[Federal Register Volume 82, Number 239 (Thursday, December 14, 2017)]
[Proposed Rules]
[Pages 58764-58772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26923]


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 Proposed Rules
                                                 Federal Register
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 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.
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  Federal Register / Vol. 82, No. 239 / Thursday, December 14, 2017 / 
Proposed Rules  

[[Page 58764]]



FEDERAL RESERVE SYSTEM

12 CFR Chapter II

[Docket No. OP-1589]


Federal Reserve Policy on Payment System Risk; U.S. Branches and 
Agencies of Foreign Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION:  Policy statement; request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System 
(``Board'') is requesting comment on proposed changes to part II of the 
Federal Reserve Policy on Payment System Risk (``PSR policy'') related 
to procedures for determining the net debit cap and maximum daylight 
overdraft capacity of a U.S. branch or agency of a foreign banking 
organization (``FBO''). Under the PSR policy, an FBO's strength of 
support assessment (``SOSA'') ranking can affect its eligibility for a 
positive net debit cap, the size of its net debit cap, and its 
eligibility to request a streamlined procedure to obtain maximum 
daylight overdraft capacity. Additionally, an FBO that is a financial 
holding company (``FHC'') can generally receive a higher net debit cap 
than an FBO that is not an FHC, and is generally eligible to request a 
streamlined procedure to obtain maximum daylight overdraft capacity. 
The proposed changes to the PSR policy would remove references to the 
SOSA ranking; remove references to FBOs' FHC status; and adopt 
alternative methods for determining an FBO's eligibility for a positive 
net debit cap, the size of its net debit cap, and its eligibility to 
request a streamlined procedure to obtain maximum daylight overdraft 
capacity. The Board recognizes that the proposed changes would reduce 
net debit caps for some FBOs, but the Board believes that the adjusted 
FBO net debit caps would be better tailored to FBOs' actual usage of 
intraday credit and would not constrain FBOs' U.S. operations.

DATES: Comments on the proposed changes must be received on or before 
February 12, 2018.

ADDRESSES: You may submit comments, identified by Docket No. OP-1589, 
by any of the following methods:
     Agency website: 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 
number in the subject line of the message.
     FAX: 202/452-3819 or 202/452-3102.
     Mail: Ann E. Misback, 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 website at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
except as necessary 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 in Room 
3515, 1801 K Street NW (between 18th and 19th Streets NW), Washington, 
DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jeffrey Walker, Assistant Director 
(202-721-4559), Jason Hinkle, Manager (202-912-7805), or Alex So, 
Senior Financial Services Analyst (202-452-2300), Division of Reserve 
Bank Operations and Payment Systems; or Evan Winerman, Counsel (202-
872-7578), Legal Division, Board of Governors of the Federal Reserve 
System. For users of Telecommunications Device for the Deaf (TDD) only, 
please call 202-263-4869.

SUPPLEMENTARY INFORMATION: 

I. Current Use of SOSA Ranking and FHC Status in the PSR Policy

    Part II of the PSR policy establishes the maximum levels of 
daylight overdrafts that depository institutions (``institutions'') may 
incur in their Federal Reserve accounts.\20\ As described further 
below, an FBO's SOSA ranking--which assesses an FBO's ability to 
provide financial, liquidity, and management support to its U.S. 
operations--can affect the FBO's daylight overdraft capacity. 
Similarly, an FBO's status as an FHC can affect its daylight overdraft 
capacity.\21\
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    \20\ See https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
    \21\ The Gramm-Leach-Bliley Act defines a ``financial holding 
company'' as a bank holding company that meets certain eligibility 
requirements. In order for a bank holding company to become a 
financial holding company and be eligible to engage in the new 
activities authorized under the Gramm-Leach-Bliley Act, the Act 
requires that all depository institutions controlled by the bank 
holding company be well capitalized and well managed (12 U.S.C. 
1841(p)). With regard to a foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the 
United States, the Act requires the Board to apply comparable 
capital and management standards that give due regard to the 
principle of national treatment and equality of competitive 
opportunity (12 U.S.C. 1843(l)).
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A. Net Debit Caps

    An institution's net debit cap is the maximum amount of 
uncollateralized daylight overdrafts that the institution can incur in 
its Federal Reserve account. The PSR policy generally requires that an 
institution be ``financially healthy'' to be eligible for a positive 
net debit cap.\22\ To that end, the Guide to the Federal Reserve's 
Payment System Risk Policy (``Guide'') clarifies that most FBOs with a 
SOSA ranking of 3 or a U.S. Operations Supervisory Composite Rating of 
marginal or unsatisfactory generally do not qualify for a positive net 
debit cap.\23\
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    \22\ See Part II.D.1 of the PSR Policy.
    \23\ Section VI.A.1 of the Guide states that ``[m]ost SOSA 3-
ranked institutions do not qualify for a positive net debit cap,'' 
though it clarifies that ``[i]n limited circumstances, a Reserve 
Bank may grant a net debit cap or extend intraday credit to a 
financially healthy SOSA 3-ranked FBO.'' Separately, Table VII-2 of 
the Guide states that SOSA-3 ranked FBOs and FBOs that receive a 
U.S. Operations Supervisory Composite Rating of marginal or 
unsatisfactory have ``below standard'' creditworthiness, and Table 
VII-3 of the Guide states that institutions with below standard 
creditworthiness cannot incur daylight overdrafts.
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    Assuming that an institution qualifies for a positive net debit 
cap, the size of its net debit cap equals the institution's ``capital 
measure'' multiplied by its ``cap multiple.'' \24\ As described further

[[Page 58765]]

below, an institution's capital measure is a number derived (under most 
circumstances) from the size of its capital base. An institution's cap 
multiple is determined by the institution's ``cap category,'' which 
generally reflects, among other things, the institution's 
creditworthiness. An institution with a higher capital measure or a 
higher cap category (and thus a higher cap multiple) will qualify for a 
higher net debit cap than an institution with a lower capital measure 
or lower cap category.
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    \24\ See Part II.D.1 of the PSR Policy. All net debit caps are 
granted at the discretion of the institution's Administrative 
Reserve Bank, which is the Reserve Bank that is responsible for 
managing an institution's account relationship with the Federal 
Reserve.
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    An FBO's SOSA ranking can affect both its cap category and its 
capital measure. An FBO's status as an FHC can affect its capital 
measure.\25\
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    \25\ In contrast, the FHC status of a domestic bank holding 
company does not affect its capital measure.
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    1. Cap categories and cap multiples.
    Under Section II.D.2 of the PSR policy, an institution's ``cap 
category'' is one of six classifications--high, above average, average, 
de minimis, exempt-from-filing, and zero. In order to establish a cap 
category of high, above average, or average, an institution must 
perform a self-assessment of its own creditworthiness, intraday funds 
management and control, customer credit policies and controls, and 
operating controls and contingency procedures. Other cap categories do 
not require a self-assessment.\26\ Each cap category corresponds to a 
``cap multiple.'' \27\ As noted above, an institution's net debit cap 
generally equals its capital measure multiplied by its cap multiple.
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    \26\ An institution that meets reasonable safety and soundness 
standards can request a de minimis cap category, without performing 
a self-assessment, by submitting a board of directors resolution to 
its Administrative Reserve Bank. An institution that only rarely 
incurs daylight overdrafts in its Federal Reserve account that 
exceed the lesser of $10 million or 20 percent of its capital 
measure can be assigned an ``exempt-from-filing'' cap category 
without performing a self-assessment or filing a board of directors 
resolution with its Administrative Reserve Bank.
    \27\ Under Section II.D.1 of the PSR policy, the cap multiple 
for the ``high'' category is 2.25, for the ``above average'' 
category is 1.875, for the ``average'' category is 1.125, for the 
``de minimis'' category is 0.4, for the ``exempt-from-filing'' 
category is 0.2 or $10 million, and for the ``zero'' category is 0. 
Note that the net debit cap for the exempt-from-filing category is 
equal to the lesser of $10 million or 0.2 multiplied by the capital 
measure.
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    An FBO's SOSA ranking can affect its cap category (and thus its cap 
multiple). As noted above, an institution that wishes to establish a 
net debit cap category of high, above average, or average must perform 
a self-assessment of, among other things, its own creditworthiness. 
Under Part II.D.2.a of the PSR policy, ``[t]he assessment of 
creditworthiness is based on the institution's supervisory rating and 
Prompt Corrective Action (PCA) designation.'' Part VII.A of the Guide 
includes a matrix for assessing domestic institutions' creditworthiness 
that incorporates an institution's supervisory rating and PCA 
designation. Because FBOs do not receive PCA designations, however, 
Part VII.A of the Guide includes a separate matrix for assessing FBO 
creditworthiness that incorporates an FBO's U.S. Operations Supervisory 
Composite Rating and--in lieu of a PCA designation--SOSA ranking.\28\
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    \28\ Under Section 38 of the Federal Deposit Insurance Act, 12 
U.S.C. 1831o, PCA designations apply only to insured depository 
institutions.
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    Similarly, while an FBO is not required to perform a self-
assessment if it requests a cap category of de minimis or wishes to be 
assigned a cap category of exempt-from-filing by the Reserve Bank, the 
Reserve Banks rely on the minimum standards set by the creditworthiness 
matrix when they evaluate FBO requests for any cap category greater 
than zero. Accordingly, the Reserve Banks generally do not allow FBOs 
to qualify for a positive net debit cap, including the de minimis or 
exempt-from-filing cap category, if the FBO has a SOSA ranking of 3 or 
a U.S. Operations Supervisory Composite Rating of marginal or 
unsatisfactory.\29\
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    \29\ See n. 4, supra, and accompanying text.
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    In certain situations, the Reserve Banks require institutions to 
perform a full assessment of their creditworthiness instead of using 
the relevant self-assessment matrix (e.g., when the institution has 
experienced a significant development that may materially affect its 
financial condition). The Guide includes procedures for full 
assessments of creditworthiness.
    2. Capital measures.
    Under Section II.D.3 of the PSR policy, an institution's ``capital 
measure'' is a number derived (under most circumstances) from the size 
of its capital base. The determination of the capital measure, however, 
differs between domestic institutions and FBOs. A domestic 
institution's capital measure equals 100 percent of the institution's 
risk-based capital. Conversely, an FBO's capital measure (also called 
``U.S. capital equivalency'') \30\ equals a percentage of (under most 
circumstances) the FBO's worldwide capital base \31\ ranging from 5 
percent to 35 percent, with the exact percentage depending on (1) the 
FBO's SOSA ranking and (2) whether the FBO is an FHC. Specifically, the 
capital measure of an FBO that is an FHC is 35 percent of its capital; 
an FBO that is not an FHC and has a SOSA ranking of 1 is 25 percent of 
its capital; and an FBO that is not an FHC and has a SOSA ranking of 2 
is 10 percent of its capital. The capital measure of an FBO that is not 
an FHC and has a SOSA ranking of 3 equals 5 percent of its ``net due to 
related depository institutions'' (although, as noted above, FBOs with 
a SOSA ranking of 3 generally do not qualify for a positive net debit 
cap).\32\
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    \30\ The term ``U.S. capital equivalency'' is used in this 
context to refer to the particular capital measure used to calculate 
net debit caps and does not necessarily represent an appropriate 
capital measure for supervisory or other purposes.
    \31\ FBOs that wish to establish a non-zero net debit cap must 
report their worldwide capital on the Annual Daylight Overdraft 
Capital Report for U.S. Branches and Agencies of Foreign Banks (FR 
2225). The instructions for FR 2225 explain how FBOs should 
calculate their worldwide capital. See https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZ1kLYTc+ZpEQ==.
    \32\ An FBO reports its ``net due to related depository 
institutions'' on the Report of Assets and Liabilities of U.S. 
Branches and Agencies of Foreign Banks (FFIEC 002).
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B. Maximum Daylight Overdraft Capacity

    Section II.E of the PSR policy allows certain institutions with 
self-assessed net debit caps to pledge collateral to their 
Administrative Reserve Bank to secure daylight overdraft capacity in 
excess of their net debit caps. An institution's maximum daylight 
overdraft capacity (``max cap'') equals its net debit cap plus its 
additional collateralized capacity. The max cap policy is ``intended to 
provide extra liquidity through the pledge of collateral by the few 
institutions that might otherwise be constrained from participating in 
risk-reducing payment system initiatives.''
    Institutions that wish to obtain a max cap must generally provide 
(1) documentation of the business need for collateralized capacity and 
(2) an annual board of directors' resolution approving any 
collateralized capacity. Under Section II.E.2 of the PSR policy, 
however, an FBO that has a SOSA ranking of 1 or is an FHC may request a 
streamlined procedure for obtaining a max cap.\33\ Such an FBO is not 
required to document its business need for collateralized capacity, nor 
is it required to obtain a board of directors' resolution approving 
collateralized capacity, as long as the FBO requests a max cap that is 
100 percent or less of the FBO's

[[Page 58766]]

worldwide capital times its self-assessed cap multiple.\34\
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    \33\ Even under the streamlined procedure, the Administrative 
Reserve Bank retains the right to assess an FBO's financial and 
supervisory information, including the FBO's ability to manage 
intraday credit.
    \34\ As described above, for example, the capital measure of an 
FBO that is not an FHC and has a SOSA ranking of 1 is 25 percent of 
worldwide capital. The net debit cap of such an FBO equals its 
capital measure times the cap multiple that corresponds to its cap 
category. The streamlined max cap procedure therefore allows the FBO 
to request additional collateralized capacity of 75 percent of 
worldwide capital times its cap multiple. If the FBO requests a max 
cap in excess of 100 percent of worldwide capital times its cap 
multiple, the FBO would be ineligible for the streamlined max cap 
procedure.
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II. Discussion of Proposed Changes; Request for Comment

    The SOSA ranking was originally established to provide input to the 
development and maintenance of a comprehensive supervisory strategy for 
the U.S. activities of an FBO, but Federal Reserve supervisors no 
longer use SOSA rankings for this purpose.\35\ As a result, the only 
current use of SOSA rankings by the Federal Reserve is in setting 
guidelines related to FBO access to Reserve Bank intraday credit and 
the discount window.\36\ Federal Reserve supervisors currently provide 
SOSA rankings to many FBOs, including FBOs that have not requested 
positive net debit caps. The Board believes that this is an inefficient 
use of the Federal Reserve's supervisory resources, and that it should 
streamline the Federal Reserve's FBO supervision program by 
discontinuing the SOSA ranking. As described further below, the Board 
proposes to remove references to the SOSA ranking in the PSR policy. 
The Federal Reserve will continue to provide SOSA rankings until the 
Board removes such references in the PSR Policy.
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    \35\ See SR Letter 00-14, ``Enhancements to the Interagency 
Program for Supervising the U.S. Operations of Foreign Banking 
Organizations'' (Oct. 23, 2000), https://www.federalreserve.gov/boarddocs/srletters/2000/sr0014.htm (letter adopting the SOSA 
ranking in its current form). See also Section II.C.1.a, infra, 
explaining that Federal Reserve supervisory staff now have access to 
better supervisory information that allows supervisors to monitor 
FBOs on an ongoing basis.
    \36\ In addition to the PSR policy's use of SOSA rankings, the 
Reserve Banks use SOSA rankings to determine whether an FBO can 
receive discount window loans. See https://www.frbdiscountwindow.org/en/Pages/General-Information/The-Discount-Window.aspx. Eliminating SOSA rankings will require adjustments to 
the Reserve Banks' standards for determining FBO access to primary 
credit.
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    Additionally, for reasons discussed below, the Board no longer 
believes that an FBO should receive greater daylight overdraft capacity 
because it is an FHC. The Board therefore proposes to remove references 
to FBOs' FHC status in the PSR policy.
    The Board proposes to adopt alternative methods for determining an 
FBO's eligibility for a positive net debit cap, the size of its net 
debit cap, and its eligibility to request a streamlined procedure to 
obtain a max cap. As described more fully below:
     Many undercapitalized FBOs, and all significantly or 
critically undercapitalized FBOs, would have ``below standard'' 
creditworthiness and would generally be ineligible for a positive net 
debit cap.
     An FBO's creditworthiness self-assessment would generally 
be based on the FBO's U.S. Operations Supervisory Composite Rating and 
the PCA designation that would apply to the FBO if it were subject to 
the Board's Regulation H.\37\ An FBO that is not based in a country 
that adheres to the Basel Capital Accords (``BCA'') would be required 
to perform a full assessment of its creditworthiness in lieu of the 
matrix approach to assessing creditworthiness.
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    \37\ See 12 CFR 208.43(b).
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     The capital measure of an FBO would equal 10 percent of 
its worldwide capital.
     An FBO that is well capitalized could request the 
streamlined procedure for obtaining a max cap.
    The Board requests comment on all aspects of the proposal, 
including whether FBOs would require a transition period to adjust to 
the proposed changes.

A. Eligibility of SOSA-3 Ranked FBOs for a Positive Net Debit Cap

    As discussed above, SOSA-3 ranked FBOs are presumptively ineligible 
for a positive net debit cap. Because the proposal would remove all 
references to the SOSA ranking in the PSR policy, FBOs that currently 
hold a SOSA-3 ranking would not be--on that basis--presumptively 
ineligible for a positive net debit cap. Some of those FBOs would be 
ineligible for positive net debit caps for other reasons, however. 
First, the revised creditworthiness self-assessment matrix in the Guide 
(discussed further below) would continue to assume that FBOs that have 
U.S. Operations Supervisory Composite Ratings of ``marginal'' or 
``unsatisfactory'' have ``below standard'' creditworthiness and are 
generally ineligible for a positive net debit cap.\38\ Second, the 
revised creditworthiness self-assessment matrix would--as described 
further below--assume that many undercapitalized FBOs, and all 
significantly or critically undercapitalized FBOs, have ``below 
standard'' creditworthiness and are generally ineligible for a positive 
net debit cap. Finally, an Administrative Reserve Bank might decline to 
provide a positive net debit cap to an FBO if the Reserve Bank has 
supervisory concerns regarding that FBO.
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    \38\ See n. 4, supra. Based on data from third-quarter 2017, one 
SOSA-3 ranked FBO currently has a U.S. Operations Supervisory 
Composite Rating of ``marginal'' or ``unsatisfactory,'' while 
nineteen SOSA-3 ranked FBOs currently have U.S. Operations 
Supervisory Composite Ratings higher than ``marginal'' or 
``unsatisfactory.''
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B. FBO Creditworthiness

    As discussed above, an institution that wishes to establish a net 
debit cap category of high, above average, or average must perform a 
self-assessment of, among other things, its own creditworthiness. The 
Board is proposing to revise the PSR policy to provide that, if an FBO 
is based in a jurisdiction that adheres to the BCA, the FBO's 
creditworthiness self-assessment will be based on (1) the FBO's U.S. 
Operations Supervisory Composite Rating and (2) the PCA designation 
that would apply to the FBO if it were subject to the Board's 
Regulation H.\39\ To determine its equivalent PCA designation, the FBO 
would compare the Regulation H ratios for total risk-based capital, 
tier 1 risk-based capital, common equity tier 1 risk-based capital, and 
leverage to the equivalent ratios that the FBO has calculated under its 
home country standards or on a pro forma basis.
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    \39\ See 12 CFR 208.43(b).
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    The Board believes that an FBO's equivalent PCA designation would 
serve the same purpose as the SOSA ranking in the creditworthiness 
self-assessment matrix. The SOSA ranking has been useful for assessing 
FBO creditworthiness because it provides insight into whether an FBO's 
home office has the ability to support its U.S. branch or agency. 
Similarly, an equivalent PCA designation would provide insight into an 
FBO's worldwide financial profile and its ability to support its U.S. 
branch or agency.
    Replacing the SOSA ranking with an equivalent PCA designation would 
also align the creditworthiness self-assessment for FBOs with the 
existing creditworthiness self-assessment for domestic 
institutions.\40\ The Board

[[Page 58767]]

would implement these changes by incorporating FBO creditworthiness 
self-assessments into the Guide's existing matrix for assessing 
domestic institutions' creditworthiness.\41\ The revised matrix would 
assume that many undercapitalized FBOs,\42\ and all significantly or 
critically undercapitalized FBOs, have ``below standard'' 
creditworthiness and are (like SOSA-3 ranked FBOs under the current PSR 
policy) generally ineligible for a positive net debit cap.
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    \40\ Until April 2002, the Guide included a single 
creditworthiness self-assessment matrix for domestic institutions 
and FBOs, with PCA categories on one axis and supervisory composite 
ratings on the other axis. The Guide instructed FBOs to calculate an 
equivalent PCA designation using tier I and total risk-based capital 
ratios, but did not require FBOs to use leverage ratios. In April 
2002, the Guide was revised to its present form, with a separate FBO 
creditworthiness matrix that lists SOSA rankings on one axis and 
U.S. supervisory composite ratings on the other axis.
    \41\ See Table VII-1 of the Guide.
    \42\ An undercapitalized FBO with a U.S. Operations Supervisory 
Composite Rating of ``strong'' or ``satisfactory'' would (like a 
similarly situated domestic institution) be permitted to perform a 
full assessment of its creditworthiness to determine its eligibility 
for a positive net debit cap.
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    The Board does not expect that the proposed changes to the 
creditworthiness self-assessment matrix would significantly affect 
FBOs' access to Reserve Bank intraday credit. If the proposed changes 
were to take effect, only four of the eleven FBOs that currently 
maintain a self-assessed cap category might qualify for a higher 
creditworthiness self-assessment rating and thus a higher cap category. 
These four entities would also need to satisfy the other criteria of 
the cap category self-assessment (intraday funds management and 
control, customer credit policies and controls, and operating controls 
and contingency procedures) to qualify for a higher cap category.\43\ 
Similarly, if the proposed changes were to take effect, the Board 
estimates that only one of the eleven FBOs that currently maintain a 
self-assessed cap category could potentially lose its self-assessed cap 
and/or be required to complete a full creditworthiness self-assessment.
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    \43\ See Table VII-3 of the Guide.
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    The Board does not believe that it will be burdensome for FBOs to 
calculate an equivalent PCA designation. The Board's FR Y-7Q report 
currently requires that FBOs with total consolidated assets of $50 
billion or more report the numerators and denominators of all four 
ratios in the PCA determination. The FR Y-7Q report also requires that 
FBOs with total consolidated assets below $50 billion report the 
numerators and denominators of all ratios in the PCA determination 
except the common equity tier 1 capital ratio. FBOs with total 
consolidated assets below $50 billion that are based in BCA-adhering 
jurisdictions already calculate their common equity tier 1 capital 
ratios under home country standards.
    As discussed above, while an FBO is not required to perform a self-
assessment if it requests a cap category of de minimis or wishes to be 
assigned a cap category of exempt-from-filing by the Reserve Bank, the 
Reserve Banks currently rely on the minimum standards set by the 
creditworthiness matrix when they evaluate an FBO's eligibility for any 
positive net debit cap, including the de minimis and exempt-from-filing 
cap categories. The Board proposes that the Reserve Banks will rely on 
the minimum standards of the revised creditworthiness matrix when they 
evaluate whether FBOs from BCA-adhering jurisdictions are eligible for 
a positive net debit cap, including a de minimis or exempt-from-filing 
cap category. Under the revised creditworthiness matrix, the Reserve 
Banks generally would not allow significantly or critically 
undercapitalized FBOs, many undercapitalized FBOs, and FBOs with a U.S. 
Operations Supervisory Composite Rating of marginal or unsatisfactory 
to qualify for a positive net debit cap, including a de minimis or 
exempt-from-filing cap category. The Reserve Banks would use publicly 
available data to determine the equivalent PCA designation of FBOs that 
request a cap category of de minimis or wish to be assigned a cap 
category of exempt-from-filing.
    The Board is also proposing to revise the PSR policy to provide 
that, if an FBO is not based in a country that adheres to the BCA, the 
FBO must perform a full assessment of its creditworthiness in lieu of 
the matrix approach to assessing creditworthiness. As noted above, the 
Guide includes procedures for full assessments of creditworthiness. The 
requirement to perform a full assessment of creditworthiness would 
apply to FBOs from non-BCA jurisdictions that request any net debit cap 
greater than the exempt-from-filing category, including FBOs that 
request a de minimis cap category. Additionally, Reserve Banks may 
request that FBOs from non-BCA jurisdictions perform a full assessment 
of creditworthiness before assigning the FBO an exempt-from-filing cap 
category.

C. FBO Capital Measure

    As discussed above, under the PSR policy, the determination of an 
FBO's capital measure is based on the FBO's capital base, SOSA ranking, 
and FHC status. The Board is proposing to (1) eliminate references to 
SOSA rankings and FHC status in calculating an FBO's capital measure 
and (2) replace the existing four-tier structure for calculating an 
FBO's capital measure with a simplified fixed-rate calculation that 
depends solely on the FBO's capital base. Specifically, the proposed 
change would provide that the capital measure of an FBO equals 10 
percent of its worldwide capital.
    For the reasons described below, the Board believes that it is 
unnecessary to replace the SOSA ranking with an alternative supervisory 
rating for purposes of calculating an FBO's capital measure. The Board 
also believes that an FBO's status as an FHC should not allow the FBO 
to qualify for a higher capital measure. While the proposed fixed-rate 
FBO capital measure calculation would reduce net debit caps for many 
FBOs, the Board believes that the adjusted FBO net debit caps would be 
better tailored to FBOs' actual usage of intraday credit and generally 
would not constrain FBOs' U.S. operations. Finally, while FBOs 
operating in the United States should be, generally, treated no less 
favorably than similarly-situated U.S. banking organizations, the Board 
continues to believe that it is reasonable to calculate an FBO's 
capital measure as a fraction of its worldwide capital, notwithstanding 
that the capital measure of a domestic institution generally equals 100 
percent of the institution's risk-based capital.
    1. It is unnecessary to replace the SOSA ranking with an 
alternative supervisory rating for purposes of calculating an FBO's 
capital measure.
    a. The Board and the Reserve Banks now have better supervisory 
information regarding FBOs.
    Before the Board adopted the current capital measure calculation 
process in 2002, an FBO's capital measure depended solely on whether 
the FBO was based in a country that adhered to the BCA.\44\ The Board 
adopted the current capital measure calculation in 2002 because it 
believed that SOSA rankings offered a superior basis for calculating an 
FBO's capital measure compared to home-country BCA status, explaining 
that ``SOSA rankings provide[d] broader information about the condition 
of the FBO, its supervision, and the home country, whereas the BCA 
distinction provide[d] information only about the home country 
treatment of bank capital adequacy.'' \45\ The Board also noted that 
``the BCA designation reflect[ed] the one-time adoption of BCA 
standards by

[[Page 58768]]

a country's supervisory authority, while U.S. bank supervisors 
update[d] the SOSA rankings regularly.'' \46\
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    \44\ FBOs from countries that adhered to the BCA were eligible 
to use as their capital measure the greater of 10 percent of their 
capital or 5 percent of their liabilities to nonrelated parties. 
FBOs from countries that did not adhere to the BCA were eligible to 
use as their capital measure the greater of 5 percent of their 
liabilities to nonrelated parties or the amount of capital that 
would be required of a national bank being organized at each 
location.
    \45\ 66 FR 64419, 64424 (Dec. 13, 2001).
    \46\ Id.
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    Since the Board adopted the current FBO capital measure calculation 
in February 2002, Federal Reserve staff have gained access to new 
internal and external resources that allow the Federal Reserve to 
better monitor FBOs on an ongoing basis.\47\ These new resources offer 
Federal Reserve staff additional information regarding the financial 
and managerial conditions of FBOs' U.S. and global operations. These 
resources also provide information regarding home-country accounting 
practices, financial systems, as well as international supervisory and 
regulatory developments. Additionally, Federal Reserve staff now enjoy 
better ongoing communication with many FBOs' home country 
supervisors.\48\ Collectively, this improved information allows 
Administrative Reserve Banks to make better decisions, on an ongoing 
basis, regarding FBO's level of access to intraday credit. The Board 
therefore believes that it is unnecessary to include a point-in-time 
supervisory rating when determining an FBO's capital measure.
---------------------------------------------------------------------------

    \47\ For example, the Board began requiring in December 2002 and 
March 2014 that a top-tier FBO file capital and asset information 
quarterly (rather than annually) if the FBO is (respectively) an FHC 
or has total consolidated assets of $50 billion or more. See FR Y-7Q 
(Capital and Asset Report for Foreign Banking Organizations); 67 FR 
72953 (Dec. 9, 2002) and 79 FR 9900 (Feb. 21, 2014). Additionally, 
improved commercial databases now offer Federal Reserve supervisors 
more detailed and timely information regarding FBOs and their home 
countries.
    \48\ For example, Federal Reserve supervisors participate in 
``supervisory colleges,'' which are ``multilateral working groups of 
relevant supervisors that are formed to promote effective, ongoing 
consolidated supervision of the overall operations of an 
international banking group.'' These supervisory colleges ``enhance 
[ ] the Federal Reserve's communication and collaboration with 
foreign supervisors and supplement [ ] bilateral working 
relationships with foreign supervisors.'' Federal Reserve System 
Purposes & Functions, 94-96. https://www.federalreserve.gov/aboutthefed/files/pf_complete.pdf.
---------------------------------------------------------------------------

    b. Other elements of the net debit cap calculation consider an 
FBO's overall financial condition.
    As discussed above, an FBO's net debit cap is determined by its 
capital measure and cap category. Under the Board's proposed changes to 
the FBO creditworthiness self-assessment procedures (described above), 
an FBO's worldwide capital ratios would affect its creditworthiness 
(and thus its cap category). Additionally, the FBO creditworthiness 
self-assessment procedures would continue to consider FBOs' U.S. 
Operations Supervisory Composite ratings. Given that other elements of 
the net debit cap calculation already consider an FBO's supervisory 
ratings (and will consider an FBO's overall financial condition if the 
proposed changes take effect), the Board believes that it is 
unnecessary to replace the SOSA ranking with an alternative supervisory 
rating in the FBO capital measure calculation.
    2. An FBO should not qualify for a higher capital measure because 
it is an FHC.
    When the Board adopted the current FBO capital measure calculation 
in 2002, it believed that an FBO's status as an FHC indicated that the 
FBO was financially and managerially strong, and that the FBO should 
accordingly qualify for a higher capital measure than a non-FHC FBO. 
Since 2002, however, the Board has recognized the limitations of FHC 
status in measuring an FBO's health. In particular, FBOs can maintain 
nominal FHC status (though with reduced ability to use their FHC 
powers) even when they are out of compliance with the requirement that 
they remain well capitalized. Accordingly, the Board no longer believes 
that an FBO should qualify for a higher capital measure because it is 
an FHC.
    3. The adjusted FBO net debit caps would be better tailored to 
FBOs' actual usage of intraday credit and generally would not constrain 
FBOs' U.S. operations.
    While the Board's proposed fixed-rate capital measure calculation 
would reduce net debit caps for twenty of the 49 FBOs that currently 
maintain a positive net debit cap,\49\ the Board believes that the 
adjusted FBO net debit caps would be better tailored to FBOs' actual 
usage of intraday credit: Since 2015, only 25 of 62 FBOs with a 
positive net debit cap have used any daylight overdraft capacity, the 
highest average cap utilization by an FBO was 28.5 percent, and only 
two FBOs had an average cap utilization greater than 25 percent.\50\ 
Even during the 2007-09 financial crisis, when the use of intraday 
credit spiked amid the market turmoil near the end of 2008, 51 of 58 
FBOs with a positive net debit cap used capacity, the highest average 
cap utilization was 65 percent, and only seven FBOs had an average cap 
utilization greater than 25 percent.
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    \49\ Aggregate FBO net debit caps would be reduced by 57%, 
seventeen FBOs would have their net debit caps reduced by 71%, and 
three FBOs would have their net debit caps reduced by 60%.
    \50\ In this context, average cap utilization equals an 
institution's average daily peak daylight overdraft divided by the 
FBO's net debit cap.
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    The Board recognizes that daylight overdrafts may currently occur 
less frequently because many institutions hold excess reserves and thus 
have higher opening balances in their Federal Reserve accounts. The 
Board believes, however, that FBOs' adjusted net debit caps would not 
constrain most FBOs' U.S. operations even if FBOs hold lower reserves 
in the future. The Board has reached this conclusion by comparing FBOs' 
projected net debit caps under the proposed fixed-rate capital measure 
calculation to FBOs' actual daylight overdrafts between 2003 and 2007, 
when FBOs generally maintained lower reserves.\51\ The Board's 
comparison indicates that, between 2003 and 2007, only four of the 29 
FBOs that currently maintain a cap category higher than exempt-from-
filing regularly incurred daylight overdrafts that exceeded their 
projected net debit caps, while five of the 29 FBOs incurred daylight 
overdrafts that exceeded their projected net debit caps in limited 
instances. Twenty of the 29 FBOs never incurred daylight overdrafts 
that exceeded their projected net debit caps.
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    \51\ For this purpose, the Board projected FBOs' net debit caps 
using an FBO's worldwide capital at the time of past overdrafts, 
multiplied by the proposed 10 percent FBO capital measure 
multiplier, multiplied by the relevant cap multiple that corresponds 
to the FBO's cap category.
---------------------------------------------------------------------------

    The Board also notes that FBO net debit caps are large when 
compared to the net debit caps of peer domestic institutions. For 
example, the average net debit cap of an FBO with between $10 billion 
and $50 billion in U.S.-based assets is $2.6 billion, while the average 
net debit cap of a domestic institution with between $10 billion and 
$50 billion in assets is $1.4 billion; similarly, the average net debit 
cap of an FBO with between $50 billion and $150 billion in U.S.-based 
assets is $28.2 billion, while the average net debit cap of a domestic 
institution with between $50 billion and $150 billion in assets is 
$10.5 billion.\52\ FBOs currently hold seven of the twenty largest net 
debit caps, but only three FBOs hold U.S. assets that rank among the 
twenty largest institutions by asset size.
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    \52\ The Board excluded institutions with a cap category of 
exempt-from-filing from these comparisons because these institutions 
are limited to a $10 million net debit cap. No FBO has U.S.-based 
assets above $150 billion.
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    The Board recognizes that its proposed changes to the capital 
measure calculation may increase the instances in which FBOs need 
additional daylight overdraft capacity. An FBO with a de minimis cap 
could request a higher net debit cap by applying for a self-assessed 
cap.\53\ Similarly, an FBO with a self-assessed cap could apply for a 
max cap

[[Page 58769]]

in order to obtain additional collateralized capacity.
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    \53\ Most FBOs with a cap category of exempt-from-filing receive 
the maximum net debit cap of $10 million and would not be affected 
by the proposed changes to the FBO capital measure calculation.
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    4. National treatment considerations.
    Under the principle of national treatment, FBOs operating in the 
United States should be, generally, treated no less favorably than 
similarly-situated U.S. banking organizations.\54\ When FBOs incur 
daylight overdrafts, however, they present special legal risks to the 
Federal Reserve because of differences in insolvency laws in the 
various FBOs' home countries. As the Board explained in 2001,
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    \54\ See, e.g., International Banking Act of 1978, Public Law 
95-369, 12 U.S.C. 3101 et seq; S. Rep. No. 95-1073 (Aug. 8, 1978) 
(legislative history of the International Banking Act of 1978); 
Gramm-Leach-Bliley Act of 1999, Public Law 106-102, section 141, 12 
U.S.C. 3106(c); Dodd-Frank Act, Public Law 111-203, section 
165(b)(2), 12 U.S.C. 5365(b)(2).

    In international financial transactions, the overall risk borne 
by each party is affected not only by the governing law set out in 
the contract, but also by the law governing the possible insolvency 
of its counterparty. The insolvency of an international bank 
presents significant legal issues in enforcing particular provisions 
of a financial contract (such as close-out netting or irrevocability 
provisions) against third parties (such as the liquidator or 
supervisor of the failed bank). The insolvent party's national law 
also may permit the liquidator to subordinate other parties' claims 
(such as by permitting the home country tax authorities to have 
first priority in bankruptcy), may reclassify or impose a stay on 
the right the nondefaulting party has to collateral pledged by the 
defaulting party in support of a particular transaction, or may 
require a separate proceeding to be initiated against the head 
office in addition to any proceeding against the branch.
    It is not practicable for the Federal Reserve to undertake and 
keep current extensive analysis of the legal risks presented by the 
insolvency law(s) applicable to each FBO with a Federal Reserve 
account in order to quantify precisely the legal risk that the 
Federal Reserve incurs by providing intraday credit to that 
institution. It is reasonable, however, for the Federal Reserve to 
recognize that FBOs generally present additional legal risks to the 
payments system and, accordingly, limit its exposure to these 
institutions.\55\
---------------------------------------------------------------------------

    \55\ 66 FR 30205, 30206 (Aug. 6, 2001).

    The Board continues to believe that FBOs present legal risks to the 
Federal Reserve that are above and beyond the risks posed by domestic 
institutions when FBOs incur daylight overdrafts. Accordingly, the 
Board continues to believe that it is reasonable to calculate an FBO's 
capital measure as a fraction of its worldwide capital, notwithstanding 
that the capital measure of a domestic institution generally equals 100 
percent of the institution's risk-based capital. Nevertheless, as 
discussed above, the proposed fixed-rate capital measure calculation 
would allow FBOs to obtain net debit caps that would be well tailored 
to FBOs' actual usage of intraday credit and generally would not 
constrain FBOs' U.S. operations.

D. FBO Requests for Additional Collateralized Credit Under the Max Cap 
Policy

    As discussed above, an FBO that has a SOSA-1 ranking or is an FHC 
may request a streamlined procedure for obtaining a max cap. The Board 
is proposing to remove the SOSA-1 ranking and FHC status as factors in 
determining whether FBOs can request the streamlined procedure. The 
Board instead proposes to allow FBOs that are well capitalized to 
request the streamlined procedure for obtaining a max cap.\56\
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    \56\ For these purposes, an FBO would determine whether it is 
well capitalized using the same methodology by which it would 
determine its equivalent PCA designation for the creditworthiness 
self-assessment matrix, i.e., the FBO would compare the Regulation H 
ratios for total risk-based capital, tier 1 risk-based capital, 
common equity tier 1 risk-based capital, and leverage to the 
equivalent ratios that the FBO has calculated under its home country 
standards or on a pro forma basis.
---------------------------------------------------------------------------

    The Board believes that allowing well-capitalized FBOs to request 
the streamlined max cap procedure would serve a similar purpose as 
allowing SOSA-1 ranked FBOs and FBOs with FHC status to request the 
streamlined procedure. The Board originally allowed SOSA-1 ranked FBOs 
and FBOs with FHC status to request the streamlined max cap procedure 
because the Board believed that such FBOs raised fewer supervisory 
concerns.\57\ As noted above, however, the Board now believes that (1) 
creating the SOSA ranking is an inefficient use of Federal Reserve 
resources and (2) FHC status does not necessarily indicate that FBO 
status provides a strong indication of financial health, since an FBO 
can retain nominal FHC status when it is not well capitalized. The 
Board believes instead that well-capitalized FBOs should be able to 
request the streamlined max cap procedure, because well-capitalized 
FBOs are (generally) better positioned than other FBOs to support their 
U.S. branches and agencies. The Board does not believe that it would be 
appropriate to substitute another supervisory rating for the SOSA-1 
ranking in determining FBO eligibility for the streamlined max cap 
procedure, because non-SOSA supervisory ratings focus only on the U.S. 
operations of FBOs.
---------------------------------------------------------------------------

    \57\ 73 FR 12417, 12430 (Mar. 7, 2008).
---------------------------------------------------------------------------

    The streamlined max cap procedure would provide well-capitalized 
FBOs with a straightforward process for obtaining collateralized 
intraday overdraft capacity, which could offset the reduction to FBO 
net debit caps that would result from the proposed changes to the FBO 
capital measure calculation. Any FBO that is not well capitalized and 
wishes to establish a max cap could continue to use the general 
procedure for requesting a max cap.

III. Regulatory Flexibility Act

    Congress enacted the Regulatory Flexibility Act (``RFA'') (5 U.S.C. 
601 et seq.) to address concerns related to the effects of agency rules 
on small entities, and the Board is sensitive to the impact its rules 
may impose on small entities. The RFA requires agencies either to 
provide an initial regulatory flexibility analysis with a proposed rule 
or to certify that the proposed rule will not have a significant 
economic impact on a substantial number of small entities. In this 
case, the relevant provisions of the PSR policy apply to all FBOs that 
maintain accounts at Federal Reserve Banks. While the Board does not 
believe that the proposed changes would have a significant impact on 
small entities, and regardless of whether the RFA applies to the PSR 
Policy per se, the Board has nevertheless prepared the following 
Initial Regulatory Flexibility analysis in accordance with 5 U.S.C. 
603. The Board requests public comments on all aspects of this 
analysis.
    1. Statement of the need for, objectives of, and legal basis for, 
the proposed rule. Section 11(j) of the Federal Reserve Act \58\ 
authorizes the Board to oversee the Reserve Banks' provision of 
intraday credit to Reserve Bank account holders.
---------------------------------------------------------------------------

    \58\ 12 U.S.C. 248(j).
---------------------------------------------------------------------------

    As discussed above, the Board is issuing this proposal to remove 
references to the SOSA ranking and FBOs' FHC status in the PSR policy. 
Discontinuing the SOSA ranking would streamline the Federal Reserve's 
FBO supervision program by eliminating the need for Federal Reserve 
supervisors to provide supervisory rankings that only serve a purpose 
for Reserve Bank credit decisions for many FBOs--including FBOs that 
have not requested positive net debit caps. Removing references to FHC 
status in the PSR policy would align the policy with the Board's view 
that an FBO's status as an FHC is not a suitable factor for determining 
the FBO's eligibility for intraday credit.
    2. Small entities affected by the proposed rule. Pursuant to 
regulations issued by the Small Business

[[Page 58770]]

Administration (``SBA'') (13 CFR 121.201), a ``small entity'' includes 
an entity that engages in commercial banking and has assets of $550 
million or less (NAICS code 522110). Thirty-nine FBOs that maintain 
Federal Reserve accounts are small entities. Six of those FBOs maintain 
positive net debit caps.
    3. Projected reporting, recordkeeping, and other compliance 
requirements. The proposed changes would alter the procedures by which 
FBOs obtain intraday credit from the Reserve Banks. The most important 
new requirement is that an FBO would need to determine an equivalent 
PCA designation, based on its worldwide capital ratios, to establish 
its creditworthiness under the PSR policy. Additionally, an FBO would 
need to determine that it is well capitalized, based on worldwide 
capital ratios, in order to qualify for a streamlined procedure for 
requesting collateralized intraday credit.
    As noted above, the Board does not believe that it will be 
burdensome for an FBO to calculate an equivalent PCA designation or 
determine whether it is well capitalized. The Board's FR Y-7Q report 
currently requires that FBOs with total consolidated assets of $50 
billion or more report the numerators and denominators of all four 
ratios in the PCA determination. The FR Y-7Q report also requires that 
FBOs with total consolidated assets below $50 billion report the 
numerators and denominators of all ratios in the PCA determination 
except the common equity tier 1 capital ratio. FBOs with total 
consolidated assets below $50 billion that are based in BCA-adhering 
jurisdictions already calculate their common equity tier 1 capital 
ratios under home country standards.
    4. Identification of duplicative, overlapping, or conflicting 
Federal rules. The Board has not identified any Federal rules that 
duplicate, overlap with, or conflict with the proposed changes to the 
PSR policy.
    5. Significant alternatives. The Board does not believe that 
alternatives to the proposed changes would better accomplish the 
objectives of limiting credit risk to the Reserve Banks while 
minimizing any economic impact on small entities. While one alternative 
would be to continue providing SOSA rankings to FBOs and leave the PSR 
policy in its present form, the Board believes that Federal Reserve 
supervisory resources should be allocated to other matters. Similarly, 
the Board could continue to allow FBOs that are FHCs to qualify for 
higher levels of intraday credit than FBOs that are not FHCs, but (as 
described above) the Board does not believe that an FBO's status as an 
FHC should determine the FBO's eligibility for intraday credit.
    In two places--specifically, in the capital measure calculation 
process and in the eligibility criteria for a streamlined max cap 
procedure--the proposed changes would delete references to SOSA without 
replacing those references with an alternative supervisory rating. For 
the reasons described above, the Board believes that it is unnecessary 
to substitute another supervisory rating.
    Finally, the proposed changes would replace SOSA rankings in the 
creditworthiness self-assessment matrix with an equivalent PCA 
designation. This change would require an FBO to calculate its 
equivalent PCA designation using worldwide capital ratios. 
Alternatively, the Board could simply delete the SOSA ranking and judge 
an FBO's creditworthiness solely on the basis of its U.S. operations 
supervisory composite rating. The Board believes, however, that using 
equivalent PCA designations in conjunction with supervisory ratings 
will better protect the Reserve Banks from credit risk, because an 
equivalent PCA designation would provide insight into an FBO's 
worldwide financial profile and its ability to support its U.S. 
branches and agencies.

IV. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when it considers 
a rule or policy change that may have a substantial effect on payment 
system participants. Specifically, the Board determines whether there 
would be a direct or material adverse effect on the ability of other 
service providers to compete with the Federal Reserve due to differing 
legal powers or due to the Federal Reserve's dominant market position 
deriving from such legal differences.\59\
---------------------------------------------------------------------------

    \59\ Federal Reserve Regulatory Service, 9-1558.
---------------------------------------------------------------------------

    The Board believes that the proposed modifications to the PSR 
policy will have no adverse effect on the ability of other service 
providers to compete with the Reserve Banks in providing similar 
services. While the Board expects that the proposed modifications would 
reduce net debit caps for many FBOs, the Board does not believe this 
will have a significant effect on FBOs because (as explained above) the 
adjusted FBO net debit caps would still provide ample levels of 
intraday credit. The Board therefore believes that most FBOs would 
retain sufficient access to Reserve Bank intraday credit if the 
proposed modifications take effect, and accordingly does not expect the 
proposed modifications would have a significant effect on FBOs' use of 
Federal Reserve Bank services. Additionally, the proposed modifications 
will have no effect on intraday credit access for domestic 
institutions, which comprise the vast majority of Reserve Bank account 
holders.

V. Paperwork Reduction Act

    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 number is 7100-
0217. The Board reviewed the PSR policy changes it is considering under 
the authority delegated to the Board by the OMB.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the 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 start-up 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 of this document. A copy of 
the comments may also be submitted to the OMB desk officer: 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.
    Proposed Revisions, With Extension for Three Years, of the 
Following Information Collection: (1) Title of Information Collection: 
Annual Report of Net Debit Cap.
    Agency Form Number: FR 2226.

[[Page 58771]]

    OMB Control Number: 7100-0217.
    Frequency of Response: Annually.
    Respondents: Depository institutions' board of directors.
    Abstract: Federal Reserve Banks collect these data annually to 
provide information that is essential for their administration of the 
PSR policy. The reporting panel includes all financially healthy 
depository institutions with access to the discount window. The Report 
of Net Debit Cap comprises three resolutions, which are filed by a 
depository institution's board of directors depending on its needs. The 
first resolution is used to establish a de minimis net debit cap and 
the second resolution is used to establish a self-assessed net debit 
cap.\60\ The third resolution is used to establish simultaneously a 
self-assessed net debit cap and maximum daylight overdraft capacity.
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    \60\ Institutions use these two resolutions to establish a 
capacity for daylight overdrafts above the lesser of $10 million or 
20 percent of the institution's capital measure. Financially healthy 
U.S. chartered institutions that rarely incur daylight overdrafts in 
excess of the lesser of $10 million or 20 percent of the 
institution's capital measure do not need to file board of 
directors' resolutions or self-assessments with their Reserve Bank.
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    Current Actions: Under the PSR policy, an FBO's SOSA ranking can 
affect its eligibility for a positive net debit cap, the size of its 
net debit cap, and its eligibility to request a streamlined procedure 
to obtain maximum daylight overdraft capacity. Additionally, an FBO's 
status as an FHC can affect the size of its net debit cap and its 
eligibility to request a streamlined procedure to obtain maximum 
daylight overdraft capacity. The proposed changes to the PSR policy 
would (1) remove references to the SOSA ranking, (2) remove references 
to FBOs' FHC status, and (3) adopt alternative methods for determining 
an FBO's eligibility for a positive net debit cap, the size of its net 
debit cap, and its eligibility to request a streamlined procedure to 
obtain maximum daylight overdraft capacity. The proposed revisions 
would increase the estimated average hours per response for FR 2226 
self-assessment and de minimis respondents that are FBOs by half an 
hour.
    Estimated number of respondents: De Minimis Cap: Non-FBOs, 915 
respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs, 
110 respondents and FBOs, 11 respondents; and Maximum Daylight 
Overdraft Capacity, 4 respondents.
    Estimated average hours per response: De Minimis Cap--Non-FBOs, 1 
hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and 
FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
    Estimated annual burden hours: De Minimis Cap: Non-FBOs, 915 hours 
and FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 110 hours and FBOs, 
16.5 hours; and Maximum Daylight Overdraft Capacity, 4 hours.

VI. Federal Reserve Policy on Payment System Risk

Revisions to Section II.D of the PSR Policy

    The Board proposes to revise Section II.D of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:

D. Net Debit Caps

* * * * *

2. Cap Categories

    * * *

a. Self-Assessed

    In order to establish a net debit cap category of high, above 
average, or average, an institution must perform a self-assessment 
of its own creditworthiness, intraday funds management and control, 
customer credit policies and controls, and operating controls and 
contingency procedures.\61\ For domestic institutions, the 
assessment of creditworthiness is based on the institution's 
supervisory rating and Prompt Corrective Action (PCA) 
designation.\62\ For U.S. branches and agencies of FBOs that are 
based in jurisdictions that adhere to the Basel Capital Accord, the 
assessment of creditworthiness is based on the institution's 
supervisory rating and the PCA designation that would apply to the 
FBO if it were subject to the Board's Regulation H.\63\ An 
institution may perform a full assessment of its creditworthiness in 
certain limited circumstances--for example, if its condition has 
changed significantly since its last examination or if it possesses 
additional substantive information regarding its financial 
condition. Additionally, U.S. branches and agencies of FBOs based in 
jurisdictions that do not adhere to the Basel Capital Accord are 
required to perform a full assessment of creditworthiness to 
determine their ratings for the creditworthiness component. An 
institution performing a self-assessment must also evaluate its 
intraday funds-management procedures and its procedures for 
evaluating the financial condition of and establishing intraday 
credit limits for its customers. Finally, the institution must 
evaluate its operating controls and contingency procedures to 
determine if they are sufficient to prevent losses due to fraud or 
system failures. The Guide includes a detailed explanation of the 
self-assessment process.
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    \61\ This assessment should be done on an individual-institution 
basis, treating as separate entities each commercial bank, each Edge 
corporation (and its branches), each thrift institution, and so on. 
An exception is made in the case of U.S. branches and agencies of 
FBOs. Because these entities have no existence separate from the 
FBO, all the U.S. offices of FBOs (excluding U.S.-chartered bank 
subsidiaries and U.S.-chartered Edge subsidiaries) should be treated 
as a consolidated family relying on the FBO's capital.
    \62\ An insured depository institution is (1) ``well 
capitalized'' if it significantly exceeds the required minimum level 
for each relevant capital measure, (2) ``adequately capitalized'' if 
it meets the required minimum level for each relevant capital 
measure, (3) ``undercapitalized'' if it fails to meet the required 
minimum level for any relevant capital measure, (4) ``significantly 
undercapitalized'' if it is significantly below the required minimum 
level for any relevant capital measure, or (5) ``critically 
undercapitalized'' if it fails to meet any leverage limit (the ratio 
of tangible equity to total assets) specified by the appropriate 
federal banking agency, in consultation with the FDIC, or any other 
relevant capital measure established by the agency to determine when 
an institution is critically undercapitalized (12 U.S.C. 1831o).
    \63\ See 12 CFR 208.43(b).
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* * * * *

b. De Minimis

    Many institutions incur relatively small overdrafts and thus 
pose little risk to the Federal Reserve. To ease the burden on these 
small overdrafters of engaging in the self-assessment process and to 
ease the burden on the Federal Reserve of administering caps, the 
Board allows institutions that meet reasonable safety and soundness 
standards to incur de minimis amounts of daylight overdrafts without 
performing a self-assessment.\67\ An institution may incur daylight 
overdrafts of up to 40 percent of its capital measure if the 
institution submits a board of directors resolution.
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    \67\ U.S. branches and agencies of FBOs that are based in 
jurisdictions that do not adhere to the Basel Capital Accord are 
required to perform a full assessment of creditworthiness to 
determine whether they meet reasonable safety and soundness 
standards. These FBOs must submit an assessment of creditworthiness 
with their board of directors resolution requesting a de minimis cap 
category. U.S. branches and agencies of FBOs that are based in 
jurisdictions that adhere to the Basel Capital Accord are not 
required to complete an assessment of creditworthiness, but Reserve 
Banks will assess such an FBO's creditworthiness based on the FBO's 
supervisory rating and the PCA designation that would apply to the 
FBO if it were subject to the Board's Regulation H.
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* * * * *

c. Exempt-From-Filing

    Institutions that only rarely incur daylight overdrafts in their 
Federal Reserve accounts that exceed the lesser of $10 million or 20 
percent of their capital measure are excused from performing self-
assessments and filing board of directors resolutions with their 
Reserve Banks.\68\ This dual test of dollar

[[Page 58772]]

amount and percent of capital measure is designed to limit the 
filing exemption to institutions that create only low-dollar risks 
to the Reserve Banks and that incur small overdrafts relative to 
their capital measure. * * *
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    \68\ The Reserve Bank may require U.S. branches and agencies of 
FBOs that are based in jurisdictions that do not adhere to the Basel 
Capital Accord to perform a full assessment of creditworthiness to 
determine whether the FBO meets reasonable safety and soundness 
standards. U.S. branches and agencies of FBOs that are based in 
jurisdictions that adhere to the Basel Capital Accord will not be 
required to complete an assessment of creditworthiness, but Reserve 
Banks will assess such an FBO's creditworthiness based on the FBO's 
supervisory rating and the PCA designation that would apply to the 
FBO if it were subject to the Board's Regulation H.
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* * * * *

3. Capital Measure

* * * * *

b. U.S. Branches and Agencies for Foreign Banks

    For U.S. branches and agencies of foreign banks, net debit caps 
on daylight overdrafts in Federal Reserve accounts are calculated by 
applying the cap multiples for each cap category to the FBO's U.S. 
capital equivalency measure.\69\ U.S. capital equivalency is equal 
to 10 percent of worldwide capital for FBOs.\70\
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    \69\ The term ``U.S. capital equivalency'' is used in this 
context to refer the particular measure calculate net debit caps and 
does not necessarily represent an appropriate for supervisory or 
other purposes.
    \70\ FBOs that wish to establish a non-zero net debit cap must 
report their worldwide capital on the Annual Daylight Overdraft 
Capital Report for U.S. Branches and Agencies of Foreign Banks (FR 
2225). The instructions for FR explain how FBOs should calculate 
their worldwide capital. See https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZ1kLYTc+ZpEQ==.
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    An FBO that is well capitalized (calculated as if the FBO were 
subject to the Board's Regulation H \71\) may be eligible for a 
streamlined procedure (see section II.E.) for obtaining additional 
collateralized intraday credit under the maximum daylight overdraft 
capacity provision.
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    \71\ See 12 CFR 208.43(b).
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* * * * *

Revisions to Section II.E of the PSR Policy

    The Board proposes to revise Section II.E of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:

E. Maximum Daylight Overdraft Capacity

* * * * *

1. General Procedure

    An institution with a self-assessed net debit cap that wishes to 
expand its daylight overdraft capacity by pledging collateral should 
consult with its administrative Reserve Bank. The Reserve Bank will 
work with an institution that requests additional daylight overdraft 
capacity to determine the appropriate maximum daylight overdraft 
capacity level. In considering the institution's request, the 
Reserve Bank will evaluate the institution's rationale for 
requesting additional daylight overdraft capacity as well as its 
financial and supervisory information. The financial and supervisory 
information considered may include, but is not limited to, capital 
and liquidity ratios, the composition of balance sheet assets, and 
CAMELS or other supervisory ratings and assessments. An institution 
approved for a maximum daylight overdraft capacity level must submit 
at least once in each twelve-month period a board of directors 
resolution indicating its board's approval of that level. * * *
* * * * *

2. Streamlined Procedure for Certain FBOs

    An FBO that is well capitalized (calculated as if the FBO were 
subject to the Board's Regulation H \75\) and has a self-assessed 
net debit cap may request from its Reserve Bank a streamlined 
procedure to obtain a maximum daylight overdraft capacity. These 
FBOs are not required to provide documentation of the business need 
or obtain the board of directors' resolution for collateralized 
capacity in an amount that exceeds its current net debit cap (which 
is based on 10 percent worldwide capital times its cap multiple), as 
long as the requested total capacity is 100 percent or less of 
worldwide capital times a self-assessed cap multiple.\76\ In order 
to ensure that intraday liquidity risk is managed appropriately and 
that the FBO will be able to repay daylight overdrafts, eligible 
FBOs under the streamlined procedure will be subject to initial and 
periodic reviews of liquidity plans that are analogous to the 
liquidity reviews undergone by U.S. institutions.\77\ If an eligible 
FBO requests capacity in excess of 100 percent of worldwide capital 
times the self-assessed cap multiple, it would be subject to the 
general procedure.
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    \75\ See 12 CFR 208.43(b).
    \76\ For example, an FBO that is well capitalized is eligible 
for uncollateralized capacity of 10 percent of worldwide capital 
times the cap multiple. The streamlined max cap procedure would 
provide such an institution with additional collateralized capacity 
of 90 percent of worldwide capital times the cap multiple. As noted 
above, FBOs report their worldwide capital on the Annual Daylight 
Overdraft Capital Report for U.S. Branches and Agencies of Foreign 
Banks (FR 2225).
    \77\ The liquidity reviews will be conducted by the 
administrative Reserve Bank, in consultation with each FBO's home 
country supervisor.
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* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, December 8, 2017.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2017-26923 Filed 12-13-17; 8:45 am]
BILLING CODE 6210-01-P