FRB Governor Tarullo Encourages Cooperation in Post-Crisis Regulation of Foreign Banking Organizations

Board of Governors of the Federal Reserve ("FRB") Governor Daniel K. Tarullo encouraged regulators from home and foreign jurisdictions to share responsibility for supervising international banks. "In the absence of either a global regulator or completely insular national banking systems," he said, regulators "must continue to work toward a system of shared responsibilities to assure both home and host regulators that internationally active banks are subject to adequate oversight and controls."

Governor Tarullo noted that "what might have been economic advantages for host countries from foreign banks in reasonably good times can turn into substantial disadvantages in periods of idiosyncratic or generalized stress." These disadvantages can include the parent bank's inability to support the larger foreign organization due to a lack of capacity, the home country's inability to recapitalize a failed foreign bank, and funding patterns and currency mismatches.

Governor Tarullo made the following recommendations concerning foreign banking organizations:

• regulators should utilize an approach to international compliance that "simultaneously provides regulators with a way to work with one another and to gain deeper insight into how their counterparts in other jurisdictions are applying prudential standards";
• in order to promote broadly comparable risk weighting, "technically competent supervisory staff from other jurisdictions" should participate with "home regulators in the actual bank model validations, oversight and related supervisory functions"; and
• regulators should create a program to encourage regular interaction between the "very top officials of key regulators" in order to instill "mutual confidence."

Nonetheless, Governor Tarullo said, regulators should remember that "there will be limits to how much responsibility can appropriately be shared for international banking activities . . . [and that those limits] are most apparent in the context of the possible insolvency of a major foreign banking organization." Governor Tarullo explained that such limits reflect the FRB's calibration of its proposed internal total loss-absorbing capacity requirements and are "slightly below our proposed external [total loss-absorbing capacity] requirements for U.S. global systemically important banking groups."

Governor Tarullo delivered his remarks at "The Future of Large and Internationally Active Banks" 18th Annual International Banking Conference, which was sponsored by the FRB and the World Bank.