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Fed Adopts Foreign-Bank Capital Rules

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The Federal Reserve approved new standards for foreign banks that will require the biggest to hold more capital in the U.S., joining other countries in erecting walls around domestic financial systems. Banks with $50 billion of assets in the U.S. will have to meet the standard under a revised rule approved yesterday, which raised the threshold from $10 billion proposed in 2012. Walling off U.S. units of foreign banks, designed to protect taxpayers from having to bail them out in a crisis, may increase those companies’ borrowing costs and hurt their profitability. The firms say it will also raise borrowing rates for governments and consumers. “This implies concern by policy makers in the U.S. regarding the speed and robustness of the evolving European framework for bank resolution,” The new standards take effect in July 2016, one year later than originally proposed after the final approval of the regulation was delayed. The standards are minimum capital-to-assets ratios calculated without taking risk of holdings into account. While U.S. banks have had such a requirement for decades, it was just introduced as part of global capital standards for other countries and will go into effect in 2018 as well. “It would be very onerous for European banks to comply with leverage rules so fast when it’s completely new for them.”

The U.K. is in the process of adopting U.S.-like rules, forcing subsidiarization of local operations. The European Union, which has criticized the U.S. plans, has threatened retaliation. Since the European debt crisis erupted, national regulators in the EU have prevented cross-border fund transfers among units of regional banks. The Fed is trying to prevent a repeat of the 2008 crisis when it provided $538 billion of emergency loans to U.S. units of European banks. The Balkanization of global finance will lower the industry’s average return on equity by as much as 3 percentage points.

“The funding vulnerabilities of numerous foreign banks and the absence of adequate support from their parents made them disproportionate users of the emergency facilities established by the Federal Reserve,” Tarullo said.

In an April comment letter, the IIB said member banks might be forced to curtail business in the Treasury repo market. That could drain $330 billion, or about 10 percent of the market, leading to higher borrowing costs for the government, the group said, citing an Oliver Wyman study it commissioned. Barclays could have a capital shortfall of $10 billion, according to van Steenis. Being based in London, Barclays is hit from both sides. Because the U.K. has adopted similar rules, requiring minimum capital for local units of banks operating in that country, any equity transferred to the U.S. unit has to be kept apart from the capital of the British subsidiary. That means even if the consolidated business meets global capital requirements, the U.S. and U.K. carve-outs could force the bank to hold more capital in total. bloomberg

It will also raise borrowing rates and banks do not like it.

Edited by rollover

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'The standards are minimum capital-to-assets ratios calculated without taking risk of holdings into account.'

Sounds like a plan.

Edited by Sancho Panza

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'The standards are minimum capital-to-assets ratios calculated without taking risk of holdings into account.'

Sounds like a plan.

It sounds like a local leverage ratio. Easy to implement and supervise.

The risk adjusted measures of capital, RWAs, still need to be monitored at a global level by the home regulator.

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It sounds like a local leverage ratio. Easy to implement and supervise.

The risk adjusted measures of capital, RWAs, still need to be monitored at a global level by the home regulator.

It's hard to imagine that,internally at least they wouldn't be considering asset quality on any level,especially given the action over the last 6/7 years.

It harks back to the old days of cash reserve lending to me and when combined with the Volcker Rule/Glass Steagall Lite,we seem to be retreading our steps back in time which may be no bad thing.

I'd be interested to know quite how one would risk weight 'hot money' assets like London mortgages versus more mundane mortgages in the North,where there hasn't been much bubble since 2004,as normally,I'd presume,that mortgages are normally graded in terms of income multiples....unless of course they're not.

Thanks in advance if anyone can enlighten me.

Edited by Sancho Panza

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