* Tarullo gives three-pronged approach to stem risks
* Foreign banks would establish holding companies
* Align capital, liquidity standards with U.S. banks
By Jonathan Spicer
NEW HAVEN, Conn., Nov 28 The Federal Reserve's
top regulation official on Wednesday called for broad new
liquidity and capital rules for the U.S. operations of large
foreign banks, that would align them with those for American
banks and protect the still vulnerable financial system.
Fed Governor Daniel Tarullo outlined a three-pronged
approach that includes forcing the largest U.S. divisions of
foreign banks to establish a "top-tier U.S. intermediate holding
company," or IHC, over all subsidiaries.
The plan, which the powerful Federal Reserve Board is now
refining, would also apply to the IHCs the same capital rules
applicable to U.S. banks, and make liquidity standards "broadly
consistent" with domestic rules, he said.
Tarullo's landmark proposal suggests that, four years after
the worst of the financial crisis, regulators remain wary of the
risks posed by big banks that do business globally, and are
prepared to set national rules as a precaution.
Tarullo characterized his plan as "a middle course" that
would, effectively, let U.S. regulators stop relying on foreign
oversight of banks doing big business in the United States.
"By imposing a more standardized regulatory structure on the
U.S. operations of foreign banks, we can ensure that enhanced
prudential standards are applied consistently across foreign
banks and in comparable ways between U.S. banking organizations
and foreign banking organizations," Tarullo told a Yale School
of Management forum.
"As with domestic firms subject to enhanced prudential
standards, the Federal Reserve would work to ensure that the new
regime is minimally disruptive, through transition periods and
other means," he said.
Details of the new rules are now under discussion at the
Fed, Tarullo said, adding he expects the Fed's board to issue a
more detailed notice of proposed rulemaking in coming weeks.
Earlier this month, the Fed said it would delay the
so-called Basel III capital standards beyond a Jan. 1, 2013,
deadline. That caused ripples globally, prompting some to worry
that banks' intensive lobbying efforts succeeded in watering
down and delaying post-crisis reforms.
PROBLEMS FOR EUROPEAN BANKS?
In late 2008 - in response to the financial crisis that
began in the United States but spread globally - the Fed
extended hundreds of billions of dollars in emergency loans to
support the U.S. units of European banks that were shaken by the
deep turmoil. That stoked anger at banks, leading in part to the
2010 Dodd-Frank financial reform legislation.
Tarullo's proposal could crimp international funding schemes
at European banks such as Barclays Plc and Deutsche
Bank, and compel them to beef up capital in the
It could also amplify criticisms that regulators globally
are not cooperating to set universal standards, complicating
funding-market rules at a time the world economy is still
struggling to recover from recession.
The additional capital and liquidity buffers "may
incrementally increase cost and reduce flexibility of
internationally active banks that manage their capital and
liquidity on a centralized basis," Tarullo acknowledged.
"However, managing liquidity and capital on a local basis
can have benefits not just for financial stability generally,
but also for firms themselves," he said.
Banks have relied increasingly on shorter-term funding and
riskier trading over the last decade, Tarullo added, arguing
that U.S. regulators cannot be "completely reassured" by the
capital levels of foreign banks.
The U.S. central bank will continue to cooperate with
foreign counterparts in overseeing banking, Tarullo said. But
"that supervisory tool cannot provide complete protection
against risks engendered by U.S operations as extensive as those
of many large U.S. institutions," he added.
Tarullo has been busy on bank regulation. Last month, he
surprised Wall Street by suggesting that Congress should cap the
size of banks based on their share of U.S. gross domestic