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Federal Reserve Proposes Guidelines for Foreign Banks in Keeping with U.S. Bank Capital Standards

December 19, 2012 in BNA's Banking Report · Leave a Comment 

By Jeff Bater

Big foreign banks would face capital standards applied to their U.S. counterparts and be required to maintain a 30-day buffer of highly liquid assets under a proposal Dec. 14 by the Federal Reserve that makes significant change in its regulation of overseas lenders.

The Fed proposal would have a foreign bank organize its U.S. subsidiaries under a single U.S. intermediate holding company subject to the same risk-based capital and leverage standards applied to U.S. bank holding companies. The proposal would apply to foreign banks with total global consolidated assets of $50 billion or more and U.S. assets of at least $10 billion; the Fed estimates about 107 firms would be affected.

The $10-billion threshold excludes assets held by a U.S. branch or agency. While the intermediate holding company would be subject to enhanced prudential standards on a consolidated basis, U.S. branches and agencies of a foreign banking organization can continue to operate outside of the intermediate holding company.

A reduced set of requirements would apply to 84 foreign banks that each have total global assets of $50 billion or more, but have less than $50 billion in combined U.S. assets, reflecting “the limited risk to U.S. financial stability posed by these firms,” according to a staff memo on the proposal. The 23 banks with more than $50 billion in combined U.S. assets would face more stringent standards.

The proposal would also apply to foreign nonbank financial companies. The Financial Stability Oversight Council, made up of U.S. financial regulators, is expected to designate certain nonbanks as systemically important but hasn’t done so yet.

Financial Crisis Revelations

The financial crisis revealed limitations on the ability of foreign banks to act as a source of support to their U.S. operations under stressed conditions. Congress directed the Fed, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, to impose enhanced prudential standards on foreign banks.

The Fed will accept comments on the proposal through March. The regulator is giving foreign banks considerable time to implement the requirements. Organizations with global consolidated assets of $50 billion or more on July 1, 2014, would be required to meet the new standards on July 1, 2015, according to the Fed.

“What does all this mean for covered foreign and non-bank banks? Of course, an FRB proposal is not a final rule,” Federal Financial Analytics said in a comment. “But, if the FRB proceeds as planned, covered firms will be governed by the Federal Reserve and, thus, an array of increasingly stringent standards, in ways their home-country regulators or non-bank business plans never anticipated.”

Jaret Seiberg, an analyst at Washington Research Group, a unit of Guggenheim Securities, called the proposal a negative for the large foreign banks that operate extensive broker-dealer and banking activities in the United States.

“An example of a foreign bank at risk from this approach would be Deutsche Bank,” he said. “For the domestic mega banks, this is a mixed development. It should give them a competitive advantage over their foreign bank rivals for lending and investment banking activities. Yet it also runs the risk of triggering a trade war that could result in domestic banks facing costly requirements in foreign countries. The mega banks include JP Morgan, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley. For the large regional banks, this should be all upside. These banks operate only domestically, which means foreign country retaliation will not impact them.”…

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