The Fed Wants More Protection Against Losses at Foreign Banks’ U.S. Units

The world’s biggest banks paint on a vast canvas. Many operate with a single, global balance sheet, raising money where it’s cheapest and investing it where it earns the highest return. So in certain countries, banks can have more liabilities than assets. Regulators allow them a free hand on the assumption that if one of their national operations runs into trouble, the home office will quickly route it all the funds it needs.

Daniel Tarullo doesn’t think that’s such a good idea. And as the point person for regulation on the Federal Reserve’s Board of Governors, he has sway in saying no. Tarullo is part of a wave of national regulators who are “ring-fencing” national banking operations—insisting that they have a thick cushion of capital locally. The Fed doesn’t want to have to beg other central banks for help if a foreign bank in the U.S. suffers a funding crisis. Goodbye, globalization. Hello, Balkanization.