This week the Federal Reserve took a major step toward establishing a more sensible set of rules for global banks operating in
The Fed should put its new global banking rules into effect but rethink its criteria for who should sit on the New York Fed board.
First, let me take a moment to congratulate the Fed on the good news: “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations.” This may seem arcane and it is certainly technical, but the
The new rule also covers American bank holding companies; most of these rules have been in the works for a while. The more important development is to require that large foreign banks fund their American operations and manage their risks here in a more responsible manner.
In the past, some foreign banks —
Foreign banking organizations with U.S. nonbranch assets of
If this language seems too dry, just remember the facts. In 2008, through its intervention in A.I.G. and in other ways, the Federal Reserve became a lender of last resort to large foreign banks, as well as to American financial institutions; see Pages 26 and 43 in a helpful presentation provided by Better Markets, a pro-reform group. Providing such guarantees without being able to impose effective oversight (including limits on leverage) is a recipe for moral hazard and careless behavior more generally. The Fed is now, somewhat belatedly but in a welcome fashion, recognizing these realities.
I could quibble — for example, with this provision: “The final rule also generally defers application of the leverage ratio to foreign-owned U.S. intermediate holding companies until 2018.” The long phase-in seems more generous than wise. But on the whole, this rule is a positive development.
Unfortunately, this good news was partly spoiled by the unrelated announcement that a vacancy on the board of the New York Fed would be filled by
I have nothing personal against
To be clear, not all of this happened when
At its shareholder meeting last year, two
As reported by The New York Times, at least one influential shareholder group explicitly recommended voting against
The New York Fed is full of smart, highly professional people who work hard to make the financial system more stable. At the same time, both the New York Fed and its
I have talked to people involved in this transaction, and there are various opinions regarding the extent to which the New York Fed was in control of operational details relative to merely carrying out a plan provided by the
In any case, the striking fact is that
And given persistent legitimate concerns regarding how the financial system is overseen — including the role of the New York Fed — why would the
I’m glad that the Fed’s
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