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Fed Approves Tough Bank Liquidity Rule

Stocks in this article: AIG PRU GE GS

The Fed's proposal on foreign banks, introduced in December 2012, sought to have foreign banks with $10 billion or more in U.S. assets set up the intermediary structure but the final rule only requires foreign banks with more than $50 billion in U.S. assets to implement it.

One bank regulatory attorney argued that with the new structure foreign banks would have less of an ability to avoid Fed requirements by restructuring their U.S. operations "in ways that would not necessarily reduce their risk profile in the U.S."

Fed officials said that the structure would make it easier to dismantle a large failing foreign bank with major U.S. operations, responding to many of the jurisdictional issues that regulators faced in 2008 when big global banks either were bailed out or filed for bankruptcy in various global jurisdictions. A fed official argued that during the 2008 crisis many U.S. divisions of foreign banks were "somewhat undercapitalized," adding that the new buffers will make them "more resilient." Federal Reserve Governor Daniel Tarullo noted that during the crisis many foreign banks' U.S. units experienced "funding vulnerabilities" partly because they didn't receive adequate support from their parent firms.

In addition, large foreign banks such as Deutsche Bank and Barclays Bank, will be required to hold significantly more capital in the U.S. though they won't be subject to the same tough leverage restrictions as large U.S. banks are expected to be subject to. Like U.S. banks they will be subject to stress tests, but many are expected to be permitted to rely on home country tests.

Nevertheless, responding to concerns from big foreign banks, the Fed also gave non-U.S. institutions an additional year, until July 2016 to comply with most aspects of the regulation and until 2018 to comply with the Fed's leverage caps. (Big U.S. banks must comply with the rules by Jan. 2015).

The regulations are based on the Dodd-Frank Act, legislation approved in the wake of the 2008 crisis. The rules apply to banks with $50 billion and more in assets, but there are even more stringent restrictions on ties among the biggest banks such as Goldman Sachs (GS) that have more than $500 billion in assets.

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