The Federal Reserve moved Friday to place large foreign banks under the same regulatory regime it applies to domestic banks, aiming to reduce the risk of a foreign bank collapse hurting the US financial system.
Adding fresh local regulation to the banks on top of the Basel III capital rules, the largest foreign banks will have to set up US holding companies for their US operations, have limits set on their credit exposure, and meet local capital and liquidity rules for their US operations.
They will also be subject to Fed stress tests on their US operations, to make sure they have enough local buffer to withstand external shocks, whether from inside the United States or outside.
The new rules, which if finalized will come into effect on July 1, 2015, follow the tighter regimes set for the largest US banks in the wake of the Wall Street financial crisis of 2008, which saw large undercapitalized banks and non-banks melt down and either close or require substantial rescues from the government.
The financial crisis "revealed limitations on the ability of foreign banking organizations to act as a source of support to their US operations under stressed conditions," the proposed new regulations say.
"In the wake of the crisis, some home country regulatory authorities have restricted the ability of banking organizations based in their home country to provide support to host country subsidiaries.
"In addition, the capacity and willingness of governments to act as a backstop to their largest financial institutions has declined around the world."
Moreover, the Fed proposal said, despite tightened global banking rules, there are still huge challenges associated with how a collapsed global bank can be wound up given the thicket of cross-border regulation.
The new regulation proposal "really does recognize the post-crisis reality," said Federal Reserve Vice Chair Janet Yellen.
The rules will apply to more than 100 foreign global banks and non-bank financial institutions with more than $50 billion in global assets, with the toughest rules set for the two dozen with more than $50 billion in US assets.
Those largest will have to set up US holding companies for their US operations, and meet what will prove to be expensive local capital and liquidity standards.
That will mean that "regulators wouldn't have to seek out a foreign parent" if the local operations go bust, a Federal Reserve official said.
Fed banking regulator Mark Van Der Weide told the Fed board that the move is not the US distancing itself from the global Basel III capital rules for banks, already seen as challenging institutions worldwide.
The US will continue to apply Basel III, but "it's not sufficient to protect the US financial system," he said.
"We need to have more capital and more liquidity for the US operations" of foreign banks.