Foreign banks including HSBC and Deutsche Bank are pushing back against the Federal Reserve's proposals on implementing rules designed to end too-big-to-fail, saying they are burdensome and unfair to the U.S. units of the world's biggest lenders.
Under the Fed's proposals, U.S. units of foreign banks affected would need an extra layer of debt available to be wiped out in a crisis, on top of securities qualifying as total loss-absorbing capacity, or TLAC. Both layers of debt deemed "readily available for bail-in" would have to be sold to the parent companies, rather than third-party investors, according to the draft rules, which were released for comment Oct. 30.
The rules are unfair because similar-sized domestic U.S. lenders aren't subject to the same requirements, banks and lobby groups including Banco Santander SA and the Institute of International Bankers say in their comments. In addition, the requirement to push losses up to parents runs counter to resolution plans designed to stop contagion.
"In our view, the proposed rules would impose excessive costs" on the affected banks' U.S. units and "lead to competitive disparities and unfair treatment in international banking without commensurate benefits to resolvability or U.S. financial stability," the IIB said in its response to the Fed's proposals.
The Fed is implementing rules agreed by the Financial Stability Board that aim to ensure the world's 30 biggest lenders can be wound down and recapitalized in an orderly way: without taxpayer bailouts, without interrupting "critical functions," and without posing a risk to financial stability. The importance of the U.S. market to the biggest global banks means the fallout from U.S. rule-making has an impact far beyond that country's borders.
The Fed's proposals affect not only domestic giants like JPMorgan Chase & Co. or Wells Fargo & Co., but also the U.S. units of globally systemically important banks, or G-SIBs. On top of selling TLAC-eligible debt to their parents, they will also have to issue long-term debt that's contractually subordinated to all of their third-party liabilities and includes a trigger allowing the Fed to cancel it or convert it into equity.
Those requirements are "onerous" and put the firms affected "at a significant competitive disadvantage compared with comparably sized non-G-SIB U.S. bank holding companies, many of which are direct competitors," the IIB said.
"I have sympathy with the banks on some of this," said Sharon Bowles, the former chair of the Economic and Monetary Affairs Committee of the European Parliament. "I am not sure what the point is of forcing the expense of a U.S. holding company and then not allowing it to operate as such."
Fed spokesman Darren Gersh declined to comment on the banks' responses.
The Fed's plan forced HSBC to issue TLAC-eligible debt out of its holding company, rather than from its major operating units, Iain Mackay, HSBC's group finance director, said on an earnings call last month. The proceeds will be "downstreamed" to the U.S. unit as "internal TLAC" through intra-group debt purchases. The consequence is that losses will be borne by HSBC's U.K. holding company, rather than outside investors.
As a result, the resolution plans of lenders such as HSBC and Santander would be undercut. These plan to adopt a "multiple point of entry" resolution strategy, which means local units would be resolved by host country authorities if the trouble is caused by the local business. Conversely, where it's the parent that's in trouble, the foreign unit would be unaffected. That doesn't work if losses at the U.S. unit would be pushed up to the parent, Santander said in its submission to the Fed.
Santander's "resolution strategy that is designed to reduce systemic risk and facilitate resolution at the host level," would be undermined by the Fed's rules, the Spanish bank's U.S. unit said in its response. The approach "could force a return to financial over-reliance" on the foreign parent and doesn't reflect the unit's similarity to other U.S. bank holding companies "or its low systemic-risk profile," Santander USA said.
The argument is echoed by HSBC which, with JPMorgan Chase & Co., is one of only two banks globally that attract the maximum surcharge for size and interconnectedness.
Its North American business is "economically analogous" to regional U.S. banks that aren't subject to TLAC requirements and don't have a parent company ready to stand behind them, HSBC said in its submission. Added to that, requirements that its long-term debt have a contractual conversion trigger and explicit subordination mean the securities could be treated as equity rather than debt for tax purposes, it said.
Deutsche Bank agrees. "We question the rationale for adding a contractual subordination condition," the Frankfurt-based bank said in its response. Because U.S. banks aren't being treated the same way, it "creates an unlevel playing field, adding needless cost and complexity to foreign banks, and competitively advantaging U.S. banks."
The Fed should try to stay as close as possible to the recommendations of the Financial Stability Board, and co-ordinate closely with foreign regulators, according to the Japanese Bankers' Association.
The Fed "is requested to ensure a regulatory framework that is consistent with the international total loss-absorbing capacity standard released" by the FSB, the JBA said in its reply. It also called for "regulatory harmonization between the home and host jurisdictions."