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April 26, 2013

US cannot pay for Europe’s capital sin

A rift has opened between the EU and US authorities over a Federal Reserve plan to force foreign banks to hold more capital. Michel Barnier, the European commissioner in charge of financial services, has cried ful and is threatening retaliation against US banks.

Under the new rules, which could come into effect this year, large foreign banks operating in the US would need to ensure that their subsidiaries meet a minimum threshold of 7 per cent core capital to risk-weighted assets. Mr Barnier believes that this requirement is a first step towards protectionism. But his criticism misses the point. US banks are expected to hold the same level of capital. It is only fair for the Fed to ask the same of foreign banks.

The EU would like the US to stick to its current rules, which assess banks on the basis of their international level of capital. As the case of Deutsche Bank shows, this can make a big difference. Deutsche’s US entity, Taunus, has negative capital levels because of the amount of goodwill and deferred tax assets accumulated after an acquisition spree. Yet the stronger German operations allow the bank to compensate for its weakness in the US.”

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Read full Financial Times article here

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