US Fed Proposes New Regulatory Regime for Foreign Banks

April 8, 2019 Updated: April 8, 2019

WASHINGTON—The U.S. Federal Reserve on April 8 proposed a new regulatory regime for 23 foreign banks operating in the U.S. that could make life easier for some lenders while tightening up rules for more risky foreign firms.

The proposal, which would affect major banks like UBS, Credit Suisse, Deutsche Bank, and HSBC, is part of a broader plan by the Fed to more closely tailor banking rules in line with firms’ risk profiles.

The proposed changes, which are subject to industry feedback, would relax the capital and stress testing requirements for the subsidiaries of foreign banks. They would, however, impose stricter liquidity rules on subsidiaries of foreign lenders that rely extensively on riskier activities like short-term funding.

The Fed also said it was soliciting input on imposing stricter liquidity requirements on foreign bank branches for the first time, although it stopped short of proposing new rules.

In addition, the central bank proposed relaxing the schedule for how frequently foreign banks and domestic banks must submit “living wills” detailing how they could be dissolved in the event of failure.

Currently, large foreign banks have to submit the plans annually, but the proposal would allow them to submit plans every two years. Smaller banks would be able to submit less detailed plans on a three-year cycle. All domestic banks would also be allowed to submit scaled down plans every two years and comprehensive plans every four years.

Overall, the April 8 proposal could reduce aggregate capital requirements for foreign banks by 0.5 percent, in addition to lowering compliance costs associated with stress testing, the Fed estimated.

However, changes to the liquidity rules on foreign bank subsidiaries would see aggregate liquid asset levels rise 0.5 percent to as much as 4 percent, the Fed said.

Most foreign lenders currently hold enough liquid assets to satisfy the proposed changes, but depending on a bank’s precise activity, some banks including UBS and Credit Suisse could see their overall costs rise, according to Fed officials.

The Fed board of governors voted the proposal through on April 8, although governor Lael Brainard dissented.

The proposed changes were prompted by legislation passed by Congress in May 2018 which gave the Fed discretion to ease rules for all but the nation’s largest banks.

The package aims to broadly put foreign banks on an even footing with domestic firms after the Fed last October unveiled a similar proposal tailoring rules for super-regional and other large domestic banks.

But the Fed on April 8 also said foreign banks tend to engage in riskier activities than their domestic rivals, including cross-border lending and trading, and short-term wholesale funding, leading it to be tougher on firms more heavily engaged in those businesses.

Foreign banks have for years complained that they are at a regulatory disadvantage in the U.S. and are likely to push back on an additional idea floated on April 8 to impose stricter liquidity rules on the branches of foreign banks.

Unlike foreign banks’ separately capitalized subsidiaries, branches are legally part of the overseas parent and therefore not subject to the same degree of U.S. oversight as domestic firms. That arrangement had sparked concerns that branches could become a haven for riskier assets.

Fed data shows that of foreign banks with combined assets of more than $50 billion, around 40 percent of all their U.S. assets were held in branches as of June.

By Pete Schroeder

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