United States: Federal Reserve Issues Tailoring Proposals For Foreign Banking Organizations And Resolution Planning Requirements

On April 8, 2019, the Board of Governors of the Federal Reserve System ("FRB") issued proposals to tailor (i) the enhanced prudential standards that apply to larger foreign banking organizations ("FBOs") (the "April 2019 Proposal") and (ii) the resolution planning requirements that apply to larger FBOs and larger US bank and holding companies ("BHCs"; collectively, "larger banking organizations") (the "ResPlan Proposal"). These proposals complement and expand upon a proposal to tailor the prudential standards for large US BHCs that FRB issued in October 2018 (the "October 2018 Proposal") and are part of FRB's broader effort to implement the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA").1

Certain aspects of FRB's tailoring proposals will require corresponding action by the Office of the Comptroller of the Currency and/or the Federal Deposit Insurance Corporation ("FDIC"), which have occurred or are expected to occur in the near future.2 Comments on the tailoring proposals are due by June 21, 2019.

This Legal Update (i) describes at a high level the background to FRB's tailoring proposals, (ii) explains FRB's proposed approach to categorizing larger FBOs, (iii) outlines the prudential standards that FRB expects to apply to each category of FBO, (iv) describes how FRB and the FDIC propose to tailor the resolution planning requirements for larger banking organizations and (v) presents our initial takeaway on the proposals.

FRB also is considering some changes to the enhanced prudential standards that are not driven by EGRRCPA tailoring. For example, US branches and agencies of FBOs currently are not subject to standardized liquidity requirements. The April 2019 Proposal requests comment on whether FRB should impose standardized liquidity requirements on US branches and agencies, as well as on two potential approaches for doing so. However, FRB also indicates in the April 2019 Proposal that if it decides to go forward with standardized liquidity requirements for US branches and agencies of FBOs, then it will issue a separate proposal for public comment.

Background

Section 165 of the Dodd-Frank Act required FRB and the other federal banking regulators to establish enhanced prudential standards for 2 Mayer Brown | Federal Reserve Issues Tailoring Proposals for Foreign Banking Organizations and Resolution Planning Requirements larger banking organizations, including with respect to capital, liquidity, resolution planning and single-counterparty credit limits.3 Since 2011, FRB, with the other federal banking regulators, has implemented a number of rules to establish these standards, often defining a larger banking organization as an FBO or US BHC with more than $50 billion in total consolidated assets on a global basis.4

In May 2018, Congress passed the EGRRCPA, which in part amended the Dodd-Frank Act.5 In particular, the EGRRCPA (i) increased the thresholds for defining what is a larger banking organization and (ii) authorized FRB to tailor the application of the enhanced prudential standards to banking organizations.6

In October 2018, FRB issued the October 2018 Proposal as a proposal to tailor the enhanced prudential standards (other than the resolution planning requirements) that apply to larger US BHCs and certain savings and loan holding companies ("SLHCs").7 The October 2018 Proposal would categorize US BHCs and certain SLHCs with more than $100 billion in total consolidated assets into one of four categories. Each category of larger US BHC/SLHC would be subject to a tailored set of enhanced prudential standards.8

Proposed Approach to Categorization

FRB's April 2019 Proposal parallels the October 2018 Proposal in that it would establish a categorization system for applying enhanced prudential standards to FBOs and US intermediate holding companies ("US IHCs") with more than $100 billion in total consolidated assets on a global basis ("Categories"), although FBOs and US IHCs with between $50 billion and $100 billion in total consolidated assets on a global basis would remain subject to certain enhanced prudential standards.9 As described below, once an FBO or US IHC's global size exceeds certain thresholds ($50 billion, $100 billion, or $250 billion), the application of the Categories would be primarily based on an FBO's or IHC's size and activities in the United States.

CATEGORY I

Under the October 2018 Proposal, Category I refers to US banking organizations that are global systemically important banks ("G-SIB"). The April 2019 Proposal states that FRB will not include Category I in the Categories for FBOs because an FBO cannot be a US G-SIB.

CATEGORY II

Category II would consist of FBOs and US IHCs with (i) $700 billion or more in combined US assets or (ii) $100 billion or more in combined US assets and $75 billion or more in crossjurisdictional activity.

Combined US assets are measured as the sum of the consolidated assets of each top-tier US subsidiary of an FBO (excluding so-called "2(h)(2) companies") and the total assets of each US branch and US agency of the FBO. Cross-jurisdictional activity would be measured as the sum of the cross-jurisdiction assets and liabilities of an FBO's combined US operations or its US IHC, as applicable, excluding intercompany liabilities and collateralized intercompany claims. The April 2019 Proposal appears to recognize the potential difficulty in valuing intercompany transactions by requesting comment on alternatives that would exclude all transactions with non-US affiliates and/or eliminate intercompany liabilities and collateral from the calculation.

CATEGORY III

Category III would consist of FBOs and US IHCs that are not in Category II but have (i) $250 billion or more in combined US assets or (ii) $100 billion or more in combined US assets and $75 billion or more of US nonbank assets, ("wSTWF") or US off-balance sheet exposure. wSTWF would be defined as the weighted amount of funding obtained from wholesale counterparties or retail brokered deposits and sweeps with a remaining maturity of one year or less, including relevant exposures between an FBO's US operations and non-US affiliates.10 US off-balance sheet exposure would be defined as the difference between the total exposure and on-balance sheet assets of an FBO's combined US operations. The application of FBO Category III requirements could vary based on an FBO's level of wSTWF.

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Footnote

1 Please see our earlier Legal Update on the 2018 legislation: https://www.mayerbrown.com/en/perspectivesevents/publications/2018/05/congress-passes-regulatoryreform-for-financial-in.

2 The FDIC issued its complementary proposals on April 16, 2019. See FDIC, Sunshine Act Meeting Notice (Apr. 16, 2019), https://www.fdic.gov/news/board/2019/2019-04-16- notice.html. The Comptroller of the Currency is a member of the FDIC's Board of Directors, and his assent to the issuance of an action by the FDIC is generally understood to mean that he will approve a similar action in his capacity as Comptroller.

3 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 165, 124 Stat. 1376, 1423-32 (2010) [hereinafter Dodd-Frank Act].

4 Please see our earlier Legal Update on the implementation of the enhanced prudential standards: https://www.mayerbrown.com/en/perspectivesevents/publications/2014/03/federal-reserve-issues-finalregulation-implementi. Certain enhanced prudential standards, such as company-run stress testing and risk committee requirements, have been applied to banking organizations with $10 billion or more in total consolidated assets on a global basis. See 12 C.F.R. pt. 252.

5 The Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, (2018), available at https://www.congress.gov/bill/115th-congress/senatebill/2155 [hereinafter EGRRCPA].

6 EGRRCPA § 401.

7 Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking organizations with their risk profiles (Oct. 31, 2018), https://www.federalreserve.gov/newsevents/pressreleases/bcr eg20181031a.htm.

8 See FRB, Chart of Proposed Requirements for US Banking Organizations (Oct. 31, 2018).

9 US BHCs would be required to determine their Category with respect to total consolidated assets on a global basis. While US IHCs primarily contain an FBO's US-based assets, US IHCs may control non-US-based assets and generally are treated as US BHCs under the April 2019 Proposal.

10 See 12 C.F.R. § 217.406 for the calculations used to adjust (i.e., "weight") an organization's amount of short-term wholesale funding.

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