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Big Foreign Banks Could Face New Risk Rules Under Fed's Plan

The proposed changes would relax the capital and stress testing requirements for the subsidiaries of foreign banks.

Big Foreign Banks Could Face New Risk Rules Under Fed's Plan
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C.(Photographer: Andrew Harrer/Bloomberg)

(Bloomberg) -- The Federal Reserve is proposing a new approach for overseeing foreign banks such as Deutsche Bank AG, Barclays Plc and Credit Suisse Group AG that’s expected to require some of them to hold bigger stockpiles of easy-to-sell assets to guard against losses.

Fed board members voted 4-1 on Monday to seek comment on its plan for a new system that closely matches the overhauled domestic-bank framework proposed in October. The parallel regimes are part of an effort to tailor rules to exert more pressure on the riskiest banks. The new approach creates a range of risk categories and assigns each large bank to the one that best fits its business model.

Depending on what final calculations the Fed lands on, several foreign lenders -- including Deutsche Bank, Barclays, Credit Suisse, Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Toronto-Dominion Bank -- could be slotted into the second tier, just below a group of U.S. banks with massive global footprints. A second-level designation would come with routine stress testing and the most stringent rules for capital. The banks would also be subjected to the same liquidity demands as the U.S. megabanks.

Big Foreign Banks Could Face New Risk Rules Under Fed's Plan

“Because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank,” Fed Chairman Jerome Powell said in a statement on the proposal.

Increased Demands

The new system, which draws Credit Suisse and UBS into such liquidity rules for the first time, is being proposed in cooperation with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Fed estimated it could boost overall liquidity demands by as much as 4 percent for foreign banks in the U.S. The reason for uncertainty over which category banks fall into stems from the fact that the Fed needs more information to measure “cross-jurisdictional” activity.

Banks in the third tier -- which is expected to include HSBC Holdings Plc, UBS Group AG and Royal Bank of Canada -- are likely to benefit from marginally reduced capital requirements. Those at the fourth level -- including Banco Santander SA, Societe General SA and BNP Paribas SA -- would see even lower stress-test, capital and leverage constraints.

Living Wills

While bracing themselves for potentially more vigorous liquidity rules, the biggest foreign banks may join some U.S. regional lenders in seeing a rollback of requirements for filing so-called living wills designed to show how they could be unwound after a collapse. The Fed proposed a three-year filing cycle for such banks, while keeping the two-year requirement for the biggest U.S. banks. The FDIC -- the other steward of living wills -- is set to follow.

Smaller U.S. regional lenders, such as Regions Financial Corp. and M&T Bank Corp., would be cut from the requirement completely in this proposal, with the regulators arguing that such institutions don’t really pose a threat to the financial system.

Even the largest banks could see a benefit, because the Fed intends to move to an approach that alternates between a full resolution plan in one filing and a more targeted version in the next.

The Fed has been working for years to further tailor rules put in place after the 2008 financial crisis, and it is a central priority for Fed officials appointed by President Donald Trump. The process -- which generally involves dialing back regulations for regional and smaller banks -- was further spurred when Congress passed a law last year requiring such tailoring.

Brainard Opposition

Critics including Fed Governor Lael Brainard have argued that the regulator is overly weakening some of the protections put in place to prevent another crisis. In a statement before Monday’s vote, Brainard said the Fed’s new proposals undermine oversight “at a time when large banks have comfortably achieved the post-crisis requirements and are providing ample credit to the economy and enjoying robust profitability.”

Big Foreign Banks Could Face New Risk Rules Under Fed's Plan

Brainard opposed the changes for foreign-bank oversight and also voted against the relaxation of living-wills requirements.

The Fed will open the proposals to public comment through June 21. The agency still needs to finalize the October proposal for U.S.-based banks.

The agency also called for comment Monday on a plan to expand liquidity rules to foreign bank branches in the U.S., which are separate entities from the holding companies affected by the big-bank proposal.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott, Robert Schmidt

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