Final Federal Reserve Rules for Foreign Banking Organizations

Introduction

In December of 2012 the Federal Reserve Board issued for public comment a proposed comprehensive modification to the rules governing the operations of foreign banking organizations (“FBOs”) in the United States. Premised upon very broad interpretations of Sections 165 and 166 of the Dodd-Frank Act, the FRB proposed to create an enhanced prudential standards scheme to apply to FBOs—with a layering of increased structural and operational procedures and substantive compliance requirements based upon the amount of an FBO’s global and U.S.-based assets. Among other things, these proposed requirements addressed the following:

• Risk-based capital and leverage,
• Liquidity,
• Stress testing,
• Risk management and risk committee obligations,
• Single-counterparty credit limits, and
• Resolution planning requirements.

In a somewhat Orwellian rationale that argued that its actions adhered to decades of compliance with principles of national treatment, equality of cross-border competition, and deference to home country regulatory standards (when compatible with U.S. and international paradigms), the FRB proposed to require that even modest-sized FBOs be required to organize a U.S. intermediate holding company (an “IHC”), and place most U.S. assets (other than assets held in a branch, agency office or Section 2(h)(2) subsidiary) under the newly formed IHC as its top-tier U.S. subsidiary. Further, the IHC and its subsidiary operations would become subject to U.S. capital rules applicable to domestic bank holding companies. (Stated another way, even though the IHC might technically not qualify as a bank holding company, the FRB proposal would have required that the IHC comply with most bank holding company rules as if it were, in fact, a bank holding company.)

On February 18, 2014, the FRB adopted the Final Rules, which are summarized in this Alert—with particular emphasis on the changes made by the FRB. In addition, this Alert provides initial suggestions for analyzing the impact the Final Rules will have on a particular FBO’s U.S. operations, as well as the time frames within which compliance must be completed.¹

Discussion and Analysis The Final Rules provide some small degree of relief for FBOs with smaller operations in the U.S. (based upon the amount of U.S. assets), while increasing the degree of regulatory oversight and complexity for an FBO with a substantial U.S. presence. This was accomplished by imposing increased compliance requirements on covered FBOs with U.S. assets of $50 billion or more, while permitting FBOs with smaller U.S. operations to comply in many respects with regulatory oversight as required by their respective home country supervisors—or to incorporate new U.S. requirements into existing management structures.² The most significant point of this new this regulatory scheme is that most of the new—and onerous—FBO regulatory requirements will apply to larger FBOs with U.S. assets of $50 billion or more regardless of whether those assets are held on the books and records of the FBO’s U.S. branch or agency. This is because the Final Rules create what is effectively a “mirror image” of requirements that will subject larger FBOs to U.S. compliance requirements regardless of the structural scheme by which the FBO conducts its U.S. operations.³ For purposes of understanding the applicability of the Final Rules to a particular FBO, it is useful to divide the discussion into two general categories:

• Smaller FBOs with U.S. assets less than $50 billion, and
• Larger FBOs with U.S. assets of $50 billion or more.

Each of these categories is discussed separately below, including the major compliance requirements imposed on that category (or subcategory) by the Final Rules.

Download: Final Federal Reserve Rules for Foreign Banking Organizations

1. In the same rule-making, the FRB adopted other amendments to Regulation YY (12 C.F.R. Part 252) to implement certain of the enhanced prudential standards required to be established under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) for domestic U.S. bank holding companies with total consolidated assets of $50 billion or more. For large U.S. bank holding companies, many of these enhanced prudential standards under the Dodd-Frank Act have previously been adopted or are the process of being adopted under other rule-makings by the Federal Reserve. This release focuses only upon the portions of rule-making that relate to FBOs. 
2.  For purposes of this discussion, a covered FBO must have global consolidated assets of $10 billion in order to be subject to any of the new requirements created by the Final Rules. In addition, in the category of larger FBOs, discussed below, the global asset size of an FBO must be $50 billion or more. (In that regard, the Final Rules contain comprehensive requirements for computing both an FBO’s consolidated global assets, as well as U.S.-based assets.)
3. As pointed out by many commenters, one of the practical results of the Final Rules for larger FBOs will be to subject securities brokerage subsidiaries to FRB regulation by requiring that larger FBOs place those operations under an IHC.