Federal Reserve to foreign banks- you’ll have to pay to play

The Federal Reserve yesterday announced a final rule requiring the largest foreign banks to adhere to enhanced US domestic capital and liquidity standards.

The rule applies to approximately 100 non-US banks with consolidated global assets of $50bn and over. Non-US banks with at least $50bn of assets located in the States will have to manage their US subsidiaries via a separately capitalised holding company. Despite intense lobbying by non-US banks, the final rule is largely unchanged from the Fed’s initial December 2012 plan. The intermediate holding company threshold has been increased from $10bn to $50bn, reducing the currently affected number from 26 to 18. Banks have also been given an extra year to comply with the rule, which comes into effect July 2016. The rule is overtly designed to allay public concern that the US taxpayer may need to bail out (again) subsidiaries of an ailing non-US bank. Its ancillary effect is to annul any regulatory capital advantage enjoyed by “foreign” competitors. The rule is particularly onerous for those banks which are more-heavily focused on broker-dealer business, hitherto unaffected by leverage ratios which do not account for asset risk. It is expected that some European banks will scale down their US-based repo and securities financing activity. Although a significant risk for a few banks and material for many, the final rule presents few surprises- it was always unlikely that the Fed would disadvantage the largest domestic US banks- at least not for long. It remains to be seen whether Europe will respond in kind.