By Ryan Tracy
Federal Reserve Gov. Daniel Tarullo gave a full-throated defense
of the Fed's oversight of foreign banks operating in the U.S. on
Thursday, a day after the regulator said three of those firms
failed to adequately analyze how they would fare in a severe
recession.
Mr. Tarullo laid out the case for a series of recent moves to
force foreign banks to hold more loss-absorbing capital in their
U.S. units, pushing back against criticism that the Fed was making
it harder for those banks to compete or stepping on the toes of
European regulators.
"Much of what we have done is simply to catch up" to regulations
that U.S. banks face in the European Union and the United Kingdom,
Mr. Tarullo said in remarks prepared for a Harvard Law School
symposium in Armonk, N.Y. Thursday evening. "The United States is
more a follower of the pattern set by the EU than it is an
initiator of new kinds of requirements."
The Fed's latest rules for overseas firms, adopted last month,
require them to set up a U.S. holding company and maintain minimum
levels of capital in the U.S. to protect against losses. During the
2008 crisis, some of those foreign firms came to the Fed for
emergency lending, Mr. Tarullo noted.
The Fed also sounded a warning for foreign firms Wednesday when
it barred the U.S. units of HSBC Holdings PLC, Royal Bank of
Scotland Group PLC, and Banco Santander SA from increasing the
dividends they send overseas after their "stress test" results
didn't meet the Fed's standards.
Mr. Tarullo didn't address the results of the tests or monetary
policy in his remarks on Thursday. He said that rather than
violating any international standard for regulation, the Fed's
moves are in step with global agreements that allow local
flexibility.
Regulators should strive to work together, he said, but
"presumptively, at least, nations should be able to adjust their
regulatory systems based on local circumstances and their relative
level of risk aversion as it pertains to the potential for
financial instability."
"These firms cross borders in ways their regulators do not," Mr.
Tarullo added. "We cannot ignore this fact and pretend that we have
global oversight."
The Fed's limit on bank risk-taking known as the leverage ratio,
which the new U.S. rules will apply to European banks, is likely to
be matched by European supervisors in the coming years, eliminating
any competitive imbalance, Mr. Tarullo said.
"A few foreign banks would prefer the old system under which
they held relatively little capital in their very extensive U.S.
operations. But that was neither safe for the financial system nor
particularly fair to their competitors--U.S. and foreign--that hold
significant amounts of capital here," Mr. Tarullo said.
He said the Fed's requirement for foreign firms to create a U.S.
subsidiary differs from the way European rules are written, but
that came in response to "a small number of very large foreign
banks" attempting to evade U.S. capital standards, he said. "We
needed to create this structural requirement."
Mr. Tarullo was set to take questions after his remarks.
Write to Ryan Tracy at ryan.tracy@wsj.com
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