Federal Reserve Governor Daniel Tarullo said the central bank is planning tougher capital and leverage rules for U.S. units of foreign banks, which some firms have sought to skirt.
'We need to adjust the regulatory requirements for foreign banks in response to changes in the nature of their activities in the United States, the risks attendant to those changes, and instructions from Congress', Tarullo said in a speech at Yale University in New Haven, Connecticut.
Bloomberg reports that the Fed will force non-U.S. firms to house all of their U.S. businesses, including securities trading, within regulated holding companies, Tarullo said. Those holding companies also must abide by capital and liquidity rules that already apply to U.S. counterparts, he said. That means foreign banks’ local units would have to bolster capital in the U.S. to guard against losses regardless of their parents’ resources.
Deutsche Bank AG (DBK) and London-based Barclays Plc (BARC) have changed their U.S. legal status in the past two years to discard the holding-company structure. The treatment could force foreign banks to inject capital into their U.S. units and limit their ability to move funds across borders, said Luigi De Ghenghi, a partner at law firm Davis Polk & Wardwell LLP in New York.
'Fragmenting capital along regional lines will impose real costs on doing cross-border banking', said De Ghenghi, a member of the firm’s financial-institutions group. 'Global banks will risk ending up with overcapitalized units all around the world because regulators are reluctant to allow the repatriation of capital once it’s moved to their jurisdiction'.
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