Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the Federal Reserve to establish enhanced prudential standards for the largest domestic and foreign banks. In 2012, the Federal Reserve proposed two rules that would apply a range of enhanced regulatory and supervisory requirements to large US bank holding companies (“BHCs”) and foreign banking organisations (“FBOs”), including increased standards related to capital planning, stress testing and enhanced risk- and liquidity-management standards. On February 18, 2014, the Federal Reserve released a final rule that reduces the number of foreign banks subject to the strictest of those enhanced requirements and extends the effective date by which such FBOs will need to become compliant (the “Final Rule”).
The Final Rule requires FBOs with $50 billion or more in US non-branch assets to form a US intermediate holding company (“IHC”) over their US subsidiaries. US non-branch assets are defined as the sum of the consolidated assets of each of the FBO’s top-tier US subsidiaries, excluding branch and agency assets. According to the Federal Reserve, the Final Rule reduces the number of FBOs that will need to form an IHC from roughly to 25 to 20 or fewer by raising the US non-branch assets threshold from $10 billion under the proposed rules to the current $50 billion. These reorganisation provisions are likely to affect five of the largest US broker-dealers, which are owned by FBOs.
An IHC will be subject to the same standards under the Final Rule that apply to US BHCs with total consolidated assets of $50 billion or more, including requirements to (i) appoint a chief risk officer and an independent risk committee of the board of directors; (ii) develop an enterprise-wide risk management policy and a specific liquidity-risk management policy; (iii) conduct company-run liquidity stress-testing; and (iv) accumulate a buffer of highly liquid assets to meet liquidity requirements under various stressed scenarios. In addition, IHCs are subject to other previously released Dodd-Frank Act requirements for enhanced prudential standards, including the Basel III risk-based capital and leverage requirements, released in July 2013, and requirements to conduct supervisory and company-run capital stress tests, released in October 2012. In addition, the Federal Reserve would have authority to examine any IHC and any of its subsidiaries.
FBOs with total consolidated assets of $50 billion, but fewer than $50 billion in US non-branch assets, are not required to form IHCs. These organisations will still need to meet capital, liquidity, risk-management, and stress testing requirements, but generally may satisfy these obligations by certifying compliance with the standards of their home country regulators. FBOs with $10 billion or more in total consolidated assets will also be required to conduct stress tests, and, if publicly traded, to form an enterprise-wide risk committee.
Recognizing the cost and time associated with forming an IHC and restructuring their US assets, the Final Rule extends the compliance period for FBOs that must form an IHC by one year. An FBO that meets or exceeds the $50 billion US non-branch assets threshold on July 1, 2015 must transfer its interests in any US BHC subsidiary or bank subsidiary, and US subsidiaries representing 90% of its assets not held by either a BHC or bank subsidiary, to its IHC no later than July 1, 2016. The FBO then has until July 1, 2017 to transfer its interest in any other US subsidiaries to the IHC. In addition, based on comments received on the transitional burdens of complying with the US rules implementing the Basel III capital framework, the Federal Reserve is deferring application of the leverage capital requirements until January 1, 2018.
All other FBOs that exceed either the $50 billion or $10 billion asset thresholds as of July 1, 2015 will be required to meet the applicable requirements no later than July 1, 2016. Finally, any FBO that meets the $50 or $10 billion consolidated asset thresholds or the $50 billion US non-branch asset threshold later than July 1, 2015, must meet the appropriate requirements for their size on or before the start of the ninth quarter after the date on which its assets exceeded the applicable threshold.