IIF Authors

Status: Will be live at 06/27/2019 11:42

Proposed tailoring of enhanced prudential standards for FBOs in the US

On April 8th the Federal Reserve Board and other agencies released draft notices of proposed rulemaking to amend the current enhanced prudential standards applying to the US operations of foreign banking organizations (FBOs). 

The first draft notice is a Board-only proposal to revise the framework for application of prudential standards to FBOs. The second draft notice, issued jointly by the Fed with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation is a proposal to modify the application of capital and liquidity requirements to the U.S. operations of a foreign banking organizations. This interagency proposal also requests comment on whether the Board should impose standardized liquidity requirements on FBOs with respect to their U.S. branches and agencies, including possible approaches for doing so. 

As members are aware, the IIF has actively and extensively engaged with regulatory authorities on the requirements for foreign banks, with a particular focus on fragmentation and concerns over global systemic implications and the importance of recognizing the globally agreed resolution framework and home/host relationships. We made representations to the Fed about the original FBO rules and we formed a similar working group in mid-2017 which made a detailed submission about the Intermediate Parent Undertaking (IPU) requirements to the EC. At that time we also took the opportunity to re-engage with the Fed and made a further detailed concurrent submission on the FBO rules.

We reconvened our working group and on June 21st we submitted a detailed comment letter to the US Agencies on these FBO tailoring proposals. In our letter we emphasize the importance and contribution of FBOs to the US financial system and we highlight how the scale of the FBO operations has declined significantly since the initial FBO Rules. We point out that the proposals are disproportionate and not equitable, particularly in relation to the requirements for domestic banks, they do not take into account the extensive risk reduction measures put in place in recent years, with special reference to TLAC, and the proposals continue a disconcerting trend of fragmentary actions in relation to FBOs. We highlight that the metrics being proposed to categorize the FBOs lack risk-sensitivity and are not appropriately calibrated. We strongly recommend that the branch liquidity proposition should be reconsidered and is more appropriately discussed and evaluated through global forums such as the FSB.