Banking balkanisation?

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In mid-February 2014, the Federal Reserve approved the final enhanced prudential rule for foreign banking organisations (FBOs) under Section 165 of the Dodd-Frank Act. The final rule applies enhanced standards to FBOs that have a US banking presence, with the most onerous standards being applied to FBOs that have combined US assets of $50 billion or more, or US non-branch assets of $50 billion or more. Admittedly, the rule does not require subsidiarisation of the US operations of foreign banks, and it eliminates the requirement that FBOs with US assets outside the branch and agency network of less than $50 billion establish an intermediate holding company (IHC) for its US subsidiaries. This IHC requirement would apply only to the largest FBOs. The IHC would be subject to regulatory requirements applicable to comparably sized US institutions, such as risk-based capital standards and leverage requirements and other prudential standards on a consolidated basis, including stress testing. Branches and agencies would operate outside the IHC requirement, be subject to liquidity requirements, and may be required to hold liquidity buffers outside the US. In addition, certain institutions would be required to implement certain risk management policies and procedures, including, for example, forming a risk committee to oversee risk management for its combined US operations and employing a US chief risk officer to aggregate and monitor risks of the combined US operations. Other prudential standards will be addressed separately, such as the large exposure framework for banks and remediation frameworks.

Originally published in International Financial Law Review.

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