Rating agency warns of knock-on effect of Fed’s foreign bank rules

Plans currently being considered by the Federal Reserve to impose tighter standards on foreign-owned banks operating in the US could lead to other countries upping standards as well – harming the growth of global banks, according to a note published today by the rating agency Fitch.

The Fed is currently considering plans to force foreign banks to establish an intermediate holding company for US operations. The new entity would be subject to more stringent capital and liquidity requirements, which are also being applied to US banks. A consultation period is due to end on March 31.

Fitch said that while banks would likely be able to cope with the tighter rules in the US, they could then be hit by a ramping-up of standards elsewhere. "It is unlikely that national regulators elsewhere would be comfortable allowing capital and liquidity reallocation to the US without reciprocal rules in their home jurisdictions," the note said.

Either way, tighter US rules were likely to make banks re-evaluate where they book transactions. "Depending on the final implementation and decisions by other regulators, this could result in a more extreme scenario with a material re-shuffling of activities across geographies," the rating agency said.

In a speech on November 29, Daniel Tarullo, a member of the board of governors of the Federal Reserve, said the rules should not give domestic banks a competitive advantage, and that the US would not "revoke its welcome" to foreign banks.