We use cookies to deliver our online services. Details of the cookies we use and instructions on how to disable them are set out in our Cookies Policy. By using this website you agree to our use of cookies. To close this message click close.

US foreign bank capital requirements: Time for a rethink?

Aaron Cutler

Aaron Cutler,

Washington, D.C.

Loyal T. Horsley

Loyal T. Horsley,

Washington, D.C.

05 September 2017

Rep. Blaine Luetkemeyer (R, MO-3), as Chairman of the House Subcommittee on Financial Institutions and Consumer Credit, sent Chair Yellen a letter on August 24 regarding the capital requirements for foreign banking organizations (FBOs).

Rep. Luetkemeyer contends that the recently proposed EU rule requiring ring-fencing of capital for non-EU domiciled financial institutions that are identified as global systemically important banks (G-SIBs) is retaliation for the US’s high capital requirements for FBOs.

In the wake of the financial crisis, the Federal Reserve (and most of the global financial regulatory community) has taken a much broader view of what is required to ensure safety and soundness, as well as general financial stability.  The Federal Reserve’s rules regarding FBOs require that, in some instances, the FBO establish an intermediate holding company in the US that can act as a source of strength for the FBO in the US by imposing capital requirements on that holding company. Rep. Luetkemeyer alleges that this stifles investment in the US and “[disrupts] the ability of internationally-active financial institutions to serve markets around the world, impede[s] the allocation of capital, and ultimately result[s] in market fragmentation and concentration risks.” These systemic issues are compounded by the potentially retaliatory response of international regulators who plan to impose similarly burdensome requirements on US institutions active internationally (i.e. the G-SIBs).

Rep. Luetkemeyer does not specify the response he would like to see from the Federal Reserve. Instead, the letter reiterates his belief in, and support for, comprehensive financial regulatory reform in the US, which should take into account the current state of global regulation, the specific requirements placed on FBOs, and generally, reduce the regulatory burden placed on financial institutions.

Currently, of course, the Financial CHOICE Act (FCA) is awaiting action in the Senate, where it is not expected to survive in its current form. The FCA provides comprehensive reform that many Democrats (and probably some Republicans) are likely to believe goes too far in providing “relief” to financial institutions that almost caused a global financial meltdown less than a decade ago. However, almost everyone agrees that Dodd-Frank is an imperfect law and certain parts could be amended. The Federal Reserve has previously indicated its willingness to revise the threshold for SIFI designations and is working on revising/tailoring the CCAR process.

Rep. Luetkemeyer does not urge radical action, but only requests consideration and further engagement with both the Federal Reserve and international financial regulators. A reasonable, measured approach to financial regulatory reform, done in pieces rather than the wholesale overhaul envisioned by the Financial CHOICE Act, may well be more successful in the long run.

Aaron Cutler

Aaron Cutler,

Washington, D.C.

Loyal T. Horsley

Loyal T. Horsley,

Washington, D.C.

Loading data