[Federal Register Volume 81, Number 124 (Tuesday, June 28, 2016)]
[Proposed Rules]
[Pages 41877-41886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15096]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 81, No. 124 / Tuesday, June 28, 2016 / 
Proposed Rules  

[[Page 41877]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 347

RIN 3064-AE36


Alternatives to References to Credit Ratings With Respect to 
Permissible Activities for Foreign Branches of Insured State Nonmember 
Banks and Pledge of Assets by Insured Domestic Branches of Foreign 
Banks

AGENCY: Federal Deposit Insurance Corporation (``FDIC'').

ACTION: Notice of Proposed Rulemaking (``NPR'').

-----------------------------------------------------------------------

SUMMARY: The FDIC is seeking public comment on a proposed rule to amend 
its international banking regulations (``Part 347'') consistent with 
section 939A (``section 939A'') of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act'') and the FDIC's 
authority under section 5(c) of the Federal Deposit Insurance Act 
(``FDI Act''). Section 939A directs each federal agency to review and 
modify regulations that reference credit ratings. The proposed rule 
would amend the provisions of subparts A and B of Part 347 that 
reference credit ratings. Subpart A, which sets forth the FDIC's 
requirements for insured state nonmember banks that operate foreign 
branches, would be amended to replace references to credit ratings in 
the definition of ``investment grade'' with a standard of 
creditworthiness that has been adopted in other federal regulations 
that conform with section 939A. Subpart B would be amended to revise 
the FDIC's asset pledge requirement for insured U.S. branches of 
foreign banks. The eligibility criteria for the types of assets that 
foreign banks may pledge would be amended by replacing the references 
to credit ratings with the revised definition of ``investment grade.'' 
The proposed rule would apply this investment grade standard to each 
type of pledgeable asset, establish a liquidity requirement for such 
assets, and subject them to a fair value discount. The proposed rule 
would also introduce cash as a new asset type that foreign banks may 
pledge under subpart B and create a separate asset category expressly 
for debt securities issued by government sponsored enterprises.

DATES: Comments must be received by August 29, 2016.

ADDRESSES: You may submit comments, identified by RIN 3064-AE36, by any 
of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the Agency Web 
site.
     Email: [email protected]. Include the RIN 3064-AE36 on the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7:00 a.m. and 5:00 p.m.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Public Inspection: All comments received must include the 
agency name and RIN 3064-AE36 for this rulemaking. All comments 
received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. 
Paper copies of public comments may be ordered from the FDIC Public 
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, 
VA 22226 by telephone at 1 (877) 275-3342 or 1 (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Eric Reither, Senior Capital Markets 
Specialist, Capital Markets Branch, Division of Risk Management 
Supervision, [email protected]; Lanu Duffy, Senior International 
Advisor, International Affairs Branch, Division of Insurance and 
Research, [email protected]; Catherine Topping, Counsel, 
[email protected]; Benjamin Klein, Senior Attorney, [email protected], 
Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Policy Objectives

    The intent of the proposed rule is to conform part 347 with section 
939A's directive to reduce reliance on credit ratings. By removing 
references to credit ratings in part 347 and adopting an alternative 
standard of creditworthiness, the proposed rule would encourage 
regular, in-depth analysis of the credit risks associated with specific 
types of securities held by foreign branches of state nonmember banks 
under subpart A, or pledged for the benefit of the FDIC by the insured 
U.S. branches of foreign banks under subpart B. The proposed rule 
supports these objectives by establishing an ``investment grade'' 
definition that would be applied in both subparts A and B.
    The financial crisis in 2008 highlighted the importance of 
considering the liquidity of a security when assessing its overall 
risk. To address this concern, the proposed revisions to the asset 
pledge requirement in subpart B would include the application of a 
liquidity standard to the securities pledged to the FDIC by the insured 
U.S. branches of foreign banks, and would subject such pledged assets 
to a fair value discount. These amendments would support the objective 
of the asset pledge requirement, which is to ensure orderly asset 
liquidation at maximum value in the event such assets need to be 
liquidated to pay the insured deposits of the U.S. branch of the 
foreign bank.

II. Background

    In the decades prior to the financial crisis in 2008, third party 
credit risk assessments by nationally recognized statistical ratings 
organizations (``NRSROs'') helped to provide transparency and 
efficiency to the securities markets. Their assessments of 
creditworthiness allowed originators and investors to more accurately 
and readily meet their risk tolerances and investment strategies. Many 
financial regulations used these external credit risk ratings to set 
limits on the activities of regulated entities in order to foster safe 
and sound investment practices. However, during the run up to the 
crisis many regulated institutions overly relied on the credit risk 
assessments of NRSROs, often neglecting to do a thorough analysis of 
their own. At the same time, flaws in the NRSROs' business model 
(including certain commercial relationships with the originators of 
securities and strong competition by NRSROs for market

[[Page 41878]]

share) undermined the accuracy of the credit ratings. Consequently, 
many investors, including banking organizations, experienced 
significant losses on securities with ratings that implied credit 
losses would be very unlikely and minimal. This prompted Congress to 
enact section 939A, which directs each federal agency to review and 
modify regulations that reference credit ratings.
    Section 939A \1\ requires each federal agency to review its 
regulations that require the use of an assessment of creditworthiness 
of a security or money market instrument and any references to or 
requirements in such regulations regarding credit ratings. Each agency 
must modify its regulations identified in the review by removing 
references to, or requirements of reliance on, credit ratings and 
substituting appropriate standards of creditworthiness.
---------------------------------------------------------------------------

    \1\ Pub. L. 111-203, section 939A, 124 Stat. 1376, 1887 (July 
21, 2010).
---------------------------------------------------------------------------

Subpart A of Part 347--Foreign Banking and Investment by Insured State 
Nonmember Banks

    Subpart A of part 347, 12 CFR 347.101, et seq., addresses the 
international banking and investment activities of state nonmember 
banks, including the establishment and operations of foreign branches 
and subsidiaries.\2\ In general, these regulations implement the FDIC's 
statutory authority under section 18(d)(2) of the FDI Act \3\ regarding 
branches of insured state nonmember banks in foreign countries, and 
section 18(l) of the FDI Act \4\ regarding insured state nonmember bank 
investments in foreign entities.
---------------------------------------------------------------------------

    \2\ A state nonmember bank may establish a non-U.S. branch with 
the approval of the FDIC (12 U.S.C. 1828(d)(2)). National banks must 
gain the approval of the Board of Governors of the Federal Reserve 
System (``Federal Reserve'') to open a non-U.S. branch. These 
branches may engage in any activity that is permitted in the United 
States, as well as those that are usual in connection with the 
banking business in the foreign country where it is located. State 
member banks may establish foreign branches with the approval of the 
Federal Reserve. U.S. banking organizations may also conduct 
international banking activities through Edge and agreement 
corporations. (12 U.S.C. 611-631) (``Edge corporations''); (12 
U.S.C. 601-604(a) (``agreement corporations'').
    \3\ 12 U.S.C. 1828(d)(2).
    \4\ 12 U.S.C. 1828(l).
---------------------------------------------------------------------------

    In addition to their general banking powers, banks with foreign 
branches are permitted to conduct a broad range of investment 
activities, including investment services and underwriting of debt and 
equity securities.\5\ Under 12 CFR 347.115(b), a foreign branch of a 
bank may invest in, underwrite, distribute and deal, or trade foreign 
government obligations that have an investment grade rating, up to an 
aggregate limit of ten percent of the bank's Tier 1 capital, as 
calculated under the Basel III capital rules in 12 CFR part 324, 
subpart C.\6\ Section 347.102(o) currently defines ``investment grade'' 
to mean a security that is rated in one of the four highest categories 
by two or more NRSROs or one NRSRO if the security is rated by only one 
NRSRO.\7\
---------------------------------------------------------------------------

    \5\ The limitations on international investments and the 
definition of permissible activities found in the FDIC's regulations 
in part 347 are similar to, but not exactly, those found in 
Regulation K of the Federal Reserve.
    \6\ 12 CFR 324.20, et seq.
    \7\ An NRSRO is an entity registered with the U.S. Securities 
and Exchange Commission as an NRSRO under section 15E of the 
Securities Exchange Act of 1934. See 15 U.S.C. 78o-7, as implemented 
by 17 CFR 240.17g-1.
---------------------------------------------------------------------------

Subpart B of Part 347--Foreign Banks

    The regulations contained in subpart B of part 347 primarily 
implement provisions of the FDI Act and the International Banking Act 
(``IBA'') \8\ concerning insured and noninsured U.S. branches of 
foreign banks.\9\ Each foreign banking organization maintaining an 
insured branch must comply with specific FDIC asset maintenance \10\ 
and asset pledge requirements under section 5(c) of the FDI Act. These 
requirements are separate and apart from other capital equivalency 
requirements of the federal or state licensing authorities.\11\ The 
FDIC no longer insures the deposits accepted by branches of foreign 
banks, except for deposits made in branches of foreign banks that are 
insured by operation of the grandfathering provisions of the IBA, as 
amended by the Foreign Bank Supervision Enhancement Act of 1991 
(``FBSEA'').\12\ The universe of these grandfathered branches is very 
limited. There are currently only ten insured U.S. branches of foreign 
banks in operation (four federal branches and six state branches). A 
foreign bank that has an insured branch must pledge assets for the 
benefit of the FDIC to protect the DIF in the event the FDIC is 
obligated to pay the insured deposits of an insured branch under 
section 11(f) of the FDI Act.\13\ Section 347.209(d) provides a list of 
the types of assets that a foreign bank may pledge for the benefit of 
the FDIC. In describing certain asset types, 12 CFR 347.209(d) 
references credit ratings issued by a nationally recognized rating 
service in connection with a determination of the credit quality of the 
assets that a foreign bank may pledge.
---------------------------------------------------------------------------

    \8\ Pub. L. 95-369, 92 Stat. 607 (Sept. 17, 1978) (codified at 
12 U.S.C. 3101 et seq.).
    \9\ U.S. branches of foreign banks may be licensed by the Office 
of the Comptroller of the Currency (``OCC'') or by an individual 
state. The Federal Reserve is required to approve any new foreign 
bank branch. The Federal Reserve, among other things, is required to 
certify that the country from which the foreign bank is located 
subjects its banks, including the applicant, to comprehensive, 
consolidated supervision. 12 U.S.C. 3105(d).
    \10\ The FDIC requires that an insured branch of a foreign bank 
maintain, on a daily basis, eligible U.S. dollar-denominated assets 
in an amount not less than 106% of the preceding quarter's average 
book value of the branch's liabilities excluding those due to other 
offices or wholly owned subsidiaries of the foreign bank. 12 CFR 
347.210.
    \11\ Although U.S. branches and agencies of foreign banks have 
no capital of their own, those that are federally licensed must 
deposit cash or eligible securities at approved insured banks to 
satisfy the ``capital equivalency requirement'' specified by the 
IBA. The amount of the deposit is required to be at least 5% of the 
total liabilities of the branch or agency office, or the capital 
that would be required if it were a freestanding national bank. 12 
U.S.C. 3102(g)(2). The underlying purpose of the IBA provision is to 
ensure that branches and agencies of a foreign bank maintain a 
minimum level of unencumbered assets in the United States that would 
be available in a liquidation of the branch or agency. State-
licensed branches and agencies also must meet capital equivalency 
requirements, which vary from state to state. See, e.g., N.Y. 
Banking Law Sec.  202-b.
    \12\ Since the enactment of FBSEA, a foreign bank seeking to 
accept retail deposits (initial deposits under $250,000) in the 
United States may do so only by establishing a U.S. subsidiary bank 
(or savings association) whose deposits are insured by the FDIC. 
Before FBSEA, a small number of foreign bank branches had obtained 
FDIC insurance under the provisions of the IBA and thus were 
permitted to accept retail deposits. These branches (insured 
branches) are ``grandfathered'', i.e., they may continue to receive 
insured retail deposits pursuant to section 6(d)(2) of the IBA (12 
U.S.C. 3104(d)(2)).
    \13\ 12 U.S.C. 1821(f).
---------------------------------------------------------------------------

    The proposed amendments and revisions are discussed below, by 
subpart. The FDIC invites public comment on all aspects of the 
proposal, including the potential costs and benefits of the proposed 
rule.\14\
---------------------------------------------------------------------------

    \14\ The Economic Growth and Regulatory Paperwork Reduction Act 
of 1996 (``EGRPRA'') requires that regulations prescribed by the 
Federal Financial Institutions Examination Council, OCC, FDIC, and 
Federal Reserve (collectively, the Agencies) be reviewed by the 
Agencies to identify outdated, unnecessary, or unduly burdensome 
regulations. The EGRPRA review is currently ongoing, and will be 
conducted in four separate notices, with each notice focusing on 
certain categories of regulations. The first notice, published on 
June 4, 2014, included a review of part 347, subpart A. 79 FR 32172 
(June 4, 2014). The FDIC received one comment on part 347, subpart 
A, where the commenter requested that the Agencies increase the 
capital-based limits on investments in foreign organizations. The 
FDIC is considering this comment as part of its EGRPRA review 
efforts, and not as a part of this proposed rulemaking.
---------------------------------------------------------------------------

III. Description of the Proposed Revisions to Part 347--International 
Banking Subpart A--Foreign Banking and Investment by Insured State 
Nonmember Banks

A. Section 347.102. Definitions

    The FDIC's rules in 12 CFR 347.102(o) define the term ``investment 
grade'' as a

[[Page 41879]]

security that is rated in one of the four highest categories by two or 
more NRSROs; or one NRSRO if the security is rated by only one NRSRO. 
The proposed rule would amend the definition of ``investment grade'' by 
deleting the references to credit ratings and NRSROs. The new 
definition in the proposed rule would define ``investment grade'' as a 
security whose issuer has adequate capacity to meet all financial 
commitments under the security for the projected life of the exposure. 
Such an entity has adequate capacity to meet financial commitments if 
the risk of its default is low and the full and timely repayment of 
principal and interest is expected.

B. Section 347.115. Permissible Activities for a Foreign Branch of an 
Insured State Nonmember Bank

    Section 347.115 defines the particular activities that a foreign 
branch of an insured state nonmember bank may conduct. These activities 
are subject to safety and soundness limitations and are limited by the 
extent to which the activities are consistent with banking practices in 
the foreign country where the bank maintains a branch. The proposed 
rule would retain the language of 12 CFR 347.115(b), but Sec.  
347.115(b) would be affected by the proposed rule insofar as Sec.  
347.115(b) uses the proposed definition of the term ``investment 
grade'' in 12 CFR 347.102(o). Section 347.115(b) allows the foreign 
branch of an insured state nonmember bank to engage in certain types of 
transactions with respect to the obligations of foreign countries, so 
long as aggregate investments, securities held in connection with 
distribution and dealing, and underwriting commitments do not exceed 
ten percent of the bank's Tier 1 capital. More specifically, a foreign 
branch of a bank may underwrite, distribute and deal, invest in, or 
trade obligations of the national government of the country in which 
the branch is located, as well as obligations of political subdivisions 
of such national government, and certain agencies or instrumentalities 
of such national government. Furthermore, foreign branches may, subject 
to the law of the issuing foreign country, underwrite, distribute and 
deal, invest in, or trade investment grade obligations of other foreign 
countries, political subdivisions, and certain agencies and 
instrumentalities. As provided for in the existing rule, if the 
obligation is an equity interest, it must be held through a subsidiary 
of the foreign branch and the insured state nonmember bank must meet 
its minimum capital requirements.
    The definition of ``investment grade'' for obligations of 
governments other than the host government was adopted in 2005 when the 
FDIC amended its international banking regulations, part 347.\15\ The 
definition was derived from the limitations and definitions of 
Regulation K of the Federal Reserve, which governs the international 
operations of foreign branches of member banks. Under the Federal 
Reserve regulations, a foreign branch of a member bank may underwrite, 
distribute, buy, sell, and hold certain government debt obligations 
only if such obligations are rated investment grade.\16\ The Federal 
Reserve adopted the definition of investment grade in its revisions to 
Regulation K in 2001. The investment grade rating requirement for 
obligations of governments other than the host government was 
considered appropriate because it limited cross-border transfer 
risk.\17\
---------------------------------------------------------------------------

    \15\ 70 FR 17550 (April 6, 2005).
    \16\ See 12 CFR 211.4(a)(2)(C)-(D) (providing that a foreign 
branch of a member bank may underwrite, distribute, buy, sell, and 
hold obligations of (1) the national government or political 
subdivision of any country, where such obligations are rated 
investment grade, and (2) an agency or instrumentality of any 
national government where such obligations are rated investment 
grade and are supported by the taxing authority, guarantee or full 
faith and credit of that government).
    \17\ 66 FR 54346 (Oct. 26, 2001).
---------------------------------------------------------------------------

    The revisions in the proposed rule to the regulatory definition of 
``investment grade'' will remove references to credit ratings 
consistent with section 939A but will not affect the general 
consistency between the Federal Reserve's Regulation K and the FDIC's 
part 347 with regard to permissible activities. For purposes of the 
proposed rule, an issuer would satisfy this requirement or new standard 
if the state nonmember bank appropriately determines that the obligor 
presents low default risk and is expected to make timely payments of 
principal and interest. The definition addresses the safety and 
soundness concerns of this activity of foreign branches--namely the 
exposure of the foreign branch and the DIF to the entity issuing the 
security--without reference to a credit rating or an NRSRO. The FDIC 
believes that the proposed standard provides a flexible, 
straightforward measure of creditworthiness that is consistent with 
existing policy.

C. Consistency With Other Federal Regulations

    The proposed definition of investment grade in 12 CFR 347.102(o) is 
consistent with the definition of investment grade that was adopted by 
the FDIC, OCC, and Federal Reserve in the promulgation of regulatory 
capital rules that implement the Basel III framework (``Basel III 
capital rules'').\18\ This definition is also consistent with the non-
ratings based, creditworthiness standard applicable to permissible 
corporate debt securities investments of savings associations adopted 
by the FDIC in 12 CFR part 362 \19\ and the credit quality standards 
regarding permissible investments for national banks adopted by the OCC 
under 12 CFR parts 1, 16, and 160.\20\ In addition, it is consistent 
with the final rules adopted by the OCC that remove references to 
credit ratings from its regulations pertaining to foreign bank capital 
equivalency deposits for federal branches under 12 CFR 28.15. The OCC's 
regulations previously allowed for the use of certificates of deposit 
(``CDs'') or bankers' acceptances as part of the deposit if the issuer 
of the instrument was rated ``investment grade'' by an internationally 
recognized rating organization. Under the revised regulation, the 
issuer of the certificate of deposit or banker's acceptance must have 
``an adequate capacity to meet financial commitments under the security 
for the projected life of the asset or exposure.'' \21\
---------------------------------------------------------------------------

    \18\ See 78 FR 62018 (Oct. 11, 2013) (Federal Reserve and OCC) 
(final rule); 78 FR 55340 (Sept. 10, 2013)(interim final 
rule)(FDIC); 79 FR 20754 (April 14, 2014)(final rule)(FDIC). In 
finalizing the Basel III capital rules, Federal Reserve and OCC 
issued a joint final rule, and the FDIC separately issued a 
substantively identical interim final rule, which was later made 
final without substantive changes.
    \19\ See Permissible Investments for Federal and State Savings 
Associations: Corporate Debt Securities, 77 FR 43151 (July 24, 
2012).
    \20\ See Alternatives to the Use of External Credit Ratings in 
the Regulations of the OCC, 77 FR 35253 (June 13, 2012).
    \21\ See Alternatives to the Use of External Credit Ratings in 
the Regulations of the OCC, 77 FR 35253 (June 13, 2012).
---------------------------------------------------------------------------

D. Request for Comment

    This NPR seeks comment on whether:
     This standard of creditworthiness is sufficient to address 
safety and soundness concerns of this activity of foreign branches of 
state nonmember banks regarding exposure to obligations of foreign 
countries, and
     The proposed revisions would address the FDIC's objective 
of applying a standard of creditworthiness, other than the exclusive 
use of credit ratings, that is transparent, well defined, 
differentiates credit risk, and provides for the timely measurement of 
changes to the credit profile of the investment.

[[Page 41880]]

IV. Description of the Proposed Revisions to Part 347--International 
Banking Subpart B--Foreign Banks

A. Section 347.209. Pledge of Assets

    The asset pledge requirement in 12 CFR 347.209 applies to insured 
U.S. branches of foreign banks. There are ten such branches that exist 
by authority of the statutory grandfathering established by FBSEA.\22\ 
The foreign banks that have branches covered by this grandfathering 
must pledge assets for the benefit of the FDIC.\23\ The amount that 
each foreign bank must pledge is determined by the supervisory risk 
posed by each U.S. branch and the U.S. branch's asset maintenance 
level.\24\ The amount of assets that a U.S. branch of a foreign bank 
must pledge varies from two percent to eight percent of the branch's 
liabilities and is determined by reference to the risk-based assessment 
schedule provided in 12 CFR 347.209(b)(1).
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 3104(d).
    \23\ The pledged assets must be placed at a depository approved 
by the FDIC. Generally, each insured branch of the foreign bank must 
meet the asset pledge requirement separately; however, a foreign 
bank with more than one insured branch in any state may treat all of 
its insured branches in the state as one entity for purposes of 
complying with this requirement. See 12 CFR 347.209(b)(5).
    \24\ 12 CFR 347.209(b). Generally, an insured branch must 
maintain a level of assets that exceeds 106 percent of its 
liabilities. 12 CFR 347.210.
---------------------------------------------------------------------------

    FDIC rules in 12 CFR 347.209(d) describe the types of assets that 
may be pledged, and require that certain of these asset types have 
credit ratings within the top rating bands of an NRSRO. Under the 
existing rule, commercial paper may be eligible for pledging purposes 
if it is rated P-1 or P-2, or their equivalent, by an NRSRO.\25\ 
Municipal general obligations are eligible under the existing rule if 
they have a credit rating within the top two rating bands of a NRSRO. 
Notes issued by bank and thrift holding companies, banks, or savings 
associations must also be rated within the top two rating bands of an 
NRSRO in order to be eligible under the asset pledge requirement of the 
existing rule. The other types of eligible assets, which must be U.S. 
dollar denominated, are: bank CDs with maturities of not greater than 
one year; Treasury bills, interest bearing bonds, notes, debentures, or 
other direct obligations of or fully guaranteed by the United States or 
any agency thereof; banker's acceptances with a maturity not greater 
than 180 days; and obligations of certain international development 
banks.\26\
---------------------------------------------------------------------------

    \25\ P-1 and P-2 are Moody's top two rating bands for short-term 
obligations.
    \26\ See 12 CFR 347.209(d)(1), (2), (5), and (6).
---------------------------------------------------------------------------

    The FDIC's asset pledge requirement has been in place since 1978. 
The FDIC adopted the current risk-based, asset pledge requirements in 
part 347 in 2005.\27\ The asset pledge requirement was established to 
provide the DIF protection against losses on insured deposit claims by 
depositors of U.S. branches of foreign banks. Since the adoption of its 
initial foreign banking regulation implementing the IBA and FDI Act's 
requirements, the FDIC has focused on the quality and marketability of 
assets pledged, as well as the assurance of payment within the United 
States, in determining whether the assets are acceptable to be 
pledged.\28\ The FDIC has made clear that the essence of the asset 
pledge requirement is that pledged assets be as free from risk and as 
liquid as possible in order to provide protection to the DIF.\29\
---------------------------------------------------------------------------

    \27\ 70 FR 17550 (April 6, 2005).
    \28\ See 43 FR 60279,60281 (Dec. 27, 1978).
    \29\ See 49 FR 49614, 49615 (Dec. 21, 1984).
---------------------------------------------------------------------------

    Under the FDIC's deposit insurance authority in the FDI Act, the 
FDIC may impose requirements determined to be necessary to mitigate the 
risks associated with providing deposit insurance to an insured U.S. 
branch of a foreign bank. Consistent with section 939A and the FDIC's 
authority in the FDI Act, the proposed rule would revise the categories 
of assets in 12 CFR 347.209(d) that may be used for pledging. In so 
doing, the proposed rule would remove the references to credit ratings 
issued by NRSROs and substitute an investment grade standard to ensure 
the assets have appropriate credit quality. In addition, the proposed 
rule would permit only highly liquid assets to be pledged, and would 
submit these instruments to fair value haircuts. The three instances in 
subpart B that must be revised contain references not to investment 
grade ratings, but to the highest subset of rating bands within the 
investment grade categories established by the ratings agencies. In 
other words, subpart B embodies a standard for protection of the DIF 
from the pledged assets that goes beyond that of simply being 
investment grade. The FDIC believes that adopting the investment grade 
and highly liquid criteria, as well as the fair value haircut, would 
ensure that pledged assets continue to provide a high degree of 
protection to the DIF. The proposed credit and liquidity standards are 
discussed below.
Credit and Liquidity Standards
    Under the proposed rule, instruments falling within the relevant 
asset categories would be eligible for pledging if they are 
``investment grade.'' The proposed rule would add the definition of 
``investment grade'' to the definitions section of subpart B, 12 CFR 
347.202. Consistent with the proposed amendment to subpart A of part 
347, the proposed rule would define ``investment grade'' as a security 
issued by an entity that has adequate capacity to meet financial 
commitments under the security for the projected life of the security 
or exposure. To meet this standard for asset pledge purposes, the 
insured branch or foreign bank would need to determine whether the risk 
of default by the obligor is low and full and timely repayment of 
principal and interest is expected. Using this ``investment grade'' 
standard as defined would be consistent with existing regulations and 
policies.\30\
---------------------------------------------------------------------------

    \30\ The investment grade standard is consistent with that 
adopted by the FDIC, OCC, and Federal Reserve in their issuance of 
Basel III capital rules; as adopted by the OCC under 12 CFR parts 1, 
16, 28, 160; and as adopted by the FDIC under part 362 for corporate 
bonds held by savings associations.
---------------------------------------------------------------------------

    Also, under the proposed rule, instruments falling within the 
relevant asset categories would be eligible for pledging only if they 
are ``highly liquid.'' The proposed rule would define ``highly liquid'' 
securities as those that:
     Exhibit low credit and market risk;
     are 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
     are a type of asset that investors historically have 
purchased in periods of financial market distress during which market 
liquidity has been impaired.\31\
---------------------------------------------------------------------------

    \31\ The definition of a highly liquid asset is consistent with 
the definition established in 12 CFR part 252 subpart O Enhanced 
Prudential Standards for Foreign Banking Organizations (The Federal 
Reserve's Regulation YY).

    A foreign bank would be required to demonstrate that the instrument 
meets the highly liquid standard.
Fair Value Discount
    In addition, the FDIC is proposing that the fair values of the 
investment grade and highly liquid pledged assets be discounted to 
reflect the credit risk and market price volatility of the asset. The 
discounted fair value of the assets would determine the pledged dollar 
amount. The FDIC would expect that the valuations of the pledged assets 
be updated at least quarterly. Quarterly valuation updates are 
consistent with

[[Page 41881]]

the quarterly valuations currently required in the pledge agreement 
between each of the foreign banks and the FDIC.\32\ The proposed method 
for discounting fair values is consistent with the haircuts applied to 
financial collateral pledged to certain transactions under the Basel 
III capital rules as adopted by the FDIC.\33\
---------------------------------------------------------------------------

    \32\ 12 CFR 347.209(e) provides that a foreign bank shall not 
pledge any assets unless a pledge agreement in a form and substance 
satisfactory to the FDIC has been executed by the foreign bank and 
the depository.
    \33\ FDIC-supervised institutions may use the risk-mitigating 
effects of financial collateral, subject to a market price 
volatility haircut, in determining the exposure amount of such 
transactions for risk-weighting purposes. See 79 FR 20760 (April 14, 
2014).
---------------------------------------------------------------------------

    Further, the FDIC proposes to include a standardized haircut table, 
consistent with the Basel III capital rules, to promote simplicity and 
ease of reference.\34\ Under this approach, the applicable haircut 
would be determined by reference to the asset's risk-weight and 
remaining maturity.\35\ For example, a foreign insured branch may elect 
to pledge investment grade commercial paper with a fair value of 
$100,000 and remaining maturity of less than one year. These 
instruments are risk-weighted at 100 percent under the Basel III 
capital rules. Under the proposed reference table, the corresponding 
haircut would be 4 percent; therefore, the amount of the $100,000 asset 
that would count towards the satisfaction of the asset pledge 
requirement would be $100,000 multiplied by 0.96 (1 - 0.04), or 
$96,000. Consistent with the haircut requirements in the risk-based 
capital rules, pledged assets that receive a zero percent risk weight 
will generally not require a fair value haircut.\36\
---------------------------------------------------------------------------

    \34\ In 12 CFR 324.37(c)(3), the FDIC established requirements 
for applying standardized haircuts for market price volatility which 
are scheduled on Table 1 to Sec.  324.37--Standard Supervisory 
Market Price Volatility Haircuts (Table 1). A portion of Table 1 
concerning haircuts for non-sovereign issuers serves as the basis 
for the reference table included in the proposed rule.
    \35\ See 12 CFR 324.32 for general risk weights.
    \36\ Assets with zero percent risk weight include cash; Treasury 
bills, interest bearing bonds, notes, debentures, or other direct 
obligations of or obligations fully guaranteed as to principal and 
interest by the United States or any agency thereof; and obligations 
of the African Development Bank, Asian Development Bank, Inter-
American Development Bank, and the International Bank for 
Reconstruction and Development.
---------------------------------------------------------------------------

Assets That May Be Pledged
    The proposed rule also amends 12 CFR 347.209(d) by adding cash as a 
new asset type that foreign banks may pledge under subpart B and 
creating a separate asset category expressly for debt securities issued 
by government sponsored enterprises (``GSEs''). Cash and securities 
issued by GSEs are included in the definition of highly liquid assets 
in the Federal Reserve's regulation prescribing enhanced prudential 
standards for foreign banking organizations.\37\ With respect to debt 
securities issued by GSEs, the FDIC understands that some insured 
branches of foreign banks currently pledge such instruments under 12 
CFR 347.209(d)(2) because they qualify as obligations of a U.S. 
government ``instrumentality.'' The Basel III capital rules recognize 
that the risk characteristics of GSE securities differ from those 
guaranteed by the U.S. government. The capital rules bear this out by 
assigning the former a twenty percent risk weight and the latter a zero 
percent risk weight.\38\ Therefore, the proposed rule would eliminate 
the reference to obligations of U.S. ``instrumentalities'' in 12 CFR 
347.209(d)(2), and would create a separate category expressly for GSE 
securities. Creating a separate category for GSE securities is 
necessary because such securities would be subject to a haircut under 
the proposed rule to account for their twenty percent risk weight under 
the Basel III capital rules, whereas securities guaranteed by the U.S. 
government would not be subject to a haircut given their zero percent 
risk weight.
---------------------------------------------------------------------------

    \37\ 12 CFR part 252 subpart O.
    \38\ 12 CFR 324.32(a) and (c).
---------------------------------------------------------------------------

    Under the proposed rule, a foreign bank would be permitted to 
pledge the assets listed below, provided that such assets are 
denominated in United States dollars, and satisfy both the investment 
grade and highly liquid standards. Further, such assets would be 
discounted at the rates set forth in the haircut table.
    The proposed pledgeable asset categories include:
    (1) Cash;
    (2) Treasury bills, interest bearing bonds, notes, debentures, or 
other direct obligations of or obligations fully guaranteed as to 
principal and interest by the United States or any agency thereof;
    (3) Obligations of U.S. GSEs;
    (4) Negotiable CDs that are payable in the United States and that 
are issued by any state bank, national bank, state or federal savings 
association, or branch or agency of a foreign bank which has executed a 
valid waiver of offset agreement or similar debt instruments that are 
payable in the United States; provided, that the maturity of any 
certificate or issuance is not greater than one year; and provided 
further, that the issuing branch or agency of a foreign bank is not an 
affiliate of the pledging bank or from the same country as the pledging 
bank's domicile;
    (5) Obligations of the African Development Bank, Asian Development 
Bank, Inter-American Development Bank, and the International Bank for 
Reconstruction and Development;
    (6) Commercial paper;
    (7) Notes issued by bank and savings and loan holding companies, 
banks, or savings associations organized under the laws of the United 
States or any state thereof or notes issued by branches or agencies of 
foreign banks, provided that the notes are payable in the United 
States, and provided further, that the issuing branch or agency of a 
foreign bank is not an affiliate of the pledging bank or from the same 
country as the pledging bank's domicile;
    (8) Banker's acceptances that are payable in the United States and 
that are issued by any state bank, national bank, state or federal 
savings association, or branch or agency of a foreign bank; provided, 
that the maturity of any acceptance is not greater than 180 days; and 
provided further, that the branch or agency issuing the acceptance is 
not an affiliate of the pledging bank or from the same country as the 
pledging bank's domicile;
    (9) General obligations of any state of the United States, or any 
county or municipality of any state of the United States, or any 
agency, instrumentality, or political subdivision of the foregoing or 
any obligation guaranteed by a state of the United States or any county 
or municipality of any state of the United States; and
    (10) Any other asset determined by the FDIC to be acceptable.\39\
---------------------------------------------------------------------------

    \39\ The FDIC also reserves the right to require the 
substitution of pledged assets with other assets deemed more 
acceptable to the FDIC, as currently provided in 12 CFR 347.209(d).
---------------------------------------------------------------------------

    Cash, treasury bills or other direct obligations of or fully 
guaranteed by the United States or any agency thereof, and the 
obligations of the stated international development banks will 
categorically satisfy the investment grade and highly liquid standards 
discussed above.\40\ Therefore, foreign banks that pledge these assets 
will not be required to perform individual analyses to verify that the 
assets meet the investment grade and highly liquid standards. 
Pledgeable assets that receive

[[Page 41882]]

a zero percent risk weight will generally not require a fair value 
haircut.
---------------------------------------------------------------------------

    \40\ A direct debt obligation issued by a U.S. government-
sponsored enterprise or an asset-backed security guaranteed by a 
U.S. GSE will categorically satisfy the investment grade standard 
only if the GSE is operating with capital support or another form of 
direct financial assistance from the U.S. government. All GSEs will 
categorically satisfy the liquidity standard.
---------------------------------------------------------------------------

    Foreign banks pledging assets that do not categorically satisfy the 
investment grade and highly liquid standards, will need to demonstrate 
that the assets being pledged meet the investment grade and highly 
liquid standards. Foreign banks can find the appropriate haircut by 
identifying the risk weight associated with the asset in the capital 
rules. Although requiring foreign banks to verify that pledged assets 
satisfy these standards may require some adjustment of existing 
processes, the FDIC believes that it will impose minimal additional 
burden. The FDIC believes that conducting credit analysis on these 
instruments will ensure they satisfy the investment grade standard 
necessary for pledging. In addition, market data (e.g., price quotes, 
bid/ask spreads, trade activity levels, or other price discovery 
information) are accessible through an insured branch's normal data 
source channels used in pre-purchase and ongoing investment due 
diligence. These resources and others should be available to confirm 
whether the assets pledged meet the highly liquid asset standard.
    For purposes of carrying out the section 939A review related to 
subpart B, the FDIC surveyed the insured U.S. branches of foreign banks 
to examine the composition of assets pledged. At the time of the 
review, treasury bills, bank notes, and CDs were the primary 
instruments pledged. Consequently, the haircut provision could impact 
foreign banks that pledge bank notes or CDs because they may need to 
pledge additional collateral under the proposed rule compared with the 
pledge requirements under the existing rule. The FDIC views the 
proposed amendments to the pledgeable asset criteria as resulting in 
minimal impact on the insured U.S. branches of foreign banks.
Other Technical Revisions
    The proposed rule would also add a definition of ``agency'' to the 
definitions section of subpart B, 12 CFR 347.202, which already 
contains a definition of ``branch'' under the existing regulation, in 
order to clarify that negotiable CDs, banker's acceptances, and notes 
issued by a branch or agency of a foreign bank located only in the 
United States would be eligible for pledging. The definition is not 
currently in existing subpart B. The term agency is used in 12 CFR 
347.209(d)(1), (d)(4), and (d)(7) to describe the types of bank CDs, 
banker's acceptances, and notes issued by a branch or agency of a 
foreign bank that are eligible for pledging by a U.S. branch of a 
foreign bank. The proposed rule would use the definition of ``agency'' 
found in section 1(b)(1) of the IBA, which defines ``agency'' to mean 
``any office or any place of business of a foreign bank located in any 
State of the United States at which credit balances are maintained 
incidental to or arising out of the exercise of banking powers, checks 
are paid, or money is lent but at which deposits may not be accepted 
from citizens or residents of the United States''.\41\ This definition 
makes clear that only negotiable CDs, banker's acceptances, or notes 
issued by an agency of a foreign bank located in the United States are 
eligible pledged assets. The FDIC does not allow for the pledging of 
these instruments unless they are issued by an agency of a foreign bank 
located in the United States. It is also consistent with the definition 
of ``branch'' in subpart B, which means any office or place of business 
of a foreign bank located in any state of the United States.\42\ The 
proposed rule would also amend 12 CFR 347.209(d)(7) to remove the 
reference to ``United States'' in the description of branches or 
agencies of foreign banks because those terms as defined in existing 
subpart B, and as proposed, necessarily mean an office or place of 
business of a foreign bank located in the United States. Furthermore, 
the proposed rule would amend 12 CFR 347.209(d)(7) to clarify that, 
consistent with requirements associated with pledging CDs and banker's 
acceptances in (d)(1) and (d)(4), a pledging U.S. branch of a foreign 
bank may not pledge a note issued by a branch or agency of a foreign 
bank that has the same country of domicile as the pledging bank. This 
requirement avoids potential same-country risks represented by the 
branches and agencies as direct extensions of foreign banks.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 3101(1). The proposed definition is also 
consistent with the definition of agency in the Federal Reserve's 
and OCC's international banking regulations. See 12 CFR 211.21(b) 
(Federal Reserve) and 12 CFR 28.11(g) (OCC).
    \42\ 12 CFR 347.202(b).
---------------------------------------------------------------------------

    The FDIC proposes to amend the list of eligible collateral to 
eliminate the obsolete exception for non-negotiable CDs that were 
``pledged as collateral to the FDIC on March 18, 2005, until maturity 
according to the original terms of the existing deposit agreement.'' In 
2005, when the FDIC amended its international banking regulations in 
part 347, it adopted 12 CFR 347.209(d)(1)(i) requiring only negotiable 
CDs.\43\ The FDIC surveyed the composition of assets pledged by insured 
branches in 2005 before finalizing the regulations and found that only 
one branch had pledged a non-negotiable CD. In addition, the maturity 
date for any non-negotiable CD that was grandfathered under this 
provision has passed. Consequently, the provision by its terms is 
obsolete and no longer serves a useful purpose.
---------------------------------------------------------------------------

    \43\ 70 FR 17550 (April 6, 2005).
---------------------------------------------------------------------------

B. Request for Comment

    The FDIC seeks comment on all aspects of this proposal, and 
specifically whether:
     The proposed investment grade and liquidity standards and 
haircut requirements for pledged assets under subpart B of part 347 are 
reasonable provisions.
     The removal of references to external credit ratings 
required under section 939A should be implemented as proposed or 
whether there are alternatives that would achieve a creditworthiness 
standard that is sufficiently risk sensitive.
     Pledged assets should be subject to the highly liquid 
standard as proposed and whether the criteria for highly liquid assets 
provide reasonable standards of assurance, or whether other criteria 
should be considered in addition to, or in lieu of, the criteria 
proposed.
     Pledged assets be discounted as proposed, or whether the 
full fair values of assets pledged under the existing risk-based 
assessment schedule already provide sufficient protection to the DIF.
     Pledged assets should be discounted using the table of 
risk weights and remaining maturities as proposed, or whether pledged 
assets should be discounted by each foreign bank based on an internal 
assessment of any credit risk and market price volatility for each 
asset pledged.
     Another method of discounting would advance the objective 
of ensuring that pledged assets be as free from risk and as liquid as 
possible.
     The types of assets that may be pledged should be expanded 
to include cash and obligations of U.S. GSEs as proposed and whether 
these asset types constitute appropriate additions to the assets that 
currently may be pledged.
     There are any other asset types that should be considered 
for inclusion as a pledgeable asset.
     The proposed provisions would have a material economic 
impact on foreign banking organizations subject to part 347.
     Imposing the highly liquid standard and haircut 
requirement would cause undue regulatory burden.

[[Page 41883]]

V. Expected Effects

A. Subpart A

    The applicability of the proposed revision to subpart A of part 347 
would be limited to state nonmember banks that operate branches in 
foreign countries. As of March 31, 2016, there were nine state 
nonmember banks operating 16 foreign branches in seven countries. The 
majority of the state nonmember banks with foreign branches consist of 
larger multi-billion dollar financial institutions with commensurate 
systems and capabilities, while two of the foreign branches operated by 
the smaller state nonmember banks are limited-service facilities. The 
revision to subpart A would therefore apply to a small number of 
generally larger nonmember banks with more sophisticated operations, 
and the effect of the revision to the definition of ``investment 
grade'' would impose minimal additional burden. Note that prior to the 
enactment of the Dodd-Frank Act and implementation of section 939A, 
state nonmember banks were expected to have a credit risk management 
framework for securities and investments that included robust pre-
purchase analysis and ongoing monitoring by the banking organization. 
The proposed revision in subpart A will shift the focus away from 
reliance on credit ratings and onto this in-depth analysis and 
monitoring. The revision to the definition of ``investment grade'' in 
part 347 would encourage regular, in-depth analysis by the banking 
organization of credit risks of securities, which is a prudent practice 
already expected of banks. This would likely result in little or no 
additional costs associated with credit risk analysis over those 
currently expended. However, potential credit losses will likely 
decline as covered institutions are more diligent in assessing their 
credit risk exposure, which would provide a benefit.

B. Subpart B

    The revisions to subpart B of part 347 would apply only to the 
insured U.S. branches of foreign banks. As of March 31, 2016, there 
were ten insured branches of foreign banks. The FDIC would expect the 
revisions to subpart B to have the effect of ensuring that collateral 
pledged by these institutions is very low risk and as liquid as 
possible in order to provide protection to the DIF. The FDIC expects 
that these revisions would do so while imposing minimal additional 
burden and with little or no alteration of the composition or types of 
assets that insured branches of foreign banks currently pledge, or have 
pledged in the recent past, under the current provisions of subpart B.

VI. Alternatives Considered

    Section 939A requires that agencies adopt standards of 
creditworthiness that, to the extent feasible, are uniform. The 
adoption of an alternative definition of ``investment grade'' would be 
inconsistent with section 939A's directive to adopt uniform standards.
    In addition to adopting the definition of ``investment grade,'' the 
proposal would amend subpart B of part 347 to impose liquidity and 
discounting requirements for assets pledged by insured branches of 
foreign banks operating in the United States. Alternatives to the 
proposed definition of ``highly liquid'' would contradict the 
definition of highly liquid assets as adopted in other Dodd-Frank Act 
rulemakings, thereby creating different treatment of the same 
securities. Similarly, the calculation of fair value discounts for 
pledged assets is based on the risk weights assigned to such assets in 
the capital rules. The FDIC welcomes and requests public comment on all 
aspects of the proposed rule, including the presentation of 
alternatives that would advance the FDIC's objective of ensuring that 
assets pledged under subpart B of part 347 be free from risk and as 
liquid as possible in order to provide protection to the DIF.

VII. Regulatory Analyses

A. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (``PRA'') \44\ the FDIC may not conduct or sponsor, and the 
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 collection of information associated with 
subpart A is entitled Foreign Branching and Investment by Insured State 
Nonmember Banks (OMB No. 3064-0125). This information collection 
consists of applications related to establishing and closing a foreign 
branch; applications related to acquiring stock of a foreign 
organization; and records and reports which a nonmember bank must 
maintain once it has established a foreign branch or foreign 
organization. As described above, the proposed rule's revision to 
subpart A consists of a change to the definition of ``investment 
grade'' and imposes no additional reporting burden on insured state 
nonmember banks. Therefore, the FDIC expects that the PRA burden 
estimates of this collection will not be affected by this proposed 
rule. Accordingly, the FDIC will not be submitting any information 
collection request to OMB relating to the information collection 
associated with subpart A (OMB 3064-0125).
---------------------------------------------------------------------------

    \44\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collection of information associated with subpart B is entitled 
Foreign Banks (OMB No. 3064-0114). This information collection consists 
of, among other things, internal recordkeeping by insured branches of 
foreign banks, and reporting requirements related to an insured 
branch's pledge of assets to the FDIC. Under the proposed rule, all 
assets pledged to the FDIC under subpart B must be investment grade, 
highly liquid, and subject to a fair value discount. Several types of 
assets pledged by banks under subpart B would be categorically 
investment grade and highly liquid, and subject to a zero percent 
discount under the proposed rule. Insured branches of foreign banks 
would be able to continue to pledge these assets without any adjustment 
to their reporting and recordkeeping requirements. To the extent that 
an insured branch of a foreign bank pledges an asset that would not be 
categorically investment grade, highly liquid, or that would not 
receive a zero percent discount, the FDIC would expect minimal 
additional burden to accompany such a pledge of assets. Recordkeeping 
associated with the diligence that would be required for determining 
that an asset is highly liquid and investment grade is already expected 
of these institutions as part of their pre-purchase and ongoing 
investment due diligence. Similarly, the calculation of the applicable 
fair value discount is based on the risk weight of the applicable asset 
under the Basel III capital rules, which is an analysis that should 
already be undertaken by these institutions. Therefore, the FDIC 
expects that any resulting changes in burden would be so minimal that 
they would not alter the existing PRA burden estimates of this 
collection. Notwithstanding the fact that the FDIC does not expect a 
change in burden, the proposed rule may alter to some extent the nature 
of the recordkeeping and reporting requirements associated with subpart 
B. Accordingly, the FDIC will be submitting an information collection 
request to OMB relating to the information collection associated with 
subpart B (OMB 3064-0114). The existing burden estimates for the

[[Page 41884]]

information collection associated with subpart B are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                    Respondents      Hours per     Total burden
                      Title                         Times/year       per year        response          hours
----------------------------------------------------------------------------------------------------------------
Moving a branch.................................               1               1               8               8
Consent to operate..............................               1               1               8               8
Conduct activities..............................               1               1               8               8
Recordkeeping...................................               1              10             120           1,200
Pledge of assets
    Documents...................................               4              10            0.25              10
    Reports.....................................               4              10               2              80
                                                 ---------------------------------------------------------------
        Total Burden............................  ..............  ..............  ..............           1,314
----------------------------------------------------------------------------------------------------------------

    The FDIC welcomes comment on its existing information collections. 
Specifically, comments are invited on:
     Whether the collections of information are necessary for 
the proper performance of the Agencies' functions, including whether 
the information has practical utility;
     The accuracy of the estimates of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
     Ways to enhance the quality, utility, and clarity of the 
information to be collected;
     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
     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. A copy of the 
comments may also be submitted to the OMB desk officer for the FDIC by 
mail to U.S. Office of Management and Budget, 725 17th Street NW., 
#10235, Washington, DC 20503, by facsimile to 202-395-5806, or by email 
to [email protected], Attention, Federal Banking Agency Desk 
Officer.

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') generally requires that, 
in connection with a notice of proposed rulemaking, an agency prepare 
and make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small entities 
(defined in regulations promulgated by the Small Business 
Administration to include banking organizations with total assets of 
less than or equal to $550 million). A regulatory flexibility analysis, 
however, is not required if the agency certifies that the rule will not 
have a significant economic impact on a substantial number of small 
entities, and publishes its certification and a short explanatory 
statement in the Federal Register together with the proposed rule. For 
the reasons provided below, the FDIC certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities.
    The proposed rule makes revisions to the existing rules in subpart 
A of part 347 consistent with section 939A of the Dodd-Frank Act.\45\ 
The rules in subpart A of part 347 address issues related to the 
international activities and investments of insured state nonmember 
banks. In general, they implement the FDIC's statutory authority under 
section 18(d)(2) of the FDI Act regarding branches of insured state 
nonmember banks in foreign countries, and section 18(l) of the FDI Act 
regarding insured state nonmember bank investments in foreign entities. 
As of June 30, 2015, there were nine state nonmember banks that report 
having foreign branches. There are 16 foreign branches between these 
nine institutions. Available information indicates that state nonmember 
banks with foreign investments or foreign branches are not small 
entities.
---------------------------------------------------------------------------

    \45\ Subpart J of part 303 contains the procedural rules that 
implement part 347. No revisions are proposed to these rules.
---------------------------------------------------------------------------

    The proposed rule also would amend subpart B of part 347 as applied 
to insured U.S. branches of foreign banks. As of March 31, 2016, there 
were ten insured branches of foreign banks, only one of which qualifies 
as a small entity. Therefore, the revisions to subpart B of part 347 
would not have a significant impact on a substantial number of small 
entities.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the FDIC to use 
plain language in all proposed and final rules published after January 
1, 2000. The FDIC invites comment on how to make this proposed rule 
easier to understand.
    For example:
     Has the FDIC organized the material to inform your needs? 
If not, how could the FDIC present the rule more clearly?
     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 achieve that?
     Is this section format adequate? If not, which of the 
sections should be changed and how?
     What other changes can the agencies incorporate to make 
the regulation easier to understand?

List of Subjects in 12 CFR Part 347

    Bank deposit insurance, Banks, banking, Foreign banking, Insured 
foreign branches, Investments, Reporting and recordkeeping 
requirements, United States investments abroad.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation proposes to amend part 347 of chapter III of 
Title 12, Code of Federal Regulations as follows:

PART 347

0
1. The authority citation for part 347 is revised to read as follows:

    Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 
3104, 3105, 3108, 3109; Pub. L. No. 111-203, section 939A, 124 Stat. 
1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o-7 note).


[[Page 41885]]


0
2. In Sec.  347.102, revise paragraph (o) to read as follows:


Sec.  347.102  Definitions.

* * * * *
    (o) Investment grade means a security issued by an entity that has 
adequate capacity to meet financial commitments for the projected life 
of the exposure. Such an entity has adequate capacity to meet financial 
commitments if the risk of its default is low and the full and timely 
repayment of principal and interest is expected.
* * * * *
0
3. In Sec.  347.202, paragraphs (p) through (y) are redesignated as 
paragraphs (s) through (bb), paragraphs (k) through (o) are 
redesignated as paragraphs (m) through (q), paragraphs (b) through (j) 
are redesignated as paragraphs (c) through (k); and new paragraphs (b), 
(l), and (r) are added to read as follows:


Sec.  347.202  Definitions.

* * * * *
    (b) Agency means any office or any place of business of a foreign 
bank located in any State of the United States at which credit balances 
are maintained incidental to or arising out of the exercise of banking 
powers, checks are paid, or money is lent but at which deposits may not 
be accepted from citizens or residents of the United States.
* * * * *
    (l) Highly liquid means, with respect to a security, that the 
security has low credit and market risk; 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; is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
has been impaired.
* * * * *
    (r) Investment grade means a security issued by an entity that has 
adequate capacity to meet financial commitments for the projected life 
of the exposure. Such an entity has adequate capacity to meet financial 
commitments if the risk of its default is low and the full and timely 
repayment of principal and interest is expected.
* * * * *
0
4. In Sec.  347.209, revise paragraph (d) to read as follows:


Sec.  347.209  Pledge of assets.

* * * * *
    (d) Assets that may be pledged. This paragraph sets forth the kinds 
of assets that may be pledged to satisfy the requirements of this 
section. A foreign bank shall be deemed to have pledged any such assets 
for the benefit of the FDIC or its designee at such time as any such 
asset is placed with the depository. The FDIC reserves the right to 
require the substitution of pledged assets with other assets deemed 
acceptable to the FDIC.
    (1) A foreign bank may pledge the kinds of assets set forth in this 
subparagraph, provided that: Such assets are denominated in United 
States dollars; such assets are investment grade, as that term is 
defined in Sec.  327.202(q); and such assets are highly liquid, as that 
term is defined in Sec.  347.202(k). Furthermore, for the purposes of 
calculating the amount of assets required to be pledged under paragraph 
(b) of this section, the assets that are eligible for pledging under 
paragraph (d)(2) of this section must be discounted at the rates set 
forth in Table 1 to Sec.  347.209.
    (i) Cash
    (ii) Treasury bills, interest bearing bonds, notes, debentures, or 
other direct obligations of or obligations fully guaranteed as to 
principal and interest by the United States or any agency thereof;
    (iii) Obligations of United States government-sponsored 
enterprises;
    (iv) Negotiable certificates of deposit that are payable in the 
United States and that are issued by any state bank, national bank, 
state or federal savings association, or branch or agency of a foreign 
bank which has executed a valid waiver of offset agreement or similar 
debt instruments that are payable in the United States; provided, that 
the maturity of any certificate or issuance is not greater than one 
year; and provided further, that the issuing branch or agency of a 
foreign bank is not an affiliate of the pledging bank or from the same 
country as the pledging bank's domicile;
    (v) Obligations of the African Development Bank, Asian Development 
Bank, Inter-American Development Bank, and the International Bank for 
Reconstruction and Development;
    (vi) Commercial paper;
    (vii) Notes issued by bank and savings and loan holding companies, 
banks, or savings associations organized under the laws of the United 
States or any state thereof or notes issued by branches or agencies of 
foreign banks, provided that the notes are payable in the United 
States, and provided further, that the issuing branch or agency of a 
foreign bank is not an affiliate of the pledging bank or from the same 
country as the pledging bank's domicile;
    (viii) Banker's acceptances that are payable in the United States 
and that are issued by any state bank, national bank, state or federal 
savings association, or branch or agency of a foreign bank; provided, 
that the maturity of any acceptance is not greater than 180 days; and 
provided further, that the branch or agency issuing the acceptance is 
not an affiliate of the pledging bank or from the same country as the 
pledging bank's domicile;
    (ix) General obligations of any state of the United States, or any 
county or municipality of any state of the United States, or any 
agency, instrumentality, or political subdivision of the foregoing or 
any obligation guaranteed by a state of the United States or any county 
or municipality of any state of the United States;
    (x) Any other asset determined by the FDIC to be acceptable.
* * * * *
0
5. Amend Sec.  347.209, by adding Table 1 to read as follows:


Sec.  347.209  Pledge of assets.

* * * * *

           Table 1 to Sec.   347.209--Supervisory Haircuts for Assets Pledged Under Sec.   347.209(d)
----------------------------------------------------------------------------------------------------------------
                                                       Haircut % Assigned Based on Maturity and Risk Weight
                                                 ---------------------------------------------------------------
               Remaining Maturity                      Risk Weight (%) by Issuer as specified in Part 324.32
                                                 ---------------------------------------------------------------
                                                        0%              20%             50%            100%
----------------------------------------------------------------------------------------------------------------
<= to 1 Year....................................               0             1.0             2.0             4.0
> 1 Year but <= 5 Years.........................               0             4.0             6.0             8.0
> 5 years.......................................               0             8.0            12.0            16.0
----------------------------------------------------------------------------------------------------------------



[[Page 41886]]

    By order of the Board of Directors.

    Dated at Washington, DC, this 21st day of June, 2016.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2016-15096 Filed 6-27-16; 8:45 am]
BILLING CODE 6714-01-P