Fed targets foreign banks with tougher rules

Two dozen foreign banks with at least $50 billion of global assets to face stricter US capital rules

The Federal Reserve moved to subject two dozen foreign banks with at least $50 billion of global assets to stricter US capital rules, as it attempts to lower risks to the financial system.

The Fed proposed that most of the banks also be forced to comply with more-stringent liquidity rules and pass stress tests analysing how they would fare in a severe economic downturn. The board voted yesterday to seek public comment on the plan for 90 days. It would take effect in July 2015.

Deutsche Bank AG, based in Frankfurt, and London-based Barclays would be among the institutions that would have to keep more easy-to-sell assets in the US and face restrictions on distributing capital to parent companies. The Fed provided $538 billion of emergency loans to the US units of European banks during the financial crisis, almost as much as it did to domestic firms. That increased political pressure on lawmakers and regulators to tighten rules for all lenders.

“This is a huge paradigm shift in US regulation of foreign banks operating here,” said Kim Olson, a principal at Deloitte & Touche LLP in New York and a former bank supervisor. “This means captive capital and liquidity in the local unit that US regulators can go after during failure.”

Lenders with more than $50 billion of global assets and more than $10 billion in the US will be required to house their US businesses, including securities trading, within regulated holding companies. The $10 billion threshold excludes the domestic assets that are connected to a US branch of a bank. About 25 institutions would fall under this requirement, Fed staff said.

Those so-called intermediate holding companies would have to abide by capital rules that already apply to their US counterparts. The new treatment may force foreign banks to inject capital into their US units and limit their ability to move funds across borders.

The proposal is “overly broad and could prompt foreign banks to pull back from the US market, hurting our economy and financial markets,” Sally Miller, chief executive officer of the Institute of International Bankers, said in a statement. It would be more appropriate “to concentrate on the very small number of foreign banks whose US operations could actually be considered to present risks to US financial stability.”

Foreign companies currently can choose whether to create US bank holding companies. Those units were exempt from capital standards as long as their parent firms were well- capitalised. The 2010 Dodd-Frank financial overhaul removed that exemption. Non-US lenders including Deutsche Bank and Barclays then altered their legal structures to remain outside the scope of local capital rules.