By Douwe Miedema
WASHINGTON Feb 18 The U.S. Federal Reserve on
Tuesday adopted tight new rules for foreign banks to shield the
U.S. taxpayer from costly bailouts, ceding only minor
concessions despite pressure from abroad to weaken the rule.
Foreign banks with sizable operations on Wall Street such as
Deutsche Bank and Barclays had pushed back
hard against the plan because it means they will need to
transfer costly capital from Europe.
The Fed, which oversees foreign banks, gave them a year
longer to meet the standards, and applied it to fewer banks than
in a first draft, but the rule was largely unchanged from when
it was first proposed in December 2012.
"The most important contribution we can make to the global
financial system is to ensure the stability of the U.S.
financial system," Fed Governor Dan Tarullo, in charge of
financial regulation, said in a speech at a board meeting at
which the Fed unanimously adopted the rule.
The reform is designed to address concerns that U.S.
taxpayers will need to foot the bill if European and Asian
regulators treat U.S. subsidiaries with low priority when
rescuing one of their banks.
The largest foreign banks, with $50 billion or more in U.S.
assets, will need to set up an intermediate holding company
subject to the same capital, risk management and liquidity
standards as U.S. banks, the Fed said.
The Fed broke with its tradition of relying on regulators
abroad in overseeing foreign banks after the 2008 financial
crisis, during which it extended hundreds of billions of dollars
in emergency loans to overseas banks.
"(The rule reduces) the likelihood that a banking
organization that comes under stress in multiple jurisdictions
will be required to choose which of its operations to support,"
Fed staff said in a document.
Europe has warned of tit-for-tat action, with European Union
financial services commissioner Michel Barnier saying in October
that the bloc would draw up similar measures if the Fed pushed
ahead with its plans.
"It's too early to give a detailed response," Barnier said
in an emailed statement. "In any case, we can certainly not
accept discriminatory measures that would treat European banks
less favourably than American banks."
The Fed estimated that between 15 and 20 foreign banks will
need to set up an intermediate holding company after the cutoff
was raised to $50 billion of assets in the United States, from
$10 billion in the proposed rule.
The Fed also gave foreign banks a year longer to meet the
requirement to set up the new structure, with the new deadline
set as July 1, 2016. Both changes had been widely expected in
The new structure gives banks less flexibility to move money
around than under the current rules, which let banks use capital
legally allocated in their home country.
The Fed has taken a tougher stance than others on some of
its bank capital rules. It has, for instance, proposed a
leverage ratio - a hard cap on borrowing - of 6 percent of
assets, well above the 3 percent global requirement.
Foreign banks acknowledged the slight softening of the rule,
but said they remained unhappy.
"We continue to have a fundamental disagreement with the Fed
about the appropriateness and necessity of applying an extra
layer of U.S. bank capital requirements," said Sally Miller,
head of the Institute of International Bankers.
The rule also subjects foreign banks with global assets of
$10 billion or more to annual health checks known as stress
tests that rely on home-country standards. Only the largest
banks will also have to run U.S. stress tests.
All in all, some 100 foreign banks will be subject to all or
part of the rules, depending on their size. Many of the risk-
management and liquidity standards adopted by the Fed at the
meeting are also valid for U.S. banks.
The Fed will closely watch how banks change their strategy
on account of the new rules to avoid any risky activity popping
up elsewhere in the business, staff said during the board
Foreign banks will still be allowed to hold U.S. branches,
which unlike full U.S. subsidiaries are part of the parent
company, and are not subject to the rules. But most risky
activities are not allowed for branches.
"Certainly you're going to have the institutions analyze
their business strategy within the U.S. ...(but) you're not
going to be able to just shift assets wholesale from the
(holding company) to a branch," said Irena Gecas-McCarthy, a
regulatory consultant at Deloitte & Touche.