U.S. Federal Reserve Board Proposes Major Changes in How the U.S. Operations of Foreign Banks and Their Subsidiaries Are Supervised
January 29, 2013
While several foreign banking organizations (“FBOs”) were restructuring their U.S. presence to reduce the impact of U.S. regulation, the Board of Governors of the Federal Reserve System (“Board”) recently countered with proposed rules pursuant to the Dodd-Frank Act (“DFA”) to heighten supervision of FBOs.
The proposal generally follows the substance of the proposed rules that the Board issued under the DFA in December 2011 for the heightened supervision of large domestic bank holding companies (“Large BHCs”) and nonbank financial companies that may be designated as systemically important financial institutions ("SIFIs"). See DechertOnPoint, Potential SIFIs Take Note – Your Future is Being Decided Now: FRB Prepares to Act on Enhanced Prudential Standards (PDF). However, the proposed rules would mark a significant change in how the U.S. operations of FBOs are regulated. In many cases, an FBO would be required to house all of its non-branch U.S. operations (including U.S. investment advisory and broker-dealer subsidiaries) in a U.S-based intermediate holding company (“IHC”) that would independently be subject to substantial capital, liquidity and other prudential requirements.
The Board is also proposing to generally apply the same requirements to a foreign nonbank financial company that is designated as a SIFI as it would apply to FBOs. The Board has indicated that it plans to tailor the requirements to each foreign SIFI as appropriate and has set forth criteria that it would apply in determining whether to require a foreign SIFI to establish an IHC.
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