[Federal Register Volume 83, Number 43 (Monday, March 5, 2018)]
[Rules and Regulations]
[Pages 9135-9144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04255]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
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  Federal Register / Vol. 83, No. 43 / Monday, March 5, 2018 / Rules 
and Regulations  

[[Page 9135]]



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: Final rule.

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SUMMARY: The FDIC is adopting a final rule (final rule) to amend its 
international banking regulations 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). The final rule adopts without 
change the revisions and amendments that the FDIC proposed in a June 
2016 notice of proposed rulemaking (NPR or proposed rule). These 
revisions and amendments include: Replacing references to credit 
ratings in the regulation's definition of investment grade with an 
alternative standard of creditworthiness; and making changes to the 
eligibility criteria for the types of assets that insured branches of 
foreign banks may pledge for the benefit of the FDIC.

DATES: This rule is effective April 1, 2018.

FOR FURTHER INFORMATION CONTACT: Eric Reither, Senior Capital Markets 
Specialist, Examination Support, Capital Markets Branch, Division of 
Risk Management Supervision, 202-898-3707, [email protected]; Galo 
Cevallos, Senior International Advisor, International Affairs Branch, 
Division of Insurance and Research, [email protected]; Catherine 
Topping, Counsel, [email protected]; Benjamin Klein, Counsel, 
[email protected], Bank Activities Unit, Supervision and Legislation 
Branch, Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Policy Objectives

    The intent of the final rule is to conform Part 347 with section 
939A's directive to reduce reliance on external credit ratings. By 
removing references to credit ratings in Part 347 and adopting an 
alternative standard of creditworthiness, the final rule encourages 
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 of Part 347 (subpart A), or pledged for the benefit of 
the Deposit Insurance Fund (DIF) by the insured U.S. branches of 
foreign banks under subpart B of Part 347 (subpart B). The final rule 
supports these objectives by establishing an investment grade 
definition that is now 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 revisions to the asset pledge 
requirement in subpart B include the application of a liquidity 
standard to the securities pledged to the FDIC by the insured U.S. 
branches of foreign banks, and applying a fair value discount to such 
pledged assets. These amendments 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 conduct a thorough, independent credit risk 
analysis. At the same time, flaws in the NRSROs' rating methodologies 
and conflicts arising from their business model (including certain 
commercial relationships with the originators of securities and strong 
competition by NRSROs for market share), undermined the accuracy of the 
credit ratings for a number of asset classes. 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 
of the Dodd-Frank Act,\1\ which directs each federal agency to review 
and modify regulations that reference credit ratings.
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    \1\ Public Law No. 111-203, section 939A, 124 Stat. 1376, 1887 
(July 21, 2010).
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    Section 939A 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.

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

    Subpart A of Part 347, 12 CFR 347.101 to 347.122, 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

[[Page 9136]]

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.
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    \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).
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    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\
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    \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 identical to, those found in 
Regulation K of the Federal Reserve.
    \6\ 12 CFR 324.20 through 324.22.
    \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.
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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 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 that 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. Specifically, in three instances in subpart B, the 
references are to the highest subset of rating bands within the 
investment grade categories established by the ratings agencies.
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    \8\ Public Law 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 202-b.
    \12\ 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).
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III. Notice of Proposed Rulemaking

    On June 28, 2016, the FDIC published the NPR in the Federal 
Register.\14\ The NPR proposed amending the provisions of subparts A 
and B of Part 347 that reference credit ratings. The NPR proposed 
amending subpart A, which sets forth the FDIC's requirements for 
insured state nonmember banks that operate foreign branches, by 
replacing references to credit ratings in the definition of investment 
grade with a standard for determining the creditworthiness of 
securities and other financial instruments that has been adopted in 
other federal regulations that conform to section 939A. The NPR 
proposed amending subpart B to revise the FDIC's asset pledge 
requirement for insured U.S. branches of foreign banks. The NPR 
proposed amending the eligibility criteria for the types of assets that 
foreign banks may pledge by replacing the references to credit ratings 
with the revised definition of investment grade. This investment grade 
standard would be applied to each type of pledgeable asset under the 
NPR, which also proposed a liquidity requirement for such assets, and 
proposed subjecting them to a fair value discount. The NPR also 
proposed introducing cash as a new asset type that foreign banks may 
pledge under subpart B, and proposed creating a separate asset category 
expressly for debt securities issued by government sponsored 
enterprises.
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    \14\ 81 FR 41877 (June 28, 2016).
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    The FDIC sought comments on all aspects of the June 2016 NPR and 
received two comment letters, one from a foreign banking organization 
and one from a private individual. These comments were considered in 
developing this final rule. The comments are discussed in the relevant 
sections that follow.

IV. The Final Rule

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

Section 347.102 Definitions
    The final rule amends the definition of investment grade in 12 CFR 
347.102(o) by deleting the references to credit ratings and NRSROs. 
This final rule defines 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.
    The FDIC sought comment on whether this proposed standard of 
creditworthiness addressed the FDIC's objective of applying a standard 
that is transparent, well defined, differentiates credit risk, and 
provides for the timely measurement of change to the credit profile of 
the investment. One commenter, while generally supportive of efforts to 
implement an alternative to credit ratings references, expressed 
concern that the standard was

[[Page 9137]]

subjective, entity-specific and possibly arbitrary. The other commenter 
expressed a similar concern that the standard was general and would 
require subjective determinations. The commenter recommended that the 
FDIC provide a more straightforward and objective standard.
    The FDIC believes that the revised standard provides a flexible, 
straightforward measure of creditworthiness that is consistent with 
existing policy. The revised definition achieves the dual goal of 
reducing reliance on credit ratings and encouraging 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 revised definition of 
investment grade is also consistent with the definition of investment 
grade that was adopted by the FDIC, OCC, and Federal Reserve in the 
Basel III capital rules.\15\ 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 \16\ and the credit 
quality standards regarding permissible investments for national banks 
adopted by the OCC under 12 CFR parts 1, 16, and 160.\17\ 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.\18\ Achieving consistency with other creditworthiness standards 
adopted by the federal banking agencies advances section 939A's 
directive that agencies establish, to the extent feasible, uniform 
standards of creditworthiness. Based on these considerations, the FDIC 
is adopting as final the revisions in the proposed rule to the 
regulatory definition of investment grade.
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    \15\ 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.
    \16\ See Permissible Investments for Federal and State Savings 
Associations: Corporate Debt Securities, 77 FR 43151 (July 24, 
2012).
    \17\ See Alternatives to the Use of External Credit Ratings in 
the Regulations of the OCC, 77 FR 35253 (June 13, 2012).
    \18\ 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.'' See Alternatives to the Use of External 
Credit Ratings in the Regulations of the OCC, 77 FR 35253 (June 13, 
2012).
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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 final rule, 
consistent with the NPR, retains the language of 12 CFR 347.115(b), but 
Sec.  347.115(b) is affected by the final rule insofar as Sec.  
347.115(b) uses the adopted definition of the term investment grade in 
12 CFR 347.102(o). Subject to certain limitations and restrictions, 
Sec.  347.115(b) permits a state nonmember bank's foreign branches to 
underwrite, distribute and deal, invest in, or trade investment grade 
obligations of any foreign country, its political subdivisions, and 
certain of its agencies and instrumentalities.\19\ This authority is 
generally consistent with the provisions of the Federal Reserve's 
Regulation K, which governs the international operations of foreign 
branches of member banks.\20\
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    \19\ 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. 70 
FR 17550 (April 6, 2005).
    \20\ Under the Regulation K, 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. See 12 CFR 211.4(a)(2)(i)(C)-(D). 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. 66 FR 
54346 (Oct. 26, 2001).
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    The regulatory definition of investment grade adopted in the final 
rule 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 final rule, an issuer would 
satisfy this 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. As noted above, the FDIC believes that the finalized standard 
will encourage state nonmember banks to conduct regular, in-depth 
analysis of the credit risks associated with specific types of 
securities held by their foreign branches.

Part 347--International Banking Subpart B--Foreign Banks

Section 347.209 Pledge of Assets
    12 CFR 347.209 establishes the asset pledge requirement for insured 
U.S. branches of foreign banks. 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.\21\ 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\
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    \21\ 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.
    \22\ 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).
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    The current FDIC rules in 12 CFR 347.209(d) require that certain 
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.\23\ Municipal general obligations are eligible 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. These references to the highest subset of rating bands 
within the investment grade categories established by the ratings 
agencies impose a higher credit standard than investment grade. The 
other types of eligible assets in the existing rules include: 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;

[[Page 9138]]

banker's acceptances with a maturity not greater than 180 days; and 
obligations of certain international development banks.\24\
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    \23\ P-1 and P-2 are Moody's top two rating bands for short-term 
obligations.
    \24\ See 12 CFR 347.209(d)(1), (2), (5), and (6).
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    The final rule removes the references to credit ratings issued by 
NRSROs in 12 CFR 347.209(d) and substitutes an investment grade 
standard to ensure the assets have appropriate credit quality. As 
proposed in the NPR, the final rule also permits only highly liquid 
assets to be pledged, and submits these instruments to fair value 
haircuts. The revised credit and liquidity standards and the comments 
addressing these standards are discussed below.
Credit and Liquidity Standards
    Under this final rule, instruments falling within the relevant 
asset categories are eligible for pledging if they are investment 
grade. Consistent with this final rule's amendment to subpart A of Part 
347, the final rule adds the same definition of investment grade to the 
definitions section of subpart B, 12 CFR 347.202, to 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 exposure. To meet this standard, the insured branch of the foreign 
bank needs to determine that the risk of default by the obligor is low, 
and that full and timely repayment of principal and interest is 
expected. As noted earlier, this investment grade standard is 
consistent with other regulations amended pursuant to section 939A.
    As proposed in the NPR, this final rule also provides that 
instruments falling within the relevant asset categories are eligible 
for pledging only if they are highly liquid. Highly liquid securities 
are 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.\25\
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    \25\ 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).
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    The final rule requires a foreign bank to demonstrate that the 
instrument meets the highly liquid standard.
    The FDIC sought comment on whether the proposed investment grade 
and liquidity standards for pledged assets under subpart B of Part 347 
are reasonable provisions and whether the removal of references to 
external credit ratings should be implemented as proposed or whether 
there are alternatives that would achieve a creditworthiness standard 
that is sufficiently risk sensitive. One commenter expressed concern 
that the proposed investment grade and liquidity requirements will 
significantly increase the operational burden on the branch. This 
commenter expressed concern that the new standards contained in the 
definitions of investment grade and highly liquid are general and will 
require subjective determinations. The commenter also expressed the 
opinion that the highly liquid standard is not required under Section 
939A. The commenter further noted that the introduction of this new 
standard is not necessary to protect the DIF against losses. This 
commenter contended that the types of pledgeable assets, coupled with 
the investment grade requirement, would provide adequate assurance that 
pledged assets are sufficiently low risk and liquid.
    The proposed amendments in Subpart A address the permissible 
international banking and investment activities of state nonmember 
banks. Subpart A differs in scope and purpose from subpart B, which 
establishes asset maintenance and pledge requirements for insured U.S. 
branches of foreign banks. The asset pledge requirements exist to 
protect the DIF by ensuring orderly asset liquidations at maximum 
values in the event such assets are liquidated to pay the insured 
deposits of the U.S. branch of the foreign bank.
    Although requiring foreign banks to verify that pledged assets 
satisfy the proposed standards may require some initial adjustment of 
existing processes, the FDIC believes that it would impose minimal 
additional burden. The final rule adopts standards of investment grade 
and highly liquid assets that are already in use in other banking 
regulations. In addition, insured U.S. branches of foreign banks are 
currently expected to conduct due diligence to meet applicable 
standards of safety and soundness in connection with their investment 
activities without sole reliance on NRSRO ratings as a measure of 
creditworthiness. Furthermore, market data should already be accessible 
through an insured branch's normal data source channels, and should be 
used in pre-purchase and ongoing investment due diligence. Therefore, 
the FDIC does not believe that the final rule will significantly 
increase the operational burden on insured branches of foreign banks.
    Existing 12 CFR 347.209(d) includes creditworthiness standards that 
exceed investment grade. That is, with some pledgeable asset types only 
the top two letter ratings (e.g., AAA, AA) within the investment grade 
band would be acceptable. The highly liquid standard in the final rule 
is necessary, in part, to ensure that the elevated quality of the 
pledged assets established under the current standard continues. 
Furthermore, complementing the investment grade requirement with the 
highly liquid requirement will ensure that the pledged assets can be 
readily converted to cash with little impact on their values.
    The FDIC believes that adopting the investment grade and highly 
liquid criteria, in conjunction with the fair value discount, helps 
ensure that pledged assets continue to support 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. Based on these considerations, the FDIC is adopting as 
final the revisions in the proposed rule related to the definition of 
investment grade and the highly liquid requirement.
Fair Value Discount
    As proposed in the NPR, the final rule requires 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 
such assets. Under the final rule, the discounted fair value of the 
assets determines the pledged dollar amount. The FDIC expects that the 
valuations of the pledged assets be updated at least quarterly. 
Further, the final rule adopts a standardized haircut table, consistent 
with the Basel III capital rules, to promote simplicity and ease of 
reference.\26\ Under this approach, the applicable haircut is 
determined by reference to the asset's risk-weight and remaining 
maturity.\27\ For example, a foreign insured branch may elect to pledge 
investment grade commercial paper with a fair value of

[[Page 9139]]

$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 reference table, the corresponding haircut is 
4 percent; therefore, the amount of the $100,000 asset that counts 
towards the satisfaction of the asset pledge requirement is arrived at 
by multiplying $100,000 by 0.96 (1-0.04), which equals $96,000. 
Consistent with the haircut requirements in the risk-based capital 
rules, pledged assets that receive a zero percent risk weight do not 
receive a fair value haircut.\28\
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    \26\ 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.
    \27\ See 12 CFR 324.32 for general risk weights.
    \28\ 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.
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    The FDIC solicited comment on whether pledged assets should be 
discounted as proposed, or whether the full fair value of assets 
pledged under the existing risk-based assessment schedule already 
provide sufficient protection to the DIF. In addition, the FDIC sought 
comment on whether another method of discounting would advance the 
objective of ensuring that pledged assets be as free from risk and as 
liquid as possible. One commenter indicated that the fair value 
discount is burdensome and suggested that the full fair value be 
permitted to be pledged, contending that the benefit to the DIF of the 
discount requirement would likely be minimal. The commenter further 
cited operational burden concerns with implementing the quarterly 
valuation calculation. The commenter also contended that, based on its 
tentative calculations, the fair value discount requirement would 
require it to pledge a considerable amount of additional eligible 
assets, resulting in increased costs.
    The FDIC believes the fair value haircut provides an appropriate 
methodology for discounting fair values which is consistent with the 
haircuts applied to financial collateral pledged to certain 
transactions under the Basel III capital rules as adopted by the 
FDIC.\29\ Further, the FDIC believes the expectation of quarterly 
updates to valuation of the pledged assets is reasonable given that 
quarterly valuations are currently required in the pledge agreement 
between each of the foreign banks and the FDIC. Moreover, the FDIC 
believes that applying the fair value discount results in minimal 
burden because 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. Lastly, the FDIC recognized in the NPR that 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. However, the FDIC expects any additional collateral required as a 
result of the haircut provision to be minimal.
---------------------------------------------------------------------------

    \29\ 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).
---------------------------------------------------------------------------

    Based on these and other considerations, the FDIC is adopting as 
final the discount methodology in the proposed rule.
Assets That May Be Pledged
    As proposed in the NPR, the final 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 by 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.\30\ The FDIC also understands that some insured 
branches of foreign banks currently pledge GSE debt securities 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.\31\ Therefore, the final rule eliminates the reference to 
obligations of U.S. instrumentalities in 12 CFR 347.209(d)(2), and 
creates a separate category expressly for GSE securities. Creating a 
separate category for GSE securities is necessary because such 
securities are subject to a haircut under the final rule to account for 
their twenty percent risk weight under the Basel III capital rules, 
whereas securities guaranteed by the U.S. government are not subject to 
a haircut given their zero percent risk weight.
---------------------------------------------------------------------------

    \30\ 12 CFR part 252 subpart O.
    \31\ 12 CFR 324.32(a) and (c).
---------------------------------------------------------------------------

    Pursuant to subpart B, all assets pledged, including cash, are 
required to be subject to the terms of a pledge agreement executed by 
the pledging foreign bank and the depository.\32\ Subpart B requires 
that the pledge agreement's terms include a requirement that pledged 
assets be placed with a depository for safekeeping.\33\ Subpart B also 
requires that the pledged assets be designated as assets subject to the 
pledge agreement.\34\ In addition, the assets must be held separately 
from the assets of the foreign bank or depository, and must at all 
times be segregated on the records of the depository and clearly 
identified as assets subject to the pledge agreement.\35\ Subpart B 
requires that a foreign bank obtain the FDIC's prior written approval 
of the depository selected.\36\
---------------------------------------------------------------------------

    \32\ 12 CFR 347.209(e)(5)(i). FDIC staff is reviewing executed 
pledge agreements in order to determine what revisions, if any, will 
be necessary in light of the final rule's revisions to Part 347.
    \33\ 12 CFR 347.209(c).
    \34\ 12 CFR 347.209(e)(5)(ii).
    \35\ Id.
    \36\ 12 CFR 347.209(c)
---------------------------------------------------------------------------

    The FDIC solicited comment on whether the types of assets that may 
be pledged should be expanded to include cash as proposed. One 
commenter expressed support for the addition of cash as a new eligible 
asset type. The commenter also sought clarification as to whether an 
insured branch would be permitted to receive interest on any such 
pledged cash. While subpart B generally authorizes insured branches to 
retain interest earned on pledged assets,\37\ the operation of subpart 
B's segregation and safekeeping requirements as applied to pledged cash 
would preclude the payment of interest on such cash. Most importantly, 
in order for pledged cash to be deemed held for safekeeping and 
segregated in accordance with subpart B's requirements, such cash must 
be held separate from the general funds of the bank and may not be 
commingled with any cash or other property of the depository. 
Accordingly, such cash may not be loaned, invested, used in operations, 
or used for any other purpose by the depository. Because, generally, 
interest is paid for the use of cash, if the depository complies with 
the safekeeping and segregation requirement, it cannot use the cash 
and, thus, there would be no basis for the payment of interest. In the 
event that the FDIC is appointed receiver of the depository, cash 
pledged and held for the purposes of, and in accordance with, the 
requirements of subpart B, would

[[Page 9140]]

not be treated as property of the depository receivership.
---------------------------------------------------------------------------

    \37\ 12 CFR 347.209(e)(10). A foreign bank may retain interest 
earned on pledged assets unless the FDIC by written notice prohibits 
such retention.
---------------------------------------------------------------------------

    The FDIC views the amendments to the pledgeable asset criteria as 
consistent with other rulemakings, and as resulting in minimal impact 
on the insured U.S. branches of foreign banks.
    Based on these, and other, considerations, the final rule adopts 
the pledgeable asset categories as proposed in the NPR. Accordingly, a 
foreign bank may 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 must 
be discounted at the rates set forth in the haircut table.
    The revised pledgeable asset categories are as follows:
    (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.\38\
---------------------------------------------------------------------------

    \38\ 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.\39\ 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 a zero percent risk weight will 
generally not require a fair value haircut.
---------------------------------------------------------------------------

    \39\ 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.
Other Technical Revisions
    As proposed in the NPR, the final rule adds 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 are eligible for pledging. The definition was not previously in 
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 final rule 
incorporates 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.'' \40\ 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.\41\ The final rule also amends 12 CFR 
347.209(d)(7) by removing the reference to United States in the 
description of branches or agencies of foreign banks because those 
terms as defined in existing subpart B necessarily mean an office or 
place of business of a foreign bank located in the United States. 
Furthermore, as proposed, the final rule amends 12 CFR 347.209(d)(7) to 
clarify that, consistent with requirements associated with pledging CDs 
and banker's acceptances in paragraphs (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.
---------------------------------------------------------------------------

    \40\ 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).
    \41\ 12 CFR 347.202(b).
---------------------------------------------------------------------------

    One commenter expressed concern with the proposal to amend 12 CFR 
347.209(d)(7) to clarify that 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. In 
particular, the commenter contended that in some instances the same-
country risk would be very low in certain jurisdictions and recommended 
the implementation of an objective standard when evaluating same-
country risks given that the risk

[[Page 9141]]

profiles of different countries can vary significantly. The FDIC 
believes the requirement as proposed is an important safeguard against 
potential same-country risks represented by issuing branches and 
agencies as direct extensions of foreign banks. The requirement as 
proposed is also consistent with the existing requirements for pledging 
CDs and banker's acceptances under 12 CFR 347.209(d)(1) and (d)(4). The 
FDIC is adopting the proposed requirement related to this and all other 
proposed technical revisions as final.
    As proposed in the NPR, the final rule amends 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. 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.

V. Expected Effects

a. Subpart A

    The applicability of the revision to subpart A of Part 347 in the 
final rule is limited to state nonmember banks that operate branches in 
foreign countries. As of June 30, 2017, there were seven state 
nonmember banks operating 13 foreign branches in six countries. All but 
one of the state nonmember banks with foreign branches are large, 
multi-billion dollar financial institutions with commensurate systems 
and capabilities. The revision to subpart A will therefore apply to a 
small number of mostly larger state nonmember banks with more 
sophisticated operations, and the effect of the revision to the 
definition of investment grade is expected to impose negligible 
additional burden relative to the size and capabilities of these banks. 
The FDIC also notes 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 revision to the definition 
of investment grade in Part 347 will encourage regular, in-depth 
analysis by the banking organization of credit risks of securities, 
which is a prudent practice already expected of banks. This will 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 in the final rule will apply 
only to the insured U.S. branches of foreign banks. As of June 30, 
2017, there were ten insured branches of foreign banks. The FDIC 
expects 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. 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 
choose to continue pledging a predominance of bank notes or CDs, as 
this may require pledging some measure of additional collateral under 
the proposed rule compared with the pledge requirements under the 
existing rule. Additionally, the final rule may alter to some extent 
the nature of the recordkeeping and reporting requirements associated 
with subpart B. Information developed through prudent investment 
practices will need to evidence satisfaction of the new standards. That 
information will be retained for supervisory review, but additional 
time should be negligible. Therefore, 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.

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 
final rule, consistent with the proposed rule, amends 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 did not receive any comments with specific 
recommendations for alternatives.

VII. Effective Date

    The Administrative Procedure Act (APA) generally requires that a 
final rule be published in the Federal Register no less than 30 days 
before its effective date.\42\ Section 302 of Riegle Community 
Development and Regulatory Improvement Act (RCDRIA) \43\ generally 
requires that regulations prescribed by Federal banking agencies which 
impose additional reporting, disclosures or other new requirements on 
insured depository institutions take effect on the first day of a 
calendar quarter which begins on or after the date on which the 
regulations are published in final form unless an agency finds good 
cause that the regulations should become effective sooner. The 
effective date of the Rule is April 1, 2018, which is the first day of 
the calendar quarter which begins on or after the date on which the 
regulations are published in final form, as required by RCDRIA. 12 CFR 
347.209(b) requires that a foreign bank with an insured branch pledge 
assets equal to the appropriate percentage of the insured branch's 
average liabilities for the last 30 days of the most recent calendar 
quarter. The FDIC expects foreign banks with insured branches to comply 
with Part 347 Subpart B's asset pledge requirements, as amended by the 
final rule, beginning in the calendar quarter commencing on April 1, 
2018. This provides foreign banks and their insured branches with 
adequate time to transition to Subpart B's amended asset pledge 
requirements.
---------------------------------------------------------------------------

    \42\ 5 U.S.C. 553(d).
    \43\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

VIII. Regulatory Analyses

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 Banking and Investment by Insured State 
Nonmember Banks (OMB No. 3064-0125). This information collection

[[Page 9142]]

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 final rule's revision to subpart 
A consists of a change to the definition of investment grade and 
imposes no additional recordkeeping or 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 final 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 final 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 final rule. Insured branches of foreign banks will 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 expects minimal additional 
burden to accompany such a pledge of assets. Recordkeeping associated 
with the diligence that will 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 will be so minimal that they will not alter 
the existing PRA burden estimates of this collection. Notwithstanding 
the fact that the FDIC does not expect a change in burden, the final 
rule may alter to some extent the nature of the recordkeeping 
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 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 has a continuing interest in the public's opinions of our 
existing information collections. At any time, 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.

Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of final rulemaking, an agency prepare a Final 
Regulatory Flexibility Act analysis describing the impact of the 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 Final Regulatory 
Flexibility Act 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 final rule. For the reasons provided below, the FDIC certifies that 
the final rule will not have a significant economic impact on a 
substantial number of small entities.
    The final 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, 2017, there were seven state nonmember banks with 13 
foreign branches.

[[Page 9143]]

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 final rule also amends subpart B of Part 347 as applied to 
insured U.S. branches of foreign banks. As of September 30, 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 
will not have a significant impact on a substantial number of small 
entities.

Small Business Regulatory Enforcement Fairness Act

    The OMB has determined that the final rule is not a major rule 
within the meaning of the relevant sections of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (SBREFA).\46\ As required 
by SBREFA, the FDIC will submit the final rule and other appropriate 
reports to Congress and the Government Accountability Office for 
review.
---------------------------------------------------------------------------

    \46\ 5 U.S.C. 801, et seq.
---------------------------------------------------------------------------

The Omnibus Consolidated and Emergency Supplemental Appropriations Act, 
1999: Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act, 1999.\47\
---------------------------------------------------------------------------

    \47\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

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 sought to present the final rule in a simple and 
straightforward manner. The FDIC did not receive any comment on its use 
of plain language.

List of Subjects in 12 CFR Part 347

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

Authority and Issuance

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

PART 347--INTERNATIONAL BANKING

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).


0
2. In Sec.  347.102, paragraph (o) is revised 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, paragraph (d) is revised and Table 1 is added to 
the end of the section to read as follows:


Sec.  347.209  Pledge of assets.

* * * * *
    (d) Assets that may be pledged. (1) 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.
    (2) A foreign bank may pledge the kinds of assets set forth in this 
paragraph (d)(2), provided that: Such assets are denominated in United 
States dollars; such assets are investment grade, as that term is 
defined in Sec.  347.202(r); and such assets are highly liquid, as that 
term is defined in Sec.  347.202(l). 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 
this paragraph (d)(2) 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 of a foreign bank which 
has executed a valid waiver of offset agreement or similar debt 
instruments that are payable in the United States and that are issued 
by any agency of a foreign bank which has executed a valid waiver of 
offset agreement; 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;

[[Page 9144]]

    (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.
* * * * *

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


    Dated at Washington, DC, on February 14, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018-04255 Filed 3-2-18; 8:45 am]
 BILLING CODE 6714-01-P