The Federal Reserve Board on Tuesday approved tight new rules for foreign banks to shield the U.S. taxpayer from costly bailouts.
The Federal Reserve has thus given only minor concessions despite pressure from abroad to weaken the rule.
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$50 billion threshold for foreign banks
According to the new rules, the largest foreign banks with $50 billion or more in U.S. assets will need to set up an intermediate holding company subject to the same capital, risk management and liquidity standards as U.S. banks.
Earlier, foreign banks with sizable operations on Wall Street such as Deutsche Bank AG (NYSE:DB) (ETR:DBK) and Barclays PLC (NYSE:BCS) (LON:BARC) had pushed back hard against the plan because it means they will need to transfer costly capital from Europe.
The rule also subjects foreign banks with global assets of $10 billion or more to annual health checks known as stress tests that rely on home-country standards. Only the largest banks will also have to run U.S. stress tests.
As reported earlier, in November, the U.S. Federal Reserve expanded the list of major banks it subjects to tough stress tests to include US subsidiaries of six foreign banks. The fourth annual evaluation of the strength of major banks, undertaken after the numerous collapses of the 2008 financial crisis, would cover 30 banks in early 2014, up from 18 in 2013. The 30 are all bank holding companies with over $50 billion in total assets.
Fed’s response to comments
In its press release, the Fed highlighted that the final rule for foreign banking organizations includes several adjustments in response to comments. For example, the final rule raises the threshold for requiring a U.S. intermediate holding company from $10 billion to $50 billion of U.S. non-branch assets and extends the initial compliance date for foreign banking organizations to July 1, 2016, a year later than originally proposed. The final rule also generally defers application of the leverage ratio to foreign-owned U.S. intermediate holding companies until 2018.
The Fed’s new move will subject Deutsche Bank AG (NYSE:DB) (ETR:DBK), Credit Suisse Group AG (ADR) (NYSE:CS), UBS AG (NYSE:UBS), Barclays PLC (NYSE:BCS) (LON:BARC) and other large lenders with U.S. operations to the Fed’s requirements on capital, debt levels and annual ‘stress tests’. Citing Citigroup analysts, Stephanie Armour and Ryan Tracy of The Wall Street Journal point out Deutsche Bank, whose U.S. unit at times has operated with virtually zero capital, faces a shortfall of roughly $7 billion under the new rules.