Has US Fed overstepped on foreign Sifi rules?

Author: | Published: 20 Dec 2012
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Large foreign banks with significant US operations could soon be required to organise local subsidiaries under an intermediate holding company, which will be subject to liquidity and capital requirements comparable to their US peers.

The US Federal Reserve Board’s (Fed) proposal could encounter widespread pushback from industry groups, foreign banks and foreign governments, according to The Wall Street Journal.

One way to change the proposal is to file a lawsuit against the Fed in the US District Court for the District of Colombia, which vacated the Commodity Futures Trading Commission’s (CFTC) position limits rule earlier this year. This followed another vacated Dodd-Frank rulemaking; the Securities and Exchange Commission’s (SEC) proxy access rule blocked by a court of appeal in 2011.

These rules were blocked on the basis of inadequate cost-benefit analysis, which is required by regulators in absence of a congressional mandate to adopt Dodd-Frank rules.

While the December 14 proposal may lack a clear congressional mandate, the Fed is not understood to be held to a standard similar to the SEC and CFTC. This is because the Fed’s proposal is backed by its authorities under the Bank Holding Company Act as well as the Dodd-Frank Act.

Charles Horn, a DC-based partner at Morrison & Foerster, said while Dodd-Frank requires the Fed to write rules for foreign banking organisations deemed systemically important financial institutions (Sifis), it doesn’t require them to be organised under an intermediate holding company.

“It’s true that Dodd-Frank does not mandate the Fed to require an intermediate holding company,” Horn said. “Dodd-Frank does give the Fed authority to ensure there is an adequate level of systemic regulation, and there is also at least general authority in the Bank Holding Company Act as well.”

Impact

If finalised, the proposal would require foreign banking institutions with more than $50 billion in consolidated assets and $10 billion in US assets (excluding US branch and agency assets) to organise US assets into an intermediate holding company. The holding company would be subject to the Fed’s risk-based capital and leverage requirements as well as liquidity requirements for US bank holding companies that qualify as Sifis.

The proposal for enhanced prudential standards and early remediation requirements for large foreign Sifis mirrors the Fed’s yet to be finalised rule for US Sifis, which was proposed around this time last year.

According to Horn, there are two significant takeaways from the proposal: the Fed intends to treat domestic and foreign banks as equally as possible, and the Fed may now be comfortable with its 2011 proposal on US operations.

Some of the more onerous requirements for both foreign and domestic Sifis are counterparty credit limits, liquidity requirements, and risk management and stress testing provisions. It’s notable, however, that the Fed lacks the authority to prohibit dividend payments to foreign bank shareholders as a result of stress tests, as it does for domestic banks.

“Some of these requirements and their implications for capital and liquidity are going to increase costs for some of these organisations,” Horn said. “But I don’t think foreign banks all of a sudden are going to turn tail and run out of the US just because of this proposal.”

The proposal’s impact on each foreign banking organisation depends on its US structure and activities as well as its home country prudential requirements, as stated in a paper co-authored by Susan Krause Bell, a managing director at regulatory consulting firm Promontory Financial Group.

“[The proposal] will obviously affect the parent institution,” Krause Bell told IFLR.

“The Fed does have some concerns about whether they can count on support coming from the foreign parent in times of stress,” she added. “They are trying to align the rules for US and foreign banks, but also have to modify the rules for the additional risk of cross-border institutions.”

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