PARIS—European bankers are lobbying U.S. Federal Reserve board member Dan Tarullo in an attempt to dilute curbs that would tighten oversight of foreign banks in the United States and squeeze their profits in the world’s biggest financial market.
Tarullo’s plan would force foreign banks to group all their subsidiaries under a holding company, subject to the same capital standards as U.S. holding companies. The biggest banks would also need to hold liquidity buffers.
Bankers say the plan would worsen an already fragmented regulatory landscape as the European Union pushes ahead with plans to cap bankers’ bonuses and to limit risky trading. Euro zone banks believe the combination will make it tough to compete for talent or for profits against U.S. rivals.
“It’s an outrageous plan that will further balkanize the banking sector,” said a French banking lobby source.
“Thank goodness we will have a banking union with the European Central Bank as chief supervisor in place soon. Tarullo’s proposal will be the first issue to be addressed.” Fed records show that executives from Deutsche Bank and Paribas, including Deutsche’s co-CEO Anshu Jain and BNP’s CEO Jean-Laurent Bonnafe, as well as officials from Britain’s Barclays (BARC.L) and representatives from the French Embassy have met with Fed representatives in recent weeks.
The EU has already warned Tarullo that his plans will fragment the world’s capitals market and make it less efficient in financing trade and help sluggish economies revive.
The Institute of International of Bankers (IIB) held a conference call to prepare a letter the lobby group plans to send to the Fed to complain about the rule, a source who was on the call said.
“They are very upset at the change,” and are urging “less draconian” rules, said the source. Deutsche’s Jain warned this week of a regulatory arms race. “The foreign bank capital requirements as outlined in the Tarullo proposals will place a burden on foreign banks operating in the U.S.,” he said.
Antony Jenkins, the CEO of Barclays, told investors this week that he expected the changes would be “manageable.” The United States has traditionally relied on foreign supervisors to watch overseas banks, allowing them to hold less capital than their domestic counterparts.
The 2010 Dodd-Frank overhaul of the U.S. financial landscape put an end to that policy after the Fed was forced to extend hundreds of billions of dollars in emergency loans to overseas banks during the financial crisis.
Analysts say Tarullo’s plan would force some European banks to replenish their units’ balance sheets with fresh capital, hurting profits and making it even harder to compete against local champions like JPMorgan (JPM.N).
The bloc’s financial services chief, Michel Barnier, raised these concerns when he met with Tarullo last month in Washington to urge better cooperation between the United States and EU so they could rely on each other’s bank supervisors without the need for “ring fencing.”
“If we choose to part ways, this will send the wrong signal to markets and to the rest of the world. It would increase the cost of capital, and reduce growth prospects,” Barnier said during his visit.
Deutsche Bank is cited as one case that could need more capital for its U.S. business, with French banks not far behind, though their lack of disclosure makes it difficult to calculate how big the shortfall is, a London-based bank analyst said.
“Most European banks have been subsidizing their U.S. units with capital from their European franchises,” the analyst said. “The French do not give any real disclosure for their U.S. units, but knowing their style one can imagine that the level of capital is not going to be that great.”
Analysts at Morgan Stanley estimated this month that Tarullo’s plan could leave Deutsche Bank with a $7-9 billion capital deficit in its U.S. business by 2015.