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April 26, 2013

US banks begin to support European peers over Fed onshore capital and liquidity proposal for foreign banks

Goldman and JP have started to support EU banks lobbying against the Fed proposal to require US banks to hold more capital in the US (some details and nuances in these articles from the NY Times and the FT) (subs maybe required).  Morgan Stanley, BofA and Citi remain in support of the Fed proposal however.   The proposal was partly sparked by the Fed learning that DB had negative $8.8bn of capital in the US in 2007. Most US banks have separately capitalized operations in London and therefore don't fear EU reprisals.  However, broader concerns about fragmentation and stability are being brought up by Goldman and JP.   Some details of the proposal:

  • Minimum 5% non-risk weighted leverage ratio (capital / non-risk weighted assets) held in a consolidated US subsidiary which owns all the US affiliates of the European / foreign bank.  (I think higher than Basel III (3%) and higher than US banks have to pay currently (4%))
  • Minimum 7% risk weighted leverage ratio (capital/RWA).  (I think lower than Basel III but there may be a gross up effect if the capital held in the US is not allowed to be used towards parents Basel III capital.)
  • Approximately duration matched intercompany funding between parent and US sub (to avoid sudden liquidity drain effect in a crisis (as happened recently).

Jon S.


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