Federal Reserve looks to pare down supervision of overseas banks

November 6, 2020.
The United States flag hangs on the Federal Reserve Bank of New York, Tuesday, Aug. 4, 2020. (AP Photo/Mark Lennihan)

The United States flag hangs on the Federal Reserve Bank of New York, Tuesday, Aug. 4, 2020. (AP Photo/Mark Lennihan)

The U.S. said Friday it may remove certain foreign banks from its list of systemically important financial institutions as part of ongoing efforts to streamline post-2008 reforms and ease some regulatory burdens.

The central bank proposed updating the Large Institution Supervision Coordinating Committee program to include “category 1 firms,” or banks that are systemically important based on their assets and risk levels. The program currently regulates three foreign banks: , and .

This change arrived more than a year after the Federal Reserve Board set out a new regulatory framework for big banks that divvied them up into different categories for a “tailored” supervisory approach. 

The Fed did not disclose which banks would be removed from the current list and said it seeks input from the banks and other stakeholders.

“The definition will align the board’s supervisory framework with the new regulatory framework that took effect this year,” the Fed said. “As a result, certain foreign banks with U.S. operations that have substantially decreased in size and risk over the past decade will move to the Large and Foreign Banking Organization portfolio.”

“The portfolio move will have no effect on the regulatory capital or liquidity requirements of any firm,” the central bank said.

In a separate report released Friday, the Fed noted that the profitability of some large banks in the U.S. showed signs of rebound in the third quarter thanks to modest loan loss reserve buildups.

A “sample” of large banks saw their return on equity double to 10% in September, just short of roughly 11% in the previous year period. The boost came in spite of a 4% sequential decline in net interest income due to a lower-for-longer interest rate environment in the U.S. and other markets. 

These banks continued to improve their Tier 1 capital ratio to about 12% in September from around 11% in March, the Fed found. 

The Fed’s annual stress tests earlier this year affirmed that big banks remained well-capitalized during the pandemic and that they would “remain so under a V-shaped downside scenario” or an economic downturn similar to the 2008 financial crisis, it said.

“However, a delay in the economic recovery could have measurable negative effects on capital levels at many banks,” the Fed wrote. Given this uncertainty, the Fed Board is currently conducting another round of stress tests in the fourth quarter, it also said.

Some of the large foreign banks currently regulated by the Fed committee have experienced significant financial challenges this year as viral headwinds weighed heavily on their earnings.

Barclays, the U.K.’s second-largest bank, reported a total impairment reserve of GBP 3.7 billion ($4.86 billion) in the first half of 2020, up from just GBP 928 million ($1.21 billion) a year ago. As a result, the bank posted GBP 1.3 billion ($1.71 billion) in pre-tax profits in the second quarter, down 53% from the prior year quarter.

Deutsche Bank had set aside EUR 761 million ($903 million) in credit loss provisions in the second quarter, which contributed to a quarterly loss of EUR 77 million ($91.4 million)

Credit Suisse booked a 30% year-over-year dip in profits in the third quarter last week, citing challenges in its U.S.-based alternative investment business.

--Additional reporting by Allie Ciaramella, Patrick Hoff