Federal Reserve Board proposes stronger rules for foreign banks’ U.S. operations

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The Federal Reserve Board on Friday proposed rules to strengthen oversight of foreign banks operating in America.

Foreign banking organizations, with a significant U.S. presence, will have to create an intermediate holding company to make certain the bank follows U.S. regulations.

Foreign banks would be mandated to maintain stronger capital and liquidity the U.S. That’s designed to help increase the resiliency of foreign banks’ U.S. operations.

“The proposed rule making is another important step toward strengthening our regulatory framework to address the risks that large, interconnected financial institutions pose to U.S. financial stability,” Federal Reserve Chairman Ben S. Bernanke said.

The proposal implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to addresses risks associated with the increased complexity, interconnectedness, and concentration of foreign banks operating in the U.S.

“Applicable regulations have changed relatively little in the last decade, despite a significant and rapid transformation in the U.S. activities of foreign banks, many of which moved beyond their traditional lending activities to engage in substantial, and often complex, capital market activities,” Governor Daniel K. Tarullo said.

“The crisis revealed the resulting risks to U.S. financial stability,” he added.

The proposal applies to foreign banks with a U.S. banking presence and global consolidated assets of $50 billion or more. More stringent standards are proposed for foreign banking organizations with combined U.S. assets of $50 billion or more.

Along with the holding company requirement, the Fed’s proposals include:

Risk-based capital and leverage requirements. Holding companies of foreign banking organizations would be subject to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. This proposed requirement would help bolster the consolidated capital positions of the holding companies as well as promote a level playing field among all banking firms operating in the United States.

Liquidity requirements. The U.S. operations of foreign banking organizations with combined U.S. assets of $50 billion or more would be required to meet enhanced liquidity risk-management standards, conduct liquidity stress tests, and hold a 30-day buffer of highly liquid assets. The liquidity requirements would help make the U.S. operations of foreign banking organizations more resilient to funding shocks during times of stress.

The proposal also includes measures regarding capital stress tests, single-counterparty credit limits, overall risk management, and early remediation.

The Federal Reserve is proposing a phase-in period, ending July 1, 2015 to give foreign banking organizations time to adjust to the new rules.

Comments from the public will be accepted through March 31, 2013.

Read the Federal Register Notice.

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