[Debate] Fed looking at ability of EU banks' US subsidiaries to fund themselves

[Riaz K Tayob]

  Fed Eyes European Banks


    Regulators Scrutinize Ability of Institutions' U.S. Units to Fund
    Themselves


      By DAVID ENRICH
      <http://online.wsj.com/search/term.html?KEYWORDS=DAVID+ENRICH&bylinesearch=true>
      And CARRICK MOLLENKAMP
      <http://online.wsj.com/search/term.html?KEYWORDS=CARRICK+MOLLENKAMP&bylinesearch=true>


Federal and state regulators, signaling their growing worry that 
Europe's debt crisis could spill into the U.S. banking system, are 
intensifying their scrutiny of the U.S. arms of Europe's biggest banks, 
according to people familiar with the matter.

EUBANKS
EUBANKS

The Federal Reserve Bank of New York, which oversees the U.S. operations 
of many large European banks, recently has been holding extensive 
meetings with the lenders to gauge their vulnerability to escalating 
financial pressures. The Fed is demanding more information from the 
banks about whether they have reliable access to the funds needed to 
operate on a day-to-day basis in the U.S. and, in some cases, pushing 
the banks to overhaul their U.S. structures, the people familiar with 
the matter say.

Officials at the New York Fed "are very concerned" about European banks 
facing funding difficulties in the U.S., said a senior executive at a 
major European bank who has participated in the talks.

Regulators are seeking to avoid a repeat of the 2008 financial crisis, 
when the global financial system began to seize up. This time the worry 
is that the euro-zone debt crisis could eventually hinder the ability of 
European banks to fund loans and meet other financial obligations in the 
U.S. While signs of stress are bubbling up, the problems aren't yet 
approaching the severity of past crises.

Some of Europe's biggest banks---including France's Société Générale SA, 
Germany's Deutsche Bank AG and Italy's UniCredit SpA---have major 
operations in the U.S. and rely heavily on borrowed funds to finance 
those operations. There is no indication that regulators are focused in 
particular on those banks.

Foreign banks that lack extensive U.S. branch networks have a handful of 
ways to bankroll U.S. operations. They can borrow dollars from 
money-market funds, central banks or other commercial banks. Or they can 
swap their home currencies, such as euros, for dollars in the 
foreign-exchange market. The problem is, most of those options can 
vanish in a crisis.

Until recently, that hasn't been a problem. Thanks partly to the Federal 
Reserve's so-called quantitative-easing program, huge amounts of dollars 
have been sloshing around the financial system, and much of it has 
landed at international banks, according to weekly Fed reports on bank 
balance sheets.

Fed officials recently have held meetings with U.S.-based executives 
from top European banks to discuss their funding positions, according to 
the people familiar with the matter. Officials also are in contact with 
regulators in the countries where the European banks are headquartered.

The New York Fed has also been coordinating with New York's 
superintendent of financial services, Benjamin M. Lawsky, to monitor the 
foreign banks' funding positions, said people familiar with the matter. 
The state regulator supervises the New York outposts of many major 
European banks, and it has the power to force them to keep more money on 
hand in the U.S. Mr. Lawsky's office has been getting near-daily updates 
from examiners embedded in European banks' New York offices about their 
funding positions.

Regulators are trying to guard against the possibility European banks 
that encounter trouble could siphon funds out of their U.S. arms, these 
people said. Regulators recently have ramped up pressure on European 
banks to transform their U.S. businesses into self-financed 
organizations that are better insulated from problems with their parent 
companies, a senior bank executive said.

In one sign of how European banks may be having trouble getting dollar 
funding, an unidentified European bank on Wednesday borrowed $500 
million in one-week debt from the European Central Bank, according to 
ECB data. The bank paid a higher cost than what other banks would pay to 
borrow dollars from fellow lenders. It was the first time for that type 
of borrowing since Feb 23.

Anxiety about European banks' U.S. funding comes amid broader concerns 
about whether Europe's struggling banks will be able to refinance 
maturing debt in coming years. Investors, wary of many European banks' 
holdings of debt issued by troubled euro-zone governments, are shunning 
large swaths of the sector. While top European banks already have 
satisfied about 90% of their funding needs for 2011, they still need to 
raise a total of roughly EUR80 billion ($115 billion) by the end of the 
year, according to Morgan Stanley.

Part of what is unsettling regulators and bankers is the speed at which 
funding can reverse direction. This spring, foreign banks were able to 
build up ample cash cushions, thanks largely to quantitative 
easing---the Fed's $600 billion bond-buying program, which brought more 
money into the banking system in the U.S., including foreign banks' coffers.

In July 2010, non-U.S. banks had $418.7 billion on reserve and 
collecting interest at the Fed, according to Fed data. By July 13 of 
this year, the total had more than doubled, to about $900 billion. Some 
major European banks were among the main drivers of this trend, 
according to their U.S. regulatory filings.

On June 30, 2010, for example, Société Générale had $55 million in cash 
reserves in its main New York branch. A year later, that amount had 
soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm 
rose to $66.8 billion from $178 million.

Spokesmen for Société Générale and Deutsche Bank declined to comment on 
the reasons for the funding buildup or whether there has been a pullback.

In recent weeks, though, the cash piles at foreign banks' U.S. arms have 
diminished. While individual banks haven't reported data after June 30, 
foreign banks' overall U.S. cash reserves fell to $758 billion as of 
Aug. 3, the latest data available. That is down 16% from three weeks 
earlier, though it's still up sharply from the beginning of the year.

The latest Fed data "could be telltale signs that foreign banks are in 
need [of dollars] again, or institutional investors are getting 
concerned about foreign bank credit," said George Goncalves, a rates 
strategist for Nomura Securities.

---Aaron Lucchetti and Liz Rappaport  contributed to this article.
Copyright 2011 Dow Jones & Company, Inc
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://lists.fahamu.org/pipermail/debate-list/attachments/20110818/733aa027/attachment-0001.htm 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: image/jpeg
Size: 13382 bytes
Desc: not available
Url : http://lists.fahamu.org/pipermail/debate-list/attachments/20110818/733aa027/attachment-0001.jpeg 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: image/gif
Size: 625 bytes
Desc: not available
Url : http://lists.fahamu.org/pipermail/debate-list/attachments/20110818/733aa027/attachment-0001.gif