Recent reform proposals from U.S. banking regulators that would ease requirements on foreign banks in the U.S. are negative from a credit perspective, says Moody’s Investors Service in a new report.
The rating agency said changes to the rules governing the U.S. operations of large foreign banks — which were proposed by the U.S. Federal Reserve Board on Monday — are credit negative as they would impose less strict capital and liquidity standards on these banks.
For example, Moody’s said the proposed changes to capital and/or liquidity requirements for certain firms — including Royal Bank of Canada (RBC) and Bank of Montreal (BMO) along with other large foreign banks — would likely “lower their capital and liquidity buffers, reducing their ability to absorb unexpected losses and withstand market shocks, a credit negative.”
Additionally, it notes that the Fed is also proposing to ease stress testing requirements for large domestic and foreign banks operating in the U.S., which it also sees as a negative.
“The reduced frequency of capital and liquidity stress testing could lead to more relaxed oversight and afford banks greater leeway in managing their capital and liquidity, as well as reduced transparency and comparability, since fewer firms will participate in the public supervisory stress test,” the rating agency said in its report.
Finally, U.S. regulators are also looking to ease the requirements on banks to have resolution plans, also known as “living wills,” which Moody’s sees as a negative too “because living wills are a mechanism to ensure orderly resolution in bankruptcy and reduce systemic risk.”
“If a resolution must be conducted based on an obsolete or out of date living will, it could be more costly for creditors and more disruptive for the financial system,” it warned.