WASHINGTON The Federal Reserve Board finalized tough new rules Tuesday for roughly 100 foreign banks operating in the U.S., resisting pressure by overseas governments and institutions to significantly dial back from an earlier proposal.
The central bank made some slight concessions by narrowing the number of firms that would be subject to the strictest part of the regulations and providing more time to comply with the new regime.
Still, the central bank refused to give substantial ground, attempting to ensure that overseas banks operating in the U.S. face the same tough requirements as U.S. institutions.
The rule also marked a shift in how the Fed balances national stability against ongoing efforts to cooperate internationally.
"We have to recognize that notwithstanding all the international cooperation on global capital standards and global liquidity standards and all the work that's going into trying to make cross border resolution a viable proposition, we still live in a world where there is national and regulatory responsibilities," said Fed Gov. Daniel Tarullo, at the board meeting. "So we do retain the responsibility to maintain the stability of the U.S. financial system as do our brethren in jurisdictions around the world maintain responsibility for their own."
The meeting marked the first time Fed officials sought to make the case to their foreign counterparts that the new supervisory framework was "appropriate" given how dramatically the profiles of foreign banks stateside have changed dramatically since the mid-1990s.
"The vulnerabilities that were revealed here with the changes in the business model over time and the inadequacies of the existing framework really are pretty striking," said Fed Gov. Jeremy Stein. "I think this is a step in the right direction."
Over the past two decades, foreign banks have become more concentrated, more interconnected, and more reliant on short-term wholesale funding; a type of borrowing that is highly susceptible to runs. They've also relied heavily on U.S. dollars to funds operations as well as meet the funding demands of their parents abroad. Foreign banks were among those financial institutions that accessed the Fed's emergency lending facilities during the 2008 crisis.
"The character of foreign banking operations has changed dramatically in the United States and I think this requirement is definitely appropriate in light of those changes," said Fed Chair Janet Yellen, who presided over her first board meeting.
The Fed has been under fire by foreign central bankers and their financial institutions, which argued the agency's new supervisory regime as outlined in its December 2012 proposal was a "radical departure" from its past policies. (The Fed first unveiled its supervisory regime for U.S. banks in 2011, and then a year later released its plan for foreign banks.)
But regulators responded that they made a concerted effort to take a middle-of-the-road approach in reforming the system, stopping well short of full subsidiarization, a term that implies breaking up institutions via "ring fencing."
Fed officials also stressed their own mandate under the Dodd-Frank Act of 2010 to prevent risks to the financial system in the U.S. that could arise from large, interconnected companies.
Ultimately, the central bank gave some leeway from its earlier proposal. It raised the threshold to $50 billion of non-U.S. branch assets over which foreign banks would be required to create an intermediary holding company.
A Fed official estimated that the number of foreign banks that would be required to build an IHC would likely be 17, but could be as high as 20.
Still, that was a significant number less than the initial proposal, which set the threshold at $10 billion and was projected to capture roughly 25 firms under that requirement. Overall, roughly 100 foreign banks will be impacted by the new framework, but will face less strict requirements given their smaller footprint in the U.S.
Like U.S. bank holding companies with $50 billion in assets, foreign firms with IHC's will be required to adhere to similar capital, liquidity, risk management, and stress testing requirements.
But Fed officials did offer another olive branch to overseas institutions, giving them an extra year to comply with the new rules until July 2016 and until 2018 for a new leverage ratio.
Some banks like HSBC and the Institute for International Finance refrained from reacting immediately to the new rule, saying they needed time to review the final regulation.
Barclays, which is among the banks that could have to create an IHC, said they have had a program in place for more than a year to plan to comply with the regulation.
"We are reviewing the final rule, we note the extended timeline to comply and we are confident that we have options that will allow us to implement the new regulations in the prescribed timeframe," said Michael O'Looney, a spokesman for Barclays.
Sally Miller, CEO of the Institute of International Bankers, commended the Fed for making changes that would narrow the scope of the rule and provide for extra time, but still aired some concerns with the agency's approach.
"We continue to have a fundamental disagreement with the Fed about the appropriateness and necessity of applying an extra layer of U.S. bank capital requirements to foreign-owned broker-dealer subsidiaries that are already subject to SEC (Securities and Exchange Commission) capital requirements," said Miller in a statement.