In an effort to further insulate the financial system from future crises, the Federal Reserve proposed rules last week that would force foreign banks with U.S. operations to increase their U.S. cash reserves. If passed, the rules have heavy implications for Canadian banks with a large presence in the U.S.
The rules generally apply to foreign banks with total global consolidated assets of $50 billion or more and U.S. subsidiaries with $10 billion or more in assets. For banks with U.S. assets of $50 billion or more, stricter rules apply.
The rules could pose a problem for U.S. corporates. According to The Washington Post
, these banks issue about 25 percent
of all commercial loans in the U.S. The rules will force banks to pay more, which means higher costs for their clients.
Generally, foreign banks keep much less cash on the side in the U.S. than their American counterparts, which could pose a problem if another financial crisis strikes. Under the Fed’s proposal, foreign banks would be subject to the same risk-based and leverage capital standards that apply to U.S. banks. Foreign banks would also have to meet enhanced liquidity provisions, and consolidate their U.S. subsidiaries into intermediate holding companies for consistent supervision and regulation.
The rules are intended to “address the risks that large, interconnected financial institutions pose to U.S. financial stability,” said Federal Reserve Chairman Ben S. Bernanke in a statement. Foreign banks will have time to adjust; organizations with total global assets of $50 billion as of July 1, 2014 would have to meet the new standards by July 1, 2015. Impact on Canada
Canadian banks raise a lot of money
in the U.S. to fund activities in Canada, the Financial Post
noted. Given the proposed regulations, they could begin to rethink operations. However, Douglas Landy, head of the U.S. financial services regulatory practice at Allen & Overy LLP in New York, speculated that exceptions could be made for Canada.
Alberto S. Nunez, CTP, treasurer for IAMGOLD Corp. and Chairman of AFP of Canada, noted that the proposal—which is in a comment period until March 31, 2013—still has time to be amended and modified. He believes it will get a lot of attention from Canadian Finance Minister Jim Flaherty, as well as the Canada’s central and commercial banks.
Nunez believes it is difficult to say whether the Fed would create a “Canada only” exception, but he does expect the regulations to be watered down before they are implemented. “If the regulations aren’t changed it will add to the cost of doing business in the U.S. for all corporates, regardless of who they bank with,” he told AFPC. “Some corporates who deal with Canadian banks in Canada may benefit from tapping the Canadian market for USD rather than obtaining it directly in the U.S., in order to save some costs.”
In general, Nunez sees the proposed rules as an overreaction to the impact of the 2008 financial crisis. “Much of the issue was American made—i.e. Lehman, Bears Stern, AIG, Fannie Mae/Mac—but seems the U.S. regulators and the Fed want to have the rest of the world bear more of the burden to protect against such an event in the future,” he said.