The new proposed regulation from the Federal Reserve Board applies to the 23 FBOs with operations in the United States and have $100 billion or more in U.S. assets.

On Monday April 8th, 2019, the Federal Reserve Board released a press statement announcing, “Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks.”1 The proposal, developed jointly with Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), introduces a new concept of imposing standard liquidity requirements on Foreign Bank Organizations (FBOs), cross-border exposure as a key risk measurement, and tailored Resolution Requirement Plans (Living Wills) to FBOs.2 The Federal Reserve Board will receive feedback until Friday June 21st, 2019 and targets finalizing the regulation by October 2019.3

What this Means

The new proposed regulation from the Federal Reserve Board (FRB) applies to the 23 FBOs with operations in the United States and have $100 billion or more in U.S. assets.4 The proposed regulation outlines three key components: standardized liquidity requirement on the U.S. branches of a foreign bank, measurement of a firm’s cross-border exposure, and tailored Resolution Requirement Plans to FBOs (Living Wills).5

To start, the Federal Reserve Board introduces a novel concept to impose a standardized liquidity requirement on the U.S. branches of a foreign bank. This is to address potentially severe liquidity strain in the U.S. banking system in times of stress due to large foreign branches engaging in short-term wholesale U.S. dollar sourcing.6 The objective is to identify an optimal balance of certainty for host supervisors and local operations in a time of crisis and freely available liquidity for home supervisors and consolidated firms in good times.7 The FRB would create ranges of risk categories and assign each large bank to the one that fits its business model.8 There would be 3 risk categories: the top tier with the strongest  requirements, the second tier would come with routine stress testing and more stringent rules for capital (estimated at 4%), and the third tier would marginally reduce capital requirements.9

Moreover, the FRB proposes FBOs measure cross-border exposures to provide a view of the foreign bank’s U.S. operations and its non-U.S. affiliates.10 The measurement would help the FRB understand the complexity and resolvability concerns of the firm’s cross-border exposures to third parties.11 The FRB intends to strike a middle ground between complete inclusion and exclusion of such inter-affiliate exposures.12

Finally, the FRB proposal recommends a tailored Resolution Requirement Plan (Living Wills) for FBOs since there was success with large banking organizations and the broader financial system.13 The FRB is looking to adjust Living Wills, by decreasing frequency of submission from annually to every two years and by adjusting the content; impacting the foreign bank’s business model and risk profile.14

Key Observations and Take-aways

The United States Federal Reserve Board is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest: conducts the nation’s monetary policy, promotes the stability of the financial system, promotes the safety and soundness of individual financial institutions, fosters payment and settlement system safety and efficiency, and promotes consumer protection and community development.15 The FRB’s new proposal is working to standardize liquidity requirement, measure cross-border exposure, and customize Resolution Requirement Plans, all specifically for FBOs.16

The proposal is built on the proposed regulation introduced for domestic banks; in their system of tiers, banks would be evaluated on not only total assets but also their dependence on riskier short-term funding, their scale of off-balance sheet exposures and how much business they do outside the U.S.17

Furthermore, the only dissenting vote came from Fed Governor Lael Brainard, sighting weakening of safeguards to stop another financial crisis and that the proposal does not address the liquidity risks associated with branch and agency networks of foreign firms. Lael stated “at a time when large banks have comfortably achieved the post-crisis requirements and are providing ample credit to the economy and enjoying robust profitability.”18

In contrast, Federal Reserve Board Chairman Jerome Powell supported the proposal by saying “Because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank.”19  Ultimately the new proposal aims to tighten up rules for more risky foreign firms, those engaging in riskier activities like short-term funding, while also easing regulations by reducing capital requirements for those considered less risky.20

References

  1. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
  2. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
  3. “Federal Reserve Board invites public comment on regulatory framework that would closely match rules for foreign banks with the risks they pose to U.S. financial system,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm
  4. “Big Foreign Banks Could Face New Risk Rules Under Fed’s Plan,” Bloomberg, April 8, 2019. Access at: https://www.bloomberg.com/news/articles/2019-04-08/fed-set-to-post-new-rules-of-the-road-for-foreign-banks-in-u-s
  5. “U.S. Fed proposes new regulatory regime for foreign banks,” Reuters, April 8, 2019. Access at: https://www.reuters.com/article/us-usa-fed-banks/u-s-fed-proposes-new-regulatory-regime-for-foreign-banks-idUSKCN1RK1KK. “Federal Reserve Board invites public comment on regulatory framework that would more closely match rules for foreign banks with the risks they pose to U.S. financial system,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm.
  6. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm. “U.S. Fed proposes new regulatory regime for foreign banks,” Reuters, April 8, 2019. Access at: https://www.reuters.com/article/us-usa-fed-banks/u-s-fed-proposes-new-regulatory-regime-for-foreign-banks-idUSKCN1RK1KK.
  7. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
  8. Ibid
  9. “Big Foreign Banks Could Face New Risk Rules Under Fed’s Plan,” Bloomberg, April 8, 2019. Access at: https://www.bloomberg.com/news/articles/2019-04-08/fed-set-to-post-new-rules-of-the-road-for-foreign-banks-in-u-s.
  10. Ibid
  11. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at: https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
  12. Ibid
  13. Ibid
  14. Ibid
  15. Ibid
  16. “About the Fed, Federal Reserve Board portal. Access at: https://www.federalreserve.gov/aboutthefed.htm.
  17. “Opening Statement on Proposals to Modify Enhanced Prudential Standards for Foreign Banks and to Modify Resolution Plan Requirements for Domestic and Foreign Banks by Vice Chair for Supervision Randal K. Quarles,” Federal Reserve Board, April 8, 2019. Access at:  https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
  18. “Fed Proposes Eased Rules for All But the Biggest U.S. Banks,” Bloomberg, October 31, 2018. Access at: https://www.bloomberg.com/news/articles/2018-10-31/fed-set-to-propose-eased-standards-for-all-but-the-biggest-banks.
  19. “Big Foreign Banks Could Face New Risk Rules Under Fed’s Plan,” Bloomberg, April 8, 2019. Access at: https://www.bloomberg.com/news/articles/2019-04-08/fed-set-to-post-new-rules-of-the-road-for-foreign-banks-in-u-s. “Fed proposes rules that would lower liquidity requirement for some foreign banks,” Market Watch, April 8, 2019. Access at: https://www.marketwatch.com/story/fed-proposes-rules-that-would-lower-liquidity-requirement-for-some-foreign-banks-2019-04-08. “Fed weighs tighter restrictions on foreign banks in rare Trump-era move,” Politico, March 5, 2019. Access at: https://www.politico.com/story/2019/03/05/fed-restrictions-foreign-banks-1236333.
  20. “Big Foreign Banks Could Face New Risk Rules Under Fed’s Plan,” Bloomberg, April 8, 2019. Access at: https://www.bloomberg.com/news/articles/2019-04-08/fed-set-to-post-new-rules-of-the-road-for-foreign-banks-in-u-s.
  21. “Big Foreign Banks Could Face New Risk Rules Under Fed’s Plan,” Bloomberg, April 8, 2019. Access at: https://www.bloomberg.com/news/articles/2019-04-08/fed-set-to-post-new-rules-of-the-road-for-foreign-banks-in-u-s. “U.S. Fed proposes new regulatory regime for foreign banks,” Reuters, April 8, 2019. Access at: https://www.reuters.com/article/us-usa-fed-banks/u-s-fed-proposes-new-regulatory-regime-for-foreign-banks-idUSKCN1RK1KK.

Newsletter Author: Venetia Woo, Mairi Bryan, Anwar Ali

Newsletter Contact Person: Venetia Woo

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

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