The Fed Broadens Its Reach

The crash of 2008 spread almost instantly from country to country, highlighting the interconnectedness of the financial world and making it brutally clear that governments need to cooperate more closely on bank regulation. That effort is faltering, though, which is why the Federal Reserve’s proposal to change its approach to regulating the U.S. operations of foreign banks is justified.

The Fed wants to treat these operations as though they were U.S. banks -- by requiring them to be organized as holding companies and making them pass a U.S. test of capital adequacy. Up to now, the U.S. units of foreign banks were seen as adequately capitalized as long as the foreign parent met the capital standard imposed by the foreign regulator.