Fed weighs easing how foreign banks in U.S. must gird for crisis

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The Federal Reserve should think about dialing back its demand that foreign banks in the U.S. have an especially amplified ability to absorb losses, Vice Chairman Randal Quarles said at a Wednesday conference.

The Fed's bank-supervision chief said he'll recommend the agency re-examine whether what's known as total loss-absorbing capacity, or TLAC, should be reduced for foreign banks operating in the U.S.

Doing so would move the Fed closer to the lower levels that non-U.S. regulators have set. Quarles said the Fed's current demand is at the top end of the standard established by global regulators, and lowering it — "without adversely affecting resolvability and U.S. financial stability" — could prompt a quid pro quo from international watchdogs that helps U.S. banks overseas.

"Willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same," Quarles said in a speech made at a Harvard Law School event.

The vice chairman, appointed by President Donald Trump, has been on a campaign to revise rules put in place after the 2008 financial crisis — arguing they can be made more efficient without making them weaker. He's focused some of that attention on the many regulations that require big banks to be able to withstand another crisis.

On Wednesday, he also said the Fed expects to seek public comments on its previous industry guidance for how to write so-called living wills — elaborate plans meant to plot a failure for each firm without endangering the financial system. Quarles specifically said the regulator is considering how it directs banks to position capital and liquidity in individual units of their companies. The agency may also write a rule to make those needs more predictable and transparent, he said

"Some amount of local capital and liquidity prepositioning can reduce the incentives for damaging and unpredictable seizures of resources by local regulators during times of stress," Quarles said.

In a January speech, Quarles set out an ambitious agenda for overhauling banking regulations. He said that he's seeking "meaningful simplification" of the steps banks need to take to make sure they can absorb losses. He said the TLAC regulations — which demand a supply of long-term debt that each firm can use for recovery and recapitalization after a failure — would be among those revised.

Bloomberg News