The European Union intensified its campaign against U.S. Federal Reserve proposals to toughen oversight of bank units belonging to overseas lenders, warning of “potential retaliation” against the plans.

Michel Barnier, the EU’s financial services chief, last week sent a three-page critique of the draft measures to Fed Chairman Ben Bernanke, saying that they risk driving up costs at EU-based banks, leaving them at a competitive disadvantage. The move follows a meeting this month between Barnier and U.S. Treasury Secretary Jacob J. Lew, where the Frenchman pressed for a change of course.

The proposals are “a radical departure from the existing U.S. policy,” and may undermine efforts to ensure that large banks can be safely wound down if they fail, Barnier wrote in his April 18 letter to Bernanke, obtained by Bloomberg News. The standards “could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery.”

Under the draft Fed plans, published in December, foreign lenders would be forced to organize their U.S. subsidiaries under a locally regulated holding company, with its own reserves of capital and easy-to-sell assets that could be tapped in crises. Bernanke has said the measure would be an “important step” in addressing “the risks that large, interconnected financial institutions pose to U.S. financial stability.”

The Fed proposals shouldn’t apply to banks that are already subject to rigorous regulation in the country where their headquarters are based, according to Barnier’s letter.

Banks would be required to comply with the new Fed rules if they have consolidated assets of $50 billion, with U.S. subsidiaries accounting for $10 billion.
 
(Bloomberg)