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The Federal Reserve’s Proposal and the Foreign Banking Community: A Practical Guide for Foreign Banks
21 December 2012
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On Friday, December 14, 2012, the Federal Reserve issued proposed rules implementing the enhanced prudential standards and early remediation requirements of Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Once adopted, the proposed rules would apply to foreign banking organizations with $10 billion or more in global consolidated assets – with heightened prudential standards applied to foreign banking organizations with at least $50 billion in total global consolidated assets and foreign nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. The proposed rules are generally consistent with the prudential standards and requirements for large U.S. bank holding companies that the Federal Reserve proposed in December 2011.
Under the proposed rules, certain foreign banking organizations may need to reorganize their U.S. subsidiaries (but not branch and agency offices) under an intermediate holding company that generally will be subject to enhanced prudential requirements – including risk-based capital and leverage requirements, liquidity requirements, single counterparty credit limits, risk committee and risk management requirements, stress testing, and debt-to-equity limits. In addition, based on asset size thresholds, a foreign banking organization’s branch and agency offices will be subject to various enhanced prudential requirements, including liquidity requirements.
The proposed rules represent a paradigm shift in the Federal Reserve’s regulation of foreign banking organizations in the United States. If adopted, the proposed rules may have pervasive effects beyond risk management and financial reporting practices that will likely shape the contours and structure of the U.S. business models of foreign banking organizations. The proposed rules will ultimately determine, among other things, the role and capacity of U.S. branches and agencies to provide U.S. dollar funding on a cost-effective basis, thereby impacting enterprise-wide capital and liquidity planning. The proposed rules also could incentivize foreign banking organizations to migrate activities to their U.S. branch network.
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