NEW YORK, Jan 06, 2012 (BUSINESS WIRE) — Fitch Ratings says the potential credit impact on banks due to new US tax regulations designed to inhibit offshore tax evasion could be tough to gauge due to uncharted consumer response. A significant outflow of foreign deposits could occur, but other customers might simply stay put.
Skittish high net worth individuals opposed to deeper deposit transparency could cause a material dislocation of deposits, but many other depositors with smaller holdings might choose to keep deposits in place based on necessity and function.
However, banks are clearly opposed to the new tax parameters as they breed additional uncertainty for an industry already under massive regulatory pressure.
US banks are contesting the proposed Foreign Account Tax Compliance Act of 2010 (FATCA) rule requiring them to report to the IRS interest income on foreign deposits earned by non-US residents. Banks contend that heightened disclosure could spook investors, prompting them to withdraw cash and place it instead in accounts requiring less transparency. Cheap deposits mean cheap funding for banks. A meaningful dip in deposits could translate to increased capital risk. Still, we feel a low interest rate environment would diminish any pinch felt by banks regarding current cost of funds stemming from foreign deposits.
Banks in states with considerable immigrant populations (Florida, California, Texas, and New Mexico) would likely be at higher risk for a sudden decrease in foreign deposits, as those states tend to rely heavily on community bank businesses versus larger institutional firms. The Florida Bankers Association has estimated that between $60 billion and $100 billion in foreign deposits, or close to 20% of the state’s total deposits, are held in Florida banks. That said, we feel the impact of a potential shift in foreign deposits for US banks would not be significant.
Additionally, overseas financial institutions will now need to report American clients with accounts of more than $50,000 to the IRS. Banks have deemed the new process both time-consuming and costly. We feel that banks will absorb the rules gradationally; keeping in mind that noncompliance will result in a stiff 30% withholding tax on payments received from the US.
While FATCA won’t become effective until Jan. 1, 2013, many banks and depositors are beginning to make decisions in order to be compliant by the end of 2012.