–Big US Banks Say No Capital Surcharge is Appropriate
–US Regulators Hope Rest of World Goes Along With US

By Denny Gulino

WASHINGTON (MNI) – U.S. banks Thursday squared off against their
regulators, hoping House Republicans will help save them from pending
capital surcharges while outgoing FDIC Chairman Sheila Bair warned the
prospect for problems with European banks are “unsettlingly high.”

“I am very concerned about the potential for the European banking
system to become a future source of financial instability,” Bair told
the House Financial Services Committee, “and not just because of the
well-publicized issued about the credit quality of some sovereigns and
banks’ exposure to the system.”

Bair’s warnings were in the context of her defense and that of
other U.S. regulators appearing before the committee of the U.S.
approach to push “intensively” for international cooperation so that no
set of banks will enjoy any special advantage.

Republicans on the committee, including Chairman Spencer Bachus,
took several opportunities during the morning sessions to suggest their
sympathies for the banks and their skepticism about international
harmonization of standards.

Acting Comptroller of the Currency John Walsh departed from the
Treasury-Fed approach to warn that capital standards and other rules
that are too stiff could help create “a new batch of ‘shadow banking’
firms'” that would try to escape the constraints.

But Bair’s warnings, coming from one of the regulators who survived
the financial crisis with her support from both aisles of Congress
intact, carried extra weight since she’s leaving her job in a few days.

Instead of worrying along with U.S. banks that their European
counterparts will enjoy some competitive advantage, Bair said they
should be worrying the European institutions will drag down the entire
financial system.

“European banks continue to effectively set their own capital
requirements using internal risk estimates, unconstrained by any
objective hard limits,” she said. “Meanwhile, representatives of some
major European governments go out of their way to express public
misgivings about following through to implement the internationally
agreed to leverage ratio.”

She continued, “With risk-based capital determined by bank
management assumptions, and no leverage constraints on the horizon for
several years, the prospects for further banking problems are
unsettlingly high.”

The chief risk officer of JPMorgan Chase, Barry Zubrow, told the
committee in his prepared testimony in other words what his boss, CEO
Jamie Dimon, told Fed Chairman Ben Bernanke last week in his
argumentative statement protesting the onslaught of new regulations.

“Even if U.S. regulators could ensure that the same capital
standards would be adopted and applied consistently across the world,
there are power, entirely legitimate reasons why the United States could
and should decide to impose little or no surcharge on large banks,”
Zubrow said.

The entire U.S. approach to reform after the crisis is ill advised,
Zubrow said. “It is striking how differently the United States has
responded to the financial crisis from almost all other major
countries,” he said. “Every other country has rejected the Volcker rule;
almost every country has failed to adopt plans for orderly resolution of
systemically important banks; no country has yet to propose margin
requirements and no is likely to adopt a scheme like the one here,” he
said.

What the U.S. considers big banks, he continued, are actually
smaller national players compared to competitors overseas. While the
three largest U.S. banks have 32% of total assets, the comparable
figures elsewhere are much larger, such as Japan’s 46%, Canada’s 58%,
the 63% in the UK and France, Germany’s 70% and Switzerland’s 76%.

Said Zubrow of proposed capital standards, “The 7 percent minimum
already set by Basel III would effectively require JPMorgan Chase to
hole 45 percent more capital than it took to weather the crisis.” It is
difficult, he said, “to understand how one could justify a surcharge for
all U.S. banks in addition.”

The American Bankers Association chose the vice chairman of an $800
million bank with 105 employees in Countryside, Ill., Thomas Boyle of
State Bank, to argue the case for the biggest banks, reeling off more of
what has become a canon of opposition arguments. He warned of the
possibility of a severe contraction of the U.S. banking industry from
new regulation and called for “quick and bold actions to relieve the
regulatory burden.”

Morgan Stanley Managing Director Stephen O’Connor offered testimony
on behalf of the International Swaps and Derivatives Association,
warning that its members in 56 countries are worried the U.S. will try
to impose Dodd-Frank rules across the border.

“Disadvantaging foreign institutions and U.S. subsidiaries of such
institutions, through divergent capital requirements or otherwise,
discourages foreign investment in U.S. subsidiaries, which leads to
fewer jobs and to less competition,” he said. Best would be for the U.S.
to work with the European rulemakers first before imposing U.S. rules.

The Securities Industry and Financial Markets Association was
represented by its president, Timothy Ryan, who said his organization
thinks “U.S. regulators and our G20 partners continue to be
insufficiently coordinated.” Besides, he said, no regulator has
attempted to assess what it means for the U.S. economy to be “piling on
additional capital requirements and other rules … absent a clear
understanding of the cumulative effect.”

Earlier this week the U.S. Chamber of Commerce, the biggest
business lobby, sent a letter to Bernanke warning the U.S. economy and
job creation could be put at risk if banks are pushed too far by
regulators.

Treasury Under Secretary Lael Brainard, in her testimony, offered
one factoid directly aimed at the banks’ arguments, pointing out that
among the 50 largest global banks, the average so-called tier one
capital adequacy ratio has already reached 11.3, close to what would be
required under new domestic and international rules. China is imposing
an 11.5 ratio on its largest banks.

In addition, she said, “European banks have raised $121 billion in
capital since Europe’s June 2010 stress test exercise.”

Brainard attracted some skeptical questioning with her statement
that, by “moving first and leading from a position of strength,” the
U.S. is “elevating the world’s standards to ours.”

Fed Gov. Daniel Tarullo, in contrast, maintained a low profile in
the hearing, emphasizing the need for international convergence of
capital standards and other reforms. He had provoked an uproar of bank
industry objections with his remarks in a speech last week suggesting a
higher capital surcharge would be appropriate and that the large size of
some banks was not necessary nor appropriate.

Answering questions Tarullo repeated that U.S. authorities are
“working in the Basel committee to standards that we would agree on
internationally.”

Another regulator, SEC chairman Mary Schapiro, acknowledged “there
is always a risk of regulatory arbitrage” and that regulators in the
U.S. and overseas are often “not exactly in the same place.” But she
went on to say that G20 finance ministers all agreed to harmonize
regulations internationally and that’s the working assumption of
everyone involved.

CFTC Chairman Gary Gensler said he was struck by how much
international consensus there has been on “capital standards, central
clearing of derivatives, margining and risk mitigation.” He said there
is a “greater challenge on swap execution facilities” and some other
issues.

The OCC’s Walsh took another approach to minimizing the link
between size and undue influence of U.S. banks, saying U.S. banks
control a far narrower slice of GDP than elsewhere. “The largest banks
in the UK, for example, have assets roughly equal to the UK GDP,” he
said. “Assets of the largest Swiss banks substantially exceed that
country’s GDP.”

In the U.S., he said, there are unique caps on deposit
concentration and Dodd-Frank imposes special concentration limits on
large firms. “Even our largest institutions are only a fraction of U.S.
GDP,” he said.

While the OCC, he said, “fully supports” raising the bar for banks,
the combination of new U.S. regulations on top of Basel III
international reforms could have “real consequences to the extent that
constraints on liquidity translate into constraints on bank lending and
the availability of credit within the economy.”

The FDIC’s Bair conceded the U.S. is implementing its reforms first
and said that is best for the country.

“No one would disagree that the U.S. has taken a far more
aggressive stance in seeking to explicitly put an end to taxpayer
support of large banking organizations,” she said. “Over time, this will
serve our economy well.

“A financial system that is dependent upon taxpayers for support is
not a source of strength for the economy, it is a source of weakness,”
she said.

** Market News International Washington Bureau: 202-371-2121 **

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