"Rewind" can't stop Fed pressing forward They called it "Project Rewind." Three years ago, Deutsche Bank's executives set up a team to respond to a proposal in the US Congress that would increase the capital requirements of their US subsidiary, Taunus. In what turned out to be a prescient assessment of the political winds in Washington, the team wrote to their bosses - in a document seen by the Financial Times - that "there is no reason to believe, post-Lehman, that US regulators would not seize the opportunity to require larger capital backstops to support the dissolution of failed entities." In 2010, Congress duly passed the Dodd-Frank Act, which included the requirement for higher capital for foreign banks in the US - mainly hitting Barclays and, above all, Deutsche. The Project Rewind team worked out that an additional $20bn of capital would have to be injected into the US business - an expensive one-off bill followed by a permanently less efficient balance sheet. They war-gamed alternatives, and considered moving business to Frankfurt. Ultimately, though, they opted to shift their holding companies around, in a way that avoided the new rules. Barclays undertook a similar move. Now, the Federal Reserve is proposing to close this loophole and impose higher capital levels anyway. The Deutsche team looks to be almost out of bullets. All these committees, codenames and cases of regulatory arbitrage can certainly look a bit nefarious. But this time round, the German bank seems to be behaving rationally in response to regulatory threats to one of its crown jewels. Deutsche is the last big investment bank to be physically situated on Wall Street. Whereas foreign banks - from Nomura to UBS - have struggled in New York for decades, Deutsche last year retained its position as the leading fixed income business in both the US and the world, according to recent data from Greenwich Associates. However, despite being named after a German mountain range, Taunus" bedrock has been looking a little thin. After a series of acquisitions over the years, including Bankers Trust in 1998, Deutsche's US operation manages to have negative capital levels, because of the amount of goodwill and deferred tax assets accumulated during the period, which have to be discounted. On a global basis, this all balances out and, although Deutsche is still more weakly capitalised than some peers, it exceeds regulatory minimums. Capital levels are usually decided globally. So the Fed's intervention - ignoring this global convention - is another worrying sign of a lack of confidence and trust in the international regulatory framework. The US central bank evidently believes there is some risk that it would have to mop up in the event of a disaster at Taunus - even though it is a matter of German law that Deutsche would have to stand by its subsidiary. The Fed's action comes as it tells large banks not to assume countries will co-operate during a crisis. If international harmony on regulation is fracturing even in peacetime how can we have any faith that officials will co-operate better during the next crisis? And what's left for Project Rewind? The Fed's ruling is not yet final. Deutsche will try to rally the German government to its cause. It may also reach out to foreign banks, arguing that they might have similar capital requirements imposed on them by European governments in retaliation. If all the banks stood shoulder to shoulder and made the case, calmly and confidently, that they should be treated as the global businesses they are, it could well have an impact. But what was striking at the World Economic Forum in Davos last week is how unpersuaded US bank executives are about siding with Deutsche. In another perceptive line from Project Rewind's initial report, the team wrote that "US banks will also lobby the Fed to impose these requirements on the US operations of international banks, citing reasons of undue competitive advantage." Indeed, many US bankers believe that pushing up Deutsche's local capital levels would be worth any retaliation. That is partly because their operations around the world are closer to standalone levels of capital and liquidity. They have almost given up on the old idea of a cross-border institution and so they have less to lose. As the Project Rewind team suspected, the Fed, with the approval of US banks, is set to press fast forward. Tom Braithwaite is the Financial Times" US Banking Editor