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Fed's Quarles suggests changes to capital requirements for foreign banks

Randal Quarles, the Federal Reserve's vice chairman for supervision, said May 16 that the U.S. central bank should consider decreasing a set of capital requirements for the U.S. subsidiaries of large foreign banks.

Quarles, speaking at a Harvard Law School event, said U.S. regulators had sought the higher end of the range suggested by the international Financial Stability Board, and that officials should reconsider whether that is the best approach.

The requirement asks the largest foreign banks operating in the U.S. to hold onto a minimum level of total loss-absorbing capacity, or TLAC, to help ensure orderly resolutions of companies and reduce the broader financial-stability impacts of companies' failures.

Those foreign banks are required to set up intermediate holding companies to run their U.S. subsidiaries, a structure that Quarles said continues to make sense. But he said the Fed should consider whether the TLAC requirements for those companies "could be adjusted to reflect the practice of other regulators without adversely affecting resolvability and U.S. financial stability."

That adjustment, he said, could lead to regulators in other countries also tweaking their requirements for large banks in the U.S. and elsewhere, in turn giving companies more flexibility on their resolution plans.

"Given the uncertainty of the circumstances or location of losses that emerge in an actual stress, adequate flexibility for the parent [company] to deploy resources where needed is ... in the host regulator's interest," he said.

The Fed, he added, could also look at streamlining the requirements, a point he says he will ask his central bank colleagues to consider and seek comments on. Another point the Fed will likely be seeking input on, he said, is whether changes to the guidance on resolution plans, or living wills, for U.S. and foreign banks are appropriate.