On Tuesday, the Federal Reserve Board approved the final rules
put in place for foreign banks. The tougher rules intend to make
banks more regularized and supervised, in order to guarantee that
the banks maintain a solid capital position and become resilient
in stressful times.
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The regulators are contemplating proactive measures to ensure
that the world's largest banks strengthen their capital and
liquidity positions to better combat another financial meltdown.
A weak capital level is always a threat to the global economy.
Needless to say, meeting new rules would act as building blocks
for the still shaky global economy, with fewer bank collapses and
less involvement of emergency loans for the bailout of troubled
The final rule directs foreign banks with $50 billion or more in
assets in America to establish an intermediary holding company in
the U.S. As per the new rules, the holding company will be
required to meet the same capital, risk management and liquidity
standards as the U.S. banks. The proposed rules suggest that
banks would need to set aside more capital as buffer in times of
Moreover, regular stress tests will be conducted on the
foreign-owned U.S. intermediate holding company. Failure in the
tests will restrict dividend payments even to the parent company.
Notably, the stress test rounds are precautionary measures amid
an economic recovery to check whether the banks have enough
capital to survive another financial crisis.
The new rules were chalked out following the financial crisis,
when the Fed shelled out huge emergency loans to big foreign
banks for pushing up their downtrodden businesses. Fed estimates
that around 15 to 20 foreign banks would be required to comply
with the new rule, which was proposed previously in Dec 2012,
when the requirement was $10 billion in U.S. assets.
According to the new rules, the foreign bank operations will be
required to maintain capital equal to 4% of their assets as
compared with the largest American banks, which will be
maintaining a leverage ratio of 5%.
Operating with low levels of capital gave foreign banks the
opportunity of decreasing theirs costs of operations, providing
them an edge over their American competitors like
The Goldman Sachs Group, Inc.
). With the aim of implementing fair rules to all operating
entities, the Fed has come up with such rules which still permit
the foreign banks' American operations to hold less capital.
However, some major foreign banks with significant operations in
the U.S. including
Deutsche Bank AG
) opposed the rules as implementation of such rules will bound
them to transfer their costly capital from Europe.
Notably, the new rules will be effective from Jul 2016, while the
leverage ratio requirement will not be applied until 2018. This
is to comply with the requirements of section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
These rules might limit the flexibility of the banks with respect
to investments and lending volumes. Moreover, such stringent
capital rules may considerably slacken the pace of a worldwide
economic recovery in the near term.
Though economic uncertainty still lingers, banks are actively
responding to every legal and regulatory pressure. In fact, this
has positioned the banks well to encounter impending challenges.
As the sector is undergoing a radical structural change, it is
expected to witness headwinds in the near to mid term. However,
entering the new capital regime will significantly improve the
industry's long-term stability and security.