The changes would maintain the most stringent requirements for firms with the most risk while reducing compliance requirements for firms with less risk.
Under the proposed framework, foreign banks with $100 billion or more in U.S. assets would be sorted into categories of increasingly stringent requirements based on several factors. The factors, which reflect banks’ complexity and risk to the financial system, include asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, non-bank assets, and off-balance-sheet exposure.
”Foreign banks play an important role in our economy. They facilitate commerce and provide credit and needed investment. Our longstanding policy is to treat foreign banks as we treat domestic banks,” Chairman Jerome Powell said in a statement. “That is the fair thing to do. It also helps U.S. banks, because banking is a global business, and a level playing field at home helps to level the playing field for U.S. banks when they venture abroad.”
“Only a few months ago, we proposed refining our regulations for domestic banking firms to account for the size, complexity, business model, and risks of each firm,” he added. “But because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities, and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank. The proposal before us creates categories of increasingly stringent regulation based on the risks that foreign banks pose. A domestic firm that engaged in the same activities would face very similar standards.”
The framework is substantially the same as the framework proposed last year by the Board for large domestic banks, with some adjustments reflecting structural differences in foreign banks’ U.S. operations. The proposal also builds on the Board’s existing tailoring of its rules.
While the framework is substantively the same for both domestic and foreign banks, the resulting impact may be different. For example, currently, foreign banks operating in the United States tend to rely on less stable short-term wholesale funding and can be complex, which presents heightened risks. If a bank is engaged in these higher-risk activities, the framework would result in more stringent regulations. The Board estimates that the framework would, at this time, increase required liquid assets by 0.5 to 4 percent and decrease required capital by roughly 0.5 percent for foreign banks with $100 billion or more in U.S. assets.
The proposal also requests comment on whether the Board should apply new liquidity requirements to the branches of foreign banks. The branches of foreign banks are currently subject to internal liquidity stress tests but are not subject to standardized liquidity requirements. The proposal asks for comment on whether such standardized liquidity requirements should be imposed and on several different approaches for doing so.
“The United States finds itself as a host to large foreign branches that engage in short-term wholesale U.S. dollar sourcing,” said Vice Chair for Supervision Randal Quarles. “That dynamic has created severe liquidity strain in the U.S. banking system in times of stress, even after the financial crisis. I think now is a good time to give serious consideration to the optimal balance of certainty for host supervisors and local operations in a time of crisis and freely available liquidity for home supervisors and consolidated firms in good times. Some degree of certainty about available local resources would form a basis for trust among regulators that might mitigate the human tendency to freeze all available resources in a stress test. Given these considerations, and the possibility that with shifting global dynamics, jurisdictions outside of the United States might also find themselves with similar risks, we should engage in much more dialogue on this subject.”
Fed Governor Lael Brainard addressed the included proposal to reduce resolution planning requirements.
“We saw clearly in the crisis that the failure of one or more large banking organizations may lead to severe stress in the financial system as fire sales and run dynamics spread contagion,” she said. “The Dodd-Frank Act requires firms to develop resolution plans that provide a credible path to orderly resolution in bankruptcy to ensure taxpayers will not again be on the hook.”
The proposal, she added, could weaken the resolution planning process for very large banking firms and leave the system less safe.
“Under the proposal, most domestic banking organizations in the range of $100 to $250 billion in assets are no longer required to file a resolution plan at all,” Brainard said. “For banks with $250 billion to $700 billion in assets, the proposal would require a full resolution plan only once every six years. Beyond that, the proposal would allow even the largest and most systemic firms to obtain a waiver for many elements of their resolution plan if only one agency fails to proactively disapprove the waiver request.”
“It is important to remind ourselves that it is not only the failure of the largest and most systemic firms that poses a risk to the financial system,” she stressed.
The proposals were jointly developed with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Comments will be accepted through June 21, 2019.