Fed considers forcing foreign banks to boost capital in U.S.
U.S. units of foreign lenders including Deutsche Bank AG may be required by regulators to comply with tougher capital rules that some banks sought to skirt, three people with knowledge of the discussions said.
The Federal Reserve, drafting standards for the nation's largest banks, may force non-U.S. firms to house all of their businesses within a U.S. holding company, said the people, who requested anonymity because the rules haven't been completed. That means local units would have to meet minimum capital standards regardless of their parents' resources.
Deutsche Bank and London-based Barclays Plc have changed their U.S. legal status in the past two years to discard the holding-company 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."
Foreign lenders 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.
The Fed provided $538 billion of emergency loans to the U.S. units of European banks during the financial crisis, almost as much as it did to U.S. firms. That increased political pressure on lawmakers and regulators to tighten rules for all.
The 2010 Dodd-Frank Act closed the capital exemption for foreign bank holding companies. Some non-U.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.