Tarullo defends Fed's move to supervise foreign bank units
Federal Reserve Governor Daniel Tarullo defended the central bank's rules requiring stricter supervision of foreign banking companies operating in the U.S., saying the global financial crisis made it clear that regulation needed to be expanded.
Foreign banking organizations with U.S. assets of $50 billion or more must now establish U.S. holding companies subject to Fed oversight, according to a rule published in February. Tarullo said accusing the U.S. of "Balkanization" in regulation was "curious," given that foreign banks needed large amounts of Fed assistance during the crisis and that the Fed is working with other national regulators to assure financial stability in host countries.
"The most important contribution the United States can make to global financial stability is to ensure the stability of our own financial system," Tarullo said in a speech today to a Harvard Law School symposium in Armonk, New York.
He noted that the branching model of large foreign banks has changed, with many of them shifting to dollar funding branches from lending branches.
Foreign bank reliance on shortterm wholesale liabilities such as commercial paper to fund longer-term securities created instability in 2008 as sources of cash grew tight. The Fed provided backstop loans to both domestic and foreign bond dealers through the Primary Dealer Credit Facility, and to foreign banks directly through the discount window.
The Fed "provided substantial liquidity to the broker-dealer affiliates of the bank holding companies, as well as to the primary dealer subsidiaries of foreign banks," Tarullo said.
"The shift in strategy of many foreign banks toward using their U.S. branches to raise dollars in short-term markets for lending around the world created another set of vulnerabilities," he said. "That resulted in substantial and, relative to total assets, disproportionate use of the Federal Reserve's discount window by foreign bank branches."
The biggest borrowers from the discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record.
Under the rule issued in February, foreign banks with non-branch assets of $50 billion or more must hold their subsidiaries in holding companies that are subject to capital and liquidity standards applied to U.S. banks, and meet special risk management standards.