Federal Reserve Board Proposes New Oversight of Foreign Banks

Federal Reserve

On December 14, the Federal Reserve Board (FRB) announced a proposal to strengthen its capabilities to oversee certain foreign banks that operate in the U.S. and move from the SEC to the Federal Reserve oversight of foreign bank broker-dealers. The proposal is aimed at fixing problems arising out of the financial crisis, specifically the way in which the SEC has regulated broker-dealer net capital over the past decade.  Many blame the SEC’s 2004 decision to lower net capital requirements as exacerbating the economic downturn.  Before the change, broker-dealers were permitted to maintain debt to equity ratios of approximately 12 to 1.  After the SEC’s 2004 change, broker-dealers were permitted to dramatically reduce their net capital obligations resulting in debt to equity ratios of 30 or 40 to 1. The proposed rules generally apply to foreign banking organizations with a U.S. banking presence and total global consolidated assets of $50 billion or more and would subject certain U.S. operations of such firms to capital plan stress tests, single-counterparty credit limits, overall risk management, and early remediation.  In addition, a foreign banking organization with both $50 billion or more in global consolidated assets and U.S. subsidiaries with $10 billion or more in total assets generally would be required to organize its U.S. subsidiaries under a single U.S. intermediate holding company (IHC) to allow for the consistent supervision and regulation of the U.S. operations of foreign banking organizations and help facilitate the resolution of failing U.S. operations of a foreign bank if needed. As proposed, the rules also would subject IHCs to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. Further, IHCs with $50 billion or more in consolidated assets would be subject to the capital plan rule. Finally, the U.S. operations of any foreign banking organization with combined U.S. assets of $50 billion or more would be subject to certain enhanced liquidity requirements. The FRB plans to give covered foreign firms until July 1, 2015 to comply. Comments on the proposal are due by March 31, 2013.