The Federal Reserve moved to implement stricter US capital rules on two dozen foreign banks with at least $50 billion of global assets. The move was made to lower risks associated with the financial system. The Fed proposed that most banks to comply with the more stringent liquidity regulations and pass several stress tests on how they would manage to stay afloat in a severe economic downturn.
The board voted to seek public opinion on the plan for 90 days. Once approved, it would take effect in July 2015. Some of the institutions that would be affected by the rule change would be Deutsche Bank AG, which is based in Frankfurt, and Barclays Plc.
The affected banks have to keep more easy-to-sell assets in the United States and face restrictions on distributing capital to their parent companies. The Fed has provided $538 billion worth of emergency loans to the US units of European banks during the financial crisis. That led to the political pressure on regulators and lawmakers to make stricter rules for lenders.
Lenders with more than $50 billion of global assets and more than $10 billion in the United States will now be required to house their US businesses within regulated holding companies. This includes their securities trading businesses. Exempted from the $10 billion requirement are domestic assets that are connected to a US unit of the bank. According to the Fed, around 25 institutions would fall under the rule.
The intermediate holding companies would have to follow the capital rules that already implemented to their US counterparts. The new regulation may force foreign banks to inject more capital into their US units and limit their ability to move funds across borders.
Foreign companies can opt to make US bank holding companies. These units were exempted from capital standards as long as the parent companies are well-capitalized. But the exemption was removed by the 2010 Dodd-Frank financial overhaul.