New rules issued by the US Federal Reserve will severely affect foreign banks with a large US presence.

The US operations of foreign banking organisations (FBOs) that  are required to set up an intermediate holding company will be treated like US bank holding companies, therefore subject to stringent rules, including capital and governance requirements.

Greg Lyons, partner at Debevoise & Plimpton, said the rules would particularly affect banks with a US broker-dealer business. Five of the top 10 brokers in the US were foreign-owned.

“Over the past five years, those brokers have changed from being net liquidity providers into the US to net liquidity removers in the US. Particularly during the financial crisis, the Federal Reserve provided all kinds of short-term funding to those institutions.”

The rule would force separate capitalisation of funding on foreign banks’ US operations, he added. “Foreign banks are going to be required to calculate capital and liquidity, and run stress tests just for their US operations. The US banks adjusted to this over five years but the foreign banks are going to have to do this in two, and so there is a lot of pressure on them to come into compliance with these rules.”

Large FBOs with more than $50bn of US assets would be hit hardest by the rule. Large FBOs with a “limited” US presence of less than $50bn in US assets would face increased standards but they would not be as harsh. Therefore the rule could force some banks with US assets just over the $50bn threshold to shrink their US operations so as to be subject to lighter rules.

There is now concern that Europe will issue similar rules for the European operations of US banks. Michel Barnier, the European Union’s internal markets commissioner, said of the rule: “These US measures are not a good signal. If we see unilateral measures in one direction there will be measures in the other direction.”

Lyons was speaking at the recent Pasla/RMA Conference on Asian Securities Lending.