On March 21, 2016, the US Board of Governors of the Federal Reserve System released letters, each dated February 18, 2016, to eight foreign banking organizations (non-US banks with US banking operations) acting on requests relating to the US intermediate holding company requirement and the US risk committee requirement. In general, the letters reflect very limited flexibility in administering these requirements.
The IHC requirement generally requires an FBO to hold all ownership interests in US subsidiaries under a single US IHC. The Federal Reserve Board denied requests from two Canadian banks that are each subject to the IHC requirement and that hold a US subsidiary through a Canadian joint venture for an exemption from the requirement to transfer the ownership interests in the US subsidiary to their respective IHCs. The Federal Reserve Board also denied an FBO’s request for permission to continue to hold a wholly-owned Puerto Rican international banking entity through a Portuguese banking subsidiary rather than through the FBO’s IHC. In addition, the Federal Reserve Board denied a request to hold minority interests in US subsidiaries engaged in alternative energy financing outside of an IHC where the effect of doing so would reduce (apparently significantly) the amount of the IHC’s regulatory capital.
In contrast, the Federal Reserve Board granted requests from FBOs that are minority co-venturers in certain non-US joint ventures that have very small US subsidiaries to hold those US subsidiaries outside the IHC. The Federal Reserve Board noted that the FBOs bank did not have the power to force a reorganization, that the co-venturers were not themselves subject to the IHC requirement, and that exclusion of the US companies from the IHCs would have an immaterial impact on the capital and liquidity of the IHC. The Federal Reserve Board also required the foreign banks to provide notice if the total assets of the US subsidiaries at issue exceed $1 billion or 1% of the total assets of the bank’s IHC, whichever is smaller, and, in the case of US asset management subsidiaries that were excluded from the IHC requirement, notice if the total assets under management of the US subsidiary exceed 5% of the joint venture’s total AUM.
The Federal Reserve Board also granted FBO requests to hold certain US special purpose vehicles outside of an IHC. These include: SPVs formed for the purpose of raising regulatory capital (under home country capital requirements); SPVs that hold US real estate in connection with non-US fiduciary activities; and an SPV established in connection with a litigation reserve.
The Federal Reserve Board granted two narrowly crafted exemptions from the requirement that an FBO with combined US assets greater than $50 billion, but not subject to the IHC requirement, establish a US risk committee of its board of directors with at least one independent member. The Federal Reserve Board granted one request on the basis that the FBO was chartered under a special statute that required all of its directors to be executive officers of the bank. The bank instead proposed to establish a committee that included two directors plus one independent member of the committee who is not a director. The Federal Reserve Board concluded the proposal met the spirit of the US risk committee requirement. The Federal Reserve Board also granted a request by an FBO not currently subject to the IHC requirement, but intends to become subject to the requirement, to locate its US risk committee in a to-be-formed US bank holding company that would become an IHC. The Federal Reserve Board noted that granting the request under these circumstances would facilitate an orderly transition to the IHC requirement and overall compliance with the enhanced prudential standards applicable to the FBO. The Federal Reserve Board letters are available at: