* 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 and Douwe Miedema
NEW HAVEN, Conn./WASHINGTON, Nov 28 A top
Federal Reserve official launched a plan to subject foreign
banks to the same tough oversight rules as their U.S. rivals, a
policy shift that could make it less attractive for banks to do
business in America.
Fed Governor Daniel Tarullo outlined a three-pronged
approach that would force the largest U.S. divisions of foreign
banks to establish holding companies over all subsidiaries.
Under this proposal, the Fed would stop relying on foreign
oversight of banks.
The proposal, which the Federal Reserve Board is now
refining, would require foreign banks' U.S. holding companies to
comply with the same capital rules that apply to U.S. banks, and
it would make liquidity standards "broadly consistent" with
domestic rules, he said.
Tarullo, who plays a leading role on regulatory issues at the
U.S. central bank, characterized his plan as "a middle course"
for foreign banks doing big business in the United States. He
said he aimed to make it "minimally disruptive."
But foreign banks were not happy with the proposal.
"We're disappointed that Governor Tarullo's speech appears
to signify a departure from the Federal Reserve Board's
long-standing case-by-case approach when dealing with foreign
banking organizations," Sally Miller, head of the Institute of
International Bankers, said in a statement.
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 tighten the rules as a precaution.
"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," Tarullo told a Yale School of Management forum.
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.
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
United States, accountants said.
"The foreign banks are going to have to relook at the cost
of doing business in the U.S. versus the benefits," said Dan
Ryan, chairman of the financial services regulatory practice at
accountancy firm PricewaterhouseCoopers.
"It will force a new look into the profitabilty of the U.S.
operations and how much capital they need," he said.
The proposed rules could amplify criticism that regulators
globally are not cooperating to set universal standards,
complicating funding-market rules at a time that 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.
Tarullo surprised Wall Street last month by suggesting that
Congress should cap the size of banks based on their share of
U.S. gross domestic product.
Charles Horn, a partner in law firm Morrison & Foerster,
said the financial industry had been expecting the Fed to put
out tougher rules for foreign banks.
"We all knew that the Fed and the other regulators were
going to turn up the regulatory heat on the U.S. operations of
large foreign banks," he said.
But U.S. banks, which already face stricter capital and
other requirements, would welcome the Fed's decision to toughen
the rules for foreign banks, he said.