potentially unstable short-term funding and on capital market activities, Fed spokeswoman Barbara Hagenbaugh said.

And the UK had equally required foreign bank subsidiaries to meet local capital and liquidity requirements.

“The Federal Reserve will consider carefully the comments received on its proposals before issuing regulations in final form,” Hagenbaugh said.

The Fed’s measure could be particularly costly for Deutsche Bank, Germany’s flagship lender, and to a lesser degree for the UK’s Barclays, because of the corporate structure of these two European banks.

The plan, authored by Fed Governor Daniel Tarullo, would be a breach with a U.S. tradition of relying on foreign supervisors to watch overseas banks and allowing them to hold less equity in America than their domestic counterparts.

In a separate April 18 letter, Barnier and a host of other international regulators have also complained about U.S. rules for derivatives regulation to U.S. Treasury Secretary Jack Lew.

The U.S. derivatives regulator wants foreign banks to stick to the same rules for trading swaps as U.S. firms, but other countries are urging it to rely more on the rules abroad, with international negotiations ongoing.

The pressure from Barnier came ahead of a meeting of the G20 most powerful economies of the world this weekend, which touched on certain financial regulation issues, such as the reform of financial benchmarks.

The EU and the United States want to include the financial services sector in a free trade agreement they are hammering out, but this would take several years to complete, and any issues now need to be resolved separately.