foreign banks with significant US operations could soon be
required to organise local subsidiaries under an intermediate
holding company, which will be subject to liquidity and capital
requirements comparable to their US peers.
Federal Reserve Boards (Fed) proposal could encounter
widespread pushback from industry groups, foreign banks and
according to The Wall Street Journal.
One way to
change the proposal is to file a lawsuit against the Fed in the
US District Court for the District of Colombia, which vacated
the Commodity Futures Trading Commissions (CFTC) position
limits rule earlier this year. This followed another vacated
Dodd-Frank rulemaking; the Securities and Exchange
Commissions (SEC) proxy access rule blocked by a court of
appeal in 2011.
were blocked on the basis of inadequate cost-benefit analysis,
which is required by regulators in absence of a congressional
mandate to adopt Dodd-Frank rules.
December 14 proposal may lack a clear congressional mandate,
the Fed is not understood to be held to a standard similar to
the SEC and CFTC. This is because the Feds proposal is
backed by its authorities under the Bank Holding Company Act as
well as the Dodd-Frank Act.
Horn, a DC-based partner at Morrison & Foerster, said while
Dodd-Frank requires the Fed to write rules for foreign banking
organisations deemed systemically important financial
institutions (Sifis), it doesnt require them to be
organised under an intermediate holding company.
that Dodd-Frank does not mandate the Fed to require an
intermediate holding company, Horn said. Dodd-Frank
does give the Fed authority to ensure there is an adequate
level of systemic regulation, and there is also at least
general authority in the Bank Holding Company Act as
finalised, the proposal would require foreign banking
institutions with more than $50 billion in consolidated assets
and $10 billion in US assets (excluding US branch and agency
assets) to organise US assets into an intermediate holding
company. The holding company would be subject to the Feds
risk-based capital and leverage requirements as well as
liquidity requirements for US bank holding companies that
qualify as Sifis.
proposal for enhanced prudential standards and early
remediation requirements for large foreign Sifis mirrors the
Feds yet to be finalised rule for US Sifis, which was
proposed around this time last year.
to Horn, there are two significant takeaways from the proposal:
the Fed intends to treat domestic and foreign banks as equally
as possible, and the Fed may now be comfortable with its 2011
proposal on US operations.
Some of the
more onerous requirements for both foreign and domestic Sifis
are counterparty credit limits, liquidity requirements, and
risk management and stress testing provisions. Its
notable, however, that the Fed lacks the authority to prohibit
dividend payments to foreign bank shareholders as a result of
stress tests, as it does for domestic banks.
of these requirements and their implications for capital and
liquidity are going to increase costs for some of these
organisations, Horn said. But I dont think
foreign banks all of a sudden are going to turn tail and run
out of the US just because of this proposal.
proposals impact on each foreign banking organisation
depends on its US structure and activities as well as its home
country prudential requirements, as stated in a
paper co-authored by Susan Krause Bell, a managing director
at regulatory consulting firm Promontory
proposal] will obviously affect the parent institution,
Krause Bell told IFLR.
Fed does have some concerns about whether they can count on
support coming from the foreign parent in times of
stress, she added. They are trying to align the
rules for US and foreign banks, but also have to modify the
rules for the additional risk of cross-border
US Basel delays put heat on
US prudential standards to
exceed Basel III: