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Fitch: Foreign Bank Rules May Cut Growth of Global Banks

ER - Acteurs du secteur financier
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Proposals by the Federal Reserve for regulating foreign banks could raise the bar for the largest global banks yet again and, if introduced in other jurisdictions, may hinder their growth, Fitch Ratings says. The plans to tighten capital and liquidity rules for foreign banks operating in the US should be technically manageable for most foreign banks. But it is unlikely that national regulators elsewhere would be comfortable allowing capital and liquidity reallocation to the US without reciprocal rules in their home jurisdictions. The banking structural reform agenda for global policymakers is still in flux. Heightened national regulatory requirements would be in contrast to the sentiment behind European Commissioner for Internal Market and Services Michel Barnier's statements in Davos last week that Liikanen ring-fencing proposals needed to avoid "penalising" lenders that were supporting the economy.

 

The impact of the new rules would be felt most by global trading and universal banks with large US operations. Deutsche Bank's management discussed in its 2012 full-year results announcement today the possible implications of tougher US rules. Down-streaming of core capital into foreign subsidiaries should theoretically be neutral for consolidated ratios. But in practice we expect domestic regulators to object to the trapping of capital and liquidity overseas if it is to the detriment of resources available to support domestic activities. Therefore consolidated capital requirements could be effectively raised if the flow of capital among entities is restricted.

 

We believe that a number of foreign banks would have to evaluate their operations in the US and where they book transactions if the capital and liquidity requirements are increased. Depending on the final implementation and decisions by other regulators, this could result in a more extreme scenario with a material re-shuffling of activities across geographies, reducing the US-based balance sheets of the foreign banks.

 

Deutsche Bank's capitalisation is weaker than most of its global peers on a "look-through" Basel III common equity Tier 1 (CET1) ratio and adjusted-leverage basis. But the pro forma regulatory capital ratio improved to 8% at end-2012 from below 7% six months earlier. We expect Deutsche to continue strengthening capital ratios quickly and achieve its target 10% Basel III CET1 ratio on a "look-through" basis earlier than end-2015 to bring this more into line with peers.

 

The Fed's proposed rules to strengthen the oversight of US operations of foreign banks, in consultation until 31 March, would force non-US banks to establish a separate US intermediate holding company, with more stringent capital and liquidity standards that are also applicable to US bank holding companies. The proposals are aimed in part at reducing the risk of de-stabilising runs on US dollar assets and the type of collapse in short-term funding that occurred during the global financial crisis.

 

Proposals by the Federal Reserve for regulating foreign banks could raise the bar for the largest global banks yet again and, if introduced in other jurisdictions, may hinder their growth, Fitch Ratings says. The plans to tighten capital and liquidity rules for foreign banks operating in the US should be technically manageable for most foreign banks. But it is unlikely that national regulators elsewhere would be comfortable allowing capital and liquidity reallocation to the US without reciprocal rules in their home jurisdictions. The banking structural reform agenda for global policymakers is still in flux. Heightened national regulatory requirements would be in contrast to the sentiment behind European Commissioner for Internal Market and Services Michel Barnier's statements in Davos last week that Liikanen ring-fencing proposals needed to avoid "penalising" lenders that were supporting the economy.

The impact of the new rules would be felt most by global trading and universal banks with large US operations. Deutsche Bank's management discussed in its 2012 full-year results announcement today the possible implications of tougher US rules. Down-streaming of core capital into foreign subsidiaries should theoretically be neutral for consolidated ratios. But in practice we expect domestic regulators to object to the trapping of capital and liquidity overseas if it is to the detriment of resources available to support domestic activities. Therefore consolidated capital requirements could be effectively raised if the flow of capital among entities is restricted.

We believe that a number of foreign banks would have to evaluate their operations in the US and where they book transactions if the capital and liquidity requirements are increased. Depending on the final implementation and decisions by other regulators, this could result in a more extreme scenario with a material re-shuffling of activities across geographies, reducing the US-based balance sheets of the foreign banks.

Deutsche Bank's capitalisation is weaker than most of its global peers on a "look-through" Basel III common equity Tier 1 (CET1) ratio and adjusted-leverage basis. But the pro forma regulatory capital ratio improved to 8% at end-2012 from below 7% six months earlier. We expect Deutsche to continue strengthening capital ratios quickly and achieve its target 10% Basel III CET1 ratio on a "look-through" basis earlier than end-2015 to bring this more into line with peers.

The Fed's proposed rules to strengthen the oversight of US operations of foreign banks, in consultation until 31 March, would force non-US banks to establish a separate US intermediate holding company, with more stringent capital and liquidity standards that are also applicable to US bank holding companies. The proposals are aimed in part at reducing the risk of de-stabilising runs on US dollar assets and the type of collapse in short-term funding that occurred during the global financial crisis.

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