Enhanced Prudential Standards for Foreign Banking Organizations: The US Approach to Ring-Fencing

The Board of Governors of the Federal Reserve System (“Board”) on February 18, 2014 adopted a final rule (“Final Rule”) to implement enhanced capital, liquidity and other prudential standards for foreign banks with US branches, agencies, commercial lending company subsidiaries or US bank subsidiaries (“foreign banking organizations”). Though not expressly dictated by the Dodd-Frank Act, the Final Rule requires unprecedented ring-fencing of capital and liquidity in the United States. A foreign banking organization may continue to conduct its banking activities in the United States through branches and agencies, but must maintain liquid assets in the United States to support those activities. Control of a US bank, brokerage firm, investment manager or other nonbank also continuesto be permitted but, if those activities reach specified asset levels, they are to be corralled into a US intermediate holding company (“IHC”) that must meet capital and liquidity requirements substantially similar to those required for US bank holding companies that control a US bank.

The Final Rule categorizes foreign banking organizations based on global assets, assets in the United States and the distribution of US assets among branch and nonbranch operations, in each case with assets as defined by the Final Rule. Each category requires compliance with incrementally stringent enhanced standards. The Board staff estimates that approximately 126 foreign banking organizations with existing US banking operations will be subject to one category or another of the Final Rule’s enhanced standards and that 15 to 20 of those will fall within the category requiring formation and ring fencing of capital and liquidity in an IHC.

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