US banks face clash over EU holding companies regulations

American banks are warning they will be unable to comply with the EU’s plan to force them to set up European holding companies because the proposals are at odds with existing US regulations.

The EU wrongfooted banks with an 11th hour amendment to the latest package of European banking regulations, which states that foreign banks must combine their businesses in the bloc into a separately capitalised subsidiary or holding company. The measure was seen as retaliation for a US rule that came into force this year compelling all banks with more than $50 billion in assets to have intermediate holding companies.

It had been expected to come under fire from the banks most affected – like Goldman Sachs, Morgan Stanley, JPMorgan, Citigroup and Bank of America – because it would be costly for them to have capital "trapped" in the EU.

But European policymakers did not foresee the banks’ arguments that the proposals would be impossible for them to comply with because they are barred from combining the investment banking activities of their broker dealers with their commercial and retail operations in a single structure below their parent company.

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‘Pretty problematic’

“US rules require the separation of the corporate [broker-dealer] chain and the bank chain,” said a senior executive at a large US bank. “The key thing in the EU rules is . . . the wording in it is that there’s a single intermediate holding company. That’s pretty problematic.”

An executive at a second US bank said: “Clearly we will argue that it creates conflicts with US legislation and is unnecessary.”

Another industry insider said the conflict with national rules appeared to take the EU authorities by surprise at a recent meeting between European Commission officials and industry representatives. “They were writing it all down,” he added.

EU officials say the proposals are fully compatible with rules in force in the US, not least because the planned EU requirements to set up holding companies can be avoided if a bank instead selects a parent operating company from its existing subsidiaries.

The bankers said this would not help. The first executive said: “These are separate chains and cannot by law be mixed and merged below the US holding company level.” The second executive said he could not see how using a subsidiary instead of a holding company “would avoid any incompatibility problems with the US rule”.

The first banker said the EU rule had been drafted in haste and there was scope to revise some of the technical aspects.

The second banker said the EU proposal “probably has its origins in the frustration and disappointment felt by EU policymakers” over the US rule forcing the biggest overseas lenders to set up separate holding companies.

Brexit consequence

US banks are hoping they can rely on support to change the rules from some countries that are vying for any business that they will be forced to move out of London as a consequence of Brexit, such as France, Germany and Luxembourg.

Michael Lever, head of prudential regulation at the Association of Financial Markets in Europe, said it was “very early days and members have yet to fully understand all the implications of the proposal”.

“It appears that it is likely to affect banks in different ways depending on how they are structured,” he added. European banks largely support the proposals, since they would make life more difficult for their American rivals.

Bob Penn, a lawyer at Cleary Gottlieb Steen and Hamilton, said a similar issue arises for UK banks, which are legally required to “ringfence” their retail banking business from riskier investment banking.

However, a spokeswoman for the commission said officials did not see any “conflict” between the planned EU rules and the UK ringfencing law. Officials at the Bank of England are not believed to be concerned the EU’s proposals as currently construed would conflict with ringfencing requirements.– Copyright The Financial Times Limited 2016