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After spending nearly a year deliberating on an approach, the Federal Reserve Board on Friday released a proposal that will overhaul the way regulators will supervise foreign banks that operate in the United States, a significant shift from its longstanding case-by-case method.
December 14 -
A pending proposal by the Federal Reserve Board to overhaul the way U.S. regulators supervise foreign bank operations is raising questions and sparking concern among industry players who fear it may go too far.
December 7 -
The central bank unveiled a 173-page proposal on Tuesday detailing how it will regulate systemically important banks and nonbanks. While the plan offered a lot of specifics, some burning questions, including how much certain firms will pay as a capital surcharge, were left unanswered.
December 20
WASHINGTON The Federal Reserve Board is set to alter its strategy for supervising foreign banks in the U.S., making it somewhat less onerous for smaller global institutions.
In a final rule implementing a large section of the Dodd-Frank Act, the Fed said it plans to raise a key threshold over which foreign banks would need to form an intermediary holding company. The rule is set to be voted on at a meeting of the Fed board on Tuesday afternoon.
Regulators had originally proposed in December 2012 to subject any foreign bank with $10 billion or more in non-U.S. branch assets to the holding company requirement. But the final rule lifts that cutoff to $50 billion.
"This threshold will reduce the burden on FBOs [foreign banking organizations] with a smaller U.S. footprint, but will maintain the IHC requirement of the larger FBOs that present the greatest risk to U.S. financial stability," according to the Fed's staff memo.
Anywhere between 15 to 20 foreign banks like Barclays, Deutsche Bank, Credit Suisse and HSBC will be required to create an intermediary holding company and meet the same set of capital, liquidity, and stress testing requirements as U.S. bank holding companies with $50 billion or more in assets. The final rule overall will impact roughly 100 foreign banks in the U.S.
To help ease the transition to a tougher set of requirements, the Fed provided foreign bank organizations with an additional year to comply with the new requirements, giving them until July 2016. The central bank also agreed not to enforce a leverage requirement on those entities until 2018.
"The extended transition period should help FBOs manage the costs of moving capital to the United States, and therefore should mitigate the impact that capital requirements might otherwise have on the IHC," according to the Fed's staff memo.
Fed officials also took other steps to ease the burden on foreign banks by deciding not to apply risk-based surcharges, a supplementary leverage ratio, and advanced approaches to such firms.
Although the changes would help some foreign institutions, the Fed altered little of the rest of its plan dictating how it will regulate overseas banks in the U.S., despite pressure from other governments and many foreign institutions.
Regulators have become increasingly concerned given the growing presence of foreign banking organizations in the U.S., which during the 2008 crisis found themselves in liquidity and capital squeezes having to draw at the Fed's discount window. They are also anxious to avoid a repeat of the failure of Lehman Brothers, which had a substantial broker-dealer subsidiary in the U.K..
Currently, foreign banking organizations own half of the 10 largest broker-dealers and nine of the 20 largest banks in the U.S.
"The consequences of these changes in foreign bank activities were seen dramatically during the crisis, when the funding vulnerabilities of numerous foreign banks and the absence of adequate support from their parents made them disproportionate users of the emergency facilities established by the Federal Reserve," said Fed Gov. Daniel Tarullo in prepared remarks at the Fed's Board meeting.
In a staff memo, the Fed explained its rationale at length for persisting with such a significant shift in its supervisory approach, given the vehement opposition by global counterparts.
At the center of its reasoning: the necessity to promote U.S. financial stability by mitigating risks tied to large, interconnected financial institutions.
"As the financial crisis demonstrated, the sudden failure of large financial institutions can have destabilizing effects on the financial system and harm the broader economy," said Janet Yellen in prepared remarks for her first public board meeting since becoming Fed Chair.
Critics of the Fed's plan have argued that an intermediary holding company requirement would wind up preventing the foreign bank from being able to manage its resources, while also hindering its flexibility to respond to stress.
But even while the Fed acknowledged such concerns, staff argued in their memo that such a requirement would wind up increasing the "resiliency of U.S. operations of the foreign bank, the ability of U.S. operations to respond to local stresses and ensure the stability of the U.S. financial system."
Another argument the Fed sought to dispute was that its so-called FBO rule didn't adequately reflect consideration of home country standards or give due credit to national treatment.
And while Fed officials acknowledged that the Dodd-Frank Act did not specifically require a foreign bank to create an intermediary holding company as part of Section 165, it gave regulators leeway to establish standards as they see fit for companies the central bank is required to supervise.
"Section 165 does not define what it means for an additional prudential standard to be appropriate, though it would be consistent with the standards of legal interpretation to look to the purpose of the authority to impose the requirement," according to the Fed's staff memo.
