New rules for foreign lenders are becoming clearer.
The Federal Reserve Board expects to complete a package of new proposed tailored prudential standards for foreign banking organizations (FBOs) soon, a top Fed official said at the recently concluded 30th annual conference of the Institute of International Bankers (IIB).
Foreign lenders face important regulatory changes as US federal agencies “tailor” capital and liquidity requirements designed to ease the regulatory burden on smaller institutions that do not pose risk to the financial system and the broader economy if they fail.
In October, the FRB proposed new enhanced prudential standards for domestic bank holding companies (BHCs), non-insurance, non-commercial savings and loan holding companies (SHLCs) with assets of more than $100 billion. These rules would not apply to FBOs.
“We recognized that we needed a second package for FBOs,” said Kwayne Jennings, manager for large and foreign banks organizations at the Federal Reserve Board. “We are working very hard to get that finalized. We should be able to see a package in the near term and we will be interested in your comments,” Jennings told the IIB audience.
The proposal takes into account banks’ size, systemic footprint, risk profile and business models. In general, it would not reduce capital requirements for US global systemically important banks (category I) and lenders with assets or more than $700 billion, or at least $100 billion in assets and $75 billion in cross-jurisdictional activity (category II). It would instead reduce compliance costs for banks with $250 billion—$700 billion and $100 billion—$250 billion of assets (III and IV).
The Federal Reserve Board has indicated that the proposal for FBOs could follow a similar approach.
According to recent media reports, the Fed is also considering imposing stricter liquidity requirements on foreign bank branches, such as those holding higher-quality assets.
US regulators are concerned that foreign banks may rely too heavily on branches’ access to the Fed’s discount window in case of a liquidity crisis. After the 2008 financial crisis, foreign banks have been required to hold non-branch assets in holding companies, subject to strict US liquidity requirements.
Asked by a participant whether there was any legitimacy to recent media reports, Jennings said: “I won’t be in a position to confirm or deny reports regarding the Fed’s approach.”
“We recognize the differences between branches and subsidiaries, we have implemented our rules around that. We will have to see where the FBO proposal goes,” he said.
In addition to FBO tailoring, other important topics for international banks were discussed at the IIB conference discussed as the revision of the Volcker rule and the cross-border swap reform. Top speakers included Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, Commodity Futures Trading Commission chairman Christopher Giancarlo, and Securities and Exchange Commission Chairman Jay Clayton.
“I think that there was a lot of positive discussion about the role of foreign banks in the US economy, the importance of the sector, the importance of coordination globally, these are very positive messages,” IIB chief executive Briget Polichene said.
“The major thing is the FBO tailoring piece. We heard ‘soon’, ‘near term’. That was something we are very interested in,” she added.