Foreign Banks May Have Won Hollow Victory

NEW YORK - Foreign banks won a victory last week when the House Banking Committee voted to allow them to use new banking powers without setting up a U.S. holding company.

But only a few foreign banks would benefit from the proposed legislation because they will have to meet tougher U.S. capital requirements.

"Poorly capitalized foreign banks are going to lose out," says one Washington-based lawyer who represents several foreign banks.

"The Swiss and the Germans won't have any problem," he added. "The Japanese and many others will."

The Federal Reserve Board has yet to fix the higher capital standards banks will have to meet if they want to go beyond traditional banking activities.

But one thing is certain: they will be above the 8% capital to asset ratio set as an international guideline by the Basel-based Bank for International Settlements.

Congress and U.S. regulators believe the higher capital requirements are needed to hedge against the increased risk of allowing banks into new areas.

"The higher capital requirements means that not every bank is going to be able to engage in every kind of business it wants to," said a senior Japanese banker in New York. "[Japanese] banks will have to be much more selective in what they do."

To be sure, U.S. banks also must meet the tougher requirements in order to expand into non-traditional banking activities.

But foreign banks complain the added requirements go beyond existing international guidelines and are mainly designed to protect the U.S. deposit insurance fund. The same risks do not apply to them since most foreign banks don't take U.S. retail deposits, they say.

"The Basel standards were intended to create an international passport to banking," says Michael Bradfield, a partner with the Washington-based law firm of Jones, Day, Reavis & Pogue, which advises several European and Japanese banks.

"I don't see the rationale for higher capital requirements."

Adds Pierre de Weck, executive vice president for Union Bank of Switzerland and chairman of the Institute of International Bankers.

"Clearly, it would have been preferable if the standards set by the BIS had been utilized as a benchmark for allowing banks to enter new activities."

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