Global Banking: Regulations Force a Retreat

As global credit markets seized up in late 2008, European banks with U.S. operations borrowed heavily from the U.S. Federal Reserve discount window, the primary program for providing cash to banks facing a liquidity squeeze. At the time, these foreign lenders didn’t have to meet Fed capital rules to cover losses on American-based units provided their parent company was properly capitalized. They competed and borrowed in the U.S.—but didn’t have to play by the house rules.

That game is up: On Nov. 28, Federal Reserve Governor Daniel Tarullo, who oversees bank supervision, announced plans to impose the same capital and liquidity rules on the U.S. operations of foreign lenders that apply to American institutions. The new rules, he added, won’t be as strict for foreign banks with small U.S. units. The U.K. and Switzerland have also proposed rules on international banks designed to gain more control. “For the foreseeable future, then, our regulatory system must recognize that while internationally active banks live globally, they may well die locally,” Tarullo said in a speech at Yale University.