Foreign banks with a major presence on Wall Street will no longer be allowed to avoid many of the tougher rules that the US introduced after the financial crisis to prevent banking failures and bailouts.
The US Federal Reserve has approved a final rule that will force the American operations of foreign banks to follow many of the same rules as American banks. In doing so, the Fed closed a gaping loophole that roughly half the big firms on Wall Street were able to exploit simply because their headquarters were overseas.
Foreign banks lobbied against the rule, which was first proposed in 2012, arguing that their home country regulators already had sufficient oversight over their global operations. Critics of the rule also contended that it would interrupt the flow of capital around the world, and even prompt foreign banks to reduce their activities in the United States, damaging the American economy.
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But in writing its final rule, the Fed kept many of the elements that angered foreign banks, making only a few concessions. “The requirements applicable to foreign banking organisations with a large US presence are an essential part of regulatory reform in the aftermath of the financial crisis,” Daniel Tarullo, the Fed governor who oversees regulation, said in a statement. In response to critics of the rule, he said that strengthening banks would help ensure that capital keeps flowing during times of stress. Under the rules, foreign banks with more than $50 billion of assets in America will have to form special holding companies in the United States. The Fed estimates that 15 to 20 foreign banks will have to form such holding companies. These entities will have to hold a minimum level of capital as a financial buffer to absorb potential losses.
The new rules have their roots in the financial crisis, when foreign Wall Street firms took out huge emergency loans from the Fed to shore up their faltering businesses. Despite needing that assistance, some foreign banks later took steps to avoid elements of the financial system overhaul that Congress passed in 2010.