Board of Governors of the Federal Reserve System

The Federal Reserve Board on Monday invited public comment on a regulatory framework that would more closely match the rules for foreign banks with the risks they pose to the U.S. financial system. The changes would maintain the most stringent requirements for firms with the most risk, while reducing compliance requirements for firms with less risk.

Under the proposed framework, foreign banks with $100 billion or more in U.S. assets would be sorted into categories of increasingly stringent requirements based on several factors. The factors, which reflect banks' complexity and risk to the financial system, include asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.

"This proposal maintains the substantial resilience built up across the U.S. financial system over the past decade, while at the same time making appropriate adjustments for firms that present less risk," Chair Jerome H. Powell said.

The framework is substantially the same as the framework proposed last year by the Board for large domestic banks, with some adjustments reflecting structural differences in foreign banks' U.S. operations. The proposal also builds on the Board's existing tailoring of its rules.

"The proposal seeks to increase the efficiency of the firms without compromising the strong resiliency of the financial sector," Vice Chair for Supervision Randal K. Quarles said.

While the framework is substantively the same for both domestic and foreign banks, the resulting impact may be different. For example, currently, foreign banks operating in the United States tend to rely on less stable short-term wholesale funding and can be complex, which present heightened risks. If a bank is engaged in these higher-risk activities, the framework would result in more stringent regulations. The Board estimates that the framework would, at this time, increase required liquid assets by 0.5 to 4 percent and decrease required capital by roughly 0.5 percent for foreign banks with $100 billion or more in U.S. assets.

The proposal also requests comment on whether the Board should apply new liquidity requirements to the branches of foreign banks. The branches of foreign banks are currently subject to internal liquidity stress tests, but are not subject to standardized liquidity requirements. The proposal asks for comment on whether such standardized liquidity requirements should be imposed and on several different approaches for doing so.

The proposals were jointly developed with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Charts are provided that show the proposed requirements for each category, as well as a list of firms projected to be included in each category. Comments will be accepted through June 21, 2019.

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