The Difference is, American Banks Allowed to Fail

LONDON (MarketWatch) -- Who says the regulatory arbitrage game isn't alive and well?

On the surface, the American and British programs on bank capitalization look pretty similar, but key differences are apparent.

In both cases, governments are issuing preferred stock. Sure, the terms are different -- taking on the Brit preferred incurs a steep 12%-a-year payout; Uncle Sam wants 5% a year, unless the holding is still on the books after five years.

In both the U.S. and the U.K., banks will face limitations on paying dividends -- American institutions won't be able to increase them; U.K. ones can't have them at all -- and both have executive pay guidelines.

But the real difference is to who it applies. In the U.K., the basic system was, get your capital up to certain thresholds privately -- or take the government money, and strings, to get there. HSBC Holdings (HBC 74.34, +0.09, +0.1%) and Barclays PLC (BCS 17.60, +1.85, +11.8%) were able to go down the private route, while Royal Bank of Scotland (RBS 1.20, -0.73, -37.8%) and Lloyds TSB (LYG 10.75, -1.42, -11.7%) were not. A quick check of the stock price shows the difference between taking private or public cash.

The U.S. one, by contrast, is voluntary. Other than the "big nine" that got roped into taking the cash, there seems to be a strong incentive for all but the most troubled lender to take a pass.

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