Royal Bank of Canada, the country’s largest lender, expects “no impact” on its U.S. businesses if the Federal Reserve imposes tougher capital rules for foreign banks, Chief Executive Officer Gordon Nixon said.
“If it’s something that we have to manage around, the impact will be more just in terms of how we’re structured and it may impact things like compliance and so forth,” Nixon said today on a conference call with analysts. “In terms of businesses, it will have no impact whatsoever.”
Fed Governor Daniel Tarullo said yesterday the central bank is planning stricter capital and leverage rules for U.S. units of foreign banks. The Fed will force non-U.S. firms to house all of their U.S. businesses, including securities trading, within regulated holding companies, he said.
Those holding companies also must abide by capital and liquidity rules that already apply to U.S. counterparts, Tarullo said. That means foreign banks’ local units would have to bolster capital in the U.S. to guard against losses of their parents’ resources.
“In the U.S. we’re very well capitalized,” Janice Fukakusa, Royal Bank’s chief financial officer, said on the call. “We believe under any outcome with respect to this talked about new legislation, we’re very well positioned to continue to operate.”
Royal Bank’s main U.S. businesses include its RBC Capital Markets investment-banking business, based in New York, and a wealth-management unit.
Tarullo, who leads the Fed’s committee on bank supervision, said the regulator is entering the “homestretch” of completing the proposal that would include the new requirements.
While Tarullo didn’t indicate which banks would be covered by the new rules, he said 23 foreign lenders have at least $50 billion in assets in the U.S., the threshold established by the 2010 Dodd-Frank Act for treating U.S. firms with “special prudential measures.”
Foreign lenders currently can choose whether to create U.S. bank holding companies. Those units were exempt from capital standards as long as their parent firms were well capitalized. Dodd-Frank removed that exemption. Some non-U.S. lenders then altered their legal structures to remain outside local capital rules.
“This is not great news for any Canadian bank as it will likely push up the amount of capital required to run their U.S. businesses,” Brad Smith, an analyst with Stonecap Securities Inc. in Toronto, said yesterday in a note. “All Canadian banks that are running capital markets businesses in the U.S. will need to take a very close look at their business lines.”
Toronto-Dominion Bank (TD), which has more retail branches in the U.S. than in Canada, already has a holding company in the U.S. that will have to add about $5 billion in capital to comply with Dodd-Frank, Smith said. Requiring all U.S. businesses be consolidated into a holding structure would boost the capital need by billions of dollars, he said.
“Media reports around potential holding company regulation in the U.S. are speculative given that no regulations have been announced, and we are not in a position to comment on what may or may not be required,” Stephen Knight, a Toronto-Dominion spokesman, said yesterday in a statement. “We would always seek to be compliant with the rules that apply to us.”
Spokesmen for Bank of Nova Scotia (BNS), Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce didn’t immediately return calls seeking comment.
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