The U.S. Federal Reserve on Friday proposed to tighten the leash on foreign banks to protect taxpayers from having to bail them out, in what banks said could lead to a pullback from U.S. markets.
The rules will likely make it more expensive for foreign banks to operate in America, and attorneys who work with foreign banks said that they needed to rethink whether they can maintain their current operations.
The plan would force foreign banks to group all their subsidiaries under a holding company, subject to the same capital standards as U.S. holding companies. The biggest banks will also need to hold liquidity buffers.
"The proposal would not disadvantage foreign banking organizations relative to domestic U.S. banking firms, but rather it seeks to maintain a level playing field," Fed Governor Jeremy Stein said at a board meeting.
Banks with fewer than $10 billion in U.S. assets would not need to comply with the new rules, the Fed said. The proposal was previewed in some detail by Fed Governor Daniel Tarullo last month, who said regulators remained wary of the risks posed by big banks that do business globally, and are prepared to tighten the rules as a precaution.
The Fed's Board of Governors voted unanimously to release the proposal for public comment.
The Fed said that while extra capital and liquidity buffers could "incrementally" boost costs, it would also make banks more stable. But international banks complained.
"The Fed's approach is...overly broad and could prompt foreign banks to pull back from the U.S. market, hurting our economy and financial markets," the Institute of International Bankers said in a statement.
The United States has traditionally relied on foreign supervisors to watch overseas banks, allowing them to hold less capital than their domestic counterparts.
The 2010 Dodd-Frank broad overhaul of the U.S. Financial landscape put an end to that policy, after the Fed was forced to extend hundreds of billions of dollars in emergency loans to overseas banks in the financial crisis.
TIT FOR TAT?
Deutsche Bank, Germany's flagship lender, is among those to be heavily affected after it overhauled its U.S. subsidiary Taunus to avoid having to inject billions of dollars of capital to meet Dodd-Frank financial reforms.
This year, Deutsche gave up bank holding company status for Taunus Corp, which has about $90 billion of risk-weighted assets, but will now have to put the unit back into a holding company. It could need to inject about $15 billion into Taunus as a result, analysts at Espirito Santo said.
And the UK's Barclays has restructured part of its U.S. operations and may have to shift funds around to meet stricter requirements for parts of its business, though it is likely to be less affected than Deutsche.
The Fed must impose tougher capital and other requirements on big banks, including foreign banks with substantial operations in the U.S., as part of its responsibilities under the Dodd-Frank law.
Regulators have put out draft rules for U.S. banks but had not yet addressed new requirements for foreign banks. The Fed's move is part of a growing trend whereby national regulators apply stricter rules, and which markets fear could lead to a series of tit-for-tat responses.
Britain, for example, has been approving new subsidiaries but looks unfavorably at applications for new branches over which they have far less influence.
But Fed officials said they believe that the risk is manageable and that they communicated with foreign regulators as they formulated the proposal.
Industry groups now have until the end of March to submit comments on the proposal. Regulators will then begin enforcing the rules - which are for banks with total global assets of $50 billion or more - in July 2015.
Under the plan, foreign banks with U.S. assets of $50 billion or more would need to maintain a 30-day buffer of highly liquid assets, and conduct internal liquidity tests. Banks with fewer U.S. assets would only be required to report the results on the liquidity tests.
The proposed rules would also limit the credit exposure of a foreign bank to a single counterparty to 25 percent of regulatory capital. Banks would need to set up risk committees, and be subject to U.S. stress tests.
The Fed said approximately 107 foreign banking organizations would be subject to the proposal, and that it expected about 25 intermediate holding companies to be set up.