Fed targets foreign banks with strict new rules

WASHINGTON – The Federal Reserve will require the largest foreign banks operating in the United States to hold higher levels of capital reserves to protect against potential loan losses.

The stricter regulations the Fed adopted Tuesday are intended to prevent the types of threats that contributed to the 2008 financial crisis. The requirements are similar to those already adopted for big U.S. banks.

Fed Chair Janet Yellen, presiding at her first public meeting of the central bank’s board, said the changes will “help address the sources of vulnerability” exposed by the crisis. The rules were adopted by a 5-0 vote.

Foreign banks had objected to the changes. They argued that the stricter rules would raise the cost of doing business in the United States and reduce the loans they could provide.

Sally Miller, CEO of the Institute of International Bankers in New York, said her organization was pleased that the Fed had made some adjustments to the rules. The adjustments include extending the date by which foreign banks must comply until July 2016, one year later than originally proposed. But she said her group still felt the rules were too onerous.

“We continue to have a fundamental disagreement with the Fed about the appropriateness and necessity of applying an extra layer of U.S. bank capital requirements,” Miller said in a statement.

John Corston, a director at consulting firm Deloitte who specializes in regulatory and banking issues, noted that the Fed’s rules were adopted with only minor revisions and had been expected. Corston said the requirements should “go a long way to address some of the issues that we faced during the crisis,” which was triggered after investment bank Lehman Brothers collapsed.

The rules will require overseas banks with at least $50 billion in assets operating in the United States to set up a subsidiary bank holding company in the United States that will be subject to the same requirements in such areas as capital reserves and leverage as U.S. bank holding companies.

The Fed was ordered to toughen its regulations for large banks that could threaten the entire financial system under the Dodd-Frank Act that Congress passed in 2010 in response to the financial crisis.

Also Tuesday, Treasury Secretary Jacob Lew urged officials in the Group of 20 major economies to follow the lead of the United States in adopting tougher banking standards to reduce the risk of another crisis.

Lew and Yellen will lead the U.S. delegation to the G-20 meeting this weekend in Sydney.