U.S. bank regulators finalized rules Tuesday that toughen standards on big U.S. banks, and foreign banks with significant U.S. operations, in response to the financial crisis.
The U.S. Federal Reserve Board has approved a final rule that strengthens supervision and regulation of large U.S. bank holding companies and foreign banking organizations. The Fed notes that the final rule establishes a number of enhanced prudential standards for large U.S. banks and foreign banks with substantial U.S. operations in an effort to increase the resiliency of their operations.
These tougher standards include measures focusing on liquidity, risk management, and capital. The rule also requires a foreign banks with a significant U.S. presence to establish an intermediate holding company over its U.S. subsidiaries to facilitate supervision and regulation of their U.S. operations.
For U.S. bank holding companies with total assets of US$50 billion or more, the final rule incorporates the previously issued capital and stress testing requirements as an enhanced prudential standard. It also requires these big banks to comply with enhanced risk-management and liquidity risk-management standards, conduct liquidity stress tests, and hold a buffer of highly liquid assets. The final rule also requires publicly traded U.S. bank holding companies with assets of $10 billion or more to establish enterprise-wide risk committees.
“As the financial crisis demonstrated, the sudden failure or near failure of large financial institutions can have destabilizing effects on the financial system and harm the broader economy,” said Fed chair Janet Yellen. “And, as the crisis also highlighted, the traditional framework for supervising and regulating major financial institutions and assessing risks contained material weaknesses. The final rule addresses these sources of vulnerability.”
The final rule also aims to bolster the capital and liquidity positions of the U.S. operations of foreign banks, and promote a level playing field with domestic banks. Under the rule, foreign banks with U.S. non-branch assets of $50 billion or more will be required to establish a holding company over their U.S. subsidiaries, which will be subject to the same standards as U.S. bank holding companies. They will also be required to establish a U.S. risk committee and employ a U.S. chief risk officer to help ensure that the foreign bank properly manages the risks of its combined U.S. operations. These foreign banks will also have to meet enhanced liquidity risk-management standards, conduct liquidity stress tests, and hold a buffer of highly liquid assets.
Foreign banks with assets of $50 billion or more, but combined U.S. assets of less than $50 billion, will be subject to enhanced prudential standards as well, but the capital, liquidity, risk-management, and stress testing requirements will be substantially less, the Fed notes.
Compared with earlier versions of the rule, the final rule raises the threshold for requiring a U.S. intermediate holding company from $10 billion to $50 billion and extends the initial compliance date for foreign banks to July 1, 2016; which is a year later than originally proposed. It also generally defers application of the leverage ratio to foreign-owned U.S. intermediate holding companies until 2018.
U.S. banks that are subject to the rule will need to comply by January 1, 2015.