Federal Reserve Board Releases Proposed Rules to Strengthen the Oversight of U.S. Operations of Foreign Banks

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The Federal Reserve Board last month proposed new rules intended to strengthen the oversight of U.S. operations of foreign banks. The proposal implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in a manner that addresses the risks associated with the increased complexity, interconnectedness, and concentration of the U.S. operations of foreign banking organizations.

The proposal generally applies to foreign banking organizations with a U.S. banking presence and total global consolidated assets of $50 billion or more. More stringent standards are proposed for foreign banking organizations with combined U.S. assets of $50 billion or more.

The proposal would require foreign banking organizations with a significant U.S. presence to create an intermediate holding company over their U.S. subsidiaries, which, according to the Fed, would help facilitate consistent and enhanced supervision and regulation of the U.S. operations of these foreign banks. Foreign banks would also be required to maintain stronger capital and liquidity positions in the United States, helping to increase the resiliency of their U.S. operations.

Under the proposed rules, a foreign banking organization with both $50 billion or more in global consolidated assets and U.S. subsidiaries with $10 billion or more in total assets generally would be required to organize its U.S. subsidiaries under a single U.S. intermediate holding company (IHC). Such a structure would create a platform for the consistent supervision and regulation of the U.S. operations of foreign banking organizations and help facilitate the resolution of failing U.S. operations of a foreign bank if needed.

Second, IHCs of foreign banking organizations would be subject to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. This proposed requirement is intended to bolster the consolidated capital positions of the IHCs as well as promote a level playing field among all banking firms operating in the United States. IHCs with $50 billion or more in consolidated assets also would be subject to the Federal Reserve's capital plan rule.

Third, the U.S. operations of foreign banking organizations with combined U.S. assets of $50 billion or more would be required to meet enhanced liquidity risk-management standards, conduct liquidity stress tests, and hold a 30-day buffer of highly liquid assets. The liquidity requirements are intended to make the U.S. operations of foreign banking organizations more resilient to funding shocks during times of stress.

The proposal also includes measures regarding capital stress tests, single-counterparty credit limits, overall risk management, and early remediation. The Federal Reserve is proposing a substantial phase-in period to give foreign banking organizations time to adjust to the new rules. Comments on the proposed rules will be accepted through March 31, 2013.