Tarullo de­fends Fed's move to su­per­vise for­eign bank units

The Pak Banker - - FRONT PAGE -

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.

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