Fed requires foreign banks in U.S. to hold more money in reserves
By Danielle Douglas

Big foreign banks operating in the United States will have to keep far more money in their reserves to reduce risks to the financial system, pulling them in line with their American competitors, the Federal Reserve said Tuesday. The board voted 5 to 0 to adopt the stricter regulations meant to limit the risks posed by foreign firms, which have been lending aggressively in the U.S. but setting aside far less to cover losses. “The traditional framework for supervising and regulating major financial institutions and assessing risks contained material weaknesses,” said Fed Chair Janet Yellen, presiding at her first public meeting of the central bank’s board. “The final rule would help address these sources of vulnerability.” Foreign banks have fought hard against the rule since it was first proposed in 2012, warning that it would result in higher costs for the millions of U.S. businesses that rely on their services. Banks based overseas issue about 25 percent of all commercial loans in the nation. Fed Governor Daniel Tarullo argued that gains derived from global capital flows are endangered when financial activity contracts rapidly in periods of high stress, as it did during the financial crisis. The funding vulnerabilities that foreign banks exhibited during the crisis, he said, “underscores the imperative of sound prudential policies.” Karen Shaw Petrou, managing partner of Federal Financial Analytics, noted that the Fed’s rules were adopted with only minor revisions, demonstrating the central bank’s commitment to a stringent regulation. “The board gave foreign banks time to comply with tough new rules, but not much else,” she said. “Yellen made it clear that any foreign bank that tries to evade the rules through its branch operations here will be harshly handled.”