[Federal Register Volume 77, Number 249 (Friday, December 28, 2012)]
[Proposed Rules]
[Pages 76627-76704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30734]



[[Page 76627]]

Vol. 77

Friday,

No. 249

December 28, 2012

Part II





Federal Reserve System





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12 CFR Part 252





Enhanced Prudential Standards and Early Remediation Requirements for 
Foreign Banking Organizations and Foreign Nonbank Financial Companies; 
Proposed Rule

Federal Register / Vol. 77 , No. 249 / Friday, December 28, 2012 / 
Proposed Rules

[[Page 76628]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. 1438]
RIN 7100 AD 86


Enhanced Prudential Standards and Early Remediation Requirements 
for Foreign Banking Organizations and Foreign Nonbank Financial 
Companies

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board is requesting comment on proposed rules that would 
implement the enhanced prudential standards required to be established 
under section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act or Act) and the early remediation 
requirements required to be established under section 166 of the Act 
for foreign banking organizations and foreign nonbank financial 
companies supervised by the Board. The enhanced prudential standards 
include risk-based capital and leverage requirements, liquidity 
standards, risk management and risk committee requirements, single-
counterparty credit limits, stress test requirements, and a debt-to-
equity limit for companies that the Financial Stability Oversight 
Council has determined pose a grave threat to financial stability.

DATES: Comments should be received on or before March 31, 2013.

ADDRESSES: You may submit comments, identified by Docket No. R-1438 and 
RIN 7100 AD 86 by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include docket 
and RIN numbers in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.

All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons. Accordingly, your comments will 
not be edited to remove any identifying or contact information. Public 
comments may also be viewed electronically or in paper form in Room MP-
500 of the Board's Martin Building (20th and C Streets NW., Washington, 
DC 20551) between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Mark E. Van Der Weide, Senior 
Associate Director, (202) 452-2263, or Molly E. Mahar, Senior 
Supervisory Financial Analyst, (202) 973-7360, Division of Banking 
Supervision and Regulation; or Ann Misback, Associate General Counsel, 
(202) 452-3788, or Christine Graham, Senior Attorney, (202) 452-3005, 
Legal Division.
    U.S. Intermediate Holding Company Requirement: Molly E. Mahar, 
Senior Supervisory Financial Analyst, (202) 973-7360, or Elizabeth 
MacDonald, Senior Supervisory Financial Analyst, (202) 475-6316, 
Division of Banking Supervision and Regulation; or Benjamin W. 
McDonough, Senior Counsel, (202) 452-2036, April C. Snyder, Senior 
Counsel, (202) 452-3099, or David Alexander, Senior Attorney, (202) 
452-2877, Legal Division.
    Risk-Based Capital Requirements and Leverage Limits: Anna Lee 
Hewko, Assistant Director, (202) 530-6260, or Elizabeth MacDonald, 
Senior Supervisory Financial Analyst, (202) 475-6316, Division of 
Banking Supervision and Regulation; or Benjamin W. McDonough, Senior 
Counsel, (202) 452-2036, or April C. Snyder, Senior Counsel, (202) 452-
3099, Legal Division.
    Liquidity Requirements: Mary Aiken, Manager, (202) 721-4534, 
Division of Banking Supervision and Regulation; or April C. Snyder, 
Senior Counsel, (202) 452-3099, Legal Division.
    Single-Counterparty Credit Limits: Molly E. Mahar, Senior 
Supervisory Financial Analyst, (202) 973-7360, or Jordan Bleicher, 
Supervisory Financial Analyst, (202) 973-6123, Division of Banking 
Supervision and Regulation; or Pamela G. Nardolilli, Senior Counsel, 
(202) 452-3289, Patricia P. Yeh, Counsel, (202) 912-4304, Anna M. 
Harrington, Senior Attorney, (202) 452-6406, or Kerrie M. Brophy, 
Attorney, (202) 452-3694, Legal Division.
    Risk Management and Risk Committee Requirements: Pamela A. Martin, 
Senior Supervisory Financial Analyst, (202) 452-3442, Division of 
Banking Supervision and Regulation; or Jonathan D. Stoloff, Special 
Counsel, (202) 452-3269, or Jeremy C. Kress, Attorney, (202) 872-7589, 
Legal Division.
    Stress Test Requirements: Tim Clark, Senior Associate Director, 
(202) 452-5264, Lisa Ryu, Assistant Director, (202) 263-4833, David 
Palmer, Senior Supervisory Financial Analyst, (202) 452-2904, or Joseph 
Cox, Financial Analyst, (202) 452-3216, Division of Banking Supervision 
and Regulation; or Benjamin W. McDonough, Senior Counsel, (202) 452-
2036, or Christine E. Graham, Senior Attorney, (202) 452-3005, Legal 
Division.
    Debt-to-Equity Limits for Certain Covered Companies: Elizabeth 
MacDonald, Senior Supervisory Financial Analyst, (202) 475-6316, 
Division of Banking Supervision and Regulation; or Benjamin W. 
McDonough, Senior Counsel, (202) 452-2036, or David Alexander, Senior 
Attorney, (202) 452-2877, Legal Division.
    Early Remediation Framework: Barbara J. Bouchard, Senior Associate 
Director, (202) 452-3072, Molly E. Mahar, Senior Supervisory Financial 
Analyst, (202) 973-7360, or Linda W. Jeng, Senior Supervisory Financial 
Analyst, (202) 475-6315, Division of Banking Supervision and 
Regulation; or Jay R. Schwarz, Counsel, (202) 452-2970, Legal Division.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Overview of the Proposal
III. Requirement To Form a U.S. Intermediate Holding Company
IV. Risk-Based Capital Requirements and Leverage Limits
V. Liquidity Requirements
VI. Single-Counterparty Credit Limits
VII. Risk Management and Risk Committee Requirements
VIII. Stress Test Requirements
IX. Debt-to-Equity Limits
X. Early Remediation
XI. Administrative Law Matters

I. Introduction

    The recent financial crisis demonstrated that certain U.S. 
financial companies had grown so large, leveraged, and interconnected 
that their failure could pose a threat to overall financial stability 
in the United States and globally. The financial crisis also 
demonstrated that large foreign banking organizations operating in the 
United States could pose similar financial stability risks. Further, 
the crisis revealed weaknesses in the existing framework for 
supervising, regulating, and resolving significant U.S. financial 
companies, including the U.S. operations of large foreign banking 
organizations.

[[Page 76629]]

    The Board recognizes the important role that foreign banking 
organizations play in the U.S. financial sector. The presence of 
foreign banking organizations in the United States has brought 
competitive and countercyclical benefits to U.S. markets. This preamble 
describes a set of proposed adjustments to the Board's regulation of 
the U.S. operations of foreign banking organizations to address risks 
posed by those entities and to implement the enhanced prudential 
standards and early remediation requirements in sections 165 and 166 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act or Act). The proposed adjustments are consistent with the 
Board's long-standing policy of national treatment and equality of 
competitive opportunity between the U.S. operations of foreign banking 
organizations and U.S. banking firms.

Current Approach To Regulating U.S. Operations of Foreign Banking 
Organizations

    The Board is responsible for the overall supervision and regulation 
of the U.S. operations of all foreign banking organizations.\1\ Other 
federal and state regulators are responsible for supervising and 
regulating certain parts of the U.S. operations of foreign banking 
organizations, such as branches, agencies, or bank and nonbank 
subsidiaries.\2\
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    \1\ International Banking Act of 1978 (12 U.S.C. 3101 et seq.) 
and Foreign Bank Supervision Enhancement Act of 1991 (12 U.S.C. 3101 
note). For purposes of this proposal, a foreign banking organization 
is a foreign bank that has a banking presence in the United States 
by virtue of operating a branch, agency, or commercial lending 
company subsidiary in the United States or controlling a bank in the 
United States; or any company of which the foreign bank is a 
subsidiary.
    \2\ For example, the Securities and Exchange Commission (SEC) is 
the primary financial regulatory agency with respect to any 
registered broker-dealer, registered investment company, or 
registered investment adviser of a foreign banking organization. 
State insurance authorities are the primary financial regulatory 
agencies with respect to the insurance subsidiaries of a foreign 
banking organization. The Office of the Comptroller of the Currency 
(OCC), the Federal Deposit Insurance Corporation (FDIC), and the 
state banking authorities have supervisory authority over the 
national and state bank subsidiaries and federal and state branches 
and agencies of foreign banking organizations, respectively, in 
addition to the Board's supervisory and regulatory responsibilities 
over some of these entities.
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    Under the current U.S. supervision framework for foreign banking 
organizations, supervisors monitor the individual legal entities of the 
U.S. operations of these companies, and the Federal Reserve aggregates 
information it receives through its own supervisory process and from 
other U.S. supervisors to form a view of the financial condition of the 
combined U.S. operations of the company. The Federal Reserve and other 
U.S. regulators also work with regulators in other national 
jurisdictions to help ensure that all internationally active banks 
operating in the United States are supervised in accordance with a 
consistent set of core capital and other prudential requirements. 
International standards are intended to address the risks posed by the 
consolidated organization and to help achieve global competitive 
equity. Under this approach, the Federal Reserve oversees operations in 
the United States, but also relies on the home country supervisor to 
supervise a foreign banking organization on a global basis consistent 
with international standards and relies on the foreign banking 
organization to support its U.S. operations under both normal and 
stressed conditions.
    Under this regulatory and supervisory framework, foreign banking 
organizations have structured their U.S. operations in ways that 
promote maximum efficiency of capital and liquidity management at the 
consolidated level. Permissible U.S. structures for foreign banking 
organizations have included cross-border branching and holding direct 
and indirect bank and nonbank subsidiaries. U.S. banking law and 
regulation also allow well-managed and well-capitalized foreign banking 
organizations to conduct a wide range of bank and nonbank activities in 
the United States on conditions comparable to those applied to U.S. 
banking organizations.\3\ Further, as a general matter, a top-tier U.S. 
bank holding company subsidiary of a foreign banking organization that 
qualifies as a financial holding company has not been required to 
comply with the Board's capital standards since 2001 pursuant to 
Supervision and Regulation (SR) Letter 01-01.\4\
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    \3\ 12 U.S.C. 1843(l)(1); 12 CFR 225.90.
    \4\ See SR Letter 01-01 (January 5, 2001), available at http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
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    As a result of this flexibility granted to foreign banking 
organizations in the United States, the current population of foreign 
banking organizations is structurally diverse. Some foreign banking 
organizations conduct U.S. banking activities directly through a branch 
or agency; others own U.S. depository institutions through a U.S.-based 
bank holding company; and still others own a U.S. depository 
institution directly. Most large foreign banking organizations also 
conduct a range of nonbank activities through separate nonbank 
subsidiaries. Similar to the largest, most complex U.S. banking 
organizations, some of the largest foreign banking organizations with 
operations in the United States maintain dozens of separate U.S. legal 
entities, many of which are engaged in nonbank activities.
    The structural diversity and consolidated management of capital and 
liquidity permitted under the current approach has facilitated cross-
border banking and increased global flows of capital and liquidity. 
However, the increase in concentration, complexity, and 
interconnectedness of the U.S. operations of foreign banking 
organizations and the financial stability lessons learned during the 
crisis have raised questions about the continued suitability of this 
approach. Additionally, the Congressional mandate included in the Dodd-
Frank Act requires the Board to impose enhanced prudential standards on 
large foreign banking organizations. Congress also directed the Board 
to strengthen the capital standards applied to U.S. bank holding 
company subsidiaries of foreign banking organizations by adopting the 
so-called ``Collins Amendment'' to the Dodd-Frank Act. Specifically, 
section 171 of the Dodd-Frank Act requires a top-tier U.S. bank holding 
company subsidiary of a foreign banking organization that had relied on 
SR Letter 01-01 to meet the minimum capital requirements established 
for U.S. bank holding companies by July 21, 2015.
    The following sections provide a description of changes in the U.S. 
activities of large foreign banking organizations during the period 
that preceded the financial crisis and the financial stability risks 
posed by the U.S. operations of these companies that motivate certain 
elements of this proposal.

Shifts in the U.S. Activities of Foreign Banking Organizations

    Many of the core elements of the Federal Reserve's current approach 
to the supervision of foreign banking organizations were designed more 
than a decade ago, when the U.S. presence of foreign banking 
organizations was significantly less complex. Although foreign banking 
organizations expanded steadily in the United States during the 1970s, 
1980s, and 1990s, their activities here posed limited risks to overall 
U.S. financial stability. Throughout this period, the U.S. operations 
of foreign banking organizations were largely net recipients of funding 
from their parent institutions and their activities were

[[Page 76630]]

generally limited to traditional lending to home-country and U.S. 
clients.\5\
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    \5\ The U.S. branches and agencies of foreign banks that 
borrowed from their parent organizations and lent those funds in the 
United States (lending branches) held roughly 60 percent of all 
foreign bank branch and agency assets in the United States during 
the 1980s and 1990s. See, Report of Assets and Liabilities of U.S. 
Branches and Agencies of Foreign Banks (Form FFIEC 002). Commercial 
and industrial lending continued to account for a large part of 
foreign bank branch and agency balance sheets through the 1990s. Id. 
In addition, U.S. branches and agencies of foreign banks held large 
amounts of cash during the 1980s and 1990s, in part to meet asset-
maintenance and asset-pledge requirements put in place by 
regulators. Id.
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    The profile of foreign bank operations in the United States changed 
substantially in the period preceding the financial crisis. U.S. 
branches and agencies of foreign banking organizations as a group moved 
from a position of receiving funding from their parent organizations on 
a net basis in 1999 to providing significant funding to non-U.S. 
affiliates by the mid-2000s.\6\ In 2008, U.S. branches and agencies 
provided more than $700 billion on a net basis to non-U.S. affiliates. 
As U.S. operations of foreign banking organizations received less 
funding, on net, from their parent companies over the past decade, they 
became more reliant on less stable, short-term U.S. dollar wholesale 
funding, contributing in some cases to a buildup in maturity 
mismatches. Trends in the global balance sheets of foreign banking 
organizations from this period reveal that short-term U.S. dollar 
funding raised in the United States was used to provide long-term U.S. 
dollar-denominated project and trade finance around the world as well 
as to finance non-U.S. affiliates' investments in U.S. dollar-
denominated asset-backed securities.\7\ Because U.S. supervisors, as 
host authorities, have more limited access to timely information on the 
global operations of foreign banking organizations than to similar 
information on U.S.-based banking organizations, the totality of the 
risk profile of the U.S. operations of a foreign banking organization 
can be obscured when these U.S. entities fund activities outside the 
United States, such as occurred in recent years.
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    \6\ Many U.S. branches of foreign banks shifted from the 
``lending branch'' model to a ``funding branch'' model, in which 
U.S. branches of foreign banks borrowed large volumes of U.S. 
dollars to upstream to their foreign bank parents. These ``funding 
branches'' went from holding 40 percent of foreign bank branch 
assets in the mid-1990s to holding 75 percent of foreign bank branch 
assets by 2009. See Form FFIEC 002.
    \7\ The amount of U.S. dollar-denominated asset-backed 
securities and other securities held by Europeans increased 
significantly from 2003 to 2007, much of it financed by U.S. short-
term dollar-denominated liabilities of European banks. See Ben S. 
Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin, 
International Capital Flows and the Returns to Safe Assets in the 
United States, 2003-2007, Board of Governors of the Federal Reserve 
System International Finance Discussion Papers Number 1014 (February 
2011), available at www.federalreserve.gov/pubs/ifdp/2011/1014/ifdp1014.htm.
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    In addition to funding vulnerabilities, the U.S. operations of 
foreign banking organizations have become increasingly concentrated, 
interconnected, and complex since the mid-1990s. Ten foreign banking 
organizations now account for roughly two-thirds of foreign banking 
organizations' third-party U.S. assets, up from 40 percent in 1995.\8\ 
Moreover, U.S. broker-dealer assets of large foreign banking 
organizations as a share of their third-party U.S. assets have grown 
rapidly since the mid-1990s. Five of the top-ten U.S. broker-dealers 
are currently owned by foreign banking organizations.\9\ In contrast, 
commercial and industrial lending originated by U.S. branches and 
agencies of foreign banking organizations as a share of their third-
party U.S. liabilities dropped after 2003.\10\
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    \8\ See Forms FR Y-9C, FFIEC 002, FR 2886B, FFIEC 031/041, FR-
Y7N/S, X-17A-5 Part II (SEC Form 1695), and X-17A-5 Part IIA (SEC 
Form 1696).
    \9\ See Forms FR Y-9C, FFIEC 002, FR-Y7, FR 2886B, FFIEC 031/
041, FR-Y7N/S, X-17A-5 Part II (SEC Form 1695), and X-17A-5 Part IIA 
(SEC Form 1696).
    \10\ See Form FFIEC 002.
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Financial Stability Risks Posed by U.S. Operations of Foreign Banking 
Organizations

    The financial stability risks associated with the increased capital 
market activity and shift in funding practices of the U.S. operations 
of foreign banking organizations in the period preceding the financial 
crisis became apparent during and after the crisis. The large intra-
firm cross-border flows that grew rapidly in the period leading up to 
the crisis created vulnerabilities for the U.S. operations of foreign 
banking organizations. While some foreign banking organizations were 
aided by their ability to move liquidity freely during the crisis, this 
model also created a degree of cross-currency funding risk and heavy 
reliance on swap markets that proved destabilizing.\11\ In many cases, 
foreign banking organizations that relied heavily on short-term U.S. 
dollar liabilities were forced to sell U.S. dollar assets and reduce 
lending rapidly when that funding source evaporated. This deleveraging 
imposed further stress on financial market participants, thereby 
compounding the risks to U.S. financial stability.
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    \11\ Committee on the Global Financial System, Funding patterns 
and liquidity management of internationally active banks, CGFS 
Papers No 39 (May 2010), available at http://www.bis.org/publ/cgfs39.pdf.
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    Although the United States did not experience a destabilizing 
failure of a foreign banking organization during the crisis, some 
foreign banking organizations required extraordinary support from home- 
and host-country central banks and governments. For example, the 
Federal Reserve provided considerable amounts of liquidity to both the 
U.S. branches and U.S. broker-dealer subsidiaries of foreign banking 
organizations during the financial crisis. While foreign banking 
organizations recently have reduced the scope and risk profile of their 
U.S. operations and have shown more stable funding patterns in response 
to these events, some have continued to face periodic funding and other 
stresses since the crisis. For example, as concerns about the euro zone 
rose in 2011, U.S. money market funds dramatically pulled back their 
lending to large euro-area banks, reducing lending to these firms by 
roughly $200 billion over a four-month period.\12\
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    \12\ See SEC Form N-MFP.
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Risks to Host Countries

    Beyond the United States, events in the global financial community 
underscore the risks posed by the operations of large multinational 
banking organizations to host country financial sectors. The failure of 
several internationally active financial firms during the crisis 
revealed that the location of capital and liquidity is critical in a 
resolution. In some cases, capital and liquidity related to operations 
abroad were trapped at the home entity. For example, the Icelandic 
banks held significant deposits belonging to citizens and residents of 
other countries, who could not access their funds once those banks came 
under pressure. Actions by government authorities during the crisis 
period highlighted the fact that, while a foreign bank regulatory 
regime designed to accommodate centralized management of capital and 
liquidity can promote efficiency during good times, it can also 
increase the chances of home and host jurisdictions placing 
restrictions on the cross-border movement of assets at the moment of a 
crisis, as local operations come under severe strain and repayment of 
local creditors is called into question. Resolution regimes and powers 
remain nationally based, complicating the resolution of firms with 
large cross-border operations.
    In response to financial stability risks highlighted during the 
crisis and

[[Page 76631]]

ongoing challenges associated with the resolution of large cross-border 
firms, several other national authorities have adopted modifications to 
or have considered proposals to modify their regulation of 
internationally active banks within their geographic boundaries. 
Modifications adopted or under consideration include increased 
requirements for liquidity to cover local operations of domestic and 
foreign banks and nonbanks, limits on intragroup exposures of domestic 
banks to foreign subsidiaries, and requirements to prioritize or 
segregate home country retail operations.\13\
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    \13\ See, e.g., Financial Services Authority, Strengthening 
Liquidity Standards (October 2009), available at www.fsa.gov.uk/
pubs/policy/ps09_16.pdf; Financial Services Authority, The Turner 
Review: A regulatory response to the global banking crisis (March 
2009), available at www.fsa.gov.uk/pubs/other/turner_review.pdf; 
Financial Services Authority, A regulatory response to the global 
banking crisis (March 2009), available at http://www.fsa.gov.uk/pubs/discussion/dp09_02.pdf; Independent Commission on Banking, 
Final Report Recommendations (September 2011), available at http://bankingcommission.s3. amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf; and State Secretariat for International Financial 
Matters SIF, Final report of the `too big to fail' commission of 
experts: Final report of the Commission of Experts for limiting the 
economic risks posed by large companies (September 30, 2010), 
available at www.sif.admin.ch/dokumentation/00514/00519/00592/
index.html?lang=en.
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    Actions by a home country to constrain a banking organization's 
ability to provide support to its foreign operations, as well as the 
diminished likelihood that home-country governments of large banking 
organizations would provide a backstop to their banks' foreign 
operations, have called into question one of the fundamental elements 
of the Board's current approach to supervising foreign banking 
organizations--the ability of the Board, as a host supervisor, to rely 
on a foreign banking organization to act as a source of strength to its 
U.S. operations when the foreign banking organization is under stress.
    The issues described above-growth over time in U.S. financial 
stability risks posed by foreign banking organizations individually and 
as a group, the need to minimize destabilizing pro-cyclical ring-
fencing in a crisis, persistent impediments to effective cross-border 
resolution, and limitations on parent support-together underscore the 
need for enhancements to foreign bank regulation in the United States.

Overview of Statutory Requirements

    Sections 165 and 166 of the Dodd-Frank Act direct the Board to 
impose a package of enhanced prudential standards on bank holding 
companies, including foreign banking organizations, with total 
consolidated assets of $50 billion or more and nonbank financial 
companies the Financial Stability Oversight Council (Council) has 
designated for supervision by the Board (nonbank financial companies 
supervised by the Board).\14\ These stricter prudential standards for 
large U.S. bank holding companies, foreign banking organizations, and 
nonbank financial companies supervised by the Board required under 
section 165 of the Dodd-Frank Act must include enhanced risk-based 
capital and leverage requirements, enhanced liquidity requirements, 
enhanced risk management and risk committee requirements, resolution 
planning requirements, single-counterparty credit limits, stress test 
requirements, and a debt-to-equity limit for companies that the Council 
has determined pose a grave threat to financial stability.
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    \14\ See 12 U.S.C. 5311(a)(1) (providing that foreign banking 
organizations are treated as bank holding companies for purposes of 
Title I of the Dodd-Frank Act). See infra note 24, for a description 
of a foreign banking organization.
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    Section 166 of the Dodd-Frank Act requires the Board to establish a 
regulatory framework for the early remediation of financial weaknesses 
for the same set of companies in order to minimize the probability that 
such companies will become insolvent and the potential harm of such 
insolvencies to the financial stability of the United States.\15\ 
Further, the Dodd-Frank Act authorizes, but does not require, the Board 
to establish additional enhanced prudential standards relating to 
contingent capital, public disclosures, short-term debt limits, and 
such other prudential standards as the Board determines 
appropriate.\16\
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    \15\ See 12 U.S.C. 5366(b).
    \16\ See 12 U.S.C. 5365(b)(1)(B).
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    The Dodd-Frank Act requires the enhanced prudential standards 
established by the Board under section 165 to be more stringent than 
those standards applicable to other bank holding companies and nonbank 
financial companies that do not present similar risks to U.S. financial 
stability.\17\ The standards must also increase in stringency based on 
the systemic footprint and risk characteristics of companies subject to 
section 165.\18\ Generally, the Board has authority under section 165 
to tailor the application of the standards, including differentiating 
among companies subject to section 165 on an individual basis or by 
category.\19\ In applying section 165 to foreign banking organizations, 
the Act also directs the Board to give due regard to the principle of 
national treatment and equality of competitive opportunity and to take 
into account the extent to which the foreign banking organization is 
subject, on a consolidated basis, to home country standards that are 
comparable to those applied to financial companies in the United 
States.\20\
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    \17\ See 12 U.S.C. 5365(a)(1)(A).
    \18\ See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B), 
the enhanced prudential standards must increase in stringency, based 
on the considerations listed in section 165(b)(3).
    \19\ See 12 U.S.C. 5365(b)(3). In addition, the Board must, as 
appropriate, adapt the required standards in light of any 
predominant line of business of a company for which particular 
standards may not be appropriate. 12 U.S.C. 5365(b)(3)(D).
    \20\ 12 U.S.C. 5365(a)(2).
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    The Board has already issued proposed and final rules implementing 
certain elements of sections 165 and 166 of the Dodd-Frank Act. The 
Board and the FDIC jointly issued a final rule to implement the 
resolution plan requirement in section 165(d) of the Dodd-Frank Act for 
foreign and U.S. companies that became effective on November 30, 2011, 
and expect to implement periodic reporting of credit exposures at a 
later date.\21\ Section 165(d) establishes requirements that large 
foreign banking organizations, large U.S. bank holding companies, and 
nonbank companies supervised by the Board submit periodically to the 
Board and the FDIC a plan for rapid and orderly resolution under the 
U.S. Bankruptcy Code in the event of material financial distress or 
failure.
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    \21\ See 76 FR 67323 (November 1, 2011). In response to concerns 
expressed by commenters about the clarity of key definitions and the 
scope of the proposed credit exposure reporting requirement, the 
Board and FDIC postponed finalizing the credit exposure reporting 
requirement.
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    In December 2011, the Board proposed a set of enhanced prudential 
standards and early remediation requirements for U.S. bank holding 
companies with total consolidated assets of $50 billion or more and 
U.S. nonbank financial companies supervised by the Board that included 
risk-based capital and leverage requirements, liquidity requirements, 
single-counterparty credit limits, overall risk management and risk 
committee requirements, stress test requirements, a debt-to-equity 
limit, and early remediation requirements (December 2011 proposal). On 
October 9, 2012, the Board issued a final rule implementing the 
supervisory and company-run stress testing requirements included in the 
December 2011 proposal for U.S. bank holding companies with total 
consolidated assets of $50 billion or more and U.S. nonbank financial

[[Page 76632]]

companies supervised by the Board.\22\ Concurrently, the Board issued a 
final rule implementing the company-run stress testing requirements for 
U.S. bank holding companies with total consolidated assets of more than 
$10 billion but less than $50 billion as well as state member banks and 
savings and loan holding companies with total consolidated assets of 
more than $10 billion.\23\
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    \22\ See 12 CFR Part 252, Subparts F and G.
    \23\ See 12 CFR Part 252, Subpart H.
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    The proposed standards for foreign banking organizations are 
broadly consistent with the standards proposed for large U.S. bank 
holding companies and nonbank financial companies supervised by the 
Board in the December 2011 proposal. In general, differences between 
this proposal and the December 2011 proposal reflect the different 
regulatory framework and structure under which foreign banking 
organizations operate, and do not reflect potential modifications that 
may be made to the December 2011 proposal for U.S. bank holding 
companies. The Board is currently in the process of reviewing comments 
on the remaining standards in the December 2011 proposal and is 
considering modifications to the proposal in response to those 
comments. Comments on this proposal will help inform how the enhanced 
prudential standards should be applied differently to foreign banking 
organizations.

II. Overview of the Proposal

    The Board is requesting comment on proposed rules to implement the 
provisions of sections 165 and 166 of the Dodd-Frank Act for foreign 
banking organizations with total consolidated assets of $50 billion or 
more and foreign nonbank financial companies supervised by the 
Board.\24\ The proposal includes: risk-based capital and leverage 
requirements, liquidity requirements, single-counterparty credit 
limits, overall risk management and risk committee requirements, stress 
test requirements, a debt-to-equity limit for companies that the 
Council has determined pose a grave threat to financial stability, and 
early remediation requirements. As described below, the Board is also 
proposing a supplemental enhanced standard: a requirement for certain 
foreign banking organizations to form a U.S. intermediate holding 
company, which would generally serve as a U.S. top-tier holding company 
for the U.S. subsidiaries of the company. The Board is not proposing 
any other enhanced prudential standards at this time, but continues to 
consider whether adopting any additional standards would be 
appropriate.
---------------------------------------------------------------------------

    \24\ For purposes of this proposal, foreign banking organization 
is a foreign bank that has a banking presence in the United States 
by virtue of operating a branch, agency, or commercial lending 
company subsidiary in the United States or controlling a bank in the 
United States; or any company of which the foreign bank is a 
subsidiary. A foreign nonbank financial company supervised by the 
Board is a nonbank financial company incorporated or organized in a 
country other than the United States that the Council has designated 
for Board supervision. No such designations have been made.
---------------------------------------------------------------------------

    By setting forth comprehensive enhanced prudential standards and an 
early remediation framework for large foreign banking organizations, 
the proposal would create an integrated set of requirements that are 
intended to increase the resiliency of the U.S. operations of large 
foreign banking organizations and minimize damage to the U.S. financial 
system and the U.S. economy in the event such a company fails. The 
proposed rules, which increase in stringency with the level of systemic 
risk posed by and the risk characteristics of the U.S. operations of 
the company, would provide incentives for large foreign banking 
organizations to reduce the riskiness of their U.S. operations and to 
consider the costs that their failure or distress would impose on the 
U.S. financial system.
    In applying section 165 to foreign banking organizations, the Act 
directs the Board to give due regard to the principle of national 
treatment and equality of competitive opportunity.\25\ As discussed 
above, the proposal broadly adopts the standards set forth in the 
December 2011 proposal to ensure equality of competitive opportunity, 
as modified appropriately for foreign banking organizations. 
Modifications address the fact that foreign banking organizations may 
operate in the United States through direct branches and agencies. The 
proposal also recognizes that not all foreign banking organizations 
that meet the statutory asset size thresholds, particularly those with 
a small U.S. presence, present the same level of risk to U.S. financial 
stability. As a result, the proposal would apply a reduced set of 
requirements to foreign banking organizations with combined U.S. assets 
of less than $50 billion in light of the reduced risk that these 
companies pose to U.S. financial stability.
---------------------------------------------------------------------------

    \25\ 12 U.S.C. 5365(a)(2).
---------------------------------------------------------------------------

    The Act also directs the Board in implementing section 165 to take 
into account the extent to which a foreign banking organization is 
subject on a consolidated basis to home country standards that are 
comparable to those applied to financial companies in the United 
States. In developing the proposal, the Board has taken into account 
home country standards in balance with financial stability 
considerations and concerns about extraterritorial application of U.S. 
enhanced prudential standards. The proposed capital and stress testing 
standards rely on home country standards to a significant extent with 
respect to a foreign banking organization's U.S. branches and agencies 
because branches and agencies are not separate legal entities and are 
not required to hold capital separately from their parent 
organizations. In addition, the proposed risk management standards 
would provide flexibility for foreign banking organizations to rely on 
home country governance structures to implement certain proposed risk 
management requirements.
    The Dodd-Frank Act requires the Board to apply enhanced prudential 
standards to any foreign nonbank financial company supervised by the 
Board. Consistent with this statutory requirement, the proposal would 
also apply the enhanced prudential standards, other than the 
intermediate holding company requirement, to a foreign nonbank 
financial company supervised by the Board. In addition, the proposal 
would set forth the criteria that the Board would consider to determine 
whether a U.S. intermediate holding company should be established by a 
foreign nonbank financial company. The Board would expect to tailor the 
enhanced prudential standards to individual foreign nonbank financial 
companies, as necessary, upon designation by the Council.

Consultation With the Council

    The Board consulted with the Council by providing periodic updates 
to agencies represented on the Council and their staff on the 
development of the proposed enhanced prudential standards for foreign 
banking organizations. The proposal reflects comments provided to the 
Board as a part of this consultation process. The Board also intends to 
consult with each Council member agency that primarily supervises a 
functionally regulated subsidiary or depository institution subsidiary 
of a foreign banking organization subject to this proposal before 
imposing prudential standards or any other requirements pursuant to 
section 165 that are likely to have a significant impact on such 
subsidiary.\26\
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    \26\ See 12 U.S.C. 5365(b)(4).

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[[Page 76633]]

A. Scope of Application
    This proposal would implement enhanced prudential standards under 
section 165 of the Dodd-Frank Act and early remediation requirements 
under section 166 of the Act for foreign banking organizations with 
total consolidated assets of $50 billion or more. The proposal also 
would implement the risk committee and stress testing standards set 
forth in sections 165(h) and (i) of the Act that apply to a larger 
group of foreign banking organizations and, with respect to stress 
testing, foreign savings and loan holding companies.
    In addition, foreign banking organizations with total consolidated 
assets of $50 billion or more and combined U.S. assets (excluding U.S. 
branch and agency assets) of $10 billion or more would be required to 
form a U.S. intermediate holding company that directly would be subject 
to enhanced prudential standards.\27\ Foreign banking organizations 
with total consolidated assets of $500 billion or more would also be 
subject to more stringent single-counterparty credit limits.
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    \27\ Combined U.S. assets (excluding U.S. branch and agency 
assets) would be equal to the average of the total assets of each 
top-tier U.S. subsidiary of the foreign banking organization 
(excluding any section 2(h)(2) company) on a consolidated basis for 
the four most recent consecutive quarters as reported by the foreign 
banking organization on its Capital and Asset Report for Foreign 
Banking Organizations (FR Y-7Q). If a foreign banking organization 
had not filed the FR Y-7Q for each of the four most recent 
consecutive quarters, combined U.S. assets would be based on the 
most recent quarter or consecutive quarters as reported on FR Y-7Q 
(or as determined under applicable accounting standards, if no FR Y-
7Q has been filed). A foreign banking organization would be 
permitted to reduce its combined U.S. assets (excluding the total 
assets of each U.S. branch and agency of the foreign banking 
organization) by the amount corresponding to balances and 
transactions between any U.S. subsidiaries that would be eliminated 
in consolidation were a U.S. intermediate holding company already 
formed.
---------------------------------------------------------------------------

    A foreign banking organization or its U.S. intermediate holding 
company that meets any relevant asset threshold in this proposal would 
be subject to the requirements applicable to that size of company until 
the company's total consolidated assets or combined U.S. assets fell 
and remained below the relevant asset threshold for four consecutive 
quarters.
    Table 1 includes a general description of the standards that apply 
to each type of foreign banking organization subject to sections 165 
and 166 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \28\ Foreign banking organizations with assets of $500 billion 
or more and U.S. IHCs with assets of $500 billion or more would be 
subject to stricter limits.

                                     Table 1--Scope of Application for FBOs
----------------------------------------------------------------------------------------------------------------
          Global assets                 U.S. assets                  Summary of requirements that apply
----------------------------------------------------------------------------------------------------------------
> $10 billion and...............  n/a....................   Have a U.S. risk committee.
< $50 billion...................
                                                            Meet home country stress test requirements
                                                            that are broadly consistent with U.S. requirements.
> $50 billion...................  < $50 billion..........  All of the above, plus:
                                                            Meet home country capital standards that are
                                                            broadly consistent with Basel standards.
                                                            Single-counterparty credit limits \28\.
                                                            Subject to an annual liquidity stress test
                                                            requirement.
                                                            Subject to DFA section 166 early remediation
                                                            requirements.
                                                            Subject to U.S. intermediate holding company
                                                            (IHC) requirements:.
                                                              [cir] Required to form U.S. IHC if non-branch U.S.
                                                               assets exceed $10 billion. All U.S. IHCs are
                                                               subject to U.S BHC capital requirements.
                                                              [cir] U.S. IHC with assets between $10 and $50
                                                               billion subject to DFA Stress Testing Rule
                                                               (company-run stress test).
> $50 billion...................  > $50 billion..........  All of the above, plus:
                                                            U.S. IHC with assets >$50 billion subject to
                                                            capital plan rule and all DFA stress test
                                                            requirements (CCAR).
                                                            U.S. IHC and branch/agency network subject
                                                            to monthly liquidity stress tests and in-country
                                                            liquidity requirements.
                                                            Must have a U.S. risk committee and U.S.
                                                            Chief Risk Officer.
                                                            Subject to nondiscretionary DFA section 166
                                                            early remediation requirements.
----------------------------------------------------------------------------------------------------------------

Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More

    The U.S. operations of foreign banking organizations with total 
consolidated assets of $50 billion or more would be subject to the 
enhanced prudential standards of this proposal. Total consolidated 
assets for a foreign banking organization would include its global 
consolidated assets, calculated as the four-quarter average of total 
assets reported on the foreign banking organization's quarterly 
regulatory report filed with the Board, the Capital and Asset Report 
for Foreign Banking Organizations (FR Y-7Q).\29\
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    \29\ If the foreign banking organization had not filed the FR Y-
7Q for each of the four most recent consecutive quarters, total 
consolidated assets would be based on the average of the foreign 
banking organization's total assets for the most recent quarter or 
consecutive quarters as reported on the FR Y-7Q (or as determined 
under applicable accounting standards, if no FR Y-7Q has been 
filed).
---------------------------------------------------------------------------

Foreign Banking Organizations With Combined U.S. Assets of $50 Billion 
or More

    As explained above, the proposal would apply more stringent 
standards to the U.S. operations of foreign banking organizations that 
have a more significant presence in the United States. The U.S. 
operations of a foreign banking organization with combined U.S. assets 
of $50 billion or more (including U.S. branch and agency assets) would 
be subject to more stringent liquidity standards, risk management 
standards, stress testing requirements, and early remediation 
requirements than would apply to the U.S. operations of other foreign 
banking organizations. The proposal would measure combined U.S. assets 
of a foreign banking organization as the sum of (i) the average of the 
total assets of each U.S. branch and agency of the foreign banking 
organization for the four most recent consecutive quarters as reported 
by the foreign bank on the Report of Assets and Liabilities of U.S. 
Branches and Agencies of Foreign Banks (FFIEC 002) \30\ and (ii) the 
average of the

[[Page 76634]]

total consolidated assets of its U.S. intermediate holding company for 
the four most recent consecutive quarters as reported to the Board on 
the U.S. intermediate holding company's Consolidated Financial 
Statements for Bank Holding Companies (FR Y-9C).\31\ If the foreign 
banking organization had not established a U.S. intermediate holding 
company, combined U.S. assets would include the average of the total 
consolidated assets of each top-tier U.S. subsidiary of the foreign 
banking organization (other than a section 2(h)(2) company).\32\
---------------------------------------------------------------------------

    \30\ If the foreign bank had not filed the FFIEC 002 for each of 
the four most recent consecutive quarters, the foreign bank should 
use the most recent quarter or consecutive quarters as reported on 
FFIEC 002 (or as determined under applicable accounting standards, 
if no FFIEC 002 has been filed).
    \31\ All U.S. intermediate holding companies would be required 
to file Form FR Y-9C, regardless of whether they control a bank. If 
the U.S. intermediate holding company had not filed an FR Y-9C for 
each of the four most recent consecutive quarters, the U.S. 
intermediate holding company should use the most recent quarter or 
consecutive quarters as reported on FR Y-9C (or as determined under 
applicable accounting standards, if no FR Y-9C had been filed).
    \32\ A ``section 2(h)(2) company'' would be defined to have the 
same meaning as in section 2(h)(2) of the Bank Holding Company Act 
(12 U.S.C. 2(h)(2)) and section 211.23(f)(3) or (f)(5) of the 
Board's Regulation Y. If the foreign banking organization had not 
filed the relevant reporting form for each of the four most recent 
consecutive quarters, total consolidated assets would be based on 
the average of the foreign banking organization's total assets for 
the most recent quarter or consecutive quarters as reported on the 
relevant reporting form (or as determined under applicable 
accounting standards, if no reporting form has been filed).
---------------------------------------------------------------------------

    In any case, for this purpose, the company would be permitted to 
exclude from the calculation of its combined U.S. assets the amount 
corresponding to balances and transactions between any U.S. 
subsidiaries that would be eliminated in consolidation were a U.S. 
intermediate holding company already formed. The company may also 
exclude balances and transactions between any U.S. subsidiary and any 
U.S. branch or agency. The company would be required to reflect 
balances and transactions between the U.S. subsidiary or U.S. branch or 
agency, on the one hand, and the foreign bank's non-U.S. offices and 
other non-U.S. affiliates, on the other.
    Several Dodd-Frank Act rulemakings require the calculation of 
combined U.S. assets and combined U.S. risk-weighted assets. The Board 
expects to standardize this calculation, as appropriate, and implement 
reporting requirements on the FR Y-7Q through the regulatory report 
development process.
    In addition, if a foreign banking organization's U.S. intermediate 
holding company itself had total consolidated assets of $50 billion or 
more, the U.S. intermediate holding company would be subject to more 
stringent requirements in addition to those that would apply to all 
U.S. intermediate holding companies, including higher capital 
standards, stress testing standards, and early remediation 
requirements. In addition, a U.S. intermediate holding company with 
total consolidated assets of $500 billion or more would be subject to 
stricter single-counterparty credit limits.

Foreign Banking Organizations and Foreign Savings and Loan Holding 
Companies With Total Consolidated Assets of More Than $10 Billion

    The proposal also would implement the risk management and stress 
testing provisions of section 165 that apply to a broader set of 
entities than the other standards in section 165 of the Dodd-Frank Act. 
Section 165(h) of the Dodd-Frank Act requires any publicly traded bank 
holding company with $10 billion or more in total consolidated assets 
to establish a risk committee.\33\ The Board proposes to apply this 
requirement to any foreign banking organization with publicly traded 
stock and total consolidated assets of $10 billion or more and any 
foreign banking organization, regardless of whether its stock is 
publicly traded, with total consolidated assets of $50 billion or more.
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 5365(h).
---------------------------------------------------------------------------

    Section 165(i)(2) requires any financial company with more than $10 
billion in total consolidated assets that is regulated by a primary 
federal financial regulator to conduct annual company-run stress 
tests.\34\ The Board, as the primary federal financial regulatory 
agency for foreign banking organizations and foreign savings and loan 
holding companies, proposes to apply certain stress test requirements 
to any foreign banking organization and foreign savings and loan 
holding company with more than $10 billion in total consolidated 
assets.\35\ Finally, a U.S. intermediate holding company that has total 
consolidated assets of $10 billion or more would be subject to certain 
company-run stress test requirements.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 5365(i)(2). The Dodd-Frank Act defines primary 
financial regulatory agency in section 2 of the Act. See 12 U.S.C. 
5301(12).
    \35\ For a savings and loan holding company, ``total 
consolidated assets'' would be defined as the average of the total 
assets reported by the foreign savings and loan holding company on 
its applicable regulatory report for the four most recent 
consecutive quarters, or if not reported, as determined under 
applicable accounting standards. Consistent with the methodology 
used to calculate ``total consolidated assets'' of a foreign banking 
organization, if the foreign savings and loan holding company had 
not filed the applicable reporting form for each of the four most 
recent consecutive quarters, total consolidated assets would be 
based on the average of the foreign savings and loan holding 
company's total consolidated assets, as reported on the company's 
regulatory report, for the most recent quarter or consecutive 
quarters. There are currently no foreign savings and loan holding 
companies.
---------------------------------------------------------------------------

    The proposed stress test and risk management requirements 
applicable to each set of companies are explained in detail below.

Foreign Nonbank Financial Companies

    Under the Dodd-Frank Act, the Council generally may determine that 
a U.S. or foreign nonbank financial company should be subject to 
supervision by the Board if it determines that material financial 
distress at the company, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the activities of the 
company, could pose a threat to the financial stability of the United 
States.\36\ Upon such a determination, the Board is required to apply 
the enhanced prudential standards under section 165 of the Act and the 
early remediation requirements under section 166 of the Act to a 
nonbank financial company supervised by the Board. The Board may also 
determine whether to require the foreign nonbank financial company to 
establish a U.S. intermediate holding company under section 167 of the 
Act. At present, the Council has not designated any nonbank financial 
companies for supervision by the Board.
---------------------------------------------------------------------------

    \36\ See 12 U.S.C. 5315; see also 77 FR 21637 (April 11, 2012) 
(final rule regarding the Council's authority under section 113 of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    Consistent with the Dodd-Frank Act, this proposal would establish 
the general framework for application of the enhanced prudential 
standards and the early remediation requirements applicable to a 
foreign nonbank financial company supervised by the Board. In addition, 
the proposal would set forth the criteria that the Board would use to 
consider whether a U.S. intermediate holding company should be 
established by a foreign nonbank financial company.
    In applying the proposed enhanced prudential standards to foreign 
nonbank financial companies supervised by the Board, the Board expects 
to tailor the application of the standards to different companies on an 
individual basis or by category, taking into consideration their 
capital structure, riskiness, complexity, financial activities, size, 
and any other risk-related factors that the Board deems 
appropriate.\37\ The Board also would review whether enhanced 
prudential standards as applied to particular

[[Page 76635]]

foreign nonbank financial companies would give due regard to the 
principle of national treatment and equality of competitive opportunity 
and would take into account the extent to which the foreign nonbank 
financial company is subject on a consolidated basis to home country 
standards that are comparable to those applied to financial companies 
in the United States. The Board expects to issue an order that provides 
clarity on how the enhanced prudential standards would apply to a 
particular foreign nonbank financial company once the company is 
designated by the Council.
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 5365(a)(2).
---------------------------------------------------------------------------

    Question 1: Should the Board require a foreign nonbank financial 
company supervised by the Board to establish a U.S. intermediate 
holding company? Why or why not? What activities, operations, or 
subsidiaries should the foreign nonbank financial company be required 
to conduct or hold under the U.S. intermediate holding company?
    Question 2: If the Board required a foreign nonbank financial 
company supervised by the Board to form a U.S. intermediate holding 
company, how should the Board modify the manner in which the enhanced 
prudential standards and early remediation requirements would apply to 
the U.S. intermediate holding company, if at all? What specific 
characteristics of a foreign nonbank financial company should the Board 
consider when determining how to apply the enhanced prudential 
standards and the early remediation requirements to such a company?
B. Summary of the Major Elements of the Proposal
    The proposal would implement sections 165 and 166 through 
requirements that enhance the Board's current regulatory framework for 
foreign banking organizations in order to better mitigate the risks 
posed to U.S. financial stability by the U.S. activities of foreign 
banking organizations. These changes would provide a platform for 
consistent regulation and supervision of the U.S. operations of large 
foreign banking organizations. The changes would also bolster the 
capital and liquidity positions of the U.S. operations of foreign 
banking organizations to improve their resiliency to asset quality or 
funding shocks and may mitigate certain challenges associated with the 
resolution of the U.S. operations of a large foreign banking 
organization. Together, these changes should increase the resiliency of 
the U.S. operations of foreign banking organizations during normal and 
stressed periods. The Board seeks comment on all elements of this 
proposal.

Enhanced Structural, Capital, and Liquidity Requirements

    The proposal would mandate a more standardized structure for the 
U.S. bank and nonbank subsidiaries of foreign banking organizations in 
order to enhance regulation and supervision of their combined U.S. 
operations. Foreign banking organizations with total consolidated 
assets of $50 billion or more and with combined U.S. assets (excluding 
the total assets of each U.S. branch and agency of the foreign banking 
organization) of $10 billion or more would be required to establish a 
top-tier U.S. intermediate holding company over all U.S. bank and 
nonbank subsidiaries of the company, except for any company held under 
section 2(h)(2) of the Bank Holding Company Act.\38\ The U.S. 
intermediate holding company would be subject to the enhanced 
prudential standards of this proposal and would not be separately 
subject to the enhanced prudential standards applicable to U.S. bank 
holding companies.
---------------------------------------------------------------------------

    \38\ 12 U.S.C. 1841(c)(2).
---------------------------------------------------------------------------

    The U.S. intermediate holding company requirement would provide 
consistency in the application of enhanced prudential standards to the 
U.S. operations of foreign banking organizations with a large U.S. 
subsidiary presence. In addition, a U.S. intermediate holding company 
structure would provide the Board, as umbrella supervisor of the U.S. 
operations of foreign banking organizations, with a more uniform 
platform on which to implement its supervisory program across the U.S. 
operations of foreign banking organizations. In the case of a foreign 
banking organization with large subsidiaries in the United States, the 
U.S. intermediate holding company could also help facilitate the 
resolution of those U.S. subsidiaries. A foreign banking organization 
would be permitted to continue to operate in the United States through 
branches and agencies, albeit subject to the enhanced prudential 
standards included in the proposal for U.S. branch and agency 
networks.\39\
---------------------------------------------------------------------------

    \39\ U.S. branch and agency network would be defined to include 
all U.S. branches and U.S. agencies of a foreign bank subject to 
this proposal.
---------------------------------------------------------------------------

    The proposed rule would apply the risk-based capital and leverage 
rules that are applicable to U.S. bank holding companies to U.S. 
intermediate holding companies of foreign banking organizations, 
including U.S. intermediate holding companies that do not have a 
depository institution subsidiary. U.S. intermediate holding companies 
with total consolidated assets of $50 billion or more would also be 
subject to the capital plan rule.\40\ In addition, any foreign banking 
organization with total consolidated assets of $50 billion or more 
generally would be required to meet its home country's risk-based 
capital and leverage standards at the consolidated level that are 
consistent with internationally agreed risk-based capital and leverage 
standards, including the risk-based capital and leverage requirements 
included in the Basel III agreement, on an ongoing basis as that 
framework is scheduled to take effect.\41\
---------------------------------------------------------------------------

    \40\ See 12 CFR 225.8.
    \41\ See Basel Committee on Banking Supervision (BCBS), Basel 
III: A global framework for more resilient banks and banking systems 
(December 2010), available at http://www.bis.org/publ/bcbs189.pdf 
(Basel III Accord).
---------------------------------------------------------------------------

    The proposal would also generally apply the same set of liquidity 
risk management standards to the U.S. operations of foreign banking 
organizations with combined U.S. assets of $50 billion or more that 
would be required under the December 2011 proposal for large U.S. bank 
holding companies. These standards would include a requirement to 
conduct monthly liquidity stress tests over a series of time intervals 
out to one year, and to hold a buffer of high quality liquid assets to 
cover the first 30 days of stressed cash flow needs. These standards 
are designed to increase the resiliency of the U.S. operations of 
foreign banking organizations during times of stress and to reduce the 
risk of asset fire sales when U.S. dollar funding channels are strained 
and short-term debt cannot easily be rolled over.
    Under the proposal, the liquidity buffer would separately apply to 
the U.S. branch and agency network and the U.S. intermediate holding 
company of a foreign banking organization with combined U.S. assets of 
$50 billion or more. The proposal would require the U.S. intermediate 
holding company to maintain the entire 30-day buffer in the United 
States to maintain consistency with requirements for large U.S. bank 
holding companies. In recognition that U.S. branches and agencies are 
not separate legal entities from their parent foreign bank and can 
engage only in traditional banking activities by the terms of their 
licenses, the proposal would require the U.S. branch and agency network 
to maintain the first 14 days of its 30-day liquidity buffer in the 
United States and would permit the U.S. branch and agency network to 
meet the remainder of its requirement at the consolidated level.

[[Page 76636]]

Single-Counterparty Credit Limits

    In addition to the structural, capital and liquidity requirements 
described above, the proposal would apply single-counterparty credit 
limits to foreign banking organizations in a manner generally 
consistent with the December 2011 proposal. Single-counterparty credit 
limits would be separately applied to a foreign banking organization 
with total consolidated assets of $50 billion or more with respect to 
its combined U.S. operations and its U.S. intermediate holding company. 
In general, the combined U.S. operations of a foreign banking 
organization would be subject to a limit of 25 percent of the foreign 
banking organization's total regulatory capital to a single-
counterparty, and the U.S. intermediate holding company would be 
subject to a limit of 25 percent of its total regulatory capital to a 
single-counterparty. The proposal would also apply a more stringent 
limit to the combined U.S. operations of a foreign banking organization 
that has total consolidated assets of $500 billion or more and to a 
U.S. intermediate holding company that has total consolidated assets of 
$500 billion or more, with respect to exposures to certain large 
financial counterparties. The size of the stricter limit would be 
aligned with the limit imposed on U.S. bank holding companies with 
total consolidated assets of $500 billion or more.
    The Board received a large volume of comments on the single-
counterparty credit limits set forth in the December 2011 proposal. The 
Board is currently in the process of reviewing comments on the 
standards in the December 2011 proposal and is considering 
modifications to the proposal in response to those comments. Comments 
on this proposal will help inform how the enhanced prudential standards 
should be applied differently to foreign banking organizations.

Risk Management Requirements

    The proposal would require any foreign banking organization with 
publicly traded stock and total consolidated assets of $10 billion or 
more and any foreign banking organization, regardless of whether its 
stock is publicly traded, with total consolidated assets of $50 billion 
or more to certify that it maintains a U.S. risk committee. In 
addition, a foreign banking organization with combined U.S. assets of 
$50 billion or more would be required to employ a U.S. chief risk 
officer and implement enhanced risk management requirements in a manner 
that is generally consistent with the requirements in the December 2011 
proposal. However, the proposal would also implement these requirements 
in a manner that provides some flexibility for foreign banking 
organizations and recognizes the complexity in applying standards to 
foreign banking organizations that maintain a U.S. branch and agency 
network and bank and nonbank subsidiaries.

Stress Testing

    The proposal would implement stress test requirements for a U.S. 
intermediate holding company in a manner parallel to those required of 
a U.S. bank holding company.\42\ The parallel implementation would help 
to ensure that U.S. intermediate holding companies have sufficient 
capital in the United States to withstand a severely adverse stress 
scenario. As provided in more detail in section VIII of this preamble, 
a foreign banking organization with total consolidated assets of $50 
billion or more that maintains a U.S. branch and agency network could 
satisfy the proposal's stress test requirements applicable to the U.S. 
branch and agency network if it is subject to a consolidated capital 
stress testing regime that is broadly consistent with the stress test 
requirements in the United States and, if it has combined U.S. assets 
of $50 billion or more, provides information to the Board regarding the 
results of the consolidated stress tests.
---------------------------------------------------------------------------

    \42\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October 
12, 2012).
---------------------------------------------------------------------------

Early Remediation

    The recent financial crisis revealed that the condition of large 
U.S. and foreign banking organizations can deteriorate rapidly even 
during periods when their reported capital ratios and other financial 
positions are well above minimum requirements. The proposal would 
implement early remediation requirements for foreign banking 
organizations with total consolidated assets of $50 billion or more in 
a manner generally consistent with the December 2011 proposal. All 
foreign banking organizations subject to the regime would be subject to 
the same set of triggers; however, only foreign banking organizations 
with combined U.S. assets of $50 billion or more would be subject to 
mandatory remedial actions.
C. Considerations in Developing the Proposal
    While this proposal would implement some standards that require a 
more direct allocation of capital and liquidity resources to U.S. 
operations than the Board's current approach to foreign bank 
regulation, the proposal should be viewed as supplementing rather than 
departing from existing supervisory practice. The proposal would 
continue to allow foreign banking organizations to operate branches and 
agencies in the United States and would generally allow U.S. branches 
and agencies to continue to meet capital requirements at the 
consolidated level. Similarly, the proposal would not impose a cap on 
cross-border intra-group flows, thereby allowing foreign banking 
organizations in sound financial condition to continue to obtain U.S. 
dollar funding for their global operations through their U.S. 
operations. The proposal would, however, regulate liquidity risk in the 
U.S. operations of foreign banking organizations in a way that 
increases their resiliency to changes in the availability of funding.
    Requiring capital and liquidity buffers in a specific jurisdiction 
of operation below the consolidated level may incrementally increase 
costs and reduce flexibility of internationally active banks that 
manage their capital and liquidity on a centralized basis. However, 
managing liquidity and capital within jurisdictions can have benefits 
not just for financial stability generally, but also for firms 
themselves. During the crisis, more decentralized global banks relied 
less on cross-currency funding and were less exposed to disruptions in 
international wholesale funding and foreign exchange swap markets than 
more centralized banks.\43\
---------------------------------------------------------------------------

    \43\ Committee on the Global Financial System, Funding patterns 
and liquidity management of internationally active banks, supra note 
11.
---------------------------------------------------------------------------

    The Board considered implementing the enhanced prudential standards 
required under the Dodd-Frank Act for foreign banking organizations by 
extending the Federal Reserve's current approach to foreign bank 
regulation to include ongoing and more detailed assessments of each 
firm's home country regulatory and resolution regimes and each firm's 
consolidated financial condition. While this type of analysis is an 
important part of ongoing supervisory efforts, such an approach to 
financial stability regulation, on its own, could significantly 
increase regulatory uncertainty and lead to meaningful inconsistencies 
in the U.S. regulatory regime for foreign and U.S. companies. In 
addition, as host supervisor, the Board is limited in its ability to 
assess the financial condition of a foreign banking organization on a 
timely basis, inhibiting complete analysis of the

[[Page 76637]]

parent organization's ability to act as a source of support to its U.S. 
operations during times of stress.

Additional Information Requests

    The Board recognizes that the U.S. operations of foreign banking 
organizations represent only one part of the global consolidated 
company and as such will be affected by developments at the 
consolidated and U.S. operations levels. In addition, U.S. branches and 
agencies are direct offices of the foreign banking organization and are 
not subject to U.S. capital requirements or restrictions in the United 
States on providing funding to their parent. As a result, the Board 
anticipates that U.S. supervisors of foreign banking organizations 
would continue to require information about the overall financial 
condition of the consolidated entity. Requests for information on the 
consolidated operations of foreign banking organizations that are part 
of this proposal or the Federal Reserve's broader supervisory process 
would be more frequent for those companies that pose more material risk 
to U.S. financial stability. Information requests may also increase in 
frequency in cases when the condition of the consolidated foreign 
banking organization has shown signs of deterioration, when the Federal 
Reserve has significant concerns about the willingness or ability of 
the foreign banking organization to provide support to its U.S. 
operations, when the U.S. operations of a foreign banking organization 
represent a large share of the global firm, or when risk management 
decisions for the U.S. operations are largely made at the consolidated 
level.
    Question 3: Does the proposal effectively promote the policy goals 
stated in this preamble and help mitigate the challenges with cross-
border supervision discussed above? Do any aspects of the policy create 
undue burden for supervised institutions?
D. Timing of Application
    The proposal would provide an extended phase-in period to allow 
foreign banking organizations time to implement the proposed 
requirements. For foreign banking organizations that meet the total 
consolidated asset threshold of $50 billion and, as applicable, the 
combined U.S. asset threshold of $50 billion as of July 1, 2014, the 
enhanced prudential standards required under this proposal would apply 
beginning on July 1, 2015.\44\
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    \44\ The proposed debt-to-equity ratio limitation, which applies 
upon a determination by the Council that a foreign banking 
organization with total consolidated assets of $50 billion or more 
poses a grave threat to the financial stability of the United States 
and that the imposition of a debt to equity requirement is necessary 
to mitigate such risk, would apply beginning on the effective date 
of the final rule.
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    Foreign banking organizations that become subject to the 
requirements of the proposal after July 1, 2014, would be required to 
form a U.S. intermediate holding company beginning 12 months after they 
reach the total consolidated asset threshold of $50 billion, unless 
accelerated or extended by the Board in writing. These foreign banking 
organizations would be required to comply with the enhanced prudential 
standards (other than stress test requirements and the capital plan 
rule) beginning on the same date they are required to establish a U.S. 
intermediate holding company, unless accelerated or extended by the 
Board. Stress test requirements and the capital plan rule would be 
applied in October of the year after that in which the foreign banking 
organization is required to establish a U.S. intermediate holding 
company.
    Question 4: What challenges are associated with the proposed phase-
in schedule?
    Question 5: What other considerations should the Board address in 
developing any phase-in of the proposed requirements?

III. Requirement To Form a U.S. Intermediate Holding Company

A. Background

    As noted previously, foreign banking organizations operate in the 
United States under a variety of structures. Some foreign banking 
organizations conduct banking activities directly through a U.S. branch 
or agency; others own U.S. depository institutions through a U.S.-based 
bank holding company; and still others own a U.S. depository 
institution directly. Most large foreign banking organizations also 
conduct a range of nonbank activities through separate nonbank 
subsidiaries, which may or may not be under a U.S.-based bank holding 
company. Many foreign banking organizations do not have a single top-
tier U.S. entity through which to apply prudential requirements to 
their combined U.S. operations.
    Section 165 requires the Board to impose enhanced prudential 
standards on foreign banking organizations with total consolidated 
assets of $50 billion or more in a manner that preserves national 
treatment and reduces risk to U.S. financial stability. Given the 
current variety in structures, applying these standards consistently 
across the U.S. operations of foreign banking organizations and in 
comparable ways to both large U.S. bank holding companies and foreign 
banking organizations would be challenging and may not reduce the risk 
posed by these companies.
    Furthermore, relying solely on home country implementation of the 
enhanced prudential standards would also present challenges. Several of 
the Act's required enhanced prudential standards are not subject to 
international agreement. In addition, U.S. supervisors, as host 
authorities, have limited access to timely information on the global 
operations of foreign banking organizations. As a result, monitoring 
compliance with any enhanced prudential standards at the consolidated 
foreign banking organization would be difficult and may raise concerns 
of extraterritorial application of the standards.
    Accordingly, the proposal would apply a structural enhanced 
standard under which foreign banking organizations with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
$10 billion or more (excluding U.S. branch and agency assets and 
section 2(h)(2) companies) would be required to form a U.S. 
intermediate holding company. The foreign banking organization would 
hold and operate its U.S. operations (other than those operations 
conducted through U.S. branches and agencies and section 2(h)(2) 
companies, as defined below) through the U.S. intermediate holding 
company, which would serve as a focal point for the Board's supervision 
and regulation of the foreign banking organization's U.S. subsidiaries.
    The U.S. intermediate holding company requirement would be an 
integral component of the proposal's risk-based capital requirements, 
leverage limits, and liquidity requirements. It would enable the Board 
to impose these standards on the foreign banking organization's U.S. 
bank and nonbank subsidiaries on a consistent, comprehensive, and 
consolidated basis. The U.S. intermediate holding company requirement 
would also assist in implementing the proposal's other enhanced risk 
management standards, as it would facilitate the foreign company's 
ability to oversee and the Board's ability to supervise the combined 
risks taken by the foreign company's U.S. operations. A U.S. 
intermediate holding company could also help facilitate the resolution 
or restructuring of the U.S. subsidiary operations of a foreign banking 
organization by providing one top-tier U.S. legal entity to be resolved 
or restructured.

[[Page 76638]]

B. Intermediate Holding Company Requirements for Foreign Banking 
Organizations With Combined U.S. Assets (Excluding U.S. Branch and 
Agency Assets) of $10 Billion or More

    As noted, the proposal would require a foreign banking organization 
with total consolidated assets of $50 billion or more and combined U.S. 
assets (excluding U.S. branch and agency assets) of $10 billion or more 
to establish a U.S. intermediate holding company.\45\ The Board has 
chosen the $10 billion threshold because it is aligned with the $10 
billion threshold established by the Dodd-Frank Act for stress test and 
risk management requirements.
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    \45\ Combined U.S. assets (excluding U.S. branch and agency 
assets) would be based on the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding 
any section 2(h)(2) company). A company would be permitted to reduce 
its combined U.S. assets for this purpose by the amount 
corresponding to balances and transactions between any U.S. 
subsidiaries that would be eliminated in consolidation were a U.S. 
intermediate holding company already formed.
---------------------------------------------------------------------------

    A foreign banking organization that meets the asset thresholds 
would be required to establish a U.S. intermediate holding company on 
July 1, 2015, unless that time is extended by the Board in writing. A 
foreign banking organization that crosses the asset thresholds after 
July 1, 2014 would be required to establish a U.S. intermediate holding 
company 12 months after it crossed the asset threshold, unless that 
time is accelerated or extended by the Board in writing.
    A foreign banking organization that establishes a U.S. intermediate 
holding company would be required to hold its interest in any U.S. 
subsidiary, other than a section 2(h)(2) company, through the U.S. 
intermediate holding company. The term subsidiary would be defined 
using the Bank Holding Company Act definition of control, such that a 
foreign banking organization would be required to transfer its interest 
in any U.S. company, including interests in joint ventures, for which 
it: (i) Directly or indirectly or acting through one or more other 
persons owns, controls, or has power to vote 25 percent or more of any 
class of voting securities of the company; (ii) controls in any manner 
the election of a majority of the directors or trustees of the company; 
or (iii) directly or indirectly exercises a controlling influence over 
the management or policies of the company.
    U.S. subsidiaries held under section 2(h)(2) of the Bank Holding 
Company Act are not required to be held under the U.S. intermediate 
holding company. Section 2(h)(2) of the Bank Holding Company Act allows 
qualifying foreign banking organizations to retain their interest in 
foreign commercial firms that conduct business in the United States. 
This long-standing statutory exception was enacted in recognition of 
the fact that some foreign jurisdictions do not impose a clear 
separation between banking and commerce. The current proposal would not 
require foreign banking organizations to hold section 2(h)(2) 
investments under the U.S. intermediate holding company because these 
commercial firms have not been subject to Board supervision, are not 
integrated into the U.S. financial operations of foreign banking 
organizations, and foreign banking organizations often cannot 
restructure their foreign commercial investments. The proposal would 
also require the foreign banking organization to transfer to the U.S. 
intermediate holding company any controlling interests in U.S. 
companies acquired pursuant to merchant banking authority.
    In exceptional circumstances, the proposal would provide the Board 
with authority to permit a foreign banking organization to establish 
multiple U.S. intermediate holding companies or use an alternative 
organizational structure to hold its U.S. operations. For example, the 
Board may exercise this authority when a foreign banking organization 
controls multiple lower-tier foreign banking organizations that have 
separate U.S. operations. In addition, the Board may exercise this 
authority when, under applicable home country law, the foreign banking 
organization may not control its U.S. subsidiaries through a single 
U.S. intermediate holding company. Finally, the proposal would provide 
the Board with authority on an exceptional basis to approve a modified 
U.S. organizational structure based on the foreign banking 
organization's activities, scope of operations, structure, or similar 
considerations.
    The proposal would not require a foreign banking organization to 
transfer any assets associated with a U.S. branch or agency to the U.S. 
intermediate holding company. Congress has permitted foreign banking 
organizations to establish branches and agencies in the United States 
if they meet specific standards, and has chosen not to require foreign 
banks to conduct their banking business in the United States only 
through subsidiary U.S. depository institutions. Excluding U.S. 
branches and agencies from the intermediate holding company requirement 
would also preserve flexibility for foreign banking organizations to 
operate directly in the United States based on the capital adequacy of 
their consolidated organization, subject to proposed enhanced 
prudential standards applicable to the U.S. branch and agency networks.
    After issuing a final rule, the Board intends to monitor how 
foreign banking organizations adapt their operations in response to the 
structural requirement, including whether foreign banking organizations 
relocate activities from U.S. subsidiaries into their U.S. branch and 
agency networks.
    Question 6: What opportunities for regulatory arbitrage exist 
within the proposed framework, if any? What additional requirements 
should the Board consider applying to a U.S. branch and agency network 
to ensure that U.S. branch and agency networks do not receive favorable 
treatment under the enhanced prudential standards regime?
    Question 7: Should the Board consider an alternative asset 
threshold for purposes of identifying the companies required to form a 
U.S. intermediate holding company, and if so, what alternative 
threshold should be considered and why? What other methodologies for 
calculating a company's total U.S. assets would better serve the 
purposes of the proposal?
    Question 8: Should the Board provide an exclusive list of 
exemptions to the intermediate holding company requirement or provide 
exceptions on a case-by-case basis?
    Question 9: Is the definition of U.S. subsidiary appropriate for 
purposes of determining which entities should be held under the U.S. 
intermediate holding company?
    Question 10: Should the Board consider exempting any other 
categories of companies from the requirement to be held under the U.S. 
intermediate holding company, such as controlling investments in U.S. 
subsidiaries made by foreign investment vehicles that make a majority 
of their investments outside of the United States, and if so, which 
categories of companies?
    Question 11: What, if any, tax consequences, international or 
otherwise, could present challenges to a foreign banking organization 
seeking to (1) reorganize its U.S. subsidiaries under a U.S. 
intermediate holding company and (2) operate on an ongoing basis in the 
United States through a U.S. intermediate holding company that meets 
the corporate form requirements described in the proposal?
    Question 12: What other costs would be associated with forming a 
U.S. intermediate holding company? Please be specific and describe 
accounting or other operating costs.

[[Page 76639]]

    Question 13: What impediments in home country law exist that could 
prohibit or limit the formation of a single U.S. intermediate holding 
company?
Notice Requirements
    To reduce burden on foreign banking organizations, the Board 
proposes to adopt an after-the-fact notice procedure for the formation 
of a U.S. intermediate holding company and the changes in corporate 
structure required by this proposal. Under the proposal, within 30 days 
of establishing a U.S. intermediate holding company, a foreign banking 
organization would be required to provide to the Board: (1) A 
description of the U.S. intermediate holding company, including its 
name, location, corporate form, and organizational structure, (2) a 
certification that the U.S. intermediate holding company meets the 
requirements of this section, and (3) any other information that the 
Board determines is appropriate.
    Question 14: Should the Board adopt an alternative process in 
addition to, or in lieu of, the post-notice procedure described above? 
For example, should the Board require a before-the-fact application? 
Why or why not?
Corporate Form
    The proposal would require that a U.S. intermediate holding company 
be organized under the laws of the United States, any state, or the 
District of Columbia. While the proposal generally provides flexibility 
in the corporate form of the U.S. intermediate holding company, the 
U.S. intermediate holding company could not be structured in a manner 
that would prevent it from meeting the requirements in subparts K 
through R of this proposal.\46\
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    \46\ The proposal would not require the U.S. intermediate 
holding company to be wholly owned. Thus, a U.S. intermediate 
holding company could have minority investors.
---------------------------------------------------------------------------

    Under the risk management requirements of subpart O, the U.S. 
intermediate holding company would be required to have a board of 
directors or equivalent thereto to help ensure a strong, centralized 
corporate governance system.
Applicable Standards and Supervision
    Under the proposal, a U.S. intermediate holding company would be 
subject to the enhanced prudential standards set forth in this 
proposal. In addition, a U.S. intermediate holding company would be 
subject to comparable regulatory reporting requirements and inspection 
requirements to those described in section 225.5 of the Board's 
Regulation Y (12 CFR 225.5) that apply to a bank holding company.
    The proposal would also provide that a U.S. intermediate holding 
company would be subject to the enhanced prudential standards of this 
proposal, and would not be separately subject to the enhanced 
prudential standards applicable to U.S. bank holding companies, 
regardless of whether the company would also meet the scope of 
application of those provisions. In doing so, the proposal intends to 
minimize uncertainty about the timing or applicability of certain 
requirements and to ensure that all U.S. intermediate holding companies 
of foreign banking organizations are subject to consistent rules.
    In connection with this and other rulemakings, the Board is 
conducting a review of existing supervisory guidance to identify 
guidance that may be relevant to the operations and activities of a 
U.S. intermediate holding company that does not have a bank subsidiary. 
The Board proposes to apply such guidance to U.S. intermediate holding 
companies on a rolling basis, either by revising and reissuing the 
guidance or by publishing a notification that references the applicable 
guidance.

IV. Risk-Based Capital Requirements and Leverage Limits

A. Background

    The financial crisis revealed that internationally agreed bank 
capital requirements were too low, the definition of capital was too 
weak, and the risk weights assigned to certain asset classes were not 
proportional to their actual risk. The financial crisis also 
demonstrated that in the resolution of a failing financial firm, the 
location of capital is critical and that companies that managed 
resources on a decentralized basis were generally less exposed to 
disruptions in international markets than those that solely managed 
resources on a centralized basis.
    The international regulatory community has made substantial 
progress on strengthening consolidated bank capital standards in 
response to the crisis. The Basel Committee on Banking Supervision's 
(BCBS) comprehensive reform package, ``Basel III: A global regulatory 
framework for more resilient banks and banking systems'' (Basel III 
Accord), has significantly enhanced the strength of international 
consolidated capital standards by raising minimum standards, more 
conservatively defining qualification standards for regulatory capital, 
and establishing a framework for capital conservation when capital 
levels do not remain well above the minimum standards.\47\
---------------------------------------------------------------------------

    \47\ See Basel III Accord, supra note 40.
---------------------------------------------------------------------------

    While Basel III improves the standards for quantity and quality of 
consolidated capital of internationally active banking organizations, 
it does not address the capitalization of host country operations of an 
internationally active banking organization. Moreover, lack of access 
to timely information on the consolidated capital position of the 
parent organization can limit the ability of host supervisors to 
respond to changes in consolidated capital adequacy, creating a risk of 
large losses in the host country operations of the foreign bank if the 
parent becomes distressed or fails.
    The Board's current approach to capital regulation of the U.S. 
operations of foreign banking organizations was designed to provide 
them with the flexibility to manage capital on a global consolidated 
basis, while helping to promote global competitive equity with U.S. 
banking organizations. Under the current approach, in order to 
establish a branch, agency, commercial lending company, or bank 
subsidiary in the United States, a foreign bank is required to maintain 
capital levels at the consolidated parent organization that are 
equivalent to those required of a U.S. banking organization. In making 
equivalency determinations, the Board has allowed foreign banking 
organizations to use home country capital standards if those standards 
are consistent with the standards established by the BCBS. To the 
extent that a foreign banking organization controls a U.S. depository 
institution subsidiary, the U.S. depository institution subsidiary is 
subject to the same set of risk-based capital and leverage requirements 
that apply to other U.S. depository institutions. Any functionally 
regulated nonbank subsidiaries of foreign banking organizations are 
subject to capital requirements at the individual nonbank subsidiary 
level as may be established by primary federal or state regulators. 
Pursuant to the Board's SR Letter 01-01, as a general matter, a U.S. 
bank holding company subsidiary of a foreign banking organization that 
qualifies as a financial holding company has not been required to 
comply with the Board's capital standards since 2001.\48\ This approach

[[Page 76640]]

has been predicated on the basis of the foreign bank parent maintaining 
sufficient consolidated capital levels to act as a source of support to 
its U.S. operations under stressed conditions.
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    \48\ In cases in which the Board determined that a foreign bank 
operating a U.S. branch, agency, or commercial lending company was 
well-capitalized and well-managed under standards comparable to 
those of U.S. banks controlled by financial holding companies, the 
Board has applied a presumption that the foreign banking 
organization had sufficient financial strength and resources to 
support its banking activities in the United States.
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    Several factors have prompted a targeted reassessment of the 
Board's traditional primary reliance on consolidated capital 
requirements in implementing capital regulation for U.S. subsidiaries 
of foreign banking organizations. These factors include the financial 
stability risk posed by the U.S. operations of the largest foreign 
banking organizations, questions about the ability and willingness of 
parent foreign banking organizations to act as a source of support to 
their U.S. operations during stressed periods, and challenges 
associated with cross-border resolution that create incentives for home 
and host jurisdictions to restrict cross-border intra-group capital 
flows when banking organizations face difficulties.
    The Board has considered these factors in determining how best to 
implement section 165 of the Dodd-Frank Act, which directs the Board to 
impose enhanced risk-based capital and leverage requirements on foreign 
banking organizations with total consolidated assets of $50 billion or 
more.\49\ In addition, the Board has considered section 171 of the 
Dodd-Frank Act, which requires top-tier U.S. bank holding company 
subsidiaries of foreign banking organizations that relied on SR Letter 
01-01 to meet U.S. capital standards that are not less than the 
standards generally applicable to U.S. depository institutions 
beginning in July, 2015.\50\
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    \49\ 12 U.S.C. 5365(b).
    \50\ 12 U.S.C. 5371(b)(4)(E).
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    As described below, the proposal would subject U.S. intermediate 
holding companies to the capital standards applicable to U.S. bank 
holding companies. This would both strengthen the capital position of 
U.S. subsidiaries of foreign banking organizations and provide parity 
in the capital treatment for U.S. bank holding companies and the U.S. 
subsidiaries of foreign banking organizations on a consolidated basis. 
The proposal would also subject U.S. intermediate holding companies 
with total consolidated assets of $50 billion or more to the Board's 
capital plan rule (12 CFR 225.8) in light of the more significant risks 
posed by these firms. Aligning the capital requirements between U.S. 
subsidiaries of foreign banking organizations on a consolidated basis 
and U.S. bank holding companies is also consistent with long-standing 
international capital agreements, which provide flexibility to host 
jurisdictions to set capital requirements for local subsidiaries of 
foreign banking organizations, so long as national treatment is 
preserved.
    The proposal would allow U.S. branch and agency networks of foreign 
banking organizations with total consolidated assets of $50 billion or 
more to continue to meet U.S. capital equivalency requirements at the 
consolidated level. Specifically, the proposal would require a foreign 
banking organization to certify that it meets on an ongoing basis home 
country capital adequacy standards that are consistent with the Basel 
Capital Framework, as defined below. This requirement is intended to 
help ensure that the consolidated capital base supporting the 
activities of U.S. branches and agencies remains strong, and that 
weaknesses at the consolidated foreign parent do not undermine the 
financial strength of its direct U.S. operations.

B. Risk-Based Capital Requirements Applicable to U.S. Intermediate 
Holding Companies

    This proposal would require all U.S. intermediate holding companies 
of foreign banking organizations with total consolidated assets of $50 
billion or more, regardless of whether the U.S. intermediate holding 
company controls a depository institution, to calculate and meet any 
applicable capital adequacy standards, including minimum risk-based 
capital and leverage requirements and any restrictions based on capital 
adequacy, in the same manner and to the same extent as a U.S. bank 
holding company in accordance with any capital standards established by 
the Board for bank holding companies. Currently, the Board's rules for 
calculating minimum capital requirements for bank holding companies are 
found at 12 CFR part 225, Appendix A (general risk-based capital rule), 
12 CFR part 225, Appendix D (leverage rule), 12 CFR part 225, Appendix 
E (market risk rule), and 12 CFR part 225, Appendix G (advanced 
approaches risk-based capital rule). A U.S. intermediate holding 
company that met the applicability thresholds under the market risk 
rule or the advanced approaches risk-based capital rule would be 
required to use those rules to calculate its minimum risk-based capital 
requirements, in addition to the general risk-based capital 
requirements and the leverage rule.
    The Board, along with the other banking agencies, has proposed 
revisions to its capital requirements that would include implementation 
in the United States of the Basel III Accord.\51\ The Board anticipates 
that the capital adequacy standards for U.S. bank holding companies on 
July 1, 2015, will incorporate the standards in the Basel III Accord.
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    \51\ In June 2012, the Board, together with the OCC and FDIC, 
published three notices of proposed rulemaking to implement the 
Basel III Accord in the United States. See 77 FR 52792 (August 30, 
2012); 77 FR 52888 (August 30, 2012); 77 FR 52978 (August 30, 2012) 
(collectively, the Basel III proposals). These proposed 
requirements, if adopted in final form, are expected to form the 
basis for the capital regime applicable to U.S. bank holding 
companies.
---------------------------------------------------------------------------

    A U.S. intermediate holding company established on July 1, 2015, 
would be required to comply with the capital adequacy standards on that 
date, unless that time is accelerated or extended by the Board in 
writing. A U.S. intermediate holding company that is required to be 
established after July 1, 2015, would be required to comply with the 
capital adequacy standards applicable to bank holding companies 
beginning on the date it is established, unless that time is 
accelerated or extended by the Board in writing.
    The Board may also, through a separate, future rulemaking, apply a 
quantitative risk-based capital surcharge in the United States to a 
U.S. intermediate holding company that is determined to be a domestic 
systemically important banking organization (D-SIB), consistent with 
the proposed BCBS D-SIB regime or similar framework.\52\
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    \52\ BCBS, A framework for dealing with domestic systemically 
important banks (August 1, 2012), available at http://www.bis.org/publ/bcbs224.pdf.
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    Question 15: Are there provisions in the Board's Basel III 
proposals that would be inappropriate to apply to U.S. intermediate 
holding companies?
U.S. Intermediate Holding Companies With Total Consolidated Assets of 
$50 Billion or More
    All U.S. intermediate holding companies with total consolidated 
assets of $50 billion or more would be required to comply with section 
225.8 of Regulation Y (capital plan rule) in the same manner and to the 
same extent as a bank holding company subject to that section.\53\ The 
capital plan rule currently applies to all U.S. domiciled bank holding 
companies with total consolidated assets of $50 billion or more (except 
that U.S. domiciled bank holding companies with total consolidated 
assets of $50 billion or more that are relying on SR Letter 01-01 are 
not required to comply with the capital plan rule until July 21, 2015).
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    \53\ 12 CFR 225.8. See 76 FR 74631 (December 1, 2011).

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[[Page 76641]]

    A U.S. intermediate holding company that meets the asset threshold 
on July 1, 2015, would be required to submit its first capital plan on 
January 5, 2016, unless that time is extended by the Board in writing. 
This requirement would replace the requirement that a U.S. domiciled 
bank holding company subsidiary of a foreign banking organization 
submit a capital plan under section 225.8 of the Board's Regulation Y 
(12 CFR 225.8).
    A U.S. intermediate holding company that meets the $50 billion 
asset threshold after July 1, 2015 would be required to comply with the 
capital plan rule beginning in October of the calendar year after the 
year in which the U.S. intermediate holding company is established or 
otherwise crosses the $50 billion total consolidated asset threshold.
    Under the capital plan rule, a U.S. intermediate holding company 
with total consolidated assets of $50 billion or more would be required 
to submit annual capital plans to the Federal Reserve in which it 
demonstrates an ability to maintain capital above the Board's minimum 
risk-based capital ratios under both baseline and stressed conditions 
over a minimum nine-quarter, forward-looking planning horizon. A U.S. 
intermediate holding company that is unable to satisfy these 
requirements generally would not be able to make any capital 
distributions until it provided a satisfactory capital plan to the 
Board.
    The capital plan requirement would help ensure that U.S. 
intermediate holding companies hold capital commensurate with the risks 
they would face under stressful financial conditions and should reduce 
the probability of their failure by limiting their capital 
distributions under certain circumstances.
    Question 16: In what ways, if any, should the Board consider 
modifying the requirements of the capital plan rule as it would apply 
to U.S. intermediate holding companies? For example, would the capital 
policy of a U.S. intermediate holding company of a foreign banking 
organization differ meaningfully from the capital policy of a U.S. bank 
holding company?

C. Risk-Based Capital Requirements Applicable to Foreign Banking 
Organizations With Total Consolidated Assets of $50 Billion or More

    The proposal would require a foreign banking organization with 
total consolidated assets of $50 billion or more to certify or 
otherwise demonstrate to the Board's satisfaction that it meets capital 
adequacy standards at the consolidated level that are consistent with 
the Basel Capital Framework. The proposal defines the Basel Capital 
Framework as the regulatory capital framework published by the BCBS, as 
amended from time to time. This requirement would include the standards 
in the Basel III Accord for minimum risk-based capital ratios and 
restrictions and limitations if capital conservation buffers above the 
minimum ratios are not maintained, as these requirements would come 
into effect under the transitional provisions included in the Basel III 
Accord.\54\
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    \54\ The Basel III Accord establishes the following minimum 
risked-based capital standards: 4.5 percent tier 1 common equity to 
risk-weighted assets, 6.0 percent tier 1 capital to risk-weighted 
assets, and 8.0 percent total capital to risk-weighted assets. In 
addition, the Basel III Accord includes restrictions on capital 
distributions and certain discretionary bonus payments if a banking 
organization does not hold tier 1 common equity sufficient to exceed 
the minimum risk-weighted ratio requirements outlined above by at 
least 2.5 percent. See Basel III Accord, supra note 40.
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    A company may satisfy this requirement by certifying that it meets 
the capital adequacy standards established by its home country 
supervisor, including with respect to the types of capital instruments 
that would satisfy requirements for common equity tier 1, additional 
tier 1, and tier 2 capital and for calculating its risk-weighted 
assets, if those capital adequacy standards are consistent with the 
Basel Capital Framework. If a foreign banking organization's home 
country standards are not consistent with the Basel Capital Framework, 
the foreign banking organization may demonstrate to the Board's 
satisfaction that it meets standards consistent with the Basel Capital 
Framework.
    In addition, a foreign banking organization would be required to 
provide to the Board certain information on a consolidated basis. This 
information would include its risk-based capital ratios (including its 
tier 1 risk-based capital ratio and total risk-based capital ratio and 
amount of tier 1 capital and tier 2 capital), risk-weighted assets, and 
total assets and, consistent with the transition period in the Basel 
III Accord, the common equity tier 1 ratio, leverage ratio and amount 
of common equity tier 1 capital, additional tier 1 capital, and total 
leverage assets on a consolidated basis.\55\
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    \55\ This information would have to be provided as of the close 
of the most recent quarter and as of the close of the most recent 
audited reporting period.
---------------------------------------------------------------------------

    Under the proposal, a foreign banking organization with total 
consolidated assets of $50 billion or more as of July 1, 2014, would be 
required to comply with the proposed certification beginning on July 1, 
2015, unless that time is extended by the Board in writing. A foreign 
banking organization that exceeds the $50 billion asset threshold after 
July 1, 2014, would be required to comply with the proposed 
requirements beginning 12 months after it crossed the asset threshold, 
unless that time is accelerated or extended by the Board in writing.
    The proposal would not apply the current minimum leverage ratio for 
U.S. bank holding companies to a foreign banking organization. However, 
the international leverage ratio set forth in the Basel III Accord is 
expected to be implemented internationally in 2018. At that time, the 
proposal would require foreign banking organizations subject to this 
requirement to certify or otherwise demonstrate that they comply with 
the international leverage ratio, consistent with the Basel Capital 
Framework.
    If a foreign banking organization cannot provide the certification 
or otherwise demonstrate to the Board that it meets capital adequacy 
standards at the consolidated level that are consistent with the Basel 
Capital Framework, the proposal would provide that the Board may impose 
conditions or restrictions relating to the activities or business 
operations of the U.S. operations of the foreign banking organization. 
In implementing any conditions or restrictions, the Board would 
coordinate with any relevant U.S. licensing authority.
    In addition, through a separate rulemaking, the Board may introduce 
a consolidated capital surcharge certification requirement for a 
foreign banking organization that maintains U.S. operations and that is 
designated by the BCBS as a global systemically important banking 
organization (G-SIBs). The surcharge amount would be aligned with the 
international requirement.\56\
---------------------------------------------------------------------------

    \56\ BCBS, Global systemically important banks: assessment 
methodology and the additional loss absorbency requirement (November 
2011), available at http://www.bis.org/publ/bcbs207.pdf.
---------------------------------------------------------------------------

    Question 17: What challenges would foreign banking organizations 
face in complying with the proposed enhanced capital standards 
framework described above? What alternatives should the Board consider? 
Provide detailed descriptions for alternatives.
    Question 18: What concerns, if any, are raised by the proposed 
requirement that a foreign banking organization calculate regulatory 
capital ratios in accordance with home country rules that are 
consistent with the Basel Accord, as amended from time to time? How 
might the Federal Reserve refine

[[Page 76642]]

the proposed requirement to address those concerns?
    Question 19: Should the Board require a foreign banking 
organization to meet the current minimum U.S. leverage ratio of 4 
percent on a consolidated basis in advance of the 2018 implementation 
of the international leverage ratio? Why or why not?

V. Liquidity Requirements

A. Background

    During the financial crisis, many global financial companies 
experienced significant financial stress due, in part, to inadequate 
liquidity risk management. In some cases, companies that were otherwise 
solvent had difficulty in meeting their obligations as they became due 
because some sources of funding became severely restricted. These 
events followed several years of ample liquidity in the financial 
system, during which liquidity risk management did not receive the same 
level of priority and scrutiny as management of other sources of risk. 
The rapid reversal in market conditions and availability of liquidity 
during the crisis illustrated how quickly liquidity can evaporate, and 
that illiquidity can last for an extended period, leading to a 
company's insolvency before its assets experience significant 
deterioration in value. The Senior Supervisors Group (SSG), which 
comprises senior financial supervisors from seven countries, conducted 
reviews of financial companies in different countries and found that 
failure of liquidity risk management practices contributed 
significantly to the financial crisis.\57\ In particular, the SSG noted 
that firms' inappropriate reliance on short-term sources of funding and 
in some cases inaccurate measurements of funding needs and lack of 
effective contingency funding plans contributed to the liquidity crises 
many firms faced.\58\
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    \57\ See Senior Supervisors Group, Observations on Risk 
Management Practices During the Recent Market Turbulence (March 
2008) (2008 SSG Report), available at http://www.newyorkfed.org/newsevents/news/banking/2008/SSG_Risk_Mgt_doc_final.pdf.
    \58\ See Senior Supervisors Group, Risk Management Lessons from 
the Global Banking Crisis of 2008 (October 2009) (2009 SSG Report), 
available at http://www.newyorkfed.org/newsevents/news_archive/banking/2009/SSG_report.pdf.
---------------------------------------------------------------------------

    The U.S. operations of foreign banking organizations also 
experienced liquidity stresses during the financial crisis and more 
recently in response to financial strains in Europe, due in part to 
their high levels of reliance on short-term, U.S. dollar wholesale 
funding. In the lead up to the crisis, many foreign banking 
organizations used their U.S. operations to raise short-term U.S. 
dollar debt in U.S. markets to fund longer-term assets held in other 
jurisdictions. The vulnerabilities associated with this activity are 
difficult for U.S. supervisors to monitor, due to their lack of access 
to timely information on the global U.S. dollar balance sheets of the 
consolidated banking organization. While additional information on the 
global consolidated company would partially alleviate this problem, 
U.S. supervisors are likely to remain at a significant information 
disadvantage relative to home country authorities, which limits U.S. 
supervisors' ability to fully assess the liquidity resiliency of the 
consolidated firm. Further, liquidity crises tend to occur rapidly, 
leaving banking organizations and supervisors limited time to react and 
increasing the importance of local management of liquidity sources to 
cover local vulnerabilities.
    Sole reliance on consolidated liquidity risk management of foreign 
banking organizations has also resulted in a disadvantageous funding 
structure for the U.S. operations of many firms relative to their home 
country operations. Many foreign banking organizations provide funding 
to their U.S. branches on a short-term basis and receive funding from 
their U.S. branches on a longer-term basis.
    To address these risks and help ensure parallel treatment of U.S. 
and foreign banking organizations operating in the United States that 
pose risk to U.S. financial stability, this proposal would implement a 
set of liquidity requirements for foreign banking organizations that 
build on the core provisions of the Board's SR Letter 10-6, 
``Interagency Policy Statement on Funding and Liquidity Risk 
Management'' issued March 2010 (Interagency Liquidity Risk Policy 
Statement).\59\ These requirements are broadly consistent with risk 
management requirements proposed for U.S. bank holding companies in the 
December 2011 proposal.
---------------------------------------------------------------------------

    \59\ SR Letter 10-6, Interagency Policy Statement on Funding and 
Liquidity Risk Management (March 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm.
---------------------------------------------------------------------------

    In general, the liquidity requirements in this proposal would 
establish a regulatory framework for the management of liquidity risk 
for the U.S. operations of foreign banking organizations with combined 
U.S. assets of $50 billion or more. The proposal would also require the 
U.S. operations of these companies to conduct monthly liquidity stress 
tests and maintain a buffer of local liquidity to cover cash flow needs 
under stressed conditions. The proposal would apply local liquidity 
buffer requirements to the U.S. branch and agency networks of these 
companies, as well as to U.S. intermediate holding companies.
    The liquidity requirements for U.S. operations of foreign banking 
organizations included in this proposal are aimed at increasing the 
overall liquidity resiliency of these operations during times of 
idiosyncratic and market-wide stress and reducing the threat of asset 
fire sales during periods when U.S. dollar funding channels are 
strained and short-term debt cannot easily be rolled over. The proposed 
liquidity requirements are intended to reduce the need to rely on 
parent and government support during periods of stress. This proposal 
would also provide an incentive for foreign banking organizations to 
better match the term structure of funding provided by the U.S. 
operations to the head office with funding provided from the head 
office to the U.S. operations. Beyond improving the going-concern 
resiliency of the U.S. operations of foreign banking organizations, the 
proposed liquidity requirements are aimed at minimizing the risk that 
extraordinary funding would be needed to resolve the U.S. operations of 
a foreign banking organization.
    The liquidity buffer for the U.S. intermediate holding company and 
the U.S. branch and agency network included in this proposal is not 
intended to increase the foreign banking organization's overall 
consolidated liquidity requirements. Instead, the proposal is aimed at 
ensuring that the portion of the consolidated liquidity requirement 
attributable to short-term third-party U.S. liabilities would be held 
in the United States. Foreign banking organizations that raise funding 
through U.S. entities on a 30-day or longer basis and match the term 
structures of intracompany cross-border cash flows would be able to 
minimize the amount of liquid assets they would be required to hold in 
the United States under this proposal. Finally, local ex ante liquidity 
requirements would also allow U.S. supervisors to better monitor the 
liquidity risk profile of the U.S. operations of large foreign banking 
organizations, reducing the need to implement destabilizing limits on 
intragroup flows at the moment when a foreign banking organization is 
experiencing financial distress.
    The proposed rule provides a tailored approach for foreign banking 
organizations with combined U.S. assets

[[Page 76643]]

of less than $50 billion, reflecting the lower risk these firms present 
to U.S. financial stability. Generally, these foreign banking 
organizations would not be subject to the full set of liquidity 
requirements in the proposal, but would be required to report to the 
Board the results of an internal liquidity stress test for the combined 
U.S. operations on an annual basis. The proposal requires that this 
internal test be conducted in a manner consistent with BCBS principles 
for liquidity risk management.\60\
---------------------------------------------------------------------------

    \60\ See BCBS, Principles for Sound Liquidity Risk Management 
and Supervision (September 2008) (BCBS principles for liquidity risk 
management), available at http://www.bis.org/publ/bcbs144.htm.
---------------------------------------------------------------------------

    The liquidity risk management requirements in this proposal 
represent an initial set of enhanced liquidity requirements for foreign 
banking organizations with $50 billion or more in combined U.S. assets 
that would be broadly consistent with the December 2011 proposal. The 
Board intends through future separate rulemakings to implement the 
quantitative liquidity standards included in the Basel III Accord for 
the U.S. operations of some or all foreign banking organizations with 
$50 billion or more in combined U.S. assets, consistent with the 
international timeline.
    Question 20: Is the Board's approach to enhanced liquidity 
standards for foreign banking organizations with significant U.S. 
operations appropriate? Why or why not?
    Question 21: Are there other approaches that would more effectively 
enhance liquidity standards for these companies? If so, provide 
detailed examples and explanations.
    Question 22: The Dodd-Frank Act contemplates additional enhanced 
prudential standards, including a limit on short-term debt. Should the 
Board adopt a short-term debt limit in addition to, or in place of, the 
Basel III liquidity requirements in the future? Why or why not?

B. Liquidity Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More

    In general, the liquidity requirements proposed for foreign banking 
organizations with combined U.S. assets of $50 billion or more would 
fall into three broad categories. First, the proposal would establish a 
framework for the management of liquidity risk. Second, the proposal 
would require these foreign banking organizations to conduct monthly 
liquidity stress tests. Third, each such company would be required to 
maintain a buffer of highly liquid assets primarily in the United 
States to cover cash flow needs under stressed conditions.
    A foreign banking organization with combined U.S. assets of $50 
billion or more on July 1, 2014, would be required to comply with the 
proposed liquidity requirements on July 1, 2015, unless that time is 
extended by the Board in writing. A foreign banking organization whose 
combined U.S. assets exceeded $50 billion after July 1, 2014, would be 
required to comply with the proposed liquidity standards beginning 12 
months after it crossed the $50 billion asset threshold, unless that 
time is accelerated or extended by the Board in writing.
Framework for Managing Liquidity Risk
    A critical element of sound liquidity risk management is effective 
corporate governance, consisting of oversight of a company's liquidity 
risk management by its board of directors and the appropriate risk 
management committee and executive officers.
    As discussed further below in section VII of this preamble, the 
proposal would require that a foreign banking organization with 
combined U.S. assets of $50 billion or more establish a risk committee 
to oversee the risk management of the combined U.S. operations of the 
company.\61\ The proposal would also require a foreign banking 
organization with combined U.S. assets of $50 billion or more to 
appoint a U.S. chief risk officer with responsibility for implementing 
the company's risk management practices for the combined U.S. 
operations.
---------------------------------------------------------------------------

    \61\ The U.S. risk committee can be the foreign banking 
organization's enterprise-wide risk committee, as described in 
section VII of this preamble, as long as the enterprise-wide risk 
committee specifically assumes the specified responsibilities just 
described.
---------------------------------------------------------------------------

    The U.S. risk committee would be required to review and approve the 
company's liquidity risk tolerance for its U.S. operations at least 
annually, with the concurrence of the company's board of directors or 
the enterprise-wide risk committee (if a different committee than the 
U.S. risk committee).\62\ In reviewing its liquidity risk tolerance, 
the U.S. risk committee would be required to consider the capital 
structure, risk profile, complexity, activities, and size of the 
company's U.S. operations in order to help ensure that the established 
liquidity risk tolerance is appropriate for the company's business 
strategy with respect to its U.S. operations and the role of those 
operations in the U.S. financial system. The liquidity risk tolerance 
for the U.S. operations should also be consistent with the enterprise-
wide liquidity risk tolerance established for the consolidated 
organization by the board of directors or the enterprise-wide risk 
committee.
---------------------------------------------------------------------------

    \62\ Liquidity risk tolerance is the acceptable level of 
liquidity risk the company may assume in connection with its 
operating strategies for its combined U.S. operations.
---------------------------------------------------------------------------

    The liquidity risk tolerance should reflect the U.S. risk 
committee's assessment of tradeoffs between the costs and benefits of 
liquidity. Inadequate liquidity for the U.S. operations could expose 
the operations to significant financial stress and endanger the ability 
of the company to meet contractual obligations arising out of its U.S. 
operations. Conversely, too much liquidity can entail substantial 
opportunity costs and have a negative impact on the profitability of 
the company's U.S. operations.
    The U.S. risk committee should communicate the liquidity risk 
tolerance to management within the U.S. operations such that they 
understand the U.S. risk committee's policy for managing the trade-offs 
between the risk of insufficient liquidity and generating profit and 
are able to apply the policy to liquidity risk management throughout 
the U.S. operations.
    The proposal would also require that the U.S. chief risk officer 
review and approve the liquidity costs, benefits, and risk of each 
significant new business line engaged in by the U.S. operations and 
each significant new product offered, managed, or sold through the U.S. 
operations before the company implements the line or offer the product. 
In connection with this review, the U.S. chief risk officer would be 
required to consider whether the liquidity risk of the new strategy or 
product under current conditions and under liquidity stress scenarios 
is within the established liquidity risk tolerance of the U.S. 
operations. At least annually, the U.S. chief risk officer would be 
required to review approved significant business lines and products to 
determine whether each line or product has created any unanticipated 
liquidity risk, and to determine whether the liquidity risk of each 
line or product continues to be within the established liquidity risk 
tolerance of the U.S. operations.
    A foreign banking organization with combined U.S. assets of $50 
billion or more would be required to establish a contingency funding 
plan for its combined U.S. operations. The U.S. chief risk officer 
would be required to review and approve the U.S. operations' 
contingency funding plan at least annually and whenever the company 
materially revises the plan either for the

[[Page 76644]]

company as a whole or for the combined U.S. operations specifically.
    As part of ongoing liquidity risk management within the U.S. 
operations, the proposal would require the U.S. chief risk officer to, 
at least quarterly, review the cash flow projections to ensure 
compliance with the liquidity risk tolerance; review and approve the 
liquidity stress test practices, methodologies, and assumptions; review 
the liquidity stress test results; approve the size and composition of 
the liquidity buffer; review and approve the specific limits on 
potential sources of liquidity risk and review the company's compliance 
with those limits; and review liquidity risk management information 
systems necessary to identify, measure, monitor, and control liquidity 
risk. In addition, the U.S. chief risk officer would be required to 
establish procedures governing the content of reports on the liquidity 
risk profile of the combined U.S. operations.
Additional Responsibilities of the U.S. Chief Risk Officer
    Under the proposed rule, the U.S. chief risk officer would be 
required to review the liquidity risk management strategies and 
policies and procedures established by senior management of the 
combined U.S. operations of the foreign banking organization. These 
strategies and policies and procedures should include those relating to 
liquidity risk measurement and reporting systems, cash flow 
projections, liquidity stress testing, liquidity buffer, contingency 
funding plan, specific limits, and monitoring procedures required under 
the proposed rule. The proposal also would require the U.S. chief risk 
officer to review information provided by the senior management of the 
U.S. operations to determine whether those operations are managed in 
accordance with the established liquidity risk tolerance. The U.S. 
chief risk officer would additionally be required to report at least 
semi-annually to the U.S. risk committee and enterprise-wide risk 
committee (or designated subcommittee thereof) on the liquidity risk 
profile of the combined U.S. operations of the company, and to provide 
other relevant and necessary information to the U.S. risk committee and 
the enterprise-wide risk committee to ensure that the U.S. operations 
are managed within the established liquidity risk tolerance.
Independent Review
    Under the proposed rule, a foreign banking organization with 
combined U.S. assets of $50 billion or more would be required to 
establish and maintain an independent review function to evaluate the 
liquidity risk management of its combined U.S. operations. The review 
function would be independent of management functions that execute 
funding (the treasury function). The independent review function would 
be required to review and evaluate the adequacy and effectiveness of 
the U.S. operations' liquidity risk management processes regularly, but 
no less frequently than annually. It would also be required to assess 
whether the U.S. operations' liquidity risk management complies with 
applicable laws, regulations, supervisory guidance, and sound business 
practices, and to report statutory and regulatory noncompliance and 
other material liquidity risk management issues to the U.S. risk 
committee and the enterprise-wide risk committee (or designated 
subcommittee) in writing for corrective action.
    An appropriate internal review conducted by the independent review 
function should address all relevant elements of the liquidity risk 
management process for the U.S. operations, including adherence to the 
established policies and procedures, and the adequacy of liquidity risk 
identification, measurement, and reporting processes. Personnel 
conducting these reviews should seek to understand, test, document, and 
evaluate the liquidity risk management processes, and recommend 
solutions to any identified weaknesses.
Cash Flow Projections
    To ensure that a foreign banking organization with combined U.S. 
assets of $50 billion or more has a sound process for identifying and 
measuring liquidity risk, the proposed rule would require comprehensive 
projections for the company's U.S. operations that include forecasts of 
cash flows arising from assets, liabilities, and off-balance sheet 
exposures over appropriate time periods, and identify and quantify 
discrete and cumulative cash flow mismatches over these time periods. 
The proposed rule would specifically require the company to provide 
cash flow projections for the U.S. operations over short-term and long-
term time horizons that are appropriate to the capital structure, risk 
profile, complexity, activities, size, and other risk-related factors 
of the U.S. operations.\63\
---------------------------------------------------------------------------

    \63\ A company would be required to update short-term cash flow 
projections daily, and update long-term cash flow projections at 
least monthly.
---------------------------------------------------------------------------

    The proposed rule states that a foreign banking organization must 
establish a methodology for making its cash flow projections for its 
U.S. operations, and must use reasonable assumptions regarding the 
future behavior of assets, liabilities, and off-balance sheet exposures 
in the projections. Given the critical importance that the methodology 
and underlying assumptions play in liquidity risk measurement, the 
company would also be required to adequately document the methodology 
and assumptions. In addition, the Board expects senior management to 
periodically review and approve the assumptions used in the cash flow 
projections for the U.S. operations to ensure that they are reasonable 
and appropriate.
    To ensure that the cash flow projections incorporate liquidity risk 
exposure to contingent events, the proposed rule would require that 
projections include cash flows arising from contractual maturities, and 
intercompany transactions, as well as cash flows from new business, 
funding renewals, customer options, and other potential events that may 
affect the liquidity of the U.S. operations. The Board would expect a 
company to use dynamic analysis because static projections may 
inadequately quantify important aspects of potential liquidity risk 
that could have a significant effect on the liquidity risk profile of 
the U.S. operations. A dynamic analysis that incorporates management's 
reasoned assumptions regarding the future behavior of assets, 
liabilities, and off-balance sheet items in projected cash flows is 
important for identifying potential liquidity risk exposure.
    The proposed rule would not require firms to provide specific cash 
flow information to the Board on their worldwide U.S. dollar activity. 
However, firms that have large global cash flows in U.S. dollars may 
require significant funding from sources in the United States during a 
time of financial stress, which may present risk to the U.S. financial 
system. The Board therefore is considering whether to require foreign 
banking organizations with combined U.S. assets of $50 billion or more 
to report all of their global consolidated cash flows that are in U.S. 
dollars. This information could assist U.S. supervisors in 
understanding the extent to which companies conduct their activities 
around the world in U.S. dollars and the potential need these companies 
may have for U.S. dollar funding.
    Question 23: Should foreign banking organizations with a large U.S. 
presence be required to provide cash flow statements for all activities 
they conduct in U.S. dollars, whether or not through the U.S. 
operations? Why or why not?

[[Page 76645]]

Liquidity Stress Test Requirements
    The proposal would require a foreign banking organization with 
combined U.S. assets of $50 billion or more to conduct monthly 
liquidity stress tests separately on its U.S. intermediate holding 
company and its U.S. branch and agency network. By considering how 
severely adverse events, conditions, and outcomes would affect the 
liquidity risk of its U.S. branch and agency network and its U.S. 
intermediate holding company, the company can identify vulnerabilities; 
quantify the depth, source, and degree of potential liquidity strain in 
its U.S. operations; and analyze the possible effects. When combined 
with comprehensive information about an institution's funding position, 
stress testing can serve as an important tool for effective liquidity 
risk management.
    In conducting liquidity stress test, the foreign banking 
organization would be required to separately identify adverse liquidity 
stress scenarios and assess the effects of these scenarios on the cash 
flow and liquidity of each of the U.S. branch and agency network and 
the U.S. intermediate holding company. In addition to monthly stress 
testing, the U.S. operations of the foreign banking organization must 
be prepared to conduct ``ad hoc'' stress tests to address rapidly 
emerging risks or consider the effect of sudden events, upon the 
request of the Board. The Board may, for example, require the U.S. 
operations of a company to perform additional stress tests where there 
has been a significant deterioration in the company's earnings, asset 
quality, or overall financial condition; when there are negative trends 
or heightened risk associated with a particular product line of the 
U.S. operations; or when there are increased concerns over the 
company's funding of off-balance sheet exposures related to U.S. 
operations.
    Effective stress testing should include adverse scenario analyses 
that incorporate historical and hypothetical scenarios to assess the 
effect on liquidity of various events and circumstances, including 
variations thereof. At a minimum, a company would be required to 
incorporate stress scenarios for its U.S. operations that account for 
adverse conditions due to market stress, idiosyncratic stress, and 
combined market and idiosyncratic stresses. Additional scenarios should 
be used as needed to ensure that all of the significant aspects of 
liquidity risks to the relevant U.S. operations have been modeled. The 
proposed rule would also require that the stress testing addresses the 
potential for market disruptions to have an adverse effect on the 
company's combined U.S. operations, and the potential actions of other 
market participants experiencing liquidity stresses under the same 
market disruption. The stress tests should appropriately consider how 
stress events would adversely affect not only the U.S. operations on a 
standalone basis, but also how idiosyncratic or market-related stresses 
on other operations of the company may affect the U.S. operations' 
liquidity.
    Stress testing should address the full set of activities, exposures 
and risks, both on- and off-balance sheet, of the U.S. operations, and 
address non-contractual sources of risks, such as reputational risks. 
For example, stress testing should address potential liquidity issues 
arising from use of sponsored vehicles that issue debt instruments 
periodically to the markets, such as asset-backed commercial paper and 
similar conduits. Under stress scenarios, elements of the U.S. 
operations may be contractually required, or compelled in the interest 
of mitigating reputational risk, to provide liquidity support to such a 
vehicle.
    Effective liquidity stress testing should be conducted over a 
variety of different time horizons to adequately capture rapidly 
developing events, and other conditions and outcomes that may 
materialize in the near or long term. To ensure that a company's stress 
testing for its U.S. operations contemplates such events, conditions, 
and outcomes, the proposed rule would require that the stress scenarios 
use a minimum of four time horizons including an overnight, a 30-day, a 
90-day, and a one-year time horizon. Additional time horizons may be 
necessary to reflect the capital structure, risk profile, complexity, 
activities, size, and other relevant factors of the company's combined 
U.S. operations.
    The proposal further provides that liquidity stress testing must be 
tailored to, and provide sufficient detail to reflect the capital 
structure, risk profile, complexity, activities, size, and other 
relevant characteristics of the U.S. operations. This requirement is 
intended to ensure that stress testing under the proposed rule would be 
tied directly to the business profile and the regulatory environment of 
the U.S. operations.\64\ The requirement also addresses relevant risk 
areas, provides for an appropriate level of aggregation, and captures 
appropriate risk drivers, internal and external influences, and other 
key considerations that may affect the liquidity position of the U.S. 
operations and the company as a whole. In order to fully assess the 
institution's liquidity risk profile, stress testing by business line 
or legal entity or stress scenarios that use additional time horizons 
may be necessary beyond the tests described above.
---------------------------------------------------------------------------

    \64\ For example, applicable statutory and regulatory 
restrictions on companies, including restrictions on the 
transferability of assets between legal entities, would need to be 
incorporated. These restrictions include sections 23A and 23B of the 
Federal Reserve Act (12 U.S.C. 371c and 371c-1) and Regulation W (12 
CFR part 223), which govern covered transactions between banks and 
their affiliates.
---------------------------------------------------------------------------

    A foreign banking organization must assume that, for the first 30 
days of a liquidity stress horizon, only highly liquid assets that are 
unencumbered may be used as cash flow sources to meet projected funding 
needs for the U.S. operations. For time periods beyond the first 30 
days of a liquidity stress scenario, highly liquid assets that are 
unencumbered and other appropriate funding sources may be used.\65\
---------------------------------------------------------------------------

    \65\ The liquidity buffer and the definitions of unencumbered 
and highly liquid asset are discussed below.
---------------------------------------------------------------------------

    Liquidity stress testing for the U.S. operations should account for 
deteriorations in asset valuations when there is market stress. 
Accordingly, the proposed rule would require discounting the fair 
market value of an asset that is used as a cash flow source to offset 
projected funding needs in order to reflect any credit risk and market 
price volatility of the asset. The proposed rule would also require 
that sources of funding used to generate cash to offset projected 
outflows be diversified by collateral, counterparty, or borrowing 
capacity, or other factors associated with the liquidity risk of the 
assets throughout each stress test time horizon. Thus, if U.S. 
operations hold high quality assets other than cash and securities 
issued or guaranteed by the U.S. government, a U.S. government 
agency,\66\ or a U.S. government-sponsored entity,\67\ to meet future 
outflows, the assets must be diversified by collateral, counterparty, 
or borrowing capacity, and other liquidity risk identifiers.
---------------------------------------------------------------------------

    \66\ A U.S. government agency is defined in the proposed rule as 
an agency or instrumentality of the U.S. government whose 
obligations are fully and explicitly guaranteed as to the timely 
payment of principal and interest by the full faith and credit of 
the U.S. government.
    \67\ A U.S. government-sponsored entity is defined in the 
proposed rule as an entity originally established or chartered by 
the U.S. government to serve public purposes specified by the U.S. 
Congress, but whose obligations are not explicitly guaranteed by the 
full faith and credit of the U.S. government.

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[[Page 76646]]

    The proposed rule would require that the U.S. operations maintain 
policies and procedures that outline its liquidity stress testing 
practices, methodologies, and assumptions, and provide for the 
enhancement of stress testing practices as risks change and as 
techniques evolve. The proposal would also require the company to 
provide to the Board the results of its stress test for U.S. operations 
on a monthly basis within 14 days of the end of each month.
    Foreign banking organizations also would be required to provide to 
the Board a summary of the results of any liquidity stress test and 
liquidity buffers established by their home country regulators, on a 
quarterly basis and within 14 days of completion of the stress test. 
This information is required to demonstrate how vulnerabilities 
identified within its U.S. operations will be covered by a buffer being 
held by the company for its global operations and how vulnerabilities 
outside the United States may affect its U.S. operations. The Board may 
require additional information from foreign banking organizations whose 
U.S. operations significantly rely on the foreign parent for funding 
with respect to their home country liquidity stress tests and buffers.
    Question 24: What challenges will foreign banking organizations 
face in formulating and implementing liquidity stress testing described 
in the proposed rule? What changes, if any, should be made to the 
proposed liquidity stress testing requirements (including the stress 
scenario requirements) to ensure that analyses of the stress testing 
will provide useful information for the management of a company's 
liquidity risk? What alternatives to the proposed liquidity stress 
testing requirements, including the stress scenario requirements, 
should the Board consider? What additional parameters for the liquidity 
stress tests should the Board consider defining?
Liquidity Buffer
    To withstand liquidity stress under adverse conditions, a company 
generally needs a sufficient supply of liquid assets that can be sold 
or pledged to obtain funds needed to meet its obligations. During the 
financial crisis, financial companies that experienced severe liquidity 
difficulties often held insufficient liquid assets to meet their 
liquidity needs, which had increased sharply as market sources of 
funding became unavailable. Accordingly, the proposed rule would 
require a company to maintain a liquidity buffer of unencumbered highly 
liquid assets for its U.S. operations to meet the cash flow needs 
identified under the required stress tests described above.
    The proposal would require separate liquidity buffers for a foreign 
banking organization's U.S. branch and agency network and its U.S. 
intermediate holding company that are equal to their respective net 
stressed cash flow needs as identified by the required stress test. 
Each calculation of the net stressed cash flow need described below 
must be performed for the U.S. branch and agency network and U.S. 
intermediate holding company separately. These calculations assess the 
stressed cash flow need both with respect to intracompany transactions 
and transactions with unaffiliated parties to quantify the liquidity 
vulnerabilities of the U.S. operations during the 30-day stress 
horizon.
Liquidity Buffer Calculation
    Under the proposal, each U.S. branch and agency network and U.S. 
intermediate holding company must maintain a liquidity buffer equal to 
its net stressed cash flow need over a 30-day stress horizon. The net 
stressed cash flow need is equal to the sum of (1) the net external 
stressed cash flow need and (2) the net internal stressed cash flow 
need. The calculation of external and internal stressed cash flow needs 
is conducted separately in order to provide different treatment of 
these two sets of cash flows when sizing the liquidity buffer needs of 
the U.S. operations. The proposal treats these cash flows differently 
to minimize the ability of a foreign banking organization to meet its 
external net stressed cash flow needs with intragroup cash flows. This 
approach is aimed at addressing the risk that the U.S. operations of a 
foreign banking organization and its non-U.S. operations will face 
funding pressures simultaneously.
    A U.S. intermediate holding company would be required to calculate 
its liquidity buffer based on both net internal stressed cash flow 
needs and net external stressed cash flow needs, as described below, 
for the entire 30-day stress period, and maintain the assets comprising 
the liquidity buffer in the United States. To avoid evasion of these 
requirements, cash assets counted in the liquidity buffer of the U.S. 
intermediate holding company may not be held in an account located at 
an affiliate of the U.S. intermediate holding company.
    The U.S. branch and agency network would also be required to hold 
liquid assets in the United States to meet a portion of its 30-day 
liquidity buffer. The liquidity buffer requirement for a U.S. branch 
and agency network is calculated using a different methodology than the 
U.S. intermediate holding company because U.S. branches and agencies 
are not separate legal entities from the foreign bank and can engage 
only in traditional banking activities by the terms of their licenses.
    For day 1 through day 14 of the 30-day stress period, the U.S. 
branch and agency network would be required to take into account net 
internal stressed cash flow needs and net external stressed cash flow 
needs. The U.S. branch and agency network would be required to maintain 
highly liquid assets sufficient to cover its net stressed cash flow 
needs for day 1 through day 14 in the United States. Consistent with 
the treatment of the U.S. intermediate holding company, cash assets 
counted in the 14-day liquidity buffer of the U.S. branch and agency 
network may not be held in an account located at the U.S. intermediate 
holding company, head office, or other affiliate. For day 15 through 
day 30 of the stress test horizon, the U.S. branch and agency network 
would be permitted to maintain its liquidity buffer to meet net 
stressed cash flow needs outside of the United States, provided that 
the company has demonstrated to the satisfaction of the Board that the 
company has and is prepared to provide, or its affiliate has and would 
be required to provide, highly liquid assets to the U.S. branch and 
agency network sufficient to meet the liquidity needs of the operations 
of the U.S. branch and agency network for day 15 through day 30 of the 
stress test horizon. The U.S. branch and agency network would be 
permitted to calculate the liquidity buffer for day 15 through day 30 
based on its external stressed cash flow need only because the buffer 
may be maintained at the parent level.
    Under the proposal, the net external stressed cash flow need is the 
difference between (1) the amount that the U.S. branch and agency 
network or the U.S. intermediate holding company, respectively, must 
pay unaffiliated parties over the relevant period in the stress test 
horizon and (2) the amount that unaffiliated parties must pay the U.S. 
branch and agency network or the U.S. intermediate holding company, 
respectively, over the relevant period in the stress test horizon.
    The net internal stressed cash flow need is the greatest daily 
cumulative cash flow need of a U.S. branch and agency network or a U.S. 
intermediate holding company, respectively, with respect to 
transactions with the head office and other affiliated parties 
identified during the stress horizon. The daily cumulative cash flow 
need is calculated as the sum of the net intracompany cash flow need 
calculated

[[Page 76647]]

for that day and the net intracompany cash flow need calculated for 
each previous day of the stress test horizon. The methodology used to 
calculate the net internal stressed cash flow need is designed to 
provide a foreign banking organization with an incentive to minimize 
maturity mismatches in transactions between the U.S. branch and agency 
network or U.S. intermediate holding company, on the one hand, and the 
company's head office or affiliates, on the other hand. The methodology 
allows intracompany cash flow sources of a U.S. branch and agency 
network or U.S. intermediate holding company to offset intracompany 
cash flow needs of a U.S. branch and agency network or U.S. 
intermediate holding company only to the extent the term of the 
intracompany cash flow source is the same as or shorter than the term 
of the intracompany cash flow need. As noted above, these assumptions 
reflect the risk that during a stress scenario, the U.S. operations, 
the head office, and other affiliated counterparties may come under 
stress simultaneously. Under such a scenario, the head office may be 
unable or unwilling to return funds to the U.S. branch and agency 
network or the U.S. intermediate holding company when those funds are 
most needed.
    Figure 1 below illustrates the steps required to calculate the 
components of the liquidity buffer.
[GRAPHIC] [TIFF OMITTED] TP28DE12.000

    The tables below set forth an example of a calculation of net 
stressed cash flow need as required under the proposal, using a stress 
period of five days. For purposes of the example, cash flow needs are 
represented as negative, and cash flow sources are represented as 
positive.
BILLING CODE 6210-01-P

[[Page 76648]]

[GRAPHIC] [TIFF OMITTED] TP28DE12.001


[[Page 76649]]


[GRAPHIC] [TIFF OMITTED] TP28DE12.002

BILLING CODE 6210-01-C

[[Page 76650]]

    As discussed above, the proposed liquidity framework provides an 
incentive for companies to match the maturities of cash flow needs and 
cash flow sources from affiliates, due to the likely high correlation 
between liquidity stress events in the U.S. operations and non-U.S. 
operations of a foreign banking organization. However, the Board 
recognizes that there may be appropriate alternatives and seeks comment 
on other approaches to addressing intracompany transactions in 
determining the size of the required U.S. liquidity buffer. The Board 
seeks comment on the following additional methods or approaches for 
calculating the net internal stressed cash flow need requirement:
    (1) Assume that any cash flows expected to be received by U.S. 
operations from the head office or affiliates are received one day 
after the scheduled maturity date. This would help ensure that the U.S. 
operations receive any payments owed by affiliates before having to 
make payments to affiliates, thereby preventing intraday arbitrage of 
the proposed maturity matching requirement.
    (2) Allow the U.S. operations to net all intracompany cash flow 
needs and sources over the entire stress period, regardless of the 
maturities within the stress horizon, but apply a 50 percent haircut to 
all intracompany cash flow sources within the stress horizon. This 
approach could simplify the calculation and reduce compliance burden, 
but provides less incentive for foreign banking organizations to 
achieve maturity matches for their U.S. operations within the stress 
horizon.
    (3) Assume that all intracompany cash flow needs during the 
relevant stress period mature and roll-off at a 100 percent rate and 
that all intracompany cash flow sources within the relevant stress 
period are not received (that is, they could not be used to offset cash 
flow needs). This approach would simplify the calculation, but assumes 
that the parent would make none of its contractual payments to the U.S. 
subsidiary or U.S. branch and agency network may be an unreasonable 
assumption even under conservatively stressed scenarios. Alternatively, 
this approach could be used as a heightened standard that could be 
imposed if the Board has particular concerns about of the ability or 
willingness of the parent company to serve as a source of strength.
    Question 25: The Board requests feedback on the proposed approach 
to intragroup flows as well as the described alternatives. What are the 
advantages and disadvantages of the alternatives versus the treatment 
in the proposal? Are there additional alternative approaches to 
intracompany cash flows that the Board should consider? Provide 
detailed answers and supporting data where available.
    Question 26: Should U.S. branch and agency networks be required to 
cover net internal stressed cash flow needs for days 15 to 30 of the 
required stress scenario within the United States? Should U.S. branch 
and agency networks be required to hold the entire 30-day liquidity 
buffer in the United States?
Composition of the Liquidity Buffer
    Under the proposed rule, only highly liquid assets that are 
unencumbered may be included in a liquidity buffer for a U.S. 
intermediate holding company or U.S. branch and agency network. Assets 
in the liquidity buffer need to be easily and immediately convertible 
to cash with little or no loss of value. Thus, cash or securities 
issued or guaranteed by the U.S. government, a U.S. government agency, 
or a U.S. government-sponsored entity are included in the proposed 
definition of highly liquid assets. In addition, under the proposed 
rule, other assets may be included in the liquidity buffer as highly 
liquid assets if a company demonstrates to the satisfaction of the 
Board that an asset:
    (i) Has low credit risk (low risk of default) and low market risk 
(low price volatility); \68\
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    \68\ Generally, market risk is the risk of loss that could 
result from broad market movements, such as changes in the general 
level of interest rates, credit spreads, equity prices, foreign 
exchange rates, or commodity prices. See 12 CFR part 225, appendix 
E.
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    (ii) Is traded in an active secondary two-way market that has 
committed market makers and independent bona fide offers to buy and 
sell so that a price reasonably related to the last sales price or 
current bona fide competitive bid and offer quotations can be 
determined within one day and settled at that price within a reasonable 
time period conforming with trade custom; and
    (iii) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which liquidity is 
impaired (flight to quality). For example, certain ``plain vanilla'' 
corporate bonds (that is, bonds that are neither structured products 
nor subordinated debt) issued by a nonfinancial company with a strong 
financial profile have been reliable sources of liquidity in the repo 
market during past stressed conditions. Assets with the above 
characteristics may meet the definition of a highly liquid asset as 
proposed.
    The highly liquid assets in the liquidity buffer should be readily 
available at all times to meet the liquidity needs of the U.S. 
operations. Accordingly, the assets must be unencumbered. Under the 
proposed rule, an asset would be unencumbered if: (i) The asset is not 
pledged, does not secure, collateralize or provide credit enhancement 
to any transaction, and is not subject to any lien, or, if the asset 
has been pledged to a Federal Reserve bank or a U.S. government-
sponsored entity, the asset has not been used; (ii) the asset is not 
designated as a hedge on a trading position under the Board's market 
risk rule; \69\ and (iii) there are no legal or contractual 
restrictions on the ability of the company to promptly liquidate, sell, 
transfer, or assign the asset.
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    \69\ The Board's market risk rule defines a trading position as 
a position that is held by a company for the purpose of short-term 
resale or with the intent of benefiting from actual or expected 
short-term price movements, or to lock-in arbitrage profits. See 12 
CFR part 225, appendix E.
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    Question 27: The Board requests comment on all aspects of the 
proposed definitions of highly liquid assets and unencumbered. What, if 
any, other assets should be specifically listed in the definition of 
highly liquid assets? Why should these other assets be included? Are 
the criteria for identifying additional assets for inclusion in the 
definition of highly liquid assets appropriate? If not, how and why 
should the Board revise the criteria?
    Question 28: Should the Board require matching of liquidity risk 
and the liquidity buffer at the individual branch level rather than 
allowing the firm to consolidate across U.S. branch and agency 
networks? Why or why not?
    Question 29: Should U.S. intermediate holding companies be allowed 
to deposit cash portions of their liquidity buffer with affiliated 
branches or U.S. entities? Why or why not?
    Question 30: In what circumstances should the cash portion of the 
liquidity buffer be permitted to be held in a currency other than U.S. 
dollars?
    Question 31: Should the Board provide more clarity around when the 
liquidity buffer would be allowed to be used to meet liquidity needs 
during times of stress? What standards would be appropriate for usage 
of the liquidity buffer?
    Question 32: Are there situations in which compliance with the 
proposed rule would hinder a foreign banking organization from 
employing appropriate liquidity risk management practices? Provide 
specific detail.

[[Page 76651]]

Contingency Funding Plan
    The proposed rule would require a foreign banking organization with 
combined U.S. assets of $50 billion or more to establish and maintain a 
contingency funding plan for its combined U.S. operations. The 
objectives of the contingency funding plan are to provide a plan for 
responding to a liquidity crisis, to identify alternate liquidity 
sources that the U.S. operations can access during liquidity stress 
events, and to describe steps that should be taken to ensure that the 
company's sources of liquidity are sufficient to fund its operating 
costs and meet its commitments while minimizing additional costs and 
disruption.
    The contingency funding plan should set out the company's 
strategies for addressing liquidity needs during liquidity stress 
events. Under the proposed rule, the contingency funding plan would be 
required to be commensurate with the U.S. operations and the company's 
capital structure, risk profile, complexity, activities, size, other 
relevant factors, and established liquidity risk tolerance. The 
contingency funding plan should also specify the contingency funding 
plans related to specific legal entities, including the U.S. branch and 
agency network and U.S. intermediate holding company. A company would 
be required to update the contingency funding plan for its U.S. 
operations at least annually, or whenever changes to market and 
idiosyncratic conditions warrant an update.
    Under the proposed rule, the contingency funding plan would include 
four components: A quantitative assessment, an event management 
process, monitoring requirements, and testing requirements. Under the 
quantitative assessment, a company must: (i) Identify liquidity stress 
events that have a significant effect on the U.S. operations' 
liquidity; (ii) assess the level and nature of the effect on the U.S. 
operations' liquidity that may occur during identified liquidity 
events; (iii) assess available funding sources and needs during the 
identified liquidity stress events; and (iv) identify alternative 
funding sources that may be used during the liquidity stress events.
    A liquidity stress event that may have a significant effect on a 
company's liquidity would include deterioration in asset quality, 
ratings downgrades, widening of credit default swap spreads, operating 
losses, declining financial institution equity prices, negative press 
coverage, or other events that call into question the company or its 
U.S. operations' ability to meet its obligations.
    The contingency funding plan should delineate the various levels of 
stress severity that can occur during the stress event, and identify 
the various stages for each type of event. The events, stages, and 
severity levels should include temporary disruptions, as well as those 
that might be intermediate or longer term. To meet the requirements of 
the proposal, the contingency funding plan must assess available 
funding sources and needs during identified liquidity stress events for 
the company's combined U.S. operations. This should include an analysis 
of the potential erosion of available funding at alternative stages or 
severity levels of each stress event, as well as the identification of 
potential cash flow mismatches that may occur during the various stress 
levels. A company is expected to base its analysis on realistic 
assessments of the behavior of funds providers during the event, and 
should incorporate alternative funding sources. The analysis should 
include all material on- and off-balance sheet cash flows and their 
related effects on the combined U.S. operations. The result should be a 
realistic analysis of the cash inflows, outflows, and funds available 
to the combined U.S. operations at different time intervals during the 
identified liquidity stress event.
    Liquidity pressures are likely to spread from one funding source to 
another during significant liquidity stress events. Accordingly, the 
proposed rule would require a company to identify alternative funding 
sources that may be accessed by the combined U.S. operations during 
identified liquidity stress events. Any legal or other restrictions 
that exist that may limit the ability of funding sources to be used by 
different legal entities within the U.S. operations should be 
identified. Since some of these alternative funding sources will rarely 
be used in the normal course of business, the U.S. operations should 
conduct advance planning and periodic testing to ensure that the 
funding sources are available when needed. Administrative procedures 
and agreements are also expected to be in place before the U.S. 
operations needs to access the alternative funding sources.
    Discount window credit may be incorporated into contingency funding 
plans as a potential source of funds for a foreign bank's U.S. branches 
and agencies, in a manner consistent with terms provided by Federal 
Reserve Banks. For example, primary credit is currently available on a 
collateralized basis for financially sound institutions as a backup 
source of funds for short-term funding needs. Contingency funding plans 
that incorporate borrowing from the discount window should specify the 
actions that would be taken to replace discount window borrowing with 
more permanent funding, and include the proposed time frame for these 
actions.
    Under the proposed rule, the contingency funding plan must also 
include an event management process that sets out procedures for 
managing liquidity during identified liquidity stress events. This 
process must include an action plan that clearly describes the 
strategies the combined U.S. operations of the company would use to 
respond to liquidity shortfalls for identified liquidity stress events, 
including the methods that the company or its combined U.S. operations 
would use to access the alternative funding sources identified in the 
quantitative assessment.
    Under the proposed rule, the event management process must also 
identify a liquidity stress event management team that would execute 
the action plan described above and specify the process, 
responsibilities, and triggers for invoking the contingency funding 
plan, escalating the responses described in the action plan, decision-
making during the identified liquidity stress events, and executing 
contingency measures identified in the action plan for the U.S. 
operations.
    In addition, to promote the flow of necessary information during a 
period of liquidity stress, the proposed rule would require the event 
management process to include a mechanism that ensures effective 
reporting and communication within the company and its combined U.S. 
operations and with outside parties, including the Board and other 
relevant supervisors, counterparties, and other stakeholders.
    The proposal would also impose monitoring requirements on the 
company's combined U.S. operations so that the U.S. operations would be 
able to proactively position themselves into progressive states of 
readiness as liquidity stress events evolve. These requirements include 
procedures for monitoring emerging liquidity stress events and for 
identifying early warning indicators of emerging liquidity stress 
events that are tailored to a company's capital structure, risk 
profile, complexity, activities, size, and other relevant factors. Such 
early warning indicators may include negative publicity concerning an 
asset class owned by the company, potential deterioration in the 
company's financial condition, widening debt or credit

[[Page 76652]]

default swap spreads, and increased concerns over the funding of off-
balance-sheet items.
    The proposed rule would require a company to periodically test the 
components of the U.S. operations' contingency funding plan to assess 
its reliability during liquidity stress events. Such testing would 
include trial runs of the operational elements of the contingency 
funding plan to ensure that they work as intended during a liquidity 
stress event. These tests would include operational simulations to test 
communications, coordination, and decision making involving relevant 
managers, including managers at relevant legal entities within the 
corporate structure.
    A company would also be required to periodically test the methods 
it will use to access alternate funding for its U.S. operations to 
determine whether these sources of funding would be readily available 
when needed. For example, the Board expects that a company would test 
the operational elements of a contingency funding plan that are 
associated with lines of credit, the Federal Reserve discount window, 
or other secured borrowings, since efficient collateral processing 
during a liquidity stress event is especially important for such 
funding sources.
Specific Limits
    To enhance management of liquidity risk, the proposed rule would 
require a foreign banking organization with combined U.S. assets of $50 
billion or more to establish and maintain limits on potential sources 
of liquidity risk. Proposed limitations would include limits on: 
concentrations of funding by instrument type, single-counterparty, 
counterparty type, secured and unsecured funding, and other liquidity 
risk identifiers; the amount of specified liabilities that mature 
within various time horizons; and off-balance sheet exposures and other 
exposures that could create funding needs during liquidity stress 
events.\70\ The U.S. operations would also be required to monitor 
intraday liquidity risk exposure in accordance with procedures 
established by the foreign banking organization.
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    \70\ Such exposures may be contractual or non-contractual 
exposures, and include such liabilities as unfunded loan 
commitments, lines of credit supporting asset sales or 
securitizations, collateral requirements for derivative 
transactions, and letters of credit supporting variable demand 
notes.
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    A foreign banking organization would additionally be required to 
monitor its compliance with all limits established and maintained under 
the specific limit requirements. The size of each limit must reflect 
the U.S. operations' capital structure, risk profile, complexity, 
activities, size, and other appropriate risk related factors, and 
established liquidity risk tolerance.
    Question 33: Should foreign banking organizations with a large U.S. 
presence be required to establish and maintain limits on other 
potential sources of liquidity risk in addition to the specific sources 
listed in the proposed rule? If so, identify these additional sources 
of liquidity risk.
Monitoring
    The proposed rule would require a foreign banking organization with 
combined U.S. assets of $50 billion or more to monitor liquidity risk 
related to collateral positions of the U.S. operations, liquidity risks 
across its U.S. operations, and intraday liquidity positions for its 
combined U.S. operations, each as described below.
Collateral Positions
    Under the proposed rule, a foreign banking organization with 
combined U.S. assets of $50 billion or more would be required to 
establish and maintain procedures for monitoring assets of the combined 
U.S. operations it has pledged as collateral for an obligation or 
position, and assets that are available to be pledged. The procedures 
must address the ability of the company with respect to its combined 
U.S. operations to:
    (i) Calculate all of the collateral positions of the U.S. 
operations on a weekly basis (or more frequently as directed by the 
Board due to financial stability risks or the financial condition of 
the U.S. operations), including the value of assets pledged relative to 
the amount of security required under the contract governing the 
obligation for which the collateral was pledged, and the unencumbered 
assets available to be pledged;
    (ii) Monitor the levels of available collateral by legal entity 
(including the U.S. branch and agency networks and U.S. intermediate 
holding company), jurisdiction, and currency exposure;
    (iii) Monitor shifts between intraday, overnight, and term pledging 
of collateral; and
    (iv) Track operational and timing requirements associated with 
accessing collateral at its physical location (for example, the 
custodian or securities settlement system that holds the collateral).
Legal Entities, Currencies, and Business Lines
    Regardless of its organizational structure, it is critical that a 
company actively monitor and control liquidity risks at the level of 
individual U.S. legal entities and the U.S. operations as a whole. Such 
monitoring would aggregate data across multiple systems to develop a 
U.S. operation-wide view of liquidity risk exposure and identify 
constraints on the transferability of liquidity within the 
organization.
    To promote effective monitoring across the combined U.S. 
operations, the proposed rule would require a foreign banking 
organization with combined U.S. assets of $50 billion or more to 
establish and maintain procedures for monitoring and controlling 
liquidity risk exposures and funding needs within and across 
significant legal entities, currencies, and business lines within its 
combined U.S. operations. In addition, the proposed rule would require 
the company to take into account legal and regulatory restrictions on 
the transfer of liquidity between legal entities.\71\ The company 
should ensure that legal distinctions and possible obstacles to cash 
movements between specific legal entities or between separately 
regulated entities are recognized for the combined U.S. operations.
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    \71\ For example, such restrictions include sections 23A and 23B 
of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) and 
Regulation W (12 CFR part 223), which govern covered transactions 
between banks and their affiliates.
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Intraday Liquidity
    Intraday liquidity monitoring is an important component of the 
liquidity risk management process for a company engaged in significant 
payment, settlement, and clearing activities and is generally an 
operational risk management function. Given the interdependencies that 
exist among payment systems, the inability of large complex 
organizations' to meet critical payments has the potential to lead to 
systemic disruptions that can prevent the smooth functioning of 
payments systems and money markets. In addition to the proposed 
requirements, to ensure that liquidity risk is also appropriately 
monitored, the Board expects foreign banking organizations subject to 
these requirements to provide for integrated oversight of intraday 
exposures within the operational risk and liquidity risk functions of 
its U.S. operations. The Board also expects that the stringency of the 
procedures for monitoring and managing intraday liquidity positions 
would reflect the complexity and scope of the U.S. operations.
    Question 34: The Board requests comment on all aspects of the 
proposed rule. Specifically, what aspects of the proposed rule present 
implementation

[[Page 76653]]

challenges and why? What alternative approaches to liquidity risk 
management should the Board consider? Are the liquidity management 
requirements of this proposal too specific or too narrowly defined? If, 
so explain how. Responses should be detailed as to the nature and 
effect of these challenges and should address whether the Board should 
consider implementing transitional arrangements in the proposal to 
address these challenges.

C. Liquidity Requirements for Foreign Banking Organizations With Total 
Consolidated Assets of $50 Billion or More and Combined U.S. Assets of 
Less Than $50 Billion

    Under the proposal, a foreign banking organization with $50 billion 
or more in total consolidated assets and combined U.S. assets of less 
than $50 billion must report to the Board on an annual basis the 
results of an internal liquidity stress test for either the 
consolidated operations of the company or its combined U.S. operations 
only, conducted consistently with the BCBS principles for liquidity 
risk management and incorporating 30-day, 90-day, and one-year stress 
test horizons. A company that does not comply with this requirement 
must cause its combined U.S. operations to remain in a net due to 
funding position or a net due from funding position with non-U.S. 
affiliated entities equal to no more than 25 percent of the third-party 
liabilities of its combined U.S. operations on a daily basis.
    A foreign banking organization with total consolidated assets of 
$50 billion or more and combined U.S. assets of less than $50 billion 
on July 1, 2014, would be required to comply with the proposed 
liquidity requirements on July 1, 2015, unless that time is extended by 
the Board in writing. A foreign banking organization with combined U.S. 
assets of less than $50 billion that crosses the $50 billion total 
consolidated asset threshold after July 1, 2014 would be required to 
comply with these standards beginning 12 months after it crosses the 
asset threshold, unless that time is accelerated or extended by the 
Board in writing.

VI. Single-Counterparty Credit Limits

A. Background

    During the financial crisis, some of the largest financial firms in 
the world collapsed or nearly did so, with significant financial 
stability consequences for the United States and the global financial 
system. Counterparties of a failing firm were placed under severe 
strain when the failing firm could not meet its financial obligations, 
in some cases resulting in the counterparties' inability to meet their 
own obligations.
    The financial crisis also revealed that the existing regulatory 
requirements generally failed to meaningfully limit the 
interconnectedness among large U.S. and foreign financial institutions 
in the United States and globally. In the United States, banks were 
subject to single-borrower lending and investment limits, but those 
limits were applied at the bank level, rather than the holding company 
level. In addition, lending limits excluded credit exposures generated 
by derivatives and some securities financing transactions.\72\ Similar 
weaknesses existed in single-counterparty credit limit regimes around 
the world.
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    \72\ Section 610 of the Dodd-Frank Act amends the term ``loans 
and extensions of credit'' for purposes of the lending limits 
applicable to national banks to include any credit exposure arising 
from a derivative transaction, repurchase agreement, reverse 
repurchase agreement, securities lending transaction, or securities 
borrowing transaction. See section 610 of the Dodd-Frank Act; 12 
U.S.C. 84(b). These types of transactions are also subject to the 
single-counterparty credit limits of section 165(e) of the Act. 12 
U.S.C. 5365(e)(3).
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    Section 165(e) of the Dodd-Frank Act addresses single-counterparty 
concentration risk among large financial companies. It directs the 
Board to establish single-counterparty credit exposure limits for bank 
holding companies and foreign banking organizations with total 
consolidated assets of $50 billion or more and U.S. and foreign nonbank 
financial companies supervised by the Board in order to limit the risks 
that the failure of any individual firm could pose to the company.\73\
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    \73\ See 12 U.S.C. 5365(e)(1). Credit exposure to a company is 
defined in section 165(e) of the Dodd-Frank Act to mean all 
extensions of credit to the company, including loans, deposits, and 
lines of credit; all repurchase agreements, reverse repurchase 
agreements, and securities borrowing and lending transactions with 
the company (to the extent that such transactions create credit 
exposure to the company); all guarantees, acceptances, or letters of 
credit (including endorsement or standby letters of credit) issued 
on behalf of the company; all purchases of or investments in 
securities issued by the company; counterparty credit exposure to 
the company in connection with a derivative transaction with the 
company; and any other similar transaction that the Board, by 
regulation, determines to be a credit exposure for purposes of 
section 165.
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    Section 165(e) grants authority to the Board to: (i) issue such 
regulations and orders as may be necessary to administer and carry out 
that section; and (ii) exempt transactions, in whole or in part, from 
the definition of the term ``credit exposure,'' if the Board finds that 
the exemption is in the public interest and consistent with the 
purposes of section 165(e).\74\
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    \74\ See 12 U.S.C. 5365(e)(5)-(6).
---------------------------------------------------------------------------

    In the December 2011 proposal, the Board sought comment on 
regulations that would implement these limits for large U.S. bank 
holding companies and nonbank financial companies supervised by the 
Board.\75\ The comment period for the December 2011 proposal has 
closed, and the Board received a large volume of comments on the 
single-counterparty credit limit. Many comments focused on the proposed 
valuation methodologies for derivatives and securities financing 
transactions, the proposal to use a lower threshold for exposures 
between major covered companies and major counterparties, and the 
treatment of exposures to foreign sovereigns and central 
counterparties. The Board is currently in the process of reviewing 
comments on the standards in the December 2011 proposal and is 
considering modifications to the proposal in response to those 
comments. Comments on this proposal will help inform how the single-
counterparty credit limits should be applied differently to foreign 
banking organizations.
---------------------------------------------------------------------------

    \75\ 77 FR 594 (January 5, 2012).
---------------------------------------------------------------------------

    Consistent with the December 2011 proposal, the proposal would 
impose a two-tier single-counterparty credit limit on foreign banking 
organizations. First, the proposal would impose a 25 percent net credit 
exposure limit between a U.S. intermediate holding company or the 
combined U.S. operations of a foreign banking organization and a single 
unaffiliated counterparty. It would prohibit a U.S. intermediate 
holding company from having aggregate net credit exposure to any single 
unaffiliated counterparty in excess of 25 percent of the U.S. 
intermediate holding company's capital stock and surplus. Similarly, it 
would prohibit the combined U.S. operations of a foreign banking 
organization from having aggregate net credit exposure to any single 
unaffiliated counterparty in excess of 25 percent of the consolidated 
capital stock and surplus of the foreign banking organization.
    Second, the proposal would impose a more stringent net credit 
exposure limit between a U.S. intermediate holding company or a foreign 
banking organization with total consolidated assets of $500 billion or 
more (major U.S. intermediate holding company and major foreign banking 
organization) and financial counterparties of similar size

[[Page 76654]]

(major counterparty).\76\ This more stringent limit would be consistent 
with the stricter limit established for major U.S. bank holding 
companies and U.S. nonbank financial companies supervised by the Board. 
The stricter limit was proposed to be 10 percent in the December 2011 
proposal.
---------------------------------------------------------------------------

    \76\ Major counterparty would be defined to include a bank 
holding company or foreign banking organization with total 
consolidated assets of $500 billion or more, and their respective 
subsidiaries, and any nonbank financial company supervised by the 
Board.
---------------------------------------------------------------------------

    In response to weaknesses in the large exposures regimes observed 
in the crisis, the BCBS has established a working group to examine 
single-counterparty credit limit regimes across jurisdictions and 
evaluate potential international standards. If an international 
agreement on large exposure limits for banking organizations is 
reached, the Board may amend this proposed rule, as necessary, to 
achieve consistency with the international approach.

B. Single-Counterparty Credit Limit Applicable to Foreign Banking 
Organizations and U.S. Intermediate Holding Companies

    Under the proposal, a foreign banking organization that exceeds the 
$50 billion asset threshold or, for any more stringent limit that is 
established, the $500 billion asset threshold, as of July 1, 2014, 
would be required to comply with the proposed single-counterparty 
credit limits on July 1, 2015, unless that time is extended by the 
Board in writing. A foreign banking organization that exceeds the $50 
billion or, for any more stringent limit that is established, the $500 
billion asset threshold, after July 1, 2014, would be required to 
comply with the proposed single-counterparty credit limits beginning 12 
months after it crossed the relevant asset threshold, unless that time 
is accelerated or extended by the Board in writing.
    Similarly, a U.S. intermediate holding company that is required to 
be established on July 1, 2015, would be required to comply with the 
proposed single-counterparty credit limits beginning on July 1, 2015, 
unless that time is extended by the Board in writing. A U.S. 
intermediate holding company established after July 1, 2015, would be 
required to comply with the proposed single-counterparty credit limits, 
including any more stringent limit that is established, beginning on 
the date it is required to be established, unless that time is 
accelerated or extended by the Board in writing. A U.S. intermediate 
holding company that meets the $500 billion threshold after July 1, 
2015, would be required to comply with any stricter proposed single-
counterparty credit limit applicable to major U.S. intermediate holding 
companies beginning 12 months after it becomes a major U.S. 
intermediate holding company, unless that time is accelerated or 
extended by the Board in writing.
Scope of the Proposed Rule
    In calculating its net credit exposure to a counterparty, a foreign 
banking organization or U.S. intermediate holding company would 
generally be required to take into account exposures of its U.S. 
subsidiaries to the counterparty.\77\ Similarly, exposure to a 
counterparty would include exposures to any subsidiaries of the 
counterparty.
---------------------------------------------------------------------------

    \77\ Because a foreign banking organization calculates only the 
credit exposure of its U.S. operations, it would be required to 
include exposure only of its U.S. subsidiaries.
---------------------------------------------------------------------------

    Consistent with the December 2011 proposal, a company is treated as 
a subsidiary when it is directly or indirectly controlled by another 
company. A company controls another company if it: (i) Owns or controls 
with the power to vote 25 percent or more of a class of voting 
securities of the company; (ii) owns or controls 25 percent or more of 
the total equity of the company; or (iii) consolidates the company for 
financial reporting purposes. The proposed rule's definition of control 
differs from that in the Bank Holding Company Act and the Board's 
Regulation Y in order to provide a simpler, more objective definition 
of control.\78\
---------------------------------------------------------------------------

    \78\ See 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e)(1).
---------------------------------------------------------------------------

    The proposed definition may be underinclusive in certain 
situations. For instance, by operation of the proposed definition of 
``subsidiary,'' a fund or vehicle that is sponsored or advised by a 
U.S. intermediate holding company or any part of the combined U.S. 
operations would not be considered a subsidiary of the U.S. 
intermediate holding company or the combined U.S. operations unless it 
was ``controlled'' by the U.S. intermediate holding company or any part 
of the combined U.S. operations.\79\ A special purpose vehicle would 
not be a subsidiary of the U.S. intermediate holding company or the 
combined U.S. operations unless it was similarly ``controlled.'' The 
Board contemplates that it may use its reservation of authority to look 
through a special purpose vehicle either to the issuer of the 
underlying assets in the vehicle or to the sponsor. In the alternative, 
the Board may require a U.S. intermediate holding company or any part 
of the combined U.S. operations to look through to the underlying 
assets of a special purpose vehicle, but only if the special purpose 
vehicle failed certain discrete concentration tests (such as having 
fewer than 20 underlying exposures).
---------------------------------------------------------------------------

    \79\ The same issued is raised with respect to the treatment of 
funds sponsored and advised by counterparties. Such funds or 
vehicles similarly would not be considered to be part of the 
counterparty under the proposed rule's definition of control.
---------------------------------------------------------------------------

    Section 165(e) directs the Board to limit credit exposure of a 
foreign banking organization to ``any unaffiliated company.'' \80\ 
Consistent with the December 2011 proposal, the proposal would include 
foreign sovereign entities in the definition of counterparty to limit 
the vulnerability of a foreign banking organization's U.S. operations 
to default by a single sovereign state. The severe distress or failure 
of a sovereign entity could have effects that are comparable to those 
caused by the failure of a financial firm or nonfinancial corporation. 
The Board believes that the authority in the Dodd-Frank Act and the 
Board's general safety and soundness authority in associated banking 
laws are sufficient to encompass sovereign governments in the 
definition of counterparty in this manner.\81\ As described below, the 
proposal would provide an exemption from the limits established in this 
subpart for exposures to a foreign banking organization's home country 
sovereign entity.
---------------------------------------------------------------------------

    \80\ 12 U.S.C. 5365(e)(2)-(3). ``Company'' is defined for 
purposes of the proposed rule to mean a corporation, partnership, 
limited liability company, depository institution, business trust, 
special purpose entity, association, or similar organization.
    \81\ See 12 U.S.C. 5365(b)(1)(B)(iv) (allowing the Board to 
establish additional prudential standards as the Board, on its own 
or pursuant to a recommendation made by the Council in accordance 
with section 115 of the Dodd-Frank Act, determines are appropriate) 
and 12 U.S.C. 5368 (providing the Board with general rulemaking 
authority); see also section 5(b) of the Bank Holding Company Act 
(12 U.S.C. 1844(b)); and section 8(b) of Federal Deposit Insurance 
Act (12 U.S.C. 1818(b)). Section 5(b) of the Bank Holding Company 
Act provides the Board with the authority to issue such regulations 
and orders as may be necessary to enable it to administer and carry 
out the purposes of the Bank Holding Company Act. Section 8(b) of 
the Federal Deposit Insurance Act allows the Board to issue to bank 
holding companies an order to cease and desist from unsafe and 
unsound practices.
---------------------------------------------------------------------------

    Question 35: What challenges would a foreign banking organization 
face in implementing the requirement that all subsidiaries of the U.S. 
intermediate holding company and any part of the combined U.S. 
operations are subject to the proposed single-counterparty credit 
limit?
    Question 36: Because a foreign banking organization may have strong

[[Page 76655]]

incentives to provide support in times of distress to certain U.S.-
based funds or vehicles that it sponsors or advises, the Board seeks 
comment on whether such funds or vehicles should be included as part of 
the U.S. intermediate holding company or the combined U.S. operations 
of the foreign banking organization for purposes of this rule.
    Question 37: How should exposures to SPVs and their underlying 
assets and sponsors be treated? What other alternatives should the 
Board consider?
    Question 38: Should the definition of ``counterparty'' 
differentiate between types of exposures to a foreign sovereign entity, 
including exposures to local governments? Should exposures to a company 
controlled by a foreign sovereign entity be included in the exposure to 
that foreign sovereign entity?
    Question 39: What additional credit exposures to foreign sovereign 
entities should be exempted from the limitations of the proposed rule?
Definition of Capital Stock and Surplus
    The credit exposure limit is calculated based on the capital stock 
and surplus of the U.S. intermediate holding company and the foreign 
banking organization, respectively.\82\ Under the proposed rule, 
capital stock and surplus of a U.S. intermediate holding company is the 
sum of the company's total regulatory capital as calculated under the 
risk-based capital adequacy guidelines applicable to that U.S. 
intermediate holding company in subpart L and the balance of the 
allowance for loan and lease losses of the U.S. intermediate holding 
company not included in tier 2 capital under the capital adequacy 
guidelines in subpart L of this proposal. This definition of capital 
stock and surplus is generally consistent with the definition of the 
same term in the Board's Regulations O and W and the OCC's national 
bank lending limit regulation.\83\
---------------------------------------------------------------------------

    \82\ See 12 U.S.C. 5365(e)(2).
    \83\ See 12 CFR 215.3(i), 223.3(d); see also 12 CFR 32.2(b).
---------------------------------------------------------------------------

    In light of differences in international accounting standards, the 
capital stock and surplus of a foreign banking organization would not 
reflect the balance of the allowance for loan and lease losses not 
included in tier 2 capital. Instead, the term would be defined to 
include the total regulatory capital of such company on a consolidated 
basis, as determined in accordance with section 252.212(c) of the 
proposed rule.
    An alternative measure of ``capital stock and surplus'' might focus 
on common equity. This would be consistent with the post-crisis global 
regulatory move toward tier 1 common equity as the primary measure of 
loss absorbing capital for internationally active banking firms. For 
example, Basel III introduces a specific tier 1 common equity 
requirement and uses tier 1 common equity measures in its capital 
conservation buffer and countercyclical buffer.\84\ In addition, the 
BCBS capital surcharge framework for G-SIBs builds on the tier 1 common 
equity requirement in Basel III.\85\ Further, the Board focused on tier 
1 common equity in the Supervisory Capital Assessment Program (SCAP) 
conducted in early 2009 and again in the Comprehensive Capital Analysis 
and Review (CCAR) exercises conducted in 2011 and 2012 to assess the 
capacity of bank holding companies to absorb projected losses.\86\
---------------------------------------------------------------------------

    \84\ See Basel III Accord, supra note 40.
    \85\ See BCBS, Global systemically important banks: assessment 
methodology and the additional loss absorbency requirement, supra 
note 55.
    \86\ See, e.g., The Supervisory Capital Assessment Program: 
Overview of Results (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf 
(SCAP Overview of Results); Comprehensive Capital Analysis and 
Review: Objectives and Overview (March 18, 2011), available at 
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf (CCAR Overview of Results); and 76 FR 74631, 
74636 (December 1, 2011).
---------------------------------------------------------------------------

    Question 40: What other alternatives to the proposed definitions of 
capital stock and surplus should the Board consider?
Credit Exposure Limit
    As discussed above, the proposal would impose a 25 percent limit on 
all U.S. intermediate holding companies and the combined U.S. 
operations of foreign banking organizations. In addition, a more 
stringent limit on major U.S. intermediate holding companies and the 
combined U.S. operations of major foreign banking organizations would 
be set, consistent with the stricter limit established for major U.S. 
bank holding companies and U.S. nonbank financial companies supervised 
by the Board.
    The more stringent limit for major U.S. intermediate holding 
companies and major foreign banking organizations is consistent with 
the Dodd-Frank Act's direction to impose stricter limits on companies 
as necessary to mitigate risks to U.S. financial stability. The Board 
recognizes, however, that size is only a rough proxy for the systemic 
footprint of a company. Additional factors specific to a firm--
including the nature, scope, scale, concentration, interconnectedness, 
and mix of its activities, its leverage, and its off-balance-sheet 
exposures, among other factors--may be determinative of a company's 
systemic footprint. For example, the BCBS proposal on capital 
surcharges for systemically important banking organizations uses a 
twelve factor approach to determine the systemic importance of a global 
banking organization.\87\ Moreover, the Board recognizes that drawing a 
line through the foreign banking organization population and imposing 
stricter limits on exposures between the combined U.S. operations of 
major foreign banking organizations or major U.S. intermediate holding 
companies and their respective major counterparties may not take into 
account nuances that might be captured by other approaches.
---------------------------------------------------------------------------

    \87\ See BCBS, Global systemically important banks: assessment 
methodology and the additional loss absorbency requirement (November 
2011), supra note 55.
---------------------------------------------------------------------------

    Question 41: Should the Board adopt a more nuanced approach, like 
the BCBS approach, in determining which foreign banking organizations 
and U.S. intermediate holding companies would be treated as major 
foreign banking organizations or major U.S. intermediate holding 
companies or which counterparties should be considered major 
counterparties?
    Question 42: Should the Board introduce more granular categories of 
foreign banking organizations or U.S. intermediate holding companies to 
determine the appropriate credit exposure limit? If so, how could such 
granularity best be accomplished?
Measuring Gross Credit Exposure
    The proposal specifies how the gross credit exposure of a credit 
transaction should be calculated for each type of credit transaction 
defined in the proposed rule. For purposes of describing the limit, the 
discussion below refers to U.S. intermediate holding companies and, 
with respect to their combined U.S. operations, foreign banking 
organizations as ``covered entities.''
    The proposed valuation rules are consistent with those set forth in 
the December 2011 proposal, other than the proposed valuation for 
derivatives exposures of U.S. branches and agencies that are subject to 
a qualifying master netting agreement. When calculating a U.S. branch 
or agency's gross credit exposure to a counterparty for a derivative 
contract that is subject to a qualifying master netting agreement (and 
is not an eligible credit derivative or an eligible equity derivative 
purchased from an eligible protection provider), a foreign banking

[[Page 76656]]

organization could choose either to use the Basel II-based exposure at 
default calculation set forth in the Board's advanced approaches 
capital rules (12 CFR part 225, appendix G, Sec.  32(c)(6) provided 
that the collateral recognition rules of the proposed rule would apply) 
or to use the gross valuation methodology for derivatives not subject 
to a qualified master netting agreements. The approach recognizes that 
a qualified master netting agreement to which the U.S. branch or agency 
is subject may cover exposures of the foreign bank outside of the U.S. 
branch and agency network.
    Consistent with the December 2011 proposal, the proposed rule 
includes the statutory attribution rule that provides that a covered 
entity must treat a transaction with any person as a credit exposure to 
a counterparty to the extent the proceeds of the transaction are used 
for the benefit of, or transferred to, that counterparty. The proposal 
adopts a minimal scope of application of this attribution rule in order 
to minimize burden on foreign banking organizations.
    Question 43: The Board seeks comment on all aspects of the 
valuation methodologies included in the proposed rule.
    Question 44: The Board requests comment on whether the proposed 
scope of the attribution rule is appropriate or whether additional 
regulatory clarity around the attribution rule would be appropriate. 
What alternative approaches to applying the attribution rule should the 
Board consider? What is the potential cost or burden of applying the 
attribution rule as described above?
Net Credit Exposure
    The proposal describes how a covered entity would convert gross 
credit exposure amounts to net credit exposure amounts by taking into 
account eligible collateral, eligible guarantees, eligible credit and 
equity derivatives, other eligible hedges (that is, a short position in 
the counterparty's debt or equity security), and for securities 
financing transactions, the effect of bilateral netting agreements. The 
proposed treatment described below is consistent with the treatment 
proposed in the December 2011 proposal.
Eligible Collateral
    In computing its net credit exposure to a counterparty for a credit 
transaction, the proposal would permit a covered entity to reduce its 
gross credit exposure on a transaction by the adjusted market value of 
any eligible collateral. Eligible collateral is generally defined 
consistently with the December 2011 proposal, but the proposal 
clarifies that eligible collateral would not include any debt or equity 
securities (including convertible bonds) issued by an affiliate of the 
U.S. intermediate holding company or by any part of the combined U.S. 
operations.
    If a covered entity chooses to reduce its gross credit exposure by 
the adjusted market value of eligible collateral, the covered entity 
would be required to include the adjusted market value of the eligible 
collateral when calculating its gross credit exposure to the issuer of 
the collateral.
    Question 45: Should the list of eligible collateral be broadened or 
narrowed? Should a covered entity be able to use its own internal 
estimates for collateral haircuts as permitted under Appendix G to 
Regulation Y?
    Question 46: Is recognizing the fluctuations in the value of 
eligible collateral appropriate?
    Question 47: What is the burden associated with the proposed rule's 
approach to changes in the eligibility of collateral?
    Question 48: Is the approach to eligible collateral that allows the 
covered entity to choose whether or not to recognize eligible 
collateral and shift credit exposure to the issuer of eligible 
collateral appropriate?
Unused Credit Lines
    In computing its net credit exposure to a counterparty for a credit 
line or revolving credit facility, the proposal would permit a covered 
entity to reduce its gross credit exposure by the amount of the unused 
portion of the credit extension. To qualify for this reduction, the 
covered entity cannot have any legal obligation to advance additional 
funds under the facility until the counterparty provides collateral in 
the amount that is required with respect to that unused portion of the 
facility. In addition, the credit contract would be required to specify 
that any used portion of the credit extension must be fully secured at 
all times by high-quality of collateral.\88\
---------------------------------------------------------------------------

    \88\ Collateral must be either (i) cash; (ii) obligations of the 
United States or its agencies; (iii) obligations directly and fully 
guaranteed as to principal and interest by, the Federal National 
Mortgage Association or the Federal Home Loan Mortgage Corporation, 
only while operating under the conservatorship or receivership of 
the Federal Housing Finance Agency, and any additional obligations 
issued by a U.S. government sponsored entity as determined by the 
Board; or (iv) obligations of the home country sovereign entity.
---------------------------------------------------------------------------

    Question 49: What alternative approaches, if any, to the proposed 
treatment of the unused portion of certain credit facilities should the 
Board consider?
Eligible Guarantees
    In calculating its net credit exposure to the counterparty, the 
proposal would require a covered entity to reduce its gross credit 
exposure to the counterparty by the amount of any eligible guarantee 
from an eligible protection provider.\89\
---------------------------------------------------------------------------

    \89\ Eligible protection provider would mean an entity (other 
than the foreign banking organization or an affiliate thereof) that 
is one of the following types of entities: a sovereign entity; the 
Bank for International Settlements, the International Monetary Fund, 
the European Central Bank, the European Commission, or a 
multilateral development bank; a Federal Home Loan Bank; the Federal 
Agricultural Mortgage Corporation; a U.S. depository institution; a 
bank holding company; a savings and loan holding company; a 
registered broker dealer; an insurance company; a foreign banking 
organization; a non-U.S.-based securities firm or a non-U.S.-based 
insurance company that is subject to consolidated supervision and 
regulation comparable to that imposed on U.S. depository 
institutions, securities broker-dealers, or insurance companies; or 
a qualifying central counterparty.
---------------------------------------------------------------------------

    The Board proposes to require gross exposure be reduced by the 
amount of an eligible guarantee in order to ensure that concentrations 
in exposures to guarantors are captured by the regime. This requirement 
is meant to limit the ability of the covered entity to extend loans or 
other forms of credit to a large number of high risk borrowers that are 
guaranteed by a single guarantor. As is the case with eligible 
collateral, in no event would a covered entity's gross credit exposure 
to an eligible protection provider with respect to an eligible 
guarantee be in excess of its gross credit exposure to the original 
counterparty on the credit transaction prior to the recognition of the 
eligible guarantee.
    Question 50: Are there any additional or alternative requirements 
the Board should place on eligible protection providers to ensure their 
capacity to perform on their guarantee obligations?
    Question 51: Should a covered entity have the choice of whether or 
not to fully shift exposures to eligible protection providers in the 
case of eligible guarantees or to divide an exposure between the 
original counterparty and the eligible protection provider in some 
manner?
Eligible Credit and Equity Derivatives
    In the case when the covered entity is a protection purchaser of 
eligible credit and equity derivatives, the proposal would require a 
covered entity to reduce its credit exposure by the notional amount of 
those derivatives. To be recognized for purposes of calculating net 
credit exposure, hedges must meet the definitions of eligible credit 
and equity derivative hedges.\90\ These

[[Page 76657]]

derivatives must meet certain criteria, including that the derivative 
be written by an eligible protection provider.\91\
---------------------------------------------------------------------------

    \90\ By contrast, when the covered entity is the protection 
provider, any credit or equity derivative written by the covered 
entity would be included in the calculation of the covered entity's 
gross credit exposure to the reference obligor.
    \91\ The same types of organizations that are eligible 
protection providers for the purposes of eligible guarantees are 
eligible protection providers for purposes of eligible credit and 
equity derivatives.
---------------------------------------------------------------------------

Other Eligible Hedges
    In addition to eligible credit and equity derivatives, the proposal 
would permit a covered entity to reduce exposure to a counterparty by 
the face amount of a short sale of the counterparty's debt or equity 
security.
    Question 52: What types of derivatives should be eligible for 
mitigating gross credit exposure?
    Question 53: What alternative approaches, if any, should the Board 
consider to capture the risk mitigation benefits of proxy or portfolio 
hedges or to permit U.S. intermediate holding companies or any part of 
the combined U.S. operations to use internal models to measure 
potential exposures to sellers of credit protection?
    Question 54: Would a more conservative approach to eligible credit 
or equity derivative hedges be more appropriate, such as one in which 
the U.S. intermediate holding company or any part of the combined U.S. 
operations would be required to recognize gross notional credit 
exposure both to the original counterparty and the eligible protection 
provider?
Netting of Securities Financing Transactions
    In calculating its credit exposure to a counterparty, the proposal 
would permit a covered entity to net the gross credit exposure amounts 
of (i) its repurchase and reverse repurchase transactions with a 
counterparty, and (ii) its securities lending and borrowing 
transactions with a counterparty, in each case, where the transactions 
are subject to a bilateral netting agreement with that counterparty.
Compliance
    Under the proposal, a foreign banking organization would be 
required to comply with the requirements of the proposed rule on a 
daily basis as of the end of each business day and must submit a 
monthly compliance report demonstrating its daily compliance. A foreign 
banking organization must ensure the compliance of its U.S. 
intermediate holding company and its combined U.S. operations. If 
either the U.S. intermediate holding company or the combined U.S. 
operations is not in compliance, both of the U.S. intermediate holding 
company and the U.S. operations would be prohibited from engaging in 
any additional credit transactions with such a counterparty, except in 
cases when the Board determines that such additional credit 
transactions are necessary or appropriate to preserve the safety and 
soundness of the foreign banking organization or financial stability. 
In considering special temporary exceptions, the Board may impose 
supervisory oversight and reporting measures that it determines are 
appropriate to monitor compliance with the foregoing standards.
    Question 55: What temporary exceptions should the Board consider, 
if any?
Exemptions
    Section 165(e)(6) of the Dodd-Frank Act permits the Board to exempt 
transactions from the definition of the term ``credit exposure'' for 
purposes of this subsection, if the Board finds that the exemption is 
in the public interest and is consistent with the purposes of this 
subsection. The proposal would provide exemptions to the credit 
exposure limit for exposures to the United States and its agencies, 
Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation (while these entities are operating under the 
conservatorship or receivership of the Federal Housing Finance Agency), 
and a foreign banking organization's home country sovereign entity. The 
exemption for a foreign banking organization's home country sovereign 
would recognize that a foreign banking organization's U.S. operations 
may have exposures to its home country sovereign entity that are 
required by home country laws or are necessary to facilitate the normal 
course of business for the consolidated company.
    In addition, the proposal would also provide an exception for 
intraday credit exposure to a counterparty. This exemption would help 
minimize the effect of the rule on the payment and settlement of 
financial transactions, which often involve large exposure but are 
settled on an intraday basis. The Board would have authority to exempt 
any transaction in the public interest and consistent with the purposes 
of the proposal.\92\
---------------------------------------------------------------------------

    \92\ See 12 U.S.C. 5365(e)(6).
---------------------------------------------------------------------------

    Question 56: Would additional exemptions for foreign banking 
organizations be appropriate? Why or why not?

VII. Risk Management

A. Background

    The recent financial crisis highlighted the need for large, complex 
financial companies to have more robust enterprise-wide risk 
management. A number of companies that experienced material financial 
distress or failed during the crisis had significant deficiencies in 
key areas of risk management. Recent reviews of risk management 
practices of banking organizations conducted by the Senior Supervisors 
Group (SSG) illustrated these deficiencies.\93\
---------------------------------------------------------------------------

    \93\ See 2008 SSG Report, supra note 56; 2009 SSG Report, supra 
note 57.
---------------------------------------------------------------------------

    The SSG found that business line and senior risk managers did not 
jointly act to address a company's risks on an enterprise-wide basis 
and business line managers made decisions in isolation. In addition, 
treasury functions were not closely aligned with risk management 
processes, preventing market and counterparty risk positions from being 
readily assessed on an enterprise-wide basis.
    The risk management weaknesses revealed during the financial crisis 
among large U.S. bank holding companies were also apparent in the U.S. 
operations of large foreign banking organizations. Moreover, 
consolidated risk management practices across foreign banking 
organizations, while efficient from a global perspective, have at times 
limited U.S. supervisors' ability to understand the risks posed to U.S. 
financial stability by the U.S. operations of foreign banks. Further, 
centralized risk management practices that focus on risk by business 
line have generally limited the ability of large foreign banking 
organizations to effectively aggregate, monitor, and report risks 
across their U.S. legal entities on a timely basis.
    Section 165(b)(1)(A) of the Dodd-Frank Act requires the Board to 
establish overall risk management requirements as part of the enhanced 
prudential standards to ensure that strong risk management standards 
are part of the regulatory and supervisory framework for large bank 
holding companies, including foreign banking organizations, and nonbank 
companies supervised by the Board.\94\ Section 165(h) of the Dodd-Frank 
Act directs the Board to issue regulations requiring publicly traded 
bank holding companies with total consolidated assets of $10 billion or 
more and publicly traded

[[Page 76658]]

nonbank companies supervised by the Board to establish risk 
committees.\95\
---------------------------------------------------------------------------

    \94\ 12 U.S.C. 5365(b)(1)(A).
    \95\ 12 U.S.C. 5365(h).
---------------------------------------------------------------------------

    In its December 2011 proposal, the Board proposed to establish 
enhanced risk management standards for U.S. bank holding companies with 
total consolidated assets of $50 billion or more and U.S. nonbank 
financial companies supervised by the Board, to address weakness in 
risk management practices that had emerged during the crisis. The 
December 2011 proposal would (i) require oversight of enterprise-wide 
risk management by a stand-alone risk committee of the board of 
directors and chief risk officer; (ii) reinforce the independence of a 
firm's risk management function; and (iii) ensure appropriate expertise 
and stature for the chief risk officer. The Board also proposed to 
require U.S. bank holding companies with total consolidated assets of 
$10 billion or more that are publicly traded companies to establish an 
enterprise-wide risk committee of the board of directors.
    This proposal would apply the requirements of the December 2011 
proposal to foreign banking organizations in a way that strengthens 
foreign banking organizations' oversight and risk management of their 
combined U.S. operations and requires foreign banking organizations 
with a large U.S. presence to aggregate and monitor risks on a combined 
U.S. operations basis. The proposal would permit a foreign banking 
organization some flexibility to structure the oversight of the risks 
of its U.S. operations in a manner that is efficient and effective in 
light of its broader enterprise-wide risk management structure.
    The proposal includes a general requirement that foreign banking 
organizations that are publicly traded with total consolidated assets 
of $10 billion or more and all foreign banking organizations, 
regardless of whether their stock is publicly traded, with total 
consolidated assets of $50 billion or more certify that they maintain a 
risk committee to oversee the U.S. operations of the company. The 
proposal would set forth additional requirements for the U.S. risk 
committee of a foreign banking organization with combined U.S. assets 
of $50 billion or more and would require these companies to appoint a 
U.S. chief risk officer in charge of implementing and maintaining a 
risk management framework for the company's combined U.S. operations.
    The Board emphasizes that the enhanced U.S. risk management 
requirements contained in this proposal supplement the Board's existing 
risk management guidance and supervisory expectations for foreign 
banking organizations.\96\ All foreign banking organizations supervised 
by the Board should continue to follow such guidance to ensure 
appropriate oversight of and limitations on risk.
---------------------------------------------------------------------------

    \96\ See SR Letter 08-8 (October 16, 2008), available at http://fedweb.frb.gov/fedweb/bsr/srltrs/SR0808.htm, and SR Letter 08-9 
(October 16, 2008), available at http://fedweb.frb.gov/fedweb/bsr/srltrs/SR0809.htm.
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B. Risk Committee Requirements for Foreign Banking Organizations With 
$10 Billion or More in Consolidated Assets

    Consistent with the requirements of section 165(h) of the Dodd-
Frank Act, the proposal would require a foreign banking organization 
with publicly traded stock and total consolidated assets of $10 billion 
or more or a foreign banking organization, regardless of whether its 
stock is publicly traded, with total consolidated assets of $50 billion 
or more, to certify to the Board, on an annual basis, that it maintains 
a committee that (1) oversees the U.S. risk management practices of the 
company, and (2) has at least one member with risk management 
expertise. This certification must be filed with the Board concurrently 
with the foreign banking organization's Form FR Y-7.
    At least one member of a U.S. risk committee would be required to 
have risk management expertise that is commensurate with the capital 
structure, risk profile, complexity, activities, and size of the 
foreign banking organization's combined U.S. operations. The requisite 
level of risk management expertise for a company's U.S. risk committee 
should be commensurate with the capital structure, risk profile, 
complexity, activities, and size of the company's combined U.S. 
operations. Thus, the Board expects that the U.S. risk committee of a 
foreign banking organization that poses greater risks to the U.S. 
financial system would have members with commensurately greater risk 
management expertise than the U.S. risk committees of other companies 
whose combined U.S. operations pose less systemic risk.
    Generally, a foreign banking organization would be permitted to 
maintain its U.S. risk committee either as a committee of its global 
board of directors (or equivalent thereof) or as a committee of the 
board of directors of the U.S. intermediate holding company. If the 
U.S. risk committee is a committee of the global board of directors, it 
may be organized on a standalone basis or as part of the enterprise-
wide risk committee (or equivalent thereof). A foreign banking 
organization with combined U.S. assets of $50 billion or more that 
conducts its operations in the United States solely through a U.S. 
intermediate holding company would be required to maintain its U.S. 
risk committee at its U.S. intermediate holding company.
    In order to accommodate the diversity in corporate governance 
philosophies across countries, the proposal would not require the U.S. 
risk committee of a foreign banking organization with combined U.S. 
assets of less than $50 billion to maintain a specific number of 
independent directors on the U.S. risk committee.\97\ Further, a 
foreign banking organization's enterprise-wide risk committee may 
fulfill the responsibilities of the U.S. risk committee, unless the 
foreign banking organization has combined U.S. assets of $50 billion or 
more and operates in the United States solely through a U.S. 
intermediate holding company.
---------------------------------------------------------------------------

    \97\ As described below, foreign banking organizations with 
combined U.S. assets of $50 billion or more would be required to 
maintain an independent director on its U.S. risk committee.
---------------------------------------------------------------------------

    Under the proposal, foreign banking organization with publicly 
traded stock and total consolidated assets of $10 billion or more or a 
foreign banking organization, regardless of whether its stock is 
publicly traded, with total consolidated assets of $50 billion or more 
as of July 1, 2014, would be required to comply with the proposed risk 
committee certification requirement on July 1, 2015, unless that time 
is extended by the Board in writing. A foreign banking organization 
that crossed the relevant asset threshold after July 1, 2014 would be 
required to comply with the proposed risk committee certification 
requirement beginning 12 months after it crosses the relevant asset 
threshold, unless that time is accelerated or extended by the Board in 
writing.
    Question 57: Should the Board require that a company's 
certification under section 252.251 of the proposal include a 
certification that at least one member of the U.S. risk committee 
satisfies director independence requirements? Why or why not?
    Question 58: Should the Board consider requiring that all U.S. risk 
committees required under the proposal not be housed within another 
committee or be part of a joint committee, or limit the other functions 
that the U.S. risk committee may perform? Why or why not?

[[Page 76659]]

C. Risk Management Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More

    The proposal would establish additional requirements for the U.S. 
risk committee of a foreign banking organization with combined U.S. 
assets of $50 billion or more relating to the committee's 
responsibilities and structure. Each foreign banking organization with 
combined U.S. assets of $50 billion or more would also be required to 
appoint a U.S. chief risk officer in charge of overseeing and 
implementing the risk management framework of the company's combined 
U.S. operations. In general, the Board has sought to maintain 
consistency with the risk management requirements included in the 
December 2011 proposal, with certain adaptations to account for the 
unique characteristics of foreign banking organizations.
    A foreign banking organization with combined U.S. assets of $50 
billion or more on July 1, 2014, would be required to comply with the 
proposed risk management requirements on July 1, 2015, unless that time 
is extended by the Board in writing. A foreign banking organization 
whose combined U.S. assets exceeded $50 billion after July 1, 2014 
would be required to comply with the proposed risk management standards 
beginning 12 months after it crosses the asset threshold, unless that 
time is accelerated or extended by the Board in writing.
Responsibilities of the U.S. Risk Committee
    The proposal would require a U.S. risk committee to review and 
approve the risk management practices of the combined U.S. operations 
and to oversee the operation of an appropriate risk management 
framework that is commensurate with the capital structure, risk 
profile, complexity, activities, and size of the company's combined 
U.S. operations.
    The risk management framework for the combined U.S. operations must 
be consistent with the enterprise-wide risk management framework of the 
foreign banking organization and must include:
     Policies and procedures relating to risk management 
governance, risk management practices, and risk control infrastructure 
for the combined U.S. operations of the company;
     Processes and systems for identifying and reporting risks 
and risk management deficiencies, including emerging risks, on a 
combined U.S. operations basis;
     Processes and systems for monitoring compliance with the 
policies and procedures relating to risk management governance, 
practices, and risk controls across the company's combined U.S. 
operations;
     Processes designed to ensure effective and timely 
implementation of corrective actions to address risk management 
deficiencies;
     Specification of management and employees' authority and 
independence to carry out risk management responsibilities; and
     Integration of risk management and control objectives in 
management goals and compensation structure of the company's combined 
U.S. operations.
    The proposal would require that a U.S. risk committee meet at least 
quarterly and as needed, and that the committee fully document and 
maintain records of its proceedings, including risk management 
decisions.
    The Board expects that members of a U.S. risk committee of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more generally would have an understanding of risk management 
principles and practices relevant to the U.S. operations of their 
company. U.S. risk committee members generally should also have 
experience developing and applying risk management practices and 
procedures, measuring and identifying risks, and monitoring and testing 
risk controls with respect to banking organizations.
    Question 59: As an alternative to the proposed U.S. risk committee 
requirement, should the Board consider requiring each foreign banking 
organization with combined U.S. assets of $50 billion or more to 
establish a risk management function solely in the United States, 
rather than permitting the U.S. risk management function to be located 
in the company's home office? Why or why not? If so, how should such a 
function be structured?
    Question 60: Should the Board consider requiring or allowing a 
foreign banking organization to establish a ``U.S. risk management 
function'' that is based in the United States but not associated with a 
board of directors to oversee the risk management practices of the 
company's combined U.S. operations? What are the benefits and drawbacks 
of such an approach?
    Question 61: Should the Board consider allowing a foreign banking 
organization with combined U.S. assets of $50 billion or more that has 
a U.S. intermediate holding company subsidiary and operates no branches 
or agencies in the United States the option to comply with the proposal 
by maintaining a U.S. risk committee of the company's global board of 
directors? Why or why not?
    Question 62: Is the scope of review of the risk management 
practices of the combined U.S. operations of a foreign banking 
organization appropriate? Why or why not?
    Question 63: What unique ownership structures of foreign banking 
organizations would present challenges for such companies to comply 
with the requirements of the proposal? Should the Board incorporate 
flexibility for companies with unique or nontraditional ownership 
structures into the rule, such as more than one top-tier company? If 
so, how?
    Question 64: Is it appropriate to require the U.S. risk committee 
of a foreign banking organization to meet at least quarterly? If not, 
what alternative requirement should be considered and why?
Independent Member of the U.S. Risk Committee
    The proposal would require the U.S. risk committee of a foreign 
banking organization with combined U.S. assets of $50 billion or more 
to include at least one member who is not (1) an officer or employee of 
the company or its affiliates and has not been an officer or employee 
of the company or its affiliates during the previous three years, or 
(2) a member of the immediate family of a person who is, or has been 
within the last three years, an executive officer of the company or its 
affiliates. This requirement would apply regardless of where the U.S. 
risk committee was located.
    This requirement is adapted from director independence requirements 
of certain U.S. securities exchanges and is similar to the requirement 
in the December 2011 proposal that the director of the risk committee 
of a U.S. bank holding company or nonbank financial company supervised 
by the Board be independent.\98\
---------------------------------------------------------------------------

    \98\ The December 2011 proposal would require that the director 
be independent either under the SEC's regulations, or, if the 
domestic company was not publicly traded, the company be able to 
demonstrate to the Federal Reserve that the director would qualify 
as an independent director under the listing standards of a national 
securities exchange if the company were publicly traded.
---------------------------------------------------------------------------

    Question 65: Should the Board require that a member of the U.S. 
risk committee comply with the director independence standards? Why or 
why not?
    Question 66: Should the Board consider specifying alternative or 
additional qualifications for director independence? If so, describe 
the alternative or additional qualifications. Should the Board require 
that the chair of a U.S. risk committee satisfy the

[[Page 76660]]

director independence standards, similar to the requirements in the 
December 2011 proposal for large U.S.bank holding companies?
U.S. Chief Risk Officer
    The proposal would require a foreign banking organization with 
combined U.S. assets of $50 billion or more or its U.S. intermediate 
holding company subsidiary to appoint a U.S. chief risk officer that is 
employed by a U.S. subsidiary or U.S. office of the foreign banking 
organization. The U.S. chief risk officer would be required to have 
risk management expertise that is commensurate with the capital 
structure, risk profile, complexity, activities, and size of the 
combined U.S. operations of a foreign banking organization with 
combined U.S. assets of $50 billion or more. In addition, the U.S. 
chief risk officer would be required to receive appropriate 
compensation and other incentives to provide an objective assessment of 
the risks taken by the company's combined U.S. operations. The Board 
expects that the primary responsibility of the U.S. chief risk officer 
would be risk management oversight of the combined U.S. operations and 
that the U.S. chief risk officer would not also serve as the company's 
global chief risk officer.
    In general, a U.S. chief risk officer would report directly to the 
U.S. risk committee and the company's global chief risk officer. 
However, the Board may approve an alternative reporting structure on a 
case-by-case basis if the company demonstrates that the proposed 
reporting requirements would create an exceptional hardship for the 
company.
    Question 67: Would it be appropriate for the Board to permit the 
U.S. chief risk officer to fulfill other responsibilities, including 
with respect to the enterprise-wide risk management of the company, in 
addition to the responsibilities of section 252.253 of this proposal? 
Why or why not?
    Question 68: What are the challenges associated with the U.S. chief 
risk officer being employed by a U.S. entity?
    Question 69: Should the Board consider approving alternative 
reporting structures for a U.S. chief risk officer on a case-by-case 
basis if the company demonstrates that the proposed reporting 
requirements would create an exceptional hardship or under other 
circumstances?
    Question 70: Should the Board consider specifying by regulation the 
minimum qualifications, including educational attainment and 
professional experience, for a U.S. chief risk officer?
    Under the proposal, the U.S. chief risk officer would be required 
to directly oversee the measurement, aggregation, and monitoring of 
risks undertaken by the company's combined U.S. operations. The 
proposal would require a U.S. chief risk officer to directly oversee 
the regular provision of information to the U.S. risk committee, the 
global chief risk officer, and the Board or Federal Reserve supervisory 
staff.\99\ Such information would include information regarding the 
nature of and changes to material risks undertaken by the company's 
combined U.S. operations, including risk management deficiencies and 
emerging risks, and how such risks relate to the global operations of 
the company.
---------------------------------------------------------------------------

    \99\ The reporting would generally take place through the 
traditional supervisory process.
---------------------------------------------------------------------------

    In addition, the U.S. chief risk officer would be expected to 
oversee regularly scheduled meetings, as well as special meetings, with 
the Board or Federal Reserve supervisory staff to assess compliance 
with its risk management responsibilities. This would require the U.S. 
chief risk officer to be available to respond to supervisory inquiries 
from the Board as needed.
    The proposal includes additional responsibilities for which a U.S. 
chief risk officer must have direct oversight, including:
     Implementation of and ongoing compliance with appropriate 
policies and procedures relating to risk management governance, 
practices, and risk controls of the company's combined U.S. operations 
and monitoring compliance with such policies and procedures;
     Development appropriate processes and systems for 
identifying and reporting risks and risk management deficiencies, 
including emerging risks, on a combined U.S. operations basis;
     Management risk exposures and risk controls within the 
parameters of the risk control framework for the company's combined 
U.S. operations;
     Monitoring and testing of the risk controls of the 
combined U.S. operations; and
     Ensuring that risk management deficiencies with respect to 
the company's combined U.S. operations are resolved in a timely manner.
    Question 71: What alternative responsibilities for the U.S. chief 
risk officer should the Board consider?
    Question 72: Should the Board require each foreign banking 
organization with total consolidated assets of $50 billion or more and 
combined U.S. assets of less than $50 billion to designate an employee 
to serve as a liaison to the Board regarding the risk management 
practices of the company's combined U.S. operations? A liaison of this 
sort would meet annually, and as needed, with the appropriate 
supervisory authorities at the Board and be responsible for explaining 
the risk management oversight and controls of the foreign banking 
organization's combined U.S. operations. Would these requirements be 
appropriate? Why or why not?

VIII. Stress Test Requirements

A. Background

    The Board has long held the view that a banking organization should 
operate with capital levels well above its minimum regulatory capital 
ratios and commensurate with its risk profile.\100\ A banking 
organization should also have internal processes for assessing its 
capital adequacy that reflect a full understanding of its risks and 
ensure that it holds capital commensurate with those risks.\101\ Stress 
testing is one tool that helps both bank supervisors and a banking 
organization measure the sufficiency of capital available to support 
the banking organization's operations throughout periods of economic 
and financial stress.\102\
---------------------------------------------------------------------------

    \100\ See 12 CFR part 225, Appendix A; see also SR Letter 99-18, 
Assessing Capital Adequacy in Relation to Risk at Large Banking 
Organizations and Others with Complex Risk Profiles (July 1, 1999) 
(SR 99-18), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM.
    \101\ See SR Letter 09-4, Applying Supervisory Guidance and 
Regulations on the Payment of Dividends, Stock Redemptions, and 
Stock Repurchases at Bank Holding Companies (March 27, 2009) (SR 09-
4), available at http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm .
    \102\ A full assessment of a company's capital adequacy must 
take into account a range of risk factors, including those that are 
specific to a particular industry or company.
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    The Board has previously highlighted the use of stress testing as a 
means to better understand the range of a banking organization's 
potential risk exposures.\103\ In particular, as part of its

[[Page 76661]]

effort to stabilize the U.S. financial system during the recent 
financial crisis, the Board, along with other federal financial 
regulatory agencies, conducted stress tests of large, complex bank 
holding companies through the Supervisory Capital Assessment Program 
(SCAP). Building on the SCAP and other supervisory work coming out of 
the crisis, the Board initiated the annual Comprehensive Capital 
Analysis and Review (CCAR) in late 2010 to assess the capital adequacy 
and the internal capital planning processes of large, complex bank 
holding companies and to incorporate stress testing as part of the 
Board's regular supervisory program for large bank holding companies.
---------------------------------------------------------------------------

    \103\ See, e.g., Supervisory Guidance on Stress Testing for 
Banking Organizations With More Than $10 Billion in Total 
Consolidated Assets, 77 FR 29458 (May 17, 2012); SR 10-6, 
Interagency Policy Statement on Funding and Liquidity Risk 
Management (March 17, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm; 
Supervision and Regulation Letter 10-1, Interagency Advisory on 
Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1001.htm; SR 09-4, 
supra note 99; SR Letter 07-1, Interagency Guidance on 
Concentrations in Commercial Real Estate (January 4, 2007), 
available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; Supervisory Review Process of Capital Adequacy (Pillar 
2) Related to the Implementation of the Basel II Advanced Capital 
Framework, 73 FR 44620 (July 31, 2008); SCAP Overview of Results and 
CCAR Overview of Results, supra note 85.
---------------------------------------------------------------------------

    The global regulatory community has also emphasized the role of 
stress testing in risk management. Stress testing is an important 
element of capital adequacy assessments under Pillar 2 of the Basel II 
framework, and in 2009, the BCBS promoted principles for sound stress 
testing practices and supervision.\104\ The BCBS recently reviewed the 
implementation of these stress testing principles at its member 
countries and concluded that, while countries are in various stages of 
maturity in their implementation of the BCBS's principles, stress 
testing has become a key component of the supervisory assessment 
process as well as a tool for contingency planning and 
communication.\105\
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    \104\ See BCBS, Principles for sound stress testing practices 
and supervision, (May 2009), available at http://www.bis.org/publ/bcbs155.pdf.
    \105\ See BCBS, Peer review of supervisory authorities' 
implementation of stress testing principles, (April 2012), available 
at http://www.bis.org/publ/bcbs218.pdf.
---------------------------------------------------------------------------

    Section 165(i)(1) of the Dodd-Frank Act requires the Board to 
conduct annual stress tests of bank holding companies with total 
consolidated assets of $50 billion or more, including foreign banking 
organizations, and nonbank financial companies supervised by the Board. 
In addition, section 165(i)(2) requires the Board to issue regulations 
establishing requirements for certain regulated financial companies, 
including foreign banking organizations and foreign savings and loan 
holding companies with total consolidated assets of more than $10 
billion, to conduct company-run stress tests.
    The December 2011 proposal included provisions that would implement 
the stress testing provisions in section 165(i) of the Dodd-Frank Act 
for U.S. companies. On October 9, 2012, the Board issued a final rule 
implementing the supervisory and company-run stress testing 
requirements for U.S. bank holding companies with total consolidated 
assets of $50 billion or more and U.S. nonbank financial companies 
supervised by the Board.\106\ Concurrently, the Board issued a final 
rule implementing the company-run stress testing requirements for U.S. 
bank holding companies with total consolidated assets of more than $10 
billion but less than $50 billion.\107\
---------------------------------------------------------------------------

    \106\ See 12 CFR part 252, subparts F and G.
    \107\ See 12 CFR part 252, subpart H.
---------------------------------------------------------------------------

    This proposed rule seeks to adapt the requirements of the final 
stress testing rules currently applicable to U.S. bank holding 
companies to the U.S. operations of foreign banking organizations. The 
proposal would subject U.S. intermediate holding companies to the 
Board's stress testing rules as if they were U.S. bank holding 
companies, in order to ensure national treatment and equality of 
competitive opportunity. As a result, U.S. intermediate holding 
companies with total consolidated assets of more than $10 billion but 
less than $50 billion would be required to conduct annual company-run 
stress tests. U.S. intermediate holding companies with assets of $50 
billion or more would be required to conduct semi-annual company-run 
stress tests and would be subject to annual supervisory stress tests.
    The proposal takes a different approach to the U.S. branches and 
agencies of a foreign banking organization because U.S. branches and 
agencies do not hold capital separately from their parent foreign 
banking organization. Accordingly, the proposal also would apply stress 
testing requirements to the U.S. branches and agencies by first 
evaluating whether the home country supervisor for the foreign banking 
organization conducts a stress test and, if so, whether the stress 
testing standards applicable to the consolidated foreign banking 
organization in its home country are broadly consistent with U.S. 
stress testing standards.
    Consistent with the approach taken in the final stress testing 
rules for U.S. firms, the proposal would tailor the stress testing 
requirements based on the size of the U.S. operations of the foreign 
banking organizations.

B. Stress Test Requirements for U.S. Intermediate Holding Companies

U.S. Intermediate Holding Companies With Total Consolidated Assets of 
$50 Billion or More
    U.S. intermediate holding companies with total consolidated assets 
of $50 billion or more would be subject to the annual supervisory and 
semi-annual company-run stress testing requirements set forth in 
subparts F and G of Regulation YY.\108\ A U.S. intermediate holding 
company that meets the $50 billion total consolidated asset threshold 
as of July 1, 2015, would be required to comply with the stress testing 
final rule requirements beginning with the stress test cycle that 
commences on October 1, 2015, unless that time is extended by the Board 
in writing. A U.S. intermediate holding company that meets the $50 
billion total consolidated asset threshold after July 1, 2015, would be 
required to comply with the stress test requirements beginning in 
October of the calendar year after the year in which the U.S. 
intermediate holding company is established or otherwise crosses the 
$50 billion total consolidated asset threshold, unless that time is 
accelerated or extended by the Board in writing.
---------------------------------------------------------------------------

    \108\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October 
12, 2012).
---------------------------------------------------------------------------

    In accordance with subpart G of Regulation YY, U.S. intermediate 
holding companies with total consolidated assets of $50 billion or more 
would be required to conduct two company-run stress tests per year, 
with one test using scenarios provided by the Board (the ``annual'' 
test) and the other using scenarios developed by the company (the 
``mid-cycle'' test). In connection with the annual test, the U.S. 
intermediate holding company would be required to file a regulatory 
report containing the results of its stress test with the Board by 
January 5 of each year and publicly disclose a summary of the results 
under the severely adverse scenario between March 15 and March 31.\109\ 
In connection with the mid-cycle test, the company would be required to 
file a regulatory report containing the results of this stress test by 
July 5 of each year and disclose a summary of results between September 
15 and September 30.
---------------------------------------------------------------------------

    \109\ The annual company-run stress tests would satisfy some of 
a large intermediate holding company's proposed obligations under 
the Board's capital plan rule (12 CFR 225.8).
---------------------------------------------------------------------------

    Concurrently with the U.S. intermediate holding company's annual 
company-run stress test, the Board would conduct a supervisory stress 
test in accordance with subpart F of

[[Page 76662]]

Regulation YY of the U.S. intermediate holding company using scenarios 
identical to those provided for the annual company-run stress test. The 
U.S. intermediate holding company would be required to file regulatory 
reports that contain information to support the Board's supervisory 
stress tests. The Board would disclose a summary of the results of its 
supervisory stress test no later than March 31 of each calendar year.
U.S. Intermediate Holding Companies With Total Consolidated Assets More 
Than $10 Billion But Less Than $50 Billion
    U.S. intermediate holding companies with total consolidated assets 
of more than $10 billion but less than $50 billion would be subject to 
the annual company-run stress testing requirements set forth in subpart 
H of Regulation YY. A U.S. intermediate holding company subject to this 
requirement as of July 1, 2015, would be required to comply with the 
requirements of the stress testing final rules beginning with the 
stress test cycle that commences on October 1, 2015, unless that time 
is extended by the Board in writing. A U.S. intermediate holding 
company that becomes subject to this requirement after July 1, 2015, 
would comply with the final rule stress testing requirements beginning 
in October of the calendar year after the year in which the U.S. 
intermediate holding company is established, unless that time is 
accelerated or extended by the Board in writing.
    U.S. intermediate holding companies with total consolidated assets 
of more than $10 billion but less than $50 billion would be required to 
conduct one company-run stress test per year, using scenarios provided 
by the Board. In connection with the stress test, a U.S. intermediate 
holding company would be required to file a regulatory report 
containing the results of its stress test with the Board by March 31 of 
each year and publicly disclose a summary of the results of its stress 
test under the severely adverse scenario between June 15 and June 30.

C. Stress Test Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More

    In order to satisfy the proposed stress test requirements, a 
foreign banking organization with combined U.S. assets of $50 billion 
or more must be subject to a consolidated capital stress testing regime 
that includes either an annual supervisory capital stress test 
conducted by the foreign banking organization's home country supervisor 
or an annual evaluation and review by the foreign banking 
organization's home country supervisor of an internal capital adequacy 
stress test conducted by the foreign banking organization. In either 
case, the home country capital stress testing regime must set forth 
requirements for governance and controls of the stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the foreign banking organization.
    A foreign banking organization with combined U.S. assets of $50 
billion or more on July 1, 2014, would be required to comply with the 
proposal beginning in October 2015, unless that time is extended by the 
Board in writing. A foreign banking organization that exceeds the $50 
billion combined U.S. asset threshold after July 1, 2014, would be 
required to comply with the requirements of the proposal commencing in 
October of the calendar year after the company becomes subject to the 
stress test requirement, unless that time is accelerated or extended by 
the Board in writing.
    Question 73: What other standards should the Board consider to 
determine whether a foreign banking organization's home country stress 
testing regime is broadly consistent with the capital stress testing 
requirements of the Dodd-Frank Act?
    Question 74: Should the Board consider conducting supervisory loss 
estimates on the U.S. branch and agency networks of large foreign 
banking organizations by requiring U.S. branches and agencies to submit 
data similar to that required to be submitted by U.S. bank holding 
companies with total consolidated assets of $50 billion or more on the 
FR Y-14? Alternatively, should the Board consider requiring foreign 
banking organizations to conduct internal stress tests on their U.S. 
branch and agency networks?
Information Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More
    The proposal would require a foreign banking organization with 
combined U.S. assets of $50 billion or more to submit information 
regarding the results of its home country stress test. The information 
must include: a description of the types of risks included in the 
stress test; a description of the conditions or scenarios used in the 
stress test; a summary description of the methodologies used in the 
stress test; estimates of the foreign banking organization's projected 
financial and capital condition; and an explanation of the most 
significant causes for the changes in regulatory capital ratios.
    When the U.S. branch and agency network is in a net due from 
position to the foreign bank parent or its foreign affiliates, 
calculated as the average daily position from October-October of a 
given year, the foreign banking organization would be required to 
report additional information to the Board regarding its stress tests. 
The additional information would include a more detailed description of 
the methodologies used in the stress test, detailed information 
regarding the organization's projected financial and capital position 
over the planning horizon, and any additional information that the 
Board deems necessary in order to evaluate the ability of the foreign 
banking organization to absorb losses in stressed conditions. The 
heightened information requirements reflect the greater risk to U.S. 
creditors and U.S. financial stability posed by U.S. branches and 
agencies that serve as funding sources to their foreign parent.
    All foreign banking organizations with combined U.S. assets of $50 
billion or more would be required to provide this information by 
January 5 of each calendar year, unless extended by the Board in 
writing. The confidentiality of any information submitted to the Board 
with respect to stress testing results would be determined in 
accordance with the Board's rules regarding availability of 
information.\110\
---------------------------------------------------------------------------

    \110\ See 12 CFR part 261; see also 5 U.S.C. 552(b).
---------------------------------------------------------------------------

Supplemental Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More That Do Not Comply With 
Stress Testing Requirements
Asset Maintenance Requirement
    If a foreign banking organization with combined U.S. assets of $50 
billion or more does not meet the stress test requirements above, the 
Board would require its U.S. branch and agency network to maintain 
eligible assets equal to 108 percent of third-party liabilities (asset 
maintenance requirement). The 108 percent asset maintenance requirement 
reflects the 8 percent minimum risk-based capital standard currently 
applied to U.S. banking organizations.
    The proposal generally aligns the mechanics of the asset 
maintenance requirement with the asset maintenance requirement that may 
apply to U.S. branches and agencies under existing federal or state 
rules. Under the proposal, definitions of the terms ``eligible assets'' 
and ``liabilities'' are generally consistent with the definitions of 
the terms ``eligible assets'' and

[[Page 76663]]

``liabilities requiring cover'' used in the New York State 
Superintendent's Regulations.\111\
---------------------------------------------------------------------------

    \111\ 3 NYCRR Sec.  322.3-322.4.
---------------------------------------------------------------------------

    Question 75: Should the Board consider alternative asset 
maintenance requirements, including definitions of eligible assets or 
liabilities under cover or the percentage?
    Question 76: Do the proposed asset maintenance requirement pose any 
conflict with any asset maintenance requirements imposed on a U.S. 
branch or agency by another regulatory authority, such as the FDIC or 
the OCC?
Stress Test of U.S. Subsidiaries
    If a foreign banking organization with combined U.S. assets of $50 
billion or more does not meet the stress testing requirements, the 
foreign banking organization would be required to conduct an annual 
stress test of any U.S. subsidiary not held under a U.S. intermediate 
holding company (other than a section 2(h)(2) company), separately or 
as part of an enterprise-wide stress test, to determine whether that 
subsidiary has the capital necessary to absorb losses as a result of 
adverse economic conditions.\112\ The foreign banking organization 
would be required to report summary information about the results of 
the stress test to the Board on an annual basis.
---------------------------------------------------------------------------

    \112\ As described above under section III of this preamble, a 
foreign banking organization with combined U.S. assets (excluding 
assets held by a branch or agency or by a section 2(h)(2) company) 
of less than $10 billion would not be required to form a U.S. 
intermediate holding company.
---------------------------------------------------------------------------

    Question 77: What alternative standards should the Board consider 
for foreign banking organizations that do not have a U.S. intermediate 
holding company and are not subject to broadly consistent stress 
testing requirements? What types of challenges would the proposed 
stress testing regime present?
Intragroup Funding Restrictions or Local Liquidity Requirements
    In addition to the asset maintenance requirement and the 
subsidiary-level stress test requirement described above, the Board may 
impose intragroup funding restrictions on the U.S. operations of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more that does not satisfy the stress testing requirements. The 
Board may also impose increased local liquidity requirements with 
respect to the U.S. branch and agency network or on any U.S. subsidiary 
that is not part of a U.S. intermediate holding company. If the Board 
determines that it should impose intragroup funding restrictions or 
increased local liquidity requirements as a result of failure to meet 
the Board's stress testing requirements under this proposal, the Board 
would notify the company no later than 30 days before it proposes to 
apply additional standards. The notification will include the basis for 
imposing the additional requirement. Within 14 calendar days of receipt 
of a notification under this paragraph, the foreign banking 
organization may request in writing that the Board reconsider the 
requirement, including an explanation as to why the reconsideration 
should be granted. The Board will respond in writing within 14 calendar 
days of receipt of the company's request.
    Question 78: Should the Board consider alternative prudential 
standards for U.S. operations of foreign banking organizations that are 
not subject to home country stress test requirements that are 
consistent with those applicable to U.S. banking organizations or do 
not meet the minimum standards set by their home country regulator?

D. Stress Test Requirements for Other Foreign Banking Organizations and 
Foreign Savings and Loan Holding Companies With Total Consolidated 
Assets of More Than $10 Billion

    The Dodd-Frank Act requires the Board to impose stress testing 
requirements on its regulated entities (including bank holding 
companies, state member banks, and savings and loan holding companies) 
with total consolidated assets of more than $10 billion.\113\ Thus, 
this proposal would apply stress testing requirements to foreign 
banking organizations with total consolidated assets of more than $10 
billion, but combined U.S. assets of less than $50 billion, and foreign 
savings and loan holding companies with total consolidated assets of 
more than $10 billion.
---------------------------------------------------------------------------

    \113\ Section 165(i)(2) of the Dodd-Frank Act; 12 U.S.C. 
5363(i)(2).
---------------------------------------------------------------------------

    In order to satisfy the proposed stress testing requirements, a 
foreign banking organization or foreign savings and loan holding 
company described above must be subject to a consolidated capital 
stress testing regime that includes either an annual supervisory 
capital stress test conducted by the company's country supervisor or an 
annual evaluation and review by the company's home country supervisor 
of an internal capital adequacy stress test conducted by the company. 
In either case, the home country capital stress testing regime must set 
forth requirements for governance and controls of the stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the company. These companies would not be 
subject to separate information requirements imposed by the Board 
related to the results of their stress tests.
    If a foreign banking organization or a foreign savings and loan 
holding company described above does not meet the proposed stress test 
requirements, the Board would require its U.S. branch and agency 
network, as applicable, to maintain eligible assets equal to 105 
percent of third-party liabilities (asset maintenance requirement). The 
105 percent asset maintenance requirement reflects the more limited 
risks that these companies pose to U.S. financial stability.
    In addition, companies that do not meet the stress testing 
requirements would be required to conduct an annual stress test of any 
U.S. subsidiary not held under a U.S. intermediate holding company 
(other than a section 2(h)(2) company), separately or as part of an 
enterprise-wide stress test, to determine whether that subsidiary has 
the capital necessary to absorb losses as a result of adverse economic 
conditions.\114\ The company would be required to report high-level 
summary information about the results of the stress test to the Board 
on an annual basis.
---------------------------------------------------------------------------

    \114\ As described above under section III of this preamble, a 
foreign banking organization with combined U.S. assets (excluding 
assets held by a branch or agency or by a section 2(h)(2) company) 
of less than $10 billion would not be required to form a U.S. 
intermediate holding company.
---------------------------------------------------------------------------

    Question 79: Should the Board consider providing a longer phase-in 
for foreign banking organizations with combined U.S. assets of less 
than $50 billion?
    Question 80: Is the proposed asset maintenance requirement 
calibrated appropriately to reflect the risks to U.S. financial 
stability posed by these companies?
    Question 81: What alternative standards should the Board consider 
for foreign banking organizations that do not have a U.S. intermediate 
holding company and are not subject to consistent stress testing 
requirements? What types of challenges would the proposed stress 
testing regime present?
    The proposal would require any foreign banking organization or 
foreign savings and loan holding company that meets the $10 billion 
asset threshold as of July 1, 2014 to comply with the proposed stress 
testing requirements beginning in October 2015, unless that time is 
extended by the Board in writing. A foreign banking organization or 
foreign savings and loan holding

[[Page 76664]]

company that meets the asset threshold after July 1, 2014, would be 
required to comply with the proposed requirements beginning in the 
October of the calendar year after it meets the asset threshold, unless 
that time is accelerated or extended by the Board in writing.

IX. Debt-to-Equity Limits

    Section 165(j) of the Act provides that the Board must require a 
foreign banking organization with total consolidated assets of $50 
billion or more to maintain a debt-to-equity ratio of no more than 15-
to-1, upon a determination by the Council that such company poses a 
grave threat to the financial stability of the United States and that 
the imposition of such requirement is necessary to mitigate the risk 
that such company poses to the financial stability of the United 
States.\115\ The Board is required to promulgate regulations to 
establish procedures and timelines for compliance with section 
165(j).\116\
---------------------------------------------------------------------------

    \115\ The Act requires that, in making its determination, the 
Council must take into consideration the criteria in Dodd-Frank Act 
sections 113(a) and (b) and any other risk-related factors that the 
Council deems appropriate. See 12 U.S.C. 5366(j)(1).
    \116\ 12 U.S.C. 5366(j)(3).
---------------------------------------------------------------------------

    The proposal would implement the debt-to-equity ratio limitation 
with respect to a foreign banking organization by applying a 15-to-1 
debt-to-equity limitation on its U.S. intermediate holding company and 
any U.S. subsidiary not organized under a U.S. intermediate holding 
company (other than a section 2(h)(2) company), and a 108 percent asset 
maintenance requirement on its U.S. branch and agency network. Unlike 
the other provisions of this proposal, the debt-to-equity ratio 
limitation would be effective on the effective date of the final rule.
    Under the proposal, a foreign banking organization for which the 
Council has made the determination described above would receive 
written notice from the Council, or from the Board on behalf of the 
Council, of the Council's determination. Within 180 calendar days from 
the date of receipt of the notice, the foreign banking organization 
must come into compliance with the proposal's requirements. The 
proposed rule does not establish a specific set of actions to be taken 
by a company in order to comply with the debt-to-equity ratio 
requirement; however, the company would be expected to come into 
compliance with the ratio in a manner that is consistent with the 
company's safe and sound operation and preservation of financial 
stability. For example, a company generally would be expected to make a 
good faith effort to increase equity capital through limits on 
distributions, share offerings, or other capital raising efforts prior 
to liquidating margined assets in order to achieve the required ratio.
    The proposal would permit a company subject to the debt-to-equity 
ratio requirement to request up to two extension periods of 90 days 
each to come into compliance with this requirement. Requests for an 
extension of time to comply must be received in writing by the Board 
not less than 30 days prior to the expiration of the existing time 
period for compliance and must provide information sufficient to 
demonstrate that the company has made good faith efforts to comply with 
the debt-to-equity ratio requirement and that each extension would be 
in the public interest. In the event that an extension of time is 
requested, the Board would review the request in light of the relevant 
facts and circumstances, including the extent of the company's efforts 
to comply with the ratio and whether the extension would be in the 
public interest.
    A company would no longer be subject to the debt-to-equity ratio 
requirement of this subpart as of the date it receives notice of a 
determination by the Council that the company no longer poses a grave 
threat to the financial stability of the United States and that the 
imposition of a debt-to-equity requirement is no longer necessary.
    Question 82: What alternatives to the definitions and procedural 
aspects of the proposed rule regarding a company that poses a grave 
threat to U.S. financial stability should the Board consider?

X. Early Remediation

A. Background

    The recent financial crisis revealed that the condition of large 
banking organizations can deteriorate rapidly even during periods when 
their reported capital ratios are well above minimum regulatory 
requirements. The crisis also revealed fundamental weaknesses in the 
U.S. regulatory community's tools to deal promptly with emerging 
issues.
    Section 166 of the Dodd-Frank Act was designed to address these 
problems by directing the Board to establish a regulatory framework for 
the early remediation of financial weaknesses of U.S. bank holding 
companies and foreign banking organizations with total consolidated 
assets of $50 billion or more and nonbank companies supervised by the 
Board. Such a framework would minimize the probability that such 
companies will become insolvent and mitigate the potential harm of such 
insolvencies to the financial stability of the United States.\117\ The 
Dodd-Frank Act requires the Board to define measures of a company's 
financial condition, including regulatory capital, liquidity measures, 
and other forward-looking indicators that would trigger remedial 
action. The Dodd-Frank Act also mandates that remedial action 
requirements increase in stringency as the financial condition of a 
company deteriorates and include: (i) Limits on capital distributions, 
acquisitions, and asset growth in the early stages of financial 
decline; and (ii) capital restoration plans, capital raising 
requirements, limits on transactions with affiliates, management 
changes, and asset sales in the later stages of financial decline.\118\
---------------------------------------------------------------------------

    \117\ See 12 U.S.C. 5366(b).
    \118\ 12 U.S.C. 5366.
---------------------------------------------------------------------------

    The December 2011 proposal would establish a regime for early 
remediation of U.S. bank holding companies with total consolidated 
assets of $50 billion or more and nonbank financial companies 
supervised by the Board. This proposal would adapt the requirements of 
the December 2011 proposal to the U.S. operations of foreign banking 
organizations, tailored to address the risk to U.S. financial stability 
posed by the U.S. operations of foreign banking organizations and 
taking into consideration their structure.
    Similar to the December 2011 proposal, the proposed rule sets forth 
four levels of remediation. The proposed triggers would be based on 
capital, stress tests, risk management, liquidity risk management, and 
market indicators. As in the December 2011 proposal, this proposal does 
not include an explicit quantitative liquidity trigger because such a 
trigger could exacerbate funding pressures at the U.S. operations of 
foreign banking organizations, rather than provide for early 
remediation of issues. Remediation standards are tailored for each 
level of remediation and include restrictions on growth and capital 
distributions, intragroup funding restrictions, liquidity requirements, 
changes in management, and, if needed, actions related to the 
resolution or termination of the combined U.S. operations of the 
company. The U.S. operations of foreign banking organizations with 
combined U.S. assets of $50 billion or more that meet the relevant 
triggers would automatically be subject to the remediation standards 
upon a trigger event, while the U.S.

[[Page 76665]]

operations of foreign banking organizations with a more limited U.S. 
presence would be subject to those remediation standards on a case-by-
case basis.
    A foreign banking organization with total consolidated assets of 
$50 billion or more on July 1, 2014, would be required to comply with 
the proposed early remediation requirements on July 1, 2015, unless 
that time is extended by the Board in writing. A foreign banking 
organization whose total consolidated assets exceed $50 billion after 
July 1, 2014 would be required to comply with the proposed early 
remediation standards beginning 12 months after it became subject to 
the early remediation requirements, unless that time is accelerated or 
extended by the Board in writing.
    In implementing the proposed rule, the Board expects to notify the 
home country supervisor of a foreign banking organization, the primary 
regulators of a foreign banking organization's U.S. offices and 
subsidiaries, and the FDIC as the U.S. operations of the foreign 
banking organization enter into or change remediation levels.
    Tables 2 and 3, below, provide a summary of all triggers and 
associated remediation actions in this proposed rule.

                                          Table 2--Early Remediation Triggers for Foreign Banking Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Enhanced risk       Enhanced
                                                                                                        management and   liquidity risk       Market
                                  Risk-based capital/         Risk-based capital/       Stress tests    risk committee     management       indicators
                                 leverage  (U.S. IHC)         leverage  (parent)         (U.S. IHC)       standards        standards     (parent or U.S.
                                                                                                        (U.S. combined   (U.S. combined       IHC as
                                                                                                         operations)      operations)      applicable)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened           The firm has demonstrated   The firm has demonstrated   The firm does    Firm has         Firm has         The median
 Supervisory Review (HSR)).    capital structure or        capital structure or        not comply       manifested       manifested       value of any
                               capital planning            capital planning            with the         signs of         signs of         market
                               weaknesses, even though     weaknesses, even though     Board's          weakness in      weakness in      indicator over
                               the firm:                   the firm:                   capital plan     meeting          meeting the      the breach
                              Maintains risk-based        Maintains risk-based         or stress        enhanced risk    enhanced         period crosses
                               capital ratios that         capital ratios that         testing rules,   management or    liquidity risk   the trigger
                               exceed all minimum risk-    exceed all minimum risk-    even though      risk committee   management       threshold.
                               based and requirements      based and requirements      regulatory       requirements.    standards.
                               established under subpart   established under subpart   capital ratios
                               L by [200-250] basis        L by [200-250] basis        exceed minimum
                               points or more; or          points or more; or          requirements
                              Maintains applicable        Maintains an applicable      under the
                               leverage ratio(s) that      leverage ratio that         supervisory
                               exceed all minimum          exceed all minimum          stress test
                               leverage requirements       leverage requirements       severely
                               established under subpart   established under subpart   adverse
                               L by [75-100] basis         L by [75-100] basis         scenario.
                               points or more.             points or more.
Level 2.....................  Any risk-based capital      Any risk-based capital      Under the        Firm has         Firm has         n.a.
(Initial remediation).......   ratio is less than [200-    ratio is less than [200-    supervisory      demonstrated     demonstrated
                               250] basis points above a   250] basis points above a   stress test      multiple         multiple
                               minimum applicable risk-    minimum applicable risk-    severely         deficiencies     deficiencies
                               based capital requirement   based capital requirement   adverse          in meeting the   in meeting the
                               established under subpart   established under subpart   scenario, the    enhanced risk    enhanced
                               L; or                       L; or                       firm's tier 1    management and   liquidity risk
                              Any leverage ratio is less  Any applicable leverage      common risk-     risk committee   management
                               than [75-125] basis         ratio is less than [75-     based capital    requirements.    standards.
                               points above a minimum      125] basis points above a   ratio falls
                               applicable leverage         minimum applicable          below 5%
                               requirement established     leverage requirement        during any
                               under subpart L.            established under subpart   quarter of the
                                                           L.                          nine quarter
                                                                                       planning
                                                                                       horizon.

[[Page 76666]]

 
Level 3 (Recovery)..........  Any risk-based capital      Any risk-based capital      Under the        Firm is in       Firm is in       n.a.
                               ratio is less than a        ratio is less than a        severely         substantial      substantial
                               minimum applicable risk-    minimum applicable risk-    adverse          noncompliance    noncompliance
                               based capital requirement   based capital requirement   scenario, the    with enhanced    with enhanced
                               established under subpart   established under subpart   firm's tier 1    risk             liquidity risk
                               L; or                       L; or                       common risk-     management and   management
                              Any applicable leverage     Any applicable leverage      based capital    risk committee   standards.
                               ratio is less than a        ratio is less than a        ratio falls      requirements.
                               minimum applicable          minimum applicable          below 3%
                               leverage requirement        leverage requirement        during any
                               established under subpart   established under subpart   quarter of the
                               L.                          L.                          nine quarter
                              Or for two complete         Or for two complete          planning
                               consecutive calendar        consecutive calendar        horizon.
                               quarters:                   quarters:
                              Any risk-based capital      Any risk-based capital
                               ratio is less than [200-    ratio is less than [200-
                               250] basis points above a   250] basis points above a
                               minimum applicable risk-    minimum applicable risk-
                               based capital requirement   based capital requirement
                               established under subpart   established under subpart
                               L; or                       L; or
                              Any leverage ratio is less  Any leverage ratio is less
                               than [75-125] basis         than [75-125] basis
                               points above a minimum      points above a minimum
                               applicable leverage         applicable leverage
                               requirement established     requirement established
                               under subpart L.            under subpart L.
Level 4 (Recommended          Any risk-based capital      Any risk-based capital      n.a............  n.a............  n.a............  n.a.
 resolution).                  ratio is more than [100-    ratio is more than [100-
                               250] basis points below a   250] basis points below a
                               minimum applicable risk-    minimum applicable risk-
                               based capital requirement   based capital requirement
                               established under subpart   established under subpart
                               L; or                       L; or
                              Any applicable leverage     Any applicable leverage
                               ratio is more than [50-     ratio is more than [50-
                               150] basis points below a   150] basis points below a
                               minimum applicable          minimum applicable
                               leverage requirement        leverage requirement
                               established under subpart   established under subpart
                               L.                          L.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                             Table 3--Remediation Actions for Foreign Banking Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Enhanced risk       Enhanced
                                                                                               management and    liquidity risk
                                                      Risk-based capital/     Stress tests     risk committee      management        Market indicators
                                                      leverage  (U.S. IHC      (U.S. IHC)       requirements    standards  (U.S.  (parent or U.S. IHC as
                                                        or parent level)                       (U.S. combined       combined            applicable)
                                                                                                 operations)       operations)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened supervisory review)............  For foreign banking organizations with $50 billion or more of global consolidated assets:
                                                     The Board will conduct a targeted supervisory review of the combined U.S. operations to evaluate
                                                      whether the combined U.S. operations are experiencing financial distress or material risk
                                                      management weaknesses, including with respect to exposures to the foreign banking organization,
                                                      such that further decline of the combined U.S. operations is probable.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 2 (Initial Remediation)......................  For foreign banking organizations with $50 billion or more in U.S. assets:   n.a.
                                                     [cir] U.S. IHC capital distributions (e.g., dividends and buybacks) are
                                                      restricted to no more than 50% of the average of the firm's net income in
                                                      the previous two quarters.
                                                     [cir] U.S. branches and agency network must remain in a net due to position
                                                      to head office and non-U.S. affiliates.
                                                     [cir] U.S. branch and agency network must hold 30-day liquidity buffer in
                                                      the United States (not required in level 3).

[[Page 76667]]

 
                                                     [cir] U.S. IHC and U.S. branch and agency network face restrictions on
                                                      growth (no more than 5% growth in total assets or total risk-weighted
                                                      assets per quarter or per annum), and must obtain prior approval before
                                                      directly or indirectly acquiring controlling interest in any company.
                                                     [cir] Foreign banking organization must enter into non-public MOU to
                                                      improve U.S. condition.
                                                     [cir] U.S. IHC and U.S. branch and agency network may be subject to other
                                                      limitations and conditions on their conduct or activities as the Board
                                                      deems appropriate.
                                                     [cir] For foreign banking organizations with less than $50 billion in U.S.
                                                      assets: Supervisors may undertake some or all of the actions outlined
                                                      above on a case-by-case basis.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 3 (Recovery).................................  For foreign banking organizations with $50 billion or more in U.S. assets:   n.a.
                                                     [cir] Foreign banking organization must enter into written agreement that
                                                      specifying that the U.S. IHC must take appropriate actions to restore its
                                                      capital to or above the applicable minimum capital requirements and take
                                                      such other remedial actions as prescribed by the Board.
                                                     [cir] U.S. IHC is prohibited from making capital distributions.
                                                     [cir] U.S. branch and agency network must remain in a net due to position
                                                      to office and non-U.S. affiliates.
                                                     [cir] U.S. branch and agency network is subject to a 108% asset maintenance
                                                      requirement.
                                                     [cir] U.S. IHC and U.S. branch and agency network will be subject to a
                                                      prohibition on growth, and must obtain prior approval before directly or
                                                      indirectly acquiring controlling interest in any company.
                                                     [cir] Foreign banking organization and U.S. IHC are prohibited from
                                                      increasing pay or paying bonus to U.S. senior management.
                                                     [cir] U.S. IHC may be required to remove culpable senior management.
                                                     [cir] U.S. IHC and U.S. branch and agency network may be subject to other
                                                      limitations and conditions on their conduct or activities as the Board
                                                      deems appropriate.
                                                     For foreign banking organizations with less than $50 billion in U.S.
                                                      assets: Supervisors may undertake some or all of the actions outlined
                                                      above on a case-by-case basis.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 4 (Recommended Resolution)...................  The Board will         n.a.                                                  n.a.
                                                      consider whether the
                                                      combined U.S.
                                                      operations of the
                                                      foreign banking
                                                      organization warrant
                                                      termination or
                                                      resolution based on
                                                      the financial
                                                      decline of the U.S.
                                                      combined operations,
                                                      the factors
                                                      contained in section
                                                      203 of the Dodd-
                                                      Frank Act as
                                                      applicable, or any
                                                      other relevant
                                                      factor. If such a
                                                      determination is
                                                      made, the Board will
                                                      take actions that
                                                      include recommending
                                                      to the appropriate
                                                      financial regulatory
                                                      agencies that an
                                                      entity within the
                                                      U.S. branch or
                                                      agency network be
                                                      terminated or that a
                                                      U.S. subsidiary be
                                                      resolved.
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Early Remediation Triggering Events

    The proposal would establish early remediation triggers based on 
the risk-based capital and leverage, stress tests, liquidity risk 
management, and risk management standards set forth in the other 
subparts of this proposal. These triggers are broadly consistent with 
the triggers set forth in the December 2011 proposal but are modified 
to reflect the structure of foreign banking organizations. Consistent 
with the

[[Page 76668]]

December 2011 proposal, the proposal also includes early remediation 
triggers based on market indicators.
    As noted above, the Board is currently in the process of reviewing 
comments on the remaining standards in the December 2011 proposal and 
is considering modifications to the proposal in response to those 
comments. Comments on this proposal will help inform how the enhanced 
prudential standards should be applied differently to foreign banking 
organizations.
Risk-Based Capital and Leverage
    The proposed risk-based capital and leverage triggers for the U.S. 
operations of foreign banking organizations are based on the risk-based 
capital and leverage standards set forth in subpart L of this proposal 
applicable to U.S. intermediate holding companies and foreign banking 
organizations. If a home country supervisor establishes higher minimum 
capital ratios for a foreign banking organization, the Board will 
consider the foreign banking organization's capital with reference to 
the minimum capital ratios set forth in the Basel III Accord, rather 
than the home country supervisor's higher standards.
    The capital triggers for each level of remediation reflect 
deteriorating levels of risk-based capital and leverage levels. The 
level 1 capital triggers are based on the Board's qualitative 
assessment of the capital levels of a foreign banking organization or 
U.S. intermediate holding company. The capital triggers for levels 2, 3 
and 4 of early remediation are based on the quantitative measures of 
the capital ratios of a foreign banking organization or U.S. 
intermediate holding company relative to the minimum capital ratios 
applicable to that entity. The Board is considering a range of numbers 
that would establish these levels at this time, as set forth below and 
in the proposal. The final rule will include specific levels for the 
capital triggers for levels 2, 3, and 4 of early remediation, and the 
Board expects that the levels in the final rule will be within, or near 
to, the proposed range. The Board seeks comment on the numbers within 
the range.
    Question 83: Should the Board consider a level outside of the 
specified range? Why or why not?
Level 1 Capital Trigger
    Level 1 remediation would be triggered based on a determination by 
the Board that a foreign banking organization's or a U.S. intermediate 
holding company's capital position has evidenced signs of 
deterioration. The U.S. operations of a foreign banking organization 
would be subject to level 1 remediation if the Board determined that 
the capital position of the foreign banking organization or the U.S. 
intermediate holding company were not commensurate with the level and 
nature of the risks to which it is exposed in the United States. This 
trigger would apply even if the foreign banking organization or U.S. 
intermediate holding company maintained risk-based capital ratios that 
exceed any applicable minimum requirements under subpart L of the 
proposal by [200-250] basis points or more or leverage ratios that 
exceed any applicable minimum requirements by [75-125] basis points or 
more. The qualitative nature of the proposed level 1 capital trigger is 
consistent with the level 1 remedial action, the heightened supervisory 
review described below.
    In addition, level 1 remediation would be triggered if the U.S. 
intermediate holding company of a foreign banking organization fell out 
of compliance with the Board's capital plan rule.\119\
---------------------------------------------------------------------------

    \119\ Only U.S. intermediate holding companies with total 
consolidated assets of $50 billion or more would be subject to the 
capital plan rule.
---------------------------------------------------------------------------

Level 2 Capital Trigger
    The U.S. operations of a foreign banking organization would be 
subject to level 2 remediation when any risk-based capital ratio of the 
foreign banking organization or the U.S. intermediate holding company 
fell below [200-250] basis points above the minimum applicable risk-
based capital requirements under subpart L of this proposal, or any 
applicable leverage ratio of the foreign banking organization or the 
U.S. intermediate holding company fell below [75-125] basis points 
above the minimum applicable leverage requirements under subpart L of 
this proposal.
    For a foreign banking organization, the applicable level of risk-
based capital ratios and minimum leverage ratio would be those 
established by the Basel III Accord, including relevant transition 
provisions, calculated in accordance with home country standards that 
are consistent with the Basel Capital Framework. As proposed, a U.S. 
intermediate holding company's minimum risk-based capital ratios and 
leverage ratios would be the same as those that apply to U.S. bank 
holding companies.
    Assuming implementation of the Basel III Accord and the U.S. Basel 
III proposals, after the transition period, the relevant minimum risk-
based capital ratios applicable to the foreign banking organization and 
the U.S. intermediate holding company would be a 4.5 percent risk-based 
tier 1 common ratio, 6.0 percent risk-based tier 1 ratio, and 8.0 
percent risk-based total capital ratio. Thus, the level 2 trigger would 
be breached if any of the foreign banking organization's or U.S. 
intermediate holding company's risk-based capital ratios fell below a 
[6.5-7.0] percent tier 1 common, [8.0-8.5] percent tier 1, or [10.0-
10.5] percent total risk-based capital ratio.
    Similarly, assuming implementation of the Basel III Accord and the 
U.S. Basel III proposals, after the transition period, the relevant 
minimum leverage ratio applicable to a foreign banking organization 
would be the international leverage ratio of 3.0 percent, and the 
relevant minimum leverage ratio(s) applicable to a U.S. intermediate 
holding company would be the U.S. leverage ratio of 4.0 percent, and, 
if the U.S. intermediate holding company is subject to the advanced 
approaches rule,\120\ a supplementary leverage ratio of 3.0 percent. 
Thus, the level 2 trigger would be breached if the foreign banking 
organization's leverage ratio fell below [3.75-4.25] or if the U.S. 
intermediate holding company's U.S. leverage ratio fell below [4.75-
5.25] percent or its supplementary leverage ratio fell below [3.75-
4.25] percent, if applicable.
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    \120\ A U.S. intermediate holding company would be subject to 
the advanced approaches rules if its total consolidated assets are 
$250 billion or more or its consolidated total on-balance sheet 
foreign exposures are $10 billion or more. See 12 CFR part 225, 
appendix G.
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Level 3 Capital Trigger
    The level 3 trigger would be breached where either: (1) for two 
complete consecutive quarters, any risk-based capital ratio of the 
foreign banking organization or the U.S. intermediate holding company 
fell below [200-250] basis points above the minimum applicable risk-
based capital ratios under subpart L, or any leverage ratio of the 
foreign banking organization or the U.S. intermediate holding company 
fell below [75-125] basis points above any minimum applicable leverage 
ratio under subpart L; or (2) any risk-based capital ratio or leverage 
ratio of the foreign banking organization or the U.S. intermediate 
holding company fell below the minimum applicable risk-based capital 
ratio or leverage ratio under subpart L.
Level 4 Capital Trigger
    For the U.S. operations of a foreign banking organization, the 
level 4 trigger would be breached where any of the

[[Page 76669]]

foreign banking organization's or U.S. intermediate holding company's 
risk-based capital ratios fell [100-200] basis points or more below the 
applicable minimum risk-based capital ratios under subpart L or where 
any of the foreign banking organization's or U.S. intermediate holding 
company's leverage ratios fell [50-150] basis points or more below 
applicable leverage requirements under subpart L.
    Question 84: The Board seeks comment on the proposed risk-based 
capital and leverage triggers. What is the appropriate level within the 
proposed ranges above and below minimum requirements that should be 
established for the triggers in a final rule? Provide support for your 
answer.
    Question 85: The Board seeks comment on how and to what extent the 
proposed risk-based capital and leverage triggers should be aligned 
with the capital conservation buffer of 250 basis points presented in 
the Basel III rule proposal.
    Question 86: What alternative or additional risk-based capital or 
leverage triggering events, if any, should the Board adopt? Provide a 
detailed explanation of such alternative triggering events with 
supporting data.
Stress Tests
    Under subpart P of this proposal, U.S. intermediate holding 
companies with total consolidated assets of $50 billion or more would 
be subject to supervisory and company-run stress tests, and all other 
U.S. intermediate holding companies would be subject to annual company-
run stress tests. The proposal would use the stress test regime as an 
early remediation trigger, as stress tests can provide a forward-
looking indicator of a company's ability to absorb losses in stressed 
conditions.
    The stress test triggers for level 2 and 3 remediation would be 
based on the results of the Board's supervisory stress test of a U.S. 
intermediate holding company with total consolidated assets of $50 
billion or more. Foreign banking organizations that do not own U.S. 
intermediate holding companies that meet the $50 billion asset 
threshold would not be subject to the triggers for levels 2 and 3 
remediation.
Level 1 Stress Test Trigger
    The U.S. operations of a foreign banking organization would enter 
level 1 of early remediation if a U.S. intermediate holding company is 
not in compliance with the proposed rules regarding stress testing, 
including the company-run and supervisory stress test requirements 
applicable to U.S. intermediate holding companies.
Level 2 Stress Test Trigger
    The U.S. operations of a foreign banking organization would enter 
level 2 remediation if the results of a supervisory stress test of its 
U.S. intermediate holding company reflect a tier 1 common risk-based 
capital ratio of less than 5.0 percent, under the severely adverse 
scenario during any quarter of the nine-quarter planning horizon. A 
severely adverse scenario is defined as a set of conditions that affect 
the U.S. economy or the financial condition of a U.S. intermediate 
holding and that overall are more severe than those associated with the 
adverse scenario, and may include trading or other additional 
components.\121\
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    \121\ 77 FR 62378, 62391 (October 12, 2012).
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Level 3 Stress Test Trigger
    The U.S. operations of a foreign banking organization would enter 
level 3 remediation if the results of a supervisory stress test of its 
U.S. intermediate holding company reflect a tier 1 common risk-based 
capital ratio of less than 3.0 percent, under the severely adverse 
scenario during any quarter of the nine-quarter planning horizon.
    Question 87: What additional factors should the Board consider when 
incorporating stress test results into the early remediation framework 
for foreign banking organizations? What alternative forward looking 
triggers should the Board consider in addition to or in lieu of stress 
test triggers?
    Question 88: Is the severely adverse scenario appropriately 
incorporated as a triggering event? Why or why not?
Risk Management
    Material weaknesses and deficiencies in risk management contribute 
significantly to a firm's decline and ultimate failure. Under the 
proposal, if the Board determines that the U.S. operations of a foreign 
banking organization have failed to comply with the enhanced risk 
management provisions of subpart O of the proposed rule, the U.S. 
operations of the foreign banking organization would be subject to 
level 1, 2, or 3 remediation, depending on the severity of the 
compliance failure.
    Thus, for example, level 1 remediation would be triggered if the 
Board determines that any part of the U.S. operations of a foreign 
banking organization had manifested signs of weakness in meeting the 
proposal's enhanced risk management and risk committee requirements.
    Similarly, level 2 remediation would be triggered if the Board 
determines that any part of the company's combined U.S. operations has 
demonstrated multiple deficiencies in meeting the enhanced risk 
management or risk committee requirements, and level 3 remediation 
would be triggered if the Board determines that any part of the 
company's combined U.S. operations is in substantial noncompliance with 
the enhanced risk management and risk committee requirements of the 
proposal.
    Question 89: The Board seeks comment on triggers tied to risk 
management. Should the Board consider specific risk management triggers 
tied to particular events? If so, what might such triggers involve? How 
should failure to promptly address material risk management weaknesses 
be addressed by the early remediation regime? Under such circumstances, 
should companies be moved to progressively more stringent levels of 
remediation, or are other actions more appropriate? Provide a detailed 
explanation.
Liquidity Risk Management
    The Dodd-Frank Act provides that the measures of financial 
condition to be included in the early remediation framework must 
include liquidity measures. This proposal would implement liquidity 
risk management triggers related to the liquidity risk management 
standards in subpart M of this proposal. The level of remediation to 
which the U.S. operations of a foreign banking organization would be 
subject would vary depending on the severity of the compliance failure.
    The U.S. operations of a foreign banking organization would be 
subject to level 1 remediation if the Board determines that any part of 
the combined U.S. operations of the company has manifested signs of 
weakness in meeting the proposal's enhanced liquidity risk management 
standards. Similarly, the U.S. operations of a foreign banking 
organization would be subject to level 2 remediation if the Board 
determines that any part of its combined U.S. operations has 
demonstrated multiple deficiencies in meeting the enhanced liquidity 
risk management standards of this proposal, and level 3 remediation 
would be triggered if the Board determines that any part of its 
combined U.S. operations is in substantial noncompliance with the 
enhanced liquidity risk management standards.
Market Indicators
    Section 166(c)(1) of the Dodd-Frank Act directs the Board, in 
defining measures of a foreign banking organization's condition, to 
utilize ``other forward-looking indicators.'' A review of market 
indicators in the lead

[[Page 76670]]

up to the recent financial crisis reveals that market-based data often 
provided an early signal of deterioration in a company's financial 
condition. Moreover, numerous academic studies have concluded that 
market information is complementary to supervisory information in 
uncovering problems at financial companies.\122\ Accordingly, the Board 
is considering whether to use a variety of market-based triggers 
designed to capture both emerging idiosyncratic and systemic risk 
across foreign banking organizations in the early remediation regime.
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    \122\ See, e.g., Berger, Davies, and Flannery, Comparing Market 
and Supervisory Assessments of Bank Performance: Who Knows What 
When?, Journal of Money, Credit, and Banking, 32 (3), at 641-667 
(2000). Krainer and Lopez, How Might Financial Market Information Be 
Used for Supervisory Purposes?, FRBSF Economic Review, at 29-45 
(2003). Furlong and Williams, Financial Market Signals and Banking 
Supervision: Are Current Practices Consistent with Research 
Findings?, FRBSF Economics Review, at 17-29 (2006).
---------------------------------------------------------------------------

    The market-based triggers would trigger level 1 remediation, 
prompting heighted supervisory review of the financial condition and 
risk management of a foreign banking organization's U.S. operations. In 
addition to the Board's authority under section 166 of the Dodd-Frank 
Act, the Board may also use other supervisory authority to cause the 
U.S. operations of a foreign banking organization to take appropriate 
actions to address the problems reviewed by the Board under level 1 
remediation.
    The Board recognizes that market-based early remediation triggers--
like all early warning metrics--have the potential to trigger 
remediation for firms that have no material weaknesses (false 
positives) and fail to trigger remediation for firms whose financial 
condition has deteriorated (false negatives), depending on the sample, 
time period and thresholds chosen. Further, the Board notes that if 
market indicators are used to trigger corrective actions in a 
regulatory framework, market prices may adjust to reflect this use and 
potentially become less revealing over time. Accordingly, the Board is 
not proposing to use market-based triggers to subject the U.S. 
operations of a foreign banking organization directly to remediation 
levels 2, 3, or 4 at this time. The Board expects to review this 
approach after gaining additional experience with the use of market 
data in the supervisory process.
    Given that the informational content and availability of market 
data will change over time, the Board also proposes to publish for 
notice and comment the market-based triggers and thresholds on an 
annual basis (or less frequently depending on whether the Board 
determines that changes to an existing regime would be appropriate), 
rather than specifying these triggers in this proposal. In order to 
ensure transparency, the Board's disclosure of market-based triggers 
would include sufficient detail to allow the process to be replicated 
in general form by market participants. While the Board is not 
proposing market-based triggers at this time, it seeks comment on the 
potential use of market indicators for the U.S. operations of foreign 
banking organizations described in section G--Potential market 
indicators and potential trigger design.
    Question 90: Should the Board include market indicators described 
in section G--Potential market indicators and potential trigger design 
of this preamble in the early remediation regime for the U.S. 
operations of foreign banking organizations? If not, what other market 
indicators or forward-looking indicators should the Board include?
    Question 91: How should the Board consider the liquidity of an 
underlying security when it chooses indicators for the U.S. operations 
of foreign banking organizations?
    Question 92: Should the Board consider using market indicators to 
move the U.S. operations of foreign banking organizations directly to 
level 2 (initial remediation)? If so, what time thresholds should be 
considered for such a trigger? What would be the drawbacks of such a 
second trigger?
    Question 93: To what extent do these indicators convey different 
information about the short-term and long-term performance of foreign 
banking organizations that should be taken into account for the 
supervisory review?
    Question 94: Should the Board use peer comparisons to trigger 
heightened supervisory review for foreign banking organizations? How 
should the peer group be defined for foreign banking organizations?
    Question 95: How should the Board account for overall market 
movements in order to isolate idiosyncratic risk of foreign banking 
organizations?

C. Notice and Remedies

    Under the proposal, the Board would notify a foreign banking 
organization when it determines that a remediation trigger event has 
occurred and will provide a description of the remedial actions that 
would apply to the U.S. operations of the foreign banking organization 
as a result of the trigger. The U.S. operations of a foreign banking 
organization would remain subject to the requirements imposed by early 
remediation until the Board notifies the foreign banking organization 
that its financial condition or risk management no longer warrants 
application of the requirement. In addition, a foreign banking 
organization has an affirmative duty to notify the Board of triggering 
events and other changes in circumstances that could result in changes 
to the early remediation provisions that apply to it.
    Question 96: What additional monitoring requirements should the 
Board impose to ensure timely notification of trigger breaches?

D. Early Remediation Requirements for Foreign Banking Organizations 
with Combined U.S. Assets of $50 Billion or More

Level 1 Remediation (Heightened Supervisory Review)
    The first level of remediation for the U.S. operations of foreign 
banking organizations with combined U.S. assets of $50 billion or more 
would consist of heightened supervisory review of the U.S. operations 
of the foreign banking organization. In conducting the review, the 
Board would evaluate whether the U.S. operations of a foreign banking 
organization are experiencing financial distress or material risk 
management weaknesses, including with respect to exposures that the 
combined operations have to the foreign banking organization, such that 
further decline of the combined U.S. operations is probable.
    The Board may also use other supervisory authority to cause the 
U.S. operations of a foreign banking organization to take appropriate 
actions to address the problems reviewed by the Board under level 1 
remediation.
Level 2 Remediation (Initial Remediation)
    The Dodd-Frank Act provides that remedial actions of companies in 
the initial stages of financial decline must include limits on capital 
distributions, acquisitions, and asset growth. The proposal would 
implement these remedial actions for the U.S. operations of foreign 
banking organizations with combined U.S. assets of $50 billion or more 
that have breached a level 2 trigger by imposing limitations on its 
U.S. intermediate holding company, its U.S. branch and agency network, 
and its combined U.S. operations.
    Upon a level 2 trigger event, the U.S. intermediate holding company 
of a foreign banking organization would be prohibited from making 
capital distributions in any calendar quarter in

[[Page 76671]]

an amount that exceeded 50 percent of the average of its net income for 
the preceding two calendar quarters. Capital distributions would be 
defined consistently with the Board's capital plan rule (12 CFR 225.8) 
to include any redemption or repurchase of any debt or equity capital 
instrument, a payment of common or preferred stock dividends, a payment 
that may be temporarily or permanently suspended by the issuer on any 
instrument that is eligible for inclusion in the numerator of any 
minimum regulatory capital ratio, and any similar transaction that the 
Board determines to be in substance a distribution of capital. The 
limitation would help to ensure that U.S. intermediate holding 
companies preserve capital through retained earnings during the 
earliest periods of financial stress. Prohibiting a weakened company 
from distributing more than 50 percent of its recent earnings should 
promote the company's ability to build a capital cushion to absorb 
additional potential losses while still allowing the firm some room to 
pay dividends and repurchase shares.\123\ This cushion is important to 
making the company's failure less likely, and also to minimize the 
external costs that the company's distress or possible failure could 
impose on markets and the United States economy generally.
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    \123\ The Board notes that the capital conservation buffer 
implemented under the Basel III Accord is similarly designed to 
impose increasingly stringent restrictions on capital distributions 
and employee bonus payments by banking organizations as their 
capital ratios approach regulatory minima. See Basel III Accord, 
supra note 40.
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    The U.S. branches and agencies of a foreign banking organization in 
level 2 remediation would also be subject to limitations. While in 
level 2 remediation, the U.S. branch and agency network would be 
required to remain in a net due to position to the foreign banking 
organization's non-U.S. offices and to non-U.S. affiliates. The U.S. 
branch and agency network would also be required to maintain a liquid 
asset buffer in the United States sufficient to cover 30 days of 
stressed outflows, calculated as the sum of net external stressed cash 
flow needs and net internal stressed cash flow needs for the full 30-
day period. However, this requirement would cease to apply were the 
foreign banking organization to become subject to level 3 remediation.
    In addition, the U.S. operations of the foreign banking 
organization in level 2 remediation would be subject to growth 
limitations. The foreign banking organization would be prohibited from 
allowing the average daily total assets or average daily total risk-
weighted assets of its combined U.S. operations in any calendar quarter 
to exceed average daily total assets and average daily total risk-
weighted assets, respectively, during the preceding calendar quarter by 
more than 5 percent. Similarly, it would be prohibited from allowing 
the average daily total assets or average daily total risk-weighted 
assets of its combined U.S. operations in any calendar year to exceed 
average daily total assets and average daily total risk-weighted 
assets, respectively, during the preceding calendar year by more than 5 
percent. These restrictions on asset growth are intended to prevent the 
consolidated U.S. operations of foreign banking organizations that are 
encountering the initial stages of financial difficulties from growing 
at a rate inconsistent with preserving capital and focusing on 
resolving material financial or risk management weaknesses. A 5 percent 
limit should generally be consistent with reasonable growth in the 
normal course of business.
    In addition to existing requirements for prior Board approval to 
make certain acquisitions or establishing new branches or other 
offices, the foreign banking organization would also be prohibited, 
without prior Board approval, from establishing a new branch, agency, 
or representative office in the United States; engaging in any new line 
of business in the United States; or directly or indirectly acquiring a 
controlling interest (as defined in the proposal) in any company that 
would be required to be a subsidiary of a U.S. intermediate holding 
company under the proposal. This would include acquiring controlling 
interests in U.S. nonbank companies engaged in financial activities. 
Non-controlling acquisitions, such as the acquisition of less than 5 
percent of the voting shares of a company, generally would not require 
prior approval. The level 2 remediation restriction on acquisitions of 
controlling interests in companies would also prevent foreign banking 
organizations that are experiencing initial stages of financial 
difficulties from materially increasing their size in the United States 
or their systemic interconnectedness to the United States. Under this 
provision, the Board would evaluate the materiality of acquisitions on 
a case-by-case basis to determine whether approval is warranted. 
Acquisitions of non-controlling interests would continue to be 
permitted to allow the U.S. operations of foreign banking organizations 
to proceed with ordinary business functions (such as equity securities 
dealing) that may involve acquisitions of shares in other companies 
that do not rise to the level of control.
    Question 97: Should the Board provide an exception to the prior 
approval requirement for de minimis acquisitions or other acquisitions 
in the ordinary course? If so, how would this exception be drafted in a 
narrow way so as not to subvert the intent of this restriction?
    A foreign banking organization subject to level 2 remediation would 
be required to enter into a non-public memorandum of understanding, or 
other enforcement action acceptable to the Board. In addition, the 
Board may impose limitations or conditions on the conduct or activities 
of the combined U.S. operations of the foreign banking organization as 
the Board deems appropriate and consistent with the purposes of Title I 
of the Dodd-Frank Act. Those may include limitations or conditions 
deemed necessary to improve the safety and soundness of the 
consolidated U.S. operations of the foreign banking organization, 
promote financial stability, or limit the external costs of the 
potential failure of the foreign banking organization or its 
affiliates.
Level 3 Remediation (Recovery)
    The Dodd-Frank Act provides that remediation actions for companies 
in later stages of financial decline must include a capital restoration 
plan and capital raising requirements, limits on transactions with 
affiliates, management changes and asset sales. The proposal would 
implement these remedial actions for the U.S. operations of a foreign 
banking organization with combined U.S. assets of $50 billion or more 
that has breached a level 3 trigger by imposing limitations on its U.S. 
intermediate holding company, its U.S. branch and agency network, and 
its combined U.S. operations.
    A foreign banking organization and its U.S. intermediate holding 
company would be required to enter into a written agreement or other 
formal enforcement action with the Board that specifies that the U.S. 
intermediate holding company must take appropriate actions to restore 
its capital to or above the applicable minimum risk-based capital and 
leverage requirements under subpart L of this proposal and to take such 
other remedial actions as prescribed by the Board. If the company fails 
to satisfy the requirements of such a written agreement, the company 
may be required to divest assets identified by the Board as 
contributing to the financial decline or posing substantial risk of 
contributing to further financial decline of the company.

[[Page 76672]]

    The U.S. intermediate holding company and other U.S. subsidiaries 
of a foreign banking organization also would be prohibited from making 
capital distributions.
    In addition, the foreign banking organization in level 3 
remediation would be subject to growth limitations with respect to its 
combined U.S. operations. It would be prohibited from allowing the 
average daily total assets or average daily risk-weighted assets of its 
combined U.S. operations in any calendar quarter to exceed average 
daily total assets and average daily risk-weighted assets, 
respectively, during the preceding calendar quarter. Similarly, it 
would be prohibited from allowing the average daily total assets or 
average daily total risk-weighted assets of its combined U.S. 
operations in any calendar year to exceed average daily total assets 
and average daily total risk-weighted assets, respectively, during the 
preceding calendar year.
    As in level 2 remediation, in addition to existing requirements for 
prior Board approval to making certain acquisitions or establishing new 
branches or other offices, the foreign banking organization would be 
prohibited, with prior Board approval, from establishing a new branch, 
agency, representative office or place of business in the United 
States, engaging in any new line of business in the United States, or 
directly or indirectly acquiring a controlling interest (as defined in 
the proposal) in any company that would be required to be a subsidiary 
of a U.S. intermediate holding company under the proposal. This would 
include acquiring controlling interests in nonbank companies engaged in 
financial activities.
    In addition, the foreign banking organization and its U.S. 
intermediate holding company would not be able to increase the 
compensation of, or pay any bonus to, an executive officer whose 
primary responsibility pertains to any part of the combined U.S. 
operations or any member of the board of directors (or its equivalent) 
of the U.S. intermediate holding company. The Board could also require 
the U.S. intermediate holding company of a foreign banking organization 
in level 3 remediation to replace its board of directors, or require 
the U.S. intermediate holding company or foreign banking organization 
to dismiss U.S. senior executive officers or the U.S. intermediate 
holding company to dismiss members of its board of directors who have 
been in office for more than 180 days, or add qualified U.S. senior 
executive officers subject to approval by the Board. To the extent that 
a U.S. intermediate holding company's or U.S. branch and agency 
network's management is a primary cause of a foreign banking 
organization's level 3 remediation status, the proposal would allow the 
Board to take appropriate action to ensure that such management could 
not increase the risk profile of the company or make its failure more 
likely.
    Furthermore, the foreign banking organization would be required to 
cause its U.S. branch and agency network to remain in a net due to 
position with respect to the foreign bank's non-U.S. offices and non-
U.S. affiliates and maintain eligible assets that equal at least 108 
percent of the U.S. branch and agency network's third-party 
liabilities. However, the U.S. branch and agency network would not be 
subject to the liquid asset buffer required by level 2 remediation in 
order to allow the foreign banking organization to make use of those 
assets to mitigate liquidity stress.
    The Board believes that these restrictions would appropriately 
limit a foreign banking organization's ability to increase its risk 
profile in the United States and ensure maximum capital conservation 
when its condition or risk management failures have deteriorated to the 
point that it is subject to level 3 remediation. These restrictions, 
while potentially disruptive to aspects of the company's U.S. business, 
are consistent with the purpose of section 166 of the Dodd-Frank Act: 
to arrest a foreign banking organization's decline in the United States 
and help to mitigate external costs in the United States associated 
with a potential failure.
    Under the proposed rule, the Board has discretion to impose 
limitations or conditions on the conduct of activities at the combined 
U.S. operations of the company as the Board deems appropriate and 
consistent with Title I of the Dodd-Frank Act. Taken together, the 
mandatory and optional restrictions and actions of level 3 remediation 
provide the Board with important tools to make a foreign banking 
organization's potential failure less costly to the U.S. financial 
system.
Level 4 Remediation (Resolution Assessment)
    Under the proposed rule, if level 4 remediation is triggered, the 
Board would consider whether the combined U.S. operations of the 
foreign banking organization warrant termination or resolution based on 
the financial decline of the combined U.S. operations, the factors 
contained in section 203 of the Dodd-Frank Act as applicable, or any 
other relevant factor. If such a determination is made, the Board will 
take actions that include recommending to the appropriate financial 
regulatory agencies that an entity within the U.S. branch and agency 
network be terminated or that a U.S. subsidiary be resolved.
    Question 98: The Board seeks comment on the proposed mandatory 
actions that would occur at each level of remediation. What, if any, 
additional or different restrictions should the Board impose on 
distressed foreign banking organizations or their U.S. operations?

E. Early Remediation Requirements for Foreign Banking Organizations 
With Total Consolidated Assets of $50 Billion or More and Combined U.S. 
Assets of Less than $50 Billion

    The proposal would tailor the application of the proposed early 
remediation regime for the U.S. operations of foreign banking 
organizations with total consolidated assets of $50 billion or more and 
combined U.S. assets of less than $50 billion. The U.S. operations of 
these foreign banking organizations would be subject to the same 
triggers and notification requirements applicable to the U.S. 
operations of foreign banking organizations with a larger presence in 
the United States. When the Board is aware that a foreign banking 
organization breached a trigger, the Board may apply any of the 
remedial provisions that would be applicable to a foreign banking 
organization with combined U.S. assets of $50 billion or more. In 
exercising this authority, the Board will consider the activities, 
scope of operations, structure, and risk to U.S. financial stability 
posed by the foreign banking organization.

F. Relationship to Other Laws and Requirements

    The early remediation regime that would be established by the 
proposed rule would supplement rather than replace the Board's other 
supervisory processes with respect to the U.S. operations of foreign 
banking organizations. The proposed rule would not limit the Board's 
supervisory authority, including authority to initiate supervisory 
actions to address deficiencies, unsafe or unsound conduct, practices, 
conditions, or violations of law. For example, the Board may respond to 
signs of a foreign banking organization's or a U.S. intermediate 
holding company's financial stress by requiring corrective measures in 
addition to remedial actions required under the proposed rule. The 
Board also may use other supervisory authority to cause a foreign

[[Page 76673]]

banking organization or U.S. intermediate holding company to take 
remedial actions enumerated in the early remediation regime on a basis 
other than a triggering event.

G. Potential Market Indicators and Potential Trigger Design

    As noted above in section B--Early Remediation Triggering Events, 
the Board is considering whether to use market indicators as a level 1 
trigger. In considering market indicators to incorporate into the early 
remediation regime, the Board focused on indicators that have 
significant information content, that is for which prices quotes are 
available for foreign banking organizations, and provide a sufficiently 
early indication of emerging or potential issues. The Board is 
considering using the following or similar market-based indicators in 
its early remediation framework for the U.S. operations of foreign 
banking organizations:
1. Equity-Based Indicators
    Expected default frequency (EDF). EDF measures the expected 
probability of default in the next 365 days. EDFs could be calculated 
using Moody's KMV RISKCALC model.
    Marginal expected shortfall (MES). The MES of a financial 
institution is defined as the expected loss on its equity when the 
overall market declines by more than a certain amount. Each financial 
institution's MES depends on the volatility of its stock price, the 
correlation between its stock price and the market return, and the co-
movement of the tails of the distributions for its stock price and for 
the market return. The Board may use MES calculated following the 
methodology of Acharya, Pederson, Phillipon, and Richardson (2010). MES 
data are available at http://vlab.stern.nyu.edu/welcome/risk.
    Market Equity Ratio. The market equity ratio could be defined as 
the ratio of market value of equity to market value of equity plus book 
value of debt.
    Option-implied volatility. The option-implied volatility of a 
firm's stock price is calculated from out-of-the-money option prices 
using a standard option pricing model, for example as reported as an 
annualized standard deviation in percentage points by Bloomberg.
2. Debt-Based Indicators
    Credit default swaps (CDS). The Board would refer to CDS offering 
protection against default on a 5-year maturity, senior unsecured bond 
by a financial institution.
    Subordinated debt (bond) spreads. The Board would refer to 
financial companies' subordinated bond spreads with a remaining 
maturity of at least 5 years over the Treasury rate with the same 
maturity or the LIBOR swap rate as published by Bloomberg.
3. Considerations for Foreign Banking Organizations
    The Board recognizes that some market indicators may not be 
available for foreign banking organizations and that market indicators 
for different foreign banking organizations are not traded with the 
same frequency and therefore may not contain the same level of 
informational content. Further, the Board anticipates analyzing market 
indicators available for both U.S. subsidiaries of foreign banking 
organizations, if available and the consolidated foreign banking 
organization. The use of market indicators at the consolidated level is 
appropriate for foreign banking organizations since the U.S. operations 
are likely to be affected by any deterioration in financial condition 
of the consolidated company.
    Question 99: The Board seeks comment on the proposed approach to 
market-based triggers detailed below, alternative specifications of 
market-based indicators, and the potential benefits and challenges of 
introducing additional market-based triggers for remediation levels 2, 
3, or 4 of the proposal. In addition, the Board seeks comment on the 
sufficiency of information content in market-based indicators 
generally.
Proposed Trigger Design
    The Board's proposed market indicator-based regime would trigger 
heightened supervisory review when any of a foreign banking 
organization's indicators cross a threshold based on different 
percentiles of historical distributions. The triggers described below 
have been designed based on observations for U.S. financial 
institutions but are indicative of the approach the Board anticipates 
proposing for foreign banking organizations.
    Time-variant triggers capture changes in the value of a company's 
market-based indicator relative to its own past performance and the 
past performance of its peers. Peer groups would be determined on an 
annual basis. Current values of indicators, measured in levels and 
changes, would be evaluated relative to a foreign banking 
organization's own time series (using a rolling 5-year window) and 
relative to the median of a group of predetermined low-risk peers 
(using a rolling 5-year window), and after controlling for market or 
systematic effects.\124\ The value represented by the percentiles for 
each signal varies over time as data is updated for each indicator.
---------------------------------------------------------------------------

    \124\ Market or systemic effects are controlled by subtracting 
the median of corresponding changes from the peer group.
---------------------------------------------------------------------------

    For all time-variant triggers, heightened supervisory review would 
be required when the median value of at least one market indicator over 
a period of 22 consecutive business days, either measured as its level, 
its 1-month change, or its 3-month change, both absolute and relative 
to the median of a group of predetermined low-risk peers, is above the 
95th percentile of the firm's or the median peer's market indicator 5-
year rolling window time series. The Board proposes to use time-variant 
triggers based on all six market indicators listed above.
    Time-invariant triggers capture changes in the value of a company's 
market-based indicators relative to the historical distribution of 
market-based variables over a specific fixed period of time and across 
a predetermined peer group. Time-invariant triggers are used to 
complement time-variant triggers since time-variant triggers could lead 
to excessively low or high thresholds in cases where the rolling window 
covers only an extremely benign period or a highly disruptive financial 
period. The Board acknowledges that a time-invariant threshold should 
be subject to subsequent revisions when warranted by circumstances.
    As currently contemplated, the Board would consider all pre-crisis 
panel data for the peer group (January 2000-December 2006), which 
contain observations from the subprime crisis in the late 1990s and 
early 2000s as well as the tranquil period of 2004-2006. For each 
market indicator, percentiles of the historical distributions would be 
computed to calibrate time-invariant thresholds. The Board would focus 
on five indicators for time-invariant triggers, calibrated to balance 
between their propensity to produce false positives and false 
negatives: CDS prices, subordinated debt spreads, option-implied 
volatility, EDF and MES. The market equity ratio is not used in the 
time-invariant approach because the cross-sectional variation of this 
variable was not found to be informative of early issues across 
financial companies. Time-invariant thresholds would trigger heightened 
supervisory review if the median value for a foreign banking 
organization over 22 consecutive business days was above the threshold 
for any of the market indicators used in the regime.

[[Page 76674]]

    In considering all thresholds for each time-invariant trigger, the 
Board has evaluated the tradeoff between early signals and supervisory 
burden associated with potentially false signals. Data limitations in 
the time-invariant approach also require the construction of different 
thresholds for different market indicators. The Board is considering 
the following calibration:
    CDS. The CDS price data used to create the distribution consist of 
an unbalanced panel of daily CDS price observations for 25 financial 
companies over the 2001- 2006 period. Taking the skewed distribution of 
CDS prices in the sample and persistent outliers into account, the 
threshold was set at 44 basis points, which corresponds to the 80th 
percentile of the distribution.
    Subordinated debt (bond) spreads. The data covered an unbalanced 
panel of daily subordinated debt spread observations for 30 financial 
companies. Taking the skewed distribution into account, the threshold 
was set to 124 basis points, which corresponds to the 90th percentile 
of the distribution.
    MES. The data covered a balanced panel of daily observations for 29 
financial companies. The threshold was set to 4.7 percent, which 
corresponds to the 95th percentile of the distribution.
    Option-implied volatility. The data covered a balanced panel of 
daily option-implied volatility observations for 29 financial 
companies. The threshold was set to 45.6 percent, which corresponds to 
the 90th percentile of the distribution.
    EDF. The monthly EDF data cover a balanced panel of 27 financial 
companies. The threshold was set to 0.57 percent, which corresponds to 
the 90th percentile of the distribution.
    The Board invites comment on the use of market indicators, 
including time-variant and time-invariant triggers to prompt early 
remediation actions.
    Question 100: The Board is considering using both absolute levels 
and changes in indicators, as described in section G--Potential market 
indicators and potential trigger design. Over what period should 
changes be calculated?
    Question 101: Should the Board use both time-variant and time-
invariant indicators? What are the comparative advantages of using one 
or the other?
    Question 102: Is the proposed trigger time (when the median value 
over a period of 22 consecutive business days crosses the predetermined 
threshold) to trigger heightened supervisory review appropriate for 
foreign banking organizations? What periods should be considered and 
why?
    Question 103: Should the Board use a statistical threshold to 
trigger heightened supervisory review or some other framework?

X. Administrative Law Matters

A. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invites comment on the use of 
plain language.
    For example:
     Have we organized the material to suit your needs? If not, 
how could the rule be more clearly stated?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would make the regulation easier to 
understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could we do to make the regulation easier to 
understand?

B. Paperwork Reduction Act Analysis

Request for Comment on Proposed Information Collection
    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The OMB control numbers are 7100-0350, 
7100-0125, 7100-0035, 7100-0319, 7100-0073, 7100-0297, 7100-0126, 7100-
0128, 7100-0297, 7100-0244, 7100-0300, 7100-NEW, 7100-0342, 7100-0341. 
The Board reviewed the proposed rule under the authority delegated to 
the Board by OMB.
    The proposed rule contains requirements subject to the PRA. The 
reporting requirements are found in sections 252.202(b); 252.203(b); 
252.212(c)(3); 252.226(c); 252.231(a); 252.262; 252.263(b)(1), (b)(2), 
(c)(2), and (d); 252.264(b)(2); and 252.283(b). The recordkeeping 
requirements are found in sections 252.225(c); 252.226(b)(1); 252.228; 
252.229(a); 252.230(a) and (c); 252.252(a); and 252.262. The disclosure 
requirements are found in section 252.262. Detailed burden estimates 
for these requirements are provided below. These information collection 
requirements would implement section 165 and 166 of the Dodd-Frank Act.
Proposed Revisions to Information Collections
    1. Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Regulation YY.
    Frequency of Response: Annual, semiannual, and on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: Foreign banking organizations, U.S. intermediate 
holding companies, foreign savings and loan holding companies, and 
foreign nonbank financial companies supervised by the Board.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
establish enhanced prudential standards on bank holding companies with 
consolidated assets of $50 billion or more and nonbank financial 
companies supervised by the Board, and section 166 requires the Board 
to establish an early remediation framework for these companies. The 
enhanced prudential standards include risk-based capital and leverage 
requirements, liquidity standards, requirements for overall risk 
management (including establishing a risk committee), single-
counterparty credit limits, stress test requirements, and debt-to-
equity limits for companies that the Council has determined pose a 
grave threat to financial stability. The proposal would implement these 
requirements for foreign banking organizations with total consolidated 
assets of $50 billion or more and foreign nonbank financial companies 
supervised by the Board.
Reporting Requirements
    Section 252.202(b) would require a foreign banking organization 
with total consolidated assets of $50 billion or more that submits a 
request to the Board to adopt an alternative organizational structure 
to submit its request at least 180 days prior to the date that the 
foreign banking organization would establish the U.S. intermediate 
holding company and include a description of why the request should be 
granted and any other information the Board may require.
    Section 252.203(b) would require that within 30 days of 
establishing a U.S.

[[Page 76675]]

intermediate holding company, a foreign banking organization with total 
consolidated assets of $50 billion or more would provide to the Board: 
(1) A description of the U.S. intermediate holding company, including 
its name, location, corporate form, and organizational structure; (2) a 
certification that the U.S. intermediate holding company meets the 
requirements of this subpart; and (3) any other information that the 
Board determines is appropriate.
    Section 252.226(c) would require a foreign banking organization 
with total consolidated assets of $50 billion or more and with combined 
U.S. assets of $50 billion or more to report (1) the results of the 
stress tests for its combined U.S. operations conducted under this 
section to the Board within 14 days of completing the stress test. The 
report would include the amount of liquidity buffer established by the 
foreign banking organization for its combined U.S. operations under 
Sec.  252.227 of the proposal and (2) the results of any liquidity 
internal stress tests and establishment of liquidity buffers required 
by regulators in its home jurisdiction to the Board on a quarterly 
basis within 14 days of completion of the stress test. The report 
required under this paragraph would include the results of its 
liquidity stress test and liquidity buffer, if as required by the laws, 
regulations, or expected under supervisory guidance implemented in the 
home jurisdiction.
    Section 252.231(a) would require a foreign banking organization 
with total consolidated assets of $50 billion or more and combined U.S. 
assets of less than $50 billion to report to the Board on an annual 
basis the results of an internal liquidity stress test for either the 
consolidated operations of the company or its combined U.S. operations 
conducted consistent with the BCBS principles for liquidity risk 
management and incorporating 30-day, 90-day and one-year stress test 
horizons.
    Section 252.263(b)(1) would require a foreign banking organization 
with total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more to report summary information to the 
Board by January 5 of each calendar year, unless extended by the Board, 
about its stress testing activities and results, including the 
following quantitative and qualitative information: (1) A description 
of the types of risks included in the stress test; (2) a description of 
the conditions or scenarios used in the stress test; (3) a summary 
description of the methodologies used in the stress test; (4) estimates 
of: (a) Aggregate losses; (b) pre-provision net revenue; (c) Total loan 
loss provisions; (d) Net income before taxes; and (e) Pro forma 
regulatory capital ratios required to be computed by the home country 
supervisor of the foreign banking organization and any other relevant 
capital ratios; and (5) an explanation of the most significant causes 
for the changes in regulatory capital ratios.
    Section 252.263(b)(2) would require a foreign banking organization 
with total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more whose U.S. branch and agency network 
provides funding on a net basis to its foreign banking organization's 
head office and its non-U.S. affiliates (calculated as the average 
daily position over a stress test cycle for a given year) to report the 
following more detailed information to the Board by the following 
January 5 of each calendar year, unless extended by the Board: (1) A 
detailed description of the methodologies used in the stress test, 
including those employed to estimate losses, revenues, total loan loss 
provisions, and changes in capital positions over the planning horizon; 
(2) estimates of realized losses or gains on available-for-sale and 
held-to-maturity securities, trading and counterparty losses, if 
applicable; loan losses (dollar amount and as a percentage of average 
portfolio balance) in the aggregate and by sub-portfolio; and (3) any 
additional information that the Board requests in order to evaluate the 
ability of the foreign banking organization to absorb losses in 
stressed conditions and thereby continue to support its combined U.S. 
operations.
    Section 252.263(c)(2) would require the foreign banking 
organization with total consolidated assets of $50 billion or more and 
combined U.S. assets of $50 billion or more that does not satisfy the 
proposed stress testing requirements under section 252.262 to 
separately or as part of an enterprise-wide stress test conduct an 
annual stress test of its U.S. subsidiaries not organized under a U.S. 
intermediate holding company to determine whether those subsidiaries 
have the capital necessary to absorb losses as a result of adverse 
economic conditions. The foreign banking organization would report a 
summary of the results of the stress test to the Board on an annual 
basis that includes the information required under paragraph (b)(1) of 
this section.
    Section 252.263(d) would require that if the Board determines to 
impose one or more standards under paragraph (c)(3) of that section on 
a foreign banking organization with total consolidated assets of $50 
billion or more and combined U.S. assets of $50 billion or more, the 
Board would notify the company no later than 30 days before it proposes 
to apply additional standard(s). The notification would include a 
description of the additional standard(s) and the basis for imposing 
the additional standard(s). Within 14 calendar days of receipt of a 
notification under this paragraph, the foreign banking organization may 
request in writing that the Board reconsider the requirement that the 
company comply with the additional standard(s), including an 
explanation as to why the reconsideration should be granted. The Board 
would respond in writing within 14 calendar days of receipt of the 
company's request.
    Section 252.264(b)(2) would require a foreign banking organization 
with total consolidated assets of $50 billion or more and with combined 
U.S. assets of less than $50 billion or a foreign savings and loan 
holding company with total consolidated assets of $50 billion or more 
to separately, or as part of an enterprise-wide stress test, conduct an 
annual stress test over a nine-quarter forward-looking planning horizon 
of its U.S. subsidiaries to determine whether those subsidiaries have 
the capital necessary to absorb losses as a result of adverse economic 
conditions. The foreign banking organization or foreign savings and 
loan holding company would report a summary of the results of the 
stress test to the Board on an annual basis that includes the 
information required under paragraph Sec.  252.253(b)(1) of this 
subpart.
    Section 252.283(b) would require a foreign banking organization to 
provide notice to the Board within 5 business days of the date it 
determines that one or more triggering events set forth in section 
252.283 of that subpart has occurred, identifying the nature of the 
triggering event or change in circumstances.
Recordkeeping Requirements
    Sections 252.225(c), 252.226(b)(1), 252.228, 252.229(a), 
252.230(a), and 252.230(c) would require foreign banking organizations 
with total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more to adequately document all material 
aspects of its liquidity risk management processes and its compliance 
with the requirements of Subpart M and submit all such documentation to 
its U.S. risk committee.
    Section 252.252(a) would require the U.S. risk committee of a 
foreign banking organization with total consolidated assets of $50 
billion or more and

[[Page 76676]]

combined U.S. assets of $50 billion or more to review and approve the 
risk management practices of the U.S. combined operations; and oversee 
the operation of an appropriate risk management framework for the 
combined U.S. operations that is commensurate with the capital 
structure, risk profile, complexity, activities, and size of the 
company's combined U.S. operations. The risk management framework of 
the company's combined U.S. operations must be consistent with the 
company's enterprise-wide risk management policies and must include: 
(i) Policies and procedures relating to risk management governance, 
risk management practices, and risk control infrastructure for the 
combined U.S. operations of the company; (ii) processes and systems for 
identifying and reporting risks and risk-management deficiencies, 
including emerging risks, on a combined U.S. operations-basis; (iii) 
processes and systems for monitoring compliance with the policies and 
procedures relating to risk management governance, practices, and risk 
controls across the company's combined U.S. operations; (iv) processes 
designed to ensure effective and timely implementation of corrective 
actions to address risk management deficiencies; (v) specification of 
authority and independence of management and employees to carry out 
risk management responsibilities; and (vi) integration of risk 
management and control objectives in management goals and compensation 
structure of the company's combined U.S. operations. Section 252.252(a) 
would also require that the U.S. risk committee meet at least quarterly 
and otherwise as needed, and fully document and maintain records of its 
proceedings, including risk management decisions.
Reporting, Recordkeeping, and Disclosure Requirements
    Section 252.262 would require (1) a U.S. intermediate holding 
company with total consolidated assets $50 billion or more to comply 
with the stress testing requirements of subparts F and G of the Board's 
Regulation YY (12 CFR 252.131 et seq., 12 CFR 252.141) to the same 
extent and in the same manner as if it were a covered company as 
defined in that subpart and (2) a U.S. intermediate holding company 
that has average total consolidated assets of greater than $10 billion 
but less than $50 billion would comply with the stress testing 
requirements of subpart H of the Board's Regulation YY (12 CFR 252.151 
et seq.) to the same extent and in the same manner as if it were a bank 
holding company with total consolidated assets of greater than $10 
billion but less than $50 billion, as determined under that subpart.
Estimated Paperwork Burden for 7100-0350

    Note: The burden estimate associated with 7100-0350 does not 
include the current burden.

Estimated Burden per Response
Reporting Burden
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More
    Section 252.202b--160 hours.
    Section 252.203b--100 hours.
    Section 252.283b--2 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More and Combined U.S. Assets of $50 Billion or More
    Section 252.226c1--40 hours.
    Section 252.226c2--40 hours.
    Section 252.263b1--40 hours.
    Section 252.263b2--40 hours.
    Section 252.263c2--80 hours.
    Section 252.263d--10 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More and Combined U.S. Assets of Less Than $50 Billion
    Section 252.231a--50 hours.
Intermediate Holding Companies With Total Consolidated Assets of More 
Than $10 Billion but Less Than $50 Billion
    Section 252.262--80 hours (Initial setup 200 hours)
Foreign Banking Organizations With Total Consolidated Assets of More 
Than $10 Billion and Combined U.S. Assets of Less Than $50 Billion and 
Foreign Savings and Loan Holding Companies With Total Consolidated 
Assets of $10 Billion or More
    Section 252.264b2--80 hours.
Recordkeeping Burden
Foreign Banking Organizations of Total Consolidated Assets of $50 
Billion or More and Combined U.S. Assets of $50 Billion or More
    Sections 252.225c, 252.226b1, 252.228, 252.229a, 252.230a, and 
252.230c--200 hours (Initial setup 160 hours).
    Section 252.252a--200 hours.
Intermediate Holding Companies With Total Consolidated Assets of $50 
Billion or More
    Section 252.262--40 hours (Initial setup 280 hours)
Intermediate Holding Companies With Total Consolidated Assets of More 
Than $10 Billion but Less Than $50 Billion
    Section 252.262--40 hours (Initial setup 240 hours)
Disclosure Burden
Intermediate Holding Companies With Total Consolidated Assets of $50 
Billion or More
    Section 252.262--80 hours (Initial setup 200 hours)

    Number of respondents: 23 foreign banking organizations with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
$50 billion or more, 26 U.S. intermediate holding companies (18 U.S. 
intermediate holding companies with total consolidated assets of $50 
billion or more), and 113 foreign banking organizations with total 
consolidated assets of more than $10 billion and combined U.S. assets 
of less than $50 billion.
    Total estimated annual burden: 58,660 hours (19,440 hours for 
initial setup and 39,220 hours for ongoing compliance).
    2. Title of Information Collection: The Capital and Asset Report 
for Foreign Banking Organizations.
    Frequency of Response: Quarterly.
    Affected Public: Businesses or other for-profit.
    Respondents: Foreign banking organizations.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
establish enhanced prudential standards on bank holding companies with 
consolidated assets of $50 billion or more and nonbank financial 
companies supervised by the Board, and section 166 requires the Board 
to establish an early remediation framework for these companies. The 
enhanced prudential standards include risk-based capital and leverage 
requirements, liquidity standards, requirements for overall risk 
management (including establishing a risk committee), single-
counterparty credit limits, stress test requirements, and debt-to-
equity limits for companies that the Council has determined pose a 
grave threat to financial stability. The proposal would implement these 
requirements for foreign banking organizations with total consolidated 
assets of $50 billion or more and foreign nonbank financial companies 
supervised by the Board.
Reporting Requirements
    Section 252.212(c)(3) would require that a foreign banking 
organization with total consolidated assets of $50 billion or more 
provide the following

[[Page 76677]]

information to the Federal Reserve concurrently with the Capital and 
Asset Report for Foreign Banking Organizations (FR Y-7Q; OMB No. 7100-
0125): (1) the tier 1 risk-based capital ratio, total risk-based 
capital ratio and amount of tier 1 capital, tier 2 capital, risk-
weighted assets and total assets of the foreign banking organization, 
as of the close of the most recent quarter and as of the close of the 
most recent audited reporting period; (2) consistent with the 
transition period in the Basel III Accord, the common equity tier 1 
ratio, leverage ratio and amount of common equity tier 1 capital, 
additional tier 1 capital, and total leverage assets of the foreign 
banking organization; and (3) a certification that the foreign banking 
organization meets the standard in (c)(1)(i) of this section.
Estimated Paperwork Burden for 7100-0125

    Note: The burden estimate associated with 7100-0125 does not 
include the current burden.

    Estimated Burden per Response: Section 252.212c3 reporting--0.5 
hours.
    Number of respondents: 107 foreign banking organizations.
    Total estimated annual burden: 214 hours.
    In addition to the requirements discussed above, section 252.203(c) 
would require U.S. intermediate holding companies to submit the 
following reporting forms:
     Country Exposure Report (FFIEC 009; OMB No. 7100-0035);
     Country Exposure Information Report (FFIEC 009a; OMB No. 
7100-0035);
     Risk-Based Capital Reporting for Institutions Subject to 
the Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 7100-0319);
     Financial Statements of Foreign Subsidiaries of U.S. 
Banking Organizations (FR 2314; OMB No. 7100-0073);
     Abbreviated Financial Statements of Foreign Subsidiaries 
of U.S. Banking Organizations (FR 2314S; OMB No. 7100-0073);
     Annual Report of Holding Companies (FR Y-6; OMB No. 7100-
0297);
     The Bank Holding Company Report of Insured Depository 
Institution's Section 23A Transactions with Affiliates (FR Y-8; OMB No. 
7100-0126);
     Consolidated Financial Statements for Bank Holding 
Companies (FR Y-9C; OMB No. 7100-0128);
     Parent Company Only Financial Statements for Large Bank 
Holding Companies (FR Y-9LP; OMB No. 7100-0128);
     Financial Statements for Employee Stock Ownership Plan 
Bank Holding Companies (FR Y-9ES; OMB No. 7100-0128);
     Report of Changes in Organization Structure (FR Y-10; OMB 
No. 7100-0297);
     Financial Statements of U.S. Nonbank Subsidiaries of U.S. 
Bank Holding Companies (FR Y-11; OMB No. 7100-0244);
     Abbreviated Financial Statements of U.S. Nonbank 
Subsidiaries of U.S. Bank Holding Companies (FR Y-11S; OMB No. 7100-
0244);
     Consolidated Bank Holding Company Report of Equity 
Investments in Nonfinancial Companies (FR Y-12; OMB No. 7100-0300);
     Annual Report of Merchant Banking Investments Held for an 
Extended Period (FR Y-12A; OMB No. 7100-0300); and
     Banking Organization Systemic Risk Report (FR Y-15; OMB 
No. 7100-NEW). This reporting form will be implemented in December 
2012.\125\
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    \125\ See 77 FR 50102 (August 20, 2012).
---------------------------------------------------------------------------

    The Board would increase the respondent panels for these reporting 
forms to include U.S. intermediate holding companies.
    Also, section 252.212(b) would increase the respondent panels for 
the following information collections to include U.S. intermediate 
holding companies with total consolidated assets of $50 billion or 
more:
     Recordkeeping and Reporting Requirements Associated with 
Regulation Y (Reg Y-13; OMB No. 7100-0342);
     Capital Assessments and Stress Testing (FR Y-14M and Q; 
OMB No. 7100-0341).
    Section 252.212 would increase the respondent panel for the Capital 
Assessments and Stress Testing (FR Y-14A; OMB No. 7100-0341) to include 
U.S. intermediate holding companies with total consolidated assets of 
$10 billion or more.
    Finally, the reporting requirement found in section 252.245(a) will 
be addressed in a separate Federal Register notice at a later date.
    Comments are invited on:
    (a) Whether the proposed collections of information are necessary 
for the proper performance of the Federal Reserve's functions, 
including whether the information has practical utility;
    (b) The accuracy of the Federal Reserve's estimate of the burden of 
the proposed information collections, including the validity of the 
methodology and assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer for the Agencies: By mail to 
U.S. Office of Management and Budget, 725 17th Street NW., 
10235, Washington, DC 20503 or by facsimile to 202-395-5806, 
Attention, Commission and Federal Banking Agency Desk Officer.

C. Regulatory Flexibility Act Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
\126\ (RFA), the Board is publishing an initial regulatory flexibility 
analysis of the proposed rule. The RFA requires an agency either to 
provide an initial regulatory flexibility analysis with a proposed rule 
for which a general notice of proposed rulemaking is required or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Based on its analysis 
and for the reasons stated below, the Board believes that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the Board is publishing an 
initial regulatory flexibility analysis. A final regulatory flexibility 
analysis will be conducted after comments received during the public 
comment period have been considered.
---------------------------------------------------------------------------

    \126\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    In accordance with sections 165 and 166 of the Dodd-Frank Act, the 
Board is proposing to amend Regulation YY (12 CFR 252 et seq.) to 
establish enhanced prudential standards and early remediation 
requirements applicable for foreign banking organizations and foreign 
nonbank financial companies supervised by the Board.\127\ The enhanced 
prudential standards include a requirement to establish a U.S. 
intermediate holding company, risk-based capital and leverage 
requirements,

[[Page 76678]]

liquidity standards, risk management and risk committee requirements, 
single-counterparty credit limits, stress test requirements, and debt-
to-equity limits for companies that the Council has determined pose a 
grave threat to financial stability.
---------------------------------------------------------------------------

    \127\ See 12 U.S.C. 5365 and 5366.
---------------------------------------------------------------------------

    Under regulations issued by the Small Business Administration 
(SBA), a ``small entity'' includes those firms within the ``Finance and 
Insurance'' sector with asset sizes that vary from $7 million or less 
in assets to $175 million or less in assets.\128\ The Board believes 
that the Finance and Insurance sector constitutes a reasonable universe 
of firms for these purposes because such firms generally engage in 
actives that are financial in nature. Consequently, bank holding 
companies or nonbank financial companies with assets sizes of $175 
million or less are small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \128\ 13 CFR 121.201.
---------------------------------------------------------------------------

    As discussed in the Supplementary Information, the proposed rule 
generally would apply to foreign banking organizations with total 
consolidated assets of $50 billion or more, and to foreign nonbank 
financial companies that the Council has determined under section 113 
of the Dodd-Frank Act must be supervised by the Board and for which 
such determination is in effect. However, foreign banking organizations 
with publicly traded stock and total consolidated assets of $10 billion 
or more would be required to establish a U.S. risk committee. The 
company-run stress test requirements part of the proposal being 
established pursuant to section 165(i)(2) of the Act also would apply 
to any foreign banking organization and foreign savings and loan 
holding company with more than $10 billion in total assets. Companies 
that are subject to the proposed rule therefore substantially exceed 
the $175 million asset threshold at which a banking entity is 
considered a ``small entity'' under SBA regulations.\129\ The proposed 
rule would apply to a nonbank financial company designated by the 
Council under section 113 of the Dodd-Frank Act regardless of such a 
company's asset size. Although the asset size of nonbank financial 
companies may not be the determinative factor of whether such companies 
may pose systemic risks and would be designated by the Council for 
supervision by the Board, it is an important consideration.\130\ It is 
therefore unlikely that a financial firm that is at or below the $175 
million asset threshold would be designated by the Council under 
section 113 of the Dodd-Frank Act because material financial distress 
at such firms, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of it activities, are not likely to pose a 
threat to the financial stability of the United States.
---------------------------------------------------------------------------

    \129\ The Dodd-Frank Act provides that the Board may, on the 
recommendation of the Council, increase the $50 billion asset 
threshold for the application of certain of the enhanced prudential 
standards. See 12 U.S.C. 5365(a)(2)(B). However, neither the Board 
nor the Council has the authority to lower such threshold.
    \130\ See 77 FR 21637 (April 11, 2012).
---------------------------------------------------------------------------

    As noted above, because the proposed rule is not likely to apply to 
any company with assets of $175 million or less, if adopted in final 
form, it is not expected to apply to any small entity for purposes of 
the RFA. The Board does not believe that the proposed rule duplicates, 
overlaps, or conflicts with any other Federal rules. In light of the 
foregoing, the Board does not believe that the proposed rule, if 
adopted in final form, would have a significant economic impact on a 
substantial number of small entities supervised. Nonetheless, the Board 
seeks comment on whether the proposed rule would impose undue burdens 
on, or have unintended consequences for, small organizations, and 
whether there are ways such potential burdens or consequences could be 
minimized in a manner consistent with sections 165 and 166 of the Dodd-
Frank Act.

List of Subjects in 12 CFR Part 252

12 CFR Chapter II

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

Authority and Issuance

    For the reasons stated in the Supplementary Information, the Board 
of Governors of the Federal Reserve System proposes to amend 12 CFR 
part 252 as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

    1. The authority citation for part 252 shall read as follows:

    Authority:  12 U.S.C. 321-338a, 481-486, 1818, 1828, 1831n, 
1831o, 1831p-l, 1831w, 1835, 1844(b), 3904, 3906-3909, 4808, 5365, 
5366, 5367, 5368, 5371.

    2. Add Subpart A to read as follows:
Subpart A--General Provisions
Sec.
252.1 [Reserved]
252.2 Authority, purpose, and reservation of authority for foreign 
banking organizations and foreign nonbank financial companies 
supervised by the Board.
252.3 Definitions.

Subpart A--General Provisions


Sec.  252.1  [Reserved]


Sec.  252.2  Authority, purpose, and reservation of authority for 
foreign banking organizations and foreign nonbank financial companies 
supervised by the Board.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (the Board) under sections 165, 166, 168, and 
171 of Title I of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 
1376, 1423-1432, 12 U.S.C. 5365, 5366, 5367, 5368, and 5371); section 9 
of the Federal Reserve Act (12 U.S.C. 321-338a); section 5(b) of the 
Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b)); 
section 10(g) of the Home Owners' Loan Act, as amended (12 U.S.C. 
1467a(g)); and sections 8 and 39 of the Federal Deposit Insurance Act 
(12 U.S.C. 1818(b) and 1831p-1); International Banking Act of 1978 (12 
U.S.C. 3101 et seq.); Foreign Bank Supervision Enhancement Act of 1991 
(12 U.S.C. 3101 note); and 12 U.S.C. 3904, 3906-3909, 4808.
    (b) Purpose. This part implements certain provisions of sections 
165, 166, 167, and 168 of the Dodd-Frank Act (12 U.S.C. 5365, 5366, 
5367, and 5368), which require the Board to establish enhanced 
prudential standards for foreign banking organizations with total 
consolidated assets of $50 billion or more and certain other companies.
    (c) Reservation of authority. (1) In general. Nothing in this part 
limits the authority of the Board under any provision of law or 
regulation to impose on any company additional enhanced prudential 
standards, including, but not limited to, additional risk-based capital 
or liquidity requirements, leverage limits, limits on exposures to 
single counterparties, risk management requirements, stress tests, or 
other requirements or restrictions the Board deems necessary to carry 
out the purposes of this part or Title I of the Dodd-Frank Act, or to 
take supervisory or enforcement action, including action to address 
unsafe and unsound practices or conditions, or violations of law or 
regulation.
    (2) Separate operations. If a foreign banking organization owns 
more than one foreign bank, the Board may apply the standards 
applicable to the foreign banking organization under this part in a 
manner that takes into account the

[[Page 76679]]

separate operations of such foreign banks.
    (d) Foreign nonbank financial companies. (1) In general. The 
following subparts of this part will apply to a foreign nonbank 
financial company supervised by the Board, unless the Board determines 
that application of those subparts, or any part thereof, would not be 
appropriate:
    (i) Subpart L--Risk-Based Capital Requirements and Leverage Limits 
for Covered Foreign Banking Organizations;
    (ii) Subpart M--Liquidity Requirements for Covered Foreign Banking 
Organizations;
    (iii) Subpart N--Single-Counterparty Credit Limits for Covered 
Foreign Banking Organizations;
    (iv) Subpart O--Risk Management for Covered Foreign Banking 
Organizations;
    (v) Subpart P--Stress Test Requirements for Covered Foreign Banking 
Organizations and Other Foreign Companies;
    (vi) Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign 
Banking Organizations; and
    (vii) Subpart R--Early Remediation Framework for Covered Foreign 
Banking Organizations.
    (2) Intermediate holding company criteria. In determining whether 
to apply subpart K (Intermediate Holding Company Requirement for 
Covered Foreign Banking Organizations) to a foreign nonbank financial 
company supervised by the Board in accordance with section 167 of the 
Dodd-Frank Act (12 U.S.C. 5367), the Board will consider the following 
criteria regarding the foreign nonbank financial company:
    (i) The structure and organization of the U.S. activities and 
subsidiaries of the foreign nonbank financial company;
    (ii) The riskiness, complexity, financial activities, and size of 
the U.S. activities and subsidiaries of a foreign nonbank financial 
company, and the interconnectedness of those U.S. activities and 
subsidiaries with foreign activities and subsidiaries of the foreign 
banking organization;
    (iii) The extent to which an intermediate holding company would 
help to prevent or mitigate risks to the financial stability of the 
United States that could arise from the material financial distress or 
failure, or ongoing activities, of the foreign nonbank financial 
company;
    (iv) The extent to which the foreign nonbank financial company is 
subject to prudential standards on a consolidated basis in its home 
country that are administered and enforced by a comparable foreign 
supervisory authority; and
    (v) Any other risk-related factor that the Board determines 
appropriate.


Sec.  252.3  Definitions.

    Unless otherwise specified, the following definitions will apply 
for purposes of subparts K through R of this part:
    Affiliate means any company that controls, is controlled by, or is 
under common control with, another company.
    Applicable accounting standards means U.S. generally applicable 
accounting principles (GAAP), international financial reporting 
standards (IFRS), or such other accounting standards that a company 
uses in the ordinary course of its business in preparing its 
consolidated financial statements.
    Bank has the same meaning as in section 225.2(b) of the Board's 
Regulation Y (12 CFR 225.2(b)).
    Bank holding company has the same meaning as in section 2(a) of the 
Bank Holding Company Act (12 U.S.C. 1841(a)) and section 225.2(c) of 
the Board's Regulation Y (12 CFR 225.2(c)).
    Combined U.S. operations means, with respect to a foreign banking 
organization:
    (1) Any U.S. intermediate holding company and its consolidated 
subsidiaries;
    (2) Any U.S. branch or U.S. agency; and
    (3) Any other U.S. subsidiary of the foreign banking organization 
that is not a section 2(h)(2) company.
    Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    Control has the same meaning as in section 2(a) of the Bank Holding 
Company Act (12 U.S.C. 1841(a)), and the terms controlled and 
controlling shall be construed consistently with the term control.
    Depository institution has the same meaning as in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).
    FFIEC 002 means the Report of Assets and Liabilities of U.S. 
Branches and Agencies of Foreign Banks reporting form.
    Foreign bank has the same meaning as in section 211.21(n) of the 
Board's Regulation K (12 CFR 211.21(n)).
    Foreign banking organization has the same meaning as in section 
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)).
    Foreign nonbank financial company supervised by the Board means a 
company incorporated or organized in a country other than the United 
States that the Council has determined under section 113 of the Dodd-
Frank Act (12 U.S.C. 5323) shall be supervised by the Board and for 
which such determination is still in effect.
    FR Y-7Q means the Capital and Asset Report for Foreign Banking 
Organizations reporting form.
    FR Y-9C means the Consolidated Financial Statements for Bank 
Holding Companies reporting form.
    Non-U.S. affiliate means any affiliate that is incorporated or 
organized in a country other than the United States.
    Nonbank financial company supervised by the Board means a company 
that the Council has determined under section 113 of the Dodd-Frank Act 
(12 U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect.
    Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom. A company can rely 
on its determination that a particular non-U.S.-based exchange provides 
a liquid two-way market unless the Board determines that the exchange 
does not provide a liquid two-way market.
    Section 2(h)(2) company has the same meaning as in section 2(h)(2) 
of the Bank Holding Company Act (12 U.S.C. 1841(h)(2)).
    Subsidiary has the same meaning as in section 225.2(o) of 
Regulation Y (12 CFR 225.2(o)).
    U.S. agency has the same meaning as the term ``agency'' in section 
211.21(b) of the Board's Regulation K (12 CFR 211.21(b)).
    U.S. branch has the same meaning as the term ``branch'' in section 
211.21(e) of the Board's Regulation K (12 CFR 211.21(e)).
    U.S. branch and agency network means all U.S. branches and U.S. 
agencies of a foreign bank.

[[Page 76680]]

    U.S. intermediate holding company means the top-tier U.S. company 
that is required to be formed pursuant to Sec.  252.202 of subpart K of 
this part and that controls the U.S. subsidiaries of a foreign banking 
organization.
    U.S. subsidiary means any subsidiary that is organized in the 
United States or in any State, commonwealth, territory, or possession 
of the United States, the District of Columbia, the Commonwealth of 
Puerto Rico, the Commonwealth of the North Mariana Islands, the 
American Samoa, Guam, or the United States Virgin Islands.

Subpart J--[Reserved]

    3. Add reserved subpart J.
    4. Add subpart K to read as follows:
Subpart K--Intermediate Holding Company Requirement for Covered Foreign 
Banking Organizations
Sec.
252.200 Applicability.
252.201 U.S. intermediate holding company requirement.
252.202 Alternative organizational structure.
252.203 Corporate form, notice, and reporting.
252.204 Liquidation of intermediate holding companies

Subpart K--Intermediate Holding Company Requirement for Covered 
Foreign Banking Organizations


Sec.  252.200  Applicability.

    (a) In general. (1) Total consolidated assets. This subpart applies 
to a foreign banking organization with total consolidated assets of $50 
billion or more, as determined based on the average of the total 
assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (2) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of this subpart unless and until 
total assets as reported on its FR Y-7Q are less than $50 billion for 
each of the four most recent consecutive calendar quarters.
    (3) Measurement date. For purposes of paragraphs (a)(1) and (2) of 
this section, total assets are measured on the quarter-end for each 
quarter used in the calculation of the average.
    (b) Initial applicability. A foreign banking organization that is 
subject to this subpart as of July 1, 2014, under paragraph (a)(1) of 
this section, must comply with the requirements of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (c) Ongoing applicability. A foreign banking organization that 
becomes subject to this subpart after July 1, 2014, under paragraph 
(a)(1) of this section, must comply with the requirements of this 
subpart beginning 12 months after it becomes subject to this subpart, 
unless that time is accelerated or extended by the Board in writing.


Sec.  252.201  U.S. intermediate holding company requirement.

    (a) In general. (1) A foreign banking organization with total 
consolidated assets of $50 billion or more must establish a U.S. 
intermediate holding company if the foreign banking organization has 
combined U.S. assets (excluding assets of U.S. branches and U.S. 
agencies) of $10 billion or more.
    (2) For purposes of this section, combined U.S. assets (excluding 
assets of U.S. branches and U.S. agencies) is equal to the average of 
the total consolidated assets of each top-tier U.S. subsidiary of the 
foreign banking organization (excluding any section 2(h)(2) company):
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not filed an FR Y-7Q, 
as determined under applicable accounting standards.
    (3) A company may reduce its combined U.S. assets (excluding assets 
of U.S. branches and U.S. agencies) as calculated under paragraph 
(a)(2) of this section by the amount corresponding to any balances and 
transactions between any U.S. subsidiaries that would be eliminated in 
consolidation were a U.S. intermediate holding company already formed.
    (b) Organizational structure. A foreign banking organization that 
is required to form a U.S. intermediate holding company under paragraph 
(a) of this section must hold its interest in any U.S. subsidiary 
through the U.S. intermediate holding company, other than any interest 
in a section 2(h)(2) company.


Sec.  252.202  Alternative organizational structure.

    (a) In general. Upon written request by a foreign banking 
organization subject to this subpart, the Board will consider whether 
to permit the foreign banking organization to establish multiple 
intermediate holding companies or use an alternative organizational 
structure to hold its combined U.S. operations, if:
    (1) The foreign banking organization controls another foreign 
banking organization that has separate U.S. operations;
    (2) Under applicable law, the foreign banking organization may not 
own or control one or more of its U.S. subsidiaries (excluding any 
section 2(h)(2) company) through a single U.S. intermediate holding 
company; or
    (3) The Board determines that the circumstances otherwise warrant 
an exception based on the foreign banking organization's activities, 
scope of operations, structure, or similar considerations.
    (b) Request. A request under this section must be submitted to the 
Board at least 180 days prior to the date that the foreign banking 
organization is required to establish the U.S. intermediate holding 
company and include a description of why the request should be granted 
and any other information the Board may require.


Sec.  252.203  Corporate form, notice, and reporting

    (a) Corporate form. A U.S. intermediate holding company must be 
organized under the laws of the United States, any state, or the 
District of Columbia.
    (b) Notice. Within 30 days of establishing a U.S. intermediate 
holding company under this section, a foreign banking organization must 
provide to the Board:
    (1) A description of the U.S. intermediate holding company, 
including its name, location, corporate form, and organizational 
structure;
    (2) A certification that the U.S. intermediate holding company 
meets the requirements of this subpart; and
    (3) Any other information that the Board determines is appropriate.
    (c) Reporting. Each U.S. intermediate holding company shall 
furnish, in the manner and form prescribed by the Board, any reporting 
form in the same manner and to the same extent as a bank holding 
company. Additional information and reports shall be furnished as the 
Board may require.
    (d) Examinations and inspections. The Board may examine or inspect 
any U.S. intermediate holding company and

[[Page 76681]]

each of its subsidiaries and prepare a report of their operations and 
activities.
    (e) Enhanced prudential standards. A U.S. intermediate holding 
company is subject to the enhanced prudential standards of subparts K 
through R of this part. A U.S. intermediate holding company is not 
otherwise subject to requirements of subparts B through J of this part, 
regardless of whether the company meets the scope of application of 
those subparts.


Sec.  252.204  Liquidation of intermediate holding companies.

    (a) Prior notice. A foreign banking organization that seeks to 
voluntarily liquidate its U.S. intermediate holding company but would 
remain a foreign banking organization after such liquidation must 
provide the Board with 60 days' prior written notice of the 
liquidation.
    (b) Waiver of notice period. The Board may waive the 60-day period 
in paragraph (a) of this section in light of the circumstances 
presented.
    5. Add Subpart L to part 252 to read as follows:
Subpart L--Risk-Based Capital Requirements and Leverage Limits for 
Covered Foreign Banking Organizations
Sec.
252.210 Definitions.
252.211 Applicability.
252.212 Enhanced risk-based capital and leverage requirements.

Subpart L--Risk-Based Capital Requirements and Leverage Limits for 
Covered Foreign Banking Organizations


Sec.  252.210  Definitions.

    For purposes of this subpart, the following definition applies:
    Basel Capital Framework means the regulatory capital framework 
published by the Basel Committee on Banking Supervision, as amended 
from time to time.


Sec.  252.211  Applicability.

    (a) Foreign banking organizations with total consolidated assets of 
$50 billion or more. A foreign banking organization with total 
consolidated assets of $50 billion or more is subject to the 
requirements of Sec.  252.212(c) of this subpart.
    (1) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (2) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.212(c) of this subpart 
unless and until total assets as reported on its FR Y-7Q are less than 
$50 billion for each of the four most recent consecutive calendar 
quarters.
    (3) Measurement date. For purposes of this paragraph, total assets 
are measured on the last day of the quarter used in calculation of the 
average.
    (b) U.S. intermediate holding companies. (1) In general. A U.S. 
intermediate holding company is subject to the requirements of Sec.  
252.212(a) of this subpart.
    (2) U.S. intermediate holding companies with total consolidated 
assets of $50 billion or more. A U.S. intermediate holding company that 
has total consolidated assets of $50 billion or more also is subject to 
the requirements of Sec.  252.212(b) of this subpart.
    (i) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total consolidated assets:
    (A) For the four most recent consecutive quarters as reported by 
the U.S. intermediate holding company on its FR Y-9C, or
    (B) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on FR Y-9C, or
    (C) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards.
    (ii) Cessation of requirements. A U.S. intermediate holding company 
will remain subject to the requirements of Sec.  252.212(b) of this 
subpart unless and until total assets as reported on its FR Y-9C are 
less than $50 billion for each of the four most recent consecutive 
calendar quarters.
    (iii) Measurement date. For purposes of this paragraph, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (c) Initial applicability. (1) Foreign banking organizations. A 
foreign banking organization that is subject to the requirements of 
this subpart as of July 1, 2014, under paragraph (a)(1) of this section 
must comply with the requirements of Sec.  252.212(c) of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (2) U.S. intermediate holding companies. A U.S. intermediate 
holding company that is subject to the requirements of this subpart as 
of July 1, 2015, under paragraph (b)(1) or (b)(2) of this section, must 
comply with the requirements of Sec.  252.212(a) and Sec.  252.212(b) 
of this subpart beginning on July 1, 2015, unless that time is extended 
by the Board in writing.
    (d) Ongoing applicability. (1) Foreign banking organizations. A 
foreign banking organization that becomes subject to the requirements 
of this subpart after July 1, 2014, under paragraph (a)(1) of this 
section, must comply with the requirements of Sec.  252.212(c) of this 
subpart beginning 12 months after it becomes subject to this subpart, 
unless that time is accelerated or extended by the Board in writing.
    (2) U.S. intermediate holding companies. (i) A U.S. intermediate 
holding company that becomes subject to the requirements of this 
subpart after July 1, 2015, under paragraph (b)(1) of this section, 
must comply with the requirements of Sec.  252.212(a) of this subpart 
on the date it is required to be established, unless that time is 
accelerated or extended by the Board in writing.
    (ii) A U.S. intermediate holding company that becomes subject to 
this subpart after July 1, 2015, under paragraph (b)(2) of this 
section, must comply with the requirements of Sec.  252.212(b) of this 
subpart beginning in October of the calendar year after it becomes 
subject to those requirements, unless that time is accelerated or 
extended by the Board in writing.


Sec.  252.212  Enhanced risk-based capital and leverage requirements.

    (a) Risk-based capital and leverage requirements. A U.S. 
intermediate holding company, regardless of whether it controls a bank, 
must calculate and meet all applicable capital adequacy standards, 
including minimum risk-based capital and leverage requirements, and 
comply with all restrictions associated with applicable capital 
buffers, in the same manner and to the same extent as a bank holding 
company in accordance with any capital adequacy standards established 
by the Board for bank holding companies, including 12 CFR part 225, 
appendices A, D, E, and G and any successor regulation.

[[Page 76682]]

    (b) Capital planning. A U.S. intermediate holding company with 
total consolidated assets of $50 billion or more must comply with 
section 225.8 of Regulation Y in the same manner and to the same extent 
as a bank holding company subject to that section.
    (c) Foreign banking organizations. (1) General requirements. A 
foreign banking organization with total consolidated assets of $50 
billion or more must:
    (i) Certify to the Board that it meets capital adequacy standards 
at the consolidated level that are consistent with the Basel Capital 
Framework in accordance with any capital adequacy standards established 
by its home country supervisor; or
    (ii) Demonstrate to the satisfaction of the Board that it meets 
capital adequacy standards at the consolidated level that are 
consistent with the Basel Capital Framework.
    (2) Consistency with Basel Capital Framework. For purposes of 
paragraph (c)(1) of this section, consistency with the Basel Capital 
Framework shall require, without limitation, a company to meet all 
minimum risk-based capital ratios, any minimum leverage ratio, and all 
restrictions based on applicable capital buffers set forth in Basel 
III: A global regulatory framework for more resilient banks and banking 
systems (2010), each as applicable and as implemented in accordance 
with the Basel Capital Framework, including any transitional provisions 
set forth therein.
    (3) Reporting. A foreign banking organization with total 
consolidated assets of $50 billion or more must provide the following 
information to the Federal Reserve concurrently with its FR Y-7Q:
    (i) The tier 1 risk-based capital ratio, total risk-based capital 
ratio and amount of tier 1 capital, tier 2 capital, risk-weighted 
assets and total assets of the foreign banking organization, as of the 
close of the most recent quarter and as of the close of the most recent 
audited reporting period; and
    (ii) Consistent with the transition period in the Basel III Accord, 
the common equity tier 1 ratio, leverage ratio and amount of common 
equity tier 1 capital, additional tier 1 capital, and total leverage 
assets of the foreign banking organization, as of the close of the most 
recent quarter and as of the close of the most recent audited reporting 
period.
    (4) Noncompliance with the Basel Capital Framework. If a foreign 
banking organization does not satisfy the requirements of paragraphs 
(c)(1), (c)(2), and (c)(3) of this section, the Board may impose 
conditions or restrictions relating to the activities or business 
operations of the U.S. operations of the foreign banking organization. 
The Board will coordinate with any relevant U.S. licensing authority in 
the implementation of such conditions or restrictions.
    6. Add Subpart M to read as follows:
Subpart M--Liquidity Requirements for Covered Foreign Banking 
Organizations
Sec.
252.220 Definitions.
252.221 Applicability.
252.222 Responsibilities of the U.S. risk committee and U.S. chief 
risk officer.
252.223 Additional responsibilities of the U.S. chief risk officer.
252.224 Independent review.
252.225 Cash flow projections.
252.226 Liquidity stress testing.
252.227 Liquidity buffer.
252.228 Contingency funding plan
252.229 Specific limits.
252.230 Monitoring.
252.231 Requirements for foreign banking organizations with combined 
U.S. assets of less than $50 billion.

Subpart M--Liquidity Requirements for Covered Foreign Banking 
Organizations


Sec.  252.220  Definitions.

    For purposes of this subpart, the following definitions apply:
    BCBS principles for liquidity risk management means the document 
titled ``Principles for Sound Liquidity Risk Management and 
Supervision'' (September 2008) as published by the Basel Committee on 
Banking Supervision, as supplemented and revised from time to time.
    Global headquarters means the chief administrative office of a 
company in the jurisdiction in which the company is chartered or 
organized.
    Highly liquid assets means:
    (1) Cash;
    (2) Securities issued or guaranteed by the U. S. government, a U.S. 
government agency, or a U.S. government-sponsored entity; and
    (3) Any other asset that the foreign banking organization 
demonstrates to the satisfaction of the Federal Reserve:
    (i) Has low credit risk and low market risk;
    (ii) Is traded in an active secondary two-way market that has 
committed market makers and independent bona fide offers to buy and 
sell so that a price reasonably related to the last sales price or 
current bona fide competitive bid and offer quotations can be 
determined within one day and settled at that price within a reasonable 
time period conforming with trade custom; and
    (iii) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
is impaired.
    Liquidity means a company's capacity to efficiently meet its 
expected and unexpected cash flows and collateral needs at a reasonable 
cost without adversely affecting the daily operations or the financial 
condition of the foreign banking organization.
    Liquidity risk means the risk that a company's financial condition 
or safety and soundness will be adversely affected by its inability or 
perceived inability to meet its cash and collateral obligations.
    Unencumbered means, with respect to an asset, that:
    (1) The asset is not pledged, does not secure, collateralize, or 
provide credit enhancement to any transaction, and is not subject to 
any lien, or, if the asset has been pledged to a Federal Reserve bank 
or a U.S. government-sponsored entity, it has not been used;
    (2) The asset is not designated as a hedge on a trading position 
under the Board's market risk rule under 12 CFR 225, appendix E, or any 
successor regulation thereto; or
    (3) There are no legal or contractual restrictions on the ability 
of the foreign banking organization to promptly liquidate, sell, 
transfer, or assign the asset.
    U.S. government agency means an agency or instrumentality of the 
U.S. government whose obligations are fully and explicitly guaranteed 
as to the timely payment of principal and interest by the full faith 
and credit of the U.S. government.
    U.S. government-sponsored entity means an entity originally 
established or chartered by the U.S. government to serve public 
purposes specified by the U.S. Congress, but whose obligations are not 
explicitly guaranteed by the full faith and credit of the U.S. 
government.


Sec.  252.221  Applicability.

    (a) Foreign banking organizations with combined U.S. assets of $50 
billion or more. A foreign banking organization with combined U.S. 
assets of $50 billion or more is subject to the requirements of 
Sec. Sec.  252.222 through 252.230 of this subpart.
    (1) Combined U.S. assets. For purposes of this paragraph, combined 
U.S. assets is equal to the sum of:
    (i) The average of the total assets of each U.S. branch and U.S. 
agency of the foreign banking organization:
    (A) For the four most recent consecutive quarters as reported to 
the Board on the FFIEC 002; or
    (B) If the foreign banking organization has not filed the FFIEC 002 
for a U.S. branch or U.S. agency for each of the four most recent 
consecutive quarters, for the most recent quarter or

[[Page 76683]]

consecutive quarters as reported on the FFIEC 002; or
    (C) If the foreign banking organization has not yet filed a FFIEC 
002 for a U.S. branch or U.S. agency, as determined under applicable 
accounting standards.
    (ii) If a U.S. intermediate holding company has been established, 
the average of the total consolidated assets of the U.S. intermediate 
holding company:
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the U.S. intermediate holding company's FR Y-9C, or
    (B) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on the FR Y-9C, 
or
    (C) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards; and
    (iii) If a U.S. intermediate holding company has not been 
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any 
section 2(h)(2) company):
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the FR Y-7Q; or
    (B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
    (C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
    (2) U.S. intercompany transactions. The company may reduce its 
combined U.S. assets calculated under this paragraph by the amount 
corresponding to balances and transactions between the U.S. subsidiary 
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or 
U.S. branch or U.S. agency to the extent such items are not already 
eliminated in consolidation.
    (3) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec. Sec.  252.222 through 
252.230 of this subpart unless and until the sum of the total assets of 
each U.S. branch and U.S. agency as reported on the FFIEC 002 and the 
total consolidated assets of each U.S. subsidiary as reported on the FR 
Y-9C or FR Y-7Q is less than $50 billion for each of the four most 
recent consecutive calendar quarters.
    (4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3) 
of this section, total assets and total consolidated assets are 
measured on the last day of the quarter used in calculation of the 
average.
    (b) Foreign banking organizations with combined U.S. assets of less 
than $50 billion. A foreign banking organization with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
less than $50 billion is subject to the requirements of Sec.  252.231 
of this subpart.
    (1) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (2) Combined U.S. assets. For purposes of this paragraph, combined 
U.S. assets are determined in accordance with paragraph (a)(1) of this 
section.
    (3) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.231 of this subpart 
unless and until total assets as reported on its FR Y-7Q are less than 
$50 billion for each of the four most recent consecutive calendar 
quarters.
    (4) Measurement date. For purposes of paragraph (b) of this 
section, total assets are measured on the last day of the quarter used 
in calculation of the average.
    (c) Initial applicability. A foreign banking organization that is 
subject to this subpart as of July 1, 2014, under paragraph (a) or (b) 
of this section, must comply with the applicable requirements of this 
subpart beginning on July 1, 2015, unless that time is extended by the 
Board in writing.
    (d) Ongoing applicability. A foreign banking organization that 
becomes subject to this subpart after July 1, 2014, under paragraphs 
(a) or (b) of this section, must comply with the requirements of this 
subpart beginning 12 months after it becomes subject to this subpart, 
unless that time is accelerated or extended by the Board in writing.


Sec.  252.222  Responsibilities of the U.S. risk committee and U.S. 
chief risk officer.

    (a) Liquidity risk tolerance. (1) The U.S. risk committee of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more must review and approve the liquidity risk tolerance for the 
company's combined U.S. operations at least annually, with concurrence 
from the company's board of directors or its enterprise-wide risk 
committee. The liquidity risk tolerance for the combined U.S. 
operations must be consistent with the enterprise-wide liquidity risk 
tolerance established for the foreign banking organization. The 
liquidity risk tolerance for the combined U.S. operations is the 
acceptable level of liquidity risk that the company may assume in 
connection with its operating strategies for its combined U.S. 
operations. In determining the foreign banking organization's liquidity 
risk tolerance for the combined U.S. operations, the U.S. risk 
committee must consider capital structure, risk profile, complexity, 
activities, size, and other relevant factors of the foreign banking 
organization and its combined U.S. operations.
    (b) Business strategies and products. (1) The U.S. chief risk 
officer of a foreign banking organization with combined U.S. assets of 
$50 billion or more must review and approve the liquidity costs, 
benefits, and risks of each significant new business line and each 
significant new product offered, managed or sold through the company's 
combined U.S. operations before the foreign banking organization 
implements the business line or offers the product through the combined 
U.S. operations. In connection with this review, the U.S. chief risk 
officer must consider whether the liquidity risk of the new business 
line or product under current conditions and under liquidity stress 
conditions is within the foreign banking organization's established 
liquidity risk tolerance for its combined U.S. operations.
    (2) At least annually, the U.S. chief risk officer must review 
significant business lines and products offered, managed or sold 
through the combined U.S. operations to determine whether each business 
line or product has created any unanticipated liquidity risk, and to 
determine whether the liquidity risk of each strategy or product 
continues to be within the foreign banking organization's established 
liquidity risk tolerance for its combined U.S. operations.
    (c) Contingency funding plan. The U.S. chief risk officer of a 
foreign banking organization must review and approve the contingency 
funding plan

[[Page 76684]]

for its combined U.S. operations established pursuant to Sec.  252.228 
of this subpart at least annually, and at any such time that the 
foreign banking organization materially revises its contingency funding 
plan either for the company as a whole or for its combined U.S. 
operations specifically.
    (d) Other reviews. (1) At least quarterly, the U.S. chief risk 
officer of a foreign banking organization with combined U.S. assets of 
$50 billion or more must:
    (i) Review the cash flow projections produced under Sec.  252.225 
of this subpart that use time periods in excess of 30 days for the 
long-term cash flow projections required under that section to ensure 
that the liquidity risk of the company's combined U.S. operations is 
within the established liquidity risk tolerance;
    (ii) Review and approve the liquidity stress testing practices, 
methodologies, and assumptions for the combined U.S. operations 
described in Sec.  252.226 of this subpart;
    (iii) Review the liquidity stress testing results for the combined 
U.S. operations produced under Sec.  252.226 of this subpart;
    (iv) Approve the size and composition of the liquidity buffer for 
the combined U.S. operations established under Sec.  252.227 of this 
subpart;
    (v) Review and approve the specific limits established under Sec.  
252.229 of this subpart and review the company's compliance with those 
limits; and
    (vi) Review the liquidity risk management information for the 
combined U.S. operations necessary to identify, measure, monitor, and 
control liquidity risk and to comply with this subpart.
    (2) Whenever the foreign banking organization materially revises 
its liquidity stress testing, the U.S. chief risk officer must also 
review and approve liquidity stress testing practices, methodologies, 
and assumptions of the company's combined U.S. operations.
    (3) The U.S. chief risk officer must establish procedures governing 
the content of reports generated within the combined U.S. operations on 
the liquidity risk profile of the combined U.S. operations and other 
information described in Sec.  252.223(b) of this subpart.
    (e) Frequency of reviews. The U.S. chief risk officer must conduct 
more frequent reviews and approvals than those required under this 
section if changes in market conditions or the liquidity position, risk 
profile, or financial condition of the foreign banking organization 
indicates that the liquidity risk tolerance, business strategies and 
products, or contingency funding plan of the foreign banking 
organization should be reviewed or modified.


Sec.  252.223  Additional responsibilities of the U.S. chief risk 
officer.

    (a) The U.S. chief risk officer of a foreign banking organization 
with combined U.S. assets of $50 billion or more must review the 
strategies and policies and procedures for managing liquidity risk 
established by senior management of the combined U.S. operations. The 
U.S. chief risk officer must review information provided by the senior 
management of the combined U.S. operations to determine whether the 
foreign banking organization is complying with the established 
liquidity risk tolerance for the combined U.S. operations.
    (b) The U.S. chief risk officer must regularly report to the 
foreign banking organization's U.S. risk committee and enterprise-wide 
risk committee (or designated subcommittee thereof) on the liquidity 
risk profile of the foreign banking organization's combined U.S. 
operations at least semi-annually and must provide other information to 
the U.S. risk committee and the enterprise-wide risk committee relevant 
to compliance of the foreign banking organization with the established 
liquidity risk tolerance for the U.S. operations.


Sec.  252.224  Independent review.

    (a) A foreign banking organization with combined U.S. assets of $50 
billion or more must establish and maintain a review function, 
independent of the management functions that execute funding for its 
combined U.S. operations, to evaluate the liquidity risk management for 
its combined U.S. operations.
    (b) The independent review function must:
    (1) Regularly, and no less frequently than annually, review and 
evaluate the adequacy and effectiveness of the foreign banking 
organization's liquidity risk management processes within the combined 
U.S. operations;
    (2) Assess whether the foreign banking organization's liquidity 
risk management of its combined U.S. operations complies with 
applicable laws, regulations, supervisory guidance, and sound business 
practices; and
    (3) Report material liquidity risk management issues to the U.S. 
risk committee and the enterprise-wide risk committee in writing for 
corrective action.


Sec.  252.225  Cash flow projections.

    (a) Requirement. A foreign banking organization with combined U.S. 
assets of $50 billion or more must produce comprehensive cash flow 
projections for its combined U.S. operations in accordance with the 
requirements of this section. Cash flow projections for the combined 
U.S. operations must be tailored to, and provide sufficient detail to 
reflect, the capital structure, risk profile, complexity, activities, 
size, and any other relevant factors of the foreign banking 
organization and its combined U.S. operations, including where 
appropriate analyses by business line or legal entity. The foreign 
banking organization must update short-term cash flow projections daily 
and must update long-term cash flow projections at least monthly.
    (b) Methodology. A foreign banking organization with combined U.S. 
assets of $50 billion or more must establish a methodology for making 
cash flow projections for its combined U.S. operations. The methodology 
must include reasonable assumptions regarding the future behavior of 
assets, liabilities, and off-balance sheet exposures.
    (c) Cash flow projections. A foreign banking organization with 
combined U.S. assets of $50 billion or more must produce comprehensive 
cash flow projections for its combined U.S. operations that:
    (1) Project cash flows arising from assets, liabilities, and off-
balance sheet exposures over short-term and long-term periods that are 
appropriate to the capital structure, risk profile, complexity, 
activities, size, and other relevant characteristics of the company and 
its combined U.S. operations;
    (2) Identify and quantify discrete and cumulative cash flow 
mismatches over these time periods;
    (3) Include cash flows arising from contractual maturities, 
intercompany transactions, new business, funding renewals, customer 
options, and other potential events that may impact liquidity; and
    (4) Provide sufficient detail to reflect the capital structure, 
risk profile, complexity, activities, size, and any other relevant 
factors with respect to the company and its combined U.S. operations.


Sec.  252.226  Liquidity stress testing.

    (a) Stress testing requirement. (1) In general. In accordance with 
the requirements of this section, a foreign banking organization with 
combined U.S. assets of $50 billion or more must, at least monthly, 
conduct stress tests of cash flow projections separately for its

[[Page 76685]]

U.S. branch and agency network and its U.S. intermediate holding 
company, as applicable. The required stress test analysis must identify 
liquidity stress scenarios in accordance with paragraph (a)(3) of this 
section that would have an adverse effect on the U.S. operations of the 
foreign banking organization, and assess the effects of these scenarios 
on the cash flows and liquidity of each of the U.S. branch and agency 
network and U.S. intermediate holding company. The foreign banking 
organization must use the results of this stress testing to determine 
the size of the liquidity buffer for each of its U.S. branch and agency 
network and U.S. intermediate holding company required under Sec.  
252.227 of this subpart, and must incorporate the information generated 
by stress testing in the quantitative component of its contingency 
funding plan under Sec.  252.228 of this subpart.
    (2) Frequency. If there is a material deterioration in the foreign 
banking organization's financial condition, market conditions, or if 
other supervisory concerns indicate that the monthly stress test 
required by this section is insufficient to assess the liquidity risk 
profile of the foreign banking organization's U.S. operations, the 
Board may require the foreign banking organization to perform stress 
testing for its U.S. branch and agency network and its U.S. 
intermediate holding company more frequently than monthly and to vary 
the underlying assumptions and stress scenarios. The foreign banking 
organization must be able to perform more frequent stress tests in 
accordance with this section upon the request of the Board.
    (3) Stress scenarios. (i) Stress testing must incorporate a range 
of stress scenarios that may have a significant adverse impact the 
liquidity of the foreign banking organization's U.S.operations, taking 
into consideration their balance sheet exposures, off-balance sheet 
exposures, business lines, organizational structure, and other 
characteristics.
    (ii) At a minimum, stress testing must incorporate separate stress 
scenarios to account for adverse conditions due to market stress, 
idiosyncratic stress, and combined market and idiosyncratic stresses.
    (iii) The stress testing must:
    (A) Address the potential direct adverse impact of market 
disruptions on the foreign banking organization's combined U.S. 
operations;
    (B) Address the potential adverse impact of market disruptions on 
the foreign banking organization and the related indirect effect such 
impact could have on the combined U.S. operations of the foreign 
banking organization; and
    (C) Incorporate the potential actions of other market participants 
experiencing liquidity stresses under market disruptions that would 
adversely affect the foreign banking organization or its combined U.S. 
operations.
    (iv) The stress scenarios must be forward-looking and must 
incorporate a range of potential changes in the activities, exposures, 
and risks of the foreign banking organization and its combined U.S. 
operations, as appropriate, as well as changes to the broader economic 
and financial environment.
    (v) The stress scenarios must use a variety of time horizons. At a 
minimum, these time horizons must include an overnight time horizon, a 
30-day time horizon, 90-day time horizon, and a one-year time horizon.
    (4) Operations included. Stress testing under this section must 
comprehensively address the activities, exposures, and risks, including 
off-balance sheet exposures, of the company's combined U.S. operations.
    (5) Tailoring. Stress testing under this section must be tailored 
to, and provide sufficient detail to reflect, the capital structure, 
risk profile, complexity, activities, size, and other relevant 
characteristics of the combined U.S. operations of the foreign banking 
organization and, as appropriate, the foreign banking organization as a 
whole. This may require analyses by business line or legal entity, and 
stress scenarios that use more time horizons than the minimum required 
under paragraph (a)(3)(v) of this section.
    (6) Assumptions. A foreign banking organization subject to this 
section must incorporate the following assumptions in the stress 
testing required under this section:
    (i) For the first 30 days of a liquidity stress scenario, only 
highly liquid assets that are unencumbered may be used as cash flow 
sources to offset projected cash flow needs as calculated pursuant to 
Sec.  252.227 of this subpart;
    (ii) For time periods beyond the first 30 days of a liquidity 
stress scenario, highly liquid assets that are unencumbered and other 
appropriate funding sources may be used as cash flow sources to offset 
projected cash flow needs as calculated pursuant to Sec.  252.227 of 
this subpart;
    (iii) If an asset is used as a cash flow source to offset projected 
cash flow needs as calculated pursuant to Sec.  252.227 of this 
subpart, the fair market value of the asset must be discounted to 
reflect any credit risk and market price volatility of the asset; and
    (iv) Throughout each stress test time horizon, assets used as 
sources of funding must be diversified by collateral, counterparty, or 
borrowing capacity, or other factors associated with the liquidity risk 
of the assets.
    (b) Process and systems requirements. (1) Stress test function. A 
foreign banking organization with combined U.S. assets of $50 billion 
or more, within its combined U.S. operations and its enterprise-wide 
risk management, must establish and maintain policies and procedures 
that outline its liquidity stress testing practices, methodologies, and 
assumptions; incorporate the results of liquidity stress tests; and 
provide for the enhancement of stress testing practices as risks change 
and as techniques evolve.
    (2) Controls and oversight. A foreign banking organization must 
have an effective system of controls and oversight over the stress test 
function described above to ensure that:
    (i) Each stress test is designed in accordance with the 
requirements of this section; and
    (ii) Each stress test appropriately incorporates conservative 
assumptions with respect to the stress scenario in paragraph (a)(3) of 
this section and other elements of the stress test process, taking into 
consideration the capital structure, risk profile, complexity, 
activities, size, and other relevant factors of the U.S. operations. 
These assumptions must be approved by the U.S. chief risk officer and 
be subject to the independent review under Sec.  252.224 of this 
subpart.
    (3) Systems and processes. A foreign banking organization must 
maintain management information systems and data processes sufficient 
to enable it to effectively and reliably collect, sort, and aggregate 
data and other information related to the liquidity stress testing of 
its combined U.S. operations.
    (c) Reporting Requirements. (1) Liquidity stress tests required by 
this subpart. A foreign banking organization with combined U.S. assets 
of $50 billion or more must report the results of the stress tests for 
its combined U.S. operations conducted under this section to the Board 
within 14 days of completing the stress test. The report must include 
the amount of liquidity buffer established by the foreign banking 
organization for its combined U.S. operations under Sec.  252.227 of 
this subpart.
    (2) Liquidity stress tests required by home country regulators. A 
foreign banking organization with combined U.S. assets of $50 billion 
or more must report the results of any liquidity internal stress tests 
and establishment of

[[Page 76686]]

liquidity buffers required by regulators in its home jurisdiction to 
the Board on a quarterly basis within 14 days of completion of the 
stress test. The report required under this paragraph must include the 
results of its liquidity stress test and liquidity buffer, if required 
by the laws, regulations, or expected under supervisory guidance 
implemented in the home jurisdiction.


Sec.  252.227  Liquidity buffer.

    (a) General requirement. A foreign banking organization with 
combined U.S. assets of $50 billion or more must maintain a liquidity 
buffer for its U.S. branch and agency network and a separate buffer for 
its U.S. intermediate holding company. Each liquidity buffer must 
consist of highly liquid assets that are unencumbered and that are 
sufficient to meet the net stressed cash flow need over the first 30 
days of its stress test horizon, calculated in accordance with this 
section.
    (b) Net stressed cash flow need. (1) U.S. intermediate holding 
company. The net stressed cash flow need for a U.S. intermediate 
holding company is equal to the sum of its net external stressed cash 
flow need and net internal stressed cash flow need for the first 30 
days of its stress test horizon, each as calculated under paragraph 
(c)(1) and (d)(1) of this section.
    (2) U.S. branch and agency network. (i) For the first 14 days of 
its stress test horizon, the net stressed cash flow need for a U.S. 
branch and agency network is equal to the sum of its net external 
stressed cash flow need and net internal stressed cash flow need, each 
as calculated in paragraph (c)(2) and (d)(2) of this section.
    (ii) For day 15 through day 30 of its stress test horizon, the net 
stressed cash flow need for a U.S. branch and agency network is equal 
to its net external stressed cash flow need, as calculated under this 
paragraph (c)(2).
    (c) Net external stressed cash flow need calculation. (1) U.S. 
intermediate holding company. (i) The net external stressed cash flow 
need for a U.S. intermediate holding company equals the difference 
between:
    (A) The projected amount of cash flow needs that results from 
transactions between the U.S. intermediate holding company and entities 
that are not its affiliates; and
    (B) The projected amount of cash flow sources that results from 
transactions between the U.S. intermediate holding company and entities 
that are not its affiliates.
    (ii) Each of the projected amounts of cash flow needs and cash flow 
sources must be calculated for the first 30 days of its stress test 
horizon in accordance with the stress test requirements and 
incorporating the stress scenario required by Sec.  252.226 of this 
subpart.
    (2) U.S. branch and agency network. (i) The net external stressed 
cash flow need for a U.S. branch and agency network equals the 
difference between:
    (A) The projected amount of cash flow needs that results from 
transactions between the U.S. branch and agency network and entities 
other than foreign banking organization's head office and affiliates 
thereof; and
    (B) The projected amount of cash flow sources that results from 
transactions between the U.S. branch and agency network and entities 
other than foreign banking organization's head office and affiliates 
thereof.
    (ii) Each of the projected amounts of cash flow needs and cash flow 
sources must be calculated for the first 30 days of its stress test 
horizon in accordance with the stress test requirements and 
incorporating the stress scenario required by Sec.  252.226 of this 
subpart.
    (d) Net internal stressed cash flow need calculation. (1) U.S. 
intermediate holding company. The net internal stressed cash flow need 
for a U.S. intermediate holding company equals the greater of:
    (i) The greatest daily cumulative net intracompany cash flow need 
for the first 30 days of its stress test horizon as calculated under 
paragraph (e)(1) of this section; and
    (ii) Zero.
    (2) U.S. branch and agency network. The net internal stressed cash 
flow need for a U.S. branch and agency network equals the greater of:
    (i) The greatest daily cumulative net intracompany cash flow need 
for the first 14 days of its stress test horizon, as calculated under 
paragraph (b)(5) of this section; and
    (ii) Zero.
    (e) Daily cumulative net intracompany cash flow need calculation. 
The daily cumulative net intracompany cash flow need for the U.S. 
intermediate holding company and the U.S. branch and agency network for 
purposes of paragraph (b)(4) of this section is calculated as follows:
    (1) U.S. intermediate holding company. (i) Daily cumulative net 
intracompany cash flow. A U.S. intermediate holding company's daily 
cumulative net intracompany cash flow on any given day in the first 30 
days of its stress test horizon equals the sum of the net intracompany 
cash flow calculated for that day and the net intracompany cash flow 
calculated for each previous day of the stress test horizon, each as 
calculated in accordance with paragraph (e)(1)(ii) of this section.
    (ii) Net intracompany cash flow. For any day of its stress test 
horizon, the net intracompany cash flow equals the difference between:
    (A) The amount of cash flow needs under the stress scenario 
required by Sec.  252.226 of this subpart resulting from transactions 
between the U.S. intermediate holding company and its affiliates 
(including any U.S. branch or U.S. agency); and
    (B) The amount of cash flow sources under the stress scenario 
required by Sec.  252.226 of this subpart resulting from transactions 
between the U.S. intermediate holding company and its affiliates 
(including any U.S. branch or U.S. agency).
    (iii) Daily cumulative net intracompany cash flow need. Daily 
cumulative net intracompany cash flow need means, for any given day in 
the stress test horizon, a daily cumulative net intracompany cash flow 
that is greater than zero.
    (2) U.S. branch and agency network. (i) Daily cumulative net 
intracompany cash flows. For the first 14 days of the stress test 
horizon, a U.S. branch and agency network's daily cumulative net 
intracompany cash flow equals the sum of the net intracompany cash flow 
calculated for that day and the net intracompany cash flow calculated 
for each previous day of its stress test horizon, each as calculated in 
accordance with paragraph (e)(2)(ii) of this section.
    (ii) Net intracompany cash flow. For any day of the stress test 
horizon, the net intracompany cash flow must equal the difference 
between:
    (A) The amount of cash flow needs under the stress scenario 
required by Sec.  252.226 of this subpart resulting from transactions 
between a U.S. branch or U.S. agency within the U.S. branch and agency 
network and the foreign bank's non-U.S. offices and its affiliates; and
    (B) The amount of cash flow sources under the stress scenario 
required by Sec.  252.226 of this subpart resulting from transactions 
between a U.S. branch or U.S. agency within the U.S. branch and agency 
network and the foreign bank's non-U.S. offices and its affiliates.
    (iii) Daily cumulative net intracompany cash flow need. Daily 
cumulative net intracompany cash flow need means, for any given day in 
the stress test horizon, a daily cumulative net intracompany cash flow 
that is greater than zero.
    (3) Amounts secured by highly liquid assets. For the purposes of 
calculating net intracompany cash flow under this paragraph, the 
amounts of intracompany

[[Page 76687]]

cash flow needs and intracompany cash flow sources that are secured by 
highly liquid assets must be excluded from the calculation.
    (f) Location of liquidity buffer. (1) U.S. intermediate holding 
companies. A U.S. intermediate holding company must maintain in 
accounts in the United States the highly liquid assets comprising the 
liquidity buffer required under this section. To the extent that the 
assets consist of cash, the cash may not be held in an account located 
at a U.S. branch or U.S. agency of the affiliated foreign bank or other 
affiliate.
    (2) U.S. branch and agency networks. The U.S. branch and agency 
network of a foreign banking organization must maintain in accounts in 
the United States the highly liquid assets that cover its net stressed 
cash flow need for at least the first 14 days of its stress test 
horizon, calculated under paragraph (b)(2)(i) of this section. To the 
extent that the assets consist of cash, the cash may not be held in an 
account located at the U.S. intermediate holding company or other 
affiliate. The company may maintain the highly liquid assets to cover 
its net stressed cash flow need amount for day 15 through day 30 of the 
stress test horizon, calculated under paragraph (b)(2)(ii) of this 
section, at the head office of the foreign bank of which the U.S. 
branches and U.S. agencies are a part, provided that the company has 
demonstrated to the satisfaction of the Board that it has and is 
prepared to provide, or its affiliate has and would be required to 
provide, highly liquid assets to the U.S. branch and agency network 
sufficient to meet the liquidity needs of the operations of the U.S. 
branch and agency network for day 15 through day 30 of the stress test 
horizon.
    (g) Asset requirements. (1) Valuation. In computing the amount of 
an asset included in the liquidity buffer or buffers for its combined 
U.S. operations, a U.S. intermediate holding company or U.S. branch and 
agency network must discount the fair market value of the asset to 
reflect any credit risk and market price volatility of the asset.
    (2) Diversification. Assets that are included in the pool of 
unencumbered highly liquid assets in the liquidity buffer of a U.S. 
intermediate holding company or U.S. branch and agency network other 
than cash and securities issued by the U.S. government, or securities 
issued or guaranteed by a U.S. government agency or U.S. government-
sponsored entity must be diversified by collateral, counterparty, or 
borrowing capacity, or other factors associated with the liquidity risk 
of the assets, for each day of the relevant stress period in accordance 
with paragraph (b) of this section.


Sec.  252.228  Contingency funding plan.

    (a) Contingency funding plan. A foreign banking organization must 
establish and maintain a contingency funding plan for its combined U.S. 
operations that sets out the company's strategies for addressing 
liquidity needs during liquidity stress events. The contingency funding 
plan must be commensurate with the capital structure, risk profile, 
complexity, activities, size, and other relevant characteristics of the 
company and of its combined U.S. operations. It must also be 
commensurate with the established liquidity risk tolerance for the 
combined U.S. operations. The company must update the contingency 
funding plan for its combined U.S. operations at least annually, and 
must update the plan when changes to market and idiosyncratic 
conditions would have a material impact on the plan.
    (b) Components of the contingency funding plan. (1) Quantitative 
Assessment. The contingency funding plan must:
    (i) Identify liquidity stress events that could have a significant 
impact on the liquidity of the foreign banking organization and its 
combined U.S. operations;
    (ii) Assess the level and nature of the impact on the liquidity of 
the foreign banking organization and its combined U.S. operations that 
may occur during identified liquidity stress events;
    (iii) Assess available funding sources and needs during the 
identified liquidity stress events;
    (iv) Identify alternative funding sources that may be used during 
the liquidity stress events; and
    (v) In implementing paragraphs (b)(1)(i) through (iv) of this 
section, incorporate information generated by the liquidity stress 
testing required under Sec.  252.226 of this subpart.
    (2) Event management process. The contingency funding plan for a 
foreign banking organization's combined U.S. operations must include an 
event management process that sets out the company's procedures for 
managing liquidity during identified liquidity stress events for the 
combined U.S. operations. This process must:
    (i) Include an action plan that clearly describes the strategies 
that the company will use to respond to liquidity shortfalls in its 
combined U.S. operations for identified liquidity stress events, 
including the methods that the company or the combined U.S. operations 
will use to access alternative funding sources;
    (ii) Identify a liquidity stress event management team that would 
execute the action plan in paragraph (b)(2)(i) of this section for the 
combined U.S. operations;
    (iii) Specify the process, responsibilities, and triggers for 
invoking the contingency funding plan, escalating the responses 
described in the action plan, decision-making during the identified 
liquidity stress events, and executing contingency measures identified 
in the action plan; and
    (iv) Provide a mechanism that ensures effective reporting and 
communication within the combined U.S. operations of the foreign 
banking organization and with outside parties, including the Board and 
other relevant supervisors, counterparties, and other stakeholders.
    (3) Monitoring. The contingency funding plan must include 
procedures for monitoring emerging liquidity stress events. The 
procedures must identify early warning indicators that are tailored to 
the capital structure, risk profile, complexity, activities, size, and 
other relevant characteristics of the foreign banking organization and 
its combined U.S. operations.
    (4) Testing. A foreign banking organization must periodically test 
the components of the contingency funding plan for its combined U.S. 
operations to assess the plan's reliability during liquidity stress 
events.
    (i) The company must periodically test the operational elements of 
the contingency funding plan for its combined U.S. operations to ensure 
that the plan functions as intended. These tests must include 
operational simulations to test communications, coordination, and 
decision-making involving relevant managers, including managers at 
relevant legal entities within the corporate structure.
    (ii) The company must periodically test the methods it will use to 
access alternative funding sources for its combined U.S. operations to 
determine whether these funding sources will be readily available when 
needed.


Sec.  252.229  Specific limits.

    (a) Required limits. A foreign banking organization must establish 
and maintain limits on potential sources of liquidity risk, including:
    (1) Concentrations of funding by instrument type, single-
counterparty, counterparty type, secured and unsecured funding, and 
other liquidity risk identifiers;
    (2) The amount of specified liabilities that mature within various 
time horizons; and
    (3) Off-balance sheet exposures and other exposures that could 
create

[[Page 76688]]

funding needs during liquidity stress events.
    (b) Size of limits. The size of each limit described in paragraph 
(a) of this section must reflect the capital structure, risk profile, 
complexity, activities, size, and other relevant characteristics of the 
company's combined U.S. operations, as well as the established 
liquidity risk tolerance for the combined U.S. operations.
    (c) Monitoring of limits. A foreign banking organization must 
monitor its compliance with all limits established and maintained under 
this section.


Sec.  252.230  Monitoring.

    (a) Collateral monitoring requirements. A foreign banking 
organization with combined U.S. assets of $50 billion or more must 
establish and maintain procedures for monitoring the assets that it has 
pledged as collateral in connection with transactions to which entities 
in its U.S. operations are counterparties and the assets that are 
available to be pledged for its combined U.S. operations.
    (1) These procedures must provide that the foreign banking 
organization:
    (i) Calculates all of the collateral positions for its combined 
U.S. operations on a weekly basis (or more frequently, as directed by 
the Board due to financial stability risks or the financial condition 
of the U.S. operations) including:
    (A) The value of assets pledged relative to the amount of security 
required under the contract governing the obligation for which the 
collateral was pledged; and
    (B) Unencumbered assets available to be pledged;
    (ii) Monitors the levels of available collateral by legal entity, 
jurisdiction, and currency exposure;
    (iii) Monitors shifts between intraday, overnight, and term 
pledging of collateral; and
    (iv) Tracks operational and timing requirements associated with 
accessing collateral at its physical location (for example, the 
custodian or securities settlement system that holds the collateral).
    (2) [Reserved]
    (b) Legal entities, currencies and business lines. A foreign 
banking organization must establish and maintain procedures for 
monitoring and controlling liquidity risk exposures and funding needs 
that are not covered by Sec.  252.229 of this subpart or paragraph (a) 
of this section, within and across significant legal entities, 
currencies, and business lines for its combined U.S. operations, and 
taking into account legal and regulatory restrictions on the transfer 
of liquidity between legal entities.
    (c) Intraday liquidity positions. A foreign banking organization 
must establish and maintain procedures for monitoring intraday 
liquidity risk exposure for its combined U.S. operations. These 
procedures must address how the management of the combined U.S. 
operations will:
    (1) Monitor and measure expected daily inflows and outflows;
    (2) Manage and transfer collateral when necessary to obtain 
intraday credit;
    (3) Identify and prioritize time-specific obligations so that the 
foreign banking organizations can meet these obligations as expected;
    (4) Settle less critical obligations as soon as possible;
    (5) Control the issuance of credit to customers where necessary; 
and
    (6) Consider the amounts of collateral and liquidity needed to meet 
payment systems obligations when assessing the overall liquidity needs 
of the combined U.S. operations.


Sec.  252.231  Requirements for foreign banking organizations with 
combined U.S. assets of less than $50 billion

    (a) A foreign banking organization with total consolidated assets 
of $50 billion or more and combined U.S. assets of less than $50 
billion must report to the Board on an annual basis the results of an 
internal liquidity stress test for either the consolidated operations 
of the company or its combined U.S. operations conducted consistent 
with the BCBS principles for liquidity risk management and 
incorporating 30-day, 90-day and one-year stress test horizons.
    (b) A foreign banking organization subject to this section that 
does not comply with paragraph (a) of this section must limit the net 
aggregate amount owed by the foreign banking organization's non-U.S. 
offices and its non-U.S. affiliates to the combined U.S. operations to 
25 percent or less of the third party liabilities of its combined U.S. 
operations, on a daily basis.
    7. Add Subpart N to part 252 to read as follows:
Subpart N--Single-Counterparty Credit Limits for Covered Foreign 
Banking Organizations
Sec.
252.240 Definitions.
252.241 Applicability.
252.242 Credit exposure limit
252.243 Gross credit exposure.
252.244 Net credit exposure.
252.245 Compliance.
252.246 Exemptions.

Subpart N--Single-Counterparty Credit Limits for Covered Foreign 
Banking Organizations


Sec.  252.240  Definitions.

    For purposes of this subpart:
    Adjusted market value means, with respect to any eligible 
collateral, the fair market value of the eligible collateral after 
application of the applicable haircut specified in Table 2 of this 
subpart for that type of eligible collateral.
    Bank eligible investments means investment securities that a 
national bank is permitted to purchase, sell, deal in, underwrite, and 
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
    Capital stock and surplus means:
    (1) With respect to a U.S. intermediate holding company, the sum of 
the following amounts in each case as reported by a U.S. intermediate 
holding company on the most recent FR Y-9C:
    (i) The total regulatory capital of the U.S. intermediate holding 
company, as calculated under the capital adequacy guidelines applicable 
to that U.S. intermediate holding company under subpart L of this part; 
and
    (ii) The excess allowance for loan and lease losses of the U.S. 
intermediate holding company not included in tier 2 capital under the 
capital adequacy guidelines applicable to that U.S. intermediate 
holding company under subpart L of this part; and
    (2) With respect to a foreign banking organization, the total 
regulatory capital as reported on the foreign banking organization's 
most recent FR Y-7Q or other reporting form specified by the Board.
    Control. A company controls another company if it:
    (1) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the company;
    (2) Owns or controls 25 percent or more of the total equity of the 
company; or
    (3) Consolidates the company for financial reporting purposes.
    Credit derivative means a financial contract that allows one party 
(the protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure) to another party (the protection 
provider).
    Credit transaction means:
    (1) Any extension of credit, including loans, deposits, and lines 
of credit, but excluding advised or other uncommitted lines of credit;
    (2) Any repurchase or reverse repurchase agreement;
    (3) Any securities lending or securities borrowing transaction;

[[Page 76689]]

    (4) Any guarantee, acceptance, or letter of credit (including any 
confirmed letter of credit or standby letter of credit) issued on 
behalf of a counterparty;
    (5) Any purchase of, or investment in, securities issued by a 
counterparty;
    (6) In connection with a derivative transaction:
    (i) Any credit exposure to a counterparty, and
    (ii) Any credit exposure to the reference entity (described as a 
counterparty for purposes of this subpart), where the reference asset 
is an obligation or equity security of a reference entity.
    (7) Any transaction that is the functional equivalent of the above, 
and any similar transaction that the Board determines to be a credit 
transaction for purposes of this subpart.
    Derivative transaction means any transaction that is a contract, 
agreement, swap, warrant, note, or option that is based, in whole or in 
part, on the value of, any interest in, or any quantitative measure or 
the occurrence of any event relating to, one or more commodities, 
securities, currencies, interest or other rates, indices, or other 
assets.
    Eligible collateral means collateral in which a U.S. intermediate 
holding company or any part of the foreign banking organization's 
combined U.S. operations has a perfected, first priority security 
interest (with the exception of cash on deposit and notwithstanding the 
prior security interest of any custodial agent) or, outside of the 
United States, the legal equivalent thereof and is in the form of:
    (1) Cash on deposit with the U.S. intermediate holding company or 
any part of the U.S. operations, the U.S. branch, or the U.S. agency 
(including cash held for the foreign banking organization or U.S. 
intermediate holding company by a third-party custodian or trustee);
    (2) Debt securities (other than mortgage- or asset-backed 
securities) that are bank eligible investments;
    (3) Equity securities that are publicly traded (including 
convertible bonds); and
    (4) Does not include any debt or equity securities (including 
convertible bonds), issued by an affiliate of the U.S. intermediate 
holding company or by any part of the combined U.S. operations.
    Eligible credit derivative has the same meaning as in subpart G of 
the Board's Regulation Y (12 CFR part 225, appendix G).
    Eligible equity derivative means an equity-linked total return 
swap, provided that:
    (1) The derivative contract has been confirmed by the 
counterparties;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties; and
    (3) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract.
    Eligible guarantee has the same meaning as in subpart G of the 
Board's Regulation Y (12 CFR part 225, appendix G).
    Eligible protection provider means an entity (other than the 
foreign banking organization or an affiliate thereof) that is:
    (1) A sovereign entity;
    (2) The Bank for International Settlements, the International 
Monetary Fund, the European Central Bank, the European Commission, or a 
multilateral development bank;
    (3) A Federal Home Loan Bank;
    (4) The Federal Agricultural Mortgage Corporation;
    (5) A depository institution;
    (6) A bank holding company;
    (7) A savings and loan holding company (as defined in 12 U.S.C. 
1467a);
    (8) A securities broker or dealer registered with the SEC under the 
Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.);
    (9) An insurance company that is subject to the supervision by a 
State insurance regulator;
    (10) A foreign banking organization;
    (11) A non-U.S.-based securities firm or a non-U.S.-based insurance 
company that is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies; or
    (12) A qualifying central counterparty.
    Equity derivative includes an equity-linked swap, purchased equity-
linked option, forward equity-linked contract, and any other instrument 
linked to equities that gives rise to similar counterparty credit 
risks.
    Intraday credit exposure means credit exposure of the U.S. 
intermediate holding company or any part of the combined U.S. 
operations to a counterparty that the U.S. intermediate holding company 
or any part of the combined U.S. operations by its terms is to be 
repaid, sold, or terminated by the end of its business day in the 
United States.
    Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    Major counterparty means:
    (1) A bank holding company that has total consolidated assets of 
$500 billion or more, and all of its subsidiaries, collectively;
    (2) A nonbank financial company supervised by the Board, and all of 
its subsidiaries, collectively; and
    (3) A major foreign banking organization, and all of its 
subsidiaries, collectively.
    Major foreign banking organization means any foreign banking 
organization that has total consolidated assets of $500 billion or 
more, calculated pursuant to Sec.  252.241(a) of subpart.
    Major U.S. intermediate holding company means a U.S. intermediate 
holding company that has total consolidated assets of $500 billion or 
more, pursuant to Sec.  252.241(b) of this subpart.
    Qualifying central counterparty has the same meaning as in subpart 
G of the Board's Regulation Y (12 CFR part 225, appendix G).
    Qualifying master netting agreement means a legally enforceable 
written bilateral agreement that:
    (1) Creates a single legal obligation for all individual 
transactions covered by the agreement upon an event of default, 
including bankruptcy, insolvency, or similar proceeding of the 
counterparty;
    (2) Provides the right to accelerate, terminate, and close-out on a 
net basis all transactions under the agreement and to liquidate or set 
off collateral promptly upon an event of default, including upon event 
of bankruptcy, insolvency, or similar proceeding, of the counterparty, 
provided that, in any such case, any exercise of rights under the 
agreement will not be stayed or avoided under applicable law in the 
relevant jurisdiction; and
    (3) Does not contain a provision that permits a non-defaulting 
counterparty to make lower payments than it would make otherwise under 
the agreement, or no payment at all, to a defaulter or the estate of a 
defaulter, even if the defaulter is a net creditor under the agreement.
    Short sale means any sale of a security which the seller does not 
own or any sale which is consummated by the delivery of a security 
borrowed by, or for the account of, the seller.
    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank.
    Subsidiary of a specified company means a company that is directly 
or indirectly controlled by the specified company.


Sec.  252.241  Applicability.

    (a) Foreign banking organizations with total consolidated assets of 
$50

[[Page 76690]]

billion or more. (1) In general. A foreign banking organization with 
total consolidated assets of $50 billion or more is subject to the 
general credit exposure limit set forth in Sec.  252.242(a) of this 
subpart.
    (2) Major foreign banking organizations. A foreign banking 
organization with total consolidated assets of $500 billion or more 
also is subject to the more stringent credit exposure limit set forth 
in Sec.  252.242(b) of this subpart.
    (3) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (4) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.242(a) and, as 
applicable, Sec.  252.242(b) of this subpart unless and until total 
assets as reported on its FR Y-7Q are less than $50 billion or, as 
applicable, $500 billion for each of the four most recent consecutive 
calendar quarters.
    (5) Measurement date. For purposes of this paragraph, total assets 
are measured on the last day of the quarter used in calculation of the 
average.
    (b) U.S. intermediate holding companies. (1) In general. A U.S. 
intermediate holding company is subject to the general credit exposure 
limit set forth in Sec.  252.242(a) of this subpart.
    (2) Major U.S. intermediate holding companies. A U.S. intermediate 
holding company that has total consolidated assets of $500 billion or 
more also is subject to the more stringent credit exposure limit set 
forth in Sec.  252.242(c) of this subpart.
    (3) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total consolidated assets:
    (i) For the four most recent consecutive quarters as reported by 
the U.S. intermediate holding company on its FR Y-9C, or
    (ii) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on FR Y-9C, or
    (iii) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards.
    (4) Cessation of requirements. A major U.S. intermediate holding 
company will remain subject to the more stringent credit exposure limit 
set forth in Sec.  252.242(c) of this subpart unless and until total 
assets as reported on its FR Y-9C are less than $500 billion for each 
of the four most recent consecutive calendar quarters.
    (5) Measurement date. For purposes of this paragraph, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (c) Initial applicability. (1) Foreign banking organizations. A 
foreign banking organization that is subject to this subpart as of July 
1, 2014, under paragraph (a)(1) or (2) of this section, must comply 
with the requirements of Sec.  252.242(a) and (b) of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (2) U.S. intermediate holding companies. A U.S. intermediate 
holding company that is subject to the requirements of this subpart as 
of July 1, 2015, under paragraph (b)(1) or (2) of this section, must 
comply with the requirements Sec.  252.242(a) and (c) of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (d) Ongoing applicability. (1) Foreign banking organizations. A 
foreign banking organization that becomes subject to this subpart after 
July 1, 2014, under paragraph (a)(1) and, as applicable, (a)(2) of this 
section, must comply with the requirements of Sec.  252.242(a) and (b) 
of this subpart beginning 12 months after it becomes subject to those 
requirements, unless that time is accelerated or extended by the Board 
in writing.
    (2) U.S. intermediate holding companies. (i) A U.S. intermediate 
holding company that becomes subject to this subpart after July 1, 
2015, under paragraph (b)(1) of this section, must comply with the 
requirements of Sec.  252.242(a) of this subpart on the date it is 
required to be established, unless that time is accelerated or extended 
by the Board in writing.
    (ii) A U.S. intermediate holding company that becomes subject to 
this subpart after July 1, 2015, under paragraph (b)(2) of this 
section, must comply with the requirements of Sec.  252.242(c) of this 
subpart beginning 12 months after it becomes subject to those 
requirements, unless that time is accelerated or extended by the Board 
in writing.


Sec.  252.242  Credit exposure limit.

    (a) General limit on aggregate net credit exposure. (1) No U.S. 
intermediate holding company, together with its subsidiaries, may have 
an aggregate net credit exposure to any unaffiliated counterparty in 
excess of 25 percent of the consolidated capital stock and surplus of 
the U.S. intermediate holding company.
    (2) No foreign banking organization may permit its combined U.S. 
operations, together with any subsidiary of an entity within the 
combined U.S. operations, to have an aggregate net credit exposure to 
any unaffiliated counterparty in excess of 25 percent of the 
consolidated capital stock and surplus of the foreign banking 
organization.
    (b) Major foreign banking organization limits on aggregate net 
credit exposure. No major foreign banking organization may permit its 
combined U.S. operations, together with any subsidiary of an entity 
within the combined U.S. operations, to have an aggregate net credit 
exposure to an unaffiliated major counterparty in excess of [x] percent 
of the consolidated capital stock and surplus of the major foreign 
banking organization. For purposes of this section, [x] will be a more 
stringent limit that is aligned with the limit imposed on U.S. bank 
holding companies with $500 billion or more in total consolidated 
assets.
    (c) Major U.S. intermediate holding company limits on aggregate net 
credit exposure. No U.S. intermediate holding company, together with 
its subsidiaries, may have an aggregate net credit exposure to any 
unaffiliated major counterparty in excess of [x] percent of the 
consolidated capital stock and surplus of the U.S. intermediate holding 
company. For purposes of this section, [x] will be a more stringent 
limit that is aligned with the limit imposed on U.S. bank holding 
companies with $500 billion or more in total consolidated assets.
    (d) Rule of construction. For purposes of this subpart, a 
counterparty includes:
    (1) A person and members of the person's immediate family;
    (2) A company and all of its subsidiaries, collectively;
    (3) The United States and all of its agencies and instrumentalities 
(but not including any State or political subdivision of a State) 
collectively;

[[Page 76691]]

    (4) A State and all of its agencies, instrumentalities, and 
political subdivisions (including any municipalities) collectively; and
    (5) A foreign sovereign entity and all of its agencies, 
instrumentalities, and political subdivisions, collectively.


Sec.  252.243  Gross credit exposure.

    (a) Calculation of gross credit exposure for U.S. intermediate 
holding companies and foreign banking organizations. The amount of 
gross credit exposure of a U.S. intermediate holding company or, with 
respect to any part of its combined U.S. operations, a foreign banking 
organization (each a covered entity), to a counterparty is:
    (1) In the case of a loan by a covered entity to a counterparty or 
a lease in which a covered entity is the lessor and a counterparty is 
the lessee, an amount equal to the amount owed by the counterparty to 
the covered entity under the transaction.
    (2) In the case of a debt security held by a covered entity that is 
issued by the counterparty, an amount equal to:
    (i) For trading and available for sale securities, the greater of 
the amortized purchase price or market value of the security, and
    (ii) For securities held to maturity, the amortized purchase price.
    (3) In the case of an equity security held by a covered entity that 
is issued by a counterparty, an amount equal to the greater of the 
purchase price or market value of the security.
    (4) In the case of a repurchase agreement, an amount equal to:
    (i) The market value of securities transferred by a covered entity 
to the counterparty, plus
    (ii) The amount in paragraph (a)(4)(i) of this section multiplied 
by the collateral haircut in Table 2 applicable to the securities 
transferred by the covered entity to the counterparty.
    (5) In the case of a reverse repurchase agreement, an amount equal 
to the amount of cash transferred by the covered entity to the 
counterparty.
    (6) In the case of a securities borrowing transaction, an amount 
equal to the amount of cash collateral plus the market value of 
securities collateral transferred by the covered entity to the 
counterparty.
    (7) In the case of a securities lending transaction, an amount 
equal to:
    (i) The market value of securities lent by the covered entity to 
the counterparty, plus
    (ii) The amount in paragraph (a)(7)(i) of this section multiplied 
by the collateral haircut in Table 2 applicable to the securities lent 
by the covered entity to the counterparty.
    (8) In the case of a committed credit line extended by a covered 
entity to a counterparty, an amount equal to the face amount of the 
credit line.
    (9) In the case of a guarantee or letter of credit issued by the 
covered entity on behalf of a counterparty, an amount equal to the 
lesser of the face amount or the maximum potential loss to the covered 
entity on the transaction.
    (10) In the case of a derivative transaction between a covered 
entity and a counterparty that is not an eligible credit or equity 
derivative purchased from an eligible protection provider and is not 
subject to a qualifying master netting agreement, an amount equal to 
the sum of:
    (i) The current exposure of the derivatives contract equal to the 
greater of the mark-to-market value of the derivative contract or zero 
and
    (ii) The potential future exposure of the derivatives contract, 
calculated by multiplying the notional principal amount of the 
derivative contract by the appropriate conversion factor in Table 1.
    (11) In the case of a derivative transaction:
    (i) Between a U.S. intermediate holding company and a counterparty 
that is not an eligible credit or equity derivative purchased from an 
eligible protection provider and is subject to a qualifying master 
netting agreement, an amount equal to the exposure at default amount 
calculated in accordance with 12 CFR part 225, appendix G, Sec.  
32(c)(6) (provided that the rules governing the recognition of 
collateral set forth in this subpart shall apply); and
    (ii) Between an entity within the combined U.S. operations and a 
counterparty that is not an eligible credit or equity derivative 
purchased from an eligible protection provider and is subject to a 
qualifying master netting agreement between the part of the combined 
U.S. operations and the counterparty, an amount equal to either the 
exposure at default amount calculated in accordance with 12 CFR part 
225, appendix G, Sec.  32(c)(6) (provided that the rules governing the 
recognition of collateral set forth in this subpart shall apply); or 
the gross credit exposure amount calculated under Sec.  252.243(a)(10) 
of this subpart.
    (12) In the case of a credit or equity derivative transaction 
between a covered entity and a third party, where the covered entity is 
the protection provider and the reference asset is an obligation or 
equity security of the counterparty, an amount equal to the lesser of 
the face amount of the transaction or the maximum potential loss to the 
covered entity on the transaction.

                                           Table 1--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Credit (bank- Credit (non-
                                                                                      eligible        bank-                     Precious
               Remaining maturity \2\                 Interest rate     Foreign      investment     eligible       Equity        metals         Other
                                                                     exchange rate    reference     reference                    (except
                                                                                    obligor) \3\    obligor)                      gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less....................................          0.00           0.01           0.05          0.10          0.06          0.07          0.10
Greater than one year and less than or equal to five          0.005          0.05           0.05          0.10          0.08          0.07          0.12
 years..............................................
Greater than 5 years................................          0.015          0.075          0.05          0.10          0.10          0.08          0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
  with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A company must use the column labeled ``Credit (bank-eligible investment reference obligor)'' for a credit derivative whose reference obligor has an
  outstanding unsecured debt security that is a bank eligible investment. A company must use the column labeled ``Credit (non-bank-eligible investment
  reference obligor)'' for all other credit derivatives.


[[Page 76692]]

     (b) Attribution rule. A U.S. intermediate holding company or, with 
respect to its combined U.S. operations, a foreign banking 
organization, must treat any of its respective transactions with any 
person as a credit exposure to a counterparty to the extent the 
proceeds of the transaction are used for the benefit of, or transferred 
to, that counterparty.


Sec.  252.244  Net credit exposure.

    (a) In general. Net credit exposure is determined by adjusting 
gross credit exposure of a U.S. intermediate holding company, or with 
respect to its combined U.S. operations, a foreign banking 
organization, in accordance with the rules set forth in this section.
    (b) Calculation of initial net credit exposure for securities 
financing transactions. (1) Repurchase and reverse repurchase 
transactions. For repurchase and reverse repurchase transactions with a 
counterparty that are subject to a bilateral netting agreement, a U.S. 
intermediate holding company or, with respect to its combined U.S. 
operations, a foreign banking organization, may use the net credit 
exposure associated with the netting agreement.
    (2) Securities lending and borrowing transactions. For securities 
lending and borrowing transactions with a counterparty that are subject 
to a bilateral netting agreement with that counterparty, a U.S. 
intermediate holding company or, with respect to its combined U.S. 
operations, a foreign banking organization, may use the net credit 
exposure associated with the netting agreement.
    (c) Eligible collateral. In computing its net credit exposure to a 
counterparty for any credit transaction (including transactions 
described in paragraph (b) of this section), the U.S. intermediate 
holding company or, with respect to its combined U.S. operations, a 
foreign banking organization, may reduce its gross credit exposure (or 
as applicable, net credit exposure for transactions described in 
paragraph (a) of this section) on the transaction by the adjusted 
market value of any eligible collateral, provided that:
    (1) The U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization, includes the 
adjusted market value of the eligible collateral when calculating its 
gross credit exposure to the issuer of the collateral;
    (2) The collateral used to adjust the gross credit exposure of the 
U.S. intermediate holding company or the combined U.S. operations to a 
counterparty is not used to adjust the gross credit exposure of the 
U.S. intermediate holding company or combined U.S. operations to any 
other counterparty; and
    (3) In no event will the gross credit exposure of the U.S. 
intermediate holding company or the combined U.S. operations to the 
issuer of collateral be in excess of the gross credit exposure to the 
counterparty on the credit transaction.
    (d) Unused portion of certain extensions of credit. (1) In 
computing its net credit exposure to a counterparty for a credit line 
or revolving credit facility, a U.S. intermediate holding company or, 
with respect to its combined U.S. operations, a foreign banking 
organization, may reduce its gross credit exposure by the amount of the 
unused portion of the credit extension to the extent that the U.S. 
intermediate holding company or any part of the combined U.S. 
operations does not have any legal obligation to advance additional 
funds under the extension of credit, until the counterparty provides 
collateral of the type described in paragraph (d)(2) of this section in 
the amount, based on adjusted market value (calculated in accordance 
with Sec.  252.240 of this subpart) that is required with respect to 
that unused portion of the extension of credit.
    (2) To qualify for this reduction, the credit contract must specify 
that any used portion of the credit extension must be fully secured by 
collateral that is:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations directly and fully guaranteed as to principal and 
interest by, the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency, 
and any additional obligations issued by a U.S. government sponsored 
entity as determined by the Board; or
    (iv) Obligations of the foreign banking organization's home country 
sovereign entity.
    (e) Eligible guarantees. (1) In calculating net credit exposure to 
a counterparty for a credit transaction, a U.S. intermediate holding 
company or, with respect to its combined U.S. operations, a foreign 
banking organization must reduce the gross credit exposure to the 
counterparty by the amount of any eligible guarantees from an eligible 
protection provider that covers the transaction.
    (2) The U.S. intermediate holding company or, with respect to its 
combined U.S. operations, the foreign banking organization, must 
include the amount of the eligible guarantees when calculating its 
gross credit exposure to the eligible protection provider.
    (3) In no event will the gross credit exposure of the U.S. 
intermediate holding or the combined U.S. operations to an eligible 
protection provider with respect to an eligible guarantee be in excess 
of its gross credit exposure to the counterparty on the credit 
transaction prior to recognition of the eligible guarantee.
    (f) Eligible credit and equity derivatives. (1) In calculating net 
credit exposure to a counterparty for a credit transaction, a U.S. 
intermediate holding company or, with respect to its combined U.S. 
operations, a foreign banking organization, must reduce its gross 
credit exposure to the counterparty by the notional amount of any 
eligible credit or equity derivative from an eligible protection 
provider that references the counterparty, as applicable.
    (2) The U.S. intermediate holding company or with respect to its 
combined U.S. operations, the foreign banking organization, includes 
the face amount of the eligible credit or equity derivative when 
calculating its gross credit exposure to the eligible protection 
provider.
    (3) In no event will the gross credit exposure of the U.S. 
intermediate holding company or, with respect to its combined U.S. 
operations, the foreign banking organization, to an eligible protection 
provider with respect to an eligible credit or equity derivative be in 
excess of its gross credit exposure to the counterparty on the credit 
transaction prior to recognition of the eligible credit or equity 
derivative.
    (g) Other eligible hedges. In calculating net credit exposure to a 
counterparty for a credit transaction, a U.S. intermediate holding 
company or with respect to its combined U.S. operations, a foreign 
banking organization, may reduce its gross credit exposure to the 
counterparty by the face amount of a short sale of the counterparty's 
debt or equity security.

[[Page 76693]]



                     Table 2: Collateral Haircuts--
------------------------------------------------------------------------
                                   Residual          Haircut without
                                   maturity       currency mismatch \1\
------------------------------------------------------------------------
                           Sovereign Entities
------------------------------------------------------------------------
OECD Country Risk              <=1 year........                    0.005
 Classification \2\ 0-1.
                               >1 year, <=5                         0.02
                                years.
                               >5 years........                     0.04
OECD Country Risk              <=1 year........                     0.01
 Classification 2-3.
                               >1 year, <=5                         0.03
                                years.
                               >5 years........                     0.06
------------------------------------------------------------------------
    Corporate and Municipal Bonds That Are Bank Eligible Investments
------------------------------------------------------------------------
                               Residual                  Haircut without
                                maturity for           currency mismatch
                                debt securities.
------------------------------------------------------------------------
All..........................  <=1 year........                     0.02
All..........................  >1 year, <=5                         0.06
                                years.
All..........................  >5 years........                     0.12
------------------------------------------------------------------------
                        Other Eligible Collateral
------------------------------------------------------------------------
Main index \3\ equities (including convertible                      0.15
 bonds).
Other publicly traded equities (including                           0.25
 convertible bonds).
Mutual funds...................................          Highest haircut
                                                       applicable to any
                                                   security in which the
                                                        fund can invest.
Cash collateral held...........................                        0
------------------------------------------------------------------------
\1\ In cases where the currency denomination of the collateral differs
  from the currency denomination of the credit transaction, an
  additional 8 percent haircut will apply.
\2\ OECD Country Risk Classification means the country risk
  classification as defined in Article 25 of the OECD's February 2011
  Arrangement on Officially Supported Export Credits.
\3\ Main index means the Standard & Poor's 500 Index, the FTSE All-World
  Index, and any other index for which the U.S. intermediate holding
  company, or with respect to the combined U.S. operations, the foreign
  banking organization can demonstrate to the satisfaction of the
  Federal Reserve that the equities represented in the index have
  comparable liquidity, depth of market, and size of bid-ask spreads as
  equities in the Standard & Poor's 500 Index and FTSE All-World Index.

Sec.  252.245  Compliance.

    (a) Scope of compliance. A foreign banking organization must ensure 
the compliance of its U.S. intermediate holding company and combined 
U.S. operations with the requirements of this section on a daily basis 
at the end of each business day and submit to the Board on a monthly 
basis a report demonstrating its daily compliance.
    (b) Systems. A foreign banking organization and its U.S. 
intermediate holding company must establish and maintain procedures to 
monitor potential changes in relevant law and monitor the terms of its 
qualifying master netting agreements to support a well-founded position 
that the agreements appear to be legal, valid, binding, and enforceable 
under the laws of the relevant jurisdiction.
    (c) Noncompliance. If either the U.S. intermediate holding company 
or the foreign banking organization is not in compliance with this 
subpart, neither the U.S. intermediate holding company nor the combined 
U.S. operations may engage in any additional credit transactions with 
such a counterparty in contravention of this subpart, unless the Board 
determines that such credit transactions are necessary or appropriate 
to preserve the safety and soundness of the foreign banking 
organization or U.S. financial stability. In considering this 
determination, the Board will consider whether any of the following 
circumstances exist:
    (1) A decrease in the U.S. intermediate holding company's or 
foreign banking organization's capital stock and surplus;
    (2) The merger of the U.S. intermediate holding company or foreign 
banking organization with a bank holding company with total 
consolidated assets of $50 billion or more, a nonbank financial company 
supervised by the Board, a foreign banking organization, or U.S. 
intermediate holding company; or
    (3) A merger of two unaffiliated counterparties.
    (d) Other measures. The Board may impose supervisory oversight and 
reporting measures that it determines are appropriate to monitor 
compliance with this subpart.


Sec.  252.246  Exemptions.

    The following categories of credit transactions are exempt from the 
limits on credit exposure under this subpart:
    (a) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the United States 
and its agencies (other than as provided in paragraph (b) of this 
section);
    (b) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation, only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency;
    (c) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the foreign 
banking organization's home country sovereign entity;
    (d) Intraday credit exposure to a counterparty; and
    (e) Any transaction that the Board finds should be exempt in the 
public interest and consistent with the purpose of this section.
    8. Add subpart O to read as follows:

[[Page 76694]]

Subpart O--Risk Management for Covered Foreign Banking Organizations
Sec.
252.250 Applicability.
252.251 U.S. risk committee certification.
252.252 Additional U.S. risk committee requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or 
more.
252.253 U.S. chief risk officer of a foreign banking organization.
252.254 Board of directors of a U.S. intermediate holding company.

Subpart O--Risk Management for Covered Foreign Banking 
Organizations


Sec.  252.250  Applicability.

    (a) Foreign banking organizations with total consolidated assets of 
$10 billion or more. (1) Publicly traded foreign banking organizations 
with total consolidated assets of $10 billion or more. A foreign 
banking organization with publicly traded stock and total consolidated 
assets of $10 billion or more is subject to the requirements of Sec.  
252.251 of this subpart.
    (2) Foreign banking organizations with total consolidated assets of 
$50 billion or more. A foreign banking organization, regardless of 
whether its stock is publicly traded, with total consolidated assets of 
$50 billion or more is subject to the requirements of Sec.  252.251 of 
this subpart and, if applicable, Sec.  252.254 of this subpart.
    (3) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (4) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.251 of this subpart 
unless and until total assets as reported on its FR Y-7Q are less than 
$10 billion or $50 billion, as applicable, for each of the four most 
recent consecutive calendar quarters.
    (5) Measurement date. For purposes of this paragraph, total assets 
are measured on the last day of the quarter used in calculation of the 
average.
    (b) Foreign banking organizations with combined U.S. assets of $50 
billion or more. A foreign banking organization with combined U.S. 
assets of $50 billion or more is subject to the requirements of 
Sec. Sec.  252.251 through 252.254 of this subpart.
    (1) For purposes of this paragraph, combined U.S. assets is equal 
to the sum of:
    (i) The average of the total assets of each U.S. branch and U.S. 
agency of the foreign banking organization:
    (A) For the four most recent consecutive quarters as reported to 
the Board on the FFIEC 002, or
    (B) If the foreign banking organization has not filed the FFIEC 002 
for a U.S. branch or U.S. agency for each of the four most recent 
consecutive quarters, for the most recent quarter or consecutive 
quarters as reported on the FFIEC 002, or
    (C) If the foreign banking organization has not yet filed a FFIEC 
002 for a U.S. branch or U.S. agency, as determined under applicable 
accounting standards.
    (ii) If a U.S. intermediate holding company has been established, 
the average of the total consolidated assets of the U.S. intermediate 
holding company:
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the U.S. intermediate holding company's FR Y-9C, or
    (B) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on the FR Y-9C, 
or
    (C) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards; and
    (iii) If a U.S. intermediate holding company has not been 
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any 
section 2(h)(2) company):
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the FR Y-7Q; or
    (B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
    (C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
    (2) The company may reduce its combined U.S. assets calculated 
under this paragraph by the amount corresponding to balances and 
transactions between the U.S. subsidiary or U.S. branch or U.S. agency 
and any other top-tier U.S. subsidiary or U.S. branch to the extent 
such items are not already eliminated in consolidation.
    (3) A foreign banking organization will remain subject to the 
requirements of Sec. Sec.  252.251 through 252.254 of this subpart 
unless and until the sum of the total assets of each U.S. branch and 
U.S. agency as reported on the FFIEC 002 and the total consolidated 
assets of each U.S. subsidiary as reported on the FR Y-9C or FR Y-7Q 
are less than $50 billion for each of the four most recent consecutive 
calendar quarters.
    (4) For purposes of paragraphs (b)(1) and (3) of this section, 
total assets and total consolidated assets are measured on the last day 
of the quarter used in calculation of the average.
    (c) Initial applicability. A foreign banking organization that is 
subject to this subpart as of July 1, 2014, under paragraphs (a) or (b) 
of this section, must comply with the requirements of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (d) Ongoing applicability. A foreign banking organization that 
becomes subject to this subpart after July 1, 2014, under paragraphs 
(a) or (b) of this section, must comply with the requirements of this 
subpart beginning 12 months after it becomes subject to this subpart, 
unless that time is accelerated or extended by the Board in writing.


Sec.  252.251  U.S. risk committee certification.

    (a) U.S. risk committee certification. A foreign banking 
organization with publicly traded stock and total consolidated assets 
of $10 billion or more and a foreign banking organization, regardless 
of whether its stock is publicly traded, with total consolidated assets 
of $50 billion or more, must, on an annual basis, certify to the Board 
that it maintains a U.S. risk committee that:
    (1) Oversees the risk management practices of the combined U.S. 
operations of the company; and
    (2) Has at least one member with risk management expertise that is 
commensurate with the capital structure, risk profile, complexity, 
activities, and size of the combined U.S. operations.
    (b) Placement of U.S. risk committee. (1) Subject to paragraph 
(b)(2) of this section, a foreign banking organization may maintain its 
U.S. risk committee either:
    (i) As a committee of the global board of directors (or equivalent 
thereof), on a standalone basis or as part of its enterprise-wide risk 
committee (or equivalent thereof), or

[[Page 76695]]

    (ii) As a committee of the board of directors of its U.S. 
intermediate holding company.
    (2) If a foreign banking organization with combined U.S. assets of 
$50 billion or more conducts its operations in the United States solely 
through a U.S. intermediate holding company, the foreign banking 
organization must maintain its U.S. risk committee at its U.S. 
intermediate holding company.
    (c) Timing of certification. The certification required under 
paragraph (a) of this section must be filed on an annual basis with the 
Board concurrently with the Annual Report of Foreign Banking 
Organizations (FR Y-7).
    (d) Responsibilities of the foreign banking organization. The 
foreign banking organization must take appropriate measures to ensure 
that its combined U.S. operations implement the risk management 
framework overseen by the U.S. risk committee, and its combined U.S. 
operations provide sufficient information to the U.S. risk committee to 
enable the U.S. risk committee to carry out the responsibilities of 
this subpart.
    (e) Noncompliance with this section. If a foreign banking 
organization is unable to satisfy the requirements of this section, the 
Board may impose conditions or restrictions relating to the activities 
or business operations of the combined U.S. operations of the foreign 
banking organization. The Board will coordinate with any relevant U.S. 
licensing authority in the implementation of such conditions or 
restrictions.


Sec.  252.252  Additional U.S. risk committee requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or more.

    (a) Responsibilities of U.S. risk committee. (1) The U.S. risk 
committee of a foreign banking organization with combined U.S. assets 
of $50 billion or more must:
    (i) Review and approve the risk management practices of the 
combined U.S. operations; and
    (ii) Oversee the operation of an appropriate risk management 
framework for the combined U.S. operations that is commensurate with 
the capital structure, risk profile, complexity, activities, and size 
of the company's combined U.S. operations and consistent with the 
company's enterprise-wide risk management policies. The framework must 
include:
    (A) Policies and procedures relating to risk management governance, 
risk management practices, and risk control infrastructure for the 
combined U.S. operations of the company;
    (B) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including emerging risks, on a combined 
U.S. operations-basis;
    (C) Processes and systems for monitoring compliance with the 
policies and procedures relating to risk management governance, 
practices, and risk controls across the company's combined U.S. 
operations;
    (D) Processes designed to ensure effective and timely 
implementation of corrective actions to address risk management 
deficiencies;
    (E) Specification of authority and independence of management and 
employees to carry out risk management responsibilities; and
    (F) Integration of risk management and control objectives in 
management goals and compensation structure of the company's combined 
U.S. operations.
    (2) The U.S. risk committee must meet at least quarterly and 
otherwise as needed, and fully document and maintain records of its 
proceedings, including risk management decisions.
    (b) Independent member of U.S. risk committee. A U.S. risk 
committee must have at least one member who:
    (1) Is not an officer or employee of the foreign banking 
organization or its affiliates and has not been an officer or employee 
of the company or its affiliates during the previous three years; and
    (2) Is not a member of the immediate family, as defined in section 
225.41(a)(3) of the Board's Regulation Y (12 CFR 225.41(a)(3)), of a 
person who is, or has been within the last three years, an executive 
officer, as defined in section 215.2(e)(1) of the Board's Regulation O 
(12 CFR 215.2(e)(1)) of the company or its affiliates.
    (c) Noncompliance with this section. If a foreign banking 
organization is unable to satisfy the requirements of this section, the 
Board may impose conditions or restrictions relating to the activities 
or business operations of the combined U.S. operations of the foreign 
banking organization. The Board will coordinate with any relevant U.S. 
licensing authority in the implementation of such conditions or 
restrictions.


Sec.  252.253  U.S. chief risk officer of a foreign banking 
organization.

    (a) U.S. chief risk officer. A foreign banking organization with 
combined U.S. assets of $50 billion or more or its U.S. intermediate 
holding company must appoint a U.S. chief risk officer.
    (b) General requirements for U.S. chief risk officer. A U.S. chief 
risk officer must:
    (1) Have risk management expertise that is commensurate with the 
capital structure, risk profile, complexity, activities, and size of 
the foreign banking organization's combined U.S. operations;
    (2) Be employed by the U.S. branch, U.S. agency, U.S. intermediate 
holding company, or another U.S. subsidiary;
    (3) Receive appropriate compensation and other incentives to 
provide an objective assessment of the risks taken by the combined U.S. 
operations of the foreign banking organization; and
    (4) Unless the Board approves an alternative reporting structure 
based on circumstances specific to the foreign banking organization, 
report directly to:
    (i) The U.S. risk committee; and
    (ii) The global chief risk officer or equivalent management 
official (or officials) of the foreign banking organization who is 
responsible for overseeing, on an enterprise-wide basis, the 
implementation of and compliance with policies and procedures relating 
to risk management governance, practices, and risk controls of the 
foreign banking organization.
    (c) U.S. chief risk officer responsibilities. A U.S. chief risk 
officer is directly responsible for:
    (1) Measuring, aggregating, and monitoring risks undertaken by the 
combined U.S. operations;
    (2) Regularly providing information to the U.S. risk committee, 
global chief risk officer, and the Board regarding the nature of and 
changes to material risks undertaken by the company's combined U.S. 
operations, including risk management deficiencies and emerging risks, 
and how such risks relate to the global operations of the foreign 
banking organization;
    (3) Meeting regularly and as needed with the Board to assess 
compliance with the requirements of this section;
    (4) Implementation of and ongoing compliance with appropriate 
policies and procedures relating to risk management governance, 
practices, and risk controls of the company's combined U.S. operations 
and monitoring compliance with such policies and procedures;
    (5) Developing appropriate processes and systems for identifying 
and reporting risks and risk-management deficiencies, including 
emerging risks, on a combined U.S. operations basis;
    (6) Managing risk exposures and risk controls within the parameters 
of the risk control framework for the combined U.S. operations;
    (7) Monitoring and testing the risk controls of the combined U.S. 
operations; and

[[Page 76696]]

    (8) Ensuring that risk management deficiencies with respect to the 
combined U.S. operations are resolved in a timely manner.
    (d) Noncompliance with this section. If a foreign banking 
organization is unable to satisfy the requirements of this section, the 
Board may impose conditions or restrictions relating to the activities 
or business operations of the combined U.S. operations of the foreign 
banking organization. The Board will coordinate with any relevant U.S. 
licensing authority in the implementation of such conditions or 
restrictions.


Sec.  252.254  Board of directors of a U.S. intermediate holding 
company.

    A U.S. intermediate holding company of an foreign banking 
organization with total consolidated assets of $50 billion or more must 
be governed by a board of managers or directors that is elected or 
appointed by the owners and that operates in substantially the same 
manner as, and has substantially the same rights, powers, privileges, 
duties, and responsibilities as a board of directors of a company 
chartered as a corporation under the laws of the United States, any 
state, or the District of Columbia.
    9. Add subpart P to read as follows:
Subpart P--Stress Test Requirements for Covered Foreign Banking 
Organizations and Other Foreign Companies
Sec.
252.260 Definitions.
252.261 Applicability.
252.262 Stress test requirements for intermediate holding companies.
252.263 Stress test requirements for foreign banking organizations 
with combined U.S. assets of $50 billion or more.
252.264 Stress test requirements for foreign banking organizations 
and foreign savings and loan holding companies with total 
consolidated assets of more than $10 billion.

Subpart P--Stress Test Requirements for Covered Foreign Banking 
Organizations and Other Foreign Companies


Sec.  252.260  Definitions.

    For purposes of this subpart, the following definitions apply:
    Eligible assets means any asset of the U.S. branch or U.S. agency 
(reduced by the amount of any specifically allocated reserves 
established on the books in connection with such assets) held in the 
United States and recorded on the general ledger of a U.S. branch or 
U.S. agency of the foreign bank, subject to the following exclusions 
and rules of valuation.
    (1) The following assets do not qualify as eligible assets:
    (i) Equity securities;
    (ii) Any assets classified as loss, and accrued income on assets 
classified loss, doubtful, substandard or value impaired, at the 
preceding examination by a regulatory agency, outside accountant, or 
the bank's internal loan review staff;
    (iii) All amounts due from the home office, other offices and 
affiliates, including income accrued but uncollected on such amounts, 
except that the Board may determine to treat amounts due from other 
offices or affiliates located in the United States as eligible assets;
    (iv) The balance from time to time of any other asset or asset 
category disallowed at the preceding examination or by direction of the 
Board for any other reason until the underlying reasons for the 
disallowance have been removed;
    (v) Prepaid expenses and unamortized costs, furniture and fixtures 
and leasehold improvements; and
    (vi) Any other asset that the Board determines should not qualify 
as an eligible asset.
    (2) The following rules of valuation apply:
    (i) A marketable debt security is valued at its principal amount or 
market value, whichever is lower;
    (ii) A restructured foreign debt bond backed by United States 
Treasury obligations (commonly known as Brady Bonds), whether carried 
on the books of the U.S. branch or U.S. agency as a loan or a security, 
is allowed at its book value or market value, whichever is lower;
    (iii) An asset classified doubtful or substandard at the preceding 
examination by a regulatory agency, outside accountant, or the bank's 
internal loan review staff, is valued at 50 percent and 20 percent, 
respectively.
    (iv) With respect to an asset classified value impaired, the amount 
representing the allocated transfer risk reserve which would be 
required for such exposure at a domestically chartered bank is valued 
at 0; and the residual exposure is valued at 80 percent.
    (v) Precious metals are valued at 75 percent of the market value.
    (vi) Real estate located in the United States and carried on the 
accounting records as an asset are eligible at net book value or 
appraised value, whichever is less.
    Foreign savings and loan holding company means a savings and loan 
holding company as defined in section 10 of the Home Owners' Loan Act 
(12 U.S.C. 1467a(a)) that is incorporated or organized under the laws 
of a country other than the United States.
    Liabilities of a U.S. branch and agency network shall include all 
liabilities of the U.S. branch and agency network, including 
acceptances and any other liabilities (including contingent 
liabilities), but excluding the following:
    (1) Amounts due to and other liabilities to other offices, 
agencies, branches and affiliates of such foreign banking organization, 
including its head office, including unremitted profits; and
    (2) Reserves for possible loan losses and other contingencies.
    Pre-provision net revenue means revenue less expenses before 
adjusting for total loan loss provisions.
    Stress test cycle has the same meaning as in subpart G of this 
part.
    Total loan loss provisions means the amount needed to make reserves 
adequate to absorb estimated credit losses, based upon management's 
evaluation of the loans and leases that the company has the intent and 
ability to hold for the foreseeable future or until maturity or payoff, 
as determined under applicable accounting standards.


Sec.  252.261  Applicability.

    (a) Foreign banking organizations with combined U.S. assets of $50 
billion or more. A foreign banking organization with combined U.S. 
assets of $50 billion or more is subject to the requirements of Sec.  
252.263 of this subpart.
    (1) Combined U.S. assets. For purposes of this paragraph, combined 
U.S. assets is equal to the sum of:
    (i) The average of the total assets of each U.S. branch and U.S. 
agency of the foreign banking organization:
    (A) For the four most recent consecutive quarters as reported to 
the Board on the FFIEC 002, or
    (B) If the foreign banking organization has not filed the FFIEC 002 
for a U.S. branch or U.S. agency for each of the four most recent 
consecutive quarters, for the most recent quarter or consecutive 
quarters as reported on the FFIEC 002, or
    (C) If the foreign banking organization has not yet filed a FFIEC 
002 for a U.S. branch or U.S. agency, as determined under applicable 
accounting standards.
    (ii) If a U.S. intermediate holding company has been established, 
the average of the total consolidated assets of the U.S. intermediate 
holding company:
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the U.S. intermediate holding company's FR Y-9C, or
    (B) If the U.S. intermediate holding company has not filed the FR 
Y-9C for

[[Page 76697]]

each of the four most recent consecutive quarters, for the most recent 
quarter or consecutive quarters as reported on the FR Y-9C, or
    (C) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards; and
    (iii) If a U.S. intermediate holding company has not been 
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any 
section 2(h)(2) company):
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the Capital and Asset Report for Foreign Banking 
Organizations (FR Y-7Q); or
    (B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
    (C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
    (2) U.S. intercompany transactions. The company may reduce its 
combined U.S. assets calculated under this paragraph by the amount 
corresponding to balances and transactions between the U.S. subsidiary 
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or 
U.S. branch to the extent such items are not already eliminated in 
consolidation.
    (3) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.263 of this subpart 
unless and until the sum of the total assets of each U.S. branch and 
U.S. agency as reported on the FFIEC 002 and the total consolidated 
assets of each U.S. subsidiary as reported on the FR Y-9C or FR Y-7Q 
are less than $50 billion for each of the four most recent consecutive 
calendar quarters.
    (4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3) 
of this section, total assets and total consolidated assets are 
measured on the last day of the quarter used in calculation of the 
average.
    (b) Foreign banking organizations with total consolidated assets of 
more than $10 billion but with combined U.S. assets of less than $50 
billion. A foreign banking organization with total consolidated assets 
of more than $10 billion and with combined U.S. assets of less than $50 
billion is subject to the requirements of Sec.  252.264 of this 
subpart.
    (1) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its Capital and Asset Report for 
Foreign Banking Organizations (FR Y-7Q); or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (2) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec.  252.264 of this subpart 
unless and until total assets as reported on its FR Y-7Q are less than 
$10 billion for each of the four most recent consecutive calendar 
quarters.
    (3) Measurement date. For purposes of this paragraph, total assets 
are measured on the last day of the quarter used in calculation of the 
average.
    (4) Calculation of combined U.S. assets. For purposes of this 
paragraph, combined U.S. assets are determined in accordance with 
paragraph (a)(1) of this section.
    (c) Foreign savings and loan holding companies with total 
consolidated assets of more than $10 billion. A foreign savings and 
loan holding company with total consolidated assets of more than $10 
billion is subject to the requirements of Sec.  252.264 of this 
subpart.
    (1) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign savings and loan holding company on the applicable 
regulatory report, or
    (ii) If the foreign savings and loan holding company has not filed 
an applicable regulatory report for each of the four most recent 
consecutive quarters, for the most recent quarter or consecutive 
quarters as reported on the applicable regulatory report, or
    (iii) If the foreign savings and loan holding company has not yet 
filed a regulatory report, as determined under applicable accounting 
standards.
    (2) Cessation of requirements. A foreign savings and loan holding 
company will remain subject to the requirements Sec.  252.264 of this 
subpart unless and until total assets as reported on its applicable 
regulatory report are less than $10 billion for each of the four most 
recent consecutive calendar quarters.
    (3) Measurement date. For purposes of this paragraph, total assets 
are measured on the last day of the quarter used in calculation of the 
average.
    (d) U.S. intermediate holding companies. (1) U.S. intermediate 
holding companies with total consolidated assets of $50 billion or 
more. A U.S. intermediate holding company with total consolidated 
assets of $50 billion or more is subject to the requirements of Sec.  
252.262(a) of this subpart.
    (2) Other U.S. intermediate holding companies. A U.S. intermediate 
holding company that has total consolidated assets of more than $10 
billion but less than $50 billion, is subject to the requirements of 
Sec.  252.262(b) of this subpart.
    (3) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total consolidated assets:
    (i) For the four most recent consecutive quarters as reported by 
the U.S. intermediate holding company on its FR Y-9C, or
    (ii) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on FR Y-9C, or
    (iii) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards.
    (4) Cessation of requirements. A U.S. intermediate holding company 
will remain subject to:
    (i) The requirements of Sec.  252.262(a) of this subpart unless and 
until total consolidated assets as reported on its FR Y-9C are less 
than $50 billion for each of the four most recent consecutive calendar 
quarters; and
    (ii) The requirements of Sec.  252.262(b) of this subpart unless 
and until total consolidated assets as reported on its FR Y-9C are less 
than $10 billion for each of the four most recent consecutive calendar 
quarters or the company becomes subject to Sec.  252.262(a) of this 
subpart.
    (5) Measurement date. For purposes of this paragraph, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (e) Initial applicability. (1) Foreign banking organizations. A 
foreign banking organization or foreign savings and loan holding 
company that is subject to this subpart as of July 1, 2014, under 
paragraph (a), (b), or (c) of this

[[Page 76698]]

section must comply with the requirements of this subpart beginning on 
July 1, 2015, unless that time is extended by the Board in writing.
    (2) U.S. intermediate holding companies. A U.S. intermediate 
holding company that is subject to this subpart as of July 1, 2015, 
under paragraph (d) of this section, must comply with the requirements 
of Sec.  252.262 of this subpart beginning on July 1, 2015, unless that 
time is extended by the Board in writing.
    (f) Ongoing applicability. (1) Foreign banking organizations. A 
foreign banking organization or foreign savings and loan holding 
company that becomes subject to the requirements of this subpart after 
July 1, 2014, under paragraph (a), (b), or (c) of this section must 
comply with the requirements of this subpart beginning in the October 
of the calendar year after it becomes subject to the requirements of 
this subpart, unless that time is accelerated or extended by the Board 
in writing.
    (2) U.S. intermediate holding companies. A U.S. intermediate 
holding company that becomes subject to the requirements of this 
subpart after July 1, 2015, under paragraph (d) of this section must 
comply with the requirements of Sec.  252.262 of this subpart beginning 
in October of the calendar year after it becomes subject to those 
requirements, unless that time is accelerated or extended by the Board 
in writing.


Sec.  252.262  Stress test requirements for intermediate holding 
companies.

    (a) Large U.S. intermediate holding companies. A U.S. intermediate 
holding company with total consolidated assets $50 billion or more must 
comply with the requirements of subparts F and G of this part to the 
same extent and in the same manner as if it were bank holding company 
with total consolidated assets of $50 billion or more.
    (b) Other U.S. intermediate holding companies. A U.S. intermediate 
holding company with total consolidated assets of more than $10 billion 
but less than $50 billion must comply with the requirements of subpart 
H of this part to the same extent and in the same manner as if it were 
a bank holding company with total consolidated assets of more than $10 
billion but less than $50 billion, as determined under that subpart.


Sec.  252.263  Stress test requirements for foreign banking 
organizations with combined U.S. assets of $50 billion or more.

    (a) In general. Unless otherwise determined in writing by the 
Board, a foreign banking organization with combined U.S. assets of $50 
billion or more that has a U.S. branch and U.S. agency network is 
subject to the requirements of paragraph (c) of this section, unless:
    (1) The foreign banking organization is subject to a consolidated 
capital stress testing regime by its home country supervisor that 
includes:
    (i) An annual supervisory capital stress test conducted by the 
foreign banking organization's home country supervisor or an annual 
evaluation and review by the foreign banking organization's home 
country supervisor of an internal capital adequacy stress test 
conducted by the foreign banking organization; and
    (ii) Requirements for governance and controls of the stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the foreign banking organization.
    (2) The foreign banking organization conducts such stress tests and 
meets the minimum standards set by its home country supervisor with 
respect to the stress tests;
    (3) The foreign banking organization provides information required 
under paragraph (b) of this section, as applicable; and
    (4) The foreign banking organization demonstrates to the Board that 
it has adequate capital to withstand stressed conditions if, on a net 
basis, its U.S. branch and agency network provides funding to its 
foreign banking organization's non-U.S. offices and its non-U.S. 
affiliates, calculated as the average daily position over a stress test 
cycle for a given year.
    (b) Information requirements. (1) In general. A foreign banking 
organization with total consolidated assets of $50 billion or more must 
report summary information to the Board by January 5 of each calendar 
year, unless extended by the Board, about its stress testing activities 
and results, including the following quantitative and qualitative 
information:
    (i) A description of the types of risks included in the stress 
test;
    (ii) A description of the conditions or scenarios used in the 
stress test;
    (iii) A summary description of the methodologies used in the stress 
test;
    (iv) Estimates of:
    (A) Aggregate losses;
    (B) Pre-provision net revenue;
    (C) Total loan loss provisions;
    (D) Net income before taxes; and
    (E) Pro forma regulatory capital ratios required to be computed by 
the home country supervisor of the foreign banking organization and any 
other relevant capital ratios; and
    (v) An explanation of the most significant causes for the changes 
in regulatory capital ratios.
    (2) Additional information required for foreign banking 
organizations in a net due from position. If, on a net basis, its U.S. 
branch and agency network provides funding to its foreign banking 
organization's non-U.S. offices and its non-U.S. affiliates, calculated 
as the average daily position over a stress test cycle for a given 
year, the foreign banking must report the following information to the 
Board by the following January 5 of each calendar year, unless extended 
by the Board:
    (i) A detailed description of the methodologies used in the stress 
test, including those employed to estimate losses, revenues, total loan 
loss provisions, and changes in capital positions over the planning 
horizon;
    (ii) Estimates of realized losses or gains on available-for-sale 
and held-to-maturity securities, trading and counterparty losses, if 
applicable; loan losses (dollar amount and as a percentage of average 
portfolio balance) in the aggregate and by sub-portfolio; and
    (iii) Any additional information that the Board requests in order 
to evaluate the ability of the foreign banking organization to absorb 
losses in stressed conditions and thereby continue to support its 
combined U.S. operations.
    (c) Imposition of additional standards for capital stress tests. A 
foreign banking organization that does not meet each of the 
requirements in paragraph (a)(1) through (4) of this section is subject 
to the following requirements:
    (1) Asset maintenance requirement. The U.S. branch and agency 
network must maintain on a daily basis eligible assets in an amount not 
less than 108 percent of the preceding quarter's average value of the 
liabilities of the branch and agency network;
    (2) Stress test requirement. The foreign banking organization must 
separately or as part of an enterprise-wide stress test conduct an 
annual stress test of its U.S. subsidiaries not organized under a U.S. 
intermediate holding company (other than a section 2(h)(2) company) to 
determine whether those subsidiaries have the capital necessary to 
absorb losses as a result of adverse economic conditions. The foreign 
banking organization must report a summary of the results of the stress 
test to the Board on an annual basis that includes the information 
required under paragraph (b)(1) of this section or as otherwise 
specified by the Board.
    (3) Intragroup funding restrictions or liquidity requirements for 
U.S. operations. The U.S. branch and agency network of the foreign 
banking organization and any U.S. subsidiary of

[[Page 76699]]

the foreign banking organization that is not a subsidiary of a U.S. 
intermediate holding company may be required to maintain a liquidity 
buffer or be subject to intragroup funding restrictions as determined 
by the Board.
    (d) Notice and response. If the Board determines to impose one or 
more standards under paragraph (c)(3) of this section, the Board will 
notify the company no later than 30 days before it proposes to apply 
additional standard(s). The notification will include a description of 
the additional standard(s) and the basis for imposing the additional 
standard(s). Within 14 calendar days of receipt of a notification under 
this paragraph, the company may request in writing that the Board 
reconsider the requirement that the company comply with the additional 
standard(s), including an explanation as to why the reconsideration 
should be granted. The Board will respond in writing within 14 calendar 
days of receipt of the company's request.


Sec.  252.264  Stress test requirements for foreign banking 
organizations and foreign savings and loan holding companies with total 
consolidated assets of more than $10 billion.

    (a) In general. Unless otherwise determined in writing by the 
Board, a foreign banking organization with total consolidated assets of 
more than $10 billion that has combined U.S. assets of less than $50 
billion and a foreign savings and loan holding company with average 
total consolidated assets of more than $10 billion will be subject to 
the standards in paragraph (b) of this section, as applicable, unless:
    (1) The company is subject to a stress testing regime by its home 
country supervisor that includes:
    (i) An annual supervisory capital stress test conducted by the 
company's home country supervisor or an annual evaluation and review by 
the home country supervisor of an internal capital adequacy stress test 
conducted by the company; and
    (ii) Requirements for governance and controls of the stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the foreign banking organization; and
    (2) The company conducts such stress tests and meets the minimum 
standards set by its home country supervisor with respect to the stress 
tests.
    (b) Additional standards. A foreign banking organization or a 
foreign savings and loan holding company that does not meet each of the 
requirements in paragraph (a)(1) and (2) of this section is subject to 
the following requirements, as applicable:
    (1) Asset maintenance requirement. A U.S. branch and agency 
network, if any, of the foreign banking organization must maintain on a 
daily basis eligible assets in an amount not less than 105 percent of 
the preceding quarter's average value of the branch and agency 
network's liabilities.
    (2) Stress test requirement. A foreign banking organization or a 
foreign savings and loan holding company must separately, or as part of 
an enterprise-wide stress test, conduct an annual stress test of its 
U.S. subsidiaries not organized under a U.S. intermediate holding 
company (other than a section 2(h)(2) company) to determine whether 
those subsidiaries have the capital necessary to absorb losses as a 
result of adverse economic conditions. The foreign banking organization 
or foreign savings and loan holding company must report a summary of 
the results of the stress test to the Board on an annual basis that 
includes the information required under paragraph Sec.  252.263(b)(1) 
of this subpart.
    10. Add subpart Q to read as follows:
Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign Banking 
Organizations
Sec.
252.270 Definitions.
252.271 Debt-to-equity ratio limitation.

Subpart Q--Debt-to-Equity Limits for Certain Covered Foreign 
Banking Organization


Sec.  252.270  Definitions.

    Debt and equity have the same meaning as ``total liabilities'' and 
``total equity capital,'' respectively, as reported by a U.S. 
intermediate holding company or U.S. subsidiary on the FR Y-9C, or 
other reporting form prescribed by the Board.
    Debt to equity ratio means the ratio of total liabilities to total 
equity capital less goodwill.
    Eligible assets and liabilities of a U.S. branch and agency network 
have the same meaning as in subpart P of this part.


Sec.  252.271  Debt-to-equity ratio limitation.

    (a) Notice and maximum debt-to-equity ratio requirement. Beginning 
no later than 180 days after receiving written notice from the Council 
or from the Board on behalf of the Council that the Council has made a 
determination, pursuant to section 165(j) of the Dodd-Frank Act, that 
the foreign banking organization poses a grave threat to the financial 
stability of the United States and that the imposition of a debt to 
equity requirement is necessary to mitigate such risk--
    (1) The U.S. intermediate holding company and any U.S. subsidiary 
not organized under a U.S. intermediate holding company (other than a 
section 2(h)(2) company), must achieve and maintain a debt to equity 
ratio of no more than 15-to-1; and
    (2) The U.S. branch and agency network must achieve and maintain on 
a daily basis eligible assets in an amount not less than 108 percent of 
the preceding quarter's average value of the U.S. branch and agency 
network's liabilities.
    (b) Extension. The Board may, upon request by an foreign banking 
organization for which the Council has made a determination pursuant to 
section 165(j) of the Dodd-Frank Act, extend the time period for 
compliance established under paragraph (a) of this section for up to 
two additional periods of 90 days each, if the Board determines that 
such company has made good faith efforts to comply with the debt to 
equity ratio requirement and that each extension would be in the public 
interest. Requests for an extension must be received in writing by the 
Board not less than 30 days prior to the expiration of the existing 
time period for compliance and must provide information sufficient to 
demonstrate that the company has made good faith efforts to comply with 
the debt-to-equity ratio requirement and that each extension would be 
in the public interest.
    (c) Termination. The requirements in paragraph (a) of this section 
cease to apply to a foreign banking organization as of the date it 
receives notice from the Council of a determination that the company no 
longer poses a grave threat to the financial stability of the United 
States and that imposition of the requirements in paragraph (a) of this 
section are no longer necessary.
    11. Add Subpart R to part 252 to read as follows:
Subpart R--Early Remediation Framework for Covered Foreign Banking 
Organizations
Sec.
252.280 Definitions.
252.281 Applicability.
252.282 Remediation triggering events.
252.283 Notice and remedies.
252.284 Remediation actions for U.S. operations of foreign banking 
organizations with combined U.S. assets of $50 billion or more.
252.285 Remediation actions for foreign banking organizations with 
total consolidated assets of $50 billion or more and with combined 
U.S. assets of less than $50 billion.

[[Page 76700]]

Subpart R--Early Remediation Framework for Covered Foreign Banking 
Organizations


Sec.  252.280  Definitions.

    For purposes of this subpart, the following definitions apply:
    Capital distribution means a redemption or repurchase of any debt 
or equity capital instrument, a payment of common or preferred stock 
dividends, a payment that may be temporarily or permanently suspended 
by the issuer on any instrument that is eligible for inclusion in the 
numerator of any minimum regulatory capital ratio, and any similar 
transaction that the Board determines to be in substance a distribution 
of capital.
    Eligible assets has the same meaning as in subpart P of this part.
    Liabilities of U.S. branch and agency network has the same meaning 
as in subpart P of this part.
    Net income means the net income as reported on line 14 of schedule 
HI of the U.S. intermediate holding company's FR Y-9C.
    Planning horizon means the period of at least nine quarters, 
beginning on the first day of a stress test cycle under subpart F of 
this part (on October 1 of each calendar year) over which the stress 
testing projections extend.
    Risk-weighted assets means, for the combined U.S. operations:
    (1) Total risk-weighted assets of the U.S. intermediate holding 
company, as determined under the minimum risk-based capital 
requirements applicable to the U.S. intermediate holding company under 
subpart L of this part and as reported on the FR Y-9C, or
    (2) If the foreign banking organization has not established a U.S. 
intermediate holding company, total risk-weighted assets of any U.S. 
subsidiary of the foreign banking organization that is not a section 
2(h)(2) company, as determined in accordance with the minimum risk-
based capital requirements applicable to the foreign banking 
organization under subpart L of this part and as reported on the FR Y-7 
or as otherwise required by the Board; and
    (3) Total risk-weighted assets of a U.S. branch or U.S. agency, as 
determined under the minimum risk-based capital requirements applicable 
to the foreign banking organization under subpart L of this part and as 
reported on the FR Y-7 or as otherwise reported by the Board.
    Severely adverse scenario has the same meaning as in subpart G of 
this part.


Sec.  252.281  Applicability.

    (a) Foreign banking organizations with combined U.S. assets of $50 
billion or more. A foreign banking organization with combined U.S. 
assets of $50 billion or more is subject to the requirements of 
Sec. Sec.  252.282 through 252.284 of this subpart.
    (1) Combined U.S. assets. For purposes of this subpart, combined 
U.S. assets is equal to the sum of:
    (i) The average of the total assets of each U.S. branch and U.S. 
agency of the foreign banking organization:
    (A) For the four most recent consecutive quarters as reported to 
the Board on the FFIEC 002, or
    (B) If the foreign banking organization has not filed the FFIEC 002 
for a U.S. branch or U.S. agency for each of the four most recent 
consecutive quarters, for the most recent quarter or consecutive 
quarters as reported on the FFIEC 002, or
    (C) If the foreign banking organization has not yet filed a FFIEC 
002 for a U.S. branch or U.S. agency, as determined under applicable 
accounting standards.
    (ii) If a U.S. intermediate holding company has been established, 
the average of the total consolidated assets of the U.S. intermediate 
holding company:
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the U.S. intermediate holding company's FR Y-9C, or
    (B) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on the FR Y-9C, 
or
    (C) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards; and
    (iii) If a U.S. intermediate holding company has not been 
established, the average of the total consolidated assets of each top-
tier U.S. subsidiary of the foreign banking organization (excluding any 
section 2(h)(2) company):
    (A) For the four most recent consecutive quarters, as reported to 
the Board on the Capital and Asset Report for Foreign Banking 
Organizations (FR Y-7Q); or
    (B) If the foreign banking organization has not yet filed the FR Y-
7Q for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on the FR Y-7Q; or
    (C) If the foreign banking organization has not yet filed an FR Y-
7Q, as determined under applicable accounting standards.
    (2) U.S. intercompany transactions. The company may reduce its 
combined U.S. assets calculated under this paragraph by the amount 
corresponding to balances and transactions between the U.S. subsidiary 
or U.S. branch or U.S. agency and any other top-tier U.S. subsidiary or 
U.S. branch or U.S. agency to the extent such items are not already 
eliminated in consolidation.
    (3) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements Sec. Sec.  252.282 through 252.284 
of this subpart unless and until the sum of the total assets of each 
U.S. branch and U.S. agency as reported on the FFIEC 002 and the total 
consolidated assets of each U.S. subsidiary as reported on the FR Y-9C 
or FR Y-7Q are less than $50 billion for each of the four most recent 
consecutive calendar quarters.
    (4) Measurement date. For purposes of paragraphs (a)(1) and (a)(3) 
of this section, total assets and total consolidated assets are 
measured on the last day of the quarter used in calculation of the 
average.
    (b) Foreign banking organizations with combined U.S. assets of less 
than $50 billion. A foreign banking organization with total 
consolidated assets of $50 billion or more and with combined U.S. 
assets of less than $50 billion is subject to the requirements of 
Sec. Sec.  252.282, 252.283, and 252.285 of this subpart.
    (1) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on the average of the 
total assets:
    (i) For the four most recent consecutive quarters as reported by 
the foreign banking organization on its Capital and Asset Report for 
Foreign Banking Organizations (FR Y-7Q); or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, for the most 
recent quarter or consecutive quarters as reported on FR Y-7Q; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (2) Combined U.S. assets. For purposes of this paragraph, combined 
U.S. assets are determined in accordance with paragraph (a)(1) of this 
section.
    (3) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of Sec. Sec.  252.282, 252.283, and 
252.285 of this subpart unless and until total assets as reported on 
its FR Y-7Q are less than $50 billion for each of the four most recent 
consecutive calendar quarters.
    (4) Measurement date. For purposes of paragraph (b) of this 
section, total assets are measured on the last day of

[[Page 76701]]

the quarter used in calculation of the average.
    (c) Initial applicability. A foreign banking organization that is 
subject to this subpart as of July 1, 2014, under paragraph (a) or (b) 
of this section, must comply with the requirements of this subpart 
beginning on July 1, 2015, unless that time is extended by the Board in 
writing.
    (d) Ongoing applicability. A foreign banking organization that 
becomes subject to this subpart after July 1, 2014, under paragraphs 
(a) or (b) of this section, must comply with the requirements of this 
subpart beginning 12 months after it becomes subject to those 
requirements, unless that time is accelerated or extended by the Board 
in writing.


Sec.  252.282  Remediation triggering events.

    (a) Capital and leverage. (1) Level 1 remediation triggering 
events. (i) Foreign banking organizations. The combined U.S. operations 
of a foreign banking organization are subject to level 1 remediation 
(heightened supervisory review) if the Board determines that the 
foreign banking organization's capital position is not commensurate 
with the level and nature of the risks to which it is exposed in the 
United States, and
    (A) Any risk-based capital ratio of the foreign banking 
organization exceeds the minimum applicable risk-based capital 
requirements for the foreign banking organization under subpart L of 
this part by [200-250] basis points or more; and
    (B) Any leverage ratio of the foreign banking organization exceeds 
the minimum applicable leverage requirements for the foreign banking 
organization under subpart L of this part by [75-125] basis points or 
more.
    (ii) U.S. intermediate holding company. The combined U.S. 
operations of a foreign banking organization are subject to level 1 
remediation (heightened supervisory review) if the Board determines 
that the U.S. intermediate holding company of the foreign banking 
organization is not in compliance with rules regarding capital plans 
under section 252.212(b) or that the U.S. intermediate holding 
company's capital position is not commensurate with the level and 
nature of the risks to which it is exposed, and:
    (A) Any risk-based capital ratio of the U.S. intermediate holding 
company exceeds the minimum applicable risk-based capital requirements 
for the U.S. intermediate holding company under subpart L of this part 
by [200-250] basis points or more; and
    (B) Any leverage ratio of the U.S. intermediate holding company 
exceeds the minimum applicable leverage requirements for the U.S. 
intermediate holding company under subpart L of this part by [75-125] 
basis points or more.
    (2) Level 2 remediation triggering events. (i) Foreign banking 
organizations. The combined U.S. operations of a foreign banking 
organization are subject to level 2 remediation (initial remediation) 
if:
    (A) Any risk-based capital ratio of the foreign banking 
organization is less than [200-250] basis points above the minimum 
applicable risk-based capital requirements for the foreign banking 
organization under subpart L of this part; or
    (B) Any leverage ratio of the foreign banking organization is less 
than [75-125] basis points above the minimum applicable leverage 
requirements for the foreign banking organization under subpart L of 
this part.
    (ii) U.S. intermediate holding companies. The combined U.S. 
operations of a foreign banking organization are subject to level 2 
remediation (initial remediation) if:
    (A) Any risk-based capital ratio of the U.S. intermediate holding 
company is less than [200-250] basis points above the minimum 
applicable risk-based capital requirements for the U.S. intermediate 
holding company under subpart L of this part; or
    (B) Any leverage ratio of the U.S. intermediate holding company is 
less than [75-125] basis points above the minimum applicable leverage 
requirements for the U.S. intermediate holding company under subpart L 
of this part.
    (3) Level 3 remediation triggering events. (i) Foreign banking 
organizations. The combined U.S. operations of a foreign banking 
organization are subject to level 3 remediation (recovery) if:
    (A) For two complete consecutive quarters:
    (1) Any risk-based capital ratio of the foreign banking 
organization is less than [200-250] basis points above the minimum 
applicable risk-based capital requirements for the foreign banking 
organization under subpart L of this part;
    (2) Any leverage ratio of the foreign banking organization is less 
than [75-125] basis points above the minimum applicable leverage 
requirements for the foreign banking organization under subpart L of 
this part; or
    (B)(1) Any risk-based capital ratio of the foreign banking 
organization is below the applicable minimum risk-based capital 
requirements for the foreign banking organization under subpart L of 
this part; or
    (2) Any leverage ratio of the foreign banking organization is below 
the applicable minimum leverage requirements for the foreign banking 
organization under subpart L of this part.
    (ii) U.S. intermediate holding companies. The combined U.S. 
operations of a foreign banking organization are subject to level 3 
remediation (recovery) if:
    (A) For two complete consecutive quarters:
    (1) Any risk-based capital ratio of the U.S. intermediate holding 
company is less than [200-250] basis points above the applicable 
minimum risk-based capital requirements for the U.S. intermediate 
holding company under subpart L of this part;
    (2) Any leverage ratio of the U.S. intermediate holding company is 
less than [75-125] basis points above the minimum applicable leverage 
requirements for the U.S. intermediate holding company under subpart L 
of this part; or
    (B)(1) Any risk-based capital ratio of the U.S. intermediate 
holding company is below the applicable minimum risk-based capital 
requirements for the U.S. intermediate holding company under subpart L 
of this part; or
    (2) Any leverage ratio of the U.S. intermediate holding company is 
below the applicable minimum leverage requirements for the U.S. 
intermediate holding company under subpart L of this part.
    (4) Level 4 remediation triggering events. (i) Foreign banking 
organizations. The combined U.S. operations of a foreign banking 
organization are subject to level 4 remediation (resolution assessment) 
if:
    (A) Any risk-based capital ratio of the foreign banking 
organization is [100-250] basis points or more below the applicable 
minimum risk-based capital requirements for the foreign banking 
organization under subpart L of this part; or
    (B) Any leverage ratio of the foreign banking organization is [50-
150] basis points or more below the applicable minimum leverage 
requirements for the foreign banking organization under subpart L of 
this part.
    (ii) U.S. intermediate holding companies. The combined U.S. 
operations of a foreign banking organization are subject to level 4 
remediation (resolution assessment) if:
    (A) Any risk-based capital ratio of the U.S. intermediate holding 
company is [100-250] basis points or more below the applicable minimum 
risk-based

[[Page 76702]]

capital requirements for the U.S. intermediate holding company under 
subpart L of this part; or
    (B) Any leverage ratio of the U.S. intermediate holding company is 
[50-150] basis points or more below the applicable minimum leverage 
requirements for the U.S. intermediate holding company under subpart L 
of this part.
    (b) Stress Tests. (1) Level 1 remediation triggering events. The 
combined U.S. operations of a foreign banking organization are subject 
to level 1 remediation if the foreign banking organization or its U.S. 
intermediate holding company is not in compliance with rules regarding 
stress tests pursuant to subpart P of this part.
    (2) Level 2 remediation triggering events. The combined U.S. 
operations of a foreign banking organization are subject to level 2 
remediation if the results of a supervisory stress test of its U.S. 
intermediate holding company conducted under subpart P of this part 
reflect a tier 1 common ratio of less than 5.0 percent under the 
severely adverse scenario during any quarter of the planning horizon.
    (3) Level 3 remediation triggering events. The combined U.S. 
operations of a foreign banking organization are subject to level 3 
remediation if the results of a supervisory stress test of its U.S. 
intermediate holding company conducted under subpart P of this part 
reflect a tier 1 common ratio of less than 3.0 percent under the 
severely adverse scenario during any quarter of the planning horizon.
    (c) Risk management. (1) Level 1 remediation triggering events. The 
combined U.S. operations of a foreign banking organization are subject 
to level 1 remediation if the Board determines that any part of the 
combined U.S. operations has manifested signs of weakness in meeting 
the enhanced risk management and risk committee requirements under 
subpart O of this part.
    (2) Level 2 remediation triggering events. The combined U.S. 
operations of a foreign banking organization are subject to level 2 
remediation if the Board determines that any part of the combined U.S. 
operations has demonstrated multiple deficiencies in meeting the 
enhanced risk management or risk committee requirements under subpart O 
of this part.
    (3) Level 3 remediation triggering events. The combined U.S. 
operations of a foreign banking organization are subject to level 3 
remediation if the Board determines that any part of the combined U.S. 
operations is in substantial noncompliance with the enhanced risk 
management and risk committee requirements under subpart O of this 
part.
    (d) Liquidity. (1) Level 1 remediation triggering event. The 
combined U.S. operations of a foreign banking organization are subject 
to level 1 remediation if the Board determines that any part of the 
combined U.S. operations has manifested signs of weakness in meeting 
the enhanced liquidity risk management requirements under subpart M of 
this part.
    (2) Level 2 remediation triggering event. The combined U.S. 
operations of a foreign banking organization are subject to level 2 
remediation if the Board determines that any part of the combined U.S. 
operations has demonstrated multiple deficiencies in meeting the 
enhanced liquidity risk management requirements under subpart M of this 
part.
    (3) Level 3 remediation triggering events. The combined U.S. 
operations of a foreign banking organization are subject to level 3 
remediation if the Board determines that any part of the combined U.S. 
operations is in substantial noncompliance with the enhanced liquidity 
risk management requirements under subpart M of this part.
    (e) Market indicators. (1) Publication. The Board will publish for 
comment annually, or less frequently as appropriate, a list of market 
indicators based on publicly available market data, market indicator 
thresholds, and breach periods that will be used to indicate when the 
market views a firm to be in financial distress.
    (2) Period of application. Those market indicators will be 
referenced for purposes of applying this subparagraph during the 
twelve-month period beginning at the end of the first full calendar 
quarter after publication by the Board of the final market indicators, 
market indicator thresholds, and breach periods.
    (3) Level 1 remediation. The combined U.S. operations of a foreign 
banking organization will be subject to level 1 remediation upon 
receipt of a notice indicating that the Board has found that, with 
respect to the foreign banking organization or U.S. intermediate 
holding company, any market indicator has exceeded the market indicator 
threshold for the breach period.
    (f) Measurement and timing of remediation action events. (1) 
Capital. For the purposes of this subpart, the capital of a foreign 
banking organization or U.S. intermediate holding company is deemed to 
have been calculated as of the most recent of the following:
    (i) The date on which the FR Y-9C for the U.S. intermediate holding 
company or the FR Y-7 for the foreign banking organization is due;
    (ii) The as-of date of any calculations of capital by the foreign 
banking organization or U.S. intermediate holding company submitted to 
the Board, pursuant to a Board request to the foreign banking 
organization or U.S. intermediate holding company to calculate its 
ratios; or
    (iii) A final inspection report is delivered to the U.S. 
intermediate holding company that includes capital ratios calculated 
more recently than the most recent FR Y-9C submitted by the U.S. 
intermediate holding company to the Board.
    (2) Stress tests. For purposes of this paragraph, the ratios 
calculated under the supervisory stress test apply as of the date the 
Board reports the supervisory stress test results to the U.S. 
intermediate holding company pursuant to subpart P of this part.


Sec.  252.283  Notice and remedies.

    (a) Notice to foreign banking organization of remediation action 
event. If the Board determines that a remediation triggering event set 
forth in Sec.  252.282 of this subpart has occurred with respect to a 
foreign banking organization, the Board will notify the foreign banking 
organization of the event and the remediation actions under Sec.  
252.284 or Sec.  252.285 of this subpart applicable to the foreign 
banking organization as a result of the event. The applicable 
remediation actions will apply from the date such notice is issued.
    (b) Notification of change in status. A foreign banking 
organization must provide notice to the Board within 5 business days of 
the date it determines that one or more triggering events set forth in 
Sec.  252.282 of this subpart has occurred, identifying the nature of 
the triggering event or change in circumstances.
    (c) Termination of remediation action. A foreign banking 
organization subject to one or more remediation actions under this 
subpart will remain subject to the remediation action until the Board 
provides written notice to the foreign banking organization that its 
financial condition or risk management no longer warrants application 
of the requirement.


Sec.  252.284  Remediation actions for U.S. operations of foreign 
banking organizations with combined U.S. assets of $50 billion or more.

    (a) Level 1 remediation (heightened supervisory review). (1) Under 
level 1

[[Page 76703]]

remediation, the Board will conduct a targeted supervisory review of 
the combined U.S. operations of a foreign banking organization with 
combined U.S. assets of $50 billion or more, to evaluate whether the 
combined U.S. operations are experiencing financial distress or 
material risk management weaknesses, including with respect to 
exposures that the combined operations have to the foreign banking 
organization, such that further decline of the combined U.S. operations 
is probable.
    (2) If, upon completion of the review, the Board determines that 
the combined U.S. operations of a foreign banking organization are 
experiencing financial distress or material risk management weaknesses 
such that further decline of the combined U.S. operations is probable, 
the Board may determine to subject the foreign banking organization to 
initial remediation (level 2 remediation).
    (b) Level 2 remediation (initial remediation). (1) The U.S. 
intermediate holding company of a foreign banking organization with 
combined U.S. assets of $50 billion or more that is subject to level 2 
remediation may not make capital distributions during any calendar 
quarter in an amount that exceeds 50 percent of the average of the U.S. 
intermediate holding company's net income in the preceding two calendar 
quarters.
    (2) The U.S. branch and agency network of a foreign banking 
organization subject to level 2 remediation:
    (i) Must not provide funding on a net basis to its foreign banking 
organization's non-U.S. offices and its non-U.S. affiliates, calculated 
on a daily basis; and
    (ii) Must maintain in accounts in the United States highly liquid 
assets in an amount sufficient to cover the 30-day net stressed cash 
flow need calculated under Sec.  252.227 of this part; provided that 
this requirement would cease to apply were the foreign banking 
organization to become subject to level 3 remediation.
    (3) The combined U.S. operations of a foreign banking organization 
subject to level 2 remediation may not:
    (i) Permit its average daily combined U.S. assets during any 
calendar quarter to exceed its average daily combined U.S. assets 
during the preceding calendar quarter by more than 5 percent;
    (ii) Permit its average daily combined U.S. assets during any 
calendar year to exceed its average daily combined U.S. assets during 
the preceding calendar year by more than 5 percent;
    (iii) Permit its average daily risk-weighted assets during any 
calendar quarter to exceed its average daily risk-weighted assets 
during the preceding calendar quarter by more than 5 percent; or
    (iv) Permit its average daily risk-weighted assets during any 
calendar year to exceed its average daily risk-weighted assets during 
the preceding calendar year by more than 5 percent.
    (4) A foreign banking organization subject to level 2 remediation:
    (i) May not directly or indirectly acquire any controlling interest 
in any U.S. company (including an insured depository institution), 
establish or acquire any U.S. branch, U.S. agency, or representative 
office in the United States, or engage in any new line of business in 
the United States, without the prior approval of the Board; and
    (ii) Must enter into a non-public memorandum of understanding or 
other enforcement action acceptable to the Board to improve its 
financial and managerial condition in the United States.
    (5) The Board may, in its discretion, impose additional limitations 
or conditions on the conduct or activities of the combined U.S. 
operations of a foreign banking organization subject to level 2 
remediation that the Board finds to be appropriate and consistent with 
the purposes of Title I of the Dodd-Frank Act.
    (c) Level 3 remediation (recovery). (1) A foreign banking 
organization with combined U.S. assets of $50 billion or more that is 
subject to level 3 remediation and its U.S. intermediate holding 
company must enter into a written agreement or other formal enforcement 
action with the Board that specifies that the U.S. intermediate holding 
company must take appropriate actions to restore its capital to or 
above the applicable minimum risk-based and leverage requirements under 
subpart L of this part and take such other remedial actions as 
prescribed by the Board. If the company fails to satisfy the 
requirements of such a written agreement, the company may be required 
to divest assets identified by the Board as contributing to the 
financial decline or posing substantial risk of contributing to further 
financial decline of the company.
    (2) The U.S. intermediate holding company and any other U.S. 
subsidiary of the foreign banking organization may not make capital 
distributions.
    (3) The combined U.S. operations of a foreign banking organization 
subject to level 3 remediation may not:
    (i) Permit its average daily combined U.S. assets during any 
calendar quarter to exceed its average daily combined U.S. assets 
during the preceding calendar quarter;
    (ii) Permit its average daily combined U.S. assets during any 
calendar year to exceed its average daily combined U.S. assets during 
the preceding calendar year;
    (iii) Permit its average daily risk-weighted assets during any 
calendar quarter to exceed its average daily risk-weighted assets 
during the preceding calendar quarter; or
    (iv) Permit its average daily risk-weighted assets during any 
calendar year to exceed its average daily risk-weighted assets during 
the preceding calendar year.
    (4) A foreign banking organization subject to level 3 remediation 
may not directly or indirectly acquire any controlling interest in any 
U.S. company (including an insured depository institution), establish 
or acquire any U.S. branch, U.S. agency, office, or other place of 
business in the United States, or engage in any new line of business in 
the United States, without the prior approval of the Board.
    (5) A foreign banking organization subject to level 3 remediation 
and its U.S. intermediate holding company may not increase the 
compensation of, or pay any bonus to, an executive officer whose 
primary responsibility pertains to any part of the combined U.S. 
operations, or any member of the board of directors (or its equivalent) 
of the U.S. intermediate holding company.
    (6) The U.S. intermediate holding company of a foreign banking 
organization subject to level 3 remediation may also be required by the 
Board to:
    (i) Replace the U.S. intermediate holding company's board of 
directors;
    (ii) Dismiss from office any executive officer whose primary 
responsibility pertains to any part of the combined U.S. operations or 
member of the U.S. intermediate holding company's board of directors 
who held office for more than 180 days immediately prior to receipt of 
notice pursuant to Sec.  252.283 of this subpart that the foreign 
banking organization is subject to level 3 remediation; or
    (iii) Add qualified U.S. senior executive officers subject to 
approval by the Board.
    (7) The U.S. branch and agency network of a foreign banking 
organization subject to level 3 remediation must not provide funding to 
the foreign banking organization's non-U.S. offices and its non-U.S. 
affiliates, calculated on a daily basis, and must maintain on a daily 
basis eligible assets in an amount not less

[[Page 76704]]

than 108 percent of the preceding quarter's average value of the U.S. 
branch and agency network's liabilities.
    (8) The Board may, in its discretion, impose additional limitations 
or conditions on the conduct or activities of the combined U.S. 
operations of a foreign banking organization subject to level 3 
remediation that the Board finds to be appropriate and consistent with 
the purposes of Title I of the Dodd-Frank Act, including restrictions 
on transactions with affiliates.
    (d) Level 4 remediation (resolution assessment). The Board will 
consider whether the combined U.S. operations of the foreign banking 
organization warrant termination or resolution based on the financial 
decline of the combined U.S. operations, the factors contained in 
section 203 of the Dodd-Frank Act as applicable, or any other relevant 
factor. If such a determination is made, the Board will take actions 
that include recommending to the appropriate financial regulatory 
agencies that an entity within the U.S. branch and agency network be 
terminated or that a U.S. subsidiary be resolved.


Sec.  252.285  Remediation actions for foreign banking organizations 
with total consolidated assets of $50 billion or more and with combined 
U.S. assets of less than $50 billion.

    (a) Level 1 remediation (heightened supervisory review). (1) Under 
level 1 remediation, the Board will determine whether to conduct a 
targeted supervisory review of the combined U.S. operations of a 
foreign banking organization with total consolidated assets of $50 
billion or more and with combined U.S. assets of less than $50 billion 
that takes into account the condition of the foreign banking 
organization on a consolidated basis, as appropriate, to evaluate 
whether the combined U.S. operations are experiencing financial 
distress or material risk management weaknesses such that further 
decline of the combined U.S. operations is probable.
    (2) If, upon completion of the review, the Board determines that 
the combined U.S. operations are experiencing financial distress or 
material risk management weaknesses such that further decline of the 
combined U.S. operations is probable, the Board may subject the foreign 
banking organization to initial remediation (level 2 remediation) or 
other remedial actions as the Board determines appropriate.
    (b) Level 2 remediation (initial remediation). The Board will 
determine, in its discretion, whether to impose any of the standards 
set forth in Sec.  252.284(b)(1) through (5) of this subpart on any 
part of the combined U.S. operations of a foreign banking organization 
with total consolidated assets of $50 billion or more and with combined 
U.S. assets of less than $50 billion that is subject to level 2 
remediation.
    (c) Level 3 remediation (recovery). The Board will determine, in 
its discretion, whether to impose any of the standards set forth in 
Sec.  252.284(c)(1) through (8) of this subpart on any part of the U.S. 
operations of a foreign banking organization with total consolidated 
assets of $50 billion or more and with combined U.S. assets of less 
than $50 billion that is subject to level 3 remediation.
    (d) Level 4 remediation (resolution assessment). The Board will 
consider whether the combined U.S. operations of the foreign banking 
organization warrant termination or resolution based on the financial 
decline of the combined U.S. operations, the factors contained in 
section 203 of the Dodd-Frank Act as applicable, or any other relevant 
factor. If such a determination is made, the Board will take actions 
that include recommending to the appropriate financial regulatory 
agencies that an entity within the U.S. branch and agency network be 
terminated or that a U.S. subsidiary be resolved.

    By order of the Board of Governors of the Federal Reserve 
System, December 17, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-30734 Filed 12-27-12; 8:45 am]
BILLING CODE 6210-01-P