EU Warns US Over “Radical” Bank Protectionism
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A United States proposal to force foreign banks to hold more capital is costly, unfair and potentially damaging to the global economy, said EU commissioner Michel Barnier, who warned of “potential retaliation” against U.S. banks.
Under the Federal Reserve’s proposal, which could come into effect later this year, foreign lenders would be forced to organise that their U.S. subsidiaries under a locally regulated holding company, with its own reserves of capital and easy-to-sell assets that can be accessed in crises.
A United States proposal to force foreign banks to hold more capital is costly, unfair and potentially damaging to the global economy, said EU commissioner Michel Barnier, who warned of “potential retaliation” against U.S. banks.
Under the Federal Reserve’s proposal, which could come into effect later this year, foreign lenders would be forced to organise that their U.S. subsidiaries under a locally regulated holding company, with its own reserves of capital and easy-to-sell assets that can be accessed in crises.
The measure is significant because U.S. authorities have traditionally allowed the capital requirements of foreign banks to be supervised by their home countries. Pressure grew to overhaul that policy after the Fed was forced to extend emergency loans to foreign banks caught up in the financial crisis.
Federal Reserve chairman Ben Bernanke called the shift an “important step” in addressing “the risks that large, interconnected financial institutions pose to U.S. financial stability.”
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However, Barnier warned that this would occur at the expense of European banks and go against the spirit of global-level coordination in financial regulation agreed at, among other forums, the Group of 20 biggest economies.
“The (rule) would seem to represent a radical departure from the existing U.S. policy on consolidated supervision of (foreign banks),” Barnier said in an April 18 letter to Bernanke.
“We fear that (the rules) could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery,” Barnier wrote, adding that “these developments would translate into higher costs for banks, particularly those which are internationally active.”
The new rules could prove to be particularly cost for Deutsche Bank, whose U.S. subsidiary maintains negative equity capital, as well as UK’s Barclays because of its corporate structure.
In addition, European bankers have warned that the proposals could become an obstacle in talks over a Transatlantic Trade and Investment Partnership between the United States and the European Union.
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A senior U.S. official rebuffed the letter, saying that the EU sometimes appeared more concerned about protecting the competitiveness of its banks than the safety and integrity of the financial system.
The transatlantic rift exposes the growing levels of discord between global regulators, whose efforts to protect local taxpayers are raising concerns that international finance will be forced to retreat behind national borders.
