US regulatory overhaul cuts burden for some, but not all
Kiran Stacey and Sam Fleming in Washington and Robert Armstrong in New York
© Reuters
Some large foreign banks operating in the US face having to hold more liquid assets under a regulatory shake-up proposed on Monday by the Federal Reserve.
The changes to the post-crisis rule book would reduce capital requirements and frequency of stress tests for many institutions, but they also tighten liquidity rules for a list of banks that could include Barclays, Credit Suisse and Deutsche Bank.
The plans are based on those released by the Fed last year for domestic banks, designed to regulate institutions in different ways depending on how much risk they pose to the financial system.
Whereas for domestic banks the changes largely came as a relief from the post-crisis Dodd-Frank legislation, the outcome is more complex for foreign banks, some of which are set to gain while others are likely to lose out.
Under the new rules, banks would have to hold different amounts of liquid assets depending on how big their US subsidiaries are and the riskiness of their activities. Foreign banks operating in the US tend to rely on less stable short-term wholesale funding, the Fed said, which heightens their risk.
Liquid assets are those which are easy to sell to cover short-term cash needs.
The Fed will sort foreign banks into four tiers based on their perceived riskiness. For Barclays and Deutsche Bank, it could mean they have to hold significantly more liquid assets than under the current regime, depending on how regulators treat their cross-border transactions. The central bank said it did not yet have the data to decide which tier those banks would be in.
For the two big Swiss investment banks, UBS and Credit Suisse, the changes would mean the amount of liquid assets they must hold will be set by the regulator for the first time, rather than by their own internal stress tests.
Overall, the Fed calculated, liquid assets held by foreign banks will have to increase by up to 4 per cent, or between $1bn and $10bn across the industry.
The new system is likely to provide relief for Santander, the Spanish bank, which will no longer be subject to a rule that it must have enough liquid assets on hand to cover three weeks’ worth of operations; it will only have to meet its own internal stress tests.
The Fed punted on an issue that has particularly concerned foreign banks, namely a proposal to extend liquidity rules to cover US branches of foreign banks, not just their US subsidiaries, which could significantly increase liquidity requirements. The Fed will put such a proposal out for further consideration.
One Fed governor, Lael Brainard, voted against the package of reforms in protest at the failure to include the local branches. “I am disappointed the proposal today does not address this important outstanding vulnerability and therefore does not represent a balanced package,” she said.
In other proposed changes announced on Monday, several foreign banks will now only have to participate in regulatory stress tests every two years rather than annually. They include Santander, BNP Paribas and Société Générale.
And several large banks — both foreign and domestic — will only have to file a so-called “living will” every three years, rather than every two. In these resolution plans, a bank spells out how it can be unwound in an orderly way if it were to fail.
Randal Quarles, the Fed’s vice-chair for bank supervision, said: “The proposals seek to increase the efficiency of the firms without compromising the strong resiliency of the financial sector.”
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