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Fed's Tarullo defends tough rules for foreign banks

Daniel Tarullo, member of the Board of Governors of the Federal Reserve System, testifies to the House Financial Services Committee about th
Daniel Tarullo, member of the Board of Governors of the Federal Reserve System, testifies to the House Financial Services Committee about th

WASHINGTON (Reuters) - A top U.S. regulator gave a spirited defense on Thursday of new rules forcing foreign banks to hold more capital in their U.S. units, after overseas firms and regulators criticized the requirements.

Federal Reserve Governor Daniel Tarullo said the rules are necessary to protect the U.S. financial system from another meltdown like the 2007-2009 crisis.

"Of course, a few foreign banks would prefer the old system under which they held relatively little capital in their very extensive U.S. operations," Tarullo said in a speech at a Harvard Law School event in Armonk, New York.

"But that was neither safe for the financial system nor particularly fair to their competitors - U.S. and foreign - that hold significant amounts of capital here."

Tarullo said foreign regulators also have applied capital and liquidity requirements to subsidiaries of U.S. banks in their countries that differed from rules enforced by U.S. officials.

Before the financial crisis, U.S. regulators traditionally counted on foreign supervisors to watch overseas banks operating here. But after hundreds of foreign banks needed emergency loans from the Fed during the meltdown, regulators changed tactics.

The Fed's new rules require foreign banks with sizeable U.S. operations, such as Deutsche Bank and Barclays , to group their U.S. units under a single entity and meet tougher requirements on their debt loads and the amount of easy-to-sell assets they need in case of a credit crunch.

Regulators have estimated that 17 foreign banks would have to comply with the new requirements, which were finalized in February.

Foreign banks argued that the rules would deviate from globally harmonized regulatory regimes and make the financial system less stable. Some critics warned of a "Balkanization" of financial regulation.

Tarullo said the Fed's decision allows the same rules to apply to domestic and foreign banks operating here. He said U.S. units of foreign banks needed tougher scrutiny because they relied on risky, short-term funding before the crisis.

"The most important contribution the United States can make to global financial stability is to ensure the stability of our own financial system," he said.

(Reporting by Emily Stephenson; Editing by Lisa Shumaker)

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