UK banks brace for tough new US capital rules

Tim Wallace
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BRITISH banks will be forced to move capital from their UK headquarters over to their US arms, under plans to be voted on today by the Federal Reserve.

The result is likely to be higher costs for British and European banks operating in the US, which could reduce the viability of some of their less profitable business lines.

Banks from across the world with large operations in the United States, such as Barclays, which bought much of Lehman Brothers’ operations, and Deutsche Bank, face the tougher rules.

Under current plans, Foreign Banking Organisations (FBOs) with global assets of more than $50bn (£29.9bn) and US assets of more than $10bn will be hit by the changes.

They will have to put their US operations into a new ring-fenced legal entity, with the same capital restrictions as faced by domestic US banks.

That is a sharp change from the current setup where banks can hold the capital in their headquarters.

Banks have lobbied the Fed over the past year in an effort to reduce the impact of the rules.

“The proposal would increase the marginal cost of FBOs doing business in the US, which could cause some firms to exit the US market or not enter the US market in the first instance,” warned the Global Financial Markets Association (GFMA), in one letter to the Fed.

It will make it harder to resolve any failed banks across borders, by tying up capital and liquidity in the US, as well as discriminating against foreign banks’ subsidiaries the GFMA said.

It could even have global repercussions, reversing much of the globalisation of finance of recent decades.

“The proposal would take the extraordinary step of ring-fencing capital and liquidity in the US, making these resources extremely difficult to deploy to the FBO’s operations experiencing stress in other countries - an action that will encourage countries around the world to ring-fence, which could lead to a truly balkanized global financial system,” said the letter.