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Categorized | Banks

EU to retaliate against US bank capital rules


Posted on November 21, 2016

Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit.

The European Commission will unveil provisions on Wednesday that mirror controversial US “intermediate holding company” rules that ringfence foreign bank capital. When these were announced in 2014, the EU complained to Washington of “protectionism” and threatened to retaliate.

If adopted into EU law, the commission’s proposals would force US investment banks such as Goldman Sachs and JPMorgan to have additional capital and liquidity in the EU so their subsidiaries can better withstand a crisis and be separately wound up if needed by European authorities.

The counterblow from Brussels, slipped into late drafts of the proposal, will be welcomed by European banks that have been complaining about an unlevel playing field with their US rivals. But it underlines the accelerating trend towards further fragmentation in financial rules, as jurisdictions assert control even at the risk of duplicating international requirements.

Although EU officials insist the proposal was drafted without Brexit in mind, the reforms would potentially affect London as a non-EU financial centre. The proposal could add costs and complexity to UK-based banks by forcing them to establish a separate pool of capital in the EU after the country leaves the bloc.

Most bankers are reluctant to hold multiple pools of capital around the world, overseen by different regulators, which they see as more inefficient than a centrally managed pot set by their home authority. The need for a separately capitalised holding company in Frankfurt, for instance, would make London less attractive as a headquarters for European operations.

“This is a taste of what is to come,” said one adviser to an investment bank that would be affected by the rules. “At a time when everyone is rethinking bank structures, it adds one more point of uncertainty.”

He added: “If you must create an EU holding company that acts as your hub, the question becomes: how many European hubs do you want?”

The move is likely to stoke tensions between the US and Europe, which have already been ignited by a $14bn claim on Deutsche Bank from the US Department of Justice to settle claims of mis-selling mortgage securities.

European officials have also pushed back against US-led pressure for tough capital requirements to be introduced by the Basel Committee of global regulators in a move that some European banks claim would put them at a disadvantage to their US rivals.

US banks say they are already forced to hold significant amounts of capital and liquidity in their large UK operations. But if Europe presses ahead with the latest proposals, it could force them to increase the amount of resources they have tied up in Europe.

The measures are part of a package of financial reforms that Valdis Dombrovskis, the EU vice-president overseeing financial services, will bring forward on Wednesday. The holding-company requirements are included in revisions to the capital requirements directive, which introduce new rules intended to prevent banks becoming “too big to fail”.

These include a measure, known as Total Loss Absorbing Capacity, or TLAC, which aims to force the very biggest banks to fund themselves through equity and hybrid debt that can absorb losses in a crisis. Mr Dombrovskis has said up to 13 European banks will have to comply with the rule. But drafts seen by the Financial Times in effect extend the TLAC requirements to subsidiaries of non-EU bank that are globally systemic or those with total assets of more than €30bn.

A non-EU bank that has two or more offshoots within the EU would be required to establish an “intermediate parent undertaking”, in effect a holding company subject to EU capital requirements. Only subsidiaries would be included in the holding structure.

Ringfencing capital helps Brussels tighten its grip over the resolution process for foreign banks with big EU operations. TLAC will force banks to issue a minimum amount of subordinated debt and other securities that could easily be written off or converted into equity if the firm gets into difficulties, giving regulators an easy way to boost a stricken bank’s capital position. It is expected to force banks to issue billions in new debt.

In 2014 Michel Barnier, then EU’s financial services commissioner, warned that US plans to force foreign banks to hold more capital were “protectionist” and risked bringing a “fragmentation of global banking markets”. Mr Barnier is now the commission’s chief Brexit negotiator.