Fed Mulls Rule Forcing Foreign Banks To House Assets Within US Holding Companies In Effort To Contain Risk

Wednesday, November 28, 2012 07:50
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Fed Mulls Rule Forcing Foreign Banks To House Assets Within US Holding Companies In Effort To Contain Risk

Tags: banks | Dodd-Frank | economy

The Federal Reserve may force non-US banks such as Deutsche Bank AG and Barclays Plc to house all of their US businesses within a US holding company.
 
The rules have yet to be completed and if they are enacted, domestic units of foreign banks will have to meet minimum capital requirements regardless of the size of their parent companies.

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This will inhibit cross-border banking and global banks will run the risk of overcapitalizing units all of the world because regulators are reluctant to allow capital to return to the US once it is moved to a foreign jurisdiction.
 
The potential rules stem from the Fed’s loans of more than $538 billion of emergency funding to US units of European banks during the financial crisis.
 
The Dodd-Frank Act ended the capital exemption for bank holding companies, causing some foreign lenders to change their legal structures to remain outside US capital rules.
 
Forcing foreign banks to place US assets under bank holding companies would also make them subject to US-specific leverage requirements in addition to the Basel III reserve requirements.
 
The limit on leverage may force US trading units of foreign banks to raise more capital. Across-the-board regulations like the one being considered by the Fed could cause foreign banks to pull out of the US.
 
Foreign banks make 25% of all US commercial and industrial bank loans. Withdrawal from the US market could harm lending, an effect that could spill over into the economy.

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