Big foreign lenders could face new risk rules under Fed’s plan

Bloomberg

The Federal Reserve is proposing a new approach for overseeing foreign banks such as Deutsche Bank AG, Barclays Plc and Credit Suisse Group AG that’s expected to require some of them to hold bigger stockpiles of easy-to-sell assets to guard against losses.
Fed board members voted 4-1 to seek comment on its plan for a new system that closely matches the overhauled domestic-bank framework proposed in October. The parallel regimes are part of an effort to tailor rules to exert more pressure on the riskiest banks. The new approach creates a range of risk categories and assigns each large bank to the one that best fits its business model.
Depending on what final calculations the Fed lands on, several foreign lenders — including Deutsche Bank, Barclays, Credit Suisse, Mitsu- bishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Toronto-Dominion Bank — could be slotted into the second tier, just below a group of US banks with massive global footprints. A second-level designation would come with routine stress testing and the most stringent rules for capital. The banks would also be subjected to the same liquidity demands as the US megabanks.
“Because the US operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank,” Fed Chairman Jerome Powell said in a statement on the proposal.

INCREASED DEMANDS
The new system, which draws Credit Suisse and UBS into such liquidity rules for the first time, is being proposed in cooperation with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Fed estimated it could boost overall liquidity demands by as much as 4 percent for foreign banks in the US. The reason for uncertainty over which category banks fall into stems from the fact that the Fed needs more information to measure “cross-jurisdictional” activity.
Banks in the third tier — which is expected to include HSBC Holdings Plc, UBS Group AG and Royal Bank of Canada — are likely to benefit from marginally reduced capital requirements. Those at the fourth level — including Banco Santander SA, Societe General SA and BNP Paribas SA — would see even lower stress-test, capital and leverage constraints.

LIVING WILLS
While bracing themselves for potentially more vigorous liquidity rules, the biggest foreign banks may join some US regional lenders in seeing a rollback of requirements for filing so-called living wills designed to show how they could be unwound after a collapse. The Fed proposed a three-year filing cycle for such banks, while keeping the two-year requirement for the biggest US banks. The FDIC — the other steward of living wills — is set to follow.
Smaller US regional lenders, such as Regions Financial Corp. and M&T Bank Corp., would be cut from the requirement completely in this proposal, with the regulators arguing that such institutions don’t really pose a threat to the financial system.