Federal Reserve shelves tougher liquidity rules for foreign banks
The Board of Governors of the Federal Reserve has announced new rules that means it will not be forcing the US branches of foreign banks to hold a minimum level of liquid assets.
The rules establish a framework that sorts banks with $100 billion or more in total assets into four different categories based on factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.
According to the Fed, the new mandate simplifies things by applying liquidity standards to a foreign bank’s US intermediate holding company (IHC) based on the risk profile of the IHC, rather than on the combined US operations of the foreign bank.
Under rules established in the Dodd-Frank Act, foreign banks which meet a certain asset threshold (greater than $50 billion) in the US perform a majority of their business through IHCs. These companies are subject to stress testing and regulatory scrutiny.
Banks changed their strategies in reaction to the imposition of IHCs. Some shrunk their assets to avoid the requirement, while other shifted assets overseas. Some firms which already maintained bank holding companies (BHCs) converted them.
“Our rules keep the toughest requirements on the largest and most complex firms,” Fed chair Jerome H. Powell says. “In this way, the rules maintain the fundamental strength and resiliency that has been built into our financial system over the past decade.”
The Fed board estimates that the changes will result in a 0.6% decrease in required capital and a reduction of 2% of required liquid assets for all banks with assets of $100 billion or more. “The rules do not reduce capital or liquidity requirements for firms in the highest risk categories, including US global systemically important banks,” it adds.