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December 14, 2012

“Federal Reserve Proposed Rules Will Help Prevent Future Crises”

 

Washington DC, December 14, 2012—

“The Federal Reserve Bank proposed rules today that will make financial crises and taxpayer bailouts less likely,” said Dennis Kelleher, President and CEO of Better Markets, regarding the Federal Reserve’s proposed rules for regulating the U.S. operations of foreign banks Friday. “The rule will promote fair competition by treating high risk financial firms the same regardless of the particular form they take.  This is good news for our financial system and for our economy.”

The proposed rules will apply to large foreign banks operating in the U.S. that pose significant stability risks to the U.S. financial system.  “This is an incredibly important rule because five of the largest broker-dealers in the U.S. are parts of foreign banks.  These are high risk banks because they typically rely on large amounts of borrowed money, dependent on very short term financing and, therefore, are subject to run risk, which is what caused Bear Stearns and Lehman Brothers to collapse and which significantly contributed to the financial crisis,” Kelleher continued. “For the first time these large foreign banks will be subjected to the same capital rules and prudential standards applicable to large U.S. banks.”

This will mean that large firms like Deutsche Bank’s Taunus subsidiary – which had $354 billion in assets and a negative 1.2 percent Tier 1 leverage ratio in December of 2011 – will now be required to meet capital and liquidity standards that will increase their ability to absorb losses and reduce their risk of a run and failure.

“In addition, banks will no longer be able to evade regulatory oversight just by changing their corporate form, which is a tactic recently used by Deutsche Bank’s Taunus subsidiary,” Mr. Kelleher stated. 

“However, it must be recognized that the proposed new standards for foreign banks, which will mirror the proposed new standards for large U.S. banks, remain inadequate.  For example, leverage limits must be significantly stronger to reduce the risk of failure, particularly when markets are under stress.  Also, the run risk created by reliance on short term borrowing means that required equity should increase when short term borrowing increases,” Kelleher concluded.

Read the Federal Reserve’s rule proposal here

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