Last December, the Federal Reserve Board proposed regulations to implement the enhanced prudential regulation and early remediation requirements of Sections 165 and 166 of the Dodd-Frank Act. These proposals, if adopted, would apply to systemically-important foreign banks with U.S. banking operations, and to foreign nonbank financial institutions that are designated by U.S. authorities as systemically significant. The proposed rules, which are very similar to rules proposed in December 2011 for large U.S. banks, cover a broad range of regulatory subjects, including capital, liquidity, stress testing, risk management, single counterparty credit limits, conditional debt-to-equity ratios, and early remediation. In addition, the proposed rules would require a covered foreign banking organization with $10 billion or more of U.S. assets (excluding its U.S. branch and agency assets) to place all such assets and related activities under an intermediate U.S. holding company that would be separately subject to U.S. regulatory capital and other requirements, substantially as if it were a U.S. bank holding company.

While the specific requirements of the proposed rules may be changed during the process of adopting them in final form—which may occur sometime in 2013—the broad thrust of these proposals is not likely to change materially when they are finally adopted, for at least two reasons. First, these foreign banking organization rules, with the exception of the intermediate holding company requirement, are required under the Dodd-Frank Act, so the Federal Reserve Board is obligated by statute to put into place a regulatory scheme of this nature for large foreign banks with U.S. banking operations. Second, the Federal Reserve Board has signaled its concerns over the nature, size and tenor of foreign banking organizations’ U.S. operations, especially their capital markets and corporate finance operations, and the ramifications of such activities for U.S. financial stability. In short, the Federal Reserve Board has effectively committed itself to the regulatory course of action reflected in its proposed rules.

The rule proposals have generated extensive discussion about their impact on foreign banking organizations doing business in the U.S., and how those foreign banking organizations may respond to these rules in conducting or modifying their U.S. activities. Although the focus of these discussions has generally revolved around the substantive U.S. business activities and operations of foreign banking organizations, foreign bank issuers that obtain funding for their operations in the U.S. through debt issuances should pause and reflect on the possible effects of these rules on their U.S. financing activities.

Fortunately, for many foreign banking organizations, the news on this front should be relatively good. First, foreign banks that do not have any U.S. banking operations other than representative offices, and that issue debt in the U.S. markets, will not be affected in any respect by the new rules when they are adopted. Second, foreign banking organizations that access the U.S. debt markets directly from their home offices (e.g., through registered or Rule 144A offerings) also will not feel the impact of the Federal Reserve Board’s foreign bank rules.

Two other types of foreign banking organization debt issuances, however, may be affected: (i) debt issuances where a U.S. branch or agency issues or guarantees a debt security issued in the U.S. markets in reliance on the Securities Act section 3(a)(2) exemption for securities issued or guaranteed by a bank, and (ii) debt issuances by the U.S. holding companies of foreign banking organizations.

In the case of section 3(a)(2) offerings, the Federal Reserve Board’s rules may have an incrementally greater impact, but even that impact should not be significant in most cases. U.S. branches and agencies are not subject to the rules’ separate U.S. regulatory capital requirements, and the impact of the risk-management, stress-testing, single counterparty credit limits and early remediation requirements on U.S. branch and agency financing activities will either be indirect or incidental. The proposed liquidity requirements that would apply to U.S. branches and agencies of foreign banking organizations with $50 billion or more of combined U.S. assets (namely, 14 days of liquidity in the form of cash and high-quality assets), might have an impact on the use of debt issuance proceeds by affected foreign banking organizations. Also, the conditional debt-to-equity limits for foreign banking organizations that are identified as posing a “grave threat” to U.S. financial stability, and the asset maintenance requirements (calculated as a percentage of assets to covered liabilities) for designated foreign banking organizations, and foreign banking organizations that are not in compliance with the rules’ stress-testing requirements (or are in Level 3 remediation), would be a potentially significant complication for troubled or noncompliant foreign banking organizations with U.S. branch/agency debt outstanding. That complication, however, would not be present in the ordinary course of the U.S. branch’s or agency’s funding activities, although it would have to be factored into the risk management and stress-testing activities required under the rules, and would complicate asset-liability management activities if the foreign banking organization were to be designated or remediated, or fall out of stress testing compliance.

The impact of the rules on U.S. financing activities conducted through domestic intermediate holding companies presents more interesting questions, assuming foreign banking organizations elect to pursue this route for their funding activities. Foreign banking organizations that seek debt funding through their intermediate holding companies would need to consider the impact of the Federal Reserve Board’s separate regulatory capital and liquidity requirements on the direct and indirect costs of such funding. The cost-benefit analysis of this funding strategy, however, may be influenced by the fact that the Federal Reserve Board at some point is likely to require U.S. bank holding companies—and possibly the top U.S. intermediate holding companies of foreign banking organizations—to hold minimum amounts of long-term debt that would be available to absorb losses in the event of a resolution. Moreover, the issuance of intermediate holding company debt would have to become part of the intermediate holding company’s broader risk management, stress testing and capital planning activities that would be required under the Federal Reserve Board’s rules.

In sum, the impact of the Federal Reserve Board’s rules on the U.S. operations of foreign banking organizations will be of greater or lesser significance depending on the size and tenor of a foreign banking organization’s U.S. activities. The rules’ impact on their U.S. debt financings, however, currently is not expected to be material in most cases.