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RBC, BMO unfazed by Fed’s new foreign bank rules

Two of the three Canadian banks with large U.S. operations say there aren't worried about the Federal Reserve's new rules for foreign banks.

After a length consultation period, the Fed recently released final details on the regulation of foreign banking organizations – or foreign banks with sizable U.S operations.

The most prominent changes require these banks to set up intermediate holding companies over their U.S. subsidiaries, so that they can be governed by U.S. laws, as well as tougher standards for risk management, liquidity and leverage.

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Examples of the latter measures include establishing a U.S. risk committee with a U.S. chief risk officer, and adhering to leverage rules that require the banks to hold capital amounting to 3 per cent or 4 per cent of both on-and-off-balance sheet assets, depending on their size. Affected banks have until 2018 to comply with the leverage rules.

For some banks, the rules can be incredibly onerous. Deutsche Bank already announced that it has to slash $100-billion (U.S.) worth of assets in order to comply.

Canadian banks, though, look to be in a different class. While there are many details to pore over in the 415-page document, both Royal Bank of Canada and Bank of Montreal were asked about their abilities to meet the new rules this week. Both banks said it shouldn't be a problem.

"We actually have quite a bit of capital in terms of our U.S. businesses," RBC chief executive officer Gordon Nixon said at the bank's annual general meeting. After RBC sold its U.S. retail arm in 2011, "we left the vast majority of that capital in the United States."

"We're in a very good position to be able to comply," Mr. Nixon added.

Bank of Montreal is in a similar boat. "From our perspective, because we run the U.S. bank as a U.S. banking subsidiary of a holding company, we have historically maintained the capitalization and the leverage as though it was a domestic institution," CEO Bill Downe said on a conference call. For years Canada has enforced tough capital standards that were much stricter than those of most other countries.

"There will clearly be some details in the final interpretation that will be important, but the overall impact on BMO Financial Corp, the U.S. holding company, and BMO Harris Bank, is going to be very little," Mr. Downe added.

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"On a relative competitive basis, having run that bank the way we did as a discrete well-capitalized institution stood us in very good stead going through the period of challenge during the crisis," he added. "And it means as we look at this new body of regulation, we don't expect to be materially impacted, so it was actually a good-news piece."

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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