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Fed to review Deutsche Bank’s Dodd-Frank circumvention

In response to Deutsche Bank’s move to restructure in order to avoid increasing capital requirements brought on by Dodd-Frank, Federal Reserve Governor Daniel Tarullo announced last Thursday that it would review foreign bank oversight in the U.S.

“As I think about the appropriate modes of regulation and supervision of foreign banking organizations in the United States,” Tarullo said, Financial Times reports. “[Deutsche’s reorganization] has certainly affected my thinking about how we do structure regulation of foreign bank organizations, and I think we will need to respond to that.”

Deutsche Bank, Germany’s largest bank, announced in an annual report last week that the company had been restructured and its investment bank and broker-dealer had been separated.

The reorganization would allow the institution to avoid committing extra capital to support its U.S. operations, a Dodd-Frank-mandated reform. Barclay’s PLC made a similar move in 2010 when it also restructured in the face of mounting U.S. regulations.

Currently, the Federal Reserve is reviewing its supervisory duties of foreign banks and how they align with those mandated by Dodd-Frank. Should the Federal Reserve choose to impose the capital requirements that Deutsche Bank and Barclay’s tried to circumvent, it would signify a major policy reversal, Financial Times reports.

Deutsche Bank has, up until recently, been allowed to compensate for negative U.S. capital levels with high German capital levels due to a 2001 Federal Reserve policy that allows for the assessment of foreign banks based on consolidated capital levels, not U.S. capital levels.

On Wednesday, Deutsche Bank announced that it “always had and will continue to have appropriate capital levels in all our U.S.-regulated entities,” according to Financial Times. The Dodd-Frank requirement that Deutsche Bank circumvented requires that large bank-holding institutions are just as capitalized as U.S. banks.

Sheila Bair, a former chairwoman of the FDIC, helped to enact that Dodd-Frank provision.

“The only capital that matters is that which is here in the U.S. and can be accessed,” Bair, now an adviser at Pew Charitable Trusts, said, according to Financial Times. “That is the real issue that needs to be addressed.”

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