Daniel Tarullo, governor of the US Federal Reserve, has outlined stricter capital and liquidity rules for foreign banks operating in the US. His plan would force them to adhere to the same attitudes toward cash investment standards as domestic US institutions.
According to Tarullo the US central bank will in future require foreign firms to create intermediate holding companies to house all of their US subsidiaries, which would reduce the ability of foreign banks to avoid US consolidated capital regulations and make supervision more consistent across foreign banks. Other enhanced prudential standards required by the Dodd-Frank Act including stress testing requirements, risk management requirements, single counterparty credit limits, and early remediation requirements should be applied to the US operations of large foreign banks, he added.
Tarullo acknowledged that added capital and liquidity requirements could “increase cost and reduce flexibility of internationally active banks that manage their capital and liquidity on a centralised basis.” However, he supported tougher rules because “managing liquidity and capital on a local basis can have benefits not just for financial stability generally, but also for firms themselves.”
A total of 23 foreign banks with at least US$50bn in assets operate in the US compared with 25 US firms. Five of the top 10 US broker-dealers are owned by foreign banks. “For the foreseeable future, then, our regulatory system must recognise that while internationally active banks live globally, they may well die locally,” said Tarullo, adding that a proposed rule will follow within the next few weeks.
The new rules are unlikely to find favour internationally, especially as the US has only recently announced a delay on its implementation of the global Basel III capital adequacy rules, which are due to start next year. The reasons for this delay are now perhaps clearer.
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