Foreign banks with a major presence on Wall Street will no longer be allowed to avoid many of the tougher rules that the United States introduced after the financial crisis to prevent banking failures and bailouts.
The Federal Reserve, a leading bank regulator, issued a final rule on Tuesday that will force the American operations of foreign banks to follow many of the same rules as American banks. The Federal Reserve Board is expected to approve the rule at a meeting Tuesday afternoon.
Foreign banks lobbied against the rule, which was first proposed in 2012, arguing that their own regulators already had sufficient oversight over their global operations. Critics of the rule also contended that it would prompt foreign banks to reduce their activities in the United States, damaging the American economy.
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 organizations with a large U.S. presence are an essential part of regulatory reform in the aftermath of the financial crisis,†Daniel K. Tarullo, the Fed governor who oversees regulation, said in a statement.
Many foreign firms, particularly those with large Wall Street businesses, will have to hold more capital, the financial buffer that banks maintain to absorb losses. They will also have to hold a certain amount of easy-to-sell assets, in case they quickly need to raise cash in a period of stress. The banks will also be subject to regular stress tests, which the Fed applies to banks to gauge whether they can weather shocks to markets and the economy.
Foreign Wall Street firms took out emergency loans from the Fed during the crisis. Despite their reliance on the Fed, some foreign banks took steps to avoid elements of the financial system overhaul that Congress passed in 2010. Deutsche Bank, for instance, changed the status of its large American operations.
Some analysts believe that some foreign banks have been operating in America with far less capital than their American rivals. This allowed some of the foreign banks to reduce the costs of running their businesses, giving them a competitive advantage over their American competitors like Goldman Sachs and Morgan Stanley. The new rules would appear to force many of the foreign banks to hold a lot more capital at their American operations, but they could still be allowed to hold less than the largest American Wall Street firms.
The new rules come into effect in July 2016, a year later than envisioned in the proposed rule. The capital rule that foreign banks disliked the most â€" the so-called leverage ratio requirement â€" begins to apply in July 2018.
