Banks Find Loophole on Capital Rule

The Wall Street Journal’s David Enrich reports from London that some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank’s main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

“It’s just not worth it to have all that capital trapped” in the holding company, said a New York lawyer who is advising banks on how to restructure.

The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world.

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.

Last summer’s Dodd-Frank law beefed up rules governing the quantity and types of capital banks must keep to protect themselves from potential losses. The provision also closed a loophole that allowed foreign banks to run their U.S. subsidiaries with thinner capital buffers than those of their local rivals.

For example, Barclays Group US Inc., the U.K. bank’s Delaware-based holding company, had a Tier 1 leverage ratio of just 1.37% as of Sept. 30. That put the holding company below almost all its peers of similar size, which had an average ratio of 9.13%, according to Federal Reserve data.

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Bloomberg News



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