Washington, DC, United States (4E) – In a move to reduce the risk for the U.S. financial system brought by a potential foreign bank collapse, the Federal Reserve announced on Friday to apply to large foreign banks the same regulatory rules for domestic banks.
Under the new regime, the biggest foreign banks are required to create U.S. holding companies for their operations in the country. The Fed has also set limits on their credit exposure, and liquidity rules that they should meet for their U.S. operations.
The banks’ U.S. operations will also be placed under stress tests by the Fed to ensure they have sufficient local buffer to resist external shocks, originating from either the U.S. or abroad.
All 107 foreign banks and another 26 or 27 non-bank financial firms would have to brace for these new rules, which will take effect on July 1, 2015 if finalized.
The introduction of new set of tighter rules came in the wake of the financial crisis in 2008 that almost brought many Wall Street banks into their knees.
The proposed new regulation say that the financial crisis showed the limitations of the foreign banks’ ability to support their U.S. operations during stressed conditions.
Mark Van Der Weide, a Federal Reserve banking regulator, told the Fed board that the new rules do not indicate the U.S. moving away from the Basel III capital rules for banks. He added that Basel III will continue to be applied in the U.S. but noted that it is not enough to protect the nation’s financial system.