[Federal Register Volume 77, Number 249 (Friday, December 28, 2012)]
[Proposed Rules]
[Pages 76628-76704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30734]
[[Page 76627]]
Vol. 77
Friday,
No. 249
December 28, 2012
Part II
Federal Reserve System
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12 CFR Part 252
Enhanced Prudential Standards and Early Remediation Requirements for
Foreign Banking Organizations and Foreign Nonbank Financial Companies;
Proposed Rule
Federal Register / Vol. 77 , No. 249 / Friday, December 28, 2012 /
Proposed Rules
[[Page 76628]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 252
[Regulation YY; Docket No. 1438]
RIN 7100 AD 86
Enhanced Prudential Standards and Early Remediation Requirements
for Foreign Banking Organizations and Foreign Nonbank Financial
Companies
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board is requesting comment on proposed rules that would
implement 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 or Act) and the early remediation
requirements required to be established under section 166 of the Act
for foreign banking organizations and foreign nonbank financial
companies supervised by the Board. The enhanced prudential standards
include risk-based capital and leverage requirements, liquidity
standards, risk management and risk committee requirements, single-
counterparty credit limits, stress test requirements, and a debt-to-
equity limit for companies that the Financial Stability Oversight
Council has determined pose a grave threat to financial stability.
DATES: Comments should be received on or before March 31, 2013.
ADDRESSES: You may submit comments, identified by Docket No. R-1438 and
RIN 7100 AD 86 by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
and RIN numbers in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper form in Room MP-
500 of the Board's Martin Building (20th and C Streets NW., Washington,
DC 20551) between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Mark E. Van Der Weide, Senior
Associate Director, (202) 452-2263, or Molly E. Mahar, Senior
Supervisory Financial Analyst, (202) 973-7360, Division of Banking
Supervision and Regulation; or Ann Misback, Associate General Counsel,
(202) 452-3788, or Christine Graham, Senior Attorney, (202) 452-3005,
Legal Division.
U.S. Intermediate Holding Company Requirement: Molly E. Mahar,
Senior Supervisory Financial Analyst, (202) 973-7360, or Elizabeth
MacDonald, Senior Supervisory Financial Analyst, (202) 475-6316,
Division of Banking Supervision and Regulation; or Benjamin W.
McDonough, Senior Counsel, (202) 452-2036, April C. Snyder, Senior
Counsel, (202) 452-3099, or David Alexander, Senior Attorney, (202)
452-2877, Legal Division.
Risk-Based Capital Requirements and Leverage Limits: Anna Lee
Hewko, Assistant Director, (202) 530-6260, or Elizabeth MacDonald,
Senior Supervisory Financial Analyst, (202) 475-6316, Division of
Banking Supervision and Regulation; or Benjamin W. McDonough, Senior
Counsel, (202) 452-2036, or April C. Snyder, Senior Counsel, (202) 452-
3099, Legal Division.
Liquidity Requirements: Mary Aiken, Manager, (202) 721-4534,
Division of Banking Supervision and Regulation; or April C. Snyder,
Senior Counsel, (202) 452-3099, Legal Division.
Single-Counterparty Credit Limits: Molly E. Mahar, Senior
Supervisory Financial Analyst, (202) 973-7360, or Jordan Bleicher,
Supervisory Financial Analyst, (202) 973-6123, Division of Banking
Supervision and Regulation; or Pamela G. Nardolilli, Senior Counsel,
(202) 452-3289, Patricia P. Yeh, Counsel, (202) 912-4304, Anna M.
Harrington, Senior Attorney, (202) 452-6406, or Kerrie M. Brophy,
Attorney, (202) 452-3694, Legal Division.
Risk Management and Risk Committee Requirements: Pamela A. Martin,
Senior Supervisory Financial Analyst, (202) 452-3442, Division of
Banking Supervision and Regulation; or Jonathan D. Stoloff, Special
Counsel, (202) 452-3269, or Jeremy C. Kress, Attorney, (202) 872-7589,
Legal Division.
Stress Test Requirements: Tim Clark, Senior Associate Director,
(202) 452-5264, Lisa Ryu, Assistant Director, (202) 263-4833, David
Palmer, Senior Supervisory Financial Analyst, (202) 452-2904, or Joseph
Cox, Financial Analyst, (202) 452-3216, Division of Banking Supervision
and Regulation; or Benjamin W. McDonough, Senior Counsel, (202) 452-
2036, or Christine E. Graham, Senior Attorney, (202) 452-3005, Legal
Division.
Debt-to-Equity Limits for Certain Covered Companies: Elizabeth
MacDonald, Senior Supervisory Financial Analyst, (202) 475-6316,
Division of Banking Supervision and Regulation; or Benjamin W.
McDonough, Senior Counsel, (202) 452-2036, or David Alexander, Senior
Attorney, (202) 452-2877, Legal Division.
Early Remediation Framework: Barbara J. Bouchard, Senior Associate
Director, (202) 452-3072, Molly E. Mahar, Senior Supervisory Financial
Analyst, (202) 973-7360, or Linda W. Jeng, Senior Supervisory Financial
Analyst, (202) 475-6315, Division of Banking Supervision and
Regulation; or Jay R. Schwarz, Counsel, (202) 452-2970, Legal Division.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Overview of the Proposal
III. Requirement To Form a U.S. Intermediate Holding Company
IV. Risk-Based Capital Requirements and Leverage Limits
V. Liquidity Requirements
VI. Single-Counterparty Credit Limits
VII. Risk Management and Risk Committee Requirements
VIII. Stress Test Requirements
IX. Debt-to-Equity Limits
X. Early Remediation
XI. Administrative Law Matters
I. Introduction
The recent financial crisis demonstrated that certain U.S.
financial companies had grown so large, leveraged, and interconnected
that their failure could pose a threat to overall financial stability
in the United States and globally. The financial crisis also
demonstrated that large foreign banking organizations operating in the
United States could pose similar financial stability risks. Further,
the crisis revealed weaknesses in the existing framework for
supervising, regulating, and resolving significant U.S. financial
companies, including the U.S. operations of large foreign banking
organizations.
[[Page 76629]]
The Board recognizes the important role that foreign banking
organizations play in the U.S. financial sector. The presence of
foreign banking organizations in the United States has brought
competitive and countercyclical benefits to U.S. markets. This preamble
describes a set of proposed adjustments to the Board's regulation of
the U.S. operations of foreign banking organizations to address risks
posed by those entities and to implement the enhanced prudential
standards and early remediation requirements in sections 165 and 166 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act or Act). The proposed adjustments are consistent with the
Board's long-standing policy of national treatment and equality of
competitive opportunity between the U.S. operations of foreign banking
organizations and U.S. banking firms.
Current Approach To Regulating U.S. Operations of Foreign Banking
Organizations
The Board is responsible for the overall supervision and regulation
of the U.S. operations of all foreign banking organizations.\1\ Other
federal and state regulators are responsible for supervising and
regulating certain parts of the U.S. operations of foreign banking
organizations, such as branches, agencies, or bank and nonbank
subsidiaries.\2\
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\1\ International Banking Act of 1978 (12 U.S.C. 3101 et seq.)
and Foreign Bank Supervision Enhancement Act of 1991 (12 U.S.C. 3101
note). For purposes of this proposal, a foreign banking organization
is a foreign bank that has a banking presence in the United States
by virtue of operating a branch, agency, or commercial lending
company subsidiary in the United States or controlling a bank in the
United States; or any company of which the foreign bank is a
subsidiary.
\2\ For example, the Securities and Exchange Commission (SEC) is
the primary financial regulatory agency with respect to any
registered broker-dealer, registered investment company, or
registered investment adviser of a foreign banking organization.
State insurance authorities are the primary financial regulatory
agencies with respect to the insurance subsidiaries of a foreign
banking organization. The Office of the Comptroller of the Currency
(OCC), the Federal Deposit Insurance Corporation (FDIC), and the
state banking authorities have supervisory authority over the
national and state bank subsidiaries and federal and state branches
and agencies of foreign banking organizations, respectively, in
addition to the Board's supervisory and regulatory responsibilities
over some of these entities.
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Under the current U.S. supervision framework for foreign banking
organizations, supervisors monitor the individual legal entities of the
U.S. operations of these companies, and the Federal Reserve aggregates
information it receives through its own supervisory process and from
other U.S. supervisors to form a view of the financial condition of the
combined U.S. operations of the company. The Federal Reserve and other
U.S. regulators also work with regulators in other national
jurisdictions to help ensure that all internationally active banks
operating in the United States are supervised in accordance with a
consistent set of core capital and other prudential requirements.
International standards are intended to address the risks posed by the
consolidated organization and to help achieve global competitive
equity. Under this approach, the Federal Reserve oversees operations in
the United States, but also relies on the home country supervisor to
supervise a foreign banking organization on a global basis consistent
with international standards and relies on the foreign banking
organization to support its U.S. operations under both normal and
stressed conditions.
Under this regulatory and supervisory framework, foreign banking
organizations have structured their U.S. operations in ways that
promote maximum efficiency of capital and liquidity management at the
consolidated level. Permissible U.S. structures for foreign banking
organizations have included cross-border branching and holding direct
and indirect bank and nonbank subsidiaries. U.S. banking law and
regulation also allow well-managed and well-capitalized foreign banking
organizations to conduct a wide range of bank and nonbank activities in
the United States on conditions comparable to those applied to U.S.
banking organizations.\3\ Further, as a general matter, a top-tier U.S.
bank holding company subsidiary of a foreign banking organization that
qualifies as a financial holding company has not been required to
comply with the Board's capital standards since 2001 pursuant to
Supervision and Regulation (SR) Letter 01-01.\4\
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\3\ 12 U.S.C. 1843(l)(1); 12 CFR 225.90.
\4\ See SR Letter 01-01 (January 5, 2001), available at http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
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As a result of this flexibility granted to foreign banking
organizations in the United States, the current population of foreign
banking organizations is structurally diverse. Some foreign banking
organizations conduct U.S. banking activities directly through a branch
or agency; others own U.S. depository institutions through a U.S.-based
bank holding company; and still others own a U.S. depository
institution directly. Most large foreign banking organizations also
conduct a range of nonbank activities through separate nonbank
subsidiaries. Similar to the largest, most complex U.S. banking
organizations, some of the largest foreign banking organizations with
operations in the United States maintain dozens of separate U.S. legal
entities, many of which are engaged in nonbank activities.
The structural diversity and consolidated management of capital and
liquidity permitted under the current approach has facilitated cross-
border banking and increased global flows of capital and liquidity.
However, the increase in concentration, complexity, and
interconnectedness of the U.S. operations of foreign banking
organizations and the financial stability lessons learned during the
crisis have raised questions about the continued suitability of this
approach. Additionally, the Congressional mandate included in the Dodd-
Frank Act requires the Board to impose enhanced prudential standards on
large foreign banking organizations. Congress also directed the Board
to strengthen the capital standards applied to U.S. bank holding
company subsidiaries of foreign banking organizations by adopting the
so-called ``Collins Amendment'' to the Dodd-Frank Act. Specifically,
section 171 of the Dodd-Frank Act requires a top-tier U.S. bank holding
company subsidiary of a foreign banking organization that had relied on
SR Letter 01-01 to meet the minimum capital requirements established
for U.S. bank holding companies by July 21, 2015.
The following sections provide a description of changes in the U.S.
activities of large foreign banking organizations during the period
that preceded the financial crisis and the financial stability risks
posed by the U.S. operations of these companies that motivate certain
elements of this proposal.
Shifts in the U.S. Activities of Foreign Banking Organizations
Many of the core elements of the Federal Reserve's current approach
to the supervision of foreign banking organizations were designed more
than a decade ago, when the U.S. presence of foreign banking
organizations was significantly less complex. Although foreign banking
organizations expanded steadily in the United States during the 1970s,
1980s, and 1990s, their activities here posed limited risks to overall
U.S. financial stability. Throughout this period, the U.S. operations
of foreign banking organizations were largely net recipients of funding
from their parent institutions and their activities were
[[Page 76630]]
generally limited to traditional lending to home-country and U.S.
clients.\5\
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\5\ The U.S. branches and agencies of foreign banks that
borrowed from their parent organizations and lent those funds in the
United States (lending branches) held roughly 60 percent of all
foreign bank branch and agency assets in the United States during
the 1980s and 1990s. See, Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks (Form FFIEC 002). Commercial
and industrial lending continued to account for a large part of
foreign bank branch and agency balance sheets through the 1990s. Id.
In addition, U.S. branches and agencies of foreign banks held large
amounts of cash during the 1980s and 1990s, in part to meet asset-
maintenance and asset-pledge requirements put in place by
regulators. Id.
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The profile of foreign bank operations in the United States changed
substantially in the period preceding the financial crisis. U.S.
branches and agencies of foreign banking organizations as a group moved
from a position of receiving funding from their parent organizations on
a net basis in 1999 to providing significant funding to non-U.S.
affiliates by the mid-2000s.\6\ In 2008, U.S. branches and agencies
provided more than $700 billion on a net basis to non-U.S. affiliates.
As U.S. operations of foreign banking organizations received less
funding, on net, from their parent companies over the past decade, they
became more reliant on less stable, short-term U.S. dollar wholesale
funding, contributing in some cases to a buildup in maturity
mismatches. Trends in the global balance sheets of foreign banking
organizations from this period reveal that short-term U.S. dollar
funding raised in the United States was used to provide long-term U.S.
dollar-denominated project and trade finance around the world as well
as to finance non-U.S. affiliates' investments in U.S. dollar-
denominated asset-backed securities.\7\ Because U.S. supervisors, as
host authorities, have more limited access to timely information on the
global operations of foreign banking organizations than to similar
information on U.S.-based banking organizations, the totality of the
risk profile of the U.S. operations of a foreign banking organization
can be obscured when these U.S. entities fund activities outside the
United States, such as occurred in recent years.
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\6\ Many U.S. branches of foreign banks shifted from the
``lending branch'' model to a ``funding branch'' model, in which
U.S. branches of foreign banks borrowed large volumes of U.S.
dollars to upstream to their foreign bank parents. These ``funding
branches'' went from holding 40 percent of foreign bank branch
assets in the mid-1990s to holding 75 percent of foreign bank branch
assets by 2009. See Form FFIEC 002.
\7\ The amount of U.S. dollar-denominated asset-backed
securities and other securities held by Europeans increased
significantly from 2003 to 2007, much of it financed by U.S. short-
term dollar-denominated liabilities of European banks. See Ben S.
Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin,
International Capital Flows and the Returns to Safe Assets in the
United States, 2003-2007, Board of Governors of the Federal Reserve
System International Finance Discussion Papers Number 1014 (February
2011), available at www.federalreserve.gov/pubs/ifdp/2011/1014/ifdp1014.htm.
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In addition to funding vulnerabilities, the U.S. operations of
foreign banking organizations have become increasingly concentrated,
interconnected, and complex since the mid-1990s. Ten foreign banking
organizations now account for roughly two-thirds of foreign banking
organizations' third-party U.S. assets, up from 40 percent in 1995.\8\
Moreover, U.S. broker-dealer assets of large foreign banking
organizations as a share of their third-party U.S. assets have grown
rapidly since the mid-1990s. Five of the top-ten U.S. broker-dealers
are currently owned by foreign banking organizations.\9\ In contrast,
commercial and industrial lending originated by U.S. branches and
agencies of foreign banking organizations as a share of their third-
party U.S. liabilities dropped after 2003.\10\
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\8\ See Forms FR Y-9C, FFIEC 002, FR 2886B, FFIEC 031/041, FR-
Y7N/S, X-17A-5 Part II (SEC Form 1695), and X-17A-5 Part IIA (SEC
Form 1696).
\9\ See Forms FR Y-9C, FFIEC 002, FR-Y7, FR 2886B, FFIEC 031/
041, FR-Y7N/S, X-17A-5 Part II (SEC Form 1695), and X-17A-5 Part IIA
(SEC Form 1696).
\10\ See Form FFIEC 002.
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Financial Stability Risks Posed by U.S. Operations of Foreign Banking
Organizations
The financial stability risks associated with the increased capital
market activity and shift in funding practices of the U.S. operations
of foreign banking organizations in the period preceding the financial
crisis became apparent during and after the crisis. The large intra-
firm cross-border flows that grew rapidly in the period leading up to
the crisis created vulnerabilities for the U.S. operations of foreign
banking organizations. While some foreign banking organizations were
aided by their ability to move liquidity freely during the crisis, this
model also created a degree of cross-currency funding risk and heavy
reliance on swap markets that proved destabilizing.\11\ In many cases,
foreign banking organizations that relied heavily on short-term U.S.
dollar liabilities were forced to sell U.S. dollar assets and reduce
lending rapidly when that funding source evaporated. This deleveraging
imposed further stress on financial market participants, thereby
compounding the risks to U.S. financial stability.
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\11\ Committee on the Global Financial System, Funding patterns
and liquidity management of internationally active banks, CGFS
Papers No 39 (May 2010), available at http://www.bis.org/publ/cgfs39.pdf.
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Although the United States did not experience a destabilizing
failure of a foreign banking organization during the crisis, some
foreign banking organizations required extraordinary support from home-
and host-country central banks and governments. For example, the
Federal Reserve provided considerable amounts of liquidity to both the
U.S. branches and U.S. broker-dealer subsidiaries of foreign banking
organizations during the financial crisis. While foreign banking
organizations recently have reduced the scope and risk profile of their
U.S. operations and have shown more stable funding patterns in response
to these events, some have continued to face periodic funding and other
stresses since the crisis. For example, as concerns about the euro zone
rose in 2011, U.S. money market funds dramatically pulled back their
lending to large euro-area banks, reducing lending to these firms by
roughly $200 billion over a four-month period.\12\
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\12\ See SEC Form N-MFP.
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Risks to Host Countries
Beyond the United States, events in the global financial community
underscore the risks posed by the operations of large multinational
banking organizations to host country financial sectors. The failure of
several internationally active financial firms during the crisis
revealed that the location of capital and liquidity is critical in a
resolution. In some cases, capital and liquidity related to operations
abroad were trapped at the home entity. For example, the Icelandic
banks held significant deposits belonging to citizens and residents of
other countries, who could not access their funds once those banks came
under pressure. Actions by government authorities during the crisis
period highlighted the fact that, while a foreign bank regulatory
regime designed to accommodate centralized management of capital and
liquidity can promote efficiency during good times, it can also
increase the chances of home and host jurisdictions placing
restrictions on the cross-border movement of assets at the moment of a
crisis, as local operations come under severe strain and repayment of
local creditors is called into question. Resolution regimes and powers
remain nationally based, complicating the resolution of firms with
large cross-border operations.
In response to financial stability risks highlighted during the
crisis and
[[Page 76631]]
ongoing challenges associated with the resolution of large cross-border
firms, several other national authorities have adopted modifications to
or have considered proposals to modify their regulation of
internationally active banks within their geographic boundaries.
Modifications adopted or under consideration include increased
requirements for liquidity to cover local operations of domestic and
foreign banks and nonbanks, limits on intragroup exposures of domestic
banks to foreign subsidiaries, and requirements to prioritize or
segregate home country retail operations.\13\
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\13\ See, e.g., Financial Services Authority, Strengthening
Liquidity Standards (October 2009), available at www.fsa.gov.uk/
pubs/policy/ps09_16.pdf; Financial Services Authority, The Turner
Review: A regulatory response to the global banking crisis (March
2009), available at www.fsa.gov.uk/pubs/other/turner_review.pdf;
Financial Services Authority, A regulatory response to the global
banking crisis (March 2009), available at http://www.fsa.gov.uk/pubs/discussion/dp09_02.pdf; Independent Commission on Banking,
Final Report Recommendations (September 2011), available at http://bankingcommission.s3. amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf; and State Secretariat for International Financial
Matters SIF, Final report of the `too big to fail' commission of
experts: Final report of the Commission of Experts for limiting the
economic risks posed by large companies (September 30, 2010),
available at www.sif.admin.ch/dokumentation/00514/00519/00592/
index.html?lang=en.
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Actions by a home country to constrain a banking organization's
ability to provide support to its foreign operations, as well as the
diminished likelihood that home-country governments of large banking
organizations would provide a backstop to their banks' foreign
operations, have called into question one of the fundamental elements
of the Board's current approach to supervising foreign banking
organizations--the ability of the Board, as a host supervisor, to rely
on a foreign banking organization to act as a source of strength to its
U.S. operations when the foreign banking organization is under stress.
The issues described above-growth over time in U.S. financial
stability risks posed by foreign banking organizations individually and
as a group, the need to minimize destabilizing pro-cyclical ring-
fencing in a crisis, persistent impediments to effective cross-border
resolution, and limitations on parent support-together underscore the
need for enhancements to foreign bank regulation in the United States.
Overview of Statutory Requirements
Sections 165 and 166 of the Dodd-Frank Act direct the Board to
impose a package of enhanced prudential standards on bank holding
companies, including foreign banking organizations, with total
consolidated assets of $50 billion or more and nonbank financial
companies the Financial Stability Oversight Council (Council) has
designated for supervision by the Board (nonbank financial companies
supervised by the Board).\14\ These stricter prudential standards for
large U.S. bank holding companies, foreign banking organizations, and
nonbank financial companies supervised by the Board required under
section 165 of the Dodd-Frank Act must include enhanced risk-based
capital and leverage requirements, enhanced liquidity requirements,
enhanced risk management and risk committee requirements, resolution
planning requirements, single-counterparty credit limits, stress test
requirements, and a debt-to-equity limit for companies that the Council
has determined pose a grave threat to financial stability.
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\14\ See 12 U.S.C. 5311(a)(1) (providing that foreign banking
organizations are treated as bank holding companies for purposes of
Title I of the Dodd-Frank Act). See infra note 24, for a description
of a foreign banking organization.
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Section 166 of the Dodd-Frank Act requires the Board to establish a
regulatory framework for the early remediation of financial weaknesses
for the same set of companies in order to minimize the probability that
such companies will become insolvent and the potential harm of such
insolvencies to the financial stability of the United States.\15\
Further, the Dodd-Frank Act authorizes, but does not require, the Board
to establish additional enhanced prudential standards relating to
contingent capital, public disclosures, short-term debt limits, and
such other prudential standards as the Board determines
appropriate.\16\
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\15\ See 12 U.S.C. 5366(b).
\16\ See 12 U.S.C. 5365(b)(1)(B).
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The Dodd-Frank Act requires the enhanced prudential standards
established by the Board under section 165 to be more stringent than
those standards applicable to other bank holding companies and nonbank
financial companies that do not present similar risks to U.S. financial
stability.\17\ The standards must also increase in stringency based on
the systemic footprint and risk characteristics of companies subject to
section 165.\18\ Generally, the Board has authority under section 165
to tailor the application of the standards, including differentiating
among companies subject to section 165 on an individual basis or by
category.\19\ In applying section 165 to foreign banking organizations,
the Act also directs the Board to give due regard to the principle of
national treatment and equality of competitive opportunity and to take
into account the extent to which the foreign banking organization is
subject, on a consolidated basis, to home country standards that are
comparable to those applied to financial companies in the United
States.\20\
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\17\ See 12 U.S.C. 5365(a)(1)(A).
\18\ See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B),
the enhanced prudential standards must increase in stringency, based
on the considerations listed in section 165(b)(3).
\19\ See 12 U.S.C. 5365(b)(3). In addition, the Board must, as
appropriate, adapt the required standards in light of any
predominant line of business of a company for which particular
standards may not be appropriate. 12 U.S.C. 5365(b)(3)(D).
\20\ 12 U.S.C. 5365(a)(2).
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The Board has already issued proposed and final rules implementing
certain elements of sections 165 and 166 of the Dodd-Frank Act. The
Board and the FDIC jointly issued a final rule to implement the
resolution plan requirement in section 165(d) of the Dodd-Frank Act for
foreign and U.S. companies that became effective on November 30, 2011,
and expect to implement periodic reporting of credit exposures at a
later date.\21\ Section 165(d) establishes requirements that large
foreign banking organizations, large U.S. bank holding companies, and
nonbank companies supervised by the Board submit periodically to the
Board and the FDIC a plan for rapid and orderly resolution under the
U.S. Bankruptcy Code in the event of material financial distress or
failure.
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\21\ See 76 FR 67323 (November 1, 2011). In response to concerns
expressed by commenters about the clarity of key definitions and the
scope of the proposed credit exposure reporting requirement, the
Board and FDIC postponed finalizing the credit exposure reporting
requirement.
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In December 2011, the Board proposed a set of enhanced prudential
standards and early remediation requirements for U.S. bank holding
companies with total consolidated assets of $50 billion or more and
U.S. nonbank financial companies supervised by the Board that included
risk-based capital and leverage requirements, liquidity requirements,
single-counterparty credit limits, overall risk management and risk
committee requirements, stress test requirements, a debt-to-equity
limit, and early remediation requirements (December 2011 proposal). On
October 9, 2012, the Board issued a final rule implementing the
supervisory and company-run stress testing requirements included in the
December 2011 proposal for U.S. bank holding companies with total
consolidated assets of $50 billion or more and U.S. nonbank financial
[[Page 76632]]
companies supervised by the Board.\22\ Concurrently, the Board issued a
final rule implementing the company-run stress testing requirements for
U.S. bank holding companies with total consolidated assets of more than
$10 billion but less than $50 billion as well as state member banks and
savings and loan holding companies with total consolidated assets of
more than $10 billion.\23\
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\22\ See 12 CFR Part 252, Subparts F and G.
\23\ See 12 CFR Part 252, Subpart H.
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The proposed standards for foreign banking organizations are
broadly consistent with the standards proposed for large U.S. bank
holding companies and nonbank financial companies supervised by the
Board in the December 2011 proposal. In general, differences between
this proposal and the December 2011 proposal reflect the different
regulatory framework and structure under which foreign banking
organizations operate, and do not reflect potential modifications that
may be made to the December 2011 proposal for U.S. bank holding
companies. The Board is currently in the process of reviewing comments
on the remaining standards in the December 2011 proposal and is
considering modifications to the proposal in response to those
comments. Comments on this proposal will help inform how the enhanced
prudential standards should be applied differently to foreign banking
organizations.
II. Overview of the Proposal
The Board is requesting comment on proposed rules to implement the
provisions of sections 165 and 166 of the Dodd-Frank Act for foreign
banking organizations with total consolidated assets of $50 billion or
more and foreign nonbank financial companies supervised by the
Board.\24\ The proposal includes: risk-based capital and leverage
requirements, liquidity requirements, single-counterparty credit
limits, overall risk management and risk committee requirements, stress
test requirements, a debt-to-equity limit for companies that the
Council has determined pose a grave threat to financial stability, and
early remediation requirements. As described below, the Board is also
proposing a supplemental enhanced standard: a requirement for certain
foreign banking organizations to form a U.S. intermediate holding
company, which would generally serve as a U.S. top-tier holding company
for the U.S. subsidiaries of the company. The Board is not proposing
any other enhanced prudential standards at this time, but continues to
consider whether adopting any additional standards would be
appropriate.
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\24\ For purposes of this proposal, foreign banking organization
is a foreign bank that has a banking presence in the United States
by virtue of operating a branch, agency, or commercial lending
company subsidiary in the United States or controlling a bank in the
United States; or any company of which the foreign bank is a
subsidiary. A foreign nonbank financial company supervised by the
Board is a nonbank financial company incorporated or organized in a
country other than the United States that the Council has designated
for Board supervision. No such designations have been made.
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By setting forth comprehensive enhanced prudential standards and an
early remediation framework for large foreign banking organizations,
the proposal would create an integrated set of requirements that are
intended to increase the resiliency of the U.S. operations of large
foreign banking organizations and minimize damage to the U.S. financial
system and the U.S. economy in the event such a company fails. The
proposed rules, which increase in stringency with the level of systemic
risk posed by and the risk characteristics of the U.S. operations of
the company, would provide incentives for large foreign banking
organizations to reduce the riskiness of their U.S. operations and to
consider the costs that their failure or distress would impose on the
U.S. financial system.
In applying section 165 to foreign banking organizations, the Act
directs the Board to give due regard to the principle of national
treatment and equality of competitive opportunity.\25\ As discussed
above, the proposal broadly adopts the standards set forth in the
December 2011 proposal to ensure equality of competitive opportunity,
as modified appropriately for foreign banking organizations.
Modifications address the fact that foreign banking organizations may
operate in the United States through direct branches and agencies. The
proposal also recognizes that not all foreign banking organizations
that meet the statutory asset size thresholds, particularly those with
a small U.S. presence, present the same level of risk to U.S. financial
stability. As a result, the proposal would apply a reduced set of
requirements to foreign banking organizations with combined U.S. assets
of less than $50 billion in light of the reduced risk that these
companies pose to U.S. financial stability.
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\25\ 12 U.S.C. 5365(a)(2).
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The Act also directs the Board in implementing section 165 to take
into account the extent to which a foreign banking organization is
subject on a consolidated basis to home country standards that are
comparable to those applied to financial companies in the United
States. In developing the proposal, the Board has taken into account
home country standards in balance with financial stability
considerations and concerns about extraterritorial application of U.S.
enhanced prudential standards. The proposed capital and stress testing
standards rely on home country standards to a significant extent with
respect to a foreign banking organization's U.S. branches and agencies
because branches and agencies are not separate legal entities and are
not required to hold capital separately from their parent
organizations. In addition, the proposed risk management standards
would provide flexibility for foreign banking organizations to rely on
home country governance structures to implement certain proposed risk
management requirements.
The Dodd-Frank Act requires the Board to apply enhanced prudential
standards to any foreign nonbank financial company supervised by the
Board. Consistent with this statutory requirement, the proposal would
also apply the enhanced prudential standards, other than the
intermediate holding company requirement, to a foreign nonbank
financial company supervised by the Board. In addition, the proposal
would set forth the criteria that the Board would consider to determine
whether a U.S. intermediate holding company should be established by a
foreign nonbank financial company. The Board would expect to tailor the
enhanced prudential standards to individual foreign nonbank financial
companies, as necessary, upon designation by the Council.
Consultation With the Council
The Board consulted with the Council by providing periodic updates
to agencies represented on the Council and their staff on the
development of the proposed enhanced prudential standards for foreign
banking organizations. The proposal reflects comments provided to the
Board as a part of this consultation process. The Board also intends to
consult with each Council member agency that primarily supervises a
functionally regulated subsidiary or depository institution subsidiary
of a foreign banking organization subject to this proposal before
imposing prudential standards or any other requirements pursuant to
section 165 that are likely to have a significant impact on such
subsidiary.\26\
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\26\ See 12 U.S.C. 5365(b)(4).
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[[Page 76633]]
A. Scope of Application
This proposal would implement enhanced prudential standards under
section 165 of the Dodd-Frank Act and early remediation requirements
under section 166 of the Act for foreign banking organizations with
total consolidated assets of $50 billion or more. The proposal also
would implement the risk committee and stress testing standards set
forth in sections 165(h) and (i) of the Act that apply to a larger
group of foreign banking organizations and, with respect to stress
testing, foreign savings and loan holding companies.
In addition, foreign banking organizations with total consolidated
assets of $50 billion or more and combined U.S. assets (excluding U.S.
branch and agency assets) of $10 billion or more would be required to
form a U.S. intermediate holding company that directly would be subject
to enhanced prudential standards.\27\ Foreign banking organizations
with total consolidated assets of $500 billion or more would also be
subject to more stringent single-counterparty credit limits.
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\27\ Combined U.S. assets (excluding U.S. branch and agency
assets) would be equal to the average of the total assets of each
top-tier U.S. subsidiary of the foreign banking organization
(excluding any section 2(h)(2) company) on a consolidated basis for
the four most recent consecutive quarters as reported by the foreign
banking organization on its Capital and Asset Report for Foreign
Banking Organizations (FR Y-7Q). If a foreign banking organization
had not filed the FR Y-7Q for each of the four most recent
consecutive quarters, combined U.S. assets would be based on the
most recent quarter or consecutive quarters as reported on FR Y-7Q
(or as determined under applicable accounting standards, if no FR Y-
7Q has been filed). A foreign banking organization would be
permitted to reduce its combined U.S. assets (excluding the total
assets of each U.S. branch and agency of the foreign banking
organization) by the amount corresponding to balances and
transactions between any U.S. subsidiaries that would be eliminated
in consolidation were a U.S. intermediate holding company already
formed.
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A foreign banking organization or its U.S. intermediate holding
company that meets any relevant asset threshold in this proposal would
be subject to the requirements applicable to that size of company until
the company's total consolidated assets or combined U.S. assets fell
and remained below the relevant asset threshold for four consecutive
quarters.
Table 1 includes a general description of the standards that apply
to each type of foreign banking organization subject to sections 165
and 166 of the Dodd-Frank Act.
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\28\ Foreign banking organizations with assets of $500 billion
or more and U.S. IHCs with assets of $500 billion or more would be
subject to stricter limits.
Table 1--Scope of Application for FBOs
----------------------------------------------------------------------------------------------------------------
Global assets U.S. assets Summary of requirements that apply
----------------------------------------------------------------------------------------------------------------
> $10 billion and............... n/a.................... Have a U.S. risk committee.
< $50 billion...................
Meet home country stress test requirements
that are broadly consistent with U.S. requirements.
> $50 billion................... < $50 billion.......... All of the above, plus:
Meet home country capital standards that are
broadly consistent with Basel standards.
Single-counterparty credit limits \28\.
Subject to an annual liquidity stress test
requirement.
Subject to DFA section 166 early remediation
requirements.
Subject to U.S. intermediate holding company
(IHC) requirements:.
[cir] Required to form U.S. IHC if non-branch U.S.
assets exceed $10 billion. All U.S. IHCs are
subject to U.S BHC capital requirements.
[cir] U.S. IHC with assets between $10 and $50
billion subject to DFA Stress Testing Rule
(company-run stress test).
> $50 billion................... > $50 billion.......... All of the above, plus:
U.S. IHC with assets >$50 billion subject to
capital plan rule and all DFA stress test
requirements (CCAR).
U.S. IHC and branch/agency network subject
to monthly liquidity stress tests and in-country
liquidity requirements.
Must have a U.S. risk committee and U.S.
Chief Risk Officer.
Subject to nondiscretionary DFA section 166
early remediation requirements.
----------------------------------------------------------------------------------------------------------------
Foreign Banking Organizations With Total Consolidated Assets of $50
Billion or More
The U.S. operations of foreign banking organizations with total
consolidated assets of $50 billion or more would be subject to the
enhanced prudential standards of this proposal. Total consolidated
assets for a foreign banking organization would include its global
consolidated assets, calculated as the four-quarter average of total
assets reported on the foreign banking organization's quarterly
regulatory report filed with the Board, the Capital and Asset Report
for Foreign Banking Organizations (FR Y-7Q).\29\
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\29\ If the foreign banking organization had not filed the FR Y-
7Q for each of the four most recent consecutive quarters, total
consolidated assets would be based on the average of the foreign
banking organization's total assets for the most recent quarter or
consecutive quarters as reported on the FR Y-7Q (or as determined
under applicable accounting standards, if no FR Y-7Q has been
filed).
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Foreign Banking Organizations With Combined U.S. Assets of $50 Billion
or More
As explained above, the proposal would apply more stringent
standards to the U.S. operations of foreign banking organizations that
have a more significant presence in the United States. The U.S.
operations of a foreign banking organization with combined U.S. assets
of $50 billion or more (including U.S. branch and agency assets) would
be subject to more stringent liquidity standards, risk management
standards, stress testing requirements, and early remediation
requirements than would apply to the U.S. operations of other foreign
banking organizations. The proposal would measure combined U.S. assets
of a foreign banking organization as the sum of (i) the average of the
total assets of each U.S. branch and agency of the foreign banking
organization for the four most recent consecutive quarters as reported
by the foreign bank on the Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks (FFIEC 002) \30\ and (ii) the
average of the
[[Page 76634]]
total consolidated assets of its U.S. intermediate holding company for
the four most recent consecutive quarters as reported to the Board on
the U.S. intermediate holding company's Consolidated Financial
Statements for Bank Holding Companies (FR Y-9C).\31\ If the foreign
banking organization had not established a U.S. intermediate holding
company, combined U.S. assets would include the average of the total
consolidated assets of each top-tier U.S. subsidiary of the foreign
banking organization (other than a section 2(h)(2) company).\32\
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\30\ If the foreign bank had not filed the FFIEC 002 for each of
the four most recent consecutive quarters, the foreign bank should
use the most recent quarter or consecutive quarters as reported on
FFIEC 002 (or as determined under applicable accounting standards,
if no FFIEC 002 has been filed).
\31\ All U.S. intermediate holding companies would be required
to file Form FR Y-9C, regardless of whether they control a bank. If
the U.S. intermediate holding company had not filed an FR Y-9C for
each of the four most recent consecutive quarters, the U.S.
intermediate holding company should use the most recent quarter or
consecutive quarters as reported on FR Y-9C (or as determined under
applicable accounting standards, if no FR Y-9C had been filed).
\32\ A ``section 2(h)(2) company'' would be defined to have the
same meaning as in section 2(h)(2) of the Bank Holding Company Act
(12 U.S.C. 2(h)(2)) and section 211.23(f)(3) or (f)(5) of the
Board's Regulation Y. If the foreign banking organization had not
filed the relevant reporting form for each of the four most recent
consecutive quarters, total consolidated assets would be based on
the average of the foreign banking organization's total assets for
the most recent quarter or consecutive quarters as reported on the
relevant reporting form (or as determined under applicable
accounting standards, if no reporting form has been filed).
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In any case, for this purpose, the company would be permitted to
exclude from the calculation of its combined U.S. assets the amount
corresponding to balances and transactions between any U.S.
subsidiaries that would be eliminated in consolidation were a U.S.
intermediate holding company already formed. The company may also
exclude balances and transactions between any U.S. subsidiary and any
U.S. branch or agency. The company would be required to reflect
balances and transactions between the U.S. subsidiary or U.S. branch or
agency, on the one hand, and the foreign bank's non-U.S. offices and
other non-U.S. affiliates, on the other.
Several Dodd-Frank Act rulemakings require the calculation of
combined U.S. assets and combined U.S. risk-weighted assets. The Board
expects to standardize this calculation, as appropriate, and implement
reporting requirements on the FR Y-7Q through the regulatory report
development process.
In addition, if a foreign banking organization's U.S. intermediate
holding company itself had total consolidated assets of $50 billion or
more, the U.S. intermediate holding company would be subject to more
stringent requirements in addition to those that would apply to all
U.S. intermediate holding companies, including higher capital
standards, stress testing standards, and early remediation
requirements. In addition, a U.S. intermediate holding company with
total consolidated assets of $500 billion or more would be subject to
stricter single-counterparty credit limits.
Foreign Banking Organizations and Foreign Savings and Loan Holding
Companies With Total Consolidated Assets of More Than $10 Billion
The proposal also would implement the risk management and stress
testing provisions of section 165 that apply to a broader set of
entities than the other standards in section 165 of the Dodd-Frank Act.
Section 165(h) of the Dodd-Frank Act requires any publicly traded bank
holding company with $10 billion or more in total consolidated assets
to establish a risk committee.\33\ The Board proposes to apply this
requirement to any foreign banking organization with publicly traded
stock and total consolidated assets of $10 billion or more and any
foreign banking organization, regardless of whether its stock is
publicly traded, with total consolidated assets of $50 billion or more.
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\33\ 12 U.S.C. 5365(h).
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Section 165(i)(2) requires any financial company with more than $10
billion in total consolidated assets that is regulated by a primary
federal financial regulator to conduct annual company-run stress
tests.\34\ The Board, as the primary federal financial regulatory
agency for foreign banking organizations and foreign savings and loan
holding companies, proposes to apply certain stress test requirements
to any foreign banking organization and foreign savings and loan
holding company with more than $10 billion in total consolidated
assets.\35\ Finally, a U.S. intermediate holding company that has total
consolidated assets of $10 billion or more would be subject to certain
company-run stress test requirements.
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\34\ 12 U.S.C. 5365(i)(2). The Dodd-Frank Act defines primary
financial regulatory agency in section 2 of the Act. See 12 U.S.C.
5301(12).
\35\ For a savings and loan holding company, ``total
consolidated assets'' would be defined as the average of the total
assets reported by the foreign savings and loan holding company on
its applicable regulatory report for the four most recent
consecutive quarters, or if not reported, as determined under
applicable accounting standards. Consistent with the methodology
used to calculate ``total consolidated assets'' of a foreign banking
organization, if the foreign savings and loan holding company had
not filed the applicable reporting form for each of the four most
recent consecutive quarters, total consolidated assets would be
based on the average of the foreign savings and loan holding
company's total consolidated assets, as reported on the company's
regulatory report, for the most recent quarter or consecutive
quarters. There are currently no foreign savings and loan holding
companies.
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The proposed stress test and risk management requirements
applicable to each set of companies are explained in detail below.
Foreign Nonbank Financial Companies
Under the Dodd-Frank Act, the Council generally may determine that
a U.S. or foreign nonbank financial company should be subject to
supervision by the Board if it determines that material financial
distress at the company, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
company, could pose a threat to the financial stability of the United
States.\36\ Upon such a determination, the Board is required to apply
the enhanced prudential standards under section 165 of the Act and the
early remediation requirements under section 166 of the Act to a
nonbank financial company supervised by the Board. The Board may also
determine whether to require the foreign nonbank financial company to
establish a U.S. intermediate holding company under section 167 of the
Act. At present, the Council has not designated any nonbank financial
companies for supervision by the Board.
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\36\ See 12 U.S.C. 5315; see also 77 FR 21637 (April 11, 2012)
(final rule regarding the Council's authority under section 113 of
the Dodd-Frank Act).
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Consistent with the Dodd-Frank Act, this proposal would establish
the general framework for application of the enhanced prudential
standards and the early remediation requirements applicable to a
foreign nonbank financial company supervised by the Board. In addition,
the proposal would set forth the criteria that the Board would use to
consider whether a U.S. intermediate holding company should be
established by a foreign nonbank financial company.
In applying the proposed enhanced prudential standards to foreign
nonbank financial companies supervised by the Board, the Board expects
to tailor the application of the standards to different companies on an
individual basis or by category, taking into consideration their
capital structure, riskiness, complexity, financial activities, size,
and any other risk-related factors that the Board deems
appropriate.\37\ The Board also would review whether enhanced
prudential standards as applied to particular
[[Page 76635]]
foreign nonbank financial companies would give due regard to the
principle of national treatment and equality of competitive opportunity
and would take into account the extent to which the foreign nonbank
financial company is subject on a consolidated basis to home country
standards that are comparable to those applied to financial companies
in the United States. The Board expects to issue an order that provides
clarity on how the enhanced prudential standards would apply to a
particular foreign nonbank financial company once the company is
designated by the Council.
---------------------------------------------------------------------------
\37\ 12 U.S.C. 5365(a)(2).
---------------------------------------------------------------------------
Question 1: Should the Board require a foreign nonbank financial
company supervised by the Board to establish a U.S. intermediate
holding company? Why or why not? What activities, operations, or
subsidiaries should the foreign nonbank financial company be required
to conduct or hold under the U.S. intermediate holding company?
Question 2: If the Board required a foreign nonbank financial
company supervised by the Board to form a U.S. intermediate holding
company, how should the Board modify the manner in which the enhanced
prudential standards and early remediation requirements would apply to
the U.S. intermediate holding company, if at all? What specific
characteristics of a foreign nonbank financial company should the Board
consider when determining how to apply the enhanced prudential
standards and the early remediation requirements to such a company?
B. Summary of the Major Elements of the Proposal
The proposal would implement sections 165 and 166 through
requirements that enhance the Board's current regulatory framework for
foreign banking organizations in order to better mitigate the risks
posed to U.S. financial stability by the U.S. activities of foreign
banking organizations. These changes would provide a platform for
consistent regulation and supervision of the U.S. operations of large
foreign banking organizations. The changes would also bolster the
capital and liquidity positions of the U.S. operations of foreign
banking organizations to improve their resiliency to asset quality or
funding shocks and may mitigate certain challenges associated with the
resolution of the U.S. operations of a large foreign banking
organization. Together, these changes should increase the resiliency of
the U.S. operations of foreign banking organizations during normal and
stressed periods. The Board seeks comment on all elements of this
proposal.
Enhanced Structural, Capital, and Liquidity Requirements
The proposal would mandate a more standardized structure for the
U.S. bank and nonbank subsidiaries of foreign banking organizations in
order to enhance regulation and supervision of their combined U.S.
operations. Foreign banking organizations with total consolidated
assets of $50 billion or more and with combined U.S. assets (excluding
the total assets of each U.S. branch and agency of the foreign banking
organization) of $10 billion or more would be required to establish a
top-tier U.S. intermediate holding company over all U.S. bank and
nonbank subsidiaries of the company, except for any company held under
section 2(h)(2) of the Bank Holding Company Act.\38\ The U.S.
intermediate holding company would be subject to the enhanced
prudential standards of this proposal and would not be separately
subject to the enhanced prudential standards applicable to U.S. bank
holding companies.
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\38\ 12 U.S.C. 1841(c)(2).
---------------------------------------------------------------------------
The U.S. intermediate holding company requirement would provide
consistency in the application of enhanced prudential standards to the
U.S. operations of foreign banking organizations with a large U.S.
subsidiary presence. In addition, a U.S. intermediate holding company
structure would provide the Board, as umbrella supervisor of the U.S.
operations of foreign banking organizations, with a more uniform
platform on which to implement its supervisory program across the U.S.
operations of foreign banking organizations. In the case of a foreign
banking organization with large subsidiaries in the United States, the
U.S. intermediate holding company could also help facilitate the
resolution of those U.S. subsidiaries. A foreign banking organization
would be permitted to continue to operate in the United States through
branches and agencies, albeit subject to the enhanced prudential
standards included in the proposal for U.S. branch and agency
networks.\39\
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\39\ U.S. branch and agency network would be defined to include
all U.S. branches and U.S. agencies of a foreign bank subject to
this proposal.
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The proposed rule would apply the risk-based capital and leverage
rules that are applicable to U.S. bank holding companies to U.S.
intermediate holding companies of foreign banking organizations,
including U.S. intermediate holding companies that do not have a
depository institution subsidiary. U.S. intermediate holding companies
with total consolidated assets of $50 billion or more would also be
subject to the capital plan rule.\40\ In addition, any foreign banking
organization with total consolidated assets of $50 billion or more
generally would be required to meet its home country's risk-based
capital and leverage standards at the consolidated level that are
consistent with internationally agreed risk-based capital and leverage
standards, including the risk-based capital and leverage requirements
included in the Basel III agreement, on an ongoing basis as that
framework is scheduled to take effect.\41\
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\40\ See 12 CFR 225.8.
\41\ See Basel Committee on Banking Supervision (BCBS), Basel
III: A global framework for more resilient banks and banking systems
(December 2010), available at http://www.bis.org/publ/bcbs189.pdf
(Basel III Accord).
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The proposal would also generally apply the same set of liquidity
risk management standards to the U.S. operations of foreign banking
organizations with combined U.S. assets of $50 billion or more that
would be required under the December 2011 proposal for large U.S. bank
holding companies. These standards would include a requirement to
conduct monthly liquidity stress tests over a series of time intervals
out to one year, and to hold a buffer of high quality liquid assets to
cover the first 30 days of stressed cash flow needs. These standards
are designed to increase the resiliency of the U.S. operations of
foreign banking organizations during times of stress and to reduce the
risk of asset fire sales when U.S. dollar funding channels are strained
and short-term debt cannot easily be rolled over.
Under the proposal, the liquidity buffer would separately apply to
the U.S. branch and agency network and the U.S. intermediate holding
company of a foreign banking organization with combined U.S. assets of
$50 billion or more. The proposal would require the U.S. intermediate
holding company to maintain the entire 30-day buffer in the United
States to maintain consistency with requirements for large U.S. bank
holding companies. In recognition that U.S. branches and agencies are
not separate legal entities from their parent foreign bank and can
engage only in traditional banking activities by the terms of their
licenses, the proposal would require the U.S. branch and agency network
to maintain the first 14 days of its 30-day liquidity buffer in the
United States and would permit the U.S. branch and agency network to
meet the remainder of its requirement at the consolidated level.
[[Page 76636]]
Single-Counterparty Credit Limits
In addition to the structural, capital and liquidity requirements
described above, the proposal would apply single-counterparty credit
limits to foreign banking organizations in a manner generally
consistent with the December 2011 proposal. Single-counterparty credit
limits would be separately applied to a foreign banking organization
with total consolidated assets of $50 billion or more with respect to
its combined U.S. operations and its U.S. intermediate holding company.
In general, the combined U.S. operations of a foreign banking
organization would be subject to a limit of 25 percent of the foreign
banking organization's total regulatory capital to a single-
counterparty, and the U.S. intermediate holding company would be
subject to a limit of 25 percent of its total regulatory capital to a
single-counterparty. The proposal would also apply a more stringent
limit to the combined U.S. operations of a foreign banking organization
that has total consolidated assets of $500 billion or more and to a
U.S. intermediate holding company that has total consolidated assets of
$500 billion or more, with respect to exposures to certain large
financial counterparties. The size of the stricter limit would be
aligned with the limit imposed on U.S. bank holding companies with
total consolidated assets of $500 billion or more.
The Board received a large volume of comments on the single-
counterparty credit limits set forth in the December 2011 proposal. The
Board is currently in the process of reviewing comments on the
standards in the December 2011 proposal and is considering
modifications to the proposal in response to those comments. Comments
on this proposal will help inform how the enhanced prudential standards
should be applied differently to foreign banking organizations.
Risk Management Requirements
The proposal would require any foreign banking organization with
publicly traded stock and total consolidated assets of $10 billion or
more and any foreign banking organization, regardless of whether its
stock is publicly traded, with total consolidated assets of $50 billion
or more to certify that it maintains a U.S. risk committee. In
addition, a foreign banking organization with combined U.S. assets of
$50 billion or more would be required to employ a U.S. chief risk
officer and implement enhanced risk management requirements in a manner
that is generally consistent with the requirements in the December 2011
proposal. However, the proposal would also implement these requirements
in a manner that provides some flexibility for foreign banking
organizations and recognizes the complexity in applying standards to
foreign banking organizations that maintain a U.S. branch and agency
network and bank and nonbank subsidiaries.
Stress Testing
The proposal would implement stress test requirements for a U.S.
intermediate holding company in a manner parallel to those required of
a U.S. bank holding company.\42\ The parallel implementation would help
to ensure that U.S. intermediate holding companies have sufficient
capital in the United States to withstand a severely adverse stress
scenario. As provided in more detail in section VIII of this preamble,
a foreign banking organization with total consolidated assets of $50
billion or more that maintains a U.S. branch and agency network could
satisfy the proposal's stress test requirements applicable to the U.S.
branch and agency network if it is subject to a consolidated capital
stress testing regime that is broadly consistent with the stress test
requirements in the United States and, if it has combined U.S. assets
of $50 billion or more, provides information to the Board regarding the
results of the consolidated stress tests.
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\42\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October
12, 2012).
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Early Remediation
The recent financial crisis revealed that the condition of large
U.S. and foreign banking organizations can deteriorate rapidly even
during periods when their reported capital ratios and other financial
positions are well above minimum requirements. The proposal would
implement early remediation requirements for foreign banking
organizations with total consolidated assets of $50 billion or more in
a manner generally consistent with the December 2011 proposal. All
foreign banking organizations subject to the regime would be subject to
the same set of triggers; however, only foreign banking organizations
with combined U.S. assets of $50 billion or more would be subject to
mandatory remedial actions.
C. Considerations in Developing the Proposal
While this proposal would implement some standards that require a
more direct allocation of capital and liquidity resources to U.S.
operations than the Board's current approach to foreign bank
regulation, the proposal should be viewed as supplementing rather than
departing from existing supervisory practice. The proposal would
continue to allow foreign banking organizations to operate branches and
agencies in the United States and would generally allow U.S. branches
and agencies to continue to meet capital requirements at the
consolidated level. Similarly, the proposal would not impose a cap on
cross-border intra-group flows, thereby allowing foreign banking
organizations in sound financial condition to continue to obtain U.S.
dollar funding for their global operations through their U.S.
operations. The proposal would, however, regulate liquidity risk in the
U.S. operations of foreign banking organizations in a way that
increases their resiliency to changes in the availability of funding.
Requiring capital and liquidity buffers in a specific jurisdiction
of operation below the consolidated level may incrementally increase
costs and reduce flexibility of internationally active banks that
manage their capital and liquidity on a centralized basis. However,
managing liquidity and capital within jurisdictions can have benefits
not just for financial stability generally, but also for firms
themselves. During the crisis, more decentralized global banks relied
less on cross-currency funding and were less exposed to disruptions in
international wholesale funding and foreign exchange swap markets than
more centralized banks.\43\
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\43\ Committee on the Global Financial System, Funding patterns
and liquidity management of internationally active banks, supra note
11.
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The Board considered implementing the enhanced prudential standards
required under the Dodd-Frank Act for foreign banking organizations by
extending the Federal Reserve's current approach to foreign bank
regulation to include ongoing and more detailed assessments of each
firm's home country regulatory and resolution regimes and each firm's
consolidated financial condition. While this type of analysis is an
important part of ongoing supervisory efforts, such an approach to
financial stability regulation, on its own, could significantly
increase regulatory uncertainty and lead to meaningful inconsistencies
in the U.S. regulatory regime for foreign and U.S. companies. In
addition, as host supervisor, the Board is limited in its ability to
assess the financial condition of a foreign banking organization on a
timely basis, inhibiting complete analysis of the
[[Page 76637]]
parent organization's ability to act as a source of support to its U.S.
operations during times of stress.
Additional Information Requests
The Board recognizes that the U.S. operations of foreign banking
organizations represent only one part of the global consolidated
company and as such will be affected by developments at the
consolidated and U.S. operations levels. In addition, U.S. branches and
agencies are direct offices of the foreign banking organization and are
not subject to U.S. capital requirements or restrictions in the United
States on providing funding to their parent. As a result, the Board
anticipates that U.S. supervisors of foreign banking organizations
would continue to require information about the overall financial
condition of the consolidated entity. Requests for information on the
consolidated operations of foreign banking organizations that are part
of this proposal or the Federal Reserve's broader supervisory process
would be more frequent for those companies that pose more material risk
to U.S. financial stability. Information requests may also increase in
frequency in cases when the condition of the consolidated foreign
banking organization has shown signs of deterioration, when the Federal
Reserve has significant concerns about the willingness or ability of
the foreign banking organization to provide support to its U.S.
operations, when the U.S. operations of a foreign banking organization
represent a large share of the global firm, or when risk management
decisions for the U.S. operations are largely made at the consolidated
level.
Question 3: Does the proposal effectively promote the policy goals
stated in this preamble and help mitigate the challenges with cross-
border supervision discussed above? Do any aspects of the policy create
undue burden for supervised institutions?
D. Timing of Application
The proposal would provide an extended phase-in period to allow
foreign banking organizations time to implement the proposed
requirements. For foreign banking organizations that meet the total
consolidated asset threshold of $50 billion and, as applicable, the
combined U.S. asset threshold of $50 billion as of July 1, 2014, the
enhanced prudential standards required under this proposal would apply
beginning on July 1, 2015.\44\
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\44\ The proposed debt-to-equity ratio limitation, which applies
upon a determination by the Council that a foreign banking
organization with total consolidated assets of $50 billion or more
poses a grave threat to the financial stability of the United States
and that the imposition of a debt to equity requirement is necessary
to mitigate such risk, would apply beginning on the effective date
of the final rule.
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Foreign banking organizations that become subject to the
requirements of the proposal after July 1, 2014, would be required to
form a U.S. intermediate holding company beginning 12 months after they
reach the total consolidated asset threshold of $50 billion, unless
accelerated or extended by the Board in writing. These foreign banking
organizations would be required to comply with the enhanced prudential
standards (other than stress test requirements and the capital plan
rule) beginning on the same date they are required to establish a U.S.
intermediate holding company, unless accelerated or extended by the
Board. Stress test requirements and the capital plan rule would be
applied in October of the year after that in which the foreign banking
organization is required to establish a U.S. intermediate holding
company.
Question 4: What challenges are associated with the proposed phase-
in schedule?
Question 5: What other considerations should the Board address in
developing any phase-in of the proposed requirements?
III. Requirement To Form a U.S. Intermediate Holding Company
A. Background
As noted previously, foreign banking organizations operate in the
United States under a variety of structures. Some foreign banking
organizations conduct banking activities directly through a U.S. branch
or agency; others own U.S. depository institutions through a U.S.-based
bank holding company; and still others own a U.S. depository
institution directly. Most large foreign banking organizations also
conduct a range of nonbank activities through separate nonbank
subsidiaries, which may or may not be under a U.S.-based bank holding
company. Many foreign banking organizations do not have a single top-
tier U.S. entity through which to apply prudential requirements to
their combined U.S. operations.
Section 165 requires the Board to impose enhanced prudential
standards on foreign banking organizations with total consolidated
assets of $50 billion or more in a manner that preserves national
treatment and reduces risk to U.S. financial stability. Given the
current variety in structures, applying these standards consistently
across the U.S. operations of foreign banking organizations and in
comparable ways to both large U.S. bank holding companies and foreign
banking organizations would be challenging and may not reduce the risk
posed by these companies.
Furthermore, relying solely on home country implementation of the
enhanced prudential standards would also present challenges. Several of
the Act's required enhanced prudential standards are not subject to
international agreement. In addition, U.S. supervisors, as host
authorities, have limited access to timely information on the global
operations of foreign banking organizations. As a result, monitoring
compliance with any enhanced prudential standards at the consolidated
foreign banking organization would be difficult and may raise concerns
of extraterritorial application of the standards.
Accordingly, the proposal would apply a structural enhanced
standard under which foreign banking organizations with total
consolidated assets of $50 billion or more and combined U.S. assets of
$10 billion or more (excluding U.S. branch and agency assets and
section 2(h)(2) companies) would be required to form a U.S.
intermediate holding company. The foreign banking organization would
hold and operate its U.S. operations (other than those operations
conducted through U.S. branches and agencies and section 2(h)(2)
companies, as defined below) through the U.S. intermediate holding
company, which would serve as a focal point for the Board's supervision
and regulation of the foreign banking organization's U.S. subsidiaries.
The U.S. intermediate holding company requirement would be an
integral component of the proposal's risk-based capital requirements,
leverage limits, and liquidity requirements. It would enable the Board
to impose these standards on the foreign banking organization's U.S.
bank and nonbank subsidiaries on a consistent, comprehensive, and
consolidated basis. The U.S. intermediate holding company requirement
would also assist in implementing the proposal's other enhanced risk
management standards, as it would facilitate the foreign company's
ability to oversee and the Board's ability to supervise the combined
risks taken by the foreign company's U.S. operations. A U.S.
intermediate holding company could also help facilitate the resolution
or restructuring of the U.S. subsidiary operations of a foreign banking
organization by providing one top-tier U.S. legal entity to be resolved
or restructured.
[[Page 76638]]
B. Intermediate Holding Company Requirements for Foreign Banking
Organizations With Combined U.S. Assets (Excluding U.S. Branch and
Agency Assets) of $10 Billion or More
As noted, the proposal would require a foreign banking organization
with total consolidated assets of $50 billion or more and combined U.S.
assets (excluding U.S. branch and agency assets) of $10 billion or more
to establish a U.S. intermediate holding company.\45\ The Board has
chosen the $10 billion threshold because it is aligned with the $10
billion threshold established by the Dodd-Frank Act for stress test and
risk management requirements.
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\45\ Combined U.S. assets (excluding U.S. branch and agency
assets) would be based on the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding
any section 2(h)(2) company). A company would be permitted to reduce
its combined U.S. assets for this purpose by the amount
corresponding to balances and transactions between any U.S.
subsidiaries that would be eliminated in consolidation were a U.S.
intermediate holding company already formed.
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A foreign banking organization that meets the asset thresholds
would be required to establish a U.S. intermediate holding company on
July 1, 2015, unless that time is extended by the Board in writing. A
foreign banking organization that crosses the asset thresholds after
July 1, 2014 would be required to establish a U.S. intermediate holding
company 12 months after it crossed the asset threshold, unless that
time is accelerated or extended by the Board in writing.
A foreign banking organization that establishes a U.S. intermediate
holding company would be required to hold its interest in any U.S.
subsidiary, other than a section 2(h)(2) company, through the U.S.
intermediate holding company. The term subsidiary would be defined
using the Bank Holding Company Act definition of control, such that a
foreign banking organization would be required to transfer its interest
in any U.S. company, including interests in joint ventures, for which
it: (i) Directly or indirectly or acting through one or more other
persons owns, controls, or has power to vote 25 percent or more of any
class of voting securities of the company; (ii) controls in any manner
the election of a majority of the directors or trustees of the company;
or (iii) directly or indirectly exercises a controlling influence over
the management or policies of the company.
U.S. subsidiaries held under section 2(h)(2) of the Bank Holding
Company Act are not required to be held under the U.S. intermediate
holding company. Section 2(h)(2) of the Bank Holding Company Act allows
qualifying foreign banking organizations to retain their interest in
foreign commercial firms that conduct business in the United States.
This long-standing statutory exception was enacted in recognition of
the fact that some foreign jurisdictions do not impose a clear
separation between banking and commerce. The current proposal would not
require foreign banking organizations to hold section 2(h)(2)
investments under the U.S. intermediate holding company because these
commercial firms have not been subject to Board supervision, are not
integrated into the U.S. financial operations of foreign banking
organizations, and foreign banking organizations often cannot
restructure their foreign commercial investments. The proposal would
also require the foreign banking organization to transfer to the U.S.
intermediate holding company any controlling interests in U.S.
companies acquired pursuant to merchant banking authority.
In exceptional circumstances, the proposal would provide the Board
with authority to permit a foreign banking organization to establish
multiple U.S. intermediate holding companies or use an alternative
organizational structure to hold its U.S. operations. For example, the
Board may exercise this authority when a foreign banking organization
controls multiple lower-tier foreign banking organizations that have
separate U.S. operations. In addition, the Board may exercise this
authority when, under applicable home country law, the foreign banking
organization may not control its U.S. subsidiaries through a single
U.S. intermediate holding company. Finally, the proposal would provide
the Board with authority on an exceptional basis to approve a modified
U.S. organizational structure based on the foreign banking
organization's activities, scope of operations, structure, or similar
considerations.
The proposal would not require a foreign banking organization to
transfer any assets associated with a U.S. branch or agency to the U.S.
intermediate holding company. Congress has permitted foreign banking
organizations to establish branches and agencies in the United States
if they meet specific standards, and has chosen not to require foreign
banks to conduct their banking business in the United States only
through subsidiary U.S. depository institutions. Excluding U.S.
branches and agencies from the intermediate holding company requirement
would also preserve flexibility for foreign banking organizations to
operate directly in the United States based on the capital adequacy of
their consolidated organization, subject to proposed enhanced
prudential standards applicable to the U.S. branch and agency networks.
After issuing a final rule, the Board intends to monitor how
foreign banking organizations adapt their operations in response to the
structural requirement, including whether foreign banking organizations
relocate activities from U.S. subsidiaries into their U.S. branch and
agency networks.
Question 6: What opportunities for regulatory arbitrage exist
within the proposed framework, if any? What additional requirements
should the Board consider applying to a U.S. branch and agency network
to ensure that U.S. branch and agency networks do not receive favorable
treatment under the enhanced prudential standards regime?
Question 7: Should the Board consider an alternative asset
threshold for purposes of identifying the companies required to form a
U.S. intermediate holding company, and if so, what alternative
threshold should be considered and why? What other methodologies for
calculating a company's total U.S. assets would better serve the
purposes of the proposal?
Question 8: Should the Board provide an exclusive list of
exemptions to the intermediate holding company requirement or provide
exceptions on a case-by-case basis?
Question 9: Is the definition of U.S. subsidiary appropriate for
purposes of determining which entities should be held under the U.S.
intermediate holding company?
Question 10: Should the Board consider exempting any other
categories of companies from the requirement to be held under the U.S.
intermediate holding company, such as controlling investments in U.S.
subsidiaries made by foreign investment vehicles that make a majority
of their investments outside of the United States, and if so, which
categories of companies?
Question 11: What, if any, tax consequences, international or
otherwise, could present challenges to a foreign banking organization
seeking to (1) reorganize its U.S. subsidiaries under a U.S.
intermediate holding company and (2) operate on an ongoing basis in the
United States through a U.S. intermediate holding company that meets
the corporate form requirements described in the proposal?
Question 12: What other costs would be associated with forming a
U.S. intermediate holding company? Please be specific and describe
accounting or other operating costs.
[[Page 76639]]
Question 13: What impediments in home country law exist that could
prohibit or limit the formation of a single U.S. intermediate holding
company?
Notice Requirements
To reduce burden on foreign banking organizations, the Board
proposes to adopt an after-the-fact notice procedure for the formation
of a U.S. intermediate holding company and the changes in corporate
structure required by this proposal. Under the proposal, within 30 days
of establishing a U.S. intermediate holding company, a foreign banking
organization would be required to provide to the Board: (1) A
description of the U.S. intermediate holding company, including its
name, location, corporate form, and organizational structure, (2) a
certification that the U.S. intermediate holding company meets the
requirements of this section, and (3) any other information that the
Board determines is appropriate.
Question 14: Should the Board adopt an alternative process in
addition to, or in lieu of, the post-notice procedure described above?
For example, should the Board require a before-the-fact application?
Why or why not?
Corporate Form
The proposal would require that a U.S. intermediate holding company
be organized under the laws of the United States, any state, or the
District of Columbia. While the proposal generally provides flexibility
in the corporate form of the U.S. intermediate holding company, the
U.S. intermediate holding company could not be structured in a manner
that would prevent it from meeting the requirements in subparts K
through R of this proposal.\46\
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\46\ The proposal would not require the U.S. intermediate
holding company to be wholly owned. Thus, a U.S. intermediate
holding company could have minority investors.
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Under the risk management requirements of subpart O, the U.S.
intermediate holding company would be required to have a board of
directors or equivalent thereto to help ensure a strong, centralized
corporate governance system.
Applicable Standards and Supervision
Under the proposal, a U.S. intermediate holding company would be
subject to the enhanced prudential standards set forth in this
proposal. In addition, a U.S. intermediate holding company would be
subject to comparable regulatory reporting requirements and inspection
requirements to those described in section 225.5 of the Board's
Regulation Y (12 CFR 225.5) that apply to a bank holding company.
The proposal would also provide that a U.S. intermediate holding
company would be subject to the enhanced prudential standards of this
proposal, and would not be separately subject to the enhanced
prudential standards applicable to U.S. bank holding companies,
regardless of whether the company would also meet the scope of
application of those provisions. In doing so, the proposal intends to
minimize uncertainty about the timing or applicability of certain
requirements and to ensure that all U.S. intermediate holding companies
of foreign banking organizations are subject to consistent rules.
In connection with this and other rulemakings, the Board is
conducting a review of existing supervisory guidance to identify
guidance that may be relevant to the operations and activities of a
U.S. intermediate holding company that does not have a bank subsidiary.
The Board proposes to apply such guidance to U.S. intermediate holding
companies on a rolling basis, either by revising and reissuing the
guidance or by publishing a notification that references the applicable
guidance.
IV. Risk-Based Capital Requirements and Leverage Limits
A. Background
The financial crisis revealed that internationally agreed bank
capital requirements were too low, the definition of capital was too
weak, and the risk weights assigned to certain asset classes were not
proportional to their actual risk. The financial crisis also
demonstrated that in the resolution of a failing financial firm, the
location of capital is critical and that companies that managed
resources on a decentralized basis were generally less exposed to
disruptions in international markets than those that solely managed
resources on a centralized basis.
The international regulatory community has made substantial
progress on strengthening consolidated bank capital standards in
response to the crisis. The Basel Committee on Banking Supervision's
(BCBS) comprehensive reform package, ``Basel III: A global regulatory
framework for more resilient banks and banking systems'' (Basel III
Accord), has significantly enhanced the strength of international
consolidated capital standards by raising minimum standards, more
conservatively defining qualification standards for regulatory capital,
and establishing a framework for capital conservation when capital
levels do not remain well above the minimum standards.\47\
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\47\ See Basel III Accord, supra note 40.
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While Basel III improves the standards for quantity and quality of
consolidated capital of internationally active banking organizations,
it does not address the capitalization of host country operations of an
internationally active banking organization. Moreover, lack of access
to timely information on the consolidated capital position of the
parent organization can limit the ability of host supervisors to
respond to changes in consolidated capital adequacy, creating a risk of
large losses in the host country operations of the foreign bank if the
parent becomes distressed or fails.
The Board's current approach to capital regulation of the U.S.
operations of foreign banking organizations was designed to provide
them with the flexibility to manage capital on a global consolidated
basis, while helping to promote global competitive equity with U.S.
banking organizations. Under the current approach, in order to
establish a branch, agency, commercial lending company, or bank
subsidiary in the United States, a foreign bank is required to maintain
capital levels at the consolidated parent organization that are
equivalent to those required of a U.S. banking organization. In making
equivalency determinations, the Board has allowed foreign banking
organizations to use home country capital standards if those standards
are consistent with the standards established by the BCBS. To the
extent that a foreign banking organization controls a U.S. depository
institution subsidiary, the U.S. depository institution subsidiary is
subject to the same set of risk-based capital and leverage requirements
that apply to other U.S. depository institutions. Any functionally
regulated nonbank subsidiaries of foreign banking organizations are
subject to capital requirements at the individual nonbank subsidiary
level as may be established by primary federal or state regulators.
Pursuant to the Board's SR Letter 01-01, as a general matter, a U.S.
bank holding company subsidiary of a foreign banking organization that
qualifies as a financial holding company has not been required to
comply with the Board's capital standards since 2001.\48\ This approach
[[Page 76640]]
has been predicated on the basis of the foreign bank parent maintaining
sufficient consolidated capital levels to act as a source of support to
its U.S. operations under stressed conditions.
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\48\ In cases in which the Board determined that a foreign bank
operating a U.S. branch, agency, or commercial lending company was
well-capitalized and well-managed under standards comparable to
those of U.S. banks controlled by financial holding companies, the
Board has applied a presumption that the foreign banking
organization had sufficient financial strength and resources to
support its banking activities in the United States.
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Several factors have prompted a targeted reassessment of the
Board's traditional primary reliance on consolidated capital
requirements in implementing capital regulation for U.S. subsidiaries
of foreign banking organizations. These factors include the financial
stability risk posed by the U.S. operations of the largest foreign
banking organizations, questions about the ability and willingness of
parent foreign banking organizations to act as a source of support to
their U.S. operations during stressed periods, and challenges
associated with cross-border resolution that create incentives for home
and host jurisdictions to restrict cross-border intra-group capital
flows when banking organizations face difficulties.
The Board has considered these factors in determining how best to
implement section 165 of the Dodd-Frank Act, which directs the Board to
impose enhanced risk-based capital and leverage requirements on foreign
banking organizations with total consolidated assets of $50 billion or
more.\49\ In addition, the Board has considered section 171 of the
Dodd-Frank Act, which requires top-tier U.S. bank holding company
subsidiaries of foreign banking organizations that relied on SR Letter
01-01 to meet U.S. capital standards that are not less than the
standards generally applicable to U.S. depository institutions
beginning in July, 2015.\50\
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\49\ 12 U.S.C. 5365(b).
\50\ 12 U.S.C. 5371(b)(4)(E).
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As described below, the proposal would subject U.S. intermediate
holding companies to the capital standards applicable to U.S. bank
holding companies. This would both strengthen the capital position of
U.S. subsidiaries of foreign banking organizations and provide parity
in the capital treatment for U.S. bank holding companies and the U.S.
subsidiaries of foreign banking organizations on a consolidated basis.
The proposal would also subject U.S. intermediate holding companies
with total consolidated assets of $50 billion or more to the Board's
capital plan rule (12 CFR 225.8) in light of the more significant risks
posed by these firms. Aligning the capital requirements between U.S.
subsidiaries of foreign banking organizations on a consolidated basis
and U.S. bank holding companies is also consistent with long-standing
international capital agreements, which provide flexibility to host
jurisdictions to set capital requirements for local subsidiaries of
foreign banking organizations, so long as national treatment is
preserved.
The proposal would allow U.S. branch and agency networks of foreign
banking organizations with total consolidated assets of $50 billion or
more to continue to meet U.S. capital equivalency requirements at the
consolidated level. Specifically, the proposal would require a foreign
banking organization to certify that it meets on an ongoing basis home
country capital adequacy standards that are consistent with the Basel
Capital Framework, as defined below. This requirement is intended to
help ensure that the consolidated capital base supporting the
activities of U.S. branches and agencies remains strong, and that
weaknesses at the consolidated foreign parent do not undermine the
financial strength of its direct U.S. operations.
B. Risk-Based Capital Requirements Applicable to U.S. Intermediate
Holding Companies
This proposal would require all U.S. intermediate holding companies
of foreign banking organizations with total consolidated assets of $50
billion or more, regardless of whether the U.S. intermediate holding
company controls a depository institution, to calculate and meet any
applicable capital adequacy standards, including minimum risk-based
capital and leverage requirements and any restrictions based on capital
adequacy, in the same manner and to the same extent as a U.S. bank
holding company in accordance with any capital standards established by
the Board for bank holding companies. Currently, the Board's rules for
calculating minimum capital requirements for bank holding companies are
found at 12 CFR part 225, Appendix A (general risk-based capital rule),
12 CFR part 225, Appendix D (leverage rule), 12 CFR part 225, Appendix
E (market risk rule), and 12 CFR part 225, Appendix G (advanced
approaches risk-based capital rule). A U.S. intermediate holding
company that met the applicability thresholds under the market risk
rule or the advanced approaches risk-based capital rule would be
required to use those rules to calculate its minimum risk-based capital
requirements, in addition to the general risk-based capital
requirements and the leverage rule.
The Board, along with the other banking agencies, has proposed
revisions to its capital requirements that would include implementation
in the United States of the Basel III Accord.\51\ The Board anticipates
that the capital adequacy standards for U.S. bank holding companies on
July 1, 2015, will incorporate the standards in the Basel III Accord.
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\51\ In June 2012, the Board, together with the OCC and FDIC,
published three notices of proposed rulemaking to implement the
Basel III Accord in the United States. See 77 FR 52792 (August 30,
2012); 77 FR 52888 (August 30, 2012); 77 FR 52978 (August 30, 2012)
(collectively, the Basel III proposals). These proposed
requirements, if adopted in final form, are expected to form the
basis for the capital regime applicable to U.S. bank holding
companies.
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A U.S. intermediate holding company established on July 1, 2015,
would be required to comply with the capital adequacy standards on that
date, unless that time is accelerated or extended by the Board in
writing. A U.S. intermediate holding company that is required to be
established after July 1, 2015, would be required to comply with the
capital adequacy standards applicable to bank holding companies
beginning on the date it is established, unless that time is
accelerated or extended by the Board in writing.
The Board may also, through a separate, future rulemaking, apply a
quantitative risk-based capital surcharge in the United States to a
U.S. intermediate holding company that is determined to be a domestic
systemically important banking organization (D-SIB), consistent with
the proposed BCBS D-SIB regime or similar framework.\52\
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\52\ BCBS, A framework for dealing with domestic systemically
important banks (August 1, 2012), available at http://www.bis.org/publ/bcbs224.pdf.
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Question 15: Are there provisions in the Board's Basel III
proposals that would be inappropriate to apply to U.S. intermediate
holding companies?
U.S. Intermediate Holding Companies With Total Consolidated Assets of
$50 Billion or More
All U.S. intermediate holding companies with total consolidated
assets of $50 billion or more would be required to comply with section
225.8 of Regulation Y (capital plan rule) in the same manner and to the
same extent as a bank holding company subject to that section.\53\ The
capital plan rule currently applies to all U.S. domiciled bank holding
companies with total consolidated assets of $50 billion or more (except
that U.S. domiciled bank holding companies with total consolidated
assets of $50 billion or more that are relying on SR Letter 01-01 are
not required to comply with the capital plan rule until July 21, 2015).
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\53\ 12 CFR 225.8. See 76 FR 74631 (December 1, 2011).
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[[Page 76641]]
A U.S. intermediate holding company that meets the asset threshold
on July 1, 2015, would be required to submit its first capital plan on
January 5, 2016, unless that time is extended by the Board in writing.
This requirement would replace the requirement that a U.S. domiciled
bank holding company subsidiary of a foreign banking organization
submit a capital plan under section 225.8 of the Board's Regulation Y
(12 CFR 225.8).
A U.S. intermediate holding company that meets the $50 billion
asset threshold after July 1, 2015 would be required to comply with the
capital plan rule beginning in October of the calendar year after the
year in which the U.S. intermediate holding company is established or
otherwise crosses the $50 billion total consolidated asset threshold.
Under the capital plan rule, a U.S. intermediate holding company
with total consolidated assets of $50 billion or more would be required
to submit annual capital plans to the Federal Reserve in which it
demonstrates an ability to maintain capital above the Board's minimum
risk-based capital ratios under both baseline and stressed conditions
over a minimum nine-quarter, forward-looking planning horizon. A U.S.
intermediate holding company that is unable to satisfy these
requirements generally would not be able to make any capital
distributions until it provided a satisfactory capital plan to the
Board.
The capital plan requirement would help ensure that U.S.
intermediate holding companies hold capital commensurate with the risks
they would face under stressful financial conditions and should reduce
the probability of their failure by limiting their capital
distributions under certain circumstances.
Question 16: In what ways, if any, should the Board consider
modifying the requirements of the capital plan rule as it would apply
to U.S. intermediate holding companies? For example, would the capital
policy of a U.S. intermediate holding company of a foreign banking
organization differ meaningfully from the capital policy of a U.S. bank
holding company?
C. Risk-Based Capital Requirements Applicable to Foreign Banking
Organizations With Total Consolidated Assets of $50 Billion or More
The proposal would require a foreign banking organization with
total consolidated assets of $50 billion or more to certify or
otherwise demonstrate to the Board's satisfaction that it meets capital
adequacy standards at the consolidated level that are consistent with
the Basel Capital Framework. The proposal defines the Basel Capital
Framework as the regulatory capital framework published by the BCBS, as
amended from time to time. This requirement would include the standards
in the Basel III Accord for minimum risk-based capital ratios and
restrictions and limitations if capital conservation buffers above the
minimum ratios are not maintained, as these requirements would come
into effect under the transitional provisions included in the Basel III
Accord.\54\
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\54\ The Basel III Accord establishes the following minimum
risked-based capital standards: 4.5 percent tier 1 common equity to
risk-weighted assets, 6.0 percent tier 1 capital to risk-weighted
assets, and 8.0 percent total capital to risk-weighted assets. In
addition, the Basel III Accord includes restrictions on capital
distributions and certain discretionary bonus payments if a banking
organization does not hold tier 1 common equity sufficient to exceed
the minimum risk-weighted ratio requirements outlined above by at
least 2.5 percent. See Basel III Accord, supra note 40.
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A company may satisfy this requirement by certifying that it meets
the capital adequacy standards established by its home country
supervisor, including with respect to the types of capital instruments
that would satisfy requirements for common equity tier 1, additional
tier 1, and tier 2 capital and for calculating its risk-weighted
assets, if those capital adequacy standards are consistent with the
Basel Capital Framework. If a foreign banking organization's home
country standards are not consistent with the Basel Capital Framework,
the foreign banking organization may demonstrate to the Board's
satisfaction that it meets standards consistent with the Basel Capital
Framework.
In addition, a foreign banking organization would be required to
provide to the Board certain information on a consolidated basis. This
information would include its risk-based capital ratios (including its
tier 1 risk-based capital ratio and total risk-based capital ratio and
amount of tier 1 capital and tier 2 capital), risk-weighted assets, and
total assets and, consistent with the transition period in the Basel
III Accord, the common equity tier 1 ratio, leverage ratio and amount
of common equity tier 1 capital, additional tier 1 capital, and total
leverage assets on a consolidated basis.\55\
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\55\ This information would have to be provided as of the close
of the most recent quarter and as of the close of the most recent
audited reporting period.
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Under the proposal, a foreign banking organization with total
consolidated assets of $50 billion or more as of July 1, 2014, would be
required to comply with the proposed certification beginning on July 1,
2015, unless that time is extended by the Board in writing. A foreign
banking organization that exceeds the $50 billion asset threshold after
July 1, 2014, would be required to comply with the proposed
requirements beginning 12 months after it crossed the asset threshold,
unless that time is accelerated or extended by the Board in writing.
The proposal would not apply the current minimum leverage ratio for
U.S. bank holding companies to a foreign banking organization. However,
the international leverage ratio set forth in the Basel III Accord is
expected to be implemented internationally in 2018. At that time, the
proposal would require foreign banking organizations subject to this
requirement to certify or otherwise demonstrate that they comply with
the international leverage ratio, consistent with the Basel Capital
Framework.
If a foreign banking organization cannot provide the certification
or otherwise demonstrate to the Board that it meets capital adequacy
standards at the consolidated level that are consistent with the Basel
Capital Framework, the proposal would provide that the Board may impose
conditions or restrictions relating to the activities or business
operations of the U.S. operations of the foreign banking organization.
In implementing any conditions or restrictions, the Board would
coordinate with any relevant U.S. licensing authority.
In addition, through a separate rulemaking, the Board may introduce
a consolidated capital surcharge certification requirement for a
foreign banking organization that maintains U.S. operations and that is
designated by the BCBS as a global systemically important banking
organization (G-SIBs). The surcharge amount would be aligned with the
international requirement.\56\
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\56\ BCBS, Global systemically important banks: assessment
methodology and the additional loss absorbency requirement (November
2011), available at http://www.bis.org/publ/bcbs207.pdf.
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Question 17: What challenges would foreign banking organizations
face in complying with the proposed enhanced capital standards
framework described above? What alternatives should the Board consider?
Provide detailed descriptions for alternatives.
Question 18: What concerns, if any, are raised by the proposed
requirement that a foreign banking organization calculate regulatory
capital ratios in accordance with home country rules that are
consistent with the Basel Accord, as amended from time to time? How
might the Federal Reserve refine
[[Page 76642]]
the proposed requirement to address those concerns?
Question 19: Should the Board require a foreign banking
organization to meet the current minimum U.S. leverage ratio of 4
percent on a consolidated basis in advance of the 2018 implementation
of the international leverage ratio? Why or why not?
V. Liquidity Requirements
A. Background
During the financial crisis, many global financial companies
experienced significant financial stress due, in part, to inadequate
liquidity risk management. In some cases, companies that were otherwise
solvent had difficulty in meeting their obligations as they became due
because some sources of funding became severely restricted. These
events followed several years of ample liquidity in the financial
system, during which liquidity risk management did not receive the same
level of priority and scrutiny as management of other sources of risk.
The rapid reversal in market conditions and availability of liquidity
during the crisis illustrated how quickly liquidity can evaporate, and
that illiquidity can last for an extended period, leading to a
company's insolvency before its assets experience significant
deterioration in value. The Senior Supervisors Group (SSG), which
comprises senior financial supervisors from seven countries, conducted
reviews of financial companies in different countries and found that
failure of liquidity risk management practices contributed
significantly to the financial crisis.\57\ In particular, the SSG noted
that firms' inappropriate reliance on short-term sources of funding and
in some cases inaccurate measurements of funding needs and lack of
effective contingency funding plans contributed to the liquidity crises
many firms faced.\58\
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\57\ See Senior Supervisors Group, Observations on Risk
Management Practices During the Recent Market Turbulence (March
2008) (2008 SSG Report), available at http://www.newyorkfed.org/newsevents/news/banking/2008/SSG_Risk_Mgt_doc_final.pdf.
\58\ See Senior Supervisors Group, Risk Management Lessons from
the Global Banking Crisis of 2008 (October 2009) (2009 SSG Report),
available at http://www.newyorkfed.org/newsevents/news_archive/banking/2009/SSG_report.pdf.
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The U.S. operations of foreign banking organizations also
experienced liquidity stresses during the financial crisis and more
recently in response to financial strains in Europe, due in part to
their high levels of reliance on short-term, U.S. dollar wholesale
funding. In the lead up to the crisis, many foreign banking
organizations used their U.S. operations to raise short-term U.S.
dollar debt in U.S. markets to fund longer-term assets held in other
jurisdictions. The vulnerabilities associated with this activity are
difficult for U.S. supervisors to monitor, due to their lack of access
to timely information on the global U.S. dollar balance sheets of the
consolidated banking organization. While additional information on the
global consolidated company would partially alleviate this problem,
U.S. supervisors are likely to remain at a significant information
disadvantage relative to home country authorities, which limits U.S.
supervisors' ability to fully assess the liquidity resiliency of the
consolidated firm. Further, liquidity crises tend to occur rapidly,
leaving banking organizations and supervisors limited time to react and
increasing the importance of local management of liquidity sources to
cover local vulnerabilities.
Sole reliance on consolidated liquidity risk management of foreign
banking organizations has also resulted in a disadvantageous funding
structure for the U.S. operations of many firms relative to their home
country operations. Many foreign banking organizations provide funding
to their U.S. branches on a short-term basis and receive funding from
their U.S. branches on a longer-term basis.
To address these risks and help ensure parallel treatment of U.S.
and foreign banking organizations operating in the United States that
pose risk to U.S. financial stability, this proposal would implement a
set of liquidity requirements for foreign banking organizations that
build on the core provisions of the Board's SR Letter 10-6,
``Interagency Policy Statement on Funding and Liquidity Risk
Management'' issued March 2010 (Interagency Liquidity Risk Policy
Statement).\59\ These requirements are broadly consistent with risk
management requirements proposed for U.S. bank holding companies in the
December 2011 proposal.
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\59\ SR Letter 10-6, Interagency Policy Statement on Funding and
Liquidity Risk Management (March 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm.
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In general, the liquidity requirements in this proposal would
establish a regulatory framework for the management of liquidity risk
for the U.S. operations of foreign banking organizations with combined
U.S. assets of $50 billion or more. The proposal would also require the
U.S. operations of these companies to conduct monthly liquidity stress
tests and maintain a buffer of local liquidity to cover cash flow needs
under stressed conditions. The proposal would apply local liquidity
buffer requirements to the U.S. branch and agency networks of these
companies, as well as to U.S. intermediate holding companies.
The liquidity requirements for U.S. operations of foreign banking
organizations included in this proposal are aimed at increasing the
overall liquidity resiliency of these operations during times of
idiosyncratic and market-wide stress and reducing the threat of asset
fire sales during periods when U.S. dollar funding channels are
strained and short-term debt cannot easily be rolled over. The proposed
liquidity requirements are intended to reduce the need to rely on
parent and government support during periods of stress. This proposal
would also provide an incentive for foreign banking organizations to
better match the term structure of funding provided by the U.S.
operations to the head office with funding provided from the head
office to the U.S. operations. Beyond improving the going-concern
resiliency of the U.S. operations of foreign banking organizations, the
proposed liquidity requirements are aimed at minimizing the risk that
extraordinary funding would be needed to resolve the U.S. operations of
a foreign banking organization.
The liquidity buffer for the U.S. intermediate holding company and
the U.S. branch and agency network included in this proposal is not
intended to increase the foreign banking organization's overall
consolidated liquidity requirements. Instead, the proposal is aimed at
ensuring that the portion of the consolidated liquidity requirement
attributable to short-term third-party U.S. liabilities would be held
in the United States. Foreign banking organizations that raise funding
through U.S. entities on a 30-day or longer basis and match the term
structures of intracompany cross-border cash flows would be able to
minimize the amount of liquid assets they would be required to hold in
the United States under this proposal. Finally, local ex ante liquidity
requirements would also allow U.S. supervisors to better monitor the
liquidity risk profile of the U.S. operations of large foreign banking
organizations, reducing the need to implement destabilizing limits on
intragroup flows at the moment when a foreign banking organization is
experiencing financial distress.
The proposed rule provides a tailored approach for foreign banking
organizations with combined U.S. assets
[[Page 76643]]
of less than $50 billion, reflecting the lower risk these firms present
to U.S. financial stability. Generally, these foreign banking
organizations would not be subject to the full set of liquidity
requirements in the proposal, but would be required to report to the
Board the results of an internal liquidity stress test for the combined
U.S. operations on an annual basis. The proposal requires that this
internal test be conducted in a manner consistent with BCBS principles
for liquidity risk management.\60\
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\60\ See BCBS, Principles for Sound Liquidity Risk Management
and Supervision (September 2008) (BCBS principles for liquidity risk
management), available at http://www.bis.org/publ/bcbs144.htm.
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The liquidity risk management requirements in this proposal
represent an initial set of enhanced liquidity requirements for foreign
banking organizations with $50 billion or more in combined U.S. assets
that would be broadly consistent with the December 2011 proposal. The
Board intends through future separate rulemakings to implement the
quantitative liquidity standards included in the Basel III Accord for
the U.S. operations of some or all foreign banking organizations with
$50 billion or more in combined U.S. assets, consistent with the
international timeline.
Question 20: Is the Board's approach to enhanced liquidity
standards for foreign banking organizations with significant U.S.
operations appropriate? Why or why not?
Question 21: Are there other approaches that would more effectively
enhance liquidity standards for these companies? If so, provide
detailed examples and explanations.
Question 22: The Dodd-Frank Act contemplates additional enhanced
prudential standards, including a limit on short-term debt. Should the
Board adopt a short-term debt limit in addition to, or in place of, the
Basel III liquidity requirements in the future? Why or why not?
B. Liquidity Requirements for Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or More
In general, the liquidity requirements proposed for foreign banking
organizations with combined U.S. assets of $50 billion or more would
fall into three broad categories. First, the proposal would establish a
framework for the management of liquidity risk. Second, the proposal
would require these foreign banking organizations to conduct monthly
liquidity stress tests. Third, each such company would be required to
maintain a buffer of highly liquid assets primarily in the United
States to cover cash flow needs under stressed conditions.
A foreign banking organization with combined U.S. assets of $50
billion or more on July 1, 2014, would be required to comply with the
proposed liquidity requirements on July 1, 2015, unless that time is
extended by the Board in writing. A foreign banking organization whose
combined U.S. assets exceeded $50 billion after July 1, 2014, would be
required to comply with the proposed liquidity standards beginning 12
months after it crossed the $50 billion asset threshold, unless that
time is accelerated or extended by the Board in writing.
Framework for Managing Liquidity Risk
A critical element of sound liquidity risk management is effective
corporate governance, consisting of oversight of a company's liquidity
risk management by its board of directors and the appropriate risk
management committee and executive officers.
As discussed further below in section VII of this preamble, the
proposal would require that a foreign banking organization with
combined U.S. assets of $50 billion or more establish a risk committee
to oversee the risk management of the combined U.S. operations of the
company.\61\ The proposal would also require a foreign banking
organization with combined U.S. assets of $50 billion or more to
appoint a U.S. chief risk officer with responsibility for implementing
the company's risk management practices for the combined U.S.
operations.
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\61\ The U.S. risk committee can be the foreign banking
organization's enterprise-wide risk committee, as described in
section VII of this preamble, as long as the enterprise-wide risk
committee specifically assumes the specified responsibilities just
described.
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The U.S. risk committee would be required to review and approve the
company's liquidity risk tolerance for its U.S. operations at least
annually, with the concurrence of the company's board of directors or
the enterprise-wide risk committee (if a different committee than the
U.S. risk committee).\62\ In reviewing its liquidity risk tolerance,
the U.S. risk committee would be required to consider the capital
structure, risk profile, complexity, activities, and size of the
company's U.S. operations in order to help ensure that the established
liquidity risk tolerance is appropriate for the company's business
strategy with respect to its U.S. operations and the role of those
operations in the U.S. financial system. The liquidity risk tolerance
for the U.S. operations should also be consistent with the enterprise-
wide liquidity risk tolerance established for the consolidated
organization by the board of directors or the enterprise-wide risk
committee.
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\62\ Liquidity risk tolerance is the acceptable level of
liquidity risk the company may assume in connection with its
operating strategies for its combined U.S. operations.
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The liquidity risk tolerance should reflect the U.S. risk
committee's assessment of tradeoffs between the costs and benefits of
liquidity. Inadequate liquidity for the U.S. operations could expose
the operations to significant financial stress and endanger the ability
of the company to meet contractual obligations arising out of its U.S.
operations. Conversely, too much liquidity can entail substantial
opportunity costs and have a negative impact on the profitability of
the company's U.S. operations.
The U.S. risk committee should communicate the liquidity risk
tolerance to management within the U.S. operations such that they
understand the U.S. risk committee's policy for managing the trade-offs
between the risk of insufficient liquidity and generating profit and
are able to apply the policy to liquidity risk management throughout
the U.S. operations.
The proposal would also require that the U.S. chief risk officer
review and approve the liquidity costs, benefits, and risk of each
significant new business line engaged in by the U.S. operations and
each significant new product offered, managed, or sold through the U.S.
operations before the company implements the line or offer the product.
In connection with this review, the U.S. chief risk officer would be
required to consider whether the liquidity risk of the new strategy or
product under current conditions and under liquidity stress scenarios
is within the established liquidity risk tolerance of the U.S.
operations. At least annually, the U.S. chief risk officer would be
required to review approved significant business lines and products to
determine whether each line or product has created any unanticipated
liquidity risk, and to determine whether the liquidity risk of each
line or product continues to be within the established liquidity risk
tolerance of the U.S. operations.
A foreign banking organization with combined U.S. assets of $50
billion or more would be required to establish a contingency funding
plan for its combined U.S. operations. The U.S. chief risk officer
would be required to review and approve the U.S. operations'
contingency funding plan at least annually and whenever the company
materially revises the plan either for the
[[Page 76644]]
company as a whole or for the combined U.S. operations specifically.
As part of ongoing liquidity risk management within the U.S.
operations, the proposal would require the U.S. chief risk officer to,
at least quarterly, review the cash flow projections to ensure
compliance with the liquidity risk tolerance; review and approve the
liquidity stress test practices, methodologies, and assumptions; review
the liquidity stress test results; approve the size and composition of
the liquidity buffer; review and approve the specific limits on
potential sources of liquidity risk and review the company's compliance
with those limits; and review liquidity risk management information
systems necessary to identify, measure, monitor, and control liquidity
risk. In addition, the U.S. chief risk officer would be required to
establish procedures governing the content of reports on the liquidity
risk profile of the combined U.S. operations.
Additional Responsibilities of the U.S. Chief Risk Officer
Under the proposed rule, the U.S. chief risk officer would be
required to review the liquidity risk management strategies and
policies and procedures established by senior management of the
combined U.S. operations of the foreign banking organization. These
strategies and policies and procedures should include those relating to
liquidity risk measurement and reporting systems, cash flow
projections, liquidity stress testing, liquidity buffer, contingency
funding plan, specific limits, and monitoring procedures required under
the proposed rule. The proposal also would require the U.S. chief risk
officer to review information provided by the senior management of the
U.S. operations to determine whether those operations are managed in
accordance with the established liquidity risk tolerance. The U.S.
chief risk officer would additionally be required to report at least
semi-annually to the U.S. risk committee and enterprise-wide risk
committee (or designated subcommittee thereof) on the liquidity risk
profile of the combined U.S. operations of the company, and to provide
other relevant and necessary information to the U.S. risk committee and
the enterprise-wide risk committee to ensure that the U.S. operations
are managed within the established liquidity risk tolerance.
Independent Review
Under the proposed rule, a foreign banking organization with
combined U.S. assets of $50 billion or more would be required to
establish and maintain an independent review function to evaluate the
liquidity risk management of its combined U.S. operations. The review
function would be independent of management functions that execute
funding (the treasury function). The independent review function would
be required to review and evaluate the adequacy and effectiveness of
the U.S. operations' liquidity risk management processes regularly, but
no less frequently than annually. It would also be required to assess
whether the U.S. operations' liquidity risk management complies with
applicable laws, regulations, supervisory guidance, and sound business
practices, and to report statutory and regulatory noncompliance and
other material liquidity risk management issues to the U.S. risk
committee and the enterprise-wide risk committee (or designated
subcommittee) in writing for corrective action.
An appropriate internal review conducted by the independent review
function should address all relevant elements of the liquidity risk
management process for the U.S. operations, including adherence to the
established policies and procedures, and the adequacy of liquidity risk
identification, measurement, and reporting processes. Personnel
conducting these reviews should seek to understand, test, document, and
evaluate the liquidity risk management processes, and recommend
solutions to any identified weaknesses.
Cash Flow Projections
To ensure that a foreign banking organization with combined U.S.
assets of $50 billion or more has a sound process for identifying and
measuring liquidity risk, the proposed rule would require comprehensive
projections for the company's U.S. operations that include forecasts of
cash flows arising from assets, liabilities, and off-balance sheet
exposures over appropriate time periods, and identify and quantify
discrete and cumulative cash flow mismatches over these time periods.
The proposed rule would specifically require the company to provide
cash flow projections for the U.S. operations over short-term and long-
term time horizons that are appropriate to the capital structure, risk
profile, complexity, activities, size, and other risk-related factors
of the U.S. operations.\63\
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\63\ A company would be required to update short-term cash flow
projections daily, and update long-term cash flow projections at
least monthly.
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The proposed rule states that a foreign banking organization must
establish a methodology for making its cash flow projections for its
U.S. operations, and must use reasonable assumptions regarding the
future behavior of assets, liabilities, and off-balance sheet exposures
in the projections. Given the critical importance that the methodology
and underlying assumptions play in liquidity risk measurement, the
company would also be required to adequately document the methodology
and assumptions. In addition, the Board expects senior management to
periodically review and approve the assumptions used in the cash flow
projections for the U.S. operations to ensure that they are reasonable
and appropriate.
To ensure that the cash flow projections incorporate liquidity risk
exposure to contingent events, the proposed rule would require that
projections include cash flows arising from contractual maturities, and
intercompany transactions, as well as cash flows from new business,
funding renewals, customer options, and other potential events that may
affect the liquidity of the U.S. operations. The Board would expect a
company to use dynamic analysis because static projections may
inadequately quantify important aspects of potential liquidity risk
that could have a significant effect on the liquidity risk profile of
the U.S. operations. A dynamic analysis that incorporates management's
reasoned assumptions regarding the future behavior of assets,
liabilities, and off-balance sheet items in projected cash flows is
important for identifying potential liquidity risk exposure.
The proposed rule would not require firms to provide specific cash
flow information to the Board on their worldwide U.S. dollar activity.
However, firms that have large global cash flows in U.S. dollars may
require significant funding from sources in the United States during a
time of financial stress, which may present risk to the U.S. financial
system. The Board therefore is considering whether to require foreign
banking organizations with combined U.S. assets of $50 billion or more
to report all of their global consolidated cash flows that are in U.S.
dollars. This information could assist U.S. supervisors in
understanding the extent to which companies conduct their activities
around the world in U.S. dollars and the potential need these companies
may have for U.S. dollar funding.
Question 23: Should foreign banking organizations with a large U.S.
presence be required to provide cash flow statements for all activities
they conduct in U.S. dollars, whether or not through the U.S.
operations? Why or why not?
[[Page 76645]]
Liquidity Stress Test Requirements
The proposal would require a foreign banking organization with
combined U.S. assets of $50 billion or more to conduct monthly
liquidity stress tests separately on its U.S. intermediate holding
company and its U.S. branch and agency network. By considering how
severely adverse events, conditions, and outcomes would affect the
liquidity risk of its U.S. branch and agency network and its U.S.
intermediate holding company, the company can identify vulnerabilities;
quantify the depth, source, and degree of potential liquidity strain in
its U.S. operations; and analyze the possible effects. When combined
with comprehensive information about an institution's funding position,
stress testing can serve as an important tool for effective liquidity
risk management.
In conducting liquidity stress test, the foreign banking
organization would be required to separately identify adverse liquidity
stress scenarios and assess the effects of these scenarios on the cash
flow and liquidity of each of the U.S. branch and agency network and
the U.S. intermediate holding company. In addition to monthly stress
testing, the U.S. operations of the foreign banking organization must
be prepared to conduct ``ad hoc'' stress tests to address rapidly
emerging risks or consider the effect of sudden events, upon the
request of the Board. The Board may, for example, require the U.S.
operations of a company to perform additional stress tests where there
has been a significant deterioration in the company's earnings, asset
quality, or overall financial condition; when there are negative trends
or heightened risk associated with a particular product line of the
U.S. operations; or when there are increased concerns over the
company's funding of off-balance sheet exposures related to U.S.
operations.
Effective stress testing should include adverse scenario analyses
that incorporate historical and hypothetical scenarios to assess the
effect on liquidity of various events and circumstances, including
variations thereof. At a minimum, a company would be required to
incorporate stress scenarios for its U.S. operations that account for
adverse conditions due to market stress, idiosyncratic stress, and
combined market and idiosyncratic stresses. Additional scenarios should
be used as needed to ensure that all of the significant aspects of
liquidity risks to the relevant U.S. operations have been modeled. The
proposed rule would also require that the stress testing addresses the
potential for market disruptions to have an adverse effect on the
company's combined U.S. operations, and the potential actions of other
market participants experiencing liquidity stresses under the same
market disruption. The stress tests should appropriately consider how
stress events would adversely affect not only the U.S. operations on a
standalone basis, but also how idiosyncratic or market-related stresses
on other operations of the company may affect the U.S. operations'
liquidity.
Stress testing should address the full set of activities, exposures
and risks, both on- and off-balance sheet, of the U.S. operations, and
address non-contractual sources of risks, such as reputational risks.
For example, stress testing should address potential liquidity issues
arising from use of sponsored vehicles that issue debt instruments
periodically to the markets, such as asset-backed commercial paper and
similar conduits. Under stress scenarios, elements of the U.S.
operations may be contractually required, or compelled in the interest
of mitigating reputational risk, to provide liquidity support to such a
vehicle.
Effective liquidity stress testing should be conducted over a
variety of different time horizons to adequately capture rapidly
developing events, and other conditions and outcomes that may
materialize in the near or long term. To ensure that a company's stress
testing for its U.S. operations contemplates such events, conditions,
and outcomes, the proposed rule would require that the stress scenarios
use a minimum of four time horizons including an overnight, a 30-day, a
90-day, and a one-year time horizon. Additional time horizons may be
necessary to reflect the capital structure, risk profile, complexity,
activities, size, and other relevant factors of the company's combined
U.S. operations.
The proposal further provides that liquidity stress testing must be
tailored to, and provide sufficient detail to reflect the capital
structure, risk profile, complexity, activities, size, and other
relevant characteristics of the U.S. operations. This requirement is
intended to ensure that stress testing under the proposed rule would be
tied directly to the business profile and the regulatory environment of
the U.S. operations.\64\ The requirement also addresses relevant risk
areas, provides for an appropriate level of aggregation, and captures
appropriate risk drivers, internal and external influences, and other
key considerations that may affect the liquidity position of the U.S.
operations and the company as a whole. In order to fully assess the
institution's liquidity risk profile, stress testing by business line
or legal entity or stress scenarios that use additional time horizons
may be necessary beyond the tests described above.
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\64\ For example, applicable statutory and regulatory
restrictions on companies, including restrictions on the
transferability of assets between legal entities, would need to be
incorporated. These restrictions include sections 23A and 23B of the
Federal Reserve Act (12 U.S.C. 371c and 371c-1) and Regulation W (12
CFR part 223), which govern covered transactions between banks and
their affiliates.
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A foreign banking organization must assume that, for the first 30
days of a liquidity stress horizon, only highly liquid assets that are
unencumbered may be used as cash flow sources to meet projected funding
needs for the U.S. operations. For time periods beyond the first 30
days of a liquidity stress scenario, highly liquid assets that are
unencumbered and other appropriate funding sources may be used.\65\
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\65\ The liquidity buffer and the definitions of unencumbered
and highly liquid asset are discussed below.
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Liquidity stress testing for the U.S. operations should account for
deteriorations in asset valuations when there is market stress.
Accordingly, the proposed rule would require discounting the fair
market value of an asset that is used as a cash flow source to offset
projected funding needs in order to reflect any credit risk and market
price volatility of the asset. The proposed rule would also require
that sources of funding used to generate cash to offset projected
outflows be diversified by collateral, counterparty, or borrowing
capacity, or other factors associated with the liquidity risk of the
assets throughout each stress test time horizon. Thus, if U.S.
operations hold high quality assets other than cash and securities
issued or guaranteed by the U.S. government, a U.S. government
agency,\66\ or a U.S. government-sponsored entity,\67\ to meet future
outflows, the assets must be diversified by collateral, counterparty,
or borrowing capacity, and other liquidity risk identifiers.
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\66\ A U.S. government agency is defined in the proposed rule as
an agency or instrumentality of the U.S. government whose
obligations are fully and explicitly guaranteed as to the timely
payment of principal and interest by the full faith and credit of
the U.S. government.
\67\ A U.S. government-sponsored entity is defined in the
proposed rule as an entity originally established or chartered by
the U.S. government to serve public purposes specified by the U.S.
Congress, but whose obligations are not explicitly guaranteed by the
full faith and credit of the U.S. government.
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[[Page 76646]]
The proposed rule would require that the U.S. operations maintain
policies and procedures that outline its liquidity stress testing
practices, methodologies, and assumptions, and provide for the
enhancement of stress testing practices as risks change and as
techniques evolve. The proposal would also require the company to
provide to the Board the results of its stress test for U.S. operations
on a monthly basis within 14 days of the end of each month.
Foreign banking organizations also would be required to provide to
the Board a summary of the results of any liquidity stress test and
liquidity buffers established by their home country regulators, on a
quarterly basis and within 14 days of completion of the stress test.
This information is required to demonstrate how vulnerabilities
identified within its U.S. operations will be covered by a buffer being
held by the company for its global operations and how vulnerabilities
outside the United States may affect its U.S. operations. The Board may
require additional information from foreign banking organizations whose
U.S. operations significantly rely on the foreign parent for funding
with respect to their home country liquidity stress tests and buffers.
Question 24: What challenges will foreign banking organizations
face in formulating and implementing liquidity stress testing described
in the proposed rule? What changes, if any, should be made to the
proposed liquidity stress testing requirements (including the stress
scenario requirements) to ensure that analyses of the stress testing
will provide useful information for the management of a company's
liquidity risk? What alternatives to the proposed liquidity stress
testing requirements, including the stress scenario requirements,
should the Board consider? What additional parameters for the liquidity
stress tests should the Board consider defining?
Liquidity Buffer
To withstand liquidity stress under adverse conditions, a company
generally needs a sufficient supply of liquid assets that can be sold
or pledged to obtain funds needed to meet its obligations. During the
financial crisis, financial companies that experienced severe liquidity
difficulties often held insufficient liquid assets to meet their
liquidity needs, which had increased sharply as market sources of
funding became unavailable. Accordingly, the proposed rule would
require a company to maintain a liquidity buffer of unencumbered highly
liquid assets for its U.S. operations to meet the cash flow needs
identified under the required stress tests described above.
The proposal would require separate liquidity buffers for a foreign
banking organization's U.S. branch and agency network and its U.S.
intermediate holding company that are equal to their respective net
stressed cash flow needs as identified by the required stress test.
Each calculation of the net stressed cash flow need described below
must be performed for the U.S. branch and agency network and U.S.
intermediate holding company separately. These calculations assess the
stressed cash flow need both with respect to intracompany transactions
and transactions with unaffiliated parties to quantify the liquidity
vulnerabilities of the U.S. operations during the 30-day stress
horizon.
Liquidity Buffer Calculation
Under the proposal, each U.S. branch and agency network and U.S.
intermediate holding company must maintain a liquidity buffer equal to
its net stressed cash flow need over a 30-day stress horizon. The net
stressed cash flow need is equal to the sum of (1) the net external
stressed cash flow need and (2) the net internal stressed cash flow
need. The calculation of external and internal stressed cash flow needs
is conducted separately in order to provide different treatment of
these two sets of cash flows when sizing the liquidity buffer needs of
the U.S. operations. The proposal treats these cash flows differently
to minimize the ability of a foreign banking organization to meet its
external net stressed cash flow needs with intragroup cash flows. This
approach is aimed at addressing the risk that the U.S. operations of a
foreign banking organization and its non-U.S. operations will face
funding pressures simultaneously.
A U.S. intermediate holding company would be required to calculate
its liquidity buffer based on both net internal stressed cash flow
needs and net external stressed cash flow needs, as described below,
for the entire 30-day stress period, and maintain the assets comprising
the liquidity buffer in the United States. To avoid evasion of these
requirements, cash assets counted in the liquidity buffer of the U.S.
intermediate holding company may not be held in an account located at
an affiliate of the U.S. intermediate holding company.
The U.S. branch and agency network would also be required to hold
liquid assets in the United States to meet a portion of its 30-day
liquidity buffer. The liquidity buffer requirement for a U.S. branch
and agency network is calculated using a different methodology than the
U.S. intermediate holding company because U.S. branches and agencies
are not separate legal entities from the foreign bank and can engage
only in traditional banking activities by the terms of their licenses.
For day 1 through day 14 of the 30-day stress period, the U.S.
branch and agency network would be required to take into account net
internal stressed cash flow needs and net external stressed cash flow
needs. The U.S. branch and agency network would be required to maintain
highly liquid assets sufficient to cover its net stressed cash flow
needs for day 1 through day 14 in the United States. Consistent with
the treatment of the U.S. intermediate holding company, cash assets
counted in the 14-day liquidity buffer of the U.S. branch and agency
network may not be held in an account located at the U.S. intermediate
holding company, head office, or other affiliate. For day 15 through
day 30 of the stress test horizon, the U.S. branch and agency network
would be permitted to maintain its liquidity buffer to meet net
stressed cash flow needs outside of the United States, provided that
the company has demonstrated to the satisfaction of the Board that the
company has and is prepared to provide, or its affiliate has and would
be required to provide, highly liquid assets to the U.S. branch and
agency network sufficient to meet the liquidity needs of the operations
of the U.S. branch and agency network for day 15 through day 30 of the
stress test horizon. The U.S. branch and agency network would be
permitted to calculate the liquidity buffer for day 15 through day 30
based on its external stressed cash flow need only because the buffer
may be maintained at the parent level.
Under the proposal, the net external stressed cash flow need is the
difference between (1) the amount that the U.S. branch and agency
network or the U.S. intermediate holding company, respectively, must
pay unaffiliated parties over the relevant period in the stress test
horizon and (2) the amount that unaffiliated parties must pay the U.S.
branch and agency network or the U.S. intermediate holding company,
respectively, over the relevant period in the stress test horizon.
The net internal stressed cash flow need is the greatest daily
cumulative cash flow need of a U.S. branch and agency network or a U.S.
intermediate holding company, respectively, with respect to
transactions with the head office and other affiliated parties
identified during the stress horizon. The daily cumulative cash flow
need is calculated as the sum of the net intracompany cash flow need
calculated
[[Page 76647]]
for that day and the net intracompany cash flow need calculated for
each previous day of the stress test horizon. The methodology used to
calculate the net internal stressed cash flow need is designed to
provide a foreign banking organization with an incentive to minimize
maturity mismatches in transactions between the U.S. branch and agency
network or U.S. intermediate holding company, on the one hand, and the
company's head office or affiliates, on the other hand. The methodology
allows intracompany cash flow sources of a U.S. branch and agency
network or U.S. intermediate holding company to offset intracompany
cash flow needs of a U.S. branch and agency network or U.S.
intermediate holding company only to the extent the term of the
intracompany cash flow source is the same as or shorter than the term
of the intracompany cash flow need. As noted above, these assumptions
reflect the risk that during a stress scenario, the U.S. operations,
the head office, and other affiliated counterparties may come under
stress simultaneously. Under such a scenario, the head office may be
unable or unwilling to return funds to the U.S. branch and agency
network or the U.S. intermediate holding company when those funds are
most needed.
Figure 1 below illustrates the steps required to calculate the
components of the liquidity buffer.
[GRAPHIC] [TIFF OMITTED] TP28DE12.000
The tables below set forth an example of a calculation of net
stressed cash flow need as required under the proposal, using a stress
period of five days. For purposes of the example, cash flow needs are
represented as negative, and cash flow sources are represented as
positive.
BILLING CODE 6210-01-P
[[Page 76648]]
[GRAPHIC] [TIFF OMITTED] TP28DE12.001
[[Page 76649]]
[GRAPHIC] [TIFF OMITTED] TP28DE12.002
BILLING CODE 6210-01-C
[[Page 76650]]
As discussed above, the proposed liquidity framework provides an
incentive for companies to match the maturities of cash flow needs and
cash flow sources from affiliates, due to the likely high correlation
between liquidity stress events in the U.S. operations and non-U.S.
operations of a foreign banking organization. However, the Board
recognizes that there may be appropriate alternatives and seeks comment
on other approaches to addressing intracompany transactions in
determining the size of the required U.S. liquidity buffer. The Board
seeks comment on the following additional methods or approaches for
calculating the net internal stressed cash flow need requirement:
(1) Assume that any cash flows expected to be received by U.S.
operations from the head office or affiliates are received one day
after the scheduled maturity date. This would help ensure that the U.S.
operations receive any payments owed by affiliates before having to
make payments to affiliates, thereby preventing intraday arbitrage of
the proposed maturity matching requirement.
(2) Allow the U.S. operations to net all intracompany cash flow
needs and sources over the entire stress period, regardless of the
maturities within the stress horizon, but apply a 50 percent haircut to
all intracompany cash flow sources within the stress horizon. This
approach could simplify the calculation and reduce compliance burden,
but provides less incentive for foreign banking organizations to
achieve maturity matches for their U.S. operations within the stress
horizon.
(3) Assume that all intracompany cash flow needs during the
relevant stress period mature and roll-off at a 100 percent rate and
that all intracompany cash flow sources within the relevant stress
period are not received (that is, they could not be used to offset cash
flow needs). This approach would simplify the calculation, but assumes
that the parent would make none of its contractual payments to the U.S.
subsidiary or U.S. branch and agency network may be an unreasonable
assumption even under conservatively stressed scenarios. Alternatively,
this approach could be used as a heightened standard that could be
imposed if the Board has particular concerns about of the ability or
willingness of the parent company to serve as a source of strength.
Question 25: The Board requests feedback on the proposed approach
to intragroup flows as well as the described alternatives. What are the
advantages and disadvantages of the alternatives versus the treatment
in the proposal? Are there additional alternative approaches to
intracompany cash flows that the Board should consider? Provide
detailed answers and supporting data where available.
Question 26: Should U.S. branch and agency networks be required to
cover net internal stressed cash flow needs for days 15 to 30 of the
required stress scenario within the United States? Should U.S. branch
and agency networks be required to hold the entire 30-day liquidity
buffer in the United States?
Composition of the Liquidity Buffer
Under the proposed rule, only highly liquid assets that are
unencumbered may be included in a liquidity buffer for a U.S.
intermediate holding company or U.S. branch and agency network. Assets
in the liquidity buffer need to be easily and immediately convertible
to cash with little or no loss of value. Thus, cash or securities
issued or guaranteed by the U.S. government, a U.S. government agency,
or a U.S. government-sponsored entity are included in the proposed
definition of highly liquid assets. In addition, under the proposed
rule, other assets may be included in the liquidity buffer as highly
liquid assets if a company demonstrates to the satisfaction of the
Board that an asset:
(i) Has low credit risk (low risk of default) and low market risk
(low price volatility); \68\
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\68\ Generally, market risk is the risk of loss that could
result from broad market movements, such as changes in the general
level of interest rates, credit spreads, equity prices, foreign
exchange rates, or commodity prices. See 12 CFR part 225, appendix
E.
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(ii) Is traded in an active secondary two-way market that has
committed market makers and independent bona fide offers to buy and
sell so that a price reasonably related to the last sales price or
current bona fide competitive bid and offer quotations can be
determined within one day and settled at that price within a reasonable
time period conforming with trade custom; and
(iii) Is a type of asset that investors historically have purchased
in periods of financial market distress during which liquidity is
impaired (flight to quality). For example, certain ``plain vanilla''
corporate bonds (that is, bonds that are neither structured products
nor subordinated debt) issued by a nonfinancial company with a strong
financial profile have been reliable sources of liquidity in the repo
market during past stressed conditions. Assets with the above
characteristics may meet the definition of a highly liquid asset as
proposed.
The highly liquid assets in the liquidity buffer should be readily
available at all times to meet the liquidity needs of the U.S.
operations. Accordingly, the assets must be unencumbered. Under the
proposed rule, an asset would be unencumbered if: (i) The asset is not
pledged, does not secure, collateralize or provide credit enhancement
to any transaction, and is not subject to any lien, or, if the asset
has been pledged to a Federal Reserve bank or a U.S. government-
sponsored entity, the asset has not been used; (ii) the asset is not
designated as a hedge on a trading position under the Board's market
risk rule; \69\ and (iii) there are no legal or contractual
restrictions on the ability of the company to promptly liquidate, sell,
transfer, or assign the asset.
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\69\ The Board's market risk rule defines a trading position as
a position that is held by a company for the purpose of short-term
resale or with the intent of benefiting from actual or expected
short-term price movements, or to lock-in arbitrage profits. See 12
CFR part 225, appendix E.
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Question 27: The Board requests comment on all aspects of the
proposed definitions of highly liquid assets and unencumbered. What, if
any, other assets should be specifically listed in the definition of
highly liquid assets? Why should these other assets be included? Are
the criteria for identifying additional assets for inclusion in the
definition of highly liquid assets appropriate? If not, how and why
should the Board revise the criteria?
Question 28: Should the Board require matching of liquidity risk
and the liquidity buffer at the individual branch level rather than
allowing the firm to consolidate across U.S. branch and agency
networks? Why or why not?
Question 29: Should U.S. intermediate holding companies be allowed
to deposit cash portions of their liquidity buffer with affiliated
branches or U.S. entities? Why or why not?
Question 30: In what circumstances should the cash portion of the
liquidity buffer be permitted to be held in a currency other than U.S.
dollars?
Question 31: Should the Board provide more clarity around when the
liquidity buffer would be allowed to be used to meet liquidity needs
during times of stress? What standards would be appropriate for usage
of the liquidity buffer?
Question 32: Are there situations in which compliance with the
proposed rule would hinder a foreign banking organization from
employing appropriate liquidity risk management practices? Provide
specific detail.
[[Page 76651]]
Contingency Funding Plan
The proposed rule would require a foreign banking organization with
combined U.S. assets of $50 billion or more to establish and maintain a
contingency funding plan for its combined U.S. operations. The
objectives of the contingency funding plan are to provide a plan for
responding to a liquidity crisis, to identify alternate liquidity
sources that the U.S. operations can access during liquidity stress
events, and to describe steps that should be taken to ensure that the
company's sources of liquidity are sufficient to fund its operating
costs and meet its commitments while minimizing additional costs and
disruption.
The contingency funding plan should set out the company's
strategies for addressing liquidity needs during liquidity stress
events. Under the proposed rule, the contingency funding plan would be
required to be commensurate with the U.S. operations and the company's
capital structure, risk profile, complexity, activities, size, other
relevant factors, and established liquidity risk tolerance. The
contingency funding plan should also specify the contingency funding
plans related to specific legal entities, including the U.S. branch and
agency network and U.S. intermediate holding company. A company would
be required to update the contingency funding plan for its U.S.
operations at least annually, or whenever changes to market and
idiosyncratic conditions warrant an update.
Under the proposed rule, the contingency funding plan would include
four components: A quantitative assessment, an event management
process, monitoring requirements, and testing requirements. Under the
quantitative assessment, a company must: (i) Identify liquidity stress
events that have a significant effect on the U.S. operations'
liquidity; (ii) assess the level and nature of the effect on the U.S.
operations' liquidity that may occur during identified liquidity
events; (iii) assess available funding sources and needs during the
identified liquidity stress events; and (iv) identify alternative
funding sources that may be used during the liquidity stress events.
A liquidity stress event that may have a significant effect on a
company's liquidity would include deterioration in asset quality,
ratings downgrades, widening of credit default swap spreads, operating
losses, declining financial institution equity prices, negative press
coverage, or other events that call into question the company or its
U.S. operations' ability to meet its obligations.
The contingency funding plan should delineate the various levels of
stress severity that can occur during the stress event, and identify
the various stages for each type of event. The events, stages, and
severity levels should include temporary disruptions, as well as those
that might be intermediate or longer term. To meet the requirements of
the proposal, the contingency funding plan must assess available
funding sources and needs during identified liquidity stress events for
the company's combined U.S. operations. This should include an analysis
of the potential erosion of available funding at alternative stages or
severity levels of each stress event, as well as the identification of
potential cash flow mismatches that may occur during the various stress
levels. A company is expected to base its analysis on realistic
assessments of the behavior of funds providers during the event, and
should incorporate alternative funding sources. The analysis should
include all material on- and off-balance sheet cash flows and their
related effects on the combined U.S. operations. The result should be a
realistic analysis of the cash inflows, outflows, and funds available
to the combined U.S. operations at different time intervals during the
identified liquidity stress event.
Liquidity pressures are likely to spread from one funding source to
another during significant liquidity stress events. Accordingly, the
proposed rule would require a company to identify alternative funding
sources that may be accessed by the combined U.S. operations during
identified liquidity stress events. Any legal or other restrictions
that exist that may limit the ability of funding sources to be used by
different legal entities within the U.S. operations should be
identified. Since some of these alternative funding sources will rarely
be used in the normal course of business, the U.S. operations should
conduct advance planning and periodic testing to ensure that the
funding sources are available when needed. Administrative procedures
and agreements are also expected to be in place before the U.S.
operations needs to access the alternative funding sources.
Discount window credit may be incorporated into contingency funding
plans as a potential source of funds for a foreign bank's U.S. branches
and agencies, in a manner consistent with terms provided by Federal
Reserve Banks. For example, primary credit is currently available on a
collateralized basis for financially sound institutions as a backup
source of funds for short-term funding needs. Contingency funding plans
that incorporate borrowing from the discount window should specify the
actions that would be taken to replace discount window borrowing with
more permanent funding, and include the proposed time frame for these
actions.
Under the proposed rule, the contingency funding plan must also
include an event management process that sets out procedures for
managing liquidity during identified liquidity stress events. This
process must include an action plan that clearly describes the
strategies the combined U.S. operations of the company would use to
respond to liquidity shortfalls for identified liquidity stress events,
including the methods that the company or its combined U.S. operations
would use to access the alternative funding sources identified in the
quantitative assessment.
Under the proposed rule, the event management process must also
identify a liquidity stress event management team that would execute
the action plan described above and specify the process,
responsibilities, and triggers for invoking the contingency funding
plan, escalating the responses described in the action plan, decision-
making during the identified liquidity stress events, and executing
contingency measures identified in the action plan for the U.S.
operations.
In addition, to promote the flow of necessary information during a
period of liquidity stress, the proposed rule would require the event
management process to include a mechanism that ensures effective
reporting and communication within the company and its combined U.S.
operations and with outside parties, including the Board and other
relevant supervisors, counterparties, and other stakeholders.
The proposal would also impose monitoring requirements on the
company's combined U.S. operations so that the U.S. operations would be
able to proactively position themselves into progressive states of
readiness as liquidity stress events evolve. These requirements include
procedures for monitoring emerging liquidity stress events and for
identifying early warning indicators of emerging liquidity stress
events that are tailored to a company's capital structure, risk
profile, complexity, activities, size, and other relevant factors. Such
early warning indicators may include negative publicity concerning an
asset class owned by the company, potential deterioration in the
company's financial condition, widening debt or credit
[[Page 76652]]
default swap spreads, and increased concerns over the funding of off-
balance-sheet items.
The proposed rule would require a company to periodically test the
components of the U.S. operations' contingency funding plan to assess
its reliability during liquidity stress events. Such testing would
include trial runs of the operational elements of the contingency
funding plan to ensure that they work as intended during a liquidity
stress event. These tests would include operational simulations to test
communications, coordination, and decision making involving relevant
managers, including managers at relevant legal entities within the
corporate structure.
A company would also be required to periodically test the methods
it will use to access alternate funding for its U.S. operations to
determine whether these sources of funding would be readily available
when needed. For example, the Board expects that a company would test
the operational elements of a contingency funding plan that are
associated with lines of credit, the Federal Reserve discount window,
or other secured borrowings, since efficient collateral processing
during a liquidity stress event is especially important for such
funding sources.
Specific Limits
To enhance management of liquidity risk, the proposed rule would
require a foreign banking organization with combined U.S. assets of $50
billion or more to establish and maintain limits on potential sources
of liquidity risk. Proposed limitations would include limits on:
concentrations of funding by instrument type, single-counterparty,
counterparty type, secured and unsecured funding, and other liquidity
risk identifiers; the amount of specified liabilities that mature
within various time horizons; and off-balance sheet exposures and other
exposures that could create funding needs during liquidity stress
events.\70\ The U.S. operations would also be required to monitor
intraday liquidity risk exposure in accordance with procedures
established by the foreign banking organization.
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\70\ Such exposures may be contractual or non-contractual
exposures, and include such liabilities as unfunded loan
commitments, lines of credit supporting asset sales or
securitizations, collateral requirements for derivative
transactions, and letters of credit supporting variable demand
notes.
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A foreign banking organization would additionally be required to
monitor its compliance with all limits established and maintained under
the specific limit requirements. The size of each limit must reflect
the U.S. operations' capital structure, risk profile, complexity,
activities, size, and other appropriate risk related factors, and
established liquidity risk tolerance.
Question 33: Should foreign banking organizations with a large U.S.
presence be required to establish and maintain limits on other
potential sources of liquidity risk in addition to the specific sources
listed in the proposed rule? If so, identify these additional sources
of liquidity risk.
Monitoring
The proposed rule would require a foreign banking organization with
combined U.S. assets of $50 billion or more to monitor liquidity risk
related to collateral positions of the U.S. operations, liquidity risks
across its U.S. operations, and intraday liquidity positions for its
combined U.S. operations, each as described below.
Collateral Positions
Under the proposed rule, a foreign banking organization with
combined U.S. assets of $50 billion or more would be required to
establish and maintain procedures for monitoring assets of the combined
U.S. operations it has pledged as collateral for an obligation or
position, and assets that are available to be pledged. The procedures
must address the ability of the company with respect to its combined
U.S. operations to:
(i) Calculate all of the collateral positions of the U.S.
operations on a weekly basis (or more frequently as directed by the
Board due to financial stability risks or the financial condition of
the U.S. operations), including the value of assets pledged relative to
the amount of security required under the contract governing the
obligation for which the collateral was pledged, and the unencumbered
assets available to be pledged;
(ii) Monitor the levels of available collateral by legal entity
(including the U.S. branch and agency networks and U.S. intermediate
holding company), jurisdiction, and currency exposure;
(iii) Monitor shifts between intraday, overnight, and term pledging
of collateral; and
(iv) Track operational and timing requirements associated with
accessing collateral at its physical location (for example, the
custodian or securities settlement system that holds the collateral).
Legal Entities, Currencies, and Business Lines
Regardless of its organizational structure, it is critical that a
company actively monitor and control liquidity risks at the level of
individual U.S. legal entities and the U.S. operations as a whole. Such
monitoring would aggregate data across multiple systems to develop a
U.S. operation-wide view of liquidity risk exposure and identify
constraints on the transferability of liquidity within the
organization.
To promote effective monitoring across the combined U.S.
operations, the proposed rule would require a foreign banking
organization with combined U.S. assets of $50 billion or more to
establish and maintain procedures for monitoring and controlling
liquidity risk exposures and funding needs within and across
significant legal entities, currencies, and business lines within its
combined U.S. operations. In addition, the proposed rule would require
the company to take into account legal and regulatory restrictions on
the transfer of liquidity between legal entities.\71\ The company
should ensure that legal distinctions and possible obstacles to cash
movements between specific legal entities or between separately
regulated entities are recognized for the combined U.S. operations.
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\71\ For example, such restrictions include sections 23A and 23B
of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) and
Regulation W (12 CFR part 223), which govern covered transactions
between banks and their affiliates.
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Intraday Liquidity
Intraday liquidity monitoring is an important component of the
liquidity risk management process for a company engaged in significant
payment, settlement, and clearing activities and is generally an
operational risk management function. Given the interdependencies that
exist among payment systems, the inability of large complex
organizations' to meet critical payments has the potential to lead to
systemic disruptions that can prevent the smooth functioning of
payments systems and money markets. In addition to the proposed
requirements, to ensure that liquidity risk is also appropriately
monitored, the Board expects foreign banking organizations subject to
these requirements to provide for integrated oversight of intraday
exposures within the operational risk and liquidity risk functions of
its U.S. operations. The Board also expects that the stringency of the
procedures for monitoring and managing intraday liquidity positions
would reflect the complexity and scope of the U.S. operations.
Question 34: The Board requests comment on all aspects of the
proposed rule. Specifically, what aspects of the proposed rule present
implementation
[[Page 76653]]
challenges and why? What alternative approaches to liquidity risk
management should the Board consider? Are the liquidity management
requirements of this proposal too specific or too narrowly defined? If,
so explain how. Responses should be detailed as to the nature and
effect of these challenges and should address whether the Board should
consider implementing transitional arrangements in the proposal to
address these challenges.
C. Liquidity Requirements for Foreign Banking Organizations With Total
Consolidated Assets of $50 Billion or More and Combined U.S. Assets of
Less Than $50 Billion
Under the proposal, a foreign banking organization with $50 billion
or more in total consolidated assets and combined U.S. assets of less
than $50 billion must report to the Board on an annual basis the
results of an internal liquidity stress test for either the
consolidated operations of the company or its combined U.S. operations
only, conducted consistently with the BCBS principles for liquidity
risk management and incorporating 30-day, 90-day, and one-year stress
test horizons. A company that does not comply with this requirement
must cause its combined U.S. operations to remain in a net due to
funding position or a net due from funding position with non-U.S.
affiliated entities equal to no more than 25 percent of the third-party
liabilities of its combined U.S. operations on a daily basis.
A foreign banking organization with total consolidated assets of
$50 billion or more and combined U.S. assets of less than $50 billion
on July 1, 2014, would be required to comply with the proposed
liquidity requirements on July 1, 2015, unless that time is extended by
the Board in writing. A foreign banking organization with combined U.S.
assets of less than $50 billion that crosses the $50 billion total
consolidated asset threshold after July 1, 2014 would be required to
comply with these standards beginning 12 months after it crosses the
asset threshold, unless that time is accelerated or extended by the
Board in writing.
VI. Single-Counterparty Credit Limits
A. Background
During the financial crisis, some of the largest financial firms in
the world collapsed or nearly did so, with significant financial
stability consequences for the United States and the global financial
system. Counterparties of a failing firm were placed under severe
strain when the failing firm could not meet its financial obligations,
in some cases resulting in the counterparties' inability to meet their
own obligations.
The financial crisis also revealed that the existing regulatory
requirements generally failed to meaningfully limit the
interconnectedness among large U.S. and foreign financial institutions
in the United States and globally. In the United States, banks were
subject to single-borrower lending and investment limits, but those
limits were applied at the bank level, rather than the holding company
level. In addition, lending limits excluded credit exposures generated
by derivatives and some securities financing transactions.\72\ Similar
weaknesses existed in single-counterparty credit limit regimes around
the world.
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\72\ Section 610 of the Dodd-Frank Act amends the term ``loans
and extensions of credit'' for purposes of the lending limits
applicable to national banks to include any credit exposure arising
from a derivative transaction, repurchase agreement, reverse
repurchase agreement, securities lending transaction, or securities
borrowing transaction. See section 610 of the Dodd-Frank Act; 12
U.S.C. 84(b). These types of transactions are also subject to the
single-counterparty credit limits of section 165(e) of the Act. 12
U.S.C. 5365(e)(3).
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Section 165(e) of the Dodd-Frank Act addresses single-counterparty
concentration risk among large financial companies. It directs the
Board to establish single-counterparty credit exposure limits for bank
holding companies and foreign banking organizations with total
consolidated assets of $50 billion or more and U.S. and foreign nonbank
financial companies supervised by the Board in order to limit the risks
that the failure of any individual firm could pose to the company.\73\
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\73\ See 12 U.S.C. 5365(e)(1). Credit exposure to a company is
defined in section 165(e) of the Dodd-Frank Act to mean all
extensions of credit to the company, including loans, deposits, and
lines of credit; all repurchase agreements, reverse repurchase
agreements, and securities borrowing and lending transactions with
the company (to the extent that such transactions create credit
exposure to the company); all guarantees, acceptances, or letters of
credit (including endorsement or standby letters of credit) issued
on behalf of the company; all purchases of or investments in
securities issued by the company; counterparty credit exposure to
the company in connection with a derivative transaction with the
company; and any other similar transaction that the Board, by
regulation, determines to be a credit exposure for purposes of
section 165.
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Section 165(e) grants authority to the Board to: (i) issue such
regulations and orders as may be necessary to administer and carry out
that section; and (ii) exempt transactions, in whole or in part, from
the definition of the term ``credit exposure,'' if the Board finds that
the exemption is in the public interest and consistent with the
purposes of section 165(e).\74\
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\74\ See 12 U.S.C. 5365(e)(5)-(6).
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In the December 2011 proposal, the Board sought comment on
regulations that would implement these limits for large U.S. bank
holding companies and nonbank financial companies supervised by the
Board.\75\ The comment period for the December 2011 proposal has
closed, and the Board received a large volume of comments on the
single-counterparty credit limit. Many comments focused on the proposed
valuation methodologies for derivatives and securities financing
transactions, the proposal to use a lower threshold for exposures
between major covered companies and major counterparties, and the
treatment of exposures to foreign sovereigns and central
counterparties. The Board is currently in the process of reviewing
comments on the standards in the December 2011 proposal and is
considering modifications to the proposal in response to those
comments. Comments on this proposal will help inform how the single-
counterparty credit limits should be applied differently to foreign
banking organizations.
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\75\ 77 FR 594 (January 5, 2012).
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Consistent with the December 2011 proposal, the proposal would
impose a two-tier single-counterparty credit limit on foreign banking
organizations. First, the proposal would impose a 25 percent net credit
exposure limit between a U.S. intermediate holding company or the
combined U.S. operations of a foreign banking organization and a single
unaffiliated counterparty. It would prohibit a U.S. intermediate
holding company from having aggregate net credit exposure to any single
unaffiliated counterparty in excess of 25 percent of the U.S.
intermediate holding company's capital stock and surplus. Similarly, it
would prohibit the combined U.S. operations of a foreign banking
organization from having aggregate net credit exposure to any single
unaffiliated counterparty in excess of 25 percent of the consolidated
capital stock and surplus of the foreign banking organization.
Second, the proposal would impose a more stringent net credit
exposure limit between a U.S. intermediate holding company or a foreign
banking organization with total consolidated assets of $500 billion or
more (major U.S. intermediate holding company and major foreign banking
organization) and financial counterparties of similar size
[[Page 76654]]
(major counterparty).\76\ This more stringent limit would be consistent
with the stricter limit established for major U.S. bank holding
companies and U.S. nonbank financial companies supervised by the Board.
The stricter limit was proposed to be 10 percent in the December 2011
proposal.
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\76\ Major counterparty would be defined to include a bank
holding company or foreign banking organization with total
consolidated assets of $500 billion or more, and their respective
subsidiaries, and any nonbank financial company supervised by the
Board.
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In response to weaknesses in the large exposures regimes observed
in the crisis, the BCBS has established a working group to examine
single-counterparty credit limit regimes across jurisdictions and
evaluate potential international standards. If an international
agreement on large exposure limits for banking organizations is
reached, the Board may amend this proposed rule, as necessary, to
achieve consistency with the international approach.
B. Single-Counterparty Credit Limit Applicable to Foreign Banking
Organizations and U.S. Intermediate Holding Companies
Under the proposal, a foreign banking organization that exceeds the
$50 billion asset threshold or, for any more stringent limit that is
established, the $500 billion asset threshold, as of July 1, 2014,
would be required to comply with the proposed single-counterparty
credit limits on July 1, 2015, unless that time is extended by the
Board in writing. A foreign banking organization that exceeds the $50
billion or, for any more stringent limit that is established, the $500
billion asset threshold, after July 1, 2014, would be required to
comply with the proposed single-counterparty credit limits beginning 12
months after it crossed the relevant asset threshold, unless that time
is accelerated or extended by the Board in writing.
Similarly, a U.S. intermediate holding company that is required to
be established on July 1, 2015, would be required to comply with the
proposed single-counterparty credit limits beginning on July 1, 2015,
unless that time is extended by the Board in writing. A U.S.
intermediate holding company established after July 1, 2015, would be
required to comply with the proposed single-counterparty credit limits,
including any more stringent limit that is established, beginning on
the date it is required to be established, unless that time is
accelerated or extended by the Board in writing. A U.S. intermediate
holding company that meets the $500 billion threshold after July 1,
2015, would be required to comply with any stricter proposed single-
counterparty credit limit applicable to major U.S. intermediate holding
companies beginning 12 months after it becomes a major U.S.
intermediate holding company, unless that time is accelerated or
extended by the Board in writing.
Scope of the Proposed Rule
In calculating its net credit exposure to a counterparty, a foreign
banking organization or U.S. intermediate holding company would
generally be required to take into account exposures of its U.S.
subsidiaries to the counterparty.\77\ Similarly, exposure to a
counterparty would include exposures to any subsidiaries of the
counterparty.
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\77\ Because a foreign banking organization calculates only the
credit exposure of its U.S. operations, it would be required to
include exposure only of its U.S. subsidiaries.
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Consistent with the December 2011 proposal, a company is treated as
a subsidiary when it is directly or indirectly controlled by another
company. A company controls another company if it: (i) Owns or controls
with the power to vote 25 percent or more of a class of voting
securities of the company; (ii) owns or controls 25 percent or more of
the total equity of the company; or (iii) consolidates the company for
financial reporting purposes. The proposed rule's definition of control
differs from that in the Bank Holding Company Act and the Board's
Regulation Y in order to provide a simpler, more objective definition
of control.\78\
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\78\ See 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e)(1).
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The proposed definition may be underinclusive in certain
situations. For instance, by operation of the proposed definition of
``subsidiary,'' a fund or vehicle that is sponsored or advised by a
U.S. intermediate holding company or any part of the combined U.S.
operations would not be considered a subsidiary of the U.S.
intermediate holding company or the combined U.S. operations unless it
was ``controlled'' by the U.S. intermediate holding company or any part
of the combined U.S. operations.\79\ A special purpose vehicle would
not be a subsidiary of the U.S. intermediate holding company or the
combined U.S. operations unless it was similarly ``controlled.'' The
Board contemplates that it may use its reservation of authority to look
through a special purpose vehicle either to the issuer of the
underlying assets in the vehicle or to the sponsor. In the alternative,
the Board may require a U.S. intermediate holding company or any part
of the combined U.S. operations to look through to the underlying
assets of a special purpose vehicle, but only if the special purpose
vehicle failed certain discrete concentration tests (such as having
fewer than 20 underlying exposures).
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\79\ The same issued is raised with respect to the treatment of
funds sponsored and advised by counterparties. Such funds or
vehicles similarly would not be considered to be part of the
counterparty under the proposed rule's definition of control.
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Section 165(e) directs the Board to limit credit exposure of a
foreign banking organization to ``any unaffiliated company.'' \80\
Consistent with the December 2011 proposal, the proposal would include
foreign sovereign entities in the definition of counterparty to limit
the vulnerability of a foreign banking organization's U.S. operations
to default by a single sovereign state. The severe distress or failure
of a sovereign entity could have effects that are comparable to those
caused by the failure of a financial firm or nonfinancial corporation.
The Board believes that the authority in the Dodd-Frank Act and the
Board's general safety and soundness authority in associated banking
laws are sufficient to encompass sovereign governments in the
definition of counterparty in this manner.\81\ As described below, the
proposal would provide an exemption from the limits established in this
subpart for exposures to a foreign banking organization's home country
sovereign entity.
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\80\ 12 U.S.C. 5365(e)(2)-(3). ``Company'' is defined for
purposes of the proposed rule to mean a corporation, partnership,
limited liability company, depository institution, business trust,
special purpose entity, association, or similar organization.
\81\ See 12 U.S.C. 5365(b)(1)(B)(iv) (allowing the Board to
establish additional prudential standards as the Board, on its own
or pursuant to a recommendation made by the Council in accordance
with section 115 of the Dodd-Frank Act, determines are appropriate)
and 12 U.S.C. 5368 (providing the Board with general rulemaking
authority); see also section 5(b) of the Bank Holding Company Act
(12 U.S.C. 1844(b)); and section 8(b) of Federal Deposit Insurance
Act (12 U.S.C. 1818(b)). Section 5(b) of the Bank Holding Company
Act provides the Board with the authority to issue such regulations
and orders as may be necessary to enable it to administer and carry
out the purposes of the Bank Holding Company Act. Section 8(b) of
the Federal Deposit Insurance Act allows the Board to issue to bank
holding companies an order to cease and desist from unsafe and
unsound practices.
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Question 35: What challenges would a foreign banking organization
face in implementing the requirement that all subsidiaries of the U.S.
intermediate holding company and any part of the combined U.S.
operations are subject to the proposed single-counterparty credit
limit?
Question 36: Because a foreign banking organization may have strong
[[Page 76655]]
incentives to provide support in times of distress to certain U.S.-
based funds or vehicles that it sponsors or advises, the Board seeks
comment on whether such funds or vehicles should be included as part of
the U.S. intermediate holding company or the combined U.S. operations
of the foreign banking organization for purposes of this rule.
Question 37: How should exposures to SPVs and their underlying
assets and sponsors be treated? What other alternatives should the
Board consider?
Question 38: Should the definition of ``counterparty''
differentiate between types of exposures to a foreign sovereign entity,
including exposures to local governments? Should exposures to a company
controlled by a foreign sovereign entity be included in the exposure to
that foreign sovereign entity?
Question 39: What additional credit exposures to foreign sovereign
entities should be exempted from the limitations of the proposed rule?
Definition of Capital Stock and Surplus
The credit exposure limit is calculated based on the capital stock
and surplus of the U.S. intermediate holding company and the foreign
banking organization, respectively.\82\ Under the proposed rule,
capital stock and surplus of a U.S. intermediate holding company is the
sum of the company's total regulatory capital as calculated under the
risk-based capital adequacy guidelines applicable to that U.S.
intermediate holding company in subpart L and the balance of the
allowance for loan and lease losses of the U.S. intermediate holding
company not included in tier 2 capital under the capital adequacy
guidelines in subpart L of this proposal. This definition of capital
stock and surplus is generally consistent with the definition of the
same term in the Board's Regulations O and W and the OCC's national
bank lending limit regulation.\83\
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\82\ See 12 U.S.C. 5365(e)(2).
\83\ See 12 CFR 215.3(i), 223.3(d); see also 12 CFR 32.2(b).
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In light of differences in international accounting standards, the
capital stock and surplus of a foreign banking organization would not
reflect the balance of the allowance for loan and lease losses not
included in tier 2 capital. Instead, the term would be defined to
include the total regulatory capital of such company on a consolidated
basis, as determined in accordance with section 252.212(c) of the
proposed rule.
An alternative measure of ``capital stock and surplus'' might focus
on common equity. This would be consistent with the post-crisis global
regulatory move toward tier 1 common equity as the primary measure of
loss absorbing capital for internationally active banking firms. For
example, Basel III introduces a specific tier 1 common equity
requirement and uses tier 1 common equity measures in its capital
conservation buffer and countercyclical buffer.\84\ In addition, the
BCBS capital surcharge framework for G-SIBs builds on the tier 1 common
equity requirement in Basel III.\85\ Further, the Board focused on tier
1 common equity in the Supervisory Capital Assessment Program (SCAP)
conducted in early 2009 and again in the Comprehensive Capital Analysis
and Review (CCAR) exercises conducted in 2011 and 2012 to assess the
capacity of bank holding companies to absorb projected losses.\86\
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\84\ See Basel III Accord, supra note 40.
\85\ See BCBS, Global systemically important banks: assessment
methodology and the additional loss absorbency requirement, supra
note 55.
\86\ See, e.g., The Supervisory Capital Assessment Program:
Overview of Results (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf
(SCAP Overview of Results); Comprehensive Capital Analysis and
Review: Objectives and Overview (March 18, 2011), available at
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf (CCAR Overview of Results); and 76 FR 74631,
74636 (December 1, 2011).
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Question 40: What other alternatives to the proposed definitions of
capital stock and surplus should the Board consider?
Credit Exposure Limit
As discussed above, the proposal would impose a 25 percent limit on
all U.S. intermediate holding companies and the combined U.S.
operations of foreign banking organizations. In addition, a more
stringent limit on major U.S. intermediate holding companies and the
combined U.S. operations of major foreign banking organizations would
be set, consistent with the stricter limit established for major U.S.
bank holding companies and U.S. nonbank financial companies supervised
by the Board.
The more stringent limit for major U.S. intermediate holding
companies and major foreign banking organizations is consistent with
the Dodd-Frank Act's direction to impose stricter limits on companies
as necessary to mitigate risks to U.S. financial stability. The Board
recognizes, however, that size is only a rough proxy for the systemic
footprint of a company. Additional factors specific to a firm--
including the nature, scope, scale, concentration, interconnectedness,
and mix of its activities, its leverage, and its off-balance-sheet
exposures, among other factors--may be determinative of a company's
systemic footprint. For example, the BCBS proposal on capital
surcharges for systemically important banking organizations uses a
twelve factor approach to determine the systemic importance of a global
banking organization.\87\ Moreover, the Board recognizes that drawing a
line through the foreign banking organization population and imposing
stricter limits on exposures between the combined U.S. operations of
major foreign banking organizations or major U.S. intermediate holding
companies and their respective major counterparties may not take into
account nuances that might be captured by other approaches.
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\87\ See BCBS, Global systemically important banks: assessment
methodology and the additional loss absorbency requirement (November
2011), supra note 55.
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Question 41: Should the Board adopt a more nuanced approach, like
the BCBS approach, in determining which foreign banking organizations
and U.S. intermediate holding companies would be treated as major
foreign banking organizations or major U.S. intermediate holding
companies or which counterparties should be considered major
counterparties?
Question 42: Should the Board introduce more granular categories of
foreign banking organizations or U.S. intermediate holding companies to
determine the appropriate credit exposure limit? If so, how could such
granularity best be accomplished?
Measuring Gross Credit Exposure
The proposal specifies how the gross credit exposure of a credit
transaction should be calculated for each type of credit transaction
defined in the proposed rule. For purposes of describing the limit, the
discussion below refers to U.S. intermediate holding companies and,
with respect to their combined U.S. operations, foreign banking
organizations as ``covered entities.''
The proposed valuation rules are consistent with those set forth in
the December 2011 proposal, other than the proposed valuation for
derivatives exposures of U.S. branches and agencies that are subject to
a qualifying master netting agreement. When calculating a U.S. branch
or agency's gross credit exposure to a counterparty for a derivative
contract that is subject to a qualifying master netting agreement (and
is not an eligible credit derivative or an eligible equity derivative
purchased from an eligible protection provider), a foreign banking
[[Page 76656]]
organization could choose either to use the Basel II-based exposure at
default calculation set forth in the Board's advanced approaches
capital rules (12 CFR part 225, appendix G, Sec. 32(c)(6) provided
that the collateral recognition rules of the proposed rule would apply)
or to use the gross valuation methodology for derivatives not subject
to a qualified master netting agreements. The approach recognizes that
a qualified master netting agreement to which the U.S. branch or agency
is subject may cover exposures of the foreign bank outside of the U.S.
branch and agency network.
Consistent with the December 2011 proposal, the proposed rule
includes the statutory attribution rule that provides that a covered
entity must treat a transaction with any person as a credit exposure to
a counterparty to the extent the proceeds of the transaction are used
for the benefit of, or transferred to, that counterparty. The proposal
adopts a minimal scope of application of this attribution rule in order
to minimize burden on foreign banking organizations.
Question 43: The Board seeks comment on all aspects of the
valuation methodologies included in the proposed rule.
Question 44: The Board requests comment on whether the proposed
scope of the attribution rule is appropriate or whether additional
regulatory clarity around the attribution rule would be appropriate.
What alternative approaches to applying the attribution rule should the
Board consider? What is the potential cost or burden of applying the
attribution rule as described above?
Net Credit Exposure
The proposal describes how a covered entity would convert gross
credit exposure amounts to net credit exposure amounts by taking into
account eligible collateral, eligible guarantees, eligible credit and
equity derivatives, other eligible hedges (that is, a short position in
the counterparty's debt or equity security), and for securities
financing transactions, the effect of bilateral netting agreements. The
proposed treatment described below is consistent with the treatment
proposed in the December 2011 proposal.
Eligible Collateral
In computing its net credit exposure to a counterparty for a credit
transaction, the proposal would permit a covered entity to reduce its
gross credit exposure on a transaction by the adjusted market value of
any eligible collateral. Eligible collateral is generally defined
consistently with the December 2011 proposal, but the proposal
clarifies that eligible collateral would not include any debt or equity
securities (including convertible bonds) issued by an affiliate of the
U.S. intermediate holding company or by any part of the combined U.S.
operations.
If a covered entity chooses to reduce its gross credit exposure by
the adjusted market value of eligible collateral, the covered entity
would be required to include the adjusted market value of the eligible
collateral when calculating its gross credit exposure to the issuer of
the collateral.
Question 45: Should the list of eligible collateral be broadened or
narrowed? Should a covered entity be able to use its own internal
estimates for collateral haircuts as permitted under Appendix G to
Regulation Y?
Question 46: Is recognizing the fluctuations in the value of
eligible collateral appropriate?
Question 47: What is the burden associated with the proposed rule's
approach to changes in the eligibility of collateral?
Question 48: Is the approach to eligible collateral that allows the
covered entity to choose whether or not to recognize eligible
collateral and shift credit exposure to the issuer of eligible
collateral appropriate?
Unused Credit Lines
In computing its net credit exposure to a counterparty for a credit
line or revolving credit facility, the proposal would permit a covered
entity to reduce its gross credit exposure by the amount of the unused
portion of the credit extension. To qualify for this reduction, the
covered entity cannot have any legal obligation to advance additional
funds under the facility until the counterparty provides collateral in
the amount that is required with respect to that unused portion of the
facility. In addition, the credit contract would be required to specify
that any used portion of the credit extension must be fully secured at
all times by high-quality of collateral.\88\
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\88\ Collateral must be either (i) cash; (ii) obligations of the
United States or its agencies; (iii) obligations directly and fully
guaranteed as to principal and interest by, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation,
only while operating under the conservatorship or receivership of
the Federal Housing Finance Agency, and any additional obligations
issued by a U.S. government sponsored entity as determined by the
Board; or (iv) obligations of the home country sovereign entity.
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Question 49: What alternative approaches, if any, to the proposed
treatment of the unused portion of certain credit facilities should the
Board consider?
Eligible Guarantees
In calculating its net credit exposure to the counterparty, the
proposal would require a covered entity to reduce its gross credit
exposure to the counterparty by the amount of any eligible guarantee
from an eligible protection provider.\89\
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\89\ Eligible protection provider would mean an entity (other
than the foreign banking organization or an affiliate thereof) that
is one of the following types of entities: a sovereign entity; the
Bank for International Settlements, the International Monetary Fund,
the European Central Bank, the European Commission, or a
multilateral development bank; a Federal Home Loan Bank; the Federal
Agricultural Mortgage Corporation; a U.S. depository institution; a
bank holding company; a savings and loan holding company; a
registered broker dealer; an insurance company; a foreign banking
organization; a non-U.S.-based securities firm or a non-U.S.-based
insurance company that is subject to consolidated supervision and
regulation comparable to that imposed on U.S. depository
institutions, securities broker-dealers, or insurance companies; or
a qualifying central counterparty.
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The Board proposes to require gross exposure be reduced by the
amount of an eligible guarantee in order to ensure that concentrations
in exposures to guarantors are captured by the regime. This requirement
is meant to limit the ability of the covered entity to extend loans or
other forms of credit to a large number of high risk borrowers that are
guaranteed by a single guarantor. As is the case with eligible
collateral, in no event would a covered entity's gross credit exposure
to an eligible protection provider with respect to an eligible
guarantee be in excess of its gross credit exposure to the original
counterparty on the credit transaction prior to the recognition of the
eligible guarantee.
Question 50: Are there any additional or alternative requirements
the Board should place on eligible protection providers to ensure their
capacity to perform on their guarantee obligations?
Question 51: Should a covered entity have the choice of whether or
not to fully shift exposures to eligible protection providers in the
case of eligible guarantees or to divide an exposure between the
original counterparty and the eligible protection provider in some
manner?
Eligible Credit and Equity Derivatives
In the case when the covered entity is a protection purchaser of
eligible credit and equity derivatives, the proposal would require a
covered entity to reduce its credit exposure by the notional amount of
those derivatives. To be recognized for purposes of calculating net
credit exposure, hedges must meet the definitions of eligible credit
and equity derivative hedges.\90\ These
[[Page 76657]]
derivatives must meet certain criteria, including that the derivative
be written by an eligible protection provider.\91\
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\90\ By contrast, when the covered entity is the protection
provider, any credit or equity derivative written by the covered
entity would be included in the calculation of the covered entity's
gross credit exposure to the reference obligor.
\91\ The same types of organizations that are eligible
protection providers for the purposes of eligible guarantees are
eligible protection providers for purposes of eligible credit and
equity derivatives.
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Other Eligible Hedges
In addition to eligible credit and equity derivatives, the proposal
would permit a covered entity to reduce exposure to a counterparty by
the face amount of a short sale of the counterparty's debt or equity
security.
Question 52: What types of derivatives should be eligible for
mitigating gross credit exposure?
Question 53: What alternative approaches, if any, should the Board
consider to capture the risk mitigation benefits of proxy or portfolio
hedges or to permit U.S. intermediate holding companies or any part of
the combined U.S. operations to use internal models to measure
potential exposures to sellers of credit protection?
Question 54: Would a more conservative approach to eligible credit
or equity derivative hedges be more appropriate, such as one in which
the U.S. intermediate holding company or any part of the combined U.S.
operations would be required to recognize gross notional credit
exposure both to the original counterparty and the eligible protection
provider?
Netting of Securities Financing Transactions
In calculating its credit exposure to a counterparty, the proposal
would permit a covered entity to net the gross credit exposure amounts
of (i) its repurchase and reverse repurchase transactions with a
counterparty, and (ii) its securities lending and borrowing
transactions with a counterparty, in each case, where the transactions
are subject to a bilateral netting agreement with that counterparty.
Compliance
Under the proposal, a foreign banking organization would be
required to comply with the requirements of the proposed rule on a
daily basis as of the end of each business day and must submit a
monthly compliance report demonstrating its daily compliance. A foreign
banking organization must ensure the compliance of its U.S.
intermediate holding company and its combined U.S. operations. If
either the U.S. intermediate holding company or the combined U.S.
operations is not in compliance, both of the U.S. intermediate holding
company and the U.S. operations would be prohibited from engaging in
any additional credit transactions with such a counterparty, except in
cases when the Board determines that such additional credit
transactions are necessary or appropriate to preserve the safety and
soundness of the foreign banking organization or financial stability.
In considering special temporary exceptions, the Board may impose
supervisory oversight and reporting measures that it determines are
appropriate to monitor compliance with the foregoing standards.
Question 55: What temporary exceptions should the Board consider,
if any?
Exemptions
Section 165(e)(6) of the Dodd-Frank Act permits the Board to exempt
transactions from the definition of the term ``credit exposure'' for
purposes of this subsection, if the Board finds that the exemption is
in the public interest and is consistent with the purposes of this
subsection. The proposal would provide exemptions to the credit
exposure limit for exposures to the United States and its agencies,
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation (while these entities are operating under the
conservatorship or receivership of the Federal Housing Finance Agency),
and a foreign banking organization's home country sovereign entity. The
exemption for a foreign banking organization's home country sovereign
would recognize that a foreign banking organization's U.S. operations
may have exposures to its home country sovereign entity that are
required by home country laws or are necessary to facilitate the normal
course of business for the consolidated company.
In addition, the proposal would also provide an exception for
intraday credit exposure to a counterparty. This exemption would help
minimize the effect of the rule on the payment and settlement of
financial transactions, which often involve large exposure but are
settled on an intraday basis. The Board would have authority to exempt
any transaction in the public interest and consistent with the purposes
of the proposal.\92\
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\92\ See 12 U.S.C. 5365(e)(6).
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Question 56: Would additional exemptions for foreign banking
organizations be appropriate? Why or why not?
VII. Risk Management
A. Background
The recent financial crisis highlighted the need for large, complex
financial companies to have more robust enterprise-wide risk
management. A number of companies that experienced material financial
distress or failed during the crisis had significant deficiencies in
key areas of risk management. Recent reviews of risk management
practices of banking organizations conducted by the Senior Supervisors
Group (SSG) illustrated these deficiencies.\93\
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\93\ See 2008 SSG Report, supra note 56; 2009 SSG Report, supra
note 57.
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The SSG found that business line and senior risk managers did not
jointly act to address a company's risks on an enterprise-wide basis
and business line managers made decisions in isolation. In addition,
treasury functions were not closely aligned with risk management
processes, preventing market and counterparty risk positions from being
readily assessed on an enterprise-wide basis.
The risk management weaknesses revealed during the financial crisis
among large U.S. bank holding companies were also apparent in the U.S.
operations of large foreign banking organizations. Moreover,
consolidated risk management practices across foreign banking
organizations, while efficient from a global perspective, have at times
limited U.S. supervisors' ability to understand the risks posed to U.S.
financial stability by the U.S. operations of foreign banks. Further,
centralized risk management practices that focus on risk by business
line have generally limited the ability of large foreign banking
organizations to effectively aggregate, monitor, and report risks
across their U.S. legal entities on a timely basis.
Section 165(b)(1)(A) of the Dodd-Frank Act requires the Board to
establish overall risk management requirements as part of the enhanced
prudential standards to ensure that strong risk management standards
are part of the regulatory and supervisory framework for large bank
holding companies, including foreign banking organizations, and nonbank
companies supervised by the Board.\94\ Section 165(h) of the Dodd-Frank
Act directs the Board to issue regulations requiring publicly traded
bank holding companies with total consolidated assets of $10 billion or
more and publicly traded
[[Page 76658]]
nonbank companies supervised by the Board to establish risk
committees.\95\
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\94\ 12 U.S.C. 5365(b)(1)(A).
\95\ 12 U.S.C. 5365(h).
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In its December 2011 proposal, the Board proposed to establish
enhanced risk management standards for U.S. bank holding companies with
total consolidated assets of $50 billion or more and U.S. nonbank
financial companies supervised by the Board, to address weakness in
risk management practices that had emerged during the crisis. The
December 2011 proposal would (i) require oversight of enterprise-wide
risk management by a stand-alone risk committee of the board of
directors and chief risk officer; (ii) reinforce the independence of a
firm's risk management function; and (iii) ensure appropriate expertise
and stature for the chief risk officer. The Board also proposed to
require U.S. bank holding companies with total consolidated assets of
$10 billion or more that are publicly traded companies to establish an
enterprise-wide risk committee of the board of directors.
This proposal would apply the requirements of the December 2011
proposal to foreign banking organizations in a way that strengthens
foreign banking organizations' oversight and risk management of their
combined U.S. operations and requires foreign banking organizations
with a large U.S. presence to aggregate and monitor risks on a combined
U.S. operations basis. The proposal would permit a foreign banking
organization some flexibility to structure the oversight of the risks
of its U.S. operations in a manner that is efficient and effective in
light of its broader enterprise-wide risk management structure.
The proposal includes a general requirement that foreign banking
organizations that are publicly traded with total consolidated assets
of $10 billion or more and all foreign banking organizations,
regardless of whether their stock is publicly traded, with total
consolidated assets of $50 billion or more certify that they maintain a
risk committee to oversee the U.S. operations of the company. The
proposal would set forth additional requirements for the U.S. risk
committee of a foreign banking organization with combined U.S. assets
of $50 billion or more and would require these companies to appoint a
U.S. chief risk officer in charge of implementing and maintaining a
risk management framework for the company's combined U.S. operations.
The Board emphasizes that the enhanced U.S. risk management
requirements contained in this proposal supplement the Board's existing
risk management guidance and supervisory expectations for foreign
banking organizations.\96\ All foreign banking organizations supervised
by the Board should continue to follow such guidance to ensure
appropriate oversight of and limitations on risk.
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\96\ See SR Letter 08-8 (October 16, 2008), available at http://fedweb.frb.gov/fedweb/bsr/srltrs/SR0808.htm, and SR Letter 08-9
(October 16, 2008), available at http://fedweb.frb.gov/fedweb/bsr/srltrs/SR0809.htm.
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B. Risk Committee Requirements for Foreign Banking Organizations With
$10 Billion or More in Consolidated Assets
Consistent with the requirements of section 165(h) of the Dodd-
Frank Act, the proposal would require a foreign banking organization
with publicly traded stock and total consolidated assets of $10 billion
or more or a foreign banking organization, regardless of whether its
stock is publicly traded, with total consolidated assets of $50 billion
or more, to certify to the Board, on an annual basis, that it maintains
a committee that (1) oversees the U.S. risk management practices of the
company, and (2) has at least one member with risk management
expertise. This certification must be filed with the Board concurrently
with the foreign banking organization's Form FR Y-7.
At least one member of a U.S. risk committee would be required to
have risk management expertise that is commensurate with the capital
structure, risk profile, complexity, activities, and size of the
foreign banking organization's combined U.S. operations. The requisite
level of risk management expertise for a company's U.S. risk committee
should be commensurate with the capital structure, risk profile,
complexity, activities, and size of the company's combined U.S.
operations. Thus, the Board expects that the U.S. risk committee of a
foreign banking organization that poses greater risks to the U.S.
financial system would have members with commensurately greater risk
management expertise than the U.S. risk committees of other companies
whose combined U.S. operations pose less systemic risk.
Generally, a foreign banking organization would be permitted to
maintain its U.S. risk committee either as a committee of its global
board of directors (or equivalent thereof) or as a committee of the
board of directors of the U.S. intermediate holding company. If the
U.S. risk committee is a committee of the global board of directors, it
may be organized on a standalone basis or as part of the enterprise-
wide risk committee (or equivalent thereof). A foreign banking
organization with combined U.S. assets of $50 billion or more that
conducts its operations in the United States solely through a U.S.
intermediate holding company would be required to maintain its U.S.
risk committee at its U.S. intermediate holding company.
In order to accommodate the diversity in corporate governance
philosophies across countries, the proposal would not require the U.S.
risk committee of a foreign banking organization with combined U.S.
assets of less than $50 billion to maintain a specific number of
independent directors on the U.S. risk committee.\97\ Further, a
foreign banking organization's enterprise-wide risk committee may
fulfill the responsibilities of the U.S. risk committee, unless the
foreign banking organization has combined U.S. assets of $50 billion or
more and operates in the United States solely through a U.S.
intermediate holding company.
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\97\ As described below, foreign banking organizations with
combined U.S. assets of $50 billion or more would be required to
maintain an independent director on its U.S. risk committee.
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Under the proposal, foreign banking organization with publicly
traded stock and total consolidated assets of $10 billion or more or a
foreign banking organization, regardless of whether its stock is
publicly traded, with total consolidated assets of $50 billion or more
as of July 1, 2014, would be required to comply with the proposed risk
committee certification requirement on July 1, 2015, unless that time
is extended by the Board in writing. A foreign banking organization
that crossed the relevant asset threshold after July 1, 2014 would be
required to comply with the proposed risk committee certification
requirement beginning 12 months after it crosses the relevant asset
threshold, unless that time is accelerated or extended by the Board in
writing.
Question 57: Should the Board require that a company's
certification under section 252.251 of the proposal include a
certification that at least one member of the U.S. risk committee
satisfies director independence requirements? Why or why not?
Question 58: Should the Board consider requiring that all U.S. risk
committees required under the proposal not be housed within another
committee or be part of a joint committee, or limit the other functions
that the U.S. risk committee may perform? Why or why not?
[[Page 76659]]
C. Risk Management Requirements for Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or More
The proposal would establish additional requirements for the U.S.
risk committee of a foreign banking organization with combined U.S.
assets of $50 billion or more relating to the committee's
responsibilities and structure. Each foreign banking organization with
combined U.S. assets of $50 billion or more would also be required to
appoint a U.S. chief risk officer in charge of overseeing and
implementing the risk management framework of the company's combined
U.S. operations. In general, the Board has sought to maintain
consistency with the risk management requirements included in the
December 2011 proposal, with certain adaptations to account for the
unique characteristics of foreign banking organizations.
A foreign banking organization with combined U.S. assets of $50
billion or more on July 1, 2014, would be required to comply with the
proposed risk management requirements on July 1, 2015, unless that time
is extended by the Board in writing. A foreign banking organization
whose combined U.S. assets exceeded $50 billion after July 1, 2014
would be required to comply with the proposed risk management standards
beginning 12 months after it crosses the asset threshold, unless that
time is accelerated or extended by the Board in writing.
Responsibilities of the U.S. Risk Committee
The proposal would require a U.S. risk committee to review and
approve the risk management practices of the combined U.S. operations
and to oversee the operation of an appropriate risk management
framework that is commensurate with the capital structure, risk
profile, complexity, activities, and size of the company's combined
U.S. operations.
The risk management framework for the combined U.S. operations must
be consistent with the enterprise-wide risk management framework of the
foreign banking organization and must include:
Policies and procedures relating to risk management
governance, risk management practices, and risk control infrastructure
for the combined U.S. operations of the company;
Processes and systems for identifying and reporting risks
and risk management deficiencies, including emerging risks, on a
combined U.S. operations basis;
Processes and systems for monitoring compliance with the
policies and procedures relating to risk management governance,
practices, and risk controls across the company's combined U.S.
operations;
Processes designed to ensure effective and timely
implementation of corrective actions to address risk management
deficiencies;
Specification of management and employees' authority and
independence to carry out risk management responsibilities; and
Integration of risk management and control objectives in
management goals and compensation structure of the company's combined
U.S. operations.
The proposal would require that a U.S. risk committee meet at least
quarterly and as needed, and that the committee fully document and
maintain records of its proceedings, including risk management
decisions.
The Board expects that members of a U.S. risk committee of a
foreign banking organization with combined U.S. assets of $50 billion
or more generally would have an understanding of risk management
principles and practices relevant to the U.S. operations of their
company. U.S. risk committee members generally should also have
experience developing and applying risk management practices and
procedures, measuring and identifying risks, and monitoring and testing
risk controls with respect to banking organizations.
Question 59: As an alternative to the proposed U.S. risk committee
requirement, should the Board consider requiring each foreign banking
organization with combined U.S. assets of $50 billion or more to
establish a risk management function solely in the United States,
rather than permitting the U.S. risk management function to be located
in the company's home office? Why or why not? If so, how should such a
function be structured?
Question 60: Should the Board consider requiring or allowing a
foreign banking organization to establish a ``U.S. risk management
function'' that is based in the United States but not associated with a
board of directors to oversee the risk management practices of the
company's combined U.S. operations? What are the benefits and drawbacks
of such an approach?
Question 61: Should the Board consider allowing a foreign banking
organization with combined U.S. assets of $50 billion or more that has
a U.S. intermediate holding company subsidiary and operates no branches
or agencies in the United States the option to comply with the proposal
by maintaining a U.S. risk committee of the company's global board of
directors? Why or why not?
Question 62: Is the scope of review of the risk management
practices of the combined U.S. operations of a foreign banking
organization appropriate? Why or why not?
Question 63: What unique ownership structures of foreign banking
organizations would present challenges for such companies to comply
with the requirements of the proposal? Should the Board incorporate
flexibility for companies with unique or nontraditional ownership
structures into the rule, such as more than one top-tier company? If
so, how?
Question 64: Is it appropriate to require the U.S. risk committee
of a foreign banking organization to meet at least quarterly? If not,
what alternative requirement should be considered and why?
Independent Member of the U.S. Risk Committee
The proposal would require the U.S. risk committee of a foreign
banking organization with combined U.S. assets of $50 billion or more
to include at least one member who is not (1) an officer or employee of
the company or its affiliates and has not been an officer or employee
of the company or its affiliates during the previous three years, or
(2) a member of the immediate family of a person who is, or has been
within the last three years, an executive officer of the company or its
affiliates. This requirement would apply regardless of where the U.S.
risk committee was located.
This requirement is adapted from director independence requirements
of certain U.S. securities exchanges and is similar to the requirement
in the December 2011 proposal that the director of the risk committee
of a U.S. bank holding company or nonbank financial company supervised
by the Board be independent.\98\
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\98\ The December 2011 proposal would require that the director
be independent either under the SEC's regulations, or, if the
domestic company was not publicly traded, the company be able to
demonstrate to the Federal Reserve that the director would qualify
as an independent director under the listing standards of a national
securities exchange if the company were publicly traded.
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Question 65: Should the Board require that a member of the U.S.
risk committee comply with the director independence standards? Why or
why not?
Question 66: Should the Board consider specifying alternative or
additional qualifications for director independence? If so, describe
the alternative or additional qualifications. Should the Board require
that the chair of a U.S. risk committee satisfy the
[[Page 76660]]
director independence standards, similar to the requirements in the
December 2011 proposal for large U.S.bank holding companies?
U.S. Chief Risk Officer
The proposal would require a foreign banking organization with
combined U.S. assets of $50 billion or more or its U.S. intermediate
holding company subsidiary to appoint a U.S. chief risk officer that is
employed by a U.S. subsidiary or U.S. office of the foreign banking
organization. The U.S. chief risk officer would be required to have
risk management expertise that is commensurate with the capital
structure, risk profile, complexity, activities, and size of the
combined U.S. operations of a foreign banking organization with
combined U.S. assets of $50 billion or more. In addition, the U.S.
chief risk officer would be required to receive appropriate
compensation and other incentives to provide an objective assessment of
the risks taken by the company's combined U.S. operations. The Board
expects that the primary responsibility of the U.S. chief risk officer
would be risk management oversight of the combined U.S. operations and
that the U.S. chief risk officer would not also serve as the company's
global chief risk officer.
In general, a U.S. chief risk officer would report directly to the
U.S. risk committee and the company's global chief risk officer.
However, the Board may approve an alternative reporting structure on a
case-by-case basis if the company demonstrates that the proposed
reporting requirements would create an exceptional hardship for the
company.
Question 67: Would it be appropriate for the Board to permit the
U.S. chief risk officer to fulfill other responsibilities, including
with respect to the enterprise-wide risk management of the company, in
addition to the responsibilities of section 252.253 of this proposal?
Why or why not?
Question 68: What are the challenges associated with the U.S. chief
risk officer being employed by a U.S. entity?
Question 69: Should the Board consider approving alternative
reporting structures for a U.S. chief risk officer on a case-by-case
basis if the company demonstrates that the proposed reporting
requirements would create an exceptional hardship or under other
circumstances?
Question 70: Should the Board consider specifying by regulation the
minimum qualifications, including educational attainment and
professional experience, for a U.S. chief risk officer?
Under the proposal, the U.S. chief risk officer would be required
to directly oversee the measurement, aggregation, and monitoring of
risks undertaken by the company's combined U.S. operations. The
proposal would require a U.S. chief risk officer to directly oversee
the regular provision of information to the U.S. risk committee, the
global chief risk officer, and the Board or Federal Reserve supervisory
staff.\99\ Such information would include information regarding the
nature of and changes to material risks undertaken by the company's
combined U.S. operations, including risk management deficiencies and
emerging risks, and how such risks relate to the global operations of
the company.
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\99\ The reporting would generally take place through the
traditional supervisory process.
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In addition, the U.S. chief risk officer would be expected to
oversee regularly scheduled meetings, as well as special meetings, with
the Board or Federal Reserve supervisory staff to assess compliance
with its risk management responsibilities. This would require the U.S.
chief risk officer to be available to respond to supervisory inquiries
from the Board as needed.
The proposal includes additional responsibilities for which a U.S.
chief risk officer must have direct oversight, including:
Implementation of and ongoing compliance with appropriate
policies and procedures relating to risk management governance,
practices, and risk controls of the company's combined U.S. operations
and monitoring compliance with such policies and procedures;
Development appropriate processes and systems for
identifying and reporting risks and risk management deficiencies,
including emerging risks, on a combined U.S. operations basis;
Management risk exposures and risk controls within the
parameters of the risk control framework for the company's combined
U.S. operations;
Monitoring and testing of the risk controls of the
combined U.S. operations; and
Ensuring that risk management deficiencies with respect to
the company's combined U.S. operations are resolved in a timely manner.
Question 71: What alternative responsibilities for the U.S. chief
risk officer should the Board consider?
Question 72: Should the Board require each foreign banking
organization with total consolidated assets of $50 billion or more and
combined U.S. assets of less than $50 billion to designate an employee
to serve as a liaison to the Board regarding the risk management
practices of the company's combined U.S. operations? A liaison of this
sort would meet annually, and as needed, with the appropriate
supervisory authorities at the Board and be responsible for explaining
the risk management oversight and controls of the foreign banking
organization's combined U.S. operations. Would these requirements be
appropriate? Why or why not?
VIII. Stress Test Requirements
A. Background
The Board has long held the view that a banking organization should
operate with capital levels well above its minimum regulatory capital
ratios and commensurate with its risk profile.\100\ A banking
organization should also have internal processes for assessing its
capital adequacy that reflect a full understanding of its risks and
ensure that it holds capital commensurate with those risks.\101\ Stress
testing is one tool that helps both bank supervisors and a banking
organization measure the sufficiency of capital available to support
the banking organization's operations throughout periods of economic
and financial stress.\102\
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\100\ See 12 CFR part 225, Appendix A; see also SR Letter 99-18,
Assessing Capital Adequacy in Relation to Risk at Large Banking
Organizations and Others with Complex Risk Profiles (July 1, 1999)
(SR 99-18), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM.
\101\ See SR Letter 09-4, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock Redemptions, and
Stock Repurchases at Bank Holding Companies (March 27, 2009) (SR 09-
4), available at http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm .
\102\ A full assessment of a company's capital adequacy must
take into account a range of risk factors, including those that are
specific to a particular industry or company.
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The Board has previously highlighted the use of stress testing as a
means to better understand the range of a banking organization's
potential risk exposures.\103\ In particular, as part of its
[[Page 76661]]
effort to stabilize the U.S. financial system during the recent
financial crisis, the Board, along with other federal financial
regulatory agencies, conducted stress tests of large, complex bank
holding companies through the Supervisory Capital Assessment Program
(SCAP). Building on the SCAP and other supervisory work coming out of
the crisis, the Board initiated the annual Comprehensive Capital
Analysis and Review (CCAR) in late 2010 to assess the capital adequacy
and the internal capital planning processes of large, complex bank
holding companies and to incorporate stress testing as part of the
Board's regular supervisory program for large bank holding companies.
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\103\ See, e.g., Supervisory Guidance on Stress Testing for
Banking Organizations With More Than $10 Billion in Total
Consolidated Assets, 77 FR 29458 (May 17, 2012); SR 10-6,
Interagency Policy Statement on Funding and Liquidity Risk
Management (March 17, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm;
Supervision and Regulation Letter 10-1, Interagency Advisory on
Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1001.htm; SR 09-4,
supra note 99; SR Letter 07-1, Interagency Guidance on
Concentrations in Commercial Real Estate (January 4, 2007),
available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; Supervisory Review Process of Capital Adequacy (Pillar
2) Related to the Implementation of the Basel II Advanced Capital
Framework, 73 FR 44620 (July 31, 2008); SCAP Overview of Results and
CCAR Overview of Results, supra note 85.
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The global regulatory community has also emphasized the role of
stress testing in risk management. Stress testing is an important
element of capital adequacy assessments under Pillar 2 of the Basel II
framework, and in 2009, the BCBS promoted principles for sound stress
testing practices and supervision.\104\ The BCBS recently reviewed the
implementation of these stress testing principles at its member
countries and concluded that, while countries are in various stages of
maturity in their implementation of the BCBS's principles, stress
testing has become a key component of the supervisory assessment
process as well as a tool for contingency planning and
communication.\105\
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\104\ See BCBS, Principles for sound stress testing practices
and supervision, (May 2009), available at http://www.bis.org/publ/bcbs155.pdf.
\105\ See BCBS, Peer review of supervisory authorities'
implementation of stress testing principles, (April 2012), available
at http://www.bis.org/publ/bcbs218.pdf.
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Section 165(i)(1) of the Dodd-Frank Act requires the Board to
conduct annual stress tests of bank holding companies with total
consolidated assets of $50 billion or more, including foreign banking
organizations, and nonbank financial companies supervised by the Board.
In addition, section 165(i)(2) requires the Board to issue regulations
establishing requirements for certain regulated financial companies,
including foreign banking organizations and foreign savings and loan
holding companies with total consolidated assets of more than $10
billion, to conduct company-run stress tests.
The December 2011 proposal included provisions that would implement
the stress testing provisions in section 165(i) of the Dodd-Frank Act
for U.S. companies. On October 9, 2012, the Board issued a final rule
implementing the supervisory and company-run stress testing
requirements for U.S. bank holding companies with total consolidated
assets of $50 billion or more and U.S. nonbank financial companies
supervised by the Board.\106\ Concurrently, the Board issued a final
rule implementing the company-run stress testing requirements for U.S.
bank holding companies with total consolidated assets of more than $10
billion but less than $50 billion.\107\
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\106\ See 12 CFR part 252, subparts F and G.
\107\ See 12 CFR part 252, subpart H.
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This proposed rule seeks to adapt the requirements of the final
stress testing rules currently applicable to U.S. bank holding
companies to the U.S. operations of foreign banking organizations. The
proposal would subject U.S. intermediate holding companies to the
Board's stress testing rules as if they were U.S. bank holding
companies, in order to ensure national treatment and equality of
competitive opportunity. As a result, U.S. intermediate holding
companies with total consolidated assets of more than $10 billion but
less than $50 billion would be required to conduct annual company-run
stress tests. U.S. intermediate holding companies with assets of $50
billion or more would be required to conduct semi-annual company-run
stress tests and would be subject to annual supervisory stress tests.
The proposal takes a different approach to the U.S. branches and
agencies of a foreign banking organization because U.S. branches and
agencies do not hold capital separately from their parent foreign
banking organization. Accordingly, the proposal also would apply stress
testing requirements to the U.S. branches and agencies by first
evaluating whether the home country supervisor for the foreign banking
organization conducts a stress test and, if so, whether the stress
testing standards applicable to the consolidated foreign banking
organization in its home country are broadly consistent with U.S.
stress testing standards.
Consistent with the approach taken in the final stress testing
rules for U.S. firms, the proposal would tailor the stress testing
requirements based on the size of the U.S. operations of the foreign
banking organizations.
B. Stress Test Requirements for U.S. Intermediate Holding Companies
U.S. Intermediate Holding Companies With Total Consolidated Assets of
$50 Billion or More
U.S. intermediate holding companies with total consolidated assets
of $50 billion or more would be subject to the annual supervisory and
semi-annual company-run stress testing requirements set forth in
subparts F and G of Regulation YY.\108\ A U.S. intermediate holding
company that meets the $50 billion total consolidated asset threshold
as of July 1, 2015, would be required to comply with the stress testing
final rule requirements beginning with the stress test cycle that
commences on October 1, 2015, unless that time is extended by the Board
in writing. A U.S. intermediate holding company that meets the $50
billion total consolidated asset threshold after July 1, 2015, would be
required to comply with the stress test requirements beginning in
October of the calendar year after the year in which the U.S.
intermediate holding company is established or otherwise crosses the
$50 billion total consolidated asset threshold, unless that time is
accelerated or extended by the Board in writing.
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\108\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October
12, 2012).
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In accordance with subpart G of Regulation YY, U.S. intermediate
holding companies with total consolidated assets of $50 billion or more
would be required to conduct two company-run stress tests per year,
with one test using scenarios provided by the Board (the ``annual''
test) and the other using scenarios developed by the company (the
``mid-cycle'' test). In connection with the annual test, the U.S.
intermediate holding company would be required to file a regulatory
report containing the results of its stress test with the Board by
January 5 of each year and publicly disclose a summary of the results
under the severely adverse scenario between March 15 and March 31.\109\
In connection with the mid-cycle test, the company would be required to
file a regulatory report containing the results of this stress test by
July 5 of each year and disclose a summary of results between September
15 and September 30.
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\109\ The annual company-run stress tests would satisfy some of
a large intermediate holding company's proposed obligations under
the Board's capital plan rule (12 CFR 225.8).
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Concurrently with the U.S. intermediate holding company's annual
company-run stress test, the Board would conduct a supervisory stress
test in accordance with subpart F of
[[Page 76662]]
Regulation YY of the U.S. intermediate holding company using scenarios
identical to those provided for the annual company-run stress test. The
U.S. intermediate holding company would be required to file regulatory
reports that contain information to support the Board's supervisory
stress tests. The Board would disclose a summary of the results of its
supervisory stress test no later than March 31 of each calendar year.
U.S. Intermediate Holding Companies With Total Consolidated Assets More
Than $10 Billion But Less Than $50 Billion
U.S. intermediate holding companies with total consolidated assets
of more than $10 billion but less than $50 billion would be subject to
the annual company-run stress testing requirements set forth in subpart
H of Regulation YY. A U.S. intermediate holding company subject to this
requirement as of July 1, 2015, would be required to comply with the
requirements of the stress testing final rules beginning with the
stress test cycle that commences on October 1, 2015, unless that time
is extended by the Board in writing. A U.S. intermediate holding
company that becomes subject to this requirement after July 1, 2015,
would comply with the final rule stress testing requirements beginning
in October of the calendar year after the year in which the U.S.
intermediate holding company is established, unless that time is
accelerated or extended by the Board in writing.
U.S. intermediate holding companies with total consolidated assets
of more than $10 billion but less than $50 billion would be required to
conduct one company-run stress test per year, using scenarios provided
by the Board. In connection with the stress test, a U.S. intermediate
holding company would be required to file a regulatory report
containing the results of its stress test with the Board by March 31 of
each year and publicly disclose a summary of the results of its stress
test under the severely adverse scenario between June 15 and June 30.
C. Stress Test Requirements for Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or More
In order to satisfy the proposed stress test requirements, a
foreign banking organization with combined U.S. assets of $50 billion
or more must be subject to a consolidated capital stress testing regime
that includes either an annual supervisory capital stress test
conducted by the foreign banking organization's home country supervisor
or an annual evaluation and review by the foreign banking
organization's home country supervisor of an internal capital adequacy
stress test conducted by the foreign banking organization. In either
case, the home country capital stress testing regime must set forth
requirements for governance and controls of the stress testing
practices by relevant management and the board of directors (or
equivalent thereof) of the foreign banking organization.
A foreign banking organization with combined U.S. assets of $50
billion or more on July 1, 2014, would be required to comply with the
proposal beginning in October 2015, unless that time is extended by the
Board in writing. A foreign banking organization that exceeds the $50
billion combined U.S. asset threshold after July 1, 2014, would be
required to comply with the requirements of the proposal commencing in
October of the calendar year after the company becomes subject to the
stress test requirement, unless that time is accelerated or extended by
the Board in writing.
Question 73: What other standards should the Board consider to
determine whether a foreign banking organization's home country stress
testing regime is broadly consistent with the capital stress testing
requirements of the Dodd-Frank Act?
Question 74: Should the Board consider conducting supervisory loss
estimates on the U.S. branch and agency networks of large foreign
banking organizations by requiring U.S. branches and agencies to submit
data similar to that required to be submitted by U.S. bank holding
companies with total consolidated assets of $50 billion or more on the
FR Y-14? Alternatively, should the Board consider requiring foreign
banking organizations to conduct internal stress tests on their U.S.
branch and agency networks?
Information Requirements for Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or More
The proposal would require a foreign banking organization with
combined U.S. assets of $50 billion or more to submit information
regarding the results of its home country stress test. The information
must include: a description of the types of risks included in the
stress test; a description of the conditions or scenarios used in the
stress test; a summary description of the methodologies used in the
stress test; estimates of the foreign banking organization's projected
financial and capital condition; and an explanation of the most
significant causes for the changes in regulatory capital ratios.
When the U.S. branch and agency network is in a net due from
position to the foreign bank parent or its foreign affiliates,
calculated as the average daily position from October-October of a
given year, the foreign banking organization would be required to
report additional information to the Board regarding its stress tests.
The additional information would include a more detailed description of
the methodologies used in the stress test, detailed information
regarding the organization's projected financial and capital position
over the planning horizon, and any additional information that the
Board deems necessary in order to evaluate the ability of the foreign
banking organization to absorb losses in stressed conditions. The
heightened information requirements reflect the greater risk to U.S.
creditors and U.S. financial stability posed by U.S. branches and
agencies that serve as funding sources to their foreign parent.
All foreign banking organizations with combined U.S. assets of $50
billion or more would be required to provide this information by
January 5 of each calendar year, unless extended by the Board in
writing. The confidentiality of any information submitted to the Board
with respect to stress testing results would be determined in
accordance with the Board's rules regarding availability of
information.\110\
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\110\ See 12 CFR part 261; see also 5 U.S.C. 552(b).
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Supplemental Requirements for Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or More That Do Not Comply With
Stress Testing Requirements
Asset Maintenance Requirement
If a foreign banking organization with combined U.S. assets of $50
billion or more does not meet the stress test requirements above, the
Board would require its U.S. branch and agency network to maintain
eligible assets equal to 108 percent of third-party liabilities (asset
maintenance requirement). The 108 percent asset maintenance requirement
reflects the 8 percent minimum risk-based capital standard currently
applied to U.S. banking organizations.
The proposal generally aligns the mechanics of the asset
maintenance requirement with the asset maintenance requirement that may
apply to U.S. branches and agencies under existing federal or state
rules. Under the proposal, definitions of the terms ``eligible assets''
and ``liabilities'' are generally consistent with the definitions of
the terms ``eligible assets'' and
[[Page 76663]]
``liabilities requiring cover'' used in the New York State
Superintendent's Regulations.\111\
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\111\ 3 NYCRR Sec. 322.3-322.4.
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Question 75: Should the Board consider alternative asset
maintenance requirements, including definitions of eligible assets or
liabilities under cover or the percentage?
Question 76: Do the proposed asset maintenance requirement pose any
conflict with any asset maintenance requirements imposed on a U.S.
branch or agency by another regulatory authority, such as the FDIC or
the OCC?
Stress Test of U.S. Subsidiaries
If a foreign banking organization with combined U.S. assets of $50
billion or more does not meet the stress testing requirements, the
foreign banking organization would be required to conduct an annual
stress test of any U.S. subsidiary not held under a U.S. intermediate
holding company (other than a section 2(h)(2) company), separately or
as part of an enterprise-wide stress test, to determine whether that
subsidiary has the capital necessary to absorb losses as a result of
adverse economic conditions.\112\ The foreign banking organization
would be required to report summary information about the results of
the stress test to the Board on an annual basis.
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\112\ As described above under section III of this preamble, a
foreign banking organization with combined U.S. assets (excluding
assets held by a branch or agency or by a section 2(h)(2) company)
of less than $10 billion would not be required to form a U.S.
intermediate holding company.
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Question 77: What alternative standards should the Board consider
for foreign banking organizations that do not have a U.S. intermediate
holding company and are not subject to broadly consistent stress
testing requirements? What types of challenges would the proposed
stress testing regime present?
Intragroup Funding Restrictions or Local Liquidity Requirements
In addition to the asset maintenance requirement and the
subsidiary-level stress test requirement described above, the Board may
impose intragroup funding restrictions on the U.S. operations of a
foreign banking organization with combined U.S. assets of $50 billion
or more that does not satisfy the stress testing requirements. The
Board may also impose increased local liquidity requirements with
respect to the U.S. branch and agency network or on any U.S. subsidiary
that is not part of a U.S. intermediate holding company. If the Board
determines that it should impose intragroup funding restrictions or
increased local liquidity requirements as a result of failure to meet
the Board's stress testing requirements under this proposal, the Board
would notify the company no later than 30 days before it proposes to
apply additional standards. The notification will include the basis for
imposing the additional requirement. Within 14 calendar days of receipt
of a notification under this paragraph, the foreign banking
organization may request in writing that the Board reconsider the
requirement, including an explanation as to why the reconsideration
should be granted. The Board will respond in writing within 14 calendar
days of receipt of the company's request.
Question 78: Should the Board consider alternative prudential
standards for U.S. operations of foreign banking organizations that are
not subject to home country stress test requirements that are
consistent with those applicable to U.S. banking organizations or do
not meet the minimum standards set by their home country regulator?
D. Stress Test Requirements for Other Foreign Banking Organizations and
Foreign Savings and Loan Holding Companies With Total Consolidated
Assets of More Than $10 Billion
The Dodd-Frank Act requires the Board to impose stress testing
requirements on its regulated entities (including bank holding
companies, state member banks, and savings and loan holding companies)
with total consolidated assets of more than $10 billion.\113\ Thus,
this proposal would apply stress testing requirements to foreign
banking organizations with total consolidated assets of more than $10
billion, but combined U.S. assets of less than $50 billion, and foreign
savings and loan holding companies with total consolidated assets of
more than $10 billion.
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\113\ Section 165(i)(2) of the Dodd-Frank Act; 12 U.S.C.
5363(i)(2).
---------------------------------------------------------------------------
In order to satisfy the proposed stress testing requirements, a
foreign banking organization or foreign savings and loan holding
company described above must be subject to a consolidated capital
stress testing regime that includes either an annual supervisory
capital stress test conducted by the company's country supervisor or an
annual evaluation and review by the company's home country supervisor
of an internal capital adequacy stress test conducted by the company.
In either case, the home country capital stress testing regime must set
forth requirements for governance and controls of the stress testing
practices by relevant management and the board of directors (or
equivalent thereof) of the company. These companies would not be
subject to separate information requirements imposed by the Board
related to the results of their stress tests.
If a foreign banking organization or a foreign savings and loan
holding company described above does not meet the proposed stress test
requirements, the Board would require its U.S. branch and agency
network, as applicable, to maintain eligible assets equal to 105
percent of third-party liabilities (asset maintenance requirement). The
105 percent asset maintenance requirement reflects the more limited
risks that these companies pose to U.S. financial stability.
In addition, companies that do not meet the stress testing
requirements would be required to conduct an annual stress test of any
U.S. subsidiary not held under a U.S. intermediate holding company
(other than a section 2(h)(2) company), separately or as part of an
enterprise-wide stress test, to determine whether that subsidiary has
the capital necessary to absorb losses as a result of adverse economic
conditions.\114\ The company would be required to report high-level
summary information about the results of the stress test to the Board
on an annual basis.
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\114\ As described above under section III of this preamble, a
foreign banking organization with combined U.S. assets (excluding
assets held by a branch or agency or by a section 2(h)(2) company)
of less than $10 billion would not be required to form a U.S.
intermediate holding company.
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Question 79: Should the Board consider providing a longer phase-in
for foreign banking organizations with combined U.S. assets of less
than $50 billion?
Question 80: Is the proposed asset maintenance requirement
calibrated appropriately to reflect the risks to U.S. financial
stability posed by these companies?
Question 81: What alternative standards should the Board consider
for foreign banking organizations that do not have a U.S. intermediate
holding company and are not subject to consistent stress testing
requirements? What types of challenges would the proposed stress
testing regime present?
The proposal would require any foreign banking organization or
foreign savings and loan holding company that meets the $10 billion
asset threshold as of July 1, 2014 to comply with the proposed stress
testing requirements beginning in October 2015, unless that time is
extended by the Board in writing. A foreign banking organization or
foreign savings and loan holding
[[Page 76664]]
company that meets the asset threshold after July 1, 2014, would be
required to comply with the proposed requirements beginning in the
October of the calendar year after it meets the asset threshold, unless
that time is accelerated or extended by the Board in writing.
IX. Debt-to-Equity Limits
Section 165(j) of the Act provides that the Board must require a
foreign banking organization with total consolidated assets of $50
billion or more to maintain a debt-to-equity ratio of no more than 15-
to-1, upon a determination by the Council that such company poses a
grave threat to the financial stability of the United States and that
the imposition of such requirement is necessary to mitigate the risk
that such company poses to the financial stability of the United
States.\115\ The Board is required to promulgate regulations to
establish procedures and timelines for compliance with section
165(j).\116\
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\115\ The Act requires that, in making its determination, the
Council must take into consideration the criteria in Dodd-Frank Act
sections 113(a) and (b) and any other risk-related factors that the
Council deems appropriate. See 12 U.S.C. 5366(j)(1).
\116\ 12 U.S.C. 5366(j)(3).
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The proposal would implement the debt-to-equity ratio limitation
with respect to a foreign banking organization by applying a 15-to-1
debt-to-equity limitation on its U.S. intermediate holding company and
any U.S. subsidiary not organized under a U.S. intermediate holding
company (other than a section 2(h)(2) company), and a 108 percent asset
maintenance requirement on its U.S. branch and agency network. Unlike
the other provisions of this proposal, the debt-to-equity ratio
limitation would be effective on the effective date of the final rule.
Under the proposal, a foreign banking organization for which the
Council has made the determination described above would receive
written notice from the Council, or from the Board on behalf of the
Council, of the Council's determination. Within 180 calendar days from
the date of receipt of the notice, the foreign banking organization
must come into compliance with the proposal's requirements. The
proposed rule does not establish a specific set of actions to be taken
by a company in order to comply with the debt-to-equity ratio
requirement; however, the company would be expected to come into
compliance with the ratio in a manner that is consistent with the
company's safe and sound operation and preservation of financial
stability. For example, a company generally would be expected to make a
good faith effort to increase equity capital through limits on
distributions, share offerings, or other capital raising efforts prior
to liquidating margined assets in order to achieve the required ratio.
The proposal would permit a company subject to the debt-to-equity
ratio requirement to request up to two extension periods of 90 days
each to come into compliance with this requirement. Requests for an
extension of time to comply must be received in writing by the Board
not less than 30 days prior to the expiration of the existing time
period for compliance and must provide information sufficient to
demonstrate that the company has made good faith efforts to comply with
the debt-to-equity ratio requirement and that each extension would be
in the public interest. In the event that an extension of time is
requested, the Board would review the request in light of the relevant
facts and circumstances, including the extent of the company's efforts
to comply with the ratio and whether the extension would be in the
public interest.
A company would no longer be subject to the debt-to-equity ratio
requirement of this subpart as of the date it receives notice of a
determination by the Council that the company no longer poses a grave
threat to the financial stability of the United States and that the
imposition of a debt-to-equity requirement is no longer necessary.
Question 82: What alternatives to the definitions and procedural
aspects of the proposed rule regarding a company that poses a grave
threat to U.S. financial stability should the Board consider?
X. Early Remediation
A. Background
The recent financial crisis revealed that the condition of large
banking organizations can deteriorate rapidly even during periods when
their reported capital ratios are well above minimum regulatory
requirements. The crisis also revealed fundamental weaknesses in the
U.S. regulatory community's tools to deal promptly with emerging
issues.
Section 166 of the Dodd-Frank Act was designed to address these
problems by directing the Board to establish a regulatory framework for
the early remediation of financial weaknesses of U.S. bank holding
companies and foreign banking organizations with total consolidated
assets of $50 billion or more and nonbank companies supervised by the
Board. Such a framework would minimize the probability that such
companies will become insolvent and mitigate the potential harm of such
insolvencies to the financial stability of the United States.\117\ The
Dodd-Frank Act requires the Board to define measures of a company's
financial condition, including regulatory capital, liquidity measures,
and other forward-looking indicators that would trigger remedial
action. The Dodd-Frank Act also mandates that remedial action
requirements increase in stringency as the financial condition of a
company deteriorates and include: (i) Limits on capital distributions,
acquisitions, and asset growth in the early stages of financial
decline; and (ii) capital restoration plans, capital raising
requirements, limits on transactions with affiliates, management
changes, and asset sales in the later stages of financial decline.\118\
---------------------------------------------------------------------------
\117\ See 12 U.S.C. 5366(b).
\118\ 12 U.S.C. 5366.
---------------------------------------------------------------------------
The December 2011 proposal would establish a regime for early
remediation of U.S. bank holding companies with total consolidated
assets of $50 billion or more and nonbank financial companies
supervised by the Board. This proposal would adapt the requirements of
the December 2011 proposal to the U.S. operations of foreign banking
organizations, tailored to address the risk to U.S. financial stability
posed by the U.S. operations of foreign banking organizations and
taking into consideration their structure.
Similar to the December 2011 proposal, the proposed rule sets forth
four levels of remediation. The proposed triggers would be based on
capital, stress tests, risk management, liquidity risk management, and
market indicators. As in the December 2011 proposal, this proposal does
not include an explicit quantitative liquidity trigger because such a
trigger could exacerbate funding pressures at the U.S. operations of
foreign banking organizations, rather than provide for early
remediation of issues. Remediation standards are tailored for each
level of remediation and include restrictions on growth and capital
distributions, intragroup funding restrictions, liquidity requirements,
changes in management, and, if needed, actions related to the
resolution or termination of the combined U.S. operations of the
company. The U.S. operations of foreign banking organizations with
combined U.S. assets of $50 billion or more that meet the relevant
triggers would automatically be subject to the remediation standards
upon a trigger event, while the U.S.
[[Page 76665]]
operations of foreign banking organizations with a more limited U.S.
presence would be subject to those remediation standards on a case-by-
case basis.
A foreign banking organization with total consolidated assets of
$50 billion or more on July 1, 2014, would be required to comply with
the proposed early remediation requirements on July 1, 2015, unless
that time is extended by the Board in writing. A foreign banking
organization whose total consolidated assets exceed $50 billion after
July 1, 2014 would be required to comply with the proposed early
remediation standards beginning 12 months after it became subject to
the early remediation requirements, unless that time is accelerated or
extended by the Board in writing.
In implementing the proposed rule, the Board expects to notify the
home country supervisor of a foreign banking organization, the primary
regulators of a foreign banking organization's U.S. offices and
subsidiaries, and the FDIC as the U.S. operations of the foreign
banking organization enter into or change remediation levels.
Tables 2 and 3, below, provide a summary of all triggers and
associated remediation actions in this proposed rule.
Table 2--Early Remediation Triggers for Foreign Banking Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enhanced risk Enhanced
management and liquidity risk Market
Risk-based capital/ Risk-based capital/ Stress tests risk committee management indicators
leverage (U.S. IHC) leverage (parent) (U.S. IHC) standards standards (parent or U.S.
(U.S. combined (U.S. combined IHC as
operations) operations) applicable)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened The firm has demonstrated The firm has demonstrated The firm does Firm has Firm has The median
Supervisory Review (HSR)). capital structure or capital structure or not comply manifested manifested value of any
capital planning capital planning with the signs of signs of market
weaknesses, even though weaknesses, even though Board's weakness in weakness in indicator over
the firm: the firm: capital plan meeting meeting the the breach
Maintains risk-based Maintains risk-based or stress enhanced risk enhanced period crosses
capital ratios that capital ratios that testing rules, management or liquidity risk the trigger
exceed all minimum risk- exceed all minimum risk- even though risk committee management threshold.
based and requirements based and requirements regulatory requirements. standards.
established under subpart established under subpart capital ratios
L by [200-250] basis L by [200-250] basis exceed minimum
points or more; or points or more; or requirements
Maintains applicable Maintains an applicable under the
leverage ratio(s) that leverage ratio that supervisory
exceed all minimum exceed all minimum stress test
leverage requirements leverage requirements severely
established under subpart established under subpart adverse
L by [75-100] basis L by [75-100] basis scenario.
points or more. points or more.
Level 2..................... Any risk-based capital Any risk-based capital Under the Firm has Firm has n.a.
(Initial remediation)....... ratio is less than [200- ratio is less than [200- supervisory demonstrated demonstrated
250] basis points above a 250] basis points above a stress test multiple multiple
minimum applicable risk- minimum applicable risk- severely deficiencies deficiencies
based capital requirement based capital requirement adverse in meeting the in meeting the
established under subpart established under subpart scenario, the enhanced risk enhanced
L; or L; or firm's tier 1 management and liquidity risk
Any leverage ratio is less Any applicable leverage common risk- risk committee management
than [75-125] basis ratio is less than [75- based capital requirements. standards.
points above a minimum 125] basis points above a ratio falls
applicable leverage minimum applicable below 5%
requirement established leverage requirement during any
under subpart L. established under subpart quarter of the
L. nine quarter
planning
horizon.
[[Page 76666]]
Level 3 (Recovery).......... Any risk-based capital Any risk-based capital Under the Firm is in Firm is in n.a.
ratio is less than a ratio is less than a severely substantial substantial
minimum applicable risk- minimum applicable risk- adverse noncompliance noncompliance
based capital requirement based capital requirement scenario, the with enhanced with enhanced
established under subpart established under subpart firm's tier 1 risk liquidity risk
L; or L; or common risk- management and management
Any applicable leverage Any applicable leverage based capital risk committee standards.
ratio is less than a ratio is less than a ratio falls requirements.
minimum applicable minimum applicable below 3%
leverage requirement leverage requirement during any
established under subpart established under subpart quarter of the
L. L. nine quarter
Or for two complete Or for two complete planning
consecutive calendar consecutive calendar horizon.
quarters: quarters:
Any risk-based capital Any risk-based capital
ratio is less than [200- ratio is less than [200-
250] basis points above a 250] basis points above a
minimum applicable risk- minimum applicable risk-
based capital requirement based capital requirement
established under subpart established under subpart
L; or L; or
Any leverage ratio is less Any leverage ratio is less
than [75-125] basis than [75-125] basis
points above a minimum points above a minimum
applicable leverage applicable leverage
requirement established requirement established
under subpart L. under subpart L.
Level 4 (Recommended Any risk-based capital Any risk-based capital n.a............ n.a............ n.a............ n.a.
resolution). ratio is more than [100- ratio is more than [100-
250] basis points below a 250] basis points below a
minimum applicable risk- minimum applicable risk-
based capital requirement based capital requirement
established under subpart established under subpart
L; or L; or
Any applicable leverage Any applicable leverage
ratio is more than [50- ratio is more than [50-
150] basis points below a 150] basis points below a
minimum applicable minimum applicable
leverage requirement leverage requirement
established under subpart established under subpart
L. L.
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Table 3--Remediation Actions for Foreign Banking Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enhanced risk Enhanced
management and liquidity risk
Risk-based capital/ Stress tests risk committee management Market indicators
leverage (U.S. IHC (U.S. IHC) requirements standards (U.S. (parent or U.S. IHC as
or parent level) (U.S. combined combined applicable)
operations) operations)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened supervisory review)............ For foreign banking organizations with $50 billion or more of global consolidated assets:
The Board will conduct a targeted supervisory review of the combined U.S. operations to evaluate
whether the combined U.S. operations are experiencing financial distress or material risk
management weaknesses, including with respect to exposures to the foreign banking organization,
such that further decline of the combined U.S. operations is probable.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 2 (Initial Remediation)...................... For foreign banking organizations with $50 billion or more in U.S. assets: n.a.
[cir] U.S. IHC capital distributions (e.g., dividends and buybacks) are
restricted to no more than 50% of the average of the firm's net income in
the previous two quarters.
[cir] U.S. branches and agency network must remain in a net due to position
to head office and non-U.S. affiliates.
[cir] U.S. branch and agency network must hold 30-day liquidity buffer in
the United States (not required in level 3).
[[Page 76667]]
[cir] U.S. IHC and U.S. branch and agency network face restrictions on
growth (no more than 5% growth in total assets or total risk-weighted
assets per quarter or per annum), and must obtain prior approval before
directly or indirectly acquiring controlling interest in any company.
[cir] Foreign banking organization must enter into non-public MOU to
improve U.S. condition.
[cir] U.S. IHC and U.S. branch and agency network may be subject to other
limitations and conditions on their conduct or activities as the Board
deems appropriate.
[cir] For foreign banking organizations with less than $50 billion in U.S.
assets: Supervisors may undertake some or all of the actions outlined
above on a case-by-case basis.
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Level 3 (Recovery)................................. For foreign banking organizations with $50 billion or more in U.S. assets: n.a.
[cir] Foreign banking organization must enter into written agreement that
specifying that the U.S. IHC must take appropriate actions to restore its
capital to or above the applicable minimum capital requirements and take
such other remedial actions as prescribed by the Board.
[cir] U.S. IHC is prohibited from making capital distributions.
[cir] U.S. branch and agency network must remain in a net due to position
to office and non-U.S. affiliates.
[cir] U.S. branch and agency network is subject to a 108% asset maintenance
requirement.
[cir] U.S. IHC and U.S. branch and agency network will be subject to a
prohibition on growth, and must obtain prior approval before directly or
indirectly acquiring controlling interest in any company.
[cir] Foreign banking organization and U.S. IHC are prohibited from
increasing pay or paying bonus to U.S. senior management.
[cir] U.S. IHC may be required to remove culpable senior management.
[cir] U.S. IHC and U.S. branch and agency network may be subject to other
limitations and conditions on their conduct or activities as the Board
deems appropriate.
For foreign banking organizations with less than $50 billion in U.S.
assets: Supervisors may undertake some or all of the actions outlined
above on a case-by-case basis.
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Level 4 (Recommended Resolution)................... The Board will n.a. n.a.
consider whether the
combined U.S.
operations of the
foreign banking
organization warrant
termination or
resolution based on
the financial
decline of the U.S.
combined operations,
the factors
contained in section
203 of the Dodd-
Frank Act as
applicable, or any
other relevant
factor. If such a
determination is
made, the Board will
take actions that
include recommending
to the appropriate
financial regulatory
agencies that an
entity within the
U.S. branch or
agency network be
terminated or that a
U.S. subsidiary be
resolved.
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B. Early Remediation Triggering Events
The proposal would establish early remediation triggers based on
the risk-based capital and leverage, stress tests, liquidity risk
management, and risk management standards set forth in the other
subparts of this proposal. These triggers are broadly consistent with
the triggers set forth in the December 2011 proposal but are modified
to reflect the structure of foreign banking organizations. Consistent
with the
[[Page 76668]]
December 2011 proposal, the proposal also includes early remediation
triggers based on market indicators.
As noted above, the Board is currently in the process of reviewing
comments on the remaining standards in the December 2011 proposal and
is considering modifications to the proposal in response to those
comments. Comments on this proposal will help inform how the enhanced
prudential standards should be applied differently to foreign banking
organizations.
Risk-Based Capital and Leverage
The proposed risk-based capital and leverage triggers for the U.S.
operations of foreign banking organizations are based on the risk-based
capital and leverage standards set forth in subpart L of this proposal
applicable to U.S. intermediate holding companies and foreign banking
organizations. If a home country supervisor establishes higher minimum
capital ratios for a foreign banking organization, the Board will
consider the foreign banking organization's capital with reference to
the minimum capital ratios set forth in the Basel III Accord, rather
than the home country supervisor's higher standards.
The capital triggers for each level of remediation reflect
deteriorating levels of risk-based capital and leverage levels. The
level 1 capital triggers are based on the Board's qualitative
assessment of the capital levels of a foreign banking organization or
U.S. intermediate holding company. The capital triggers for levels 2, 3
and 4 of early remediation are based on the quantitative measures of
the capital ratios of a foreign banking organization or U.S.
intermediate holding company relative to the minimum capital ratios
applicable to that entity. The Board is considering a range of numbers
that would establish these levels at this time, as set forth below and
in the proposal. The final rule will include specific levels for the
capital triggers for levels 2, 3, and 4 of early remediation, and the
Board expects that the levels in the final rule will be within, or near
to, the proposed range. The Board seeks comment on the numbers within
the range.
Question 83: Should the Board consider a level outside of the
specified range? Why or why not?
Level 1 Capital Trigger
Level 1 remediation would be triggered based on a determination by
the Board that a foreign banking organization's or a U.S. intermediate
holding company's capital position has evidenced signs of
deterioration. The U.S. operations of a foreign banking organization
would be subject to level 1 remediation if the Board determined that
the capital position of the foreign banking organization or the U.S.
intermediate holding company were not commensurate with the level and
nature of the risks to which it is exposed in the United States. This
trigger would apply even if the foreign banking organization or U.S.
intermediate holding company maintained risk-based capital ratios that
exceed any applicable minimum requirements under subpart L of the
proposal by [200-250] basis points or more or leverage ratios that
exceed any applicable minimum requirements by [75-125] basis points or
more. The qualitative nature of the proposed level 1 capital trigger is
consistent with the level 1 remedial action, the heightened supervisory
review described below.
In addition, level 1 remediation would be triggered if the U.S.
intermediate holding company of a foreign banking organization fell out
of compliance with the Board's capital plan rule.\119\
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\119\ Only U.S. intermediate holding companies with total
consolidated assets of $50 billion or more would be subject to the
capital plan rule.
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Level 2 Capital Trigger
The U.S. operations of a foreign banking organization would be
subject to level 2 remediation when any risk-based capital ratio of the
foreign banking organization or the U.S. intermediate holding company
fell below [200-250] basis points above the minimum applicable risk-
based capital requirements under subpart L of this proposal, or any
applicable leverage ratio of the foreign banking organization or the
U.S. intermediate holding company fell below [75-125] basis points
above the minimum applicable leverage requirements under subpart L of
this proposal.
For a foreign banking organization, the applicable level of risk-
based capital ratios and minimum leverage ratio would be those
established by the Basel III Accord, including relevant transition
provisions, calculated in accordance with home country standards that
are consistent with the Basel Capital Framework. As proposed, a U.S.
intermediate holding company's minimum risk-based capital ratios and
leverage ratios would be the same as those that apply to U.S. bank
holding companies.
Assuming implementation of the Basel III Accord and the U.S. Basel
III proposals, after the transition period, the relevant minimum risk-
based capital ratios applicable to the foreign banking organization and
the U.S. intermediate holding company would be a 4.5 percent risk-based
tier 1 common ratio, 6.0 percent risk-based tier 1 ratio, and 8.0
percent risk-based total capital ratio. Thus, the level 2 trigger would
be breached if any of the foreign banking organization's or U.S.
intermediate holding company's risk-based capital ratios fell below a
[6.5-7.0] percent tier 1 common, [8.0-8.5] percent tier 1, or [10.0-
10.5] percent total risk-based capital ratio.
Similarly, assuming implementation of the Basel III Accord and the
U.S. Basel III proposals, after the transition period, the relevant
minimum leverage ratio applicable to a foreign banking organization
would be the international leverage ratio of 3.0 percent, and the
relevant minimum leverage ratio(s) applicable to a U.S. intermediate
holding company would be the U.S. leverage ratio of 4.0 percent, and,
if the U.S. intermediate holding company is subject to the advanced
approaches rule,\120\ a supplementary leverage ratio of 3.0 percent.
Thus, the level 2 trigger would be breached if the foreign banking
organization's leverage ratio fell below [3.75-4.25] or if the U.S.
intermediate holding company's U.S. leverage ratio fell below [4.75-
5.25] percent or its supplementary leverage ratio fell below [3.75-
4.25] percent, if applicable.
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\120\ A U.S. intermediate holding company would be subject to
the advanced approaches rules if its total consolidated assets are
$250 billion or more or its consolidated total on-balance sheet
foreign exposures are $10 billion or more. See 12 CFR part 225,
appendix G.
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Level 3 Capital Trigger
The level 3 trigger would be breached where either: (1) for two
complete consecutive quarters, any risk-based capital ratio of the
foreign banking organization or the U.S. intermediate holding company
fell below [200-250] basis points above the minimum applicable risk-
based capital ratios under subpart L, or any leverage ratio of the
foreign banking organization or the U.S. intermediate holding company
fell below [75-125] basis points above any minimum applicable leverage
ratio under subpart L; or (2) any risk-based capital ratio or leverage
ratio of the foreign banking organization or the U.S. intermediate
holding company fell below the minimum applicable risk-based capital
ratio or leverage ratio under subpart L.
Level 4 Capital Trigger
For the U.S. operations of a foreign banking organization, the
level 4 trigger would be breached where any of the
[[Page 76669]]
foreign banking organization's or U.S. intermediate holding company's
risk-based capital ratios fell [100-200] basis points or more below the
applicable minimum risk-based capital ratios under subpart L or where
any of the foreign banking organization's or U.S. intermediate holding
company's leverage ratios fell [50-150] basis points or more below
applicable leverage requirements under subpart L.
Question 84: The Board seeks comment on the proposed risk-based
capital and leverage triggers. What is the appropriate level within the
proposed ranges above and below minimum requirements that should be
established for the triggers in a final rule? Provide support for your
answer.
Question 85: The Board seeks comment on how and to what extent the
proposed risk-based capital and leverage triggers should be aligned
with the capital conservation buffer of 250 basis points presented in
the Basel III rule proposal.
Question 86: What alternative or additional risk-based capital or
leverage triggering events, if any, should the Board adopt? Provide a
detailed explanation of such alternative triggering events with
supporting data.
Stress Tests
Under subpart P of this proposal, U.S. intermediate holding
companies with total consolidated assets of $50 billion or more would
be subject to supervisory and company-run stress tests, and all other
U.S. intermediate holding companies would be subject to annual company-
run stress tests. The proposal would use the stress test regime as an
early remediation trigger, as stress tests can provide a forward-
looking indicator of a company's ability to absorb losses in stressed
conditions.
The stress test triggers for level 2 and 3 remediation would be
based on the results of the Board's supervisory stress test of a U.S.
intermediate holding company with total consolidated assets of $50
billion or more. Foreign banking organizations that do not own U.S.
intermediate holding companies that meet the $50 billion asset
threshold would not be subject to the triggers for levels 2 and 3
remediation.
Level 1 Stress Test Trigger
The U.S. operations of a foreign banking organization would enter
level 1 of early remediation if a U.S. intermediate holding company is
not in compliance with the proposed rules regarding stress testing,
including the company-run and supervisory stress test requirements
applicable to U.S. intermediate holding companies.
Level 2 Stress Test Trigger
The U.S. operations of a foreign banking organization would enter
level 2 remediation if the results of a supervisory stress test of its
U.S. intermediate holding company reflect a tier 1 common risk-based
capital ratio of less than 5.0 percent, under the severely adverse
scenario during any quarter of the nine-quarter planning horizon. A
severely adverse scenario is defined as a set of conditions that affect
the U.S. economy or the financial condition of a U.S. intermediate
holding and that overall are more severe than those associated with the
adverse scenario, and may include trading or other additional
components.\121\
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\121\ 77 FR 62378, 62391 (October 12, 2012).
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Level 3 Stress Test Trigger
The U.S. operations of a foreign banking organization would enter
level 3 remediation if the results of a supervisory stress test of its
U.S. intermediate holding company reflect a tier 1 common risk-based
capital ratio of less than 3.0 percent, under the severely adverse
scenario during any quarter of the nine-quarter planning horizon.
Question 87: What additional factors should the Board consider when
incorporating stress test results into the early remediation framework
for foreign banking organizations? What alternative forward looking
triggers should the Board consider in addition to or in lieu of stress
test triggers?
Question 88: Is the severely adverse scenario appropriately
incorporated as a triggering event? Why or why not?
Risk Management
Material weaknesses and deficiencies in risk management contribute
significantly to a firm's decline and ultimate failure. Under the
proposal, if the Board determines that the U.S. operations of a foreign
banking organization have failed to comply with the enhanced risk
management provisions of subpart O of the proposed rule, the U.S.
operations of the foreign banking organization would be subject to
level 1, 2, or 3 remediation, depending on the severity of the
compliance failure.
Thus, for example, level 1 remediation would be triggered if the
Board determines that any part of the U.S. operations of a foreign
banking organization had manifested signs of weakness in meeting the
proposal's enhanced risk management and risk committee requirements.
Similarly, level 2 remediation would be triggered if the Board
determines that any part of the company's combined U.S. operations has
demonstrated multiple deficiencies in meeting the enhanced risk
management or risk committee requirements, and level 3 remediation
would be triggered if the Board determines that any part of the
company's combined U.S. operations is in substantial noncompliance with
the enhanced risk management and risk committee requirements of the
proposal.
Question 89: The Board seeks comment on triggers tied to risk
management. Should the Board consider specific risk management triggers
tied to particular events? If so, what might such triggers involve? How
should failure to promptly address material risk management weaknesses
be addressed by the early remediation regime? Under such circumstances,
should companies be moved to progressively more stringent levels of
remediation, or are other actions more appropriate? Provide a detailed
explanation.
Liquidity Risk Management
The Dodd-Frank Act provides that the measures of financial
condition to be included in the early remediation framework must
include liquidity measures. This proposal would implement liquidity
risk management triggers related to the liquidity risk management
standards in subpart M of this proposal. The level of remediation to
which the U.S. operations of a foreign banking organization would be
subject would vary depending on the severity of the compliance failure.
The U.S. operations of a foreign banking organization would be
subject to level 1 remediation if the Board determines that any part of
the combined U.S. operations of the company has manifested signs of
weakness in meeting the proposal's enhanced liquidity risk management
standards. Similarly, the U.S. operations of a foreign banking
organization would be subject to level 2 remediation if the Board
determines that any part of its combined U.S. operations has
demonstrated multiple deficiencies in meeting the enhanced liquidity
risk management standards of this proposal, and level 3 remediation
would be triggered if the Board determines that any part of its
combined U.S. operations is in substantial noncompliance with the
enhanced liquidity risk management standards.
Market Indicators
Section 166(c)(1) of the Dodd-Frank Act directs the Board, in
defining measures of a foreign banking organization's condition, to
utilize ``other forward-looking indicators.'' A review of market
indicators in the lead
[[Page 76670]]
up to the recent financial crisis reveals that market-based data often
provided an early signal of deterioration in a company's financial
condition. Moreover, numerous academic studies have concluded that
market information is complementary to supervisory information in
uncovering problems at financial companies.\122\ Accordingly, the Board
is considering whether to use a variety of market-based triggers
designed to capture both emerging idiosyncratic and systemic risk
across foreign banking organizations in the early remediation regime.
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\122\ See, e.g., Berger, Davies, and Flannery, Comparing Market
and Supervisory Assessments of Bank Performance: Who Knows What
When?, Journal of Money, Credit, and Banking, 32 (3), at 641-667
(2000). Krainer and Lopez, How Might Financial Market Information Be
Used for Supervisory Purposes?, FRBSF Economic Review, at 29-45
(2003). Furlong and Williams, Financial Market Signals and Banking
Supervision: Are Current Practices Consistent with Research
Findings?, FRBSF Economics Review, at 17-29 (2006).
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The market-based triggers would trigger level 1 remediation,
prompting heighted supervisory review of the financial condition and
risk management of a foreign banking organization's U.S. operations. In
addition to the Board's authority under section 166 of the Dodd-Frank
Act, the Board may also use other supervisory authority to cause the
U.S. operations of a foreign banking organization to take appropriate
actions to address the problems reviewed by the Board under level 1
remediation.
The Board recognizes that market-based early remediation triggers--
like all early warning metrics--have the potential to trigger
remediation for firms that have no material weaknesses (false
positives) and fail to trigger remediation for firms whose financial
condition has deteriorated (false negatives), depending on the sample,
time period and thresholds chosen. Further, the Board notes that if
market indicators are used to trigger corrective actions in a
regulatory framework, market prices may adjust to reflect this use and
potentially become less revealing over time. Accordingly, the Board is
not proposing to use market-based triggers to subject the U.S.
operations of a foreign banking organization directly to remediation
levels 2, 3, or 4 at this time. The Board expects to review this
approach after gaining additional experience with the use of market
data in the supervisory process.
Given that the informational content and availability of market
data will change over time, the Board also proposes to publish for
notice and comment the market-based triggers and thresholds on an
annual basis (or less frequently depending on whether the Board
determines that changes to an existing regime would be appropriate),
rather than specifying these triggers in this proposal. In order to
ensure transparency, the Board's disclosure of market-based triggers
would include sufficient detail to allow the process to be replicated
in general form by market participants. While the Board is not
proposing market-based triggers at this time, it seeks comment on the
potential use of market indicators for the U.S. operations of foreign
banking organizations described in section G--Potential market
indicators and potential trigger design.
Question 90: Should the Board include market indicators described
in section G--Potential market indicators and potential trigger design
of this preamble in the early remediation regime for the U.S.
operations of foreign banking organizations? If not, what other market
indicators or forward-looking indicators should the Board include?
Question 91: How should the Board consider the liquidity of an
underlying security when it chooses indicators for the U.S. operations
of foreign banking organizations?
Question 92: Should the Board consider using market indicators to
move the U.S. operations of foreign banking organizations directly to
level 2 (initial remediation)? If so, what time thresholds should be
considered for such a trigger? What would be the drawbacks of such a
second trigger?
Question 93: To what extent do these indicators convey different
information about the short-term and long-term performance of foreign
banking organizations that should be taken into account for the
supervisory review?
Question 94: Should the Board use peer comparisons to trigger
heightened supervisory review for foreign banking organizations? How
should the peer group be defined for foreign banking organizations?
Question 95: How should the Board account for overall market
movements in order to isolate idiosyncratic risk of foreign banking
organizations?
C. Notice and Remedies
Under the proposal, the Board would notify a foreign banking
organization when it determines that a remediation trigger event has
occurred and will provide a description of the remedial actions that
would apply to the U.S. operations of the foreign banking organization
as a result of the trigger. The U.S. operations of a foreign banking
organization would remain subject to the requirements imposed by early
remediation until the Board notifies the foreign banking organization
that its financial condition or risk management no longer warrants
application of the requirement. In addition, a foreign banking
organization has an affirmative duty to notify the Board of triggering
events and other changes in circumstances that could result in changes
to the early remediation provisions that apply to it.
Question 96: What additional monitoring requirements should the
Board impose to ensure timely notification of trigger breaches?
D. Early Remediation Requirements for Foreign Banking Organizations
with Combined U.S. Assets of $50 Billion or More
Level 1 Remediation (Heightened Supervisory Review)
The first level of remediation for the U.S. operations of foreign
banking organizations with combined U.S. assets of $50 billion or more
would consist of heightened supervisory review of the U.S. operations
of the foreign banking organization. In conducting the review, the
Board would evaluate whether the U.S. operations of a foreign banking
organization are experiencing financial distress or material risk
management weaknesses, including with respect to exposures that the
combined operations have to the foreign banking organization, such that
further decline of the combined U.S. operations is probable.
The Board may also use other supervisory authority to cause the
U.S. operations of a foreign banking organization to take appropriate
actions to address the problems reviewed by the Board under level 1
remediation.
Level 2 Remediation (Initial Remediation)
The Dodd-Frank Act provides that remedial actions of companies in
the initial stages of financial decline must include limits on capital
distributions, acquisitions, and asset growth. The proposal would
implement these remedial actions for the U.S. operations of foreign
banking organizations with combined U.S. assets of $50 billion or more
that have breached a level 2 trigger by imposing limitations on its
U.S. intermediate holding company, its U.S. branch and agency network,
and its combined U.S. operations.
Upon a level 2 trigger event, the U.S. intermediate holding company
of a foreign banking organization would be prohibited from making
capital distributions in any calendar quarter in
[[Page 76671]]
an amount that exceeded 50 percent of the average of its net income for
the preceding two calendar quarters. Capital distributions would be
defined consistently with the Board's capital plan rule (12 CFR 225.8)
to include any redemption or repurchase of any debt or equity capital
instrument, a payment of common or preferred stock dividends, a payment
that may be temporarily or permanently suspended by the issuer on any
instrument that is eligible for inclusion in the numerator of any
minimum regulatory capital ratio, and any similar transaction that the
Board determines to be in substance a distribution of capital. The
limitation would help to ensure that U.S. intermediate holding
companies preserve capital through retained earnings during the
earliest periods of financial stress. Prohibiting a weakened company
from distributing more than 50 percent of its recent earnings should
promote the company's ability to build a capital cushion to absorb
additional potential losses while still allowing the firm some room to
pay dividends and repurchase shares.\123\ This cushion is important to
making the company's failure less likely, and also to minimize the
external costs that the company's distress or possible failure could
impose on markets and the United States economy generally.
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\123\ The Board notes that the capital conservation buffer
implemented under the Basel III Accord is similarly designed to
impose increasingly stringent restrictions on capital distributions
and employee bonus payments by banking organizations as their
capital ratios approach regulatory minima. See Basel III Accord,
supra note 40.
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The U.S. branches and agencies of a foreign banking organization in
level 2 remediation would also be subject to limitations. While in
level 2 remediation, the U.S. branch and agency network would be
required to remain in a net due to position to the foreign banking
organization's non-U.S. offices and to non-U.S. affiliates. The U.S.
branch and agency network would also be required to maintain a liquid
asset buffer in the United States sufficient to cover 30 days of
stressed outflows, calculated as the sum of net external stressed cash
flow needs and net internal stressed cash flow needs for the full 30-
day period. However, this requirement would cease to apply were the
foreign banking organization to become subject to level 3 remediation.
In addition, the U.S. operations of the foreign banking
organization in level 2 remediation would be subject to growth
limitations. The foreign banking organization would be prohibited from
allowing the average daily total assets or average daily total risk-
weighted assets of its combined U.S. operations in any calendar quarter
to exceed average daily total assets and average daily total risk-
weighted assets, respectively, during the preceding calendar quarter by
more than 5 percent. Similarly, it would be prohibited from allowing
the average daily total assets or average daily total risk-weighted
assets of its combined U.S. operations in any calendar year to exceed
average daily total assets and average daily total risk-weighted
assets, respectively, during the preceding calendar year by more than 5
percent. These restrictions on asset growth are intended to prevent the
consolidated U.S. operations of foreign banking organizations that are
encountering the initial stages of financial difficulties from growing
at a rate inconsistent with preserving capital and focusing on
resolving material financial or risk management weaknesses. A 5 percent
limit should generally be consistent with reasonable growth in the
normal course of business.
In addition to existing requirements for prior Board approval to
make certain acquisitions or establishing new branches or other
offices, the foreign banking organization would also be prohibited,
without prior Board approval, from establishing a new branch, agency,
or representative office in the United States; engaging in any new line
of business in the United States; or directly or indirectly acquiring a
controlling interest (as defined in the proposal) in any company that
would be required to be a subsidiary of a U.S. intermediate holding
company under the proposal. This would include acquiring controlling
interests in U.S. nonbank companies engaged in financial activities.
Non-controlling acquisitions, such as the acquisition of less than 5
percent of the voting shares of a company, generally would not require
prior approval. The level 2 remediation restriction on acquisitions of
controlling interests in companies would also prevent foreign banking
organizations that are experiencing initial stages of financial
difficulties from materially increasing their size in the United States
or their systemic interconnectedness to the United States. Under this
provision, the Board would evaluate the materiality of acquisitions on
a case-by-case basis to determine whether approval is warranted.
Acquisitions of non-controlling interests would continue to be
permitted to allow the U.S. operations of foreign banking organizations
to proceed with ordinary business functions (such as equity securities
dealing) that may involve acquisitions of shares in other companies
that do not rise to the level of control.
Question 97: Should the Board provide an exception to the prior
approval requirement for de minimis acquisitions or other acquisitions
in the ordinary course? If so, how would this exception be drafted in a
narrow way so as not to subvert the intent of this restriction?
A foreign banking organization subject to level 2 remediation would
be required to enter into a non-public memorandum of understanding, or
other enforcement action acceptable to the Board. In addition, the
Board may impose limitations or conditions on the conduct or activities
of the combined U.S. operations of the foreign banking organization as
the Board deems appropriate and consistent with the purposes of Title I
of the Dodd-Frank Act. Those may include limitations or conditions
deemed necessary to improve the safety and soundness of the
consolidated U.S. operations of the foreign banking organization,
promote financial stability, or limit the external costs of the
potential failure of the foreign banking organization or its
affiliates.
Level 3 Remediation (Recovery)
The Dodd-Frank Act provides that remediation actions for companies
in later stages of financial decline must include a capital restoration
plan and capital raising requirements, limits on transactions with
affiliates, management changes and asset sales. The proposal would
implement these remedial actions for the U.S. operations of a foreign
banking organization with combined U.S. assets of $50 billion or more
that has breached a level 3 trigger by imposing limitations on its U.S.
intermediate holding company, its U.S. branch and agency network, and
its combined U.S. operations.
A foreign banking organization and its U.S. intermediate holding
company would be required to enter into a written agreement or other
formal enforcement action with the Board that specifies that the U.S.
intermediate holding company must take appropriate actions to restore
its capital to or above the applicable minimum risk-based capital and
leverage requirements under subpart L of this proposal and to take such
other remedial actions as prescribed by the Board. If the company fails
to satisfy the requirements of such a written agreement, the company
may be required to divest assets identified by the Board as
contributing to the financial decline or posing substantial risk of
contributing to further financial decline of the company.
[[Page 76672]]
The U.S. intermediate holding company and other U.S. subsidiaries
of a foreign banking organization also would be prohibited from making
capital distributions.
In addition, the foreign banking organization in level 3
remediation would be subject to growth limitations with respect to its
combined U.S. operations. It would be prohibited from allowing the
average daily total assets or average daily risk-weighted assets of its
combined U.S. operations in any calendar quarter to exceed average
daily total assets and average daily risk-weighted assets,
respectively, during the preceding calendar quarter. Similarly, it
would be prohibited from allowing the average daily total assets or
average daily total risk-weighted assets of its combined U.S.
operations in any calendar year to exceed average daily total assets
and average daily total risk-weighted assets, respectively, during the
preceding calendar year.
As in level 2 remediation, in addition to existing requirements for
prior Board approval to making certain acquisitions or establishing new
branches or other offices, the foreign banking organization would be
prohibited, with prior Board approval, from establishing a new branch,
agency, representative office or place of business in the United
States, engaging in any new line of business in the United States, or
directly or indirectly acquiring a controlling interest (as defined in
the proposal) in any company that would be required to be a subsidiary
of a U.S. intermediate holding company under the proposal. This would
include acquiring controlling interests in nonbank companies engaged in
financial activities.
In addition, the foreign banking organization and its U.S.
intermediate holding company would not be able to increase the
compensation of, or pay any bonus to, an executive officer whose
primary responsibility pertains to any part of the combined U.S.
operations or any member of the board of directors (or its equivalent)
of the U.S. intermediate holding company. The Board could also require
the U.S. intermediate holding company of a foreign banking organization
in level 3 remediation to replace its board of directors, or require
the U.S. intermediate holding company or foreign banking organization
to dismiss U.S. senior executive officers or the U.S. intermediate
holding company to dismiss members of its board of directors who have
been in office for more than 180 days, or add qualified U.S. senior
executive officers subject to approval by the Board. To the extent that
a U.S. intermediate holding company's or U.S. branch and agency
network's management is a primary cause of a foreign banking
organization's level 3 remediation status, the proposal would allow the
Board to take appropriate action to ensure that such management could
not increase the risk profile of the company or make its failure more
likely.
Furthermore, the foreign banking organization would be required to
cause its U.S. branch and agency network to remain in a net due to
position with respect to the foreign bank's non-U.S. offices and non-
U.S. affiliates and maintain eligible assets that equal at least 108
percent of the U.S. branch and agency network's third-party
liabilities. However, the U.S. branch and agency network would not be
subject to the liquid asset buffer required by level 2 remediation in
order to allow the foreign banking organization to make use of those
assets to mitigate liquidity stress.
The Board believes that these restrictions would appropriately
limit a foreign banking organization's ability to increase its risk
profile in the United States and ensure maximum capital conservation
when its condition or risk management failures have deteriorated to the
point that it is subject to level 3 remediation. These restrictions,
while potentially disruptive to aspects of the company's U.S. business,
are consistent with the purpose of section 166 of the Dodd-Frank Act:
to arrest a foreign banking organization's decline in the United States
and help to mitigate external costs in the United States associated
with a potential failure.
Under the proposed rule, the Board has discretion to impose
limitations or conditions on the conduct of activities at the combined
U.S. operations of the company as the Board deems appropriate and
consistent with Title I of the Dodd-Frank Act. Taken together, the
mandatory and optional restrictions and actions of level 3 remediation
provide the Board with important tools to make a foreign banking
organization's potential failure less costly to the U.S. financial
system.
Level 4 Remediation (Resolution Assessment)
Under the proposed rule, if level 4 remediation is triggered, the
Board would consider whether the combined U.S. operations of the
foreign banking organization warrant termination or resolution based on
the financial decline of the combined U.S. operations, the factors
contained in section 203 of the Dodd-Frank Act as applicable, or any
other relevant factor. If such a determination is made, the Board will
take actions that include recommending to the appropriate financial
regulatory agencies that an entity within the U.S. branch and agency
network be terminated or that a U.S. subsidiary be resolved.
Question 98: The Board seeks comment on the proposed mandatory
actions that would occur at each level of remediation. What, if any,
additional or different restrictions should the Board impose on
distressed foreign banking organizations or their U.S. operations?
E. Early Remediation Requirements for Foreign Banking Organizations
With Total Consolidated Assets of $50 Billion or More and Combined U.S.
Assets of Less than $50 Billion
The proposal would tailor the application of the proposed early
remediation regime for the U.S. operations of foreign banking
organizations with total consolidated assets of $50 billion or more and
combined U.S. assets of less than $50 billion. The U.S. operations of
these foreign banking organizations would be subject to the same
triggers and notification requirements applicable to the U.S.
operations of foreign banking organizations with a larger presence in
the United States. When the Board is aware that a foreign banking
organization breached a trigger, the Board may apply any of the
remedial provisions that would be applicable to a foreign banking
organization with combined U.S. assets of $50 billion or more. In
exercising this authority, the Board will consider the activities,
scope of operations, structure, and risk to U.S. financial stability
posed by the foreign banking organization.
F. Relationship to Other Laws and Requirements
The early remediation regime that would be established by the
proposed rule would supplement rather than replace the Board's other
supervisory processes with respect to the U.S. operations of foreign
banking organizations. The proposed rule would not limit the Board's
supervisory authority, including authority to initiate supervisory
actions to address deficiencies, unsafe or unsound conduct, practices,
conditions, or violations of law. For example, the Board may respond to
signs of a foreign banking organization's or a U.S. intermediate
holding company's financial stress by requiring corrective measures in
addition to remedial actions required under the proposed rule. The
Board also may use other supervisory authority to cause a foreign
[[Page 76673]]
banking organization or U.S. intermediate holding company to take
remedial actions enumerated in the early remediation regime on a basis
other than a triggering event.
G. Potential Market Indicators and Potential Trigger Design
As noted above in section B--Early Remediation Triggering Events,
the Board is considering whether to use market indicators as a level 1
trigger. In considering market indicators to incorporate into the early
remediation regime, the Board focused on indicators that have
significant information content, that is for which prices quotes are
available for foreign banking organizations, and provide a sufficiently
early indication of emerging or potential issues. The Board is
considering using the following or similar market-based indicators in
its early remediation framework for the U.S. operations of foreign
banking organizations:
1. Equity-Based Indicators
Expected default frequency (EDF). EDF measures the expected
probability of default in the next 365 days. EDFs could be calculated
using Moody's KMV RISKCALC model.
Marginal expected shortfall (MES). The MES of a financial
institution is defined as the expected loss on its equity when the
overall market declines by more than a certain amount. Each financial
institution's MES depends on the volatility of its stock price, the
correlation between its stock price and the market return, and the co-
movement of the tails of the distributions for its stock price and for
the market return. The Board may use MES calculated following the
methodology of Acharya, Pederson, Phillipon, and Richardson (2010). MES
data are available at http://vlab.stern.nyu.edu/welcome/risk.
Market Equity Ratio. The market equity ratio could be defined as
the ratio of market value of equity to market value of equity plus book
value of debt.
Option-implied volatility. The option-implied volatility of a
firm's stock price is calculated from out-of-the-money option prices
using a standard option pricing model, for example as reported as an
annualized standard deviation in percentage points by Bloomberg.
2. Debt-Based Indicators
Credit default swaps (CDS). The Board would refer to CDS offering
protection against default on a 5-year maturity, senior unsecured bond
by a financial institution.
Subordinated debt (bond) spreads. The Board would refer to
financial companies' subordinated bond spreads with a remaining
maturity of at least 5 years over the Treasury rate with the same
maturity or the LIBOR swap rate as published by Bloomberg.
3. Considerations for Foreign Banking Organizations
The Board recognizes that some market indicators may not be
available for foreign banking organizations and that market indicators
for different foreign banking organizations are not traded with the
same frequency and therefore may not contain the same level of
informational content. Further, the Board anticipates analyzing market
indicators available for both U.S. subsidiaries of foreign banking
organizations, if available and the consolidated foreign banking
organization. The use of market indicators at the consolidated level is
appropriate for foreign banking organizations since the U.S. operations
are likely to be affected by any deterioration in financial condition
of the consolidated company.
Question 99: The Board seeks comment on the proposed approach to
market-based triggers detailed below, alternative specifications of
market-based indicators, and the potential benefits and challenges of
introducing additional market-based triggers for remediation levels 2,
3, or 4 of the proposal. In addition, the Board seeks comment on the
sufficiency of information content in market-based indicators
generally.
Proposed Trigger Design
The Board's proposed market indicator-based regime would trigger
heightened supervisory review when any of a foreign banking
organization's indicators cross a threshold based on different
percentiles of historical distributions. The triggers described below
have been designed based on observations for U.S. financial
institutions but are indicative of the approach the Board anticipates
proposing for foreign banking organizations.
Time-variant triggers capture changes in the value of a company's
market-based indicator relative to its own past performance and the
past performance of its peers. Peer groups would be determined on an
annual basis. Current values of indicators, measured in levels and
changes, would be evaluated relative to a foreign banking
organization's own time series (using a rolling 5-year window) and
relative to the median of a group of predetermined low-risk peers
(using a rolling 5-year window), and after controlling for market or
systematic effects.\124\ The value represented by the percentiles for
each signal varies over time as data is updated for each indicator.
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\124\ Market or systemic effects are controlled by subtracting
the median of corresponding changes from the peer group.
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For all time-variant triggers, heightened supervisory review would
be required when the median value of at least one market indicator over
a period of 22 consecutive business days, either measured as its level,
its 1-month change, or its 3-month change, both absolute and relative
to the median of a group of predetermined low-risk peers, is above the
95th percentile of the firm's or the median peer's market indicator 5-
year rolling window time series. The Board proposes to use time-variant
triggers based on all six market indicators listed above.
Time-invariant triggers capture changes in the value of a company's
market-based indicators relative to the historical distribution of
market-based variables over a specific fixed period of time and across
a predetermined peer group. Time-invariant triggers are used to
complement time-variant triggers since time-variant triggers could lead
to excessively low or high thresholds in cases where the rolling window
covers only an extremely benign period or a highly disruptive financial
period. The Board acknowledges that a time-invariant threshold should
be subject to subsequent revisions when warranted by circumstances.
As currently contemplated, the Board would consider all pre-crisis
panel data for the peer group (January 2000-December 2006), which
contain observations from the subprime crisis in the late 1990s and
early 2000s as well as the tranquil period of 2004-2006. For each
market indicator, percentiles of the historical distributions would be
computed to calibrate time-invariant thresholds. The Board would focus
on five indicators for time-invariant triggers, calibrated to balance
between their propensity to produce false positives and false
negatives: CDS prices, subordinated debt spreads, option-implied
volatility, EDF and MES. The market equity ratio is not used in the
time-invariant approach because the cross-sectional variation of this
variable was not found to be informative of early issues across
financial companies. Time-invariant thresholds would trigger heightened
supervisory review if the median value for a foreign banking
organization over 22 consecutive business days was above the threshold
for any of the market indicators used in the regime.
[[Page 76674]]
In considering all thresholds for each time-invariant trigger, the
Board has evaluated the tradeoff between early signals and supervisory
burden associated with potentially false signals. Data limitations in
the time-invariant approach also require the construction of different
thresholds for different market indicators. The Board is considering
the following calibration:
CDS. The CDS price data used to create the distribution consist of
an unbalanced panel of daily CDS price observations for 25 financial
companies over the 2001- 2006 period. Taking the skewed distribution of
CDS prices in the sample and persistent outliers into account, the
threshold was set at 44 basis points, which corresponds to the 80th
percentile of the distribution.
Subordinated debt (bond) spreads. The data covered an unbalanced
panel of daily subordinated debt spread observations for 30 financial
companies. Taking the skewed distribution into account, the threshold
was set to 124 basis points, which corresponds to the 90th percentile
of the distribution.
MES. The data covered a balanced panel of daily observations for 29
financial companies. The threshold was set to 4.7 percent, which
corresponds to the 95th percentile of the distribution.
Option-implied volatility. The data covered a balanced panel of
daily option-implied volatility observations for 29 financial
companies. The threshold was set to 45.6 percent, which corresponds to
the 90th percentile of the distribution.
EDF. The monthly EDF data cover a balanced panel of 27 financial
companies. The threshold was set to 0.57 percent, which corresponds to
the 90th percentile of the distribution.
The Board invites comment on the use of market indicators,
including time-variant and time-invariant triggers to prompt early
remediation actions.
Question 100: The Board is considering using both absolute levels
and changes in indicators, as described in section G--Potential market
indicators and potential trigger design. Over what period should
changes be calculated?
Question 101: Should the Board use both time-variant and time-
invariant indicators? What are the comparative advantages of using one
or the other?
Question 102: Is the proposed trigger time (when the median value
over a period of 22 consecutive business days crosses the predetermined
threshold) to trigger heightened supervisory review appropriate for
foreign banking organizations? What periods should be considered and
why?
Question 103: Should the Board use a statistical threshold to
trigger heightened supervisory review or some other framework?
X. Administrative Law Matters
A. Solicitation of Comments on the Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed rule in a
simple and straightforward manner, and invites comment on the use of
plain language.
For example:
Have we organized the material to suit your needs? If not,
how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could we do to make the regulation easier to
understand?
B. Paperwork Reduction Act Analysis
Request for Comment on Proposed Information Collection
In accordance with section 3512 of the Paperwork Reduction Act of
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The OMB control numbers are 7100-0350,
7100-0125, 7100-0035, 7100-0319, 7100-0073, 7100-0297, 7100-0126, 7100-
0128, 7100-0297, 7100-0244, 7100-0300, 7100-NEW, 7100-0342, 7100-0341.
The Board reviewed the proposed rule under the authority delegated to
the Board by OMB.
The proposed rule contains requirements subject to the PRA. The
reporting requirements are found in sections 252.202(b); 252.203(b);
252.212(c)(3); 252.226(c); 252.231(a); 252.262; 252.263(b)(1), (b)(2),
(c)(2), and (d); 252.264(b)(2); and 252.283(b). The recordkeeping
requirements are found in sections 252.225(c); 252.226(b)(1); 252.228;
252.229(a); 252.230(a) and (c); 252.252(a); and 252.262. The disclosure
requirements are found in section 252.262. Detailed burden estimates
for these requirements are provided below. These information collection
requirements would implement section 165 and 166 of the Dodd-Frank Act.
Proposed Revisions to Information Collections
1. Title of Information Collection: Reporting, Recordkeeping, and
Disclosure Requirements Associated with Regulation YY.
Frequency of Response: Annual, semiannual, and on occasion.
Affected Public: Businesses or other for-profit.
Respondents: Foreign banking organizations, U.S. intermediate
holding companies, foreign savings and loan holding companies, and
foreign nonbank financial companies supervised by the Board.
Abstract: Section 165 of the Dodd-Frank Act requires the Board to
establish enhanced prudential standards on bank holding companies with
consolidated assets of $50 billion or more and nonbank financial
companies supervised by the Board, and section 166 requires the Board
to establish an early remediation framework for these companies. The
enhanced prudential standards include risk-based capital and leverage
requirements, liquidity standards, requirements for overall risk
management (including establishing a risk committee), single-
counterparty credit limits, stress test requirements, and debt-to-
equity limits for companies that the Council has determined pose a
grave threat to financial stability. The proposal would implement these
requirements for foreign banking organizations with total consolidated
assets of $50 billion or more and foreign nonbank financial companies
supervised by the Board.
Reporting Requirements
Section 252.202(b) would require a foreign banking organization
with total consolidated assets of $50 billion or more that submits a
request to the Board to adopt an alternative organizational structure
to submit its request at least 180 days prior to the date that the
foreign banking organization would establish the U.S. intermediate
holding company and include a description of why the request should be
granted and any other information the Board may require.
Section 252.203(b) would require that within 30 days of
establishing a U.S.
[[Page 76675]]
intermediate holding company, a foreign banking organization with total
consolidated assets of $50 billion or more would provide to the Board:
(1) A description of the U.S. intermediate holding company, including
its name, location, corporate form, and organizational structure; (2) a
certification that the U.S. intermediate holding company meets the
requirements of this subpart; and (3) any other information that the
Board determines is appropriate.
Section 252.226(c) would require a foreign banking organization
with total consolidated assets of $50 billion or more and with combined
U.S. assets of $50 billion or more to report (1) the results of the
stress tests for its combined U.S. operations conducted under this
section to the Board within 14 days of completing the stress test. The
report would include the amount of liquidity buffer established by the
foreign banking organization for its combined U.S. operations under
Sec. 252.227 of the proposal and (2) the results of any liquidity
internal stress tests and establishment of liquidity buffers required
by regulators in its home jurisdiction to the Board on a quarterly
basis within 14 days of completion of the stress test. The report
required under this paragraph would include the results of its
liquidity stress test and liquidity buffer, if as required by the laws,
regulations, or expected under supervisory guidance implemented in the
home jurisdiction.
Section 252.231(a) would require a foreign banking organization
with total consolidated assets of $50 billion or more and combined U.S.
assets of less than $50 billion to report to the Board on an annual
basis the results of an internal liquidity stress test for either the
consolidated operations of the company or its combined U.S. operations
conducted consistent with the BCBS principles for liquidity risk
management and incorporating 30-day, 90-day and one-year stress test
horizons.
Section 252.263(b)(1) would require a foreign banking organization
with total consolidated assets of $50 billion or more and combined U.S.
assets of $50 billion or more to report summary information to the
Board by January 5 of each calendar year, unless extended by the Board,
about its stress testing activities and results, including the
following quantitative and qualitative information: (1) A description
of the types of risks included in the stress test; (2) a description of
the conditions or scenarios used in the stress test; (3) a summary
description of the methodologies used in the stress test; (4) estimates
of: (a) Aggregate losses; (b) pre-provision net revenue; (c) Total loan
loss provisions; (d) Net income before taxes; and (e) Pro forma
regulatory capital ratios required to be computed by the home country
supervisor of the foreign banking organization and any other relevant
capital ratios; and (5) an explanation of the most significant causes
for the changes in regulatory capital ratios.
Section 252.263(b)(2) would require a foreign banking organization
with total consolidated assets of $50 billion or more and combined U.S.
assets of $50 billion or more whose U.S. branch and agency network
provides funding on a net basis to its foreign banking organization's
head office and its non-U.S. affiliates (calculated as the average
daily position over a stress test cycle for a given year) to report the
following more detailed information to the Board by the following
January 5 of each calendar year, unless extended by the Board: (1) A
detailed description of the methodologies used in the stress test,
including those employed to estimate losses, revenues, total loan loss
provisions, and changes in capital positions over the planning horizon;
(2) estimates of realized losses or gains on available-for-sale and
held-to-maturity securities, trading and counterparty losses, if
applicable; loan losses (dollar amount and as a percentage of average
portfolio balance) in the aggregate and by sub-portfolio; and (3) any
additional information that the Board requests in order to evaluate the
ability of the foreign banking organization to absorb losses in
stressed conditions and thereby continue to support its combined U.S.
operations.
Section 252.263(c)(2) would require the foreign banking
organization with total consolidated assets of $50 billion or more and
combined U.S. assets of $50 billion or more that does not satisfy the
proposed stress testing requirements under section 252.262 to
separately or as part of an enterprise-wide stress test conduct an
annual stress test of its U.S. subsidiaries not organized under a U.S.
intermediate holding company to determine whether those subsidiaries
have the capital necessary to absorb losses as a result of adverse
economic conditions. The foreign banking organization would report a
summary of the results of the stress test to the Board on an annual
basis that includes the information required under paragraph (b)(1) of
this section.
Section 252.263(d) would require that if the Board determines to
impose one or more standards under paragraph (c)(3) of that section on
a foreign banking organization with total consolidated assets of $50
billion or more and combined U.S. assets of $50 billion or more, the
Board would notify the company no later than 30 days before it proposes
to apply additional standard(s). The notification would include a
description of the additional standard(s) and the basis for imposing
the additional standard(s). Within 14 calendar days of receipt of a
notification under this paragraph, the foreign banking organization may
request in writing that the Board reconsider the requirement that the
company comply with the additional standard(s), including an
explanation as to why the reconsideration should be granted. The Board
would respond in writing within 14 calendar days of receipt of the
company's request.
Section 252.264(b)(2) would require a foreign banking organization
with total consolidated assets of $50 billion or more and with combined
U.S. assets of less than $50 billion or a foreign savings and loan
holding company with total consolidated assets of $50 billion or more
to separately, or as part of an enterprise-wide stress test, conduct an
annual stress test over a nine-quarter forward-looking planning horizon
of its U.S. subsidiaries to determine whether those subsidiaries have
the capital necessary to absorb losses as a result of adverse economic
conditions. The foreign banking organization or foreign savings and
loan holding company would report a summary of the results of the
stress test to the Board on an annual basis that includes the
information required under paragraph Sec. 252.253(b)(1) of this
subpart.
Section 252.283(b) would require a foreign banking organization to
provide notice to the Board within 5 business days of the date it
determines that one or more triggering events set forth in section
252.283 of that subpart has occurred, identifying the nature of the
triggering event or change in circumstances.
Recordkeeping Requirements
Sections 252.225(c), 252.226(b)(1), 252.228, 252.229(a),
252.230(a), and 252.230(c) would require foreign banking organizations
with total consolidated assets of $50 billion or more and combined U.S.
assets of $50 billion or more to adequately document all material
aspects of its liquidity risk management processes and its compliance
with the requirements of Subpart M and submit all such documentation to
its U.S. risk committee.
Section 252.252(a) would require the U.S. risk committee of a
foreign banking organization with total consolidated assets of $50
billion or more and
[[Page 76676]]
combined U.S. assets of $50 billion or more to review and approve the
risk management practices of the U.S. combined operations; and oversee
the operation of an appropriate risk management framework for the
combined U.S. operations that is commensurate with the capital
structure, risk profile, complexity, activities, and size of the
company's combined U.S. operations. The risk management framework of
the company's combined U.S. operations must be consistent with the
company's enterprise-wide risk management policies and must include:
(i) Policies and procedures relating to risk management governance,
risk management practices, and risk control infrastructure for the
combined U.S. operations of the company; (ii) processes and systems for
identifying and reporting risks and risk-management deficiencies,
including emerging risks, on a combined U.S. operations-basis; (iii)
processes and systems for monitoring compliance with the policies and
procedures relating to risk management governance, practices, and risk
controls across the company's combined U.S. operations; (iv) processes
designed to ensure effective and timely implementation of corrective
actions to address risk management deficiencies; (v) specification of
authority and independence of management and employees to carry out
risk management responsibilities; and (vi) integration of risk
management and control objectives in management goals and compensation
structure of the company's combined U.S. operations. Section 252.252(a)
would also require that the U.S. risk committee meet at least quarterly
and otherwise as needed, and fully document and maintain records of its
proceedings, including risk management decisions.
Reporting, Recordkeeping, and Disclosure Requirements
Section 252.262 would require (1) a U.S. intermediate holding
company with total consolidated assets $50 billion or more to comply
with the stress testing requirements of subparts F and G of the Board's
Regulation YY (12 CFR 252.131 et seq., 12 CFR 252.141) to the same
extent and in the same manner as if it were a covered company as
defined in that subpart and (2) a U.S. intermediate holding company
that has average total consolidated assets of greater than $10 billion
but less than $50 billion would comply with the stress testing
requirements of subpart H of the Board's Regulation YY (12 CFR 252.151
et seq.) to the same extent and in the same manner as if it were a bank
holding company with total consolidated assets of greater than $10
billion but less than $50 billion, as determined under that subpart.
Estimated Paperwork Burden for 7100-0350
Note: The burden estimate associated with 7100-0350 does not
include the current burden.
Estimated Burden per Response
Reporting Burden
Foreign Banking Organizations With Total Consolidated Assets of $50
Billion or More
Section 252.202b--160 hours.
Section 252.203b--100 hours.
Section 252.283b--2 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50
Billion or More and Combined U.S. Assets of $50 Billion or More
Section 252.226c1--40 hours.
Section 252.226c2--40 hours.
Section 252.263b1--40 hours.
Section 252.263b2--40 hours.
Section 252.263c2--80 hours.
Section 252.263d--10 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50
Billion or More and Combined U.S. Assets of Less Than $50 Billion
Section 252.231a--50 hours.
Intermediate Holding Companies With Total Consolidated Assets of More
Than $10 Billion but Less Than $50 Billion
Section 252.262--80 hours (Initial setup 200 hours)
Foreign Banking Organizations With Total Consolidated Assets of More
Than $10 Billion and Combined U.S. Assets of Less Than $50 Billion and
Foreign Savings and Loan Holding Companies With Total Consolidated
Assets of $10 Billion or More
Section 252.264b2--80 hours.
Recordkeeping Burden
Foreign Banking Organizations of Total Consolidated Assets of $50
Billion or More and Combined U.S. Assets of $50 Billion or More
Sections 252.225c, 252.226b1, 252.228, 252.229a, 252.230a, and
252.230c--200 hours (Initial setup 160 hours).
Section 252.252a--200 hours.
Intermediate Holding Companies With Total Consolidated Assets of $50
Billion or More
Section 252.262--40 hours (Initial setup 280 hours)
Intermediate Holding Companies With Total Consolidated Assets of More
Than $10 Billion but Less Than $50 Billion
Section 252.262--40 hours (Initial setup 240 hours)
Disclosure Burden
Intermediate Holding Companies With Total Consolidated Assets of $50
Billion or More
Section 252.262--80 hours (Initial setup 200 hours)
Number of respondents: 23 foreign banking organizations with total
consolidated assets of $50 billion or more and combined U.S. assets of
$50 billion or more, 26 U.S. intermediate holding companies (18 U.S.
intermediate holding companies with total consolidated assets of $50
billion or more), and 113 foreign banking organizations with total
consolidated assets of more than $10 billion and combined U.S. assets
of less than $50 billion.
Total estimated annual burden: 58,660 hours (19,440 hours for
initial setup and 39,220 hours for ongoing compliance).
2. Title of Information Collection: The Capital and Asset Report
for Foreign Banking Organizations.
Frequency of Response: Quarterly.
Affected Public: Businesses or other for-profit.
Respondents: Foreign banking organizations.
Abstract: Section 165 of the Dodd-Frank Act requires the Board to
establish enhanced prudential standards on bank holding companies with
consolidated assets of $50 billion or more and nonbank financial
companies supervised by the Board, and section 166 requires the Board
to establish an early remediation framework for these companies. The
enhanced prudential standards include risk-based capital and leverage
requirements, liquidity standards, requirements for overall risk
management (including establishing a risk committee), single-
counterparty credit limits, stress test requirements, and debt-to-
equity limits for companies that the Council has determined pose a
grave threat to financial stability. The proposal would implement these
requirements for foreign banking organizations with total consolidated
assets of $50 billion or more and foreign nonbank financial companies
supervised by the Board.
Reporting Requirements
Section 252.212(c)(3) would require that a foreign banking
organization with total consolidated assets of $50 billion or more
provide the following
[[Page 76677]]
information to the Federal Reserve concurrently with the Capital and
Asset Report for Foreign Banking Organizations (FR Y-7Q; OMB No. 7100-
0125): (1) the tier 1 risk-based capital ratio, total risk-based
capital ratio and amount of tier 1 capital, tier 2 capital, risk-
weighted assets and total assets of the foreign banking organization,
as of the close of the most recent quarter and as of the close of the
most recent audited reporting period; (2) consistent with the
transition period in the Basel III Accord, the common equity tier 1
ratio, leverage ratio and amount of common equity tier 1 capital,
additional tier 1 capital, and total leverage assets of the foreign
banking organization; and (3) a certification that the foreign banking
organization meets the standard in (c)(1)(i) of this section.
Estimated Paperwork Burden for 7100-0125
Note: The burden estimate associated with 7100-0125 does not
include the current burden.
Estimated Burden per Response: Section 252.212c3 reporting--0.5
hours.
Number of respondents: 107 foreign banking organizations.
Total estimated annual burden: 214 hours.
In addition to the requirements discussed above, section 252.203(c)
would require U.S. intermediate holding companies to submit the
following reporting forms:
Country Exposure Report (FFIEC 009; OMB No. 7100-0035);
Country Exposure Information Report (FFIEC 009a; OMB No.
7100-0035);
Risk-Based Capital Reporting for Institutions Subject to
the Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 7100-0319);
Financial Statements of Foreign Subsidiaries of U.S.
Banking Organizations (FR 2314; OMB No. 7100-0073);
Abbreviated Financial Statements of Foreign Subsidiaries
of U.S. Banking Organizations (FR 2314S; OMB No. 7100-0073);
Annual Report of Holding Companies (FR Y-6; OMB No. 7100-
0297);
The Bank Holding Company Report of Insured Depository
Institution's Section 23A Transactions with Affiliates (FR Y-8; OMB No.
7100-0126);
Consolidated Financial Statements for Bank Holding
Companies (FR Y-9C; OMB No. 7100-0128);
Parent Company Only Financial Statements for Large Bank
Holding Companies (FR Y-9LP; OMB No. 7100-0128);
Financial Statements for Employee Stock Ownership Plan
Bank Holding Companies (FR Y-9ES; OMB No. 7100-0128);
Report of Changes in Organization Structure (FR Y-10; OMB
No. 7100-0297);
Financial Statements of U.S. Nonbank Subsidiaries of U.S.
Bank Holding Companies (FR Y-11; OMB No. 7100-0244);
Abbreviated Financial Statements of U.S. Nonbank
Subsidiaries of U.S. Bank Holding Companies (FR Y-11S; OMB No. 7100-
0244);
Consolidated Bank Holding Company Report of Equity
Investments in Nonfinancial Companies (FR Y-12; OMB No. 7100-0300);
Annual Report of Merchant Banking Investments Held for an
Extended Period (FR Y-12A; OMB No. 7100-0300); and
Banking Organization Systemic Risk Report (FR Y-15; OMB
No. 7100-NEW). This reporting form will be implemented in December
2012.\125\
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\125\ See 77 FR 50102 (August 20, 2012).
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The Board would increase the respondent panels for these reporting
forms to include U.S. intermediate holding companies.
Also, section 252.212(b) would increase the respondent panels for
the following information collections to include U.S. intermediate
holding companies with total consolidated assets of $50 billion or
more:
Recordkeeping and Reporting Requirements Associated with
Regulation Y (Reg Y-13; OMB No. 7100-0342);
Capital Assessments and Stress Testing (FR Y-14M and Q;
OMB No. 7100-0341).
Section 252.212 would increase the respondent panel for the Capital
Assessments and Stress Testing (FR Y-14A; OMB No. 7100-0341) to include
U.S. intermediate holding companies with total consolidated assets of
$10 billion or more.
Finally, the reporting requirement found in section 252.245(a) will
be addressed in a separate Federal Register notice at a later date.
Comments are invited on:
(a) Whether the proposed collections of information are necessary
for the proper performance of the Federal Reserve's functions,
including whether the information has practical utility;
(b) The accuracy of the Federal Reserve's estimate of the burden of
the proposed information collections, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section. A copy of the comments may
also be submitted to the OMB desk officer for the Agencies: By mail to
U.S. Office of Management and Budget, 725 17th Street NW.,
10235, Washington, DC 20503 or by facsimile to 202-395-5806,
Attention, Commission and Federal Banking Agency Desk Officer.
C. Regulatory Flexibility Act Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
\126\ (RFA), the Board is publishing an initial regulatory flexibility
analysis of the proposed rule. The RFA requires an agency either to
provide an initial regulatory flexibility analysis with a proposed rule
for which a general notice of proposed rulemaking is required or to
certify that the proposed rule will not have a significant economic
impact on a substantial number of small entities. Based on its analysis
and for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing an
initial regulatory flexibility analysis. A final regulatory flexibility
analysis will be conducted after comments received during the public
comment period have been considered.
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\126\ 5 U.S.C. 601 et seq.
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In accordance with sections 165 and 166 of the Dodd-Frank Act, the
Board is proposing to amend Regulation YY (12 CFR 252 et seq.) to
establish enhanced prudential standards and early remediation
requirements applicable for foreign banking organizations and foreign
nonbank financial companies supervised by the Board.\127\ The enhanced
prudential standards include a requirement to establish a U.S.
intermediate holding company, risk-based capital and leverage
requirements,
[[Page 76678]]
liquidity standards, risk management and risk committee requirements,
single-counterparty credit limits, stress test requirements, and debt-
to-equity limits for companies that the Council has determined pose a
grave threat to financial stability.
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\127\ See 12 U.S.C. 5365 and 5366.
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Under regulations issued by the Small Business Administration
(SBA), a ``small entity'' includes those firms within the ``Finance and
Insurance'' sector with asset sizes that vary from $7 million or less
in assets to $175 million or less in assets.\128\ The Board believes
that the Finance and Insurance sector constitutes a reasonable universe
of firms for these purposes because such firms generally engage in
actives that are financial in nature. Consequently, bank holding
companies or nonbank financial companies with assets sizes of $175
million or less are small entities for purposes of the RFA.
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\128\ 13 CFR 121.201.
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As discussed in the Supplementary Information, the proposed rule
generally would apply to foreign banking organizations with total
consolidated assets of $50 billion or more, and to foreign nonbank
financial companies that the Council has determined under section 113
of the Dodd-Frank Act must be supervised by the Board and for which
such determination is in effect. However, foreign banking organizations
with publicly traded stock and total consolidated assets of $10 billion
or more would be required to establish a U.S. risk committee. The
company-run stress test requirements part of the proposal being
established pursuant to section 165(i)(2) of the Act also would apply
to any foreign banking organization and foreign savings and loan
holding company with more than $10 billion in total assets. Companies
that are subject to the proposed rule therefore substantially exceed
the $175 million asset threshold at which a banking entity is
considered a ``small entity'' under SBA regulations.\129\ The proposed
rule would apply to a nonbank financial company designated by the
Council under section 113 of the Dodd-Frank Act regardless of such a
company's asset size. Although the asset size of nonbank financial
companies may not be the determinative factor of whether such companies
may pose systemic risks and would be designated by the Council for
supervision by the Board, it is an important consideration.\130\ It is
therefore unlikely that a financial firm that is at or below the $175
million asset threshold would be designated by the Council under
section 113 of the Dodd-Frank Act because material financial distress
at such firms, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of it activities, are not likely to pose a
threat to the financial stability of the United States.
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\129\ The Dodd-Frank Act provides that the Board may, on the
recommendation of the Council, increase the $50 billion asset
threshold for the application of certain of the enhanced prudential
standards. See 12 U.S.C. 5365(a)(2)(B). However, neither the Board
nor the Council has the authority to lower such threshold.
\130\ See 77 FR 21637 (April 11, 2012).
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As noted above, because the proposed rule is not likely to apply to
any company with assets of $175 million or less, if adopted in final
form, it is not expected to apply to any small entity for purposes of
the RFA. The Board does not believe that the proposed rule duplicates,
overlaps, or conflicts with any other Federal rules. In light of the
foregoing, the Board does not believe that the proposed rule, if
adopted in final form, would have a significant economic impact on a
substantial number of small entities supervised. Nonetheless, the Board
seeks comment on whether the proposed rule would impose undue burdens
on, or have unintended consequences for, small organizations, and
whether there are ways such potential burdens or consequences could be
minimized in a manner consistent with sections 165 and 166 of the Dodd-
Frank Act.
List of Subjects in 12 CFR Part 252
12 CFR Chapter II
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons stated in the Supplementary Information, the Board
of Governors of the Federal Reserve System proposes to amend 12 CFR
part 252 as follows:
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
1. The authority citation for part 252 shall read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1818, 1828, 1831n,
1831o, 1831p-l, 1831w, 1835, 1844(b), 3904, 3906-3909, 4808, 5365,
5366, 5367, 5368, 5371.
2. Add Subpart A to read as follows:
Subpart A--General Provisions
Sec.
252.1 [Reserved]
252.2 Authority, purpose, and reservation of authority for foreign
banking organizations and foreign nonbank financial companies
supervised by the Board.
252.3 Definitions.
Subpart A--General Provisions
Sec. 252.1 [Reserved]
Sec. 252.2 Authority, purpose, and reservation of authority for
foreign banking organizations and foreign nonbank financial companies
supervised by the Board.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (the Board) under sections 165, 166, 168, and
171 of Title I of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat.
1376, 1423-1432, 12 U.S.C. 5365, 5366, 5367, 5368, and 5371); section 9
of the Federal Reserve Act (12 U.S.C. 321-338a); section 5(b) of the
Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b));
section 10(g) of the Home Owners' Loan Act, as amended (12 U.S.C.
1467a(g)); and sections 8 and 39 of the Federal Deposit Insurance Act
(12 U.S.C. 1818(b) and 1831p-1); International Banking Act of 1978 (12
U.S.C. 3101 et seq.); Foreign Bank Supervision Enhancement Act of 1991
(12 U.S.C. 3101 note); and 12 U.S.C. 3904, 3906-3909, 4808.
(b) Purpose. This part implements certain provisions of sections
165, 166, 167, and 168 of the Dodd-Frank Act (12 U.S.C. 5365, 5366,
5367, and 5368), which require the Board to establish enhanced
prudential standards for foreign banking organizations with total
consolidated assets of $50 billion or more and certain other companies.
(c) Reservation of authority. (1) In general. Nothing in this part
limits the authority of the Board under any provision of law or
regulation to impose on any company additional enhanced prudential
standards, including, but not limited to, additional risk-based capital
or liquidity requirements, leverage limits, limits on exposures to
single counterparties, risk management requirements, stress tests, or
other requirements or restrictions the Board deems necessary to carry
out the purposes of this part or Title I of the Dodd-Frank Act, or to
take supervisory or enforcement action, including action to address
unsafe and unsound practices or conditions, or violations of law or
regulation.
(2) Separate operations. If a foreign banking organization owns
more than one foreign bank, the Board may apply the standards
applicable to the foreign banking organization under this part in a
manner that takes into account the
[[Page 76679]]
separate operations of such foreign banks.
(d) Foreign nonbank financial companies. (1) In general. The
following subparts of this part will apply to a foreign nonbank
financial company supervised by the Board, unless the Board determines
that application of those subparts, or any part thereof, would not be
appropriate:
(i) Subpart L--Risk-Based Capital Requirements and Leverage Limits
for Covered Foreign Banking Organizations;
(ii) Subpart M--Liquidity Requirements for Covered Foreign Banking
Organizations;
(iii) Subpart N--Single-Counterparty Credit Limits for Covered
Foreign Banking Organizations;
(iv) Subpart O--Risk Management for Covered Foreign Banking
Organizations;
(v) Subpart P--Stress Test Requirements for Covered Foreign Banking
Organizations and Other Foreign Companies;
(vi) Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign
Banking Organizations; and
(vii) Subpart R--Early Remediation Framework for Covered Foreign
Banking Organizations.
(2) Intermediate holding company criteria. In determining whether
to apply subpart K (Intermediate Holding Company Requirement for
Covered Foreign Banking Organizations) to a foreign nonbank financial
company supervised by the Board in accordance with section 167 of the
Dodd-Frank Act (12 U.S.C. 5367), the Board will consider the following
criteria regarding the foreign nonbank financial company:
(i) The structure and organization of the U.S. activities and
subsidiaries of the foreign nonbank financial company;
(ii) The riskiness, complexity, financial activities, and size of
the U.S. activities and subsidiaries of a foreign nonbank financial
company, and the interconnectedness of those U.S. activities and
subsidiaries with foreign activities and subsidiaries of the foreign
banking organization;
(iii) The extent to which an intermediate holding company would
help to prevent or mitigate risks to the financial stability of the
United States that could arise from the material financial distress or
failure, or ongoing activities, of the foreign nonbank financial
company;
(iv) The extent to which the foreign nonbank financial company is
subject to prudential standards on a consolidated basis in its home
country that are administered and enforced by a comparable foreign
supervisory authority; and
(v) Any other risk-related factor that the Board determines
appropriate.
Sec. 252.3 Definitions.
Unless otherwise specified, the following definitions will apply
for purposes of subparts K through R of this part:
Affiliate means any company that controls, is controlled by, or is
under common control with, another company.
Applicable accounting standards means U.S. generally applicable
accounting principles (GAAP), international financial reporting
standards (IFRS), or such other accounting standards that a company
uses in the ordinary course of its business in preparing its
consolidated financial statements.
Bank has the same meaning as in section 225.2(b) of the Board's
Regulation Y (12 CFR 225.2(b)).
Bank holding company has the same meaning as in section 2(a) of the
Bank Holding Company Act (12 U.S.C. 1841(a)) and section 225.2(c) of
the Board's Regulation Y (12 CFR 225.2(c)).
Combined U.S. operations means, with respect to a foreign banking
organization:
(1) Any U.S. intermediate holding company and its consolidated
subsidiaries;
(2) Any U.S. branch or U.S. agency; and
(3) Any other U.S. subsidiary of the foreign banking organization
that is not a section 2(h)(2) company.
Company means a corporation, partnership, limited liability
company, depository institution, business trust, special purpose
entity, association, or similar organization.
Control has the same meaning as in section 2(a) of the Bank Holding
Company Act (12 U.S.C. 1841(a)), and the terms controlled and
controlling shall be construed consistently with the term control.
Depository institution has the same meaning as in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
FFIEC 002 means the Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks reporting form.
Foreign bank has the same meaning as in section 211.21(n) of the
Board's Regulation K (12 CFR 211.21(n)).
Foreign banking organization has the same meaning as in section
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)).
Foreign nonbank financial company supervised by the Board means a
company incorporated or organized in a country other than the United
States that the Council has determined under section 113 of the Dodd-
Frank Act (12 U.S.C. 5323) shall be supervised by the Board and for
which such determination is still in effect.
FR Y-7Q means the Capital and Asset Report for Foreign Banking
Organizations reporting form.
FR Y-9C means the Consolidated Financial Statements for Bank
Holding Companies reporting form.
Non-U.S. affiliate means any affiliate that is incorporated or
organized in a country other than the United States.
Nonbank financial company supervised by the Board means a company
that the Council has determined under section 113 of the Dodd-Frank Act
(12 U.S.C. 5323) shall be supervised by the Board and for which such
determination is still in effect.
Publicly traded means traded on:
(1) Any exchange registered with the U.S. Securities and Exchange
Commission as a national securities exchange under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question, meaning that there are enough independent bona fide offers to
buy and sell so that a sales price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can be
determined promptly and a trade can be settled at such a price within a
reasonable time period conforming with trade custom. A company can rely
on its determination that a particular non-U.S.-based exchange provides
a liquid two-way market unless the Board determines that the exchange
does not provide a liquid two-way market.
Section 2(h)(2) company has the same meaning as in section 2(h)(2)
of the Bank Holding Company Act (12 U.S.C. 1841(h)(2)).
Subsidiary has the same meaning as in section 225.2(o) of
Regulation Y (12 CFR 225.2(o)).
U.S. agency has the same meaning as the term ``agency'' in section
211.21(b) of the Board's Regulation K (12 CFR 211.21(b)).
U.S. branch has the same meaning as the term ``branch'' in section
211.21(e) of the Board's Regulation K (12 CFR 211.21(e)).
U.S. branch and agency network means all U.S. branches and U.S.
agencies of a foreign bank.
[[Page 76680]]
U.S. intermediate holding company means the top-tier U.S. company
that is required to be formed pursuant to Sec. 252.202 of subpart K of
this part and that controls the U.S. subsidiaries of a foreign banking
organization.
U.S. subsidiary means any subsidiary that is organized in the
United States or in any State, commonwealth, territory, or possession
of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the North Mariana Islands, the
American Samoa, Guam, or the United States Virgin Islands.
Subpart J--[Reserved]
3. Add reserved subpart J.
4. Add subpart K to read as follows:
Subpart K--Intermediate Holding Company Requirement for Covered Foreign
Banking Organizations
Sec.
252.200 Applicability.
252.201 U.S. intermediate holding company requirement.
252.202 Alternative organizational structure.
252.203 Corporate form, notice, and reporting.
252.204 Liquidation of intermediate holding companies
Subpart K--Intermediate Holding Company Requirement for Covered
Foreign Banking Organizations
Sec. 252.200 Applicability.
(a) In general. (1) Total consolidated assets. This subpart applies
to a foreign banking organization with total consolidated assets of $50
billion or more, as determined based on the average of the total
assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of this subpart unless and until
total assets as reported on its FR Y-7Q are less than $50 billion for
each of the four most recent consecutive calendar quarters.
(3) Measurement date. For purposes of paragraphs (a)(1) and (2) of
this section, total assets are measured on the quarter-end for each
quarter used in the calculation of the average.
(b) Initial applicability. A foreign banking organization that is
subject to this subpart as of July 1, 2014, under paragraph (a)(1) of
this section, must comply with the requirements of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(c) Ongoing applicability. A foreign banking organization that
becomes subject to this subpart after July 1, 2014, under paragraph
(a)(1) of this section, must comply with the requirements of this
subpart beginning 12 months after it becomes subject to this subpart,
unless that time is accelerated or extended by the Board in writing.
Sec. 252.201 U.S. intermediate holding company requirement.
(a) In general. (1) A foreign banking organization with total
consolidated assets of $50 billion or more must establish a U.S.
intermediate holding company if the foreign banking organization has
combined U.S. assets (excluding assets of U.S. branches and U.S.
agencies) of $10 billion or more.
(2) For purposes of this section, combined U.S. assets (excluding
assets of U.S. branches and U.S. agencies) is equal to the average of
the total consolidated assets of each top-tier U.S. subsidiary of the
foreign banking organization (excluding any section 2(h)(2) company):
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not filed an FR Y-7Q,
as determined under applicable accounting standards.
(3) A company may reduce its combined U.S. assets (excluding assets
of U.S. branches and U.S. agencies) as calculated under paragraph
(a)(2) of this section by the amount corresponding to any balances and
transactions between any U.S. subsidiaries that would be eliminated in
consolidation were a U.S. intermediate holding company already formed.
(b) Organizational structure. A foreign banking organization that
is required to form a U.S. intermediate holding company under paragraph
(a) of this section must hold its interest in any U.S. subsidiary
through the U.S. intermediate holding company, other than any interest
in a section 2(h)(2) company.
Sec. 252.202 Alternative organizational structure.
(a) In general. Upon written request by a foreign banking
organization subject to this subpart, the Board will consider whether
to permit the foreign banking organization to establish multiple
intermediate holding companies or use an alternative organizational
structure to hold its combined U.S. operations, if:
(1) The foreign banking organization controls another foreign
banking organization that has separate U.S. operations;
(2) Under applicable law, the foreign banking organization may not
own or control one or more of its U.S. subsidiaries (excluding any
section 2(h)(2) company) through a single U.S. intermediate holding
company; or
(3) The Board determines that the circumstances otherwise warrant
an exception based on the foreign banking organization's activities,
scope of operations, structure, or similar considerations.
(b) Request. A request under this section must be submitted to the
Board at least 180 days prior to the date that the foreign banking
organization is required to establish the U.S. intermediate holding
company and include a description of why the request should be granted
and any other information the Board may require.
Sec. 252.203 Corporate form, notice, and reporting
(a) Corporate form. A U.S. intermediate holding company must be
organized under the laws of the United States, any state, or the
District of Columbia.
(b) Notice. Within 30 days of establishing a U.S. intermediate
holding company under this section, a foreign banking organization must
provide to the Board:
(1) A description of the U.S. intermediate holding company,
including its name, location, corporate form, and organizational
structure;
(2) A certification that the U.S. intermediate holding company
meets the requirements of this subpart; and
(3) Any other information that the Board determines is appropriate.
(c) Reporting. Each U.S. intermediate holding company shall
furnish, in the manner and form prescribed by the Board, any reporting
form in the same manner and to the same extent as a bank holding
company. Additional information and reports shall be furnished as the
Board may require.
(d) Examinations and inspections. The Board may examine or inspect
any U.S. intermediate holding company and
[[Page 76681]]
each of its subsidiaries and prepare a report of their operations and
activities.
(e) Enhanced prudential standards. A U.S. intermediate holding
company is subject to the enhanced prudential standards of subparts K
through R of this part. A U.S. intermediate holding company is not
otherwise subject to requirements of subparts B through J of this part,
regardless of whether the company meets the scope of application of
those subparts.
Sec. 252.204 Liquidation of intermediate holding companies.
(a) Prior notice. A foreign banking organization that seeks to
voluntarily liquidate its U.S. intermediate holding company but would
remain a foreign banking organization after such liquidation must
provide the Board with 60 days' prior written notice of the
liquidation.
(b) Waiver of notice period. The Board may waive the 60-day period
in paragraph (a) of this section in light of the circumstances
presented.
5. Add Subpart L to part 252 to read as follows:
Subpart L--Risk-Based Capital Requirements and Leverage Limits for
Covered Foreign Banking Organizations
Sec.
252.210 Definitions.
252.211 Applicability.
252.212 Enhanced risk-based capital and leverage requirements.
Subpart L--Risk-Based Capital Requirements and Leverage Limits for
Covered Foreign Banking Organizations
Sec. 252.210 Definitions.
For purposes of this subpart, the following definition applies:
Basel Capital Framework means the regulatory capital framework
published by the Basel Committee on Banking Supervision, as amended
from time to time.
Sec. 252.211 Applicability.
(a) Foreign banking organizations with total consolidated assets of
$50 billion or more. A foreign banking organization with total
consolidated assets of $50 billion or more is subject to the
requirements of Sec. 252.212(c) of this subpart.
(1) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.212(c) of this subpart
unless and until total assets as reported on its FR Y-7Q are less than
$50 billion for each of the four most recent consecutive calendar
quarters.
(3) Measurement date. For purposes of this paragraph, total assets
are measured on the last day of the quarter used in calculation of the
average.
(b) U.S. intermediate holding companies. (1) In general. A U.S.
intermediate holding company is subject to the requirements of Sec.
252.212(a) of this subpart.
(2) U.S. intermediate holding companies with total consolidated
assets of $50 billion or more. A U.S. intermediate holding company that
has total consolidated assets of $50 billion or more also is subject to
the requirements of Sec. 252.212(b) of this subpart.
(i) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total consolidated assets:
(A) For the four most recent consecutive quarters as reported by
the U.S. intermediate holding company on its FR Y-9C, or
(B) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on FR Y-9C, or
(C) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards.
(ii) Cessation of requirements. A U.S. intermediate holding company
will remain subject to the requirements of Sec. 252.212(b) of this
subpart unless and until total assets as reported on its FR Y-9C are
less than $50 billion for each of the four most recent consecutive
calendar quarters.
(iii) Measurement date. For purposes of this paragraph, total
consolidated assets are measured on the last day of the quarter used in
calculation of the average.
(c) Initial applicability. (1) Foreign banking organizations. A
foreign banking organization that is subject to the requirements of
this subpart as of July 1, 2014, under paragraph (a)(1) of this section
must comply with the requirements of Sec. 252.212(c) of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(2) U.S. intermediate holding companies. A U.S. intermediate
holding company that is subject to the requirements of this subpart as
of July 1, 2015, under paragraph (b)(1) or (b)(2) of this section, must
comply with the requirements of Sec. 252.212(a) and Sec. 252.212(b)
of this subpart beginning on July 1, 2015, unless that time is extended
by the Board in writing.
(d) Ongoing applicability. (1) Foreign banking organizations. A
foreign banking organization that becomes subject to the requirements
of this subpart after July 1, 2014, under paragraph (a)(1) of this
section, must comply with the requirements of Sec. 252.212(c) of this
subpart beginning 12 months after it becomes subject to this subpart,
unless that time is accelerated or extended by the Board in writing.
(2) U.S. intermediate holding companies. (i) A U.S. intermediate
holding company that becomes subject to the requirements of this
subpart after July 1, 2015, under paragraph (b)(1) of this section,
must comply with the requirements of Sec. 252.212(a) of this subpart
on the date it is required to be established, unless that time is
accelerated or extended by the Board in writing.
(ii) A U.S. intermediate holding company that becomes subject to
this subpart after July 1, 2015, under paragraph (b)(2) of this
section, must comply with the requirements of Sec. 252.212(b) of this
subpart beginning in October of the calendar year after it becomes
subject to those requirements, unless that time is accelerated or
extended by the Board in writing.
Sec. 252.212 Enhanced risk-based capital and leverage requirements.
(a) Risk-based capital and leverage requirements. A U.S.
intermediate holding company, regardless of whether it controls a bank,
must calculate and meet all applicable capital adequacy standards,
including minimum risk-based capital and leverage requirements, and
comply with all restrictions associated with applicable capital
buffers, in the same manner and to the same extent as a bank holding
company in accordance with any capital adequacy standards established
by the Board for bank holding companies, including 12 CFR part 225,
appendices A, D, E, and G and any successor regulation.
[[Page 76682]]
(b) Capital planning. A U.S. intermediate holding company with
total consolidated assets of $50 billion or more must comply with
section 225.8 of Regulation Y in the same manner and to the same extent
as a bank holding company subject to that section.
(c) Foreign banking organizations. (1) General requirements. A
foreign banking organization with total consolidated assets of $50
billion or more must:
(i) Certify to the Board that it meets capital adequacy standards
at the consolidated level that are consistent with the Basel Capital
Framework in accordance with any capital adequacy standards established
by its home country supervisor; or
(ii) Demonstrate to the satisfaction of the Board that it meets
capital adequacy standards at the consolidated level that are
consistent with the Basel Capital Framework.
(2) Consistency with Basel Capital Framework. For purposes of
paragraph (c)(1) of this section, consistency with the Basel Capital
Framework shall require, without limitation, a company to meet all
minimum risk-based capital ratios, any minimum leverage ratio, and all
restrictions based on applicable capital buffers set forth in Basel
III: A global regulatory framework for more resilient banks and banking
systems (2010), each as applicable and as implemented in accordance
with the Basel Capital Framework, including any transitional provisions
set forth therein.
(3) Reporting. A foreign banking organization with total
consolidated assets of $50 billion or more must provide the following
information to the Federal Reserve concurrently with its FR Y-7Q:
(i) The tier 1 risk-based capital ratio, total risk-based capital
ratio and amount of tier 1 capital, tier 2 capital, risk-weighted
assets and total assets of the foreign banking organization, as of the
close of the most recent quarter and as of the close of the most recent
audited reporting period; and
(ii) Consistent with the transition period in the Basel III Accord,
the common equity tier 1 ratio, leverage ratio and amount of common
equity tier 1 capital, additional tier 1 capital, and total leverage
assets of the foreign banking organization, as of the close of the most
recent quarter and as of the close of the most recent audited reporting
period.
(4) Noncompliance with the Basel Capital Framework. If a foreign
banking organization does not satisfy the requirements of paragraphs
(c)(1), (c)(2), and (c)(3) of this section, the Board may impose
conditions or restrictions relating to the activities or business
operations of the U.S. operations of the foreign banking organization.
The Board will coordinate with any relevant U.S. licensing authority in
the implementation of such conditions or restrictions.
6. Add Subpart M to read as follows:
Subpart M--Liquidity Requirements for Covered Foreign Banking
Organizations
Sec.
252.220 Definitions.
252.221 Applicability.
252.222 Responsibilities of the U.S. risk committee and U.S. chief
risk officer.
252.223 Additional responsibilities of the U.S. chief risk officer.
252.224 Independent review.
252.225 Cash flow projections.
252.226 Liquidity stress testing.
252.227 Liquidity buffer.
252.228 Contingency funding plan
252.229 Specific limits.
252.230 Monitoring.
252.231 Requirements for foreign banking organizations with combined
U.S. assets of less than $50 billion.
Subpart M--Liquidity Requirements for Covered Foreign Banking
Organizations
Sec. 252.220 Definitions.
For purposes of this subpart, the following definitions apply:
BCBS principles for liquidity risk management means the document
titled ``Principles for Sound Liquidity Risk Management and
Supervision'' (September 2008) as published by the Basel Committee on
Banking Supervision, as supplemented and revised from time to time.
Global headquarters means the chief administrative office of a
company in the jurisdiction in which the company is chartered or
organized.
Highly liquid assets means:
(1) Cash;
(2) Securities issued or guaranteed by the U. S. government, a U.S.
government agency, or a U.S. government-sponsored entity; and
(3) Any other asset that the foreign banking organization
demonstrates to the satisfaction of the Federal Reserve:
(i) Has low credit risk and low market risk;
(ii) Is traded in an active secondary two-way market that has
committed market makers and independent bona fide offers to buy and
sell so that a price reasonably related to the last sales price or
current bona fide competitive bid and offer quotations can be
determined within one day and settled at that price within a reasonable
time period conforming with trade custom; and
(iii) Is a type of asset that investors historically have purchased
in periods of financial market distress during which market liquidity
is impaired.
Liquidity means a company's capacity to efficiently meet its
expected and unexpected cash flows and collateral needs at a reasonable
cost without adversely affecting the daily operations or the financial
condition of the foreign banking organization.
Liquidity risk means the risk that a company's financial condition
or safety and soundness will be adversely affected by its inability or
perceived inability to meet its cash and collateral obligations.
Unencumbered means, with respect to an asset, that:
(1) The asset is not pledged, does not secure, collateralize, or
provide credit enhancement to any transaction, and is not subject to
any lien, or, if the asset has been pledged to a Federal Reserve bank
or a U.S. government-sponsored entity, it has not been used;
(2) The asset is not designated as a hedge on a trading position
under the Board's market risk rule under 12 CFR 225, appendix E, or any
successor regulation thereto; or
(3) There are no legal or contractual restrictions on the ability
of the foreign banking organization to promptly liquidate, sell,
transfer, or assign the asset.
U.S. government agency means an agency or instrumentality of the
U.S. government whose obligations are fully and explicitly guaranteed
as to the timely payment of principal and interest by the full faith
and credit of the U.S. government.
U.S. government-sponsored entity means an entity originally
established or chartered by the U.S. government to serve public
purposes specified by the U.S. Congress, but whose obligations are not
explicitly guaranteed by the full faith and credit of the U.S.
government.
Sec. 252.221 Applicability.
(a) Foreign banking organizations with combined U.S. assets of $50
billion or more. A foreign banking organization with combined U.S.
assets of $50 billion or more is subject to the requirements of
Sec. Sec. 252.222 through 252.230 of this subpart.
(1) Combined U.S. assets. For purposes of this paragraph, combined
U.S. assets is equal to the sum of:
(i) The average of the total assets of each U.S. branch and U.S.
agency of the foreign banking organization:
(A) For the four most recent consecutive quarters as reported to
the Board on the FFIEC 002; or
(B) If the foreign banking organization has not filed the FFIEC 002
for a U.S. branch or U.S. agency for each of the four most recent
consecutive quarters, for the most recent quarter or
[[Page 76683]]
consecutive quarters as reported on the FFIEC 002; or
(C) If the foreign banking organization has not yet filed a FFIEC
002 for a U.S. branch or U.S. agency, as determined under applicable
accounting standards.
(ii) If a U.S. intermediate holding company has been established,
the average of the total consolidated assets of the U.S. intermediate
holding company:
(A) For the four most recent consecutive quarters, as reported to
the Board on the U.S. intermediate holding company's FR Y-9C, or
(B) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on the FR Y-9C,
or
(C) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards; and
(iii) If a U.S. intermediate holding company has not been
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any
section 2(h)(2) company):
(A) For the four most recent consecutive quarters, as reported to
the Board on the FR Y-7Q; or
(B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
(C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
(2) U.S. intercompany transactions. The company may reduce its
combined U.S. assets calculated under this paragraph by the amount
corresponding to balances and transactions between the U.S. subsidiary
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or
U.S. branch or U.S. agency to the extent such items are not already
eliminated in consolidation.
(3) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. Sec. 252.222 through
252.230 of this subpart unless and until the sum of the total assets of
each U.S. branch and U.S. agency as reported on the FFIEC 002 and the
total consolidated assets of each U.S. subsidiary as reported on the FR
Y-9C or FR Y-7Q is less than $50 billion for each of the four most
recent consecutive calendar quarters.
(4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3)
of this section, total assets and total consolidated assets are
measured on the last day of the quarter used in calculation of the
average.
(b) Foreign banking organizations with combined U.S. assets of less
than $50 billion. A foreign banking organization with total
consolidated assets of $50 billion or more and combined U.S. assets of
less than $50 billion is subject to the requirements of Sec. 252.231
of this subpart.
(1) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) Combined U.S. assets. For purposes of this paragraph, combined
U.S. assets are determined in accordance with paragraph (a)(1) of this
section.
(3) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.231 of this subpart
unless and until total assets as reported on its FR Y-7Q are less than
$50 billion for each of the four most recent consecutive calendar
quarters.
(4) Measurement date. For purposes of paragraph (b) of this
section, total assets are measured on the last day of the quarter used
in calculation of the average.
(c) Initial applicability. A foreign banking organization that is
subject to this subpart as of July 1, 2014, under paragraph (a) or (b)
of this section, must comply with the applicable requirements of this
subpart beginning on July 1, 2015, unless that time is extended by the
Board in writing.
(d) Ongoing applicability. A foreign banking organization that
becomes subject to this subpart after July 1, 2014, under paragraphs
(a) or (b) of this section, must comply with the requirements of this
subpart beginning 12 months after it becomes subject to this subpart,
unless that time is accelerated or extended by the Board in writing.
Sec. 252.222 Responsibilities of the U.S. risk committee and U.S.
chief risk officer.
(a) Liquidity risk tolerance. (1) The U.S. risk committee of a
foreign banking organization with combined U.S. assets of $50 billion
or more must review and approve the liquidity risk tolerance for the
company's combined U.S. operations at least annually, with concurrence
from the company's board of directors or its enterprise-wide risk
committee. The liquidity risk tolerance for the combined U.S.
operations must be consistent with the enterprise-wide liquidity risk
tolerance established for the foreign banking organization. The
liquidity risk tolerance for the combined U.S. operations is the
acceptable level of liquidity risk that the company may assume in
connection with its operating strategies for its combined U.S.
operations. In determining the foreign banking organization's liquidity
risk tolerance for the combined U.S. operations, the U.S. risk
committee must consider capital structure, risk profile, complexity,
activities, size, and other relevant factors of the foreign banking
organization and its combined U.S. operations.
(b) Business strategies and products. (1) The U.S. chief risk
officer of a foreign banking organization with combined U.S. assets of
$50 billion or more must review and approve the liquidity costs,
benefits, and risks of each significant new business line and each
significant new product offered, managed or sold through the company's
combined U.S. operations before the foreign banking organization
implements the business line or offers the product through the combined
U.S. operations. In connection with this review, the U.S. chief risk
officer must consider whether the liquidity risk of the new business
line or product under current conditions and under liquidity stress
conditions is within the foreign banking organization's established
liquidity risk tolerance for its combined U.S. operations.
(2) At least annually, the U.S. chief risk officer must review
significant business lines and products offered, managed or sold
through the combined U.S. operations to determine whether each business
line or product has created any unanticipated liquidity risk, and to
determine whether the liquidity risk of each strategy or product
continues to be within the foreign banking organization's established
liquidity risk tolerance for its combined U.S. operations.
(c) Contingency funding plan. The U.S. chief risk officer of a
foreign banking organization must review and approve the contingency
funding plan
[[Page 76684]]
for its combined U.S. operations established pursuant to Sec. 252.228
of this subpart at least annually, and at any such time that the
foreign banking organization materially revises its contingency funding
plan either for the company as a whole or for its combined U.S.
operations specifically.
(d) Other reviews. (1) At least quarterly, the U.S. chief risk
officer of a foreign banking organization with combined U.S. assets of
$50 billion or more must:
(i) Review the cash flow projections produced under Sec. 252.225
of this subpart that use time periods in excess of 30 days for the
long-term cash flow projections required under that section to ensure
that the liquidity risk of the company's combined U.S. operations is
within the established liquidity risk tolerance;
(ii) Review and approve the liquidity stress testing practices,
methodologies, and assumptions for the combined U.S. operations
described in Sec. 252.226 of this subpart;
(iii) Review the liquidity stress testing results for the combined
U.S. operations produced under Sec. 252.226 of this subpart;
(iv) Approve the size and composition of the liquidity buffer for
the combined U.S. operations established under Sec. 252.227 of this
subpart;
(v) Review and approve the specific limits established under Sec.
252.229 of this subpart and review the company's compliance with those
limits; and
(vi) Review the liquidity risk management information for the
combined U.S. operations necessary to identify, measure, monitor, and
control liquidity risk and to comply with this subpart.
(2) Whenever the foreign banking organization materially revises
its liquidity stress testing, the U.S. chief risk officer must also
review and approve liquidity stress testing practices, methodologies,
and assumptions of the company's combined U.S. operations.
(3) The U.S. chief risk officer must establish procedures governing
the content of reports generated within the combined U.S. operations on
the liquidity risk profile of the combined U.S. operations and other
information described in Sec. 252.223(b) of this subpart.
(e) Frequency of reviews. The U.S. chief risk officer must conduct
more frequent reviews and approvals than those required under this
section if changes in market conditions or the liquidity position, risk
profile, or financial condition of the foreign banking organization
indicates that the liquidity risk tolerance, business strategies and
products, or contingency funding plan of the foreign banking
organization should be reviewed or modified.
Sec. 252.223 Additional responsibilities of the U.S. chief risk
officer.
(a) The U.S. chief risk officer of a foreign banking organization
with combined U.S. assets of $50 billion or more must review the
strategies and policies and procedures for managing liquidity risk
established by senior management of the combined U.S. operations. The
U.S. chief risk officer must review information provided by the senior
management of the combined U.S. operations to determine whether the
foreign banking organization is complying with the established
liquidity risk tolerance for the combined U.S. operations.
(b) The U.S. chief risk officer must regularly report to the
foreign banking organization's U.S. risk committee and enterprise-wide
risk committee (or designated subcommittee thereof) on the liquidity
risk profile of the foreign banking organization's combined U.S.
operations at least semi-annually and must provide other information to
the U.S. risk committee and the enterprise-wide risk committee relevant
to compliance of the foreign banking organization with the established
liquidity risk tolerance for the U.S. operations.
Sec. 252.224 Independent review.
(a) A foreign banking organization with combined U.S. assets of $50
billion or more must establish and maintain a review function,
independent of the management functions that execute funding for its
combined U.S. operations, to evaluate the liquidity risk management for
its combined U.S. operations.
(b) The independent review function must:
(1) Regularly, and no less frequently than annually, review and
evaluate the adequacy and effectiveness of the foreign banking
organization's liquidity risk management processes within the combined
U.S. operations;
(2) Assess whether the foreign banking organization's liquidity
risk management of its combined U.S. operations complies with
applicable laws, regulations, supervisory guidance, and sound business
practices; and
(3) Report material liquidity risk management issues to the U.S.
risk committee and the enterprise-wide risk committee in writing for
corrective action.
Sec. 252.225 Cash flow projections.
(a) Requirement. A foreign banking organization with combined U.S.
assets of $50 billion or more must produce comprehensive cash flow
projections for its combined U.S. operations in accordance with the
requirements of this section. Cash flow projections for the combined
U.S. operations must be tailored to, and provide sufficient detail to
reflect, the capital structure, risk profile, complexity, activities,
size, and any other relevant factors of the foreign banking
organization and its combined U.S. operations, including where
appropriate analyses by business line or legal entity. The foreign
banking organization must update short-term cash flow projections daily
and must update long-term cash flow projections at least monthly.
(b) Methodology. A foreign banking organization with combined U.S.
assets of $50 billion or more must establish a methodology for making
cash flow projections for its combined U.S. operations. The methodology
must include reasonable assumptions regarding the future behavior of
assets, liabilities, and off-balance sheet exposures.
(c) Cash flow projections. A foreign banking organization with
combined U.S. assets of $50 billion or more must produce comprehensive
cash flow projections for its combined U.S. operations that:
(1) Project cash flows arising from assets, liabilities, and off-
balance sheet exposures over short-term and long-term periods that are
appropriate to the capital structure, risk profile, complexity,
activities, size, and other relevant characteristics of the company and
its combined U.S. operations;
(2) Identify and quantify discrete and cumulative cash flow
mismatches over these time periods;
(3) Include cash flows arising from contractual maturities,
intercompany transactions, new business, funding renewals, customer
options, and other potential events that may impact liquidity; and
(4) Provide sufficient detail to reflect the capital structure,
risk profile, complexity, activities, size, and any other relevant
factors with respect to the company and its combined U.S. operations.
Sec. 252.226 Liquidity stress testing.
(a) Stress testing requirement. (1) In general. In accordance with
the requirements of this section, a foreign banking organization with
combined U.S. assets of $50 billion or more must, at least monthly,
conduct stress tests of cash flow projections separately for its
[[Page 76685]]
U.S. branch and agency network and its U.S. intermediate holding
company, as applicable. The required stress test analysis must identify
liquidity stress scenarios in accordance with paragraph (a)(3) of this
section that would have an adverse effect on the U.S. operations of the
foreign banking organization, and assess the effects of these scenarios
on the cash flows and liquidity of each of the U.S. branch and agency
network and U.S. intermediate holding company. The foreign banking
organization must use the results of this stress testing to determine
the size of the liquidity buffer for each of its U.S. branch and agency
network and U.S. intermediate holding company required under Sec.
252.227 of this subpart, and must incorporate the information generated
by stress testing in the quantitative component of its contingency
funding plan under Sec. 252.228 of this subpart.
(2) Frequency. If there is a material deterioration in the foreign
banking organization's financial condition, market conditions, or if
other supervisory concerns indicate that the monthly stress test
required by this section is insufficient to assess the liquidity risk
profile of the foreign banking organization's U.S. operations, the
Board may require the foreign banking organization to perform stress
testing for its U.S. branch and agency network and its U.S.
intermediate holding company more frequently than monthly and to vary
the underlying assumptions and stress scenarios. The foreign banking
organization must be able to perform more frequent stress tests in
accordance with this section upon the request of the Board.
(3) Stress scenarios. (i) Stress testing must incorporate a range
of stress scenarios that may have a significant adverse impact the
liquidity of the foreign banking organization's U.S.operations, taking
into consideration their balance sheet exposures, off-balance sheet
exposures, business lines, organizational structure, and other
characteristics.
(ii) At a minimum, stress testing must incorporate separate stress
scenarios to account for adverse conditions due to market stress,
idiosyncratic stress, and combined market and idiosyncratic stresses.
(iii) The stress testing must:
(A) Address the potential direct adverse impact of market
disruptions on the foreign banking organization's combined U.S.
operations;
(B) Address the potential adverse impact of market disruptions on
the foreign banking organization and the related indirect effect such
impact could have on the combined U.S. operations of the foreign
banking organization; and
(C) Incorporate the potential actions of other market participants
experiencing liquidity stresses under market disruptions that would
adversely affect the foreign banking organization or its combined U.S.
operations.
(iv) The stress scenarios must be forward-looking and must
incorporate a range of potential changes in the activities, exposures,
and risks of the foreign banking organization and its combined U.S.
operations, as appropriate, as well as changes to the broader economic
and financial environment.
(v) The stress scenarios must use a variety of time horizons. At a
minimum, these time horizons must include an overnight time horizon, a
30-day time horizon, 90-day time horizon, and a one-year time horizon.
(4) Operations included. Stress testing under this section must
comprehensively address the activities, exposures, and risks, including
off-balance sheet exposures, of the company's combined U.S. operations.
(5) Tailoring. Stress testing under this section must be tailored
to, and provide sufficient detail to reflect, the capital structure,
risk profile, complexity, activities, size, and other relevant
characteristics of the combined U.S. operations of the foreign banking
organization and, as appropriate, the foreign banking organization as a
whole. This may require analyses by business line or legal entity, and
stress scenarios that use more time horizons than the minimum required
under paragraph (a)(3)(v) of this section.
(6) Assumptions. A foreign banking organization subject to this
section must incorporate the following assumptions in the stress
testing required under this section:
(i) For the first 30 days of a liquidity stress scenario, only
highly liquid assets that are unencumbered may be used as cash flow
sources to offset projected cash flow needs as calculated pursuant to
Sec. 252.227 of this subpart;
(ii) For time periods beyond the first 30 days of a liquidity
stress scenario, highly liquid assets that are unencumbered and other
appropriate funding sources may be used as cash flow sources to offset
projected cash flow needs as calculated pursuant to Sec. 252.227 of
this subpart;
(iii) If an asset is used as a cash flow source to offset projected
cash flow needs as calculated pursuant to Sec. 252.227 of this
subpart, the fair market value of the asset must be discounted to
reflect any credit risk and market price volatility of the asset; and
(iv) Throughout each stress test time horizon, assets used as
sources of funding must be diversified by collateral, counterparty, or
borrowing capacity, or other factors associated with the liquidity risk
of the assets.
(b) Process and systems requirements. (1) Stress test function. A
foreign banking organization with combined U.S. assets of $50 billion
or more, within its combined U.S. operations and its enterprise-wide
risk management, must establish and maintain policies and procedures
that outline its liquidity stress testing practices, methodologies, and
assumptions; incorporate the results of liquidity stress tests; and
provide for the enhancement of stress testing practices as risks change
and as techniques evolve.
(2) Controls and oversight. A foreign banking organization must
have an effective system of controls and oversight over the stress test
function described above to ensure that:
(i) Each stress test is designed in accordance with the
requirements of this section; and
(ii) Each stress test appropriately incorporates conservative
assumptions with respect to the stress scenario in paragraph (a)(3) of
this section and other elements of the stress test process, taking into
consideration the capital structure, risk profile, complexity,
activities, size, and other relevant factors of the U.S. operations.
These assumptions must be approved by the U.S. chief risk officer and
be subject to the independent review under Sec. 252.224 of this
subpart.
(3) Systems and processes. A foreign banking organization must
maintain management information systems and data processes sufficient
to enable it to effectively and reliably collect, sort, and aggregate
data and other information related to the liquidity stress testing of
its combined U.S. operations.
(c) Reporting Requirements. (1) Liquidity stress tests required by
this subpart. A foreign banking organization with combined U.S. assets
of $50 billion or more must report the results of the stress tests for
its combined U.S. operations conducted under this section to the Board
within 14 days of completing the stress test. The report must include
the amount of liquidity buffer established by the foreign banking
organization for its combined U.S. operations under Sec. 252.227 of
this subpart.
(2) Liquidity stress tests required by home country regulators. A
foreign banking organization with combined U.S. assets of $50 billion
or more must report the results of any liquidity internal stress tests
and establishment of
[[Page 76686]]
liquidity buffers required by regulators in its home jurisdiction to
the Board on a quarterly basis within 14 days of completion of the
stress test. The report required under this paragraph must include the
results of its liquidity stress test and liquidity buffer, if required
by the laws, regulations, or expected under supervisory guidance
implemented in the home jurisdiction.
Sec. 252.227 Liquidity buffer.
(a) General requirement. A foreign banking organization with
combined U.S. assets of $50 billion or more must maintain a liquidity
buffer for its U.S. branch and agency network and a separate buffer for
its U.S. intermediate holding company. Each liquidity buffer must
consist of highly liquid assets that are unencumbered and that are
sufficient to meet the net stressed cash flow need over the first 30
days of its stress test horizon, calculated in accordance with this
section.
(b) Net stressed cash flow need. (1) U.S. intermediate holding
company. The net stressed cash flow need for a U.S. intermediate
holding company is equal to the sum of its net external stressed cash
flow need and net internal stressed cash flow need for the first 30
days of its stress test horizon, each as calculated under paragraph
(c)(1) and (d)(1) of this section.
(2) U.S. branch and agency network. (i) For the first 14 days of
its stress test horizon, the net stressed cash flow need for a U.S.
branch and agency network is equal to the sum of its net external
stressed cash flow need and net internal stressed cash flow need, each
as calculated in paragraph (c)(2) and (d)(2) of this section.
(ii) For day 15 through day 30 of its stress test horizon, the net
stressed cash flow need for a U.S. branch and agency network is equal
to its net external stressed cash flow need, as calculated under this
paragraph (c)(2).
(c) Net external stressed cash flow need calculation. (1) U.S.
intermediate holding company. (i) The net external stressed cash flow
need for a U.S. intermediate holding company equals the difference
between:
(A) The projected amount of cash flow needs that results from
transactions between the U.S. intermediate holding company and entities
that are not its affiliates; and
(B) The projected amount of cash flow sources that results from
transactions between the U.S. intermediate holding company and entities
that are not its affiliates.
(ii) Each of the projected amounts of cash flow needs and cash flow
sources must be calculated for the first 30 days of its stress test
horizon in accordance with the stress test requirements and
incorporating the stress scenario required by Sec. 252.226 of this
subpart.
(2) U.S. branch and agency network. (i) The net external stressed
cash flow need for a U.S. branch and agency network equals the
difference between:
(A) The projected amount of cash flow needs that results from
transactions between the U.S. branch and agency network and entities
other than foreign banking organization's head office and affiliates
thereof; and
(B) The projected amount of cash flow sources that results from
transactions between the U.S. branch and agency network and entities
other than foreign banking organization's head office and affiliates
thereof.
(ii) Each of the projected amounts of cash flow needs and cash flow
sources must be calculated for the first 30 days of its stress test
horizon in accordance with the stress test requirements and
incorporating the stress scenario required by Sec. 252.226 of this
subpart.
(d) Net internal stressed cash flow need calculation. (1) U.S.
intermediate holding company. The net internal stressed cash flow need
for a U.S. intermediate holding company equals the greater of:
(i) The greatest daily cumulative net intracompany cash flow need
for the first 30 days of its stress test horizon as calculated under
paragraph (e)(1) of this section; and
(ii) Zero.
(2) U.S. branch and agency network. The net internal stressed cash
flow need for a U.S. branch and agency network equals the greater of:
(i) The greatest daily cumulative net intracompany cash flow need
for the first 14 days of its stress test horizon, as calculated under
paragraph (b)(5) of this section; and
(ii) Zero.
(e) Daily cumulative net intracompany cash flow need calculation.
The daily cumulative net intracompany cash flow need for the U.S.
intermediate holding company and the U.S. branch and agency network for
purposes of paragraph (b)(4) of this section is calculated as follows:
(1) U.S. intermediate holding company. (i) Daily cumulative net
intracompany cash flow. A U.S. intermediate holding company's daily
cumulative net intracompany cash flow on any given day in the first 30
days of its stress test horizon equals the sum of the net intracompany
cash flow calculated for that day and the net intracompany cash flow
calculated for each previous day of the stress test horizon, each as
calculated in accordance with paragraph (e)(1)(ii) of this section.
(ii) Net intracompany cash flow. For any day of its stress test
horizon, the net intracompany cash flow equals the difference between:
(A) The amount of cash flow needs under the stress scenario
required by Sec. 252.226 of this subpart resulting from transactions
between the U.S. intermediate holding company and its affiliates
(including any U.S. branch or U.S. agency); and
(B) The amount of cash flow sources under the stress scenario
required by Sec. 252.226 of this subpart resulting from transactions
between the U.S. intermediate holding company and its affiliates
(including any U.S. branch or U.S. agency).
(iii) Daily cumulative net intracompany cash flow need. Daily
cumulative net intracompany cash flow need means, for any given day in
the stress test horizon, a daily cumulative net intracompany cash flow
that is greater than zero.
(2) U.S. branch and agency network. (i) Daily cumulative net
intracompany cash flows. For the first 14 days of the stress test
horizon, a U.S. branch and agency network's daily cumulative net
intracompany cash flow equals the sum of the net intracompany cash flow
calculated for that day and the net intracompany cash flow calculated
for each previous day of its stress test horizon, each as calculated in
accordance with paragraph (e)(2)(ii) of this section.
(ii) Net intracompany cash flow. For any day of the stress test
horizon, the net intracompany cash flow must equal the difference
between:
(A) The amount of cash flow needs under the stress scenario
required by Sec. 252.226 of this subpart resulting from transactions
between a U.S. branch or U.S. agency within the U.S. branch and agency
network and the foreign bank's non-U.S. offices and its affiliates; and
(B) The amount of cash flow sources under the stress scenario
required by Sec. 252.226 of this subpart resulting from transactions
between a U.S. branch or U.S. agency within the U.S. branch and agency
network and the foreign bank's non-U.S. offices and its affiliates.
(iii) Daily cumulative net intracompany cash flow need. Daily
cumulative net intracompany cash flow need means, for any given day in
the stress test horizon, a daily cumulative net intracompany cash flow
that is greater than zero.
(3) Amounts secured by highly liquid assets. For the purposes of
calculating net intracompany cash flow under this paragraph, the
amounts of intracompany
[[Page 76687]]
cash flow needs and intracompany cash flow sources that are secured by
highly liquid assets must be excluded from the calculation.
(f) Location of liquidity buffer. (1) U.S. intermediate holding
companies. A U.S. intermediate holding company must maintain in
accounts in the United States the highly liquid assets comprising the
liquidity buffer required under this section. To the extent that the
assets consist of cash, the cash may not be held in an account located
at a U.S. branch or U.S. agency of the affiliated foreign bank or other
affiliate.
(2) U.S. branch and agency networks. The U.S. branch and agency
network of a foreign banking organization must maintain in accounts in
the United States the highly liquid assets that cover its net stressed
cash flow need for at least the first 14 days of its stress test
horizon, calculated under paragraph (b)(2)(i) of this section. To the
extent that the assets consist of cash, the cash may not be held in an
account located at the U.S. intermediate holding company or other
affiliate. The company may maintain the highly liquid assets to cover
its net stressed cash flow need amount for day 15 through day 30 of the
stress test horizon, calculated under paragraph (b)(2)(ii) of this
section, at the head office of the foreign bank of which the U.S.
branches and U.S. agencies are a part, provided that the company has
demonstrated to the satisfaction of the Board that it has and is
prepared to provide, or its affiliate has and would be required to
provide, highly liquid assets to the U.S. branch and agency network
sufficient to meet the liquidity needs of the operations of the U.S.
branch and agency network for day 15 through day 30 of the stress test
horizon.
(g) Asset requirements. (1) Valuation. In computing the amount of
an asset included in the liquidity buffer or buffers for its combined
U.S. operations, a U.S. intermediate holding company or U.S. branch and
agency network must discount the fair market value of the asset to
reflect any credit risk and market price volatility of the asset.
(2) Diversification. Assets that are included in the pool of
unencumbered highly liquid assets in the liquidity buffer of a U.S.
intermediate holding company or U.S. branch and agency network other
than cash and securities issued by the U.S. government, or securities
issued or guaranteed by a U.S. government agency or U.S. government-
sponsored entity must be diversified by collateral, counterparty, or
borrowing capacity, or other factors associated with the liquidity risk
of the assets, for each day of the relevant stress period in accordance
with paragraph (b) of this section.
Sec. 252.228 Contingency funding plan.
(a) Contingency funding plan. A foreign banking organization must
establish and maintain a contingency funding plan for its combined U.S.
operations that sets out the company's strategies for addressing
liquidity needs during liquidity stress events. The contingency funding
plan must be commensurate with the capital structure, risk profile,
complexity, activities, size, and other relevant characteristics of the
company and of its combined U.S. operations. It must also be
commensurate with the established liquidity risk tolerance for the
combined U.S. operations. The company must update the contingency
funding plan for its combined U.S. operations at least annually, and
must update the plan when changes to market and idiosyncratic
conditions would have a material impact on the plan.
(b) Components of the contingency funding plan. (1) Quantitative
Assessment. The contingency funding plan must:
(i) Identify liquidity stress events that could have a significant
impact on the liquidity of the foreign banking organization and its
combined U.S. operations;
(ii) Assess the level and nature of the impact on the liquidity of
the foreign banking organization and its combined U.S. operations that
may occur during identified liquidity stress events;
(iii) Assess available funding sources and needs during the
identified liquidity stress events;
(iv) Identify alternative funding sources that may be used during
the liquidity stress events; and
(v) In implementing paragraphs (b)(1)(i) through (iv) of this
section, incorporate information generated by the liquidity stress
testing required under Sec. 252.226 of this subpart.
(2) Event management process. The contingency funding plan for a
foreign banking organization's combined U.S. operations must include an
event management process that sets out the company's procedures for
managing liquidity during identified liquidity stress events for the
combined U.S. operations. This process must:
(i) Include an action plan that clearly describes the strategies
that the company will use to respond to liquidity shortfalls in its
combined U.S. operations for identified liquidity stress events,
including the methods that the company or the combined U.S. operations
will use to access alternative funding sources;
(ii) Identify a liquidity stress event management team that would
execute the action plan in paragraph (b)(2)(i) of this section for the
combined U.S. operations;
(iii) Specify the process, responsibilities, and triggers for
invoking the contingency funding plan, escalating the responses
described in the action plan, decision-making during the identified
liquidity stress events, and executing contingency measures identified
in the action plan; and
(iv) Provide a mechanism that ensures effective reporting and
communication within the combined U.S. operations of the foreign
banking organization and with outside parties, including the Board and
other relevant supervisors, counterparties, and other stakeholders.
(3) Monitoring. The contingency funding plan must include
procedures for monitoring emerging liquidity stress events. The
procedures must identify early warning indicators that are tailored to
the capital structure, risk profile, complexity, activities, size, and
other relevant characteristics of the foreign banking organization and
its combined U.S. operations.
(4) Testing. A foreign banking organization must periodically test
the components of the contingency funding plan for its combined U.S.
operations to assess the plan's reliability during liquidity stress
events.
(i) The company must periodically test the operational elements of
the contingency funding plan for its combined U.S. operations to ensure
that the plan functions as intended. These tests must include
operational simulations to test communications, coordination, and
decision-making involving relevant managers, including managers at
relevant legal entities within the corporate structure.
(ii) The company must periodically test the methods it will use to
access alternative funding sources for its combined U.S. operations to
determine whether these funding sources will be readily available when
needed.
Sec. 252.229 Specific limits.
(a) Required limits. A foreign banking organization must establish
and maintain limits on potential sources of liquidity risk, including:
(1) Concentrations of funding by instrument type, single-
counterparty, counterparty type, secured and unsecured funding, and
other liquidity risk identifiers;
(2) The amount of specified liabilities that mature within various
time horizons; and
(3) Off-balance sheet exposures and other exposures that could
create
[[Page 76688]]
funding needs during liquidity stress events.
(b) Size of limits. The size of each limit described in paragraph
(a) of this section must reflect the capital structure, risk profile,
complexity, activities, size, and other relevant characteristics of the
company's combined U.S. operations, as well as the established
liquidity risk tolerance for the combined U.S. operations.
(c) Monitoring of limits. A foreign banking organization must
monitor its compliance with all limits established and maintained under
this section.
Sec. 252.230 Monitoring.
(a) Collateral monitoring requirements. A foreign banking
organization with combined U.S. assets of $50 billion or more must
establish and maintain procedures for monitoring the assets that it has
pledged as collateral in connection with transactions to which entities
in its U.S. operations are counterparties and the assets that are
available to be pledged for its combined U.S. operations.
(1) These procedures must provide that the foreign banking
organization:
(i) Calculates all of the collateral positions for its combined
U.S. operations on a weekly basis (or more frequently, as directed by
the Board due to financial stability risks or the financial condition
of the U.S. operations) including:
(A) The value of assets pledged relative to the amount of security
required under the contract governing the obligation for which the
collateral was pledged; and
(B) Unencumbered assets available to be pledged;
(ii) Monitors the levels of available collateral by legal entity,
jurisdiction, and currency exposure;
(iii) Monitors shifts between intraday, overnight, and term
pledging of collateral; and
(iv) Tracks operational and timing requirements associated with
accessing collateral at its physical location (for example, the
custodian or securities settlement system that holds the collateral).
(2) [Reserved]
(b) Legal entities, currencies and business lines. A foreign
banking organization must establish and maintain procedures for
monitoring and controlling liquidity risk exposures and funding needs
that are not covered by Sec. 252.229 of this subpart or paragraph (a)
of this section, within and across significant legal entities,
currencies, and business lines for its combined U.S. operations, and
taking into account legal and regulatory restrictions on the transfer
of liquidity between legal entities.
(c) Intraday liquidity positions. A foreign banking organization
must establish and maintain procedures for monitoring intraday
liquidity risk exposure for its combined U.S. operations. These
procedures must address how the management of the combined U.S.
operations will:
(1) Monitor and measure expected daily inflows and outflows;
(2) Manage and transfer collateral when necessary to obtain
intraday credit;
(3) Identify and prioritize time-specific obligations so that the
foreign banking organizations can meet these obligations as expected;
(4) Settle less critical obligations as soon as possible;
(5) Control the issuance of credit to customers where necessary;
and
(6) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the overall liquidity needs
of the combined U.S. operations.
Sec. 252.231 Requirements for foreign banking organizations with
combined U.S. assets of less than $50 billion
(a) A foreign banking organization with total consolidated assets
of $50 billion or more and combined U.S. assets of less than $50
billion must report to the Board on an annual basis the results of an
internal liquidity stress test for either the consolidated operations
of the company or its combined U.S. operations conducted consistent
with the BCBS principles for liquidity risk management and
incorporating 30-day, 90-day and one-year stress test horizons.
(b) A foreign banking organization subject to this section that
does not comply with paragraph (a) of this section must limit the net
aggregate amount owed by the foreign banking organization's non-U.S.
offices and its non-U.S. affiliates to the combined U.S. operations to
25 percent or less of the third party liabilities of its combined U.S.
operations, on a daily basis.
7. Add Subpart N to part 252 to read as follows:
Subpart N--Single-Counterparty Credit Limits for Covered Foreign
Banking Organizations
Sec.
252.240 Definitions.
252.241 Applicability.
252.242 Credit exposure limit
252.243 Gross credit exposure.
252.244 Net credit exposure.
252.245 Compliance.
252.246 Exemptions.
Subpart N--Single-Counterparty Credit Limits for Covered Foreign
Banking Organizations
Sec. 252.240 Definitions.
For purposes of this subpart:
Adjusted market value means, with respect to any eligible
collateral, the fair market value of the eligible collateral after
application of the applicable haircut specified in Table 2 of this
subpart for that type of eligible collateral.
Bank eligible investments means investment securities that a
national bank is permitted to purchase, sell, deal in, underwrite, and
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
Capital stock and surplus means:
(1) With respect to a U.S. intermediate holding company, the sum of
the following amounts in each case as reported by a U.S. intermediate
holding company on the most recent FR Y-9C:
(i) The total regulatory capital of the U.S. intermediate holding
company, as calculated under the capital adequacy guidelines applicable
to that U.S. intermediate holding company under subpart L of this part;
and
(ii) The excess allowance for loan and lease losses of the U.S.
intermediate holding company not included in tier 2 capital under the
capital adequacy guidelines applicable to that U.S. intermediate
holding company under subpart L of this part; and
(2) With respect to a foreign banking organization, the total
regulatory capital as reported on the foreign banking organization's
most recent FR Y-7Q or other reporting form specified by the Board.
Control. A company controls another company if it:
(1) Owns, controls, or holds with power to vote 25 percent or more
of a class of voting securities of the company;
(2) Owns or controls 25 percent or more of the total equity of the
company; or
(3) Consolidates the company for financial reporting purposes.
Credit derivative means a financial contract that allows one party
(the protection purchaser) to transfer the credit risk of one or more
exposures (reference exposure) to another party (the protection
provider).
Credit transaction means:
(1) Any extension of credit, including loans, deposits, and lines
of credit, but excluding advised or other uncommitted lines of credit;
(2) Any repurchase or reverse repurchase agreement;
(3) Any securities lending or securities borrowing transaction;
[[Page 76689]]
(4) Any guarantee, acceptance, or letter of credit (including any
confirmed letter of credit or standby letter of credit) issued on
behalf of a counterparty;
(5) Any purchase of, or investment in, securities issued by a
counterparty;
(6) In connection with a derivative transaction:
(i) Any credit exposure to a counterparty, and
(ii) Any credit exposure to the reference entity (described as a
counterparty for purposes of this subpart), where the reference asset
is an obligation or equity security of a reference entity.
(7) Any transaction that is the functional equivalent of the above,
and any similar transaction that the Board determines to be a credit
transaction for purposes of this subpart.
Derivative transaction means any transaction that is a contract,
agreement, swap, warrant, note, or option that is based, in whole or in
part, on the value of, any interest in, or any quantitative measure or
the occurrence of any event relating to, one or more commodities,
securities, currencies, interest or other rates, indices, or other
assets.
Eligible collateral means collateral in which a U.S. intermediate
holding company or any part of the foreign banking organization's
combined U.S. operations has a perfected, first priority security
interest (with the exception of cash on deposit and notwithstanding the
prior security interest of any custodial agent) or, outside of the
United States, the legal equivalent thereof and is in the form of:
(1) Cash on deposit with the U.S. intermediate holding company or
any part of the U.S. operations, the U.S. branch, or the U.S. agency
(including cash held for the foreign banking organization or U.S.
intermediate holding company by a third-party custodian or trustee);
(2) Debt securities (other than mortgage- or asset-backed
securities) that are bank eligible investments;
(3) Equity securities that are publicly traded (including
convertible bonds); and
(4) Does not include any debt or equity securities (including
convertible bonds), issued by an affiliate of the U.S. intermediate
holding company or by any part of the combined U.S. operations.
Eligible credit derivative has the same meaning as in subpart G of
the Board's Regulation Y (12 CFR part 225, appendix G).
Eligible equity derivative means an equity-linked total return
swap, provided that:
(1) The derivative contract has been confirmed by the
counterparties;
(2) Any assignment of the derivative contract has been confirmed by
all relevant parties; and
(3) The terms and conditions dictating the manner in which the
derivative contract is to be settled are incorporated into the
contract.
Eligible guarantee has the same meaning as in subpart G of the
Board's Regulation Y (12 CFR part 225, appendix G).
Eligible protection provider means an entity (other than the
foreign banking organization or an affiliate thereof) that is:
(1) A sovereign entity;
(2) The Bank for International Settlements, the International
Monetary Fund, the European Central Bank, the European Commission, or a
multilateral development bank;
(3) A Federal Home Loan Bank;
(4) The Federal Agricultural Mortgage Corporation;
(5) A depository institution;
(6) A bank holding company;
(7) A savings and loan holding company (as defined in 12 U.S.C.
1467a);
(8) A securities broker or dealer registered with the SEC under the
Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.);
(9) An insurance company that is subject to the supervision by a
State insurance regulator;
(10) A foreign banking organization;
(11) A non-U.S.-based securities firm or a non-U.S.-based insurance
company that is subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository institutions, securities
broker-dealers, or insurance companies; or
(12) A qualifying central counterparty.
Equity derivative includes an equity-linked swap, purchased equity-
linked option, forward equity-linked contract, and any other instrument
linked to equities that gives rise to similar counterparty credit
risks.
Intraday credit exposure means credit exposure of the U.S.
intermediate holding company or any part of the combined U.S.
operations to a counterparty that the U.S. intermediate holding company
or any part of the combined U.S. operations by its terms is to be
repaid, sold, or terminated by the end of its business day in the
United States.
Immediate family means the spouse of an individual, the
individual's minor children, and any of the individual's children
(including adults) residing in the individual's home.
Major counterparty means:
(1) A bank holding company that has total consolidated assets of
$500 billion or more, and all of its subsidiaries, collectively;
(2) A nonbank financial company supervised by the Board, and all of
its subsidiaries, collectively; and
(3) A major foreign banking organization, and all of its
subsidiaries, collectively.
Major foreign banking organization means any foreign banking
organization that has total consolidated assets of $500 billion or
more, calculated pursuant to Sec. 252.241(a) of subpart.
Major U.S. intermediate holding company means a U.S. intermediate
holding company that has total consolidated assets of $500 billion or
more, pursuant to Sec. 252.241(b) of this subpart.
Qualifying central counterparty has the same meaning as in subpart
G of the Board's Regulation Y (12 CFR part 225, appendix G).
Qualifying master netting agreement means a legally enforceable
written bilateral agreement that:
(1) Creates a single legal obligation for all individual
transactions covered by the agreement upon an event of default,
including bankruptcy, insolvency, or similar proceeding of the
counterparty;
(2) Provides the right to accelerate, terminate, and close-out on a
net basis all transactions under the agreement and to liquidate or set
off collateral promptly upon an event of default, including upon event
of bankruptcy, insolvency, or similar proceeding, of the counterparty,
provided that, in any such case, any exercise of rights under the
agreement will not be stayed or avoided under applicable law in the
relevant jurisdiction; and
(3) Does not contain a provision that permits a non-defaulting
counterparty to make lower payments than it would make otherwise under
the agreement, or no payment at all, to a defaulter or the estate of a
defaulter, even if the defaulter is a net creditor under the agreement.
Short sale means any sale of a security which the seller does not
own or any sale which is consummated by the delivery of a security
borrowed by, or for the account of, the seller.
Sovereign entity means a central government (including the U.S.
government) or an agency, department, ministry, or central bank.
Subsidiary of a specified company means a company that is directly
or indirectly controlled by the specified company.
Sec. 252.241 Applicability.
(a) Foreign banking organizations with total consolidated assets of
$50
[[Page 76690]]
billion or more. (1) In general. A foreign banking organization with
total consolidated assets of $50 billion or more is subject to the
general credit exposure limit set forth in Sec. 252.242(a) of this
subpart.
(2) Major foreign banking organizations. A foreign banking
organization with total consolidated assets of $500 billion or more
also is subject to the more stringent credit exposure limit set forth
in Sec. 252.242(b) of this subpart.
(3) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(4) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.242(a) and, as
applicable, Sec. 252.242(b) of this subpart unless and until total
assets as reported on its FR Y-7Q are less than $50 billion or, as
applicable, $500 billion for each of the four most recent consecutive
calendar quarters.
(5) Measurement date. For purposes of this paragraph, total assets
are measured on the last day of the quarter used in calculation of the
average.
(b) U.S. intermediate holding companies. (1) In general. A U.S.
intermediate holding company is subject to the general credit exposure
limit set forth in Sec. 252.242(a) of this subpart.
(2) Major U.S. intermediate holding companies. A U.S. intermediate
holding company that has total consolidated assets of $500 billion or
more also is subject to the more stringent credit exposure limit set
forth in Sec. 252.242(c) of this subpart.
(3) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total consolidated assets:
(i) For the four most recent consecutive quarters as reported by
the U.S. intermediate holding company on its FR Y-9C, or
(ii) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on FR Y-9C, or
(iii) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards.
(4) Cessation of requirements. A major U.S. intermediate holding
company will remain subject to the more stringent credit exposure limit
set forth in Sec. 252.242(c) of this subpart unless and until total
assets as reported on its FR Y-9C are less than $500 billion for each
of the four most recent consecutive calendar quarters.
(5) Measurement date. For purposes of this paragraph, total
consolidated assets are measured on the last day of the quarter used in
calculation of the average.
(c) Initial applicability. (1) Foreign banking organizations. A
foreign banking organization that is subject to this subpart as of July
1, 2014, under paragraph (a)(1) or (2) of this section, must comply
with the requirements of Sec. 252.242(a) and (b) of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(2) U.S. intermediate holding companies. A U.S. intermediate
holding company that is subject to the requirements of this subpart as
of July 1, 2015, under paragraph (b)(1) or (2) of this section, must
comply with the requirements Sec. 252.242(a) and (c) of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(d) Ongoing applicability. (1) Foreign banking organizations. A
foreign banking organization that becomes subject to this subpart after
July 1, 2014, under paragraph (a)(1) and, as applicable, (a)(2) of this
section, must comply with the requirements of Sec. 252.242(a) and (b)
of this subpart beginning 12 months after it becomes subject to those
requirements, unless that time is accelerated or extended by the Board
in writing.
(2) U.S. intermediate holding companies. (i) A U.S. intermediate
holding company that becomes subject to this subpart after July 1,
2015, under paragraph (b)(1) of this section, must comply with the
requirements of Sec. 252.242(a) of this subpart on the date it is
required to be established, unless that time is accelerated or extended
by the Board in writing.
(ii) A U.S. intermediate holding company that becomes subject to
this subpart after July 1, 2015, under paragraph (b)(2) of this
section, must comply with the requirements of Sec. 252.242(c) of this
subpart beginning 12 months after it becomes subject to those
requirements, unless that time is accelerated or extended by the Board
in writing.
Sec. 252.242 Credit exposure limit.
(a) General limit on aggregate net credit exposure. (1) No U.S.
intermediate holding company, together with its subsidiaries, may have
an aggregate net credit exposure to any unaffiliated counterparty in
excess of 25 percent of the consolidated capital stock and surplus of
the U.S. intermediate holding company.
(2) No foreign banking organization may permit its combined U.S.
operations, together with any subsidiary of an entity within the
combined U.S. operations, to have an aggregate net credit exposure to
any unaffiliated counterparty in excess of 25 percent of the
consolidated capital stock and surplus of the foreign banking
organization.
(b) Major foreign banking organization limits on aggregate net
credit exposure. No major foreign banking organization may permit its
combined U.S. operations, together with any subsidiary of an entity
within the combined U.S. operations, to have an aggregate net credit
exposure to an unaffiliated major counterparty in excess of [x] percent
of the consolidated capital stock and surplus of the major foreign
banking organization. For purposes of this section, [x] will be a more
stringent limit that is aligned with the limit imposed on U.S. bank
holding companies with $500 billion or more in total consolidated
assets.
(c) Major U.S. intermediate holding company limits on aggregate net
credit exposure. No U.S. intermediate holding company, together with
its subsidiaries, may have an aggregate net credit exposure to any
unaffiliated major counterparty in excess of [x] percent of the
consolidated capital stock and surplus of the U.S. intermediate holding
company. For purposes of this section, [x] will be a more stringent
limit that is aligned with the limit imposed on U.S. bank holding
companies with $500 billion or more in total consolidated assets.
(d) Rule of construction. For purposes of this subpart, a
counterparty includes:
(1) A person and members of the person's immediate family;
(2) A company and all of its subsidiaries, collectively;
(3) The United States and all of its agencies and instrumentalities
(but not including any State or political subdivision of a State)
collectively;
[[Page 76691]]
(4) A State and all of its agencies, instrumentalities, and
political subdivisions (including any municipalities) collectively; and
(5) A foreign sovereign entity and all of its agencies,
instrumentalities, and political subdivisions, collectively.
Sec. 252.243 Gross credit exposure.
(a) Calculation of gross credit exposure for U.S. intermediate
holding companies and foreign banking organizations. The amount of
gross credit exposure of a U.S. intermediate holding company or, with
respect to any part of its combined U.S. operations, a foreign banking
organization (each a covered entity), to a counterparty is:
(1) In the case of a loan by a covered entity to a counterparty or
a lease in which a covered entity is the lessor and a counterparty is
the lessee, an amount equal to the amount owed by the counterparty to
the covered entity under the transaction.
(2) In the case of a debt security held by a covered entity that is
issued by the counterparty, an amount equal to:
(i) For trading and available for sale securities, the greater of
the amortized purchase price or market value of the security, and
(ii) For securities held to maturity, the amortized purchase price.
(3) In the case of an equity security held by a covered entity that
is issued by a counterparty, an amount equal to the greater of the
purchase price or market value of the security.
(4) In the case of a repurchase agreement, an amount equal to:
(i) The market value of securities transferred by a covered entity
to the counterparty, plus
(ii) The amount in paragraph (a)(4)(i) of this section multiplied
by the collateral haircut in Table 2 applicable to the securities
transferred by the covered entity to the counterparty.
(5) In the case of a reverse repurchase agreement, an amount equal
to the amount of cash transferred by the covered entity to the
counterparty.
(6) In the case of a securities borrowing transaction, an amount
equal to the amount of cash collateral plus the market value of
securities collateral transferred by the covered entity to the
counterparty.
(7) In the case of a securities lending transaction, an amount
equal to:
(i) The market value of securities lent by the covered entity to
the counterparty, plus
(ii) The amount in paragraph (a)(7)(i) of this section multiplied
by the collateral haircut in Table 2 applicable to the securities lent
by the covered entity to the counterparty.
(8) In the case of a committed credit line extended by a covered
entity to a counterparty, an amount equal to the face amount of the
credit line.
(9) In the case of a guarantee or letter of credit issued by the
covered entity on behalf of a counterparty, an amount equal to the
lesser of the face amount or the maximum potential loss to the covered
entity on the transaction.
(10) In the case of a derivative transaction between a covered
entity and a counterparty that is not an eligible credit or equity
derivative purchased from an eligible protection provider and is not
subject to a qualifying master netting agreement, an amount equal to
the sum of:
(i) The current exposure of the derivatives contract equal to the
greater of the mark-to-market value of the derivative contract or zero
and
(ii) The potential future exposure of the derivatives contract,
calculated by multiplying the notional principal amount of the
derivative contract by the appropriate conversion factor in Table 1.
(11) In the case of a derivative transaction:
(i) Between a U.S. intermediate holding company and a counterparty
that is not an eligible credit or equity derivative purchased from an
eligible protection provider and is subject to a qualifying master
netting agreement, an amount equal to the exposure at default amount
calculated in accordance with 12 CFR part 225, appendix G, Sec.
32(c)(6) (provided that the rules governing the recognition of
collateral set forth in this subpart shall apply); and
(ii) Between an entity within the combined U.S. operations and a
counterparty that is not an eligible credit or equity derivative
purchased from an eligible protection provider and is subject to a
qualifying master netting agreement between the part of the combined
U.S. operations and the counterparty, an amount equal to either the
exposure at default amount calculated in accordance with 12 CFR part
225, appendix G, Sec. 32(c)(6) (provided that the rules governing the
recognition of collateral set forth in this subpart shall apply); or
the gross credit exposure amount calculated under Sec. 252.243(a)(10)
of this subpart.
(12) In the case of a credit or equity derivative transaction
between a covered entity and a third party, where the covered entity is
the protection provider and the reference asset is an obligation or
equity security of the counterparty, an amount equal to the lesser of
the face amount of the transaction or the maximum potential loss to the
covered entity on the transaction.
Table 1--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit (bank- Credit (non-
eligible bank- Precious
Remaining maturity \2\ Interest rate Foreign investment eligible Equity metals Other
exchange rate reference reference (except
obligor) \3\ obligor) gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less.................................... 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or equal to five 0.005 0.05 0.05 0.10 0.08 0.07 0.12
years..............................................
Greater than 5 years................................ 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A company must use the column labeled ``Credit (bank-eligible investment reference obligor)'' for a credit derivative whose reference obligor has an
outstanding unsecured debt security that is a bank eligible investment. A company must use the column labeled ``Credit (non-bank-eligible investment
reference obligor)'' for all other credit derivatives.
[[Page 76692]]
(b) Attribution rule. A U.S. intermediate holding company or, with
respect to its combined U.S. operations, a foreign banking
organization, must treat any of its respective transactions with any
person as a credit exposure to a counterparty to the extent the
proceeds of the transaction are used for the benefit of, or transferred
to, that counterparty.
Sec. 252.244 Net credit exposure.
(a) In general. Net credit exposure is determined by adjusting
gross credit exposure of a U.S. intermediate holding company, or with
respect to its combined U.S. operations, a foreign banking
organization, in accordance with the rules set forth in this section.
(b) Calculation of initial net credit exposure for securities
financing transactions. (1) Repurchase and reverse repurchase
transactions. For repurchase and reverse repurchase transactions with a
counterparty that are subject to a bilateral netting agreement, a U.S.
intermediate holding company or, with respect to its combined U.S.
operations, a foreign banking organization, may use the net credit
exposure associated with the netting agreement.
(2) Securities lending and borrowing transactions. For securities
lending and borrowing transactions with a counterparty that are subject
to a bilateral netting agreement with that counterparty, a U.S.
intermediate holding company or, with respect to its combined U.S.
operations, a foreign banking organization, may use the net credit
exposure associated with the netting agreement.
(c) Eligible collateral. In computing its net credit exposure to a
counterparty for any credit transaction (including transactions
described in paragraph (b) of this section), the U.S. intermediate
holding company or, with respect to its combined U.S. operations, a
foreign banking organization, may reduce its gross credit exposure (or
as applicable, net credit exposure for transactions described in
paragraph (a) of this section) on the transaction by the adjusted
market value of any eligible collateral, provided that:
(1) The U.S. intermediate holding company or, with respect to its
combined U.S. operations, a foreign banking organization, includes the
adjusted market value of the eligible collateral when calculating its
gross credit exposure to the issuer of the collateral;
(2) The collateral used to adjust the gross credit exposure of the
U.S. intermediate holding company or the combined U.S. operations to a
counterparty is not used to adjust the gross credit exposure of the
U.S. intermediate holding company or combined U.S. operations to any
other counterparty; and
(3) In no event will the gross credit exposure of the U.S.
intermediate holding company or the combined U.S. operations to the
issuer of collateral be in excess of the gross credit exposure to the
counterparty on the credit transaction.
(d) Unused portion of certain extensions of credit. (1) In
computing its net credit exposure to a counterparty for a credit line
or revolving credit facility, a U.S. intermediate holding company or,
with respect to its combined U.S. operations, a foreign banking
organization, may reduce its gross credit exposure by the amount of the
unused portion of the credit extension to the extent that the U.S.
intermediate holding company or any part of the combined U.S.
operations does not have any legal obligation to advance additional
funds under the extension of credit, until the counterparty provides
collateral of the type described in paragraph (d)(2) of this section in
the amount, based on adjusted market value (calculated in accordance
with Sec. 252.240 of this subpart) that is required with respect to
that unused portion of the extension of credit.
(2) To qualify for this reduction, the credit contract must specify
that any used portion of the credit extension must be fully secured by
collateral that is:
(i) Cash;
(ii) Obligations of the United States or its agencies;
(iii) Obligations directly and fully guaranteed as to principal and
interest by, the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation, while operating under the
conservatorship or receivership of the Federal Housing Finance Agency,
and any additional obligations issued by a U.S. government sponsored
entity as determined by the Board; or
(iv) Obligations of the foreign banking organization's home country
sovereign entity.
(e) Eligible guarantees. (1) In calculating net credit exposure to
a counterparty for a credit transaction, a U.S. intermediate holding
company or, with respect to its combined U.S. operations, a foreign
banking organization must reduce the gross credit exposure to the
counterparty by the amount of any eligible guarantees from an eligible
protection provider that covers the transaction.
(2) The U.S. intermediate holding company or, with respect to its
combined U.S. operations, the foreign banking organization, must
include the amount of the eligible guarantees when calculating its
gross credit exposure to the eligible protection provider.
(3) In no event will the gross credit exposure of the U.S.
intermediate holding or the combined U.S. operations to an eligible
protection provider with respect to an eligible guarantee be in excess
of its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible guarantee.
(f) Eligible credit and equity derivatives. (1) In calculating net
credit exposure to a counterparty for a credit transaction, a U.S.
intermediate holding company or, with respect to its combined U.S.
operations, a foreign banking organization, must reduce its gross
credit exposure to the counterparty by the notional amount of any
eligible credit or equity derivative from an eligible protection
provider that references the counterparty, as applicable.
(2) The U.S. intermediate holding company or with respect to its
combined U.S. operations, the foreign banking organization, includes
the face amount of the eligible credit or equity derivative when
calculating its gross credit exposure to the eligible protection
provider.
(3) In no event will the gross credit exposure of the U.S.
intermediate holding company or, with respect to its combined U.S.
operations, the foreign banking organization, to an eligible protection
provider with respect to an eligible credit or equity derivative be in
excess of its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible credit or equity
derivative.
(g) Other eligible hedges. In calculating net credit exposure to a
counterparty for a credit transaction, a U.S. intermediate holding
company or with respect to its combined U.S. operations, a foreign
banking organization, may reduce its gross credit exposure to the
counterparty by the face amount of a short sale of the counterparty's
debt or equity security.
[[Page 76693]]
Table 2: Collateral Haircuts--
------------------------------------------------------------------------
Residual Haircut without
maturity currency mismatch \1\
------------------------------------------------------------------------
Sovereign Entities
------------------------------------------------------------------------
OECD Country Risk <=1 year........ 0.005
Classification \2\ 0-1.
>1 year, <=5 0.02
years.
>5 years........ 0.04
OECD Country Risk <=1 year........ 0.01
Classification 2-3.
>1 year, <=5 0.03
years.
>5 years........ 0.06
------------------------------------------------------------------------
Corporate and Municipal Bonds That Are Bank Eligible Investments
------------------------------------------------------------------------
Residual Haircut without
maturity for currency mismatch
debt securities.
------------------------------------------------------------------------
All.......................... <=1 year........ 0.02
All.......................... >1 year, <=5 0.06
years.
All.......................... >5 years........ 0.12
------------------------------------------------------------------------
Other Eligible Collateral
------------------------------------------------------------------------
Main index \3\ equities (including convertible 0.15
bonds).
Other publicly traded equities (including 0.25
convertible bonds).
Mutual funds................................... Highest haircut
applicable to any
security in which the
fund can invest.
Cash collateral held........................... 0
------------------------------------------------------------------------
\1\ In cases where the currency denomination of the collateral differs
from the currency denomination of the credit transaction, an
additional 8 percent haircut will apply.
\2\ OECD Country Risk Classification means the country risk
classification as defined in Article 25 of the OECD's February 2011
Arrangement on Officially Supported Export Credits.
\3\ Main index means the Standard & Poor's 500 Index, the FTSE All-World
Index, and any other index for which the U.S. intermediate holding
company, or with respect to the combined U.S. operations, the foreign
banking organization can demonstrate to the satisfaction of the
Federal Reserve that the equities represented in the index have
comparable liquidity, depth of market, and size of bid-ask spreads as
equities in the Standard & Poor's 500 Index and FTSE All-World Index.
Sec. 252.245 Compliance.
(a) Scope of compliance. A foreign banking organization must ensure
the compliance of its U.S. intermediate holding company and combined
U.S. operations with the requirements of this section on a daily basis
at the end of each business day and submit to the Board on a monthly
basis a report demonstrating its daily compliance.
(b) Systems. A foreign banking organization and its U.S.
intermediate holding company must establish and maintain procedures to
monitor potential changes in relevant law and monitor the terms of its
qualifying master netting agreements to support a well-founded position
that the agreements appear to be legal, valid, binding, and enforceable
under the laws of the relevant jurisdiction.
(c) Noncompliance. If either the U.S. intermediate holding company
or the foreign banking organization is not in compliance with this
subpart, neither the U.S. intermediate holding company nor the combined
U.S. operations may engage in any additional credit transactions with
such a counterparty in contravention of this subpart, unless the Board
determines that such credit transactions are necessary or appropriate
to preserve the safety and soundness of the foreign banking
organization or U.S. financial stability. In considering this
determination, the Board will consider whether any of the following
circumstances exist:
(1) A decrease in the U.S. intermediate holding company's or
foreign banking organization's capital stock and surplus;
(2) The merger of the U.S. intermediate holding company or foreign
banking organization with a bank holding company with total
consolidated assets of $50 billion or more, a nonbank financial company
supervised by the Board, a foreign banking organization, or U.S.
intermediate holding company; or
(3) A merger of two unaffiliated counterparties.
(d) Other measures. The Board may impose supervisory oversight and
reporting measures that it determines are appropriate to monitor
compliance with this subpart.
Sec. 252.246 Exemptions.
The following categories of credit transactions are exempt from the
limits on credit exposure under this subpart:
(a) Direct claims on, and the portions of claims that are directly
and fully guaranteed as to principal and interest by, the United States
and its agencies (other than as provided in paragraph (b) of this
section);
(b) Direct claims on, and the portions of claims that are directly
and fully guaranteed as to principal and interest by, the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation, only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency;
(c) Direct claims on, and the portions of claims that are directly
and fully guaranteed as to principal and interest by, the foreign
banking organization's home country sovereign entity;
(d) Intraday credit exposure to a counterparty; and
(e) Any transaction that the Board finds should be exempt in the
public interest and consistent with the purpose of this section.
8. Add subpart O to read as follows:
[[Page 76694]]
Subpart O--Risk Management for Covered Foreign Banking Organizations
Sec.
252.250 Applicability.
252.251 U.S. risk committee certification.
252.252 Additional U.S. risk committee requirements for foreign
banking organizations with combined U.S. assets of $50 billion or
more.
252.253 U.S. chief risk officer of a foreign banking organization.
252.254 Board of directors of a U.S. intermediate holding company.
Subpart O--Risk Management for Covered Foreign Banking
Organizations
Sec. 252.250 Applicability.
(a) Foreign banking organizations with total consolidated assets of
$10 billion or more. (1) Publicly traded foreign banking organizations
with total consolidated assets of $10 billion or more. A foreign
banking organization with publicly traded stock and total consolidated
assets of $10 billion or more is subject to the requirements of Sec.
252.251 of this subpart.
(2) Foreign banking organizations with total consolidated assets of
$50 billion or more. A foreign banking organization, regardless of
whether its stock is publicly traded, with total consolidated assets of
$50 billion or more is subject to the requirements of Sec. 252.251 of
this subpart and, if applicable, Sec. 252.254 of this subpart.
(3) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its FR Y-7Q; or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(4) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.251 of this subpart
unless and until total assets as reported on its FR Y-7Q are less than
$10 billion or $50 billion, as applicable, for each of the four most
recent consecutive calendar quarters.
(5) Measurement date. For purposes of this paragraph, total assets
are measured on the last day of the quarter used in calculation of the
average.
(b) Foreign banking organizations with combined U.S. assets of $50
billion or more. A foreign banking organization with combined U.S.
assets of $50 billion or more is subject to the requirements of
Sec. Sec. 252.251 through 252.254 of this subpart.
(1) For purposes of this paragraph, combined U.S. assets is equal
to the sum of:
(i) The average of the total assets of each U.S. branch and U.S.
agency of the foreign banking organization:
(A) For the four most recent consecutive quarters as reported to
the Board on the FFIEC 002, or
(B) If the foreign banking organization has not filed the FFIEC 002
for a U.S. branch or U.S. agency for each of the four most recent
consecutive quarters, for the most recent quarter or consecutive
quarters as reported on the FFIEC 002, or
(C) If the foreign banking organization has not yet filed a FFIEC
002 for a U.S. branch or U.S. agency, as determined under applicable
accounting standards.
(ii) If a U.S. intermediate holding company has been established,
the average of the total consolidated assets of the U.S. intermediate
holding company:
(A) For the four most recent consecutive quarters, as reported to
the Board on the U.S. intermediate holding company's FR Y-9C, or
(B) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on the FR Y-9C,
or
(C) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards; and
(iii) If a U.S. intermediate holding company has not been
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any
section 2(h)(2) company):
(A) For the four most recent consecutive quarters, as reported to
the Board on the FR Y-7Q; or
(B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
(C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
(2) The company may reduce its combined U.S. assets calculated
under this paragraph by the amount corresponding to balances and
transactions between the U.S. subsidiary or U.S. branch or U.S. agency
and any other top-tier U.S. subsidiary or U.S. branch to the extent
such items are not already eliminated in consolidation.
(3) A foreign banking organization will remain subject to the
requirements of Sec. Sec. 252.251 through 252.254 of this subpart
unless and until the sum of the total assets of each U.S. branch and
U.S. agency as reported on the FFIEC 002 and the total consolidated
assets of each U.S. subsidiary as reported on the FR Y-9C or FR Y-7Q
are less than $50 billion for each of the four most recent consecutive
calendar quarters.
(4) For purposes of paragraphs (b)(1) and (3) of this section,
total assets and total consolidated assets are measured on the last day
of the quarter used in calculation of the average.
(c) Initial applicability. A foreign banking organization that is
subject to this subpart as of July 1, 2014, under paragraphs (a) or (b)
of this section, must comply with the requirements of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(d) Ongoing applicability. A foreign banking organization that
becomes subject to this subpart after July 1, 2014, under paragraphs
(a) or (b) of this section, must comply with the requirements of this
subpart beginning 12 months after it becomes subject to this subpart,
unless that time is accelerated or extended by the Board in writing.
Sec. 252.251 U.S. risk committee certification.
(a) U.S. risk committee certification. A foreign banking
organization with publicly traded stock and total consolidated assets
of $10 billion or more and a foreign banking organization, regardless
of whether its stock is publicly traded, with total consolidated assets
of $50 billion or more, must, on an annual basis, certify to the Board
that it maintains a U.S. risk committee that:
(1) Oversees the risk management practices of the combined U.S.
operations of the company; and
(2) Has at least one member with risk management expertise that is
commensurate with the capital structure, risk profile, complexity,
activities, and size of the combined U.S. operations.
(b) Placement of U.S. risk committee. (1) Subject to paragraph
(b)(2) of this section, a foreign banking organization may maintain its
U.S. risk committee either:
(i) As a committee of the global board of directors (or equivalent
thereof), on a standalone basis or as part of its enterprise-wide risk
committee (or equivalent thereof), or
[[Page 76695]]
(ii) As a committee of the board of directors of its U.S.
intermediate holding company.
(2) If a foreign banking organization with combined U.S. assets of
$50 billion or more conducts its operations in the United States solely
through a U.S. intermediate holding company, the foreign banking
organization must maintain its U.S. risk committee at its U.S.
intermediate holding company.
(c) Timing of certification. The certification required under
paragraph (a) of this section must be filed on an annual basis with the
Board concurrently with the Annual Report of Foreign Banking
Organizations (FR Y-7).
(d) Responsibilities of the foreign banking organization. The
foreign banking organization must take appropriate measures to ensure
that its combined U.S. operations implement the risk management
framework overseen by the U.S. risk committee, and its combined U.S.
operations provide sufficient information to the U.S. risk committee to
enable the U.S. risk committee to carry out the responsibilities of
this subpart.
(e) Noncompliance with this section. If a foreign banking
organization is unable to satisfy the requirements of this section, the
Board may impose conditions or restrictions relating to the activities
or business operations of the combined U.S. operations of the foreign
banking organization. The Board will coordinate with any relevant U.S.
licensing authority in the implementation of such conditions or
restrictions.
Sec. 252.252 Additional U.S. risk committee requirements for foreign
banking organizations with combined U.S. assets of $50 billion or more.
(a) Responsibilities of U.S. risk committee. (1) The U.S. risk
committee of a foreign banking organization with combined U.S. assets
of $50 billion or more must:
(i) Review and approve the risk management practices of the
combined U.S. operations; and
(ii) Oversee the operation of an appropriate risk management
framework for the combined U.S. operations that is commensurate with
the capital structure, risk profile, complexity, activities, and size
of the company's combined U.S. operations and consistent with the
company's enterprise-wide risk management policies. The framework must
include:
(A) Policies and procedures relating to risk management governance,
risk management practices, and risk control infrastructure for the
combined U.S. operations of the company;
(B) Processes and systems for identifying and reporting risks and
risk-management deficiencies, including emerging risks, on a combined
U.S. operations-basis;
(C) Processes and systems for monitoring compliance with the
policies and procedures relating to risk management governance,
practices, and risk controls across the company's combined U.S.
operations;
(D) Processes designed to ensure effective and timely
implementation of corrective actions to address risk management
deficiencies;
(E) Specification of authority and independence of management and
employees to carry out risk management responsibilities; and
(F) Integration of risk management and control objectives in
management goals and compensation structure of the company's combined
U.S. operations.
(2) The U.S. risk committee must meet at least quarterly and
otherwise as needed, and fully document and maintain records of its
proceedings, including risk management decisions.
(b) Independent member of U.S. risk committee. A U.S. risk
committee must have at least one member who:
(1) Is not an officer or employee of the foreign banking
organization or its affiliates and has not been an officer or employee
of the company or its affiliates during the previous three years; and
(2) Is not a member of the immediate family, as defined in section
225.41(a)(3) of the Board's Regulation Y (12 CFR 225.41(a)(3)), of a
person who is, or has been within the last three years, an executive
officer, as defined in section 215.2(e)(1) of the Board's Regulation O
(12 CFR 215.2(e)(1)) of the company or its affiliates.
(c) Noncompliance with this section. If a foreign banking
organization is unable to satisfy the requirements of this section, the
Board may impose conditions or restrictions relating to the activities
or business operations of the combined U.S. operations of the foreign
banking organization. The Board will coordinate with any relevant U.S.
licensing authority in the implementation of such conditions or
restrictions.
Sec. 252.253 U.S. chief risk officer of a foreign banking
organization.
(a) U.S. chief risk officer. A foreign banking organization with
combined U.S. assets of $50 billion or more or its U.S. intermediate
holding company must appoint a U.S. chief risk officer.
(b) General requirements for U.S. chief risk officer. A U.S. chief
risk officer must:
(1) Have risk management expertise that is commensurate with the
capital structure, risk profile, complexity, activities, and size of
the foreign banking organization's combined U.S. operations;
(2) Be employed by the U.S. branch, U.S. agency, U.S. intermediate
holding company, or another U.S. subsidiary;
(3) Receive appropriate compensation and other incentives to
provide an objective assessment of the risks taken by the combined U.S.
operations of the foreign banking organization; and
(4) Unless the Board approves an alternative reporting structure
based on circumstances specific to the foreign banking organization,
report directly to:
(i) The U.S. risk committee; and
(ii) The global chief risk officer or equivalent management
official (or officials) of the foreign banking organization who is
responsible for overseeing, on an enterprise-wide basis, the
implementation of and compliance with policies and procedures relating
to risk management governance, practices, and risk controls of the
foreign banking organization.
(c) U.S. chief risk officer responsibilities. A U.S. chief risk
officer is directly responsible for:
(1) Measuring, aggregating, and monitoring risks undertaken by the
combined U.S. operations;
(2) Regularly providing information to the U.S. risk committee,
global chief risk officer, and the Board regarding the nature of and
changes to material risks undertaken by the company's combined U.S.
operations, including risk management deficiencies and emerging risks,
and how such risks relate to the global operations of the foreign
banking organization;
(3) Meeting regularly and as needed with the Board to assess
compliance with the requirements of this section;
(4) Implementation of and ongoing compliance with appropriate
policies and procedures relating to risk management governance,
practices, and risk controls of the company's combined U.S. operations
and monitoring compliance with such policies and procedures;
(5) Developing appropriate processes and systems for identifying
and reporting risks and risk-management deficiencies, including
emerging risks, on a combined U.S. operations basis;
(6) Managing risk exposures and risk controls within the parameters
of the risk control framework for the combined U.S. operations;
(7) Monitoring and testing the risk controls of the combined U.S.
operations; and
[[Page 76696]]
(8) Ensuring that risk management deficiencies with respect to the
combined U.S. operations are resolved in a timely manner.
(d) Noncompliance with this section. If a foreign banking
organization is unable to satisfy the requirements of this section, the
Board may impose conditions or restrictions relating to the activities
or business operations of the combined U.S. operations of the foreign
banking organization. The Board will coordinate with any relevant U.S.
licensing authority in the implementation of such conditions or
restrictions.
Sec. 252.254 Board of directors of a U.S. intermediate holding
company.
A U.S. intermediate holding company of an foreign banking
organization with total consolidated assets of $50 billion or more must
be governed by a board of managers or directors that is elected or
appointed by the owners and that operates in substantially the same
manner as, and has substantially the same rights, powers, privileges,
duties, and responsibilities as a board of directors of a company
chartered as a corporation under the laws of the United States, any
state, or the District of Columbia.
9. Add subpart P to read as follows:
Subpart P--Stress Test Requirements for Covered Foreign Banking
Organizations and Other Foreign Companies
Sec.
252.260 Definitions.
252.261 Applicability.
252.262 Stress test requirements for intermediate holding companies.
252.263 Stress test requirements for foreign banking organizations
with combined U.S. assets of $50 billion or more.
252.264 Stress test requirements for foreign banking organizations
and foreign savings and loan holding companies with total
consolidated assets of more than $10 billion.
Subpart P--Stress Test Requirements for Covered Foreign Banking
Organizations and Other Foreign Companies
Sec. 252.260 Definitions.
For purposes of this subpart, the following definitions apply:
Eligible assets means any asset of the U.S. branch or U.S. agency
(reduced by the amount of any specifically allocated reserves
established on the books in connection with such assets) held in the
United States and recorded on the general ledger of a U.S. branch or
U.S. agency of the foreign bank, subject to the following exclusions
and rules of valuation.
(1) The following assets do not qualify as eligible assets:
(i) Equity securities;
(ii) Any assets classified as loss, and accrued income on assets
classified loss, doubtful, substandard or value impaired, at the
preceding examination by a regulatory agency, outside accountant, or
the bank's internal loan review staff;
(iii) All amounts due from the home office, other offices and
affiliates, including income accrued but uncollected on such amounts,
except that the Board may determine to treat amounts due from other
offices or affiliates located in the United States as eligible assets;
(iv) The balance from time to time of any other asset or asset
category disallowed at the preceding examination or by direction of the
Board for any other reason until the underlying reasons for the
disallowance have been removed;
(v) Prepaid expenses and unamortized costs, furniture and fixtures
and leasehold improvements; and
(vi) Any other asset that the Board determines should not qualify
as an eligible asset.
(2) The following rules of valuation apply:
(i) A marketable debt security is valued at its principal amount or
market value, whichever is lower;
(ii) A restructured foreign debt bond backed by United States
Treasury obligations (commonly known as Brady Bonds), whether carried
on the books of the U.S. branch or U.S. agency as a loan or a security,
is allowed at its book value or market value, whichever is lower;
(iii) An asset classified doubtful or substandard at the preceding
examination by a regulatory agency, outside accountant, or the bank's
internal loan review staff, is valued at 50 percent and 20 percent,
respectively.
(iv) With respect to an asset classified value impaired, the amount
representing the allocated transfer risk reserve which would be
required for such exposure at a domestically chartered bank is valued
at 0; and the residual exposure is valued at 80 percent.
(v) Precious metals are valued at 75 percent of the market value.
(vi) Real estate located in the United States and carried on the
accounting records as an asset are eligible at net book value or
appraised value, whichever is less.
Foreign savings and loan holding company means a savings and loan
holding company as defined in section 10 of the Home Owners' Loan Act
(12 U.S.C. 1467a(a)) that is incorporated or organized under the laws
of a country other than the United States.
Liabilities of a U.S. branch and agency network shall include all
liabilities of the U.S. branch and agency network, including
acceptances and any other liabilities (including contingent
liabilities), but excluding the following:
(1) Amounts due to and other liabilities to other offices,
agencies, branches and affiliates of such foreign banking organization,
including its head office, including unremitted profits; and
(2) Reserves for possible loan losses and other contingencies.
Pre-provision net revenue means revenue less expenses before
adjusting for total loan loss provisions.
Stress test cycle has the same meaning as in subpart G of this
part.
Total loan loss provisions means the amount needed to make reserves
adequate to absorb estimated credit losses, based upon management's
evaluation of the loans and leases that the company has the intent and
ability to hold for the foreseeable future or until maturity or payoff,
as determined under applicable accounting standards.
Sec. 252.261 Applicability.
(a) Foreign banking organizations with combined U.S. assets of $50
billion or more. A foreign banking organization with combined U.S.
assets of $50 billion or more is subject to the requirements of Sec.
252.263 of this subpart.
(1) Combined U.S. assets. For purposes of this paragraph, combined
U.S. assets is equal to the sum of:
(i) The average of the total assets of each U.S. branch and U.S.
agency of the foreign banking organization:
(A) For the four most recent consecutive quarters as reported to
the Board on the FFIEC 002, or
(B) If the foreign banking organization has not filed the FFIEC 002
for a U.S. branch or U.S. agency for each of the four most recent
consecutive quarters, for the most recent quarter or consecutive
quarters as reported on the FFIEC 002, or
(C) If the foreign banking organization has not yet filed a FFIEC
002 for a U.S. branch or U.S. agency, as determined under applicable
accounting standards.
(ii) If a U.S. intermediate holding company has been established,
the average of the total consolidated assets of the U.S. intermediate
holding company:
(A) For the four most recent consecutive quarters, as reported to
the Board on the U.S. intermediate holding company's FR Y-9C, or
(B) If the U.S. intermediate holding company has not filed the FR
Y-9C for
[[Page 76697]]
each of the four most recent consecutive quarters, for the most recent
quarter or consecutive quarters as reported on the FR Y-9C, or
(C) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards; and
(iii) If a U.S. intermediate holding company has not been
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any
section 2(h)(2) company):
(A) For the four most recent consecutive quarters, as reported to
the Board on the Capital and Asset Report for Foreign Banking
Organizations (FR Y-7Q); or
(B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
(C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
(2) U.S. intercompany transactions. The company may reduce its
combined U.S. assets calculated under this paragraph by the amount
corresponding to balances and transactions between the U.S. subsidiary
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or
U.S. branch to the extent such items are not already eliminated in
consolidation.
(3) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.263 of this subpart
unless and until the sum of the total assets of each U.S. branch and
U.S. agency as reported on the FFIEC 002 and the total consolidated
assets of each U.S. subsidiary as reported on the FR Y-9C or FR Y-7Q
are less than $50 billion for each of the four most recent consecutive
calendar quarters.
(4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3)
of this section, total assets and total consolidated assets are
measured on the last day of the quarter used in calculation of the
average.
(b) Foreign banking organizations with total consolidated assets of
more than $10 billion but with combined U.S. assets of less than $50
billion. A foreign banking organization with total consolidated assets
of more than $10 billion and with combined U.S. assets of less than $50
billion is subject to the requirements of Sec. 252.264 of this
subpart.
(1) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its Capital and Asset Report for
Foreign Banking Organizations (FR Y-7Q); or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. 252.264 of this subpart
unless and until total assets as reported on its FR Y-7Q are less than
$10 billion for each of the four most recent consecutive calendar
quarters.
(3) Measurement date. For purposes of this paragraph, total assets
are measured on the last day of the quarter used in calculation of the
average.
(4) Calculation of combined U.S. assets. For purposes of this
paragraph, combined U.S. assets are determined in accordance with
paragraph (a)(1) of this section.
(c) Foreign savings and loan holding companies with total
consolidated assets of more than $10 billion. A foreign savings and
loan holding company with total consolidated assets of more than $10
billion is subject to the requirements of Sec. 252.264 of this
subpart.
(1) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign savings and loan holding company on the applicable
regulatory report, or
(ii) If the foreign savings and loan holding company has not filed
an applicable regulatory report for each of the four most recent
consecutive quarters, for the most recent quarter or consecutive
quarters as reported on the applicable regulatory report, or
(iii) If the foreign savings and loan holding company has not yet
filed a regulatory report, as determined under applicable accounting
standards.
(2) Cessation of requirements. A foreign savings and loan holding
company will remain subject to the requirements Sec. 252.264 of this
subpart unless and until total assets as reported on its applicable
regulatory report are less than $10 billion for each of the four most
recent consecutive calendar quarters.
(3) Measurement date. For purposes of this paragraph, total assets
are measured on the last day of the quarter used in calculation of the
average.
(d) U.S. intermediate holding companies. (1) U.S. intermediate
holding companies with total consolidated assets of $50 billion or
more. A U.S. intermediate holding company with total consolidated
assets of $50 billion or more is subject to the requirements of Sec.
252.262(a) of this subpart.
(2) Other U.S. intermediate holding companies. A U.S. intermediate
holding company that has total consolidated assets of more than $10
billion but less than $50 billion, is subject to the requirements of
Sec. 252.262(b) of this subpart.
(3) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total consolidated assets:
(i) For the four most recent consecutive quarters as reported by
the U.S. intermediate holding company on its FR Y-9C, or
(ii) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on FR Y-9C, or
(iii) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards.
(4) Cessation of requirements. A U.S. intermediate holding company
will remain subject to:
(i) The requirements of Sec. 252.262(a) of this subpart unless and
until total consolidated assets as reported on its FR Y-9C are less
than $50 billion for each of the four most recent consecutive calendar
quarters; and
(ii) The requirements of Sec. 252.262(b) of this subpart unless
and until total consolidated assets as reported on its FR Y-9C are less
than $10 billion for each of the four most recent consecutive calendar
quarters or the company becomes subject to Sec. 252.262(a) of this
subpart.
(5) Measurement date. For purposes of this paragraph, total
consolidated assets are measured on the last day of the quarter used in
calculation of the average.
(e) Initial applicability. (1) Foreign banking organizations. A
foreign banking organization or foreign savings and loan holding
company that is subject to this subpart as of July 1, 2014, under
paragraph (a), (b), or (c) of this
[[Page 76698]]
section must comply with the requirements of this subpart beginning on
July 1, 2015, unless that time is extended by the Board in writing.
(2) U.S. intermediate holding companies. A U.S. intermediate
holding company that is subject to this subpart as of July 1, 2015,
under paragraph (d) of this section, must comply with the requirements
of Sec. 252.262 of this subpart beginning on July 1, 2015, unless that
time is extended by the Board in writing.
(f) Ongoing applicability. (1) Foreign banking organizations. A
foreign banking organization or foreign savings and loan holding
company that becomes subject to the requirements of this subpart after
July 1, 2014, under paragraph (a), (b), or (c) of this section must
comply with the requirements of this subpart beginning in the October
of the calendar year after it becomes subject to the requirements of
this subpart, unless that time is accelerated or extended by the Board
in writing.
(2) U.S. intermediate holding companies. A U.S. intermediate
holding company that becomes subject to the requirements of this
subpart after July 1, 2015, under paragraph (d) of this section must
comply with the requirements of Sec. 252.262 of this subpart beginning
in October of the calendar year after it becomes subject to those
requirements, unless that time is accelerated or extended by the Board
in writing.
Sec. 252.262 Stress test requirements for intermediate holding
companies.
(a) Large U.S. intermediate holding companies. A U.S. intermediate
holding company with total consolidated assets $50 billion or more must
comply with the requirements of subparts F and G of this part to the
same extent and in the same manner as if it were bank holding company
with total consolidated assets of $50 billion or more.
(b) Other U.S. intermediate holding companies. A U.S. intermediate
holding company with total consolidated assets of more than $10 billion
but less than $50 billion must comply with the requirements of subpart
H of this part to the same extent and in the same manner as if it were
a bank holding company with total consolidated assets of more than $10
billion but less than $50 billion, as determined under that subpart.
Sec. 252.263 Stress test requirements for foreign banking
organizations with combined U.S. assets of $50 billion or more.
(a) In general. Unless otherwise determined in writing by the
Board, a foreign banking organization with combined U.S. assets of $50
billion or more that has a U.S. branch and U.S. agency network is
subject to the requirements of paragraph (c) of this section, unless:
(1) The foreign banking organization is subject to a consolidated
capital stress testing regime by its home country supervisor that
includes:
(i) An annual supervisory capital stress test conducted by the
foreign banking organization's home country supervisor or an annual
evaluation and review by the foreign banking organization's home
country supervisor of an internal capital adequacy stress test
conducted by the foreign banking organization; and
(ii) Requirements for governance and controls of the stress testing
practices by relevant management and the board of directors (or
equivalent thereof) of the foreign banking organization.
(2) The foreign banking organization conducts such stress tests and
meets the minimum standards set by its home country supervisor with
respect to the stress tests;
(3) The foreign banking organization provides information required
under paragraph (b) of this section, as applicable; and
(4) The foreign banking organization demonstrates to the Board that
it has adequate capital to withstand stressed conditions if, on a net
basis, its U.S. branch and agency network provides funding to its
foreign banking organization's non-U.S. offices and its non-U.S.
affiliates, calculated as the average daily position over a stress test
cycle for a given year.
(b) Information requirements. (1) In general. A foreign banking
organization with total consolidated assets of $50 billion or more must
report summary information to the Board by January 5 of each calendar
year, unless extended by the Board, about its stress testing activities
and results, including the following quantitative and qualitative
information:
(i) A description of the types of risks included in the stress
test;
(ii) A description of the conditions or scenarios used in the
stress test;
(iii) A summary description of the methodologies used in the stress
test;
(iv) Estimates of:
(A) Aggregate losses;
(B) Pre-provision net revenue;
(C) Total loan loss provisions;
(D) Net income before taxes; and
(E) Pro forma regulatory capital ratios required to be computed by
the home country supervisor of the foreign banking organization and any
other relevant capital ratios; and
(v) An explanation of the most significant causes for the changes
in regulatory capital ratios.
(2) Additional information required for foreign banking
organizations in a net due from position. If, on a net basis, its U.S.
branch and agency network provides funding to its foreign banking
organization's non-U.S. offices and its non-U.S. affiliates, calculated
as the average daily position over a stress test cycle for a given
year, the foreign banking must report the following information to the
Board by the following January 5 of each calendar year, unless extended
by the Board:
(i) A detailed description of the methodologies used in the stress
test, including those employed to estimate losses, revenues, total loan
loss provisions, and changes in capital positions over the planning
horizon;
(ii) Estimates of realized losses or gains on available-for-sale
and held-to-maturity securities, trading and counterparty losses, if
applicable; loan losses (dollar amount and as a percentage of average
portfolio balance) in the aggregate and by sub-portfolio; and
(iii) Any additional information that the Board requests in order
to evaluate the ability of the foreign banking organization to absorb
losses in stressed conditions and thereby continue to support its
combined U.S. operations.
(c) Imposition of additional standards for capital stress tests. A
foreign banking organization that does not meet each of the
requirements in paragraph (a)(1) through (4) of this section is subject
to the following requirements:
(1) Asset maintenance requirement. The U.S. branch and agency
network must maintain on a daily basis eligible assets in an amount not
less than 108 percent of the preceding quarter's average value of the
liabilities of the branch and agency network;
(2) Stress test requirement. The foreign banking organization must
separately or as part of an enterprise-wide stress test conduct an
annual stress test of its U.S. subsidiaries not organized under a U.S.
intermediate holding company (other than a section 2(h)(2) company) to
determine whether those subsidiaries have the capital necessary to
absorb losses as a result of adverse economic conditions. The foreign
banking organization must report a summary of the results of the stress
test to the Board on an annual basis that includes the information
required under paragraph (b)(1) of this section or as otherwise
specified by the Board.
(3) Intragroup funding restrictions or liquidity requirements for
U.S. operations. The U.S. branch and agency network of the foreign
banking organization and any U.S. subsidiary of
[[Page 76699]]
the foreign banking organization that is not a subsidiary of a U.S.
intermediate holding company may be required to maintain a liquidity
buffer or be subject to intragroup funding restrictions as determined
by the Board.
(d) Notice and response. If the Board determines to impose one or
more standards under paragraph (c)(3) of this section, the Board will
notify the company no later than 30 days before it proposes to apply
additional standard(s). The notification will include a description of
the additional standard(s) and the basis for imposing the additional
standard(s). Within 14 calendar days of receipt of a notification under
this paragraph, the company may request in writing that the Board
reconsider the requirement that the company comply with the additional
standard(s), including an explanation as to why the reconsideration
should be granted. The Board will respond in writing within 14 calendar
days of receipt of the company's request.
Sec. 252.264 Stress test requirements for foreign banking
organizations and foreign savings and loan holding companies with total
consolidated assets of more than $10 billion.
(a) In general. Unless otherwise determined in writing by the
Board, a foreign banking organization with total consolidated assets of
more than $10 billion that has combined U.S. assets of less than $50
billion and a foreign savings and loan holding company with average
total consolidated assets of more than $10 billion will be subject to
the standards in paragraph (b) of this section, as applicable, unless:
(1) The company is subject to a stress testing regime by its home
country supervisor that includes:
(i) An annual supervisory capital stress test conducted by the
company's home country supervisor or an annual evaluation and review by
the home country supervisor of an internal capital adequacy stress test
conducted by the company; and
(ii) Requirements for governance and controls of the stress testing
practices by relevant management and the board of directors (or
equivalent thereof) of the foreign banking organization; and
(2) The company conducts such stress tests and meets the minimum
standards set by its home country supervisor with respect to the stress
tests.
(b) Additional standards. A foreign banking organization or a
foreign savings and loan holding company that does not meet each of the
requirements in paragraph (a)(1) and (2) of this section is subject to
the following requirements, as applicable:
(1) Asset maintenance requirement. A U.S. branch and agency
network, if any, of the foreign banking organization must maintain on a
daily basis eligible assets in an amount not less than 105 percent of
the preceding quarter's average value of the branch and agency
network's liabilities.
(2) Stress test requirement. A foreign banking organization or a
foreign savings and loan holding company must separately, or as part of
an enterprise-wide stress test, conduct an annual stress test of its
U.S. subsidiaries not organized under a U.S. intermediate holding
company (other than a section 2(h)(2) company) to determine whether
those subsidiaries have the capital necessary to absorb losses as a
result of adverse economic conditions. The foreign banking organization
or foreign savings and loan holding company must report a summary of
the results of the stress test to the Board on an annual basis that
includes the information required under paragraph Sec. 252.263(b)(1)
of this subpart.
10. Add subpart Q to read as follows:
Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign Banking
Organizations
Sec.
252.270 Definitions.
252.271 Debt-to-equity ratio limitation.
Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign
Banking Organization
Sec. 252.270 Definitions.
Debt and equity have the same meaning as ``total liabilities'' and
``total equity capital,'' respectively, as reported by a U.S.
intermediate holding company or U.S. subsidiary on the FR Y-9C, or
other reporting form prescribed by the Board.
Debt to equity ratio means the ratio of total liabilities to total
equity capital less goodwill.
Eligible assets and liabilities of a U.S. branch and agency network
have the same meaning as in subpart P of this part.
Sec. 252.271 Debt-to-equity ratio limitation.
(a) Notice and maximum debt-to-equity ratio requirement. Beginning
no later than 180 days after receiving written notice from the Council
or from the Board on behalf of the Council that the Council has made a
determination, pursuant to section 165(j) of the Dodd-Frank Act, that
the foreign banking organization poses a grave threat to the financial
stability of the United States and that the imposition of a debt to
equity requirement is necessary to mitigate such risk--
(1) The U.S. intermediate holding company and any U.S. subsidiary
not organized under a U.S. intermediate holding company (other than a
section 2(h)(2) company), must achieve and maintain a debt to equity
ratio of no more than 15-to-1; and
(2) The U.S. branch and agency network must achieve and maintain on
a daily basis eligible assets in an amount not less than 108 percent of
the preceding quarter's average value of the U.S. branch and agency
network's liabilities.
(b) Extension. The Board may, upon request by an foreign banking
organization for which the Council has made a determination pursuant to
section 165(j) of the Dodd-Frank Act, extend the time period for
compliance established under paragraph (a) of this section for up to
two additional periods of 90 days each, if the Board determines that
such company has made good faith efforts to comply with the debt to
equity ratio requirement and that each extension would be in the public
interest. Requests for an extension must be received in writing by the
Board not less than 30 days prior to the expiration of the existing
time period for compliance and must provide information sufficient to
demonstrate that the company has made good faith efforts to comply with
the debt-to-equity ratio requirement and that each extension would be
in the public interest.
(c) Termination. The requirements in paragraph (a) of this section
cease to apply to a foreign banking organization as of the date it
receives notice from the Council of a determination that the company no
longer poses a grave threat to the financial stability of the United
States and that imposition of the requirements in paragraph (a) of this
section are no longer necessary.
11. Add Subpart R to part 252 to read as follows:
Subpart R--Early Remediation Framework for Covered Foreign Banking
Organizations
Sec.
252.280 Definitions.
252.281 Applicability.
252.282 Remediation triggering events.
252.283 Notice and remedies.
252.284 Remediation actions for U.S. operations of foreign banking
organizations with combined U.S. assets of $50 billion or more.
252.285 Remediation actions for foreign banking organizations with
total consolidated assets of $50 billion or more and with combined
U.S. assets of less than $50 billion.
[[Page 76700]]
Subpart R--Early Remediation Framework for Covered Foreign Banking
Organizations
Sec. 252.280 Definitions.
For purposes of this subpart, the following definitions apply:
Capital distribution means a redemption or repurchase of any debt
or equity capital instrument, a payment of common or preferred stock
dividends, a payment that may be temporarily or permanently suspended
by the issuer on any instrument that is eligible for inclusion in the
numerator of any minimum regulatory capital ratio, and any similar
transaction that the Board determines to be in substance a distribution
of capital.
Eligible assets has the same meaning as in subpart P of this part.
Liabilities of U.S. branch and agency network has the same meaning
as in subpart P of this part.
Net income means the net income as reported on line 14 of schedule
HI of the U.S. intermediate holding company's FR Y-9C.
Planning horizon means the period of at least nine quarters,
beginning on the first day of a stress test cycle under subpart F of
this part (on October 1 of each calendar year) over which the stress
testing projections extend.
Risk-weighted assets means, for the combined U.S. operations:
(1) Total risk-weighted assets of the U.S. intermediate holding
company, as determined under the minimum risk-based capital
requirements applicable to the U.S. intermediate holding company under
subpart L of this part and as reported on the FR Y-9C, or
(2) If the foreign banking organization has not established a U.S.
intermediate holding company, total risk-weighted assets of any U.S.
subsidiary of the foreign banking organization that is not a section
2(h)(2) company, as determined in accordance with the minimum risk-
based capital requirements applicable to the foreign banking
organization under subpart L of this part and as reported on the FR Y-7
or as otherwise required by the Board; and
(3) Total risk-weighted assets of a U.S. branch or U.S. agency, as
determined under the minimum risk-based capital requirements applicable
to the foreign banking organization under subpart L of this part and as
reported on the FR Y-7 or as otherwise reported by the Board.
Severely adverse scenario has the same meaning as in subpart G of
this part.
Sec. 252.281 Applicability.
(a) Foreign banking organizations with combined U.S. assets of $50
billion or more. A foreign banking organization with combined U.S.
assets of $50 billion or more is subject to the requirements of
Sec. Sec. 252.282 through 252.284 of this subpart.
(1) Combined U.S. assets. For purposes of this subpart, combined
U.S. assets is equal to the sum of:
(i) The average of the total assets of each U.S. branch and U.S.
agency of the foreign banking organization:
(A) For the four most recent consecutive quarters as reported to
the Board on the FFIEC 002, or
(B) If the foreign banking organization has not filed the FFIEC 002
for a U.S. branch or U.S. agency for each of the four most recent
consecutive quarters, for the most recent quarter or consecutive
quarters as reported on the FFIEC 002, or
(C) If the foreign banking organization has not yet filed a FFIEC
002 for a U.S. branch or U.S. agency, as determined under applicable
accounting standards.
(ii) If a U.S. intermediate holding company has been established,
the average of the total consolidated assets of the U.S. intermediate
holding company:
(A) For the four most recent consecutive quarters, as reported to
the Board on the U.S. intermediate holding company's FR Y-9C, or
(B) If the U.S. intermediate holding company has not filed the FR
Y-9C for each of the four most recent consecutive quarters, for the
most recent quarter or consecutive quarters as reported on the FR Y-9C,
or
(C) If the U.S. intermediate holding company has not yet filed an
FR Y-9C, as determined under applicable accounting standards; and
(iii) If a U.S. intermediate holding company has not been
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any
section 2(h)(2) company):
(A) For the four most recent consecutive quarters, as reported to
the Board on the Capital and Asset Report for Foreign Banking
Organizations (FR Y-7Q); or
(B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
(C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
(2) U.S. intercompany transactions. The company may reduce its
combined U.S. assets calculated under this paragraph by the amount
corresponding to balances and transactions between the U.S. subsidiary
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or
U.S. branch or U.S. agency to the extent such items are not already
eliminated in consolidation.
(3) Cessation of requirements. A foreign banking organization will
remain subject to the requirements Sec. Sec. 252.282 through 252.284
of this subpart unless and until the sum of the total assets of each
U.S. branch and U.S. agency as reported on the FFIEC 002 and the total
consolidated assets of each U.S. subsidiary as reported on the FR Y-9C
or FR Y-7Q are less than $50 billion for each of the four most recent
consecutive calendar quarters.
(4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3)
of this section, total assets and total consolidated assets are
measured on the last day of the quarter used in calculation of the
average.
(b) Foreign banking organizations with combined U.S. assets of less
than $50 billion. A foreign banking organization with total
consolidated assets of $50 billion or more and with combined U.S.
assets of less than $50 billion is subject to the requirements of
Sec. Sec. 252.282, 252.283, and 252.285 of this subpart.
(1) Total consolidated assets. For purposes of this paragraph,
total consolidated assets are determined based on the average of the
total assets:
(i) For the four most recent consecutive quarters as reported by
the foreign banking organization on its Capital and Asset Report for
Foreign Banking Organizations (FR Y-7Q); or
(ii) If the foreign banking organization has not filed the FR Y-7Q
for each of the four most recent consecutive quarters, for the most
recent quarter or consecutive quarters as reported on FR Y-7Q; or
(iii) If the foreign banking organization has not yet filed an FR
Y-7Q, as determined under applicable accounting standards.
(2) Combined U.S. assets. For purposes of this paragraph, combined
U.S. assets are determined in accordance with paragraph (a)(1) of this
section.
(3) Cessation of requirements. A foreign banking organization will
remain subject to the requirements of Sec. Sec. 252.282, 252.283, and
252.285 of this subpart unless and until total assets as reported on
its FR Y-7Q are less than $50 billion for each of the four most recent
consecutive calendar quarters.
(4) Measurement date. For purposes of paragraph (b) of this
section, total assets are measured on the last day of
[[Page 76701]]
the quarter used in calculation of the average.
(c) Initial applicability. A foreign banking organization that is
subject to this subpart as of July 1, 2014, under paragraph (a) or (b)
of this section, must comply with the requirements of this subpart
beginning on July 1, 2015, unless that time is extended by the Board in
writing.
(d) Ongoing applicability. A foreign banking organization that
becomes subject to this subpart after July 1, 2014, under paragraphs
(a) or (b) of this section, must comply with the requirements of this
subpart beginning 12 months after it becomes subject to those
requirements, unless that time is accelerated or extended by the Board
in writing.
Sec. 252.282 Remediation triggering events.
(a) Capital and leverage. (1) Level 1 remediation triggering
events. (i) Foreign banking organizations. The combined U.S. operations
of a foreign banking organization are subject to level 1 remediation
(heightened supervisory review) if the Board determines that the
foreign banking organization's capital position is not commensurate
with the level and nature of the risks to which it is exposed in the
United States, and
(A) Any risk-based capital ratio of the foreign banking
organization exceeds the minimum applicable risk-based capital
requirements for the foreign banking organization under subpart L of
this part by [200-250] basis points or more; and
(B) Any leverage ratio of the foreign banking organization exceeds
the minimum applicable leverage requirements for the foreign banking
organization under subpart L of this part by [75-125] basis points or
more.
(ii) U.S. intermediate holding company. The combined U.S.
operations of a foreign banking organization are subject to level 1
remediation (heightened supervisory review) if the Board determines
that the U.S. intermediate holding company of the foreign banking
organization is not in compliance with rules regarding capital plans
under section 252.212(b) or that the U.S. intermediate holding
company's capital position is not commensurate with the level and
nature of the risks to which it is exposed, and:
(A) Any risk-based capital ratio of the U.S. intermediate holding
company exceeds the minimum applicable risk-based capital requirements
for the U.S. intermediate holding company under subpart L of this part
by [200-250] basis points or more; and
(B) Any leverage ratio of the U.S. intermediate holding company
exceeds the minimum applicable leverage requirements for the U.S.
intermediate holding company under subpart L of this part by [75-125]
basis points or more.
(2) Level 2 remediation triggering events. (i) Foreign banking
organizations. The combined U.S. operations of a foreign banking
organization are subject to level 2 remediation (initial remediation)
if:
(A) Any risk-based capital ratio of the foreign banking
organization is less than [200-250] basis points above the minimum
applicable risk-based capital requirements for the foreign banking
organization under subpart L of this part; or
(B) Any leverage ratio of the foreign banking organization is less
than [75-125] basis points above the minimum applicable leverage
requirements for the foreign banking organization under subpart L of
this part.
(ii) U.S. intermediate holding companies. The combined U.S.
operations of a foreign banking organization are subject to level 2
remediation (initial remediation) if:
(A) Any risk-based capital ratio of the U.S. intermediate holding
company is less than [200-250] basis points above the minimum
applicable risk-based capital requirements for the U.S. intermediate
holding company under subpart L of this part; or
(B) Any leverage ratio of the U.S. intermediate holding company is
less than [75-125] basis points above the minimum applicable leverage
requirements for the U.S. intermediate holding company under subpart L
of this part.
(3) Level 3 remediation triggering events. (i) Foreign banking
organizations. The combined U.S. operations of a foreign banking
organization are subject to level 3 remediation (recovery) if:
(A) For two complete consecutive quarters:
(1) Any risk-based capital ratio of the foreign banking
organization is less than [200-250] basis points above the minimum
applicable risk-based capital requirements for the foreign banking
organization under subpart L of this part;
(2) Any leverage ratio of the foreign banking organization is less
than [75-125] basis points above the minimum applicable leverage
requirements for the foreign banking organization under subpart L of
this part; or
(B)(1) Any risk-based capital ratio of the foreign banking
organization is below the applicable minimum risk-based capital
requirements for the foreign banking organization under subpart L of
this part; or
(2) Any leverage ratio of the foreign banking organization is below
the applicable minimum leverage requirements for the foreign banking
organization under subpart L of this part.
(ii) U.S. intermediate holding companies. The combined U.S.
operations of a foreign banking organization are subject to level 3
remediation (recovery) if:
(A) For two complete consecutive quarters:
(1) Any risk-based capital ratio of the U.S. intermediate holding
company is less than [200-250] basis points above the applicable
minimum risk-based capital requirements for the U.S. intermediate
holding company under subpart L of this part;
(2) Any leverage ratio of the U.S. intermediate holding company is
less than [75-125] basis points above the minimum applicable leverage
requirements for the U.S. intermediate holding company under subpart L
of this part; or
(B)(1) Any risk-based capital ratio of the U.S. intermediate
holding company is below the applicable minimum risk-based capital
requirements for the U.S. intermediate holding company under subpart L
of this part; or
(2) Any leverage ratio of the U.S. intermediate holding company is
below the applicable minimum leverage requirements for the U.S.
intermediate holding company under subpart L of this part.
(4) Level 4 remediation triggering events. (i) Foreign banking
organizations. The combined U.S. operations of a foreign banking
organization are subject to level 4 remediation (resolution assessment)
if:
(A) Any risk-based capital ratio of the foreign banking
organization is [100-250] basis points or more below the applicable
minimum risk-based capital requirements for the foreign banking
organization under subpart L of this part; or
(B) Any leverage ratio of the foreign banking organization is [50-
150] basis points or more below the applicable minimum leverage
requirements for the foreign banking organization under subpart L of
this part.
(ii) U.S. intermediate holding companies. The combined U.S.
operations of a foreign banking organization are subject to level 4
remediation (resolution assessment) if:
(A) Any risk-based capital ratio of the U.S. intermediate holding
company is [100-250] basis points or more below the applicable minimum
risk-based
[[Page 76702]]
capital requirements for the U.S. intermediate holding company under
subpart L of this part; or
(B) Any leverage ratio of the U.S. intermediate holding company is
[50-150] basis points or more below the applicable minimum leverage
requirements for the U.S. intermediate holding company under subpart L
of this part.
(b) Stress Tests. (1) Level 1 remediation triggering events. The
combined U.S. operations of a foreign banking organization are subject
to level 1 remediation if the foreign banking organization or its U.S.
intermediate holding company is not in compliance with rules regarding
stress tests pursuant to subpart P of this part.
(2) Level 2 remediation triggering events. The combined U.S.
operations of a foreign banking organization are subject to level 2
remediation if the results of a supervisory stress test of its U.S.
intermediate holding company conducted under subpart P of this part
reflect a tier 1 common ratio of less than 5.0 percent under the
severely adverse scenario during any quarter of the planning horizon.
(3) Level 3 remediation triggering events. The combined U.S.
operations of a foreign banking organization are subject to level 3
remediation if the results of a supervisory stress test of its U.S.
intermediate holding company conducted under subpart P of this part
reflect a tier 1 common ratio of less than 3.0 percent under the
severely adverse scenario during any quarter of the planning horizon.
(c) Risk management. (1) Level 1 remediation triggering events. The
combined U.S. operations of a foreign banking organization are subject
to level 1 remediation if the Board determines that any part of the
combined U.S. operations has manifested signs of weakness in meeting
the enhanced risk management and risk committee requirements under
subpart O of this part.
(2) Level 2 remediation triggering events. The combined U.S.
operations of a foreign banking organization are subject to level 2
remediation if the Board determines that any part of the combined U.S.
operations has demonstrated multiple deficiencies in meeting the
enhanced risk management or risk committee requirements under subpart O
of this part.
(3) Level 3 remediation triggering events. The combined U.S.
operations of a foreign banking organization are subject to level 3
remediation if the Board determines that any part of the combined U.S.
operations is in substantial noncompliance with the enhanced risk
management and risk committee requirements under subpart O of this
part.
(d) Liquidity. (1) Level 1 remediation triggering event. The
combined U.S. operations of a foreign banking organization are subject
to level 1 remediation if the Board determines that any part of the
combined U.S. operations has manifested signs of weakness in meeting
the enhanced liquidity risk management requirements under subpart M of
this part.
(2) Level 2 remediation triggering event. The combined U.S.
operations of a foreign banking organization are subject to level 2
remediation if the Board determines that any part of the combined U.S.
operations has demonstrated multiple deficiencies in meeting the
enhanced liquidity risk management requirements under subpart M of this
part.
(3) Level 3 remediation triggering events. The combined U.S.
operations of a foreign banking organization are subject to level 3
remediation if the Board determines that any part of the combined U.S.
operations is in substantial noncompliance with the enhanced liquidity
risk management requirements under subpart M of this part.
(e) Market indicators. (1) Publication. The Board will publish for
comment annually, or less frequently as appropriate, a list of market
indicators based on publicly available market data, market indicator
thresholds, and breach periods that will be used to indicate when the
market views a firm to be in financial distress.
(2) Period of application. Those market indicators will be
referenced for purposes of applying this subparagraph during the
twelve-month period beginning at the end of the first full calendar
quarter after publication by the Board of the final market indicators,
market indicator thresholds, and breach periods.
(3) Level 1 remediation. The combined U.S. operations of a foreign
banking organization will be subject to level 1 remediation upon
receipt of a notice indicating that the Board has found that, with
respect to the foreign banking organization or U.S. intermediate
holding company, any market indicator has exceeded the market indicator
threshold for the breach period.
(f) Measurement and timing of remediation action events. (1)
Capital. For the purposes of this subpart, the capital of a foreign
banking organization or U.S. intermediate holding company is deemed to
have been calculated as of the most recent of the following:
(i) The date on which the FR Y-9C for the U.S. intermediate holding
company or the FR Y-7 for the foreign banking organization is due;
(ii) The as-of date of any calculations of capital by the foreign
banking organization or U.S. intermediate holding company submitted to
the Board, pursuant to a Board request to the foreign banking
organization or U.S. intermediate holding company to calculate its
ratios; or
(iii) A final inspection report is delivered to the U.S.
intermediate holding company that includes capital ratios calculated
more recently than the most recent FR Y-9C submitted by the U.S.
intermediate holding company to the Board.
(2) Stress tests. For purposes of this paragraph, the ratios
calculated under the supervisory stress test apply as of the date the
Board reports the supervisory stress test results to the U.S.
intermediate holding company pursuant to subpart P of this part.
Sec. 252.283 Notice and remedies.
(a) Notice to foreign banking organization of remediation action
event. If the Board determines that a remediation triggering event set
forth in Sec. 252.282 of this subpart has occurred with respect to a
foreign banking organization, the Board will notify the foreign banking
organization of the event and the remediation actions under Sec.
252.284 or Sec. 252.285 of this subpart applicable to the foreign
banking organization as a result of the event. The applicable
remediation actions will apply from the date such notice is issued.
(b) Notification of change in status. A foreign banking
organization must provide notice to the Board within 5 business days of
the date it determines that one or more triggering events set forth in
Sec. 252.282 of this subpart has occurred, identifying the nature of
the triggering event or change in circumstances.
(c) Termination of remediation action. A foreign banking
organization subject to one or more remediation actions under this
subpart will remain subject to the remediation action until the Board
provides written notice to the foreign banking organization that its
financial condition or risk management no longer warrants application
of the requirement.
Sec. 252.284 Remediation actions for U.S. operations of foreign
banking organizations with combined U.S. assets of $50 billion or more.
(a) Level 1 remediation (heightened supervisory review). (1) Under
level 1
[[Page 76703]]
remediation, the Board will conduct a targeted supervisory review of
the combined U.S. operations of a foreign banking organization with
combined U.S. assets of $50 billion or more, to evaluate whether the
combined U.S. operations are experiencing financial distress or
material risk management weaknesses, including with respect to
exposures that the combined operations have to the foreign banking
organization, such that further decline of the combined U.S. operations
is probable.
(2) If, upon completion of the review, the Board determines that
the combined U.S. operations of a foreign banking organization are
experiencing financial distress or material risk management weaknesses
such that further decline of the combined U.S. operations is probable,
the Board may determine to subject the foreign banking organization to
initial remediation (level 2 remediation).
(b) Level 2 remediation (initial remediation). (1) The U.S.
intermediate holding company of a foreign banking organization with
combined U.S. assets of $50 billion or more that is subject to level 2
remediation may not make capital distributions during any calendar
quarter in an amount that exceeds 50 percent of the average of the U.S.
intermediate holding company's net income in the preceding two calendar
quarters.
(2) The U.S. branch and agency network of a foreign banking
organization subject to level 2 remediation:
(i) Must not provide funding on a net basis to its foreign banking
organization's non-U.S. offices and its non-U.S. affiliates, calculated
on a daily basis; and
(ii) Must maintain in accounts in the United States highly liquid
assets in an amount sufficient to cover the 30-day net stressed cash
flow need calculated under Sec. 252.227 of this part; provided that
this requirement would cease to apply were the foreign banking
organization to become subject to level 3 remediation.
(3) The combined U.S. operations of a foreign banking organization
subject to level 2 remediation may not:
(i) Permit its average daily combined U.S. assets during any
calendar quarter to exceed its average daily combined U.S. assets
during the preceding calendar quarter by more than 5 percent;
(ii) Permit its average daily combined U.S. assets during any
calendar year to exceed its average daily combined U.S. assets during
the preceding calendar year by more than 5 percent;
(iii) Permit its average daily risk-weighted assets during any
calendar quarter to exceed its average daily risk-weighted assets
during the preceding calendar quarter by more than 5 percent; or
(iv) Permit its average daily risk-weighted assets during any
calendar year to exceed its average daily risk-weighted assets during
the preceding calendar year by more than 5 percent.
(4) A foreign banking organization subject to level 2 remediation:
(i) May not directly or indirectly acquire any controlling interest
in any U.S. company (including an insured depository institution),
establish or acquire any U.S. branch, U.S. agency, or representative
office in the United States, or engage in any new line of business in
the United States, without the prior approval of the Board; and
(ii) Must enter into a non-public memorandum of understanding or
other enforcement action acceptable to the Board to improve its
financial and managerial condition in the United States.
(5) The Board may, in its discretion, impose additional limitations
or conditions on the conduct or activities of the combined U.S.
operations of a foreign banking organization subject to level 2
remediation that the Board finds to be appropriate and consistent with
the purposes of Title I of the Dodd-Frank Act.
(c) Level 3 remediation (recovery). (1) A foreign banking
organization with combined U.S. assets of $50 billion or more that is
subject to level 3 remediation and its U.S. intermediate holding
company must enter into a written agreement or other formal enforcement
action with the Board that specifies that the U.S. intermediate holding
company must take appropriate actions to restore its capital to or
above the applicable minimum risk-based and leverage requirements under
subpart L of this part and take such other remedial actions as
prescribed by the Board. If the company fails to satisfy the
requirements of such a written agreement, the company may be required
to divest assets identified by the Board as contributing to the
financial decline or posing substantial risk of contributing to further
financial decline of the company.
(2) The U.S. intermediate holding company and any other U.S.
subsidiary of the foreign banking organization may not make capital
distributions.
(3) The combined U.S. operations of a foreign banking organization
subject to level 3 remediation may not:
(i) Permit its average daily combined U.S. assets during any
calendar quarter to exceed its average daily combined U.S. assets
during the preceding calendar quarter;
(ii) Permit its average daily combined U.S. assets during any
calendar year to exceed its average daily combined U.S. assets during
the preceding calendar year;
(iii) Permit its average daily risk-weighted assets during any
calendar quarter to exceed its average daily risk-weighted assets
during the preceding calendar quarter; or
(iv) Permit its average daily risk-weighted assets during any
calendar year to exceed its average daily risk-weighted assets during
the preceding calendar year.
(4) A foreign banking organization subject to level 3 remediation
may not directly or indirectly acquire any controlling interest in any
U.S. company (including an insured depository institution), establish
or acquire any U.S. branch, U.S. agency, office, or other place of
business in the United States, or engage in any new line of business in
the United States, without the prior approval of the Board.
(5) A foreign banking organization subject to level 3 remediation
and its U.S. intermediate holding company may not increase the
compensation of, or pay any bonus to, an executive officer whose
primary responsibility pertains to any part of the combined U.S.
operations, or any member of the board of directors (or its equivalent)
of the U.S. intermediate holding company.
(6) The U.S. intermediate holding company of a foreign banking
organization subject to level 3 remediation may also be required by the
Board to:
(i) Replace the U.S. intermediate holding company's board of
directors;
(ii) Dismiss from office any executive officer whose primary
responsibility pertains to any part of the combined U.S. operations or
member of the U.S. intermediate holding company's board of directors
who held office for more than 180 days immediately prior to receipt of
notice pursuant to Sec. 252.283 of this subpart that the foreign
banking organization is subject to level 3 remediation; or
(iii) Add qualified U.S. senior executive officers subject to
approval by the Board.
(7) The U.S. branch and agency network of a foreign banking
organization subject to level 3 remediation must not provide funding to
the foreign banking organization's non-U.S. offices and its non-U.S.
affiliates, calculated on a daily basis, and must maintain on a daily
basis eligible assets in an amount not less
[[Page 76704]]
than 108 percent of the preceding quarter's average value of the U.S.
branch and agency network's liabilities.
(8) The Board may, in its discretion, impose additional limitations
or conditions on the conduct or activities of the combined U.S.
operations of a foreign banking organization subject to level 3
remediation that the Board finds to be appropriate and consistent with
the purposes of Title I of the Dodd-Frank Act, including restrictions
on transactions with affiliates.
(d) Level 4 remediation (resolution assessment). The Board will
consider whether the combined U.S. operations of the foreign banking
organization warrant termination or resolution based on the financial
decline of the combined U.S. operations, the factors contained in
section 203 of the Dodd-Frank Act as applicable, or any other relevant
factor. If such a determination is made, the Board will take actions
that include recommending to the appropriate financial regulatory
agencies that an entity within the U.S. branch and agency network be
terminated or that a U.S. subsidiary be resolved.
Sec. 252.285 Remediation actions for foreign banking organizations
with total consolidated assets of $50 billion or more and with combined
U.S. assets of less than $50 billion.
(a) Level 1 remediation (heightened supervisory review). (1) Under
level 1 remediation, the Board will determine whether to conduct a
targeted supervisory review of the combined U.S. operations of a
foreign banking organization with total consolidated assets of $50
billion or more and with combined U.S. assets of less than $50 billion
that takes into account the condition of the foreign banking
organization on a consolidated basis, as appropriate, to evaluate
whether the combined U.S. operations are experiencing financial
distress or material risk management weaknesses such that further
decline of the combined U.S. operations is probable.
(2) If, upon completion of the review, the Board determines that
the combined U.S. operations are experiencing financial distress or
material risk management weaknesses such that further decline of the
combined U.S. operations is probable, the Board may subject the foreign
banking organization to initial remediation (level 2 remediation) or
other remedial actions as the Board determines appropriate.
(b) Level 2 remediation (initial remediation). The Board will
determine, in its discretion, whether to impose any of the standards
set forth in Sec. 252.284(b)(1) through (5) of this subpart on any
part of the combined U.S. operations of a foreign banking organization
with total consolidated assets of $50 billion or more and with combined
U.S. assets of less than $50 billion that is subject to level 2
remediation.
(c) Level 3 remediation (recovery). The Board will determine, in
its discretion, whether to impose any of the standards set forth in
Sec. 252.284(c)(1) through (8) of this subpart on any part of the U.S.
operations of a foreign banking organization with total consolidated
assets of $50 billion or more and with combined U.S. assets of less
than $50 billion that is subject to level 3 remediation.
(d) Level 4 remediation (resolution assessment). The Board will
consider whether the combined U.S. operations of the foreign banking
organization warrant termination or resolution based on the financial
decline of the combined U.S. operations, the factors contained in
section 203 of the Dodd-Frank Act as applicable, or any other relevant
factor. If such a determination is made, the Board will take actions
that include recommending to the appropriate financial regulatory
agencies that an entity within the U.S. branch and agency network be
terminated or that a U.S. subsidiary be resolved.
By order of the Board of Governors of the Federal Reserve
System, December 17, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-30734 Filed 12-27-12; 8:45 am]
BILLING CODE 6210-01-P