Japan joined Germany in opposing a proposed U.S. Federal Reserve rule aimed at compelling large foreign bank holding companies to hold more capital and liquidity in their American subsidiaries.
Bank of Japan Executive Director Hiroki Tanaka asked the Fed Board of Governors in an April 30 letter to “carefully consider major concerns” it has about the proposed rule. Japan’s Financial Services Agency asked that the proposed rule take into account “deference to home country regulation and supervision” in a letter signed by Masamichi Kono, the regulator’s vice commissioner for international affairs.
The letters followed an April 26 note by Bundesbank Vice President Sabine Lautenschlaeger and Bafin President Elke Koenig to the Fed board that “‘go it alone’ national initiatives can tend to weaken the global setup and stability” of systemically important banks “instead of stabilizing them.”
The Fed’s proposal would affect Deutsche Bank AG, Germany’s biggest lender, which last year dropped its bank holding company status so that it could meet U.S. requirements without assigning additional capital and liquidity to its unit in the country. Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, has operations in the U.S. including its San Francisco-based UnionBanCal Corp. unit.
Tanaka said the Bank of Japan is concerned about the rule’s “inconsistency” with joint global efforts to enhance the stability of the global financial system, as well as its “one-fits-all” approach for liquidity requirements. He asked the Fed not to impose additional regulatory requirements on U.S. units of foreign banks that satisfy standards at home.
Fed officials have signaled they are unlikely to back down because their experience in the financial crisis showed that some of the biggest borrowers from their emergency facilities were foreign banking groups in need of dollar funding.
“The proposal is directly responsive to the vulnerabilities in foreign bank activities observed during and after the financial crisis,” Daniel Tarullo, the Fed governor in charge of bank supervision and regulation, said Dec. 14 when the rule was proposed. “Many large foreign banking organizations came to rely heavily on short-term, wholesale U.S. dollar funding and thereby became subject to destabilizing runs.”
The Fed’s proposal would require foreign banking operations with global consolidated assets of $50 billion or more, and U.S. subsidiaries with $10 billion or more in total assets, to create an intermediate holding company, which would be required to maintain the capital and liquidity standards applied to U.S. bank holding companies.
The units would also be under supervision by the Federal Reserve, the nation’s bank holding company regulator, face stress tests, and be required to hold a 30-day buffer of “highly liquid assets.”
Foreign banking organizations with global consolidated assets of $50 billion or more would be required to meet the standards on July 1, 2015.