Banks are reviving an old campaign against an Internal Revenue Service proposal that they fear will drain foreign capital from the U.S. economy and put foreign depositors at risk in their home countries.
It won't be easy finding a catchy slogan — a regulation on the reporting of interest paid on deposits of nonresident aliens lends itself to no pithy war cries. But bank lobbyists, who successfully fought to scale back a similar proposal in 2001, are busily communicating their opposition now that the rule is under consideration once again, and they are finding allies on Capitol Hill.
Rep. Bill Posey, a Florida Republican who sits on the House Financial Services Committee, has denounced the IRS proposal in a letter circulating among other representatives from his state.
He hopes to get bipartisan support for the letter, which would be sent to President Obama and the Treasury Department, and his staff says he also may introduce legislation that would block the IRS from requiring that banks report interest paid to foreigners with funds on deposit in the United States. "This IRS proposal is a bad idea that will drive tens of billions of dollars out of U.S. banks and our economy," Posey said in a statement his office e-mailed to American Banker. "At a time when we're trying to improve the balance sheets of U.S. financial institutions, this proposal undermines that very goal."
It is unclear how much money might be at risk of leaving the system, but in 2004, when the IRS was considering a similar rule covering nonresident alien depositors from just 15 countries, George Mason University economics professor Jay Cochran wrote a paper estimating that $88.1 billion of U.S.-based deposits could be expected to be withdrawn in response.
Ultimately, banks were required to report interest paid only to nonresident aliens from Canada. But the latest proposal, issued last month and open for public comment through April 7, would require banks to report interest paid to nonresident aliens from any country.
Cochran has not updated his analysis, but he said he suspects the potential effects he identified — a drop in deposits, plus the impact that would have on foreign exchange and on the ability of banks to extend credit — have only magnified in the six years since he did his research.
"Maybe it's just me," Cochran said, "but given the precarious nature of the U.S. economy, now does not seem like a good time to be damaging the U.S. credit markets."
U.S. bank liabilities to foreigners, excluding central banks and other official foreign institutions, totaled $3.77 trillion at the end of the fourth quarter, according to Treasury Department data. That included $2.1 trillion of deposits, certificates of deposit and certain custody liabilities.
In issuing its new proposal, the IRS said routine reporting of interest paid to all nonresident aliens would strengthen the exchange of information with tax authorities in other countries, and make it tougher for U.S. taxpayers to game the system by falsely claiming foreign residency.
Opponents argue that the costs of such a rule would far outweigh any benefit.
"It's the wrong issue, wrong time," said Alex Sanchez, president and chief executive of the Florida Bankers Association.
Aside from the compliance burdens and potential capital drain, the rule would pose a danger to foreigners who keep their funds on deposit in the United States, particularly Latin American customers who look to banks in Florida and border states such as Texas and California for the safety and security of their funds.
"These people come from countries where there's political instability, where there's no trust in the government, where there are frequent kidnappings," Sanchez said. If the U.S. exchanges information with tax authorities in other countries, it is unclear how the information would stay protected, he said.
The Institute of International Bankers also plans to fight the proposal, partly on the grounds that the rule would run contrary to long-standing efforts to attract additional liquidity to the U.S. banking system by making it attractive to foreign depositors to keep capital here. That was one of the arguments that the trade group made in 2001, when the IRS first floated the idea of a reporting requirement that would have applied to deposits of nonresident aliens from any country.
The banking industry won a partial victory in 2001 when the IRS withdrew its proposal and suggested instead that a rule that would apply to deposits of nonresident aliens from 15 countries. Eventually, the 15 got whittled down to one: Canada.
Not all the participants in the last round of debates on the subject will be so involved this time. The Conference of State Bank Supervisors, which petitioned the IRS to drop its 15-country proposal a decade ago, has no formal position on the new proposal.
"You have to acknowledge that it's a different world," said Michael Stevens, director of regulatory affairs. The CSBS's members, given the industry pressures and the regulatory changes coming out of the Dodd-Frank Act, "are just not highlighting this as an issue they want to focus on right now," he said.
