New Regulations for US and Foreign Banks

The Federal Reserve Bank approved new capital, liquidity, and risk management standards to strengthen the supervision and regulation of both large U.S bank holding companies and foreign banks in the U.S. Among these requirements is the requisite for U.S. bank holding companies with global consolidated assets of $50Bn or more to enhance and comply with more stringent risk-management and liquidity stress tests as well with the provision to hold a buffer of highly liquid assets based on projected funding needs during a 30-day stress test. Additionally, U.S bank holding companies with total assets over $10Bn must incorporate enterprise-wide risk committees as per the new regulations.

The new rules also require the largest foreign banking organizations with at least $50Bn of U.S. non-branch assets, such as Credit Suisse, Barclays, and Deutsche Bank to establish a U.S. capitalized intermediate holding company (IHC) over their US subsidiaries. These IHCs will be subject to the same stringent risk, capital, and liquidity standards subject to the U.S bank holding companies. The largest foreign banks must also establish risk committees with a U.S. chief risk officer working in the U.S.

These rules are being met with opposition by European officials such as the British Banker's Association and the German banking regulators Bundesbank and Bafin who threaten to retaliate against U.S. banks in Europe. The new regulations will affect foreign banks that operate as broker-dealers, such as Barclays, the most since broker-dealers' main operations don't involve accounting for an asset's risk and thus makes it harder to meet risk-based capital and leverage ratios without hindering profitability. U.S. banks such as JPMorgan Chase and Citigroup support the views of their rival European banks and are not fans these new rules either.

Representatives from the Fed claim that these new regulations will further help stabilize the U.S. financial system which in turn will contribute to the stabilization of the global financial system and economy.

I personally believe that while the intent behind these regulations is to prevent U.S. banks from taking on too much risk and engage in reckless behavior, a blanket regulation cannot be applied all banks. Banks are very complex and inter-connected organizations with a multitude of differing operations among different banks, some inherently risky and so blanket regulations such as this one may not necessarily provide the most effective solution. A more sensible solution may be to tailor regulations by specific operations rather than by setting a threshold of the dollar value of assets under a bank's possession above which that bank must adhere to a specific regulation.

In any case, U.S. bank holding companies have until January 1, 2015 to comply with the approved regulations while foreign banks have until July 1, 2016 to comply with establishing IHCs and until 2018 to meet the leverage standards for the IHCs.

Roshan Panicker

Roshan J. Panicker B.S. in Finance & Statistics New York University, 2016


roshan.panicker@stern.nyu.edu | 908.943.7106