WASHINGTON The Federal Reserve Board's recent rule to require foreign banks to house U.S. operations in discrete subsidiaries should be the standard worldwide, a top U.S. regulator said Monday.
"Subsidarization would lead to greater recognition of the risks on firms' balance sheets, causing more capital to be held globally and thus contributing to greater overall financial stability and availability of credit," Federal Deposit Insurance Corp. Chairman Thomas Hoenig said in a speech to the National Association of Business Economics.
Such a step would subject U.S. firms, which now typically operate overseas through less heavily regulated branches, to similar scrutiny globally that international banks face here as a result of the Fed's rule. Some also point to subsidiarization as easing the path to resolving a failed behemoth through bankruptcy or the FDIC's "orderly liquidation authority" for systemic firms.
The FDIC has not taken a clear position on a subsidiarization model, but the agency's recent blueprint on how it would unwind a global company asked for comment on whether subsidiarization would make banks more resolvable. That blueprint focuses on "single point of entry" resolutions, in which losses imposed on holding company creditors and shareholders support a bridge entity housing the failed company's operations.
Hoenig did not specifically reference the FDIC document, but said that "subsidiarization would give greater clarity to where capital is lodged globally" and would provide more certainty that a firm's foreign affiliates can absorb heavy losses.
"Those who object to this concept suggest that such a requirement interferes with capital flows and would actually reduce available credit," he said. "However, subsidarization would require that capital be aligned with where assets reside, and it would identify for markets and authorities the capital available to absorb losses should it be needed. It provides far more transparency than the current structure."