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November 21, 2016 | EU Retaliates Against US Banks, London: Global Trade War Tit-For-Tat

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

The EU fired a major global trade war tit-for-tat retaliation today against US banks and the UK in a single action.

Brussels will raise costs for foreign lenders while simultaneously taking a pot shot at London.

retaliation

Please consider EU to Retaliate Against US Bank Capital Rules.

Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit.

The European Commission will unveil provisions on Wednesday that mirror controversial US “intermediate holding company” rules that ringfence foreign bank capital. When these were announced in 2014, the EU complained to Washington of “protectionism” and threatened to retaliate.

If adopted into EU law, the commission’s proposals would force big US investment banks such as Goldman Sachs and JPMorgan to hold additional capital and liquidity in the EU so their subsidiaries can be separately wound up in a crisis by European authorities.

The counterblow from Brussels, slipped into late drafts of the proposal, will be welcomed by European banks that have been complaining about an unlevel playing field with their US rivals. But it underlines the accelerating trend towards further fragmentation in financial rules, as jurisdictions assert control even at the risk of duplicating international requirements.

Although EU officials insist the proposal was drafted without Brexit in mind, the reforms would potentially affect London as a non-EU financial centre. The proposal could add costs and complexity to UK-based banks by forcing them to establish a separate pool of capital in the EU after the country leaves the bloc.

“This is a taste of what is to come,” said one adviser to an investment bank that would be affected by the rules. “At a time when everyone is rethinking bank structures, it adds one more point of uncertainty.”

He added: “If you must create an EU holding company that acts as your hub, the question becomes: how many European hubs do you want?”

The move is likely to stoke tensions between the US and Europe, which have already been ignited by a $14bn claim on Deutsche Bank from the US Department of Justice to settle claims of mis-selling mortgage securities.

European officials have also pushed back against US-led pressure for tough capital requirements to be introduced by the Basel Committee of global regulators in a move that some European banks claim would put them at a disadvantage to their US rivals.

US banks say they are already forced to hold significant amounts of capital and liquidity in their large UK operations. But if Europe presses ahead with the latest proposals, it could force them to increase the amount of resources they have tied up in Europe.

In 2014 Michel Barnier, then EU’s financial services commissioner, warned that US plans to force foreign banks to hold more capital were “protectionist” and risked bringing a “fragmentation of global banking markets”. Mr Barnier is now the commission’s chief Brexit negotiator.

The US and EU both want to be in control of a very fragmented and essentially insolvent global banking system.

It appears the UK was caught in the middle of a US-EU dispute, but in reality, the EU wanted to punish the UK and would have done this anyway.

Regardless, this adds fat to the fires of retaliations even as far bigger problems loom. Italy may be one vote away from leaving the Eurozone.

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Very few see what is coming.

Mike “Mish” Shedlock

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November 21st, 2016

Posted In: Mish Talk

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