[Federal Register Volume 79, Number 59 (Thursday, March 27, 2014)]
[Rules and Regulations]
[Pages 17239-17338]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05699]



[[Page 17239]]

Vol. 79

Thursday,

No. 59

March 27, 2014

Part II





Federal Reserve System





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12 CFR Part 252





 Enhanced Prudential Standards for Bank Holding Companies and Foreign 
Banking Organizations; Final Rule

Federal Register / Vol. 79 , No. 59 / Thursday, March 27, 2014 / 
Rules and Regulations

[[Page 17240]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

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


Enhanced Prudential Standards for Bank Holding Companies and 
Foreign Banking Organizations

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

ACTION: Final rule; request for public comment on Paperwork Reduction 
Act burden estimates only.

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SUMMARY: The Board is adopting amendments to Regulation YY to implement 
certain of the enhanced prudential standards required to be established 
under section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act for bank holding companies and foreign banking 
organizations with total consolidated assets of $50 billion or more. 
The enhanced prudential standards include risk-based and leverage 
capital requirements, liquidity standards, requirements for overall 
risk management (including establishing a risk committee), stress-test 
requirements, and a 15-to-1 debt-to-equity limit for companies that the 
Financial Stability Oversight Council (Council) has determined pose a 
grave threat to financial stability. The amendments also establish 
risk-committee requirements and capital stress-testing requirements for 
certain bank holding companies and foreign banking organizations with 
total consolidated assets of $10 billion or more. The rule does not 
impose enhanced prudential standards on nonbank financial companies 
designated by the Council for supervision by the Board.

DATES: Effective date: June 1, 2014. Comments must be submitted on the 
Paperwork Reduction Act burden estimates only by May 27, 2014.

ADDRESSES: You may submit comments on the Paperwork Reduction Act 
burden estimates only, 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, Elizabeth MacDonald, Senior 
Supervisory Financial Analyst, (202) 475-6316, Jordan Bleicher, 
Supervisory Financial Analyst, (202) 973-6123, Division of Banking 
Supervision and Regulation; or Laurie Schaffer, Associate General 
Counsel, (202) 452-2277, or Christine E. Graham, Counsel, (202) 452-
3005, Legal Division.
    Risk-Based and Leverage Capital Requirements: Anna Lee Hewko, 
Deputy Associate 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: David Emmel, Manager, (202) 603-9017, 
Division of Banking Supervision and Regulation; or April C. Snyder, 
Senior Counsel, (202) 452-3099, or Dafina Stewart, Senior Attorney, 
(202) 452-3876, Legal Division.
    Risk Management and Risk Committee Requirements: David E. Palmer, 
Senior Supervisory Financial Analyst, (202) 452-2904, Division of 
Banking Supervision and Regulation; or Jeremy C. Kress, Attorney, (202) 
872-7589, Legal Division.
    Stress-Test Requirements: Tim Clark, Senior Associate Director, 
(202) 452-5264, Lisa Ryu, Deputy Associate Director, (202) 263-4833, 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, Counsel, (202) 452-3005, Legal 
Division.
    Debt-to-Equity Limits: 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 W. Alexander, Senior Attorney, (202) 452-2877, Legal Division.
    U.S. Intermediate Holding Company Requirement for Foreign Banking 
Organizations: 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, Christine E. Graham, 
Counsel, (202) 452-3005, or David W. Alexander, Senior Attorney, (202) 
452-2877, Legal Division.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. The Dodd-Frank Act Mandate
    B. Background of the Proposals and Overview of the Final Rule
II. Final Rule and Major Changes From the Proposals
    A. Description of the Final Rule
    B. Major Changes From the Proposals
    1. Threshold for Forming a U.S. Intermediate Holding Company
    2. Implementation Timing for Foreign Banking Organizations
    3. Nonbank Financial Companies Supervised by the Board
    4. Other Changes
    C. Application to Savings and Loan Holding Companies Engaged in 
Substantial Banking Activities
III. Enhanced Prudential Standards for Bank Holding Companies
    A. Enhanced Risk-Based and Leverage Capital Requirements, 
Capital Planning and Stress Testing
    1. Capital Planning and Stress Testing
    2. Risk-Based Capital and Leverage Requirements
    B. Risk Management and Risk Committee Requirements
    1. Responsibilities of the Risk Committee
    2. Risk Committee Requirements
    3. Risk Committee for Bank Holding Companies With Total 
Consolidated Assets of More Than $10 Billion and Less Than $50 
Billion
    3. Additional Enhanced Risk-Management Standards for Bank 
Holding Companies With Total Consolidated Assets of $50 Billion or 
More
    C. Liquidity Requirements for Bank Holding Companies
    1. General
    2. Framework for Managing Liquidity Risk
    3. Independent Review
    4. Cash-flow Projections
    5. Contingency Funding Plan
    6. Liquidity Risk Limits

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    7. Collateral, Legal Entity, and Intraday Liquidity Risk 
Monitoring
    8. Liquidity Stress Testing
    9. Liquidity Buffer
    10. Short-Term Debt Limits
    D. Debt-to-Equity Limits for Bank Holding Companies
IV. Enhanced Prudential Standards for Foreign Banking Organizations
    A. Background
    1. Considerations in Developing the Proposal
    2. The Financial Stability Mandate of the Dodd-Frank Act
    3. Summary of the Proposal
    4. Targeted Adjustments to Foreign Bank Regulation
    B. U.S. Intermediate Holding Company Requirement
    1. Adopting the U.S. Intermediate Holding Company Requirement as 
an Additional Prudential Standard
    2. Restructuring Costs
    3. Scope of the Application of the U.S. Intermediate Holding 
Company Requirement
    4. Method for Calculating the Asset Threshold
    5. Formation of the U.S. Intermediate Holding Company
    6. Virtual U.S. Intermediate Holding Company
    7. Application of the Enhanced Prudential Standards to a Bank 
Holding Company That Is a Subsidiary of a Foreign Banking 
Organization
    C. Capital Requirements
    1. Risk-Based and Leverage Capital Requirements Applicable to 
U.S. Intermediate Holding Companies
    2. Capital Planning Requirements
    3. Parent Capital Requirements
    D. Risk Management Requirements for Foreign Banking 
Organizations
    1. Risk Committee Requirements for Foreign Banking Organizations 
With $10 Billion or More in Total Consolidated Assets But Less Than 
$50 Billion in Combined U.S. Assets
    2. Risk-Management and Risk Committee Requirements for Foreign 
Banking Organizations With Combined U.S. Assets of $50 Billion or 
More
    E. Liquidity Requirements for Foreign Banking Organizations
    1. General Comments
    2. Framework for Managing Liquidity Risk
    3. Independent Review
    4. Cash-Flow Projections
    5. Contingency Funding Plan
    6. Liquidity Risk Limits
    7. Collateral, Legal Entity and Intraday Liquidity Risk 
Monitoring
    8. Liquidity Stress Testing
    9. Liquidity Buffer
    10. 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
    11. Short-Term Debt Limits
    F. Stress-Test Requirements for Foreign Banking Organizations
    1. U.S. Intermediate Holding Companies
    2. Stress-Test Requirements for Branches and Agencies of Foreign 
Banks With Combined U.S. Assets of $50 Billion or More
    3. Information Requirements for Foreign Banking Organizations 
With Combined U.S. Assets of $50 Billion or More
    4. Additional Information Required From a Foreign Banking 
Organization With U.S. Branches and Agencies That Are in an 
Aggregate Net Due From Position
    5. Supplemental Requirements for Foreign Banking Organizations 
With Combined U.S. Assets of $50 Billion or More That Do Not Comply 
With Stress-Testing Requirements
    6. Stress-Test Requirements for Foreign Banking Organizations 
With Total Consolidated Assets of More Than $50 Billion But Combined 
U.S. Assets of Less Than $50 Billion
    7. Stress-Test Requirements for Other Foreign Banking 
Organizations and Foreign Savings and Loan Holding Companies With 
Total Consolidated Assets of More Than $10 Billion
    G. Debt-to-Equity Limits for Foreign Banking Organizations
V. Administrative Law Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Plain Language

I. Introduction

A. The Dodd-Frank Act Mandate

    Section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act or the Act) \1\ directs the Board of 
Governors of the Federal Reserve System (Board) to establish prudential 
standards for bank holding companies with total consolidated assets of 
$50 billion or more and for nonbank financial companies that the 
Financial Stability Oversight Council (Council) has determined will be 
supervised by the Board (nonbank financial companies supervised by the 
Board) in order to prevent or mitigate risks to U.S. financial 
stability that could arise from the material financial distress or 
failure, or ongoing activities of, large, interconnected financial 
institutions. The Dodd-Frank Act requires the enhanced prudential 
standards established by the Board under section 165 of the Act to be 
more stringent than those standards applicable to other bank holding 
companies and to nonbank financial companies that do not present 
similar risks to U.S. financial stability.\2\ The standards must also 
increase in stringency based on several factors, including the size and 
risk characteristics of a company subject to the rule, and the Board 
must take into account the difference among bank holding companies and 
nonbank financial companies based on the same factors.\3\ Generally, 
the Board has authority under section 165 of the Act to tailor the 
application of the standards, including differentiating among companies 
subject to section 165 on an individual basis or by category. In 
applying section 165 to foreign banking organizations, the Dodd-Frank 
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.\4\
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    \1\ Public Law 111-203, 124 Stat 1376 (2010).
    \2\ See 12 U.S.C. 5365(a)(1)(A).
    \3\ See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B) of 
the Dodd-Frank Act, the enhanced prudential standards must increase 
in stringency based on the considerations listed in section 
165(b)(3).
    \4\ 12 U.S.C. 5365(a)(2).
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    The prudential standards must include enhanced risk-based and 
leverage capital requirements, liquidity requirements, 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 the financial stability of the United States. Section 
165 also permits the Board to establish other prudential standards in 
addition to the mandatory standards, including three enumerated 
standards--a contingent capital requirement, enhanced public 
disclosures, and short-term debt limits--and any ``other prudential 
standards'' that the Board determines are ``appropriate.''

B. Background of the Proposals and Overview of the Final Rule

    The Board invited comment on two separate proposals to implement 
the enhanced prudential standards included in this final rule. On 
January 5, 2012, the Board invited comment on proposed rules to 
implement the provisions of sections 165 and 166 of the Dodd-Frank Act 
for bank holding companies with total consolidated assets of $50 
billion or more and for nonbank financial firms supervised by the Board 
(domestic proposal).\5\ On December 28, 2012, the Board invited 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 (foreign proposal,\6\ and, 
together

[[Page 17242]]

with the domestic proposal, the proposals). Consistent with the Dodd-
Frank Act mandate, and in furtherance of financial stability, the 
proposals contained similar enhanced risk-based and leverage capital 
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 the financial stability of the United States. The 
foreign proposal also included a U.S. intermediate holding company 
requirement for a foreign banking organization with total consolidated 
assets of $50 billion or more and combined U.S. assets, other than 
those held by a U.S. branch or agency or U.S. subsidiary held under 
section 2(h)(2) of the Bank Holding Company Act \7\ (U.S. non-branch 
assets), of $10 billion or more.
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    \5\ 77 FR 594 (January 5, 2012).
    \6\ 77 FR 76628 (December 28, 2012).
    \7\ See 12 U.S.C. 1841(h)(2).
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    The Board received over 100 public comments on the domestic 
proposal, and over 60 public comments on the foreign proposal, from 
U.S. and foreign firms, public officials (including members of 
Congress), public interest groups, private individuals, and other 
interested parties. While many commenters expressed support for the 
broad goals of the proposed rules, some commenters criticized specific 
aspects of the proposals. As discussed in this preamble, the final rule 
makes adjustments to the proposed rules that respond to commenters' 
concerns. Major changes from the proposals are discussed below in 
section II.B of this preamble.

II. Final Rule and Major Changes From the Proposals

A. Description of the Final Rule

    The final rule implements elements of both the domestic and foreign 
proposals. For a bank holding company with total consolidated assets of 
$50 billion or more, it incorporates as an enhanced prudential standard 
the previously-issued capital planning and stress testing requirements 
and imposes enhanced liquidity requirements, enhanced risk-management 
requirements, and the debt-to-equity limit for those companies that the 
Council has determined pose a grave threat to the financial stability 
of the United States. It also establishes risk-committee requirements 
for a publicly traded bank holding company with total consolidated 
assets of $10 billion or more. For a foreign banking organization with 
total consolidated assets of $50 billion or more, the final rule 
implements enhanced risk-based and leverage capital requirements, 
liquidity requirements, risk-management requirements, stress testing 
requirements, and the debt-to-equity limit for those companies that the 
Council has determined pose a grave threat to the financial stability 
of the United States. In addition, it requires foreign banking 
organizations with U.S. non-branch assets, as defined in the final 
rule, of $50 billion or more to form a U.S. intermediate holding 
company and imposes enhanced risk-based and leverage capital 
requirements, liquidity requirements, risk-management requirements, and 
stress-testing requirements on the U.S. intermediate holding company. 
The final rule also establishes a risk-committee requirement for 
publicly traded foreign banking organizations with total consolidated 
assets of $10 billion or more and implements stress-testing 
requirements for foreign banking organizations and foreign savings and 
loan holding companies with total consolidated assets of more than $10 
billion.
    The prudential standards established for bank holding companies and 
foreign banking organizations with total consolidated assets of $50 
billion or more and nonbank financial companies supervised by the Board 
(covered companies) must be more stringent than the standards and 
requirements applicable to bank holding companies and nonbank financial 
companies that do not present similar risks to the financial stability 
of the United States.\8\
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    \8\ See 12 U.S.C. 5365(a)(1)(A).
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    The Board is developing an integrated set of prudential standards 
for covered companies through a series of rulemakings, including the 
resolution plan rule, the capital plan rule, the stress test rules, and 
this final rule. As discussed further in this preamble, the Board will 
continue to develop these standards through future rules and orders. 
The integrated set of standards will result in a more stringent 
regulatory regime to mitigate risks to U.S. financial stability, and 
include measures that increase the resiliency of covered companies and 
reduce the impact on U.S. financial stability were these firms to fail. 
These rules are applicable only to covered companies, and do not apply 
to smaller firms that present less risk to U.S. financial stability.
    As explained more fully throughout the preamble, the final rules 
result in enhanced supervision and regulation of covered companies that 
is more stringent based on the systemic footprint and risk 
characteristics of the company than the provisions applicable to firms 
that are not covered companies and that take into account differences 
among covered companies based on these factors.\9\
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    \9\ See 12 U.S.C. 5365(b)(3).
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    For instance, bank holding companies and U.S. intermediate holding 
companies of foreign banking organizations are subject to the capital 
plan rule, which requires a company to project its regulatory capital 
ratios under stressed conditions and demonstrate the ability to meet 
the Board's minimum regulatory capital requirements. These minimum 
regulatory capital requirements include leverage and risk-based capital 
requirements. By requiring firms to demonstrate the ability to meet 
these capital requirements under stressed conditions, the capital plan 
rule subjects a company to more stringent standards as the leverage, 
off-balance sheet exposures, and interconnectedness of a covered 
company increase. For example, with respect to leverage, the Board's 
minimum leverage capital requirements require a U.S. company subject to 
the requirements to hold capital based on its total consolidated 
assets.\10\ The more on-balance sheet assets that a company holds, the 
more capital the company must hold to comply with the minimum leverage 
capital requirement. Companies that have $250 billion or more in total 
consolidated assets or $10 billion or more in total foreign exposure 
based on year-end financial reports will become subject to a 
supplementary leverage ratio, which requires the companies to hold 
leverage capital for both their on- and off-balance sheet assets.\11\ 
For a company subject to the supplementary leverage ratio, the more on- 
and off-balance sheet assets that the company holds, the more capital 
the company must hold to comply with the minimum leverage capital 
requirement.\12\ The Board's risk-based capital rules require a company 
subject to the rules to deduct an investment in an unconsolidated 
financial institution above certain

[[Page 17243]]

thresholds.\13\ The more investments in such unconsolidated financial 
institutions that a company has above these thresholds, the more 
deductions that a company must take from its regulatory capital.
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    \10\ See 12 CFR 217.10(a)(4); 12 CFR part 208, Appendix B; 12 
CFR part 225, Appendix D.
    \11\ 12 CFR 217.10(a)(5).
    \12\ More generally, the Board's capital rules require all 
companies subject to the rules to hold risk-based capital based on 
their off-balance sheet exposures. The more off-balance sheet 
exposures that a company holds, the more risk-based capital the 
company must hold. See 12 CFR 217.33; 12 CFR part 217, subpart E; 12 
CFR part 208, Appendix A, section III.D.; 12 CFR part 225, Appendix 
A, section III.D.
    \13\ 12 CFR 217.22(c)(4)-(5).
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    Covered bank holding companies and foreign banking organizations 
are subject to the enhanced liquidity standards included in this final 
rule, which will result in a more stringent set of standards as the 
liquidity risk of a company's liabilities increases. For instance, the 
enhanced liquidity standards require covered bank holding companies and 
foreign banking organizations to maintain a liquidity buffer sufficient 
to cover net cash outflows based on a 30-day stress test. In general, 
the more a company relies on short-term funding, the larger the 
required buffer will be.
    The set of enhanced prudential standards for bank holding companies 
and foreign banking organizations increases in stringency based on the 
nature, scope, size, scale, concentration, interconnectedness, and mix 
of the activities of the company. For example, the resolution plan rule 
applies a tailored resolution plan regime for smaller, less complex 
bank holding companies and foreign banking organizations that is 
materially less stringent than what is required of larger 
organizations. Similarly, the Board has tailored the application of and 
its supervisory expectations regarding stress testing and capital 
planning based on the size and complexity of covered companies. For 
instance, the Board applies the global market shock to the trading and 
private equity positions of the largest bank holding companies subject 
to the market risk requirements, and requires bank holding companies 
with substantial trading and custodial operations to include a 
counterparty default scenario component in their stress tests.\14\ In 
addition, the capital, liquidity, risk-management, and stress testing 
requirements applicable to foreign banking organizations with combined 
U.S. assets of less than $50 billion are substantially reduced as 
compared to the requirements applicable to foreign banking 
organizations with a larger U.S. presence.
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    \14\ See, e.g., Comprehensive Capital Analysis and Review 2014: 
Summary Instructions and Guidance (November 1, 2013), available at: 
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131101a2.pdf.
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    The Dodd-Frank Act requires the Board to consider the importance of 
the company as a source of credit for households, businesses, and state 
governments, source of liquidity for the U.S. financial system, and 
source of credit for low-income, minority, or underserved communities. 
As a whole, the standards increase the resiliency of bank holding 
companies and foreign banking organizations, which enables them to 
continue serving as financial intermediaries for the U.S. financial 
system and sources of credit to households, businesses, state 
governments, and low-income, minority, or underserved communities 
during times of stress.
    The enhanced prudential standards for bank holding companies and 
foreign banking organizations take into account the extent to which the 
company is subject to existing regulatory scrutiny. As explained more 
below, for bank holding companies, the final rule applies enhanced 
prudential standards at the consolidated bank holding company, and does 
not directly apply any standards to functionally regulated 
subsidiaries. In recognition of the home-country supervisory regime 
applicable to foreign banking organizations, the final rule relies on 
the home country capital and stress testing regimes applicable to the 
foreign banking organization. However, to the extent that a foreign 
banking organization's home country capital or stress test standards do 
not meet the standards set forth in the final rule, the Board will 
impose requirements, conditions or restrictions relating to the 
activities or business operations of the combined U.S. operations of 
the foreign banking organization.
    The Board has designed the final rule to reduce the potential that 
small changes in the characteristics of the company would result in 
sharp, discontinuous changes in the standards. The enhanced prudential 
standards regime generally mitigates the potential for sharp, 
discontinuous changes by generally measuring the threshold for 
applicability of the enhanced prudential standards over a four-quarter 
period and providing for transition periods prior to application of the 
standards.
    The final rule also takes account of differences among covered 
companies based on whether a company owns an insured depository 
institution and adapts the required standards as appropriate in light 
of any predominant line of business of such a company. Bank holding 
companies, by definition, control an insured depository institution, 
and engage in banking as a predominant line of business. Foreign 
banking organizations have a banking presence in the United States 
through either control of an insured depository institution or through 
U.S. branches or agencies. Foreign banking organizations that have 
branches and agencies are treated as if they were bank holding 
companies for purposes of the Bank Holding Company Act and the Dodd-
Frank Act. By statute, both uninsured and insured U.S. branches and 
agencies of foreign banks may receive Federal Reserve advances on the 
same terms and conditions that apply to domestic insured state member 
banks. The risks to financial stability presented by foreign banking 
organizations with U.S. branches and agencies generally are not 
dependent on whether the foreign banking organization has a U.S. 
insured depository institution. In many cases, insured depository 
institution subsidiaries of foreign banks form a small percentage of 
their U.S. assets.
    The stress-test requirements included in the domestic proposal for 
bank holding companies or nonbank financial companies supervised by the 
Board were finalized separately in 2012.\15\ Furthermore, the Board 
continues to develop the single counterparty credit limits and early 
remediation requirements for bank holding companies and foreign banking 
organizations. With respect to single counterparty credit limits, the 
Basel Committee on Banking Supervision (Basel Committee) \16\ is 
developing a similar large exposure regime that would apply to all 
global banks. The Board is participating in the Basel Committee's 
initiative and intends to take into account this effort in implementing 
the single counterparty credit limits under the Dodd-Frank Act. The 
Board also intends to take into account information gained through its 
quantitative impact study on the effects of the limit and comments 
received on the domestic and foreign proposals. With respect to early 
remediation requirements, the Board continues to review the comments.
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    \15\ 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 for U.S. nonbank financial 
companies supervised by the Board. 77 FR 62378 (October 12, 2012).
    \16\ The Basel Committee is a committee of banking supervisory 
authorities, which was established by the central bank governors of 
the G-10 countries in 1975. More information regarding the Basel 
Committee and its membership is available at: http://www.bis.org/bcbs/about.htm. Documents issued by the Basel Committee are 
available through the Bank for International Settlements Web site 
available at: http://www.bis.org.
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    Finally, the Board has determined not to impose enhanced prudential 
standards on nonbank financial companies supervised by the Board 
through this final rule. The Board intends separately to issue orders 
or

[[Page 17244]]

rules imposing such standards on each nonbank financial company 
designated by the Council for Board supervision, as further described 
below.
    The Board has consulted with all Council members and member 
agencies, including those that primarily supervise a functionally 
regulated subsidiary or depository institution subsidiary of a bank 
holding company or foreign banking organization subject to the 
proposals by providing periodic updates to agencies represented on the 
Council and their staff on the development of the final enhanced 
prudential standards.\17\ The final rule reflects comments provided to 
the Board as a part of this consultation process. The Council has not 
made any formal recommendations under section 115 of the Dodd-Frank Act 
to date.
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    \17\ See 12 U.S.C. 5365(b)(4).
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B. Major Changes From the Proposals

1. Threshold for Forming a U.S. Intermediate Holding Company
    The foreign proposal would have required a foreign banking 
organization with U.S. non-branch assets of $10 billion or more to 
establish a U.S. intermediate holding company. Many commenters argued 
that the proposed threshold was too low, asserting that the U.S. 
operations of entities with $10 billion of U.S. non-branch assets do 
not present risks to U.S. financial stability. These commenters 
suggested that a minimum of $50 billion in U.S. non-branch assets is a 
more appropriate threshold for the U.S. intermediate holding company 
requirement.\18\ After considering these comments and the other 
statutory considerations in section 165 of the Dodd-Frank Act, the 
Board is raising the final rule's threshold for the U.S. intermediate 
holding company requirement from $10 billion to $50 billion of U.S. 
non-branch assets.
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    \18\ These comments are discussed more fully below in section 
IV.B.3 of this preamble.
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2. Implementation Timing for Foreign Banking Organizations
    The proposed rule would have required a foreign banking 
organization with U.S. non-branch assets of $50 billion or more as of 
July 1, 2014, to establish a U.S. intermediate holding company by July 
1, 2015, unless that time were extended by the Board in writing.\19\ A 
foreign banking organization with U.S. non-branch assets equal to or 
exceeding the asset threshold after July 1, 2014 would have been 
required to establish a U.S. intermediate holding company within 12 
months after it met or exceeded the asset threshold, unless that time 
were accelerated or extended by the Board in writing. A number of 
commenters requested a longer transition period for the proposed 
requirements, citing the need to reorganize their U.S. operations and 
address attendant restructuring costs and tax costs, as well as the 
costs of compliance with other regulatory initiatives.\20\
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    \19\ Under the proposal, total consolidated assets of a foreign 
banking organization were determined based on the information 
provided through the Board's regulatory reporting forms, as 
discussed further below.
    \20\ These comments are discussed more fully below in section 
IV.B.2 of this preamble.
---------------------------------------------------------------------------

    In response to comments, the final rule would extend the initial 
compliance date for foreign banking organizations by one year to July 
1, 2016.\21\ The extended transition period would provide foreign 
banking organizations that exceed the asset threshold on the effective 
date of the rule with a reasonable transition period during which to 
prepare for the structural reorganization required by the final rule 
and for compliance with the enhanced prudential standards.
---------------------------------------------------------------------------

    \21\ The initial measurement date would be deferred from July 1, 
2014 to July 1, 2015. Generally, the calculation will be based on 
the average of U.S. non-branch assets reported by the foreign 
banking organization on the FR Y-7Q for the four most recent 
quarters. If U.S. non-branch assets have not been reported on the FR 
Y-7Q for the full four most recent quarters, the calculation will be 
based on the average of the U.S. non-branch assets as reported on 
the FR Y-7Q for the most recent quarter or quarters. On July 1, 
2016, the U.S. intermediate holding company would be required to 
hold the foreign banking organization's ownership interest in any 
U.S. bank holding company subsidiary, any depository institution 
subsidiary, and U.S. subsidiaries representing 90 percent of the 
foreign banking organization's assets not held under the bank 
holding company. The final rule would also provide a foreign banking 
organization until July 1, 2017, to transfer its ownership interest 
in any residual U.S. subsidiaries to the U.S. intermediate holding 
company.
---------------------------------------------------------------------------

    In order to ensure that foreign banking organizations are taking 
the necessary steps toward meeting the requirements of the final rule, 
the final rule requires a foreign banking organization that has U.S. 
non-branch assets of $50 billion or more as of June 30, 2014, to submit 
an implementation plan by January 1, 2015 outlining its proposed 
process to come into compliance with the rule's requirements.\22\
---------------------------------------------------------------------------

    \22\ As described in section IV.B.5 of this preamble, the 
implementation plan is intended to facilitate compliance with the 
U.S. intermediate holding company requirement. The implementation 
plan must include: A list of the foreign banking organization's U.S. 
subsidiaries; a projected timeline for the transfer by the foreign 
banking organization of its ownership interest in those subsidiaries 
to the U.S. intermediate holding company; a timeline of all planned 
capital actions or strategies for capital accumulation that will 
facilitate the U.S. intermediate holding company's compliance with 
the risk-based and leverage capital requirements; quarterly pro 
forma financial statements for the U.S. intermediate holding 
company; and a plan for compliance with the liquidity and risk-
management requirements in the final rule.
---------------------------------------------------------------------------

    In addition, to address commenters' concerns about the cost of 
compliance with leverage capital requirements proposed for the U.S. 
intermediate holding company, the final rule generally delays 
application of leverage capital requirements to the U.S. intermediate 
holding company until January 1, 2018.
    Finally, a foreign banking organization that has U.S. non-branch 
assets that equal or exceed $50 billion after July 1, 2015 has two 
years to come into compliance with the final rule, instead of 12 months 
under the proposal. These modifications to the transition period will 
enable a foreign banking organization to plan the transactions 
necessary to bring its U.S. subsidiaries under the U.S. intermediate 
holding company and mitigate costs.
3. Nonbank Financial Companies Supervised by the Board
    The proposals would have provided that the standards applicable to 
bank holding companies and foreign banking organizations would serve as 
the baseline for enhanced prudential standards applicable to U.S. and 
foreign nonbank financial companies, respectively. Many commenters 
representing nonbank financial companies asserted that the proposed 
enhanced prudential standards were inappropriate for nonbank financial 
companies because of their business models and activities, as well as 
the existing regulatory regime applicable to certain nonbank financial 
companies. These commenters also expressed concern that the proposals 
as applied to nonbank financial companies supervised by the Board were 
too broad, and the proposals did not provide sufficient information for 
nonbank financial companies supervised by the Board to understand 
application of the proposed standards.
    The Board recognizes that the companies designated by the Council 
may have a range of businesses, structures, and activities, that the 
types of risks to financial stability posed by nonbank financial 
companies will likely vary, and that the enhanced prudential standards 
applicable to bank holding companies and foreign banking organizations 
may not be appropriate, in whole or in part, for all nonbank financial 
companies. Accordingly, the Board is not applying enhanced prudential 
standards to nonbank financial companies supervised by the

[[Page 17245]]

Board through this rulemaking. Instead, following designation of a 
nonbank financial company for supervision by the Board, the Board 
intends thoroughly to assess the business model, capital structure, and 
risk profile of the designated company to determine how the proposed 
enhanced prudential standards should apply, and if appropriate, would 
tailor application of the standards by order or regulation to that 
nonbank financial company or to a category of nonbank financial 
companies. In applying the standards to a nonbank financial company, 
the Board will take into account differences among nonbank financial 
companies supervised by the Board and bank holding companies with total 
consolidated assets of $50 billion or more. For those nonbank financial 
companies that are similar in activities and risk profile to bank 
holding companies, the Board expects to apply enhanced prudential 
standards that are similar to those that apply to bank holding 
companies. For those that differ from bank holding companies in their 
activities, balance sheet structure, risk profile, and functional 
regulation, the Board expects to apply more tailored standards. The 
Board will ensure that nonbank financial companies receive notice and 
opportunity to comment prior to determination of their enhanced 
prudential standards.
4. Other Changes
    In the final rule, the Board also restructured the rule text of the 
domestic and foreign proposals to organize the text by type of 
company--domestic or foreign--and by the size of the company. The 
purpose of the reorganization is to improve the usability of the text 
by grouping requirements applicable to a company based on these 
criteria in one subpart.
    To facilitate this reorganization, the Board has previously moved 
the adopted stress testing requirements to the appropriate 
subparts.\23\ Following the reorganization, the company-run stress test 
requirements for domestic bank holding companies with total 
consolidated assets of more than $10 billion but less than $50 billion 
and for domestic savings and loan holding companies and state member 
banks with total consolidated assets of more than $10 billion are 
contained in subpart B, the supervisory stress tests for bank holding 
companies with total consolidated assets of $50 billion or more are 
contained in subpart E, and the company-run stress tests for bank 
holding companies of this size are contained in subpart F.
---------------------------------------------------------------------------

    \23\ See 79 FR 13498.
---------------------------------------------------------------------------

    Table 1, below, sets forth the requirements in the final rule that 
apply to bank holding companies and Table 2 sets forth the requirements 
in the final rule that apply to foreign banking organizations, each 
depending on size.

          Table 1--Requirements for U.S. Bank Holding Companies
------------------------------------------------------------------------
            Size                  Requirements             Subpart
------------------------------------------------------------------------
Total consolidated assets of  Company-run stress    Subpart B.
 more than $10 billion but     tests.
 less than $50 billion.
Total consolidated assets     Risk committee......  Subpart C.
 equal to or greater than
 $10 billion but less than
 $50 billion (if publicly-
 traded).
Total consolidated assets of  Risk-based and        Subpart D.
 $50 billion or more.          leverage capital.
                              Risk management.....
                              Risk committee......
                              Liquidity risk-
                               management, stress-
                               testing, and
                               buffers.
                              Supervisory stress    Subpart E.
                               tests.
                              Company-run stress    Subpart F.
                               tests.
                              Debt-to-equity        Subpart U.
                               limits (upon grave
                               threat
                               determination).
------------------------------------------------------------------------


         Table 2--Requirements for Foreign Banking Organizations
------------------------------------------------------------------------
            Size                  Requirements             Subpart
------------------------------------------------------------------------
Total consolidated assets of  Company-run stress    Subpart L.
 more than $10 billion but     tests.
 less than $50 billion.
Total consolidated assets     Risk committee......  Subpart M.
 equal to or greater than
 $10 billion but less than
 $50 billion (if publicly-
 traded).
Total consolidated assets of  Risk-based and        Subpart N.
 $50 billion or more, but      leverage capital.
 combined U.S. assets of      Risk management.....
 less than $50 billion.       Risk committee......
                              Liquidity...........
                              Capital stress
                               testing.
                              Debt to equity        Subpart U.
                               limits (upon grave
                               threat
                               determination).
Total consolidated assets of  Risk-based and        Subpart O.
 $50 billion or more, and      leverage capital.
 combined U.S. assets of $50  Risk management.....
 billion or more.             Risk committee......
                              Liquidity risk
                               management,
                               liquidity stress
                               testing, and buffer.
                              Capital stress
                               testing.
                              U.S. intermediate     Subpart O.
                               holding company
                               requirement (if the
                               foreign banking
                               organization has
                               U.S. non-branch
                               assets of $50
                               billion or more).
                              Debt-to-equity        Subpart U.
                               limits (upon grave
                               threat
                               determination).
------------------------------------------------------------------------

    If an institution increases in asset size, it will become subject 
to the subpart applicable to institutions of that size. On the date it 
becomes subject to the substantive requirements of a new subpart, it 
will cease to be subject to

[[Page 17246]]

requirements of the subpart for smaller institutions.

C. Application to Savings and Loan Holding Companies Engaged in 
Substantial Banking Activities

    With the exception of company-run stress-tests, the domestic 
proposal did not propose to apply the enhanced prudential standards to 
savings and loan holding companies.\24\ The domestic proposal indicated 
that the Board intends to issue a separate proposal for notice and 
comment initially to apply the enhanced prudential standards and early 
remediation requirements to all savings and loan holding companies with 
substantial banking activities--for example, any savings and loan 
holding company that: (i) Has total consolidated assets of $50 billion 
or more; and (ii)(A) controls savings association subsidiaries that 
comprise 25 percent or more of such savings and loan holding company's 
total consolidated assets; or (B) controls one or more savings 
associations with total consolidated assets of $50 billion or more. The 
preamble to the domestic proposal indicated that the Board also may 
determine to apply the enhanced prudential standards to any savings and 
loan holding company, if appropriate to ensure the safety and soundness 
of such company, on a case-by-case basis.
---------------------------------------------------------------------------

    \24\ In October 2012, the Board adopted a final rule 
implementing company-run stress testing requirements for savings and 
loan holding companies with total consolidated assets greater than 
$10 billion. See 77 FR 62396 (October 12, 2012).
---------------------------------------------------------------------------

    Commenters argued that the Home Owners' Loan Act does not provide 
the Board with authority to apply enhanced prudential standards and 
early remediation requirements to savings and loan holding companies, 
and doing so would contradict Congress's intent to apply only the 
section 165 requirements regarding company-run stress-test requirements 
to savings and loan holding companies. However, the Board, as the 
appropriate federal banking agency of savings and loan holding 
companies, has authority under the Home Owners' Loan Act to apply 
prudential standards to savings and loan holding companies to help to 
ensure their safety and soundness.\25\ The Board recently established 
risk-based and leverage capital requirements for certain savings and 
loan holding companies and has set forth supervisory expectations 
regarding, among other things, liquidity risk management and 
enterprise-wide risk management.\26\ As discussed in the domestic 
proposal, the Board may apply additional prudential requirements to 
certain savings and loan holding companies that are similar to the 
enhanced prudential standards if it determines that such standards are 
consistent with the safety and soundness of such companies.
---------------------------------------------------------------------------

    \25\ See 12 U.S.C. 1467a(g) (authorizing the Board to issue such 
regulations and orders as the Board deems necessary or appropriate 
to administer and carry out the purposes of section 10 of the Home 
Owners' Loan Act).
    \26\ See, e.g., 78 FR 62018 (October 11, 2013); Supervision and 
Regulation Letter 11-11 (July 21, 2011), available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1111.htm.
---------------------------------------------------------------------------

III. Enhanced Prudential Standards for Bank Holding Companies

A. Enhanced Risk-Based and Leverage Capital Requirements, Capital 
Planning and Stress Testing

1. Capital Planning and Stress Testing
    The final rule, consistent with the proposal, incorporates two 
existing standards: The previously-issued capital-planning and stress-
testing requirements for bank holding companies with total consolidated 
assets of $50 billion or more.\27\ The Board has long held the view 
that a bank holding company generally should hold capital that is 
commensurate with its risk profile and activities, so that the firm can 
meet its obligations to creditors and other counterparties, as well as 
continue to serve as a financial intermediary through periods of 
financial and economic stress.\28\ A bank holding company should have 
internal processes for assessing its capital adequacy that reflect a 
full understanding of its risks and ensure that it holds capital 
corresponding to those risks to maintain overall capital adequacy.\29\
---------------------------------------------------------------------------

    \27\ 12 CFR 225.8. See 76 FR 74631 (December 1, 2011). The 
capital plan rule currently applies to all U.S. bank holding 
companies with $50 billion or more in total consolidated assets, 
except for those bank holding companies that have relied on 
Supervision & Regulation Letter 01-01 (January 5, 2001), available 
at: http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
    \28\ See Supervision and Regulation Letter 12-17 (December 12, 
2012), available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm; 12 CFR Part 217; 12 CFR 225.8; Supervision and 
Regulation Letter 99-18 (July 1, 1999), available at: http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM.
    \29\ See e.g., Supervision and Regulation Letter 09-4 (March 27, 
2009); available at: http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm; 12 CFR 225.8.
---------------------------------------------------------------------------

    In 2011, the Board adopted the capital plan rule (capital plan 
rule), which imposed enhanced risk-based and leverage capital 
requirements on a bank holding company with $50 billion or more in 
total consolidated assets. The rule requires such a bank holding 
company to submit an annual capital plan to the Federal Reserve in 
which it demonstrates its 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. Such plan must also include a discussion of the bank holding 
company's sources and uses of capital reflecting the risk profile of 
the firm over the planning horizon. Since the adoption of the capital 
plan rule, the Board's Comprehensive Capital Analysis and Review 
associated with capital plans submitted by those bank holding companies 
has become an important and regular part of the Federal Reserve's 
capital adequacy assessment of the largest bank holding companies.
    In 2012, the Board, in coordination with the Federal Deposit 
Insurance Corporation (FDIC) and the Office of the Comptroller of the 
Currency (OCC), adopted stress testing rules under section 165(i)(1) of 
the Dodd-Frank Act for large bank holding companies and nonbank 
financial companies supervised by the Board. These rules establish a 
framework for the Board to conduct annual supervisory stress tests to 
evaluate whether these companies have the capital necessary to absorb 
losses as a result of adverse economic conditions and require these 
companies to conduct semi-annual company-run stress tests.\30\
---------------------------------------------------------------------------

    \30\ 77 FR 62378 (Oct. 12, 2012) (codified at 12 CFR part 252, 
subparts F and G). These rules have been re-codified to 12 CFR part 
252, subparts E and F.
---------------------------------------------------------------------------

    In addition, the Board adopted company-run stress test requirements 
under section 165(i)(2) of the Dodd-Frank Act for bank holding 
companies with more than $10 billion but less than $50 billion in total 
consolidated assets and savings and loan holding companies and state 
member banks with more than $10 billion in total consolidated 
assets.\31\ The FDIC and OCC adopted similar rules for the insured 
depository institutions that they supervise.\32\
---------------------------------------------------------------------------

    \31\ See 77 FR 62396 (October 12, 2012).
    \32\ 77 FR 61238 (October 9, 2012); 77 FR 62417 (October 15, 
2012).
---------------------------------------------------------------------------

    In September 2013, the Board issued an interim final rule that 
clarified how bank holding companies should incorporate recent 
revisions to the Board's regulatory capital rules into their capital 
plan and the stress tests.\33\
---------------------------------------------------------------------------

    \33\ See 78 FR 59779 (September 30, 2013).
---------------------------------------------------------------------------

2. Risk-Based Capital and Leverage Requirements
    In July 2013, the Board issued a final rule implementing regulatory 
capital reforms reflecting agreements reached by the Basel Committee in 
``Basel III: A

[[Page 17247]]

Global Regulatory Framework for More Resilient Banks and Banking 
Systems'' (Basel III) \34\ and certain changes required by the Dodd-
Frank Act (revised capital framework).\35\ The revised capital 
framework introduced a new minimum common equity tier 1 capital ratio 
of 4.5 percent, raised the minimum tier 1 ratio from 4 percent to 6 
percent, required all banking organizations to meet a 4 percent minimum 
leverage ratio, implemented stricter eligibility criteria for 
regulatory capital instruments, and introduced a standardized 
methodology for calculating risk-weighted assets. In addition, it 
required bank holding companies with total consolidated assets of $250 
billion or more or total consolidated on-balance sheet foreign 
exposures of at least $10 billion (advanced approaches banking 
organizations) to meet a supplementary leverage ratio of 3 percent 
based on the international leverage standard agreed to by the Basel 
Committee.
---------------------------------------------------------------------------

    \34\ Basel III was published in December 2010 and revised in 
June 2011. See Basel Committee, Basel III: A global framework for 
more resilient banks and banking systems (December 2010), available 
at: http://www.bis.org/publ/bcbs189.pdf.
    \35\ See 78 FR 62018 (October 11, 2013). The revised capital 
framework also reorganized the Board's capital adequacy guidelines 
into a harmonized, codified set of rules, located at 12 CFR Part 
217. The requirements of 12 CFR Part 217 came into effect on January 
1, 2014, for bank holding companies subject to the advanced 
approaches risk-based capital rule, and as of January 1, 2015 for 
all other bank holding companies. The predecessor capital adequacy 
guidelines 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).
---------------------------------------------------------------------------

    To further enhance capital standards for the largest companies that 
pose the most systemic risk, in July 2013, the Board sought public 
comment on a proposal that, in part, would require a U.S. top-tier bank 
holding company with more than $700 billion in total consolidated 
assets or $10 trillion in assets under custody to maintain a buffer of 
at least 2 percent above the minimum supplementary leverage capital 
requirement of 3 percent in order to avoid restrictions on capital 
distributions and discretionary bonus payments to executive 
officers.\36\ The Board is currently reviewing comments on that 
proposal. The Board also expects to seek comment on additional 
enhancements to the risk-based capital rules for large bank holding 
companies in the future, including through a proposal for a 
quantitative risk-based capital surcharge in the United States based on 
the Basel Committee's approach and implementation timeframe.
---------------------------------------------------------------------------

    \36\ 78 FR 51101 (August 20, 2013). The proposal applies to ``a 
U.S. top-tier bank holding company that has more than $700 billion 
in total assets as reported on the company's most recent 
Consolidated Financial Statement for Bank Holding Companies (FR Y-
9C) or more than $10 trillion in assets under custody as reported on 
the company's most recent Banking Organization Systemic Risk Report 
(FR Y-15).'' Id.
---------------------------------------------------------------------------

B. Risk Management and Risk Committee Requirements

    Section 165(b)(1)(A) of the Dodd-Frank Act requires the Board to 
establish enhanced risk-management requirements for bank holding 
companies with total consolidated assets of $50 billion or more.\37\ In 
addition, 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 to establish risk 
committees.\38\ Section 165(h) requires the risk committee to be 
responsible for the oversight of the enterprise-wide risk-management 
practices of the company, to have a certain number of independent 
directors as members as the Board determines is appropriate, and to 
include at least one risk-management expert having experience in 
identifying, assessing, and managing risk exposures of large, complex 
firms.
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 5365(b)(1)(A).
    \38\ 12 U.S.C. 5365(h).
---------------------------------------------------------------------------

    To address the risk-management weaknesses observed during the 
financial crisis, the proposed rule would have established risk-
management standards for bank holding companies with total consolidated 
assets of $50 billion or more that would have required oversight of 
enterprise-wide risk management by a stand-alone risk committee; 
reinforced the independence of a firm's risk-management function; and 
required employment of a chief risk officer with appropriate expertise 
and stature. In addition, the proposal would have required each 
publicly traded bank holding company with total consolidated assets 
equal to or greater than $10 billion but less than $50 billion to 
establish an enterprise-wide risk committee of its board of directors. 
The proposal would not have applied to bank holding companies that have 
assets of less than $10 billion.
    The Board is adopting many aspects of the proposed rule, with 
revisions to certain elements of the proposed rule in response to 
commenters, as described further below in this section. The Board 
emphasizes that the risk committee and overall risk-management 
requirements outlined in the final rule supplement the Board's existing 
risk-management guidance and supervisory expectations.\39\ All banking 
organizations supervised by the Board should continue to follow such 
guidance to ensure appropriate oversight of and limitations on risk.
---------------------------------------------------------------------------

    \39\ See Supervision and Regulation Letter SR 08-8 (October 16, 
2008), available at: http://www.federalreserve.gov/boarddocs/srletters/2008/SR0808.htm; Supervision and Regulation Letter SR 08-9 
(October 16, 2008), available at: http://www.federalreserve.gov/boarddocs/srletters/2008/SR0809.htm; Supervision and Regulation 
Letter SR 12-17 (December 17, 2012), available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm.
---------------------------------------------------------------------------

1. Responsibilities of the Risk Committee
    Under the proposal, a company's risk committee would generally have 
been required to document, review, and approve the enterprise-wide 
risk-management practices of the company. The risk committee would have 
overseen the operation, on an enterprise-wide basis, of an appropriate 
risk-management framework that is commensurate with the company's 
capital structure, risk profile, complexity, activities, size, and 
other appropriate risk-related factors. The proposal specified that the 
risk-management framework must include: Risk limitations appropriate to 
each business line of the company; appropriate policies and procedures 
relating to risk management governance, risk-management practices, and 
risk control infrastructure; processes and systems for identifying and 
reporting risks, including emerging risks; monitoring of compliance 
with the company's risk limit structure and policies and procedures 
relating to risk management governance, practices, and risk controls; 
effective and timely implementation of corrective actions; 
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 the company's 
compensation structure. The enterprise-wide focus would have required 
the company's risk committee to take into account both its U.S. and 
foreign operations as part of its risk-management oversight.
    Many commenters asserted that the proposed rule would 
inappropriately assign managerial and operational responsibilities to 
the risk committee. These commenters generally recommended that the 
Board clarify that a risk committee is not responsible for the day-to-
day operations of the company. In particular, some

[[Page 17248]]

commenters asserted that the proposed requirement that the risk 
committee ``document, review, and approve the enterprise-wide risk-
management practices of the company'' would not be consistent with the 
proper scope of a committee of the board of directors because it would 
require the board to assume responsibilities typically performed by 
management. These commenters recommended that the role of the risk 
committee be limited to reviewing and approving overall risk-management 
policies.
    In light of commenters' concerns, the Board has revised the 
requirements in the final rule to clarify the role of the risk 
committee. A company's risk committee, acting in its oversight role, 
should fully understand the company's enterprise-wide risk-management 
policies and framework and have a general understanding of the risk 
management practices of the company. Accordingly, the final rule 
requires the risk committee to approve and periodically review the 
enterprise-wide risk-management policies of the company, rather than 
its risk-management practices. The Board believes that the requirement 
that the risk committee ``approve and periodically review'' the 
company's enterprise-wide risk-management policies is more closely 
aligned with the board of directors' oversight role over risk 
management. Furthermore, the Board has not included in the final rule 
the requirement that the risk management framework overseen by the risk 
committee include specific risk limitations for each business line of 
the company.
    The other elements of the enterprise-wide risk management framework 
under the proposal, however, represent the key components of an 
institution's risk-management function, and are generally consistent 
with the board of directors' overall responsibilities for risk 
management. Accordingly, other than as described above, the final rule 
adopts the elements of the enterprise-wide risk-management framework 
generally as proposed. As finalized, a company's risk management 
framework must be commensurate with the company's structure, risk 
profile, complexity, activities, and size, and must include policies 
and procedures establishing risk-management governance, risk-management 
practices, and risk control infrastructure for the company's global 
operations and processes and systems for implementing and monitoring 
compliance with such policies and procedures.\40\
---------------------------------------------------------------------------

    \40\ The processes and systems must include those for 
identifying and reporting risks and risk-management deficiencies, 
including with respect to emerging risks and ensuring effective and 
timely implementation of corrective actions to address risk 
management deficiencies for the company's global operations; 
processes and systems for specifying managerial and employee 
responsibility for risk management, for ensuring the independence of 
the risk management function; and processes and systems to integrate 
management and associated controls with management goals and the 
company's compensation structure for the company's global 
operations.
---------------------------------------------------------------------------

    One commenter asserted that effective risk oversight requires the 
attention of a company's full board of directors, rather than its risk 
committee. The commenter recommended that a company's full board of 
directors approve and oversee its risk-management policies. The Board 
agrees that directors should be aware of the risk-management policies 
of the company, and the Board expects that the risk committee will 
report significant risk-management matters to the full board of 
directors. The Board observes, however, that boards of directors 
routinely delegate oversight responsibilities for particular aspects of 
a company's operations to committees in order to more efficiently 
allocate responsibility among the directors. In addition, this 
delegation is consistent with the requirements of the Dodd-Frank Act. 
Accordingly, the final rule maintains the proposed requirement that the 
risk committee oversee enterprise-wide risk management.
    One commenter recommended that the Board require companies to 
engage in a regular process of ``constructive dialogue'' among the 
board of directors, business lines, and risk management personnel. The 
Board believes that robust dialogue among these key stakeholders is 
important for effective risk management, and believes that the proposed 
and final rule already requires such communication in specific 
instances, for instance, by requiring a bank holding company's risk-
management framework to include processes and systems for identifying 
and reporting risks and risk management deficiencies. Accordingly, the 
Board is not adding a separate requirement for ``constructive 
dialogue.''
    In addition, various liquidity risk-management responsibilities are 
assigned to the board of directors or risk committee, as discussed in 
section III.C.2. These liquidity risk-management responsibilities are 
components of the risk-management framework described in this section.
2. Risk Committee Requirements
a. Independent Director
    Consistent with section 165(h)(3)(B) of the Dodd-Frank Act, the 
proposed rule would have required the risk committee of a publicly 
traded \41\ bank holding company with total consolidated assets of $10 
billion or more to have one independent director that was the chair of 
the risk committee. The proposal would have defined an independent 
director as a director who: (i) Is not an officer or employee of the 
company and had not been an officer or employee of the company during 
the previous three years; (ii) is not a member of the immediate family, 
as defined in section 225.41(b)(3) of the Board's Regulation Y (12 CFR 
225.41(b)(3)), of a person who is, or has been within the last three 
years, an executive officer of the company, as defined in section 
215.2(e)(1) of the Board's Regulation O (12 CFR 215.2(e)(1)); and (iii) 
is an independent director under Item 407 of the Securities and 
Exchange Commission's (SEC) Regulation S-K, 17 CFR 229.407(a), or would 
qualify as an independent director under the listing standards of a 
national securities exchange (as demonstrated to the satisfaction of 
the Board) in the event that the company does not have an outstanding 
class of securities traded on a national securities exchange. For 
companies that are not publicly traded in the United States, the Board 
indicated that it would make determinations about director independence 
on a case-by-case basis, and would consider compensation paid to the 
director or director's family by the company and material business 
relationships between the director and the company, among other things. 
The Board specifically sought comment on whether, and under what 
circumstances, the Board should require more than one independent 
director on the risk committee.
---------------------------------------------------------------------------

    \41\ The proposal provided that a company is publicly traded if 
it is traded on any exchange registered with the Securities and 
Exchange Commission under Section 6 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78f) or on any non-U.S.-based securities exchange 
that meets certain criteria.
---------------------------------------------------------------------------

    Some commenters supported the independent director requirement, 
although they generally opposed an increase in the number of 
independent directors required because, in their view, participation by 
management and other non-independent directors could enhance the 
deliberations of the risk committee. Two commenters, however, urged the 
Board to increase the number of independent directors required on the

[[Page 17249]]

risk committee to ensure that members of the risk committee have a 
diversity of experiences. The Board is finalizing the requirement to 
have one independent director that chairs the risk committee as 
proposed. The Board believes that a bank holding company should 
determine the appropriate proportion of independent directors on the 
risk committee based on its size, scope, and complexity, provided that 
it meets the minimum requirement of one independent director. The Board 
believes that active involvement of independent directors can be vital 
to robust oversight of risk management and encourages companies to 
consider including additional independent directors as members of their 
risk committees. The Board further notes that involvement of directors 
affiliated with the company on the risk committee may complement the 
involvement of independent directors.
b. Risk-Management Experience
    Under the proposal, at least one member of a bank holding company's 
risk committee would have been required to have risk-management 
expertise that was commensurate with the company's capital structure, 
risk profile, complexity, activities, size, and other appropriate risk-
related factors. The proposal defined risk-management expertise as an 
understanding of risk management principles and practices with respect 
to bank holding companies or depository institutions; the ability to 
assess the general application of such principles and practices; and 
experience developing and applying risk-management practices and 
procedures, measuring and identifying risks, and monitoring and testing 
risk controls with respect to banking organizations or, if applicable, 
nonbank financial companies. This requirement was intended to ensure 
that the company's risk committee has at least one member with the 
background and experience necessary to evaluate the company's risk-
management policies and practices.
    Several commenters criticized the proposed definition of risk-
management expertise as being too stringent and suggested that the 
proposal would result in a shortage of qualified candidates to serve on 
risk committees. For instance, some commenters argued that the rule 
should recognize that risk-management experience could be acquired in 
fields other than banking. Other commenters argued that the definition 
of risk-management expertise was too limiting and asserted that it was 
not realistic to require a director to fulfill all of the proposed 
requirements. Other commenters suggested that the Board adopt a 
definition of risk-management expertise that is similar to the SEC's 
definition of audit committee financial expert, which generally focuses 
on ``an individual's understanding of relevant principles, the ability 
to assess the application of such principles, and experience that is 
commensurate with the breadth and complexity of issues to be raised, 
among other factors.'' \42\ Some commenters raised concerns that some 
of the Board's statements in the preamble to the proposed rule 
suggested that more than one member of the risk committee would be 
required to have risk-management expertise.
---------------------------------------------------------------------------

    \42\ 17 CFR 228.407(d)(5)(ii).
---------------------------------------------------------------------------

    In light of these comments, the final rule revises the proposed 
``risk management expert'' requirement for the risk committee in two 
ways. First, for a publicly traded bank holding company with total 
consolidated assets equal to or greater than $10 billion but less than 
$50 billion, an individual's risk-management experience in a nonbanking 
or nonfinancial field may fulfill the requirements of the final rule. 
For instance, relevant experience could include risk-management 
experience acquired through executive-level service at a large 
nonfinancial company with a high risk profile and above-average 
complexity. For a bank holding company with total consolidated assets 
of $50 billion or more, the final rule requires that an individual have 
experience in identifying, assessing, and managing risk exposures of 
large, complex financial firms. For this purpose, a financial firm 
could include a bank, a securities broker-dealer, or an insurance 
company, provided that the experience is relevant to the particular 
risks facing the company. For all bank holding companies, the Board 
expects that the individual's experience in risk management would be 
commensurate with the bank holding company's structure, risk profile, 
complexity, activities, and size, and the bank holding company should 
be able to demonstrate that an individual's experience is relevant to 
the particular risks facing the company.
    Second, in response to commenters asserting that the proposed 
definition of ``risk management expertise'' was too limiting, the final 
rule would require that a risk committee have a member with experience 
in ``identifying, assessing, and managing risk exposures'' of large, 
complex firms.\43\ While the proposed definition of risk-management 
expertise generally set forth the types of experience that the Board 
would expect a risk-management expert to have, in some circumstances, a 
person may have an appropriate level of risk-management expertise 
without direct experience in each area cited in the proposed rule.
---------------------------------------------------------------------------

    \43\ As noted above, in the case of a bank holding company with 
total consolidated assets of $50 billion or more, the experience 
must be with respect to financial firms.
---------------------------------------------------------------------------

    The final rule requires that only one member of the committee have 
experience in identifying, assessing, and managing risk exposures of 
large, complex firms. However, the Board would expect all risk 
committee members generally to have an understanding of risk management 
principles and practices relevant to the company. The appropriate level 
of risk-management expertise for a company's risk committee can vary 
depending on the risks posed by the company to the stability of the 
U.S. financial system. Accordingly, the risk committee of a company 
that poses more systemic risk should have more risk committee members 
with commensurately greater understandings of risk management 
principles and practices.
    Two commenters urged the Board to include a requirement that 
members of the risk committee receive continuing education and training 
specifically related to risk management. Although the Board supports 
ongoing risk management education and training for risk committee 
members, the Board is not including this requirement in the final rule 
because it does not believe that the benefits of such education and 
training would justify the burden of imposing such a requirement for 
all bank holding companies of this size.
c. Corporate Governance
    The Board also proposed to establish certain corporate governance 
requirements for risk committees. Specifically, under the proposal, a 
company's risk committee would have been required to have a formal, 
written charter that is approved by the company's board of directors. 
The Board is finalizing this requirement as proposed. In addition, the 
proposal would have required that a risk committee meet regularly and 
as needed. To provide more specificity, and because quarterly meetings 
of board committees are standard in the financial industry, the final 
rule requires that a risk committee meet at least quarterly and 
otherwise as needed.
    The proposal also would have required that a risk committee fully 
document and maintain records of its proceedings, including risk 
management decisions. One commenter opposed the requirement that a risk 
committee document its ``risk management decisions.'' The commenter 
asserted

[[Page 17250]]

that management, rather than a board of directors, makes decisions on 
risk management practices and procedures. As discussed further below, 
the Board has clarified in the final rule that the risk committee is 
responsible for the oversight of risk-management policies, rather than 
for its risk-management practices. The Board believes that it is 
important for a risk committee to document its decisions relating to 
risk-management policies and, accordingly, the Board is finalizing this 
aspect of the requirement as proposed.
3. Risk Committee for Bank Holding Companies With Total Consolidated 
Assets of More Than $10 Billion and Less Than $50 Billion
    A few commenters expressed concern about the effect of the proposed 
rule on smaller bank holding companies, including publicly traded bank 
holding companies with total consolidated assets of less than $50 
billion. One commenter recommended that for bank holding companies with 
less than $50 billion in total consolidated assets, the Board allow for 
flexibility with respect to board member qualifications, risk-committee 
structure, and the reporting structure for risk management executives. 
Another commenter asserted that the risk committee requirement for bank 
holding companies with total consolidated assets of less than $50 
billion is an unreasonable and unnecessary burden on community banks. A 
commenter also expressed concern that the more stringent risk-
management standards in the proposal might be applied to bank holding 
companies with less than $10 billion in total consolidated assets.
    Section 165(h) requires publicly traded bank holding companies with 
total consolidated assets of $10 billion or more to establish risk 
committees. The final rule implements this statutory requirement. The 
Board observes that larger and more complex companies should have more 
robust risk-management practices and frameworks than smaller, less 
complex companies. As a company grows or increases in complexity, the 
company's risk committee should ensure that its risk-management 
practices and framework adapt to changes in the company's operations 
and the inherent level of risk posed by the company to the U.S. 
financial system. The Board believes that the risk committee structure 
and responsibilities in the final rule are therefore appropriate for 
publicly traded bank holding companies with at least $10 billion but 
less than $50 billion in total consolidated assets, as they address 
corporate governance issues common among bank holding companies of 
various sizes. However, as explained above, the Board does not expect 
board members of bank holding companies with total consolidated assets 
of less than $50 billion to have risk-management expertise comparable 
to that of board members of larger bank holding companies. Furthermore, 
the Board notes that the final rule does not apply the risk-committee 
requirements to bank holding companies with less than $10 billion in 
assets or to those that are not publicly traded and have assets of less 
than $50 billion.
    Another commenter expressed concern that the standards in the 
proposal for the qualifications, responsibilities, and role of a chief 
risk officer described below could be applied to a smaller company 
through supervisory examinations. The final rule, consistent with the 
proposal, would impose a chief risk officer requirement only on bank 
holding companies with total consolidated assets of $50 billion or 
more.
4. Additional Enhanced Risk-Management Standards for Bank Holding 
Companies With Total Consolidated Assets of $50 Billion or More
    In accordance with section 165(b)(1)(A)(iii) of the Dodd-Frank Act, 
the proposed rule would have established certain overall risk-
management standards for bank holding companies with total consolidated 
assets of $50 billion or more. These enhanced prudential standards are 
in addition to the risk committee requirements discussed above.
a. Additional Risk Committee Requirements
    Under the proposed rule, risk committees of bank holding companies 
with total consolidated assets of $50 billion or more would have been 
required to meet certain requirements in addition to those provided in 
the proposal for bank holding companies with total consolidated assets 
equal to or greater than $10 billion but less than $50 billion because 
of the risk posed to financial stability by these firms. For instance, 
the proposal would have required that such a banking organization's 
risk committee not be housed within another committee or be part of a 
joint committee, report directly to the bank holding company's board of 
directors, and receive and review regular reports from the bank holding 
company's chief risk officer.
    Several commenters objected to the proposed stand-alone risk 
committee requirement. These commenters generally asserted that a 
banking organization should be given flexibility to determine how to 
structure its risk committee based on the company's business strategy 
and risk profile. Some commenters requested that the final rule permit 
the use of joint risk committees by a banking organization and its 
subsidiaries. A few commenters asserted that it is common practice for 
a risk committee at a holding company also to serve as the risk 
committee for its subsidiaries and that this practice can improve the 
understanding, monitoring, and evaluation of risks throughout the 
organization. One commenter recommended that the final rule allow a 
banking organization to combine its risk and finance committees in 
order to ensure strong oversight of capital, liquidity, and stress 
testing. Similarly, a few commenters asserted that the final rule 
should permit a board of directors to allocate risk-management 
oversight responsibilities to various committees, and not solely to the 
risk committee.
    Appropriate oversight by the board of directors of the risks 
undertaken by complex banking organizations requires significant 
knowledge, experience, and time. Therefore, it is important for a bank 
holding company with total consolidated assets of $50 billion or more 
to have a separate committee of its board of directors devoted to risk-
management oversight. The Board notes that this is also consistent with 
industry practice, as large, complex banking organizations commonly 
have a risk committee of the board of directors that is distinct from 
other committees of the board. The risk committee may have members that 
are on other board committees, and other board committees, such as 
audit or finance, may have some involvement in establishing a banking 
organization's risk management framework. However, a stand-alone risk 
committee, rather than a joint risk/audit or risk/finance committee, 
enables appropriate board-level attention to risk management. The final 
rule therefore retains the requirement for a separate risk committee, 
and clarifies that the risk committee may not be part of a joint 
committee. This requirement would prevent the risk committee from 
having other substantive responsibilities at the bank holding company. 
The rule does not prevent a parent company's risk committee from 
serving as the risk committee for one or more of its subsidiaries as 
long as the requirements of the rule are otherwise satisfied.
    As noted above, the proposal would have required a bank holding 
company's risk committee to report directly to the company's board of 
directors. In

[[Page 17251]]

addition, the proposed rule would have directed a banking 
organization's risk committee to receive and review regular reports 
from the chief risk officer. These requirements were intended to ensure 
the proper flow of information regarding risk management within a 
banking organization. One commenter recommended that the Board specify 
the procedures to be followed when risk levels rise at an institution. 
The Board believes that a bank holding company should be able to 
establish procedures appropriate to its operations, provided that the 
chief risk officer reports material risk issues to the board of 
directors or the risk committee. The final rule clarifies that 
``regular reports'' must be provided not less than quarterly.
b. Chief Risk Officer
i. Appointment and Qualifications
    Under the proposal, each bank holding company with total 
consolidated assets of $50 billion or more would have been required to 
appoint a chief risk officer to implement appropriate enterprise-wide 
risk-management practices for the company. The chief risk officer would 
have been required to have risk-management expertise commensurate with 
the bank holding company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk-related factors.
    A few commenters opposed the proposed requirement that a bank 
holding company with total consolidated assets of $50 billion or more 
appoint a designated chief risk officer. The commenters asserted that 
the appointment of a specific risk management position should be left 
to the discretion of a company. Considering the complexity and size of 
the operations of a bank holding company of this size, the Board 
believes that it is important for the bank holding company to have a 
designated executive in charge of implementing and maintaining the risk 
management framework and practices approved by the risk committee. 
Accordingly, the final rule requires each bank holding company with 
total consolidated assets of $50 billion or more to appoint a chief 
risk officer.
    Several commenters opposed the risk-management expertise 
requirements in the proposal. Some commenters asserted that management 
and the board of directors should be able to determine what combination 
of skill, experience, and education is appropriate for the chief risk 
officer given the company's culture, business strategy, and risk 
profile. Other commenters opined that the risk-management field is 
still developing educational and expertise standards and urged the 
Board not to adopt specific educational or professional requirements 
for the chief risk officer. One commenter asked for clarification as to 
whether the standards for chief risk officer qualification would be 
applied prospectively or retroactively to existing chief risk officers.
    The Board believes that although a company generally should have 
flexibility to determine the particular qualifications it desires in a 
chief risk officer, because of the risks posed by bank holding 
companies with total assets of $50 billion or more, a chief risk 
officer should satisfy certain minimum standards. Accordingly, and 
similar to the risk-committee requirements, the final rule would revise 
the ``risk management expertise'' requirement to focus on an 
individual's experience in identifying, assessing, and managing 
exposures of large, complex financial firms rather than on his or her 
subjective ability to understand risk management principles and 
practices and assess the general application of such principles and 
practices. The Board believes that focusing on an individual's risk-
management experience and demonstrated ability to apply that expertise 
to risk management provides a more reliable and objective method for 
bank holding companies and supervisors to assess an individual's 
fitness to serve as a chief risk officer.
    The minimum standards for a company's chief risk officer of the 
final rule are similar to the risk-management experience requirement 
for the risk committee of a bank holding company with total 
consolidated assets of $50 billion or more, as discussed above. In 
every case, the Board expects that a bank holding company should be 
able to demonstrate that its chief risk officer's experience is 
relevant to the particular risks facing the company and commensurate 
with the bank holding company's structure, risk profile, complexity, 
activities, and size. All of the requirements for a chief risk officer, 
including the risk-management experience requirement, will become 
effective on January 1, 2015, for bank holding companies. At that time, 
bank holding companies with total consolidated assets of $50 billion or 
more will be required to employ a chief risk officer who meets the 
requirements of the final rule, regardless of how the banking 
organization managed risk prior to the effective date of the final 
rule.
ii. Responsibilities
    Under the proposal, the chief risk officer would have had direct 
oversight over: Establishment of risk limits and monitoring compliance 
with such limits; implementation and ongoing compliance with 
appropriate policies and procedures relating to risk management 
governance, practices, and risk controls; developing and implementing 
appropriate processes and systems for identifying and reporting risks, 
including emerging risks; managing risk exposures and risk controls; 
monitoring and testing risk controls; reporting risk management issues 
and emerging risks; and ensuring that risk management issues are 
effectively resolved in a timely manner.
    Several commenters criticized the responsibilities of the chief 
risk officer under the proposed rule. Some commenters opposed the 
requirement that the chief risk officer ``directly'' oversee risk-
management functions because the chief risk officer works with, and 
through, individual business units that have a primary role in managing 
risks in their businesses. Another commenter asserted that the list of 
responsibilities included matters not appropriately assigned to risk 
managers, such as the development of processes and systems for 
identifying and reporting risks, which the commenter asserted are often 
performed by information technology groups. Another commenter argued 
that the responsibilities of the chief risk officer should be more 
general and comprehensive.
    The Board agrees that the chief risk officer may execute his or her 
responsibilities by working with, or through, others in the 
organization. The final rule does not include the proposed requirement 
that the chief risk officer have ``direct'' oversight over the 
enumerated responsibilities or perform the functions that carry out 
those responsibilities. Notwithstanding involvement of other 
departments within the organization in the execution of the processes 
enumerated above, the Board believes that each responsibility described 
in the proposed rule is primarily a risk-management function and, 
therefore, is appropriately assigned to the chief risk officer as the 
officer of the company responsible for ensuring those risk management 
responsibilities are carried out. The Board is finalizing these 
requirements generally as proposed.
    The final enhanced liquidity risk managements standards set forth 
certain responsibilities of senior management, as discussed in section 
III.C.2 of this

[[Page 17252]]

preamble. A company may assign the responsibilities assigned to senior 
management to its chief risk officer, as this officer would be 
considered a member of the senior management of a company.
iii. Reporting Lines
    The proposal would have required a chief risk officer to report 
directly to the risk committee and the bank holding company's chief 
executive officer. Several commenters opposed the proposed requirement 
that a chief risk officer report directly both to the risk committee 
and the chief executive officer of the company. Some commenters 
asserted that the chief risk officer should report only to the chief 
executive officer and not to the risk committee because reporting to 
the board could interfere with the chief risk officer's ability to 
influence senior management. Other commenters asserted that the chief 
risk officer should report only to the risk committee because this 
would allow direct access to an independent director without managerial 
influence. Finally, several commenters urged the Board not to specify a 
reporting structure in the final rule to preserve flexibility for each 
bank holding company with total consolidated assets of $50 billion or 
more to structure its reporting requirements as it deems appropriate.
    The Board believes that dual reporting by the chief risk officer to 
both the risk committee and the chief executive officer will help the 
board of directors to oversee the risk-management function and may help 
disseminate information relevant to risk management throughout the 
organization. Furthermore, guidance issued by the Basel Committee and 
the Financial Stability Board (FSB) supports dual reporting by the 
chief risk officer to the risk committee and the chief executive 
officer.\44\ Thus, the Board is finalizing the chief risk officer 
reporting requirements as proposed.
---------------------------------------------------------------------------

    \44\ See Basel Committee, ``Principles for enhancing corporate 
governance,'' (October 2010), available at: http://www.bis.org/publ/bcbs176.pdf (``While the chief risk officer may report to the chief 
executive officer or other senior management, the chief risk officer 
should also report and have direct access to the board and its risk 
committee without impediment.''). See also FSB, ``Thematic Review on 
Risk Governance,'' (February 2013), available at: http://www.financialstabilityboard.org/publications/r_130212.pdf (The 
chief risk officer should have ``a direct reporting line to the 
chief executive officer'' and ``a direct reporting line to the board 
and/or risk committee.'').
---------------------------------------------------------------------------

iv. Compensation
    The proposal also would have required the compensation of a bank 
holding company's chief risk officer to be structured to provide for an 
objective assessment of the risks taken by the company. One commenter 
opposed the compensation requirement, asserting that the proposed pay 
structure would not allow for discretion in crafting a compensation 
model and that compensation committees are best suited to approve 
decisions regarding executive pay programs.
    The Board observes that the proposed requirement would not prevent 
a company from using discretion in adopting a compensation structure 
for its chief risk officer, whether through its compensation committee 
or otherwise, as long as the structure of the chief risk officer's 
compensation provides for an objective assessment of risks. 
Accordingly, the Board is adopting the substance of this requirement as 
proposed. In addition, the Board notes that this requirement 
supplements existing Board guidance on incentive compensation, which 
provides, among other things, that compensation for employees in risk 
management and control functions should avoid conflicts of interest and 
that incentive compensation received by these employees should not be 
based substantially on the financial performance of the business units 
that they review.\45\
---------------------------------------------------------------------------

    \45\ Guidance on Sound Incentive Compensation Policies, 75 FR 
36395 (June 25, 2010).
---------------------------------------------------------------------------

C. Liquidity Requirements for Bank Holding Companies

1. General
    Section 165(b) of the Dodd-Frank Act directs the Board to adopt 
enhanced liquidity requirements for bank holding companies with total 
consolidated assets of $50 billion or more.\46\ The domestic proposal 
would have required that a bank holding company establish a framework 
for the management of liquidity risk, conduct monthly liquidity stress 
tests, and maintain a buffer of highly liquid assets to cover cash-flow 
needs under stressed conditions.
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 5365(b)(1)(A)(ii).
---------------------------------------------------------------------------

    The requirements in the proposed and final rule build on the 
Board's overall supervisory framework for liquidity adequacy and 
liquidity risk management. This framework includes supervisory guidance 
set forth in the Board's Supervision and Regulation (SR) letter 10-6, 
Interagency Policy Statement on Funding and Liquidity Risk Management 
issued in March 2010 (Interagency Liquidity Risk Policy Statement), 
which was based substantially on the Basel Committee's ``Principles for 
Sound Liquidity Risk Management and Supervision'' (Basel Committee 
principles for liquidity risk management).\47\ The final rule is 
designed to provide a regulatory framework for ensuring that bank 
holding companies with total consolidated assets of $50 billion or more 
establish and maintain robust liquidity risk management practices, 
perform internal stress tests for determining the adequacy of their 
liquidity resources, and maintain a buffer of highly liquid assets in 
the United States to cover cash flow needs under stress. In addition, 
the Board intends to use the supervisory process to supplement the 
final rule through horizontal reviews of the internal stress-testing 
methods, liquidity risk management, and liquidity adequacy of the 
largest, most complex bank holding companies.
---------------------------------------------------------------------------

    \47\ Principles for Sound Liquidity Risk Management and 
Supervision (September 2008), available at: http://www.bis.org/publ/bcbs144.htm. See also Supervision and Regulation Letter 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.pdf; 75 FR 
13656 (March 22, 2010). Bank holding companies that are not subject 
to the final rule are also expected to have adequate liquidity 
resources and engage in sound liquidity risk management consistent 
with the Interagency Liquidity Risk Policy Statement.
---------------------------------------------------------------------------

    Many commenters were generally supportive of the proposed liquidity 
rules and expressed the view that the liquidity requirements were an 
appropriate step for improving liquidity risk monitoring and 
management. One commenter noted that the tools in the proposed rule 
(particularly the cash-flow projections, liquidity stress testing, 
liquidity buffer, and contingency funding planning) are consistent with 
liquidity management practices as they have evolved since the financial 
crisis. Other commenters, however, expressed concern that the proposed 
rules were too limiting and requested that the risk management and 
stress testing requirements include additional flexibility for smaller 
bank holding companies. These commenters argued that formulaic 
quantitative and specific risk management requirements should apply 
only to bank holding companies with the greatest systemic footprints, 
and, further, that criteria such as an institution's business model 
would be a better gauge of systemic importance than asset size.
    The Board observes that, in general, the proposed requirements 
build on existing guidance that sets forth supervisory expectations for 
liquidity risk management at institutions of all sizes. Additionally, 
the proposed requirements were designed to provide bank holding 
companies with

[[Page 17253]]

significant flexibility as to the structure of the liquidity risk 
management process, so that a bank holding company can manage its 
liquidity risk consistent with its overall risk profile and business 
model. However, the prescriptive elements of the proposed requirements 
represent the minimum standards that the Board believes should be 
incorporated into the liquidity risk-management practices of all bank 
holding companies with total consolidated assets of $50 billion or 
more.
    The Board therefore is adopting the proposed requirements with some 
modifications, as described below. In many cases, the final rule 
directs a company to implement the standards taking into account its 
capital structure, risk profile, complexity, activities, and size, 
reflecting the Board's view that the standards are sufficiently 
flexible to be used by bank holding companies with varying sizes, 
business models, and activities.
    Several commenters opined that they preferred the proposal's 
internal-models-based approach to stress testing to the standardized 
approach required by the international liquidity standards published by 
the Basel Committee in December 2010 and revised in January 2013, 
including the liquidity coverage ratio (Basel III LCR).\48\ While the 
Board believes that a regulatory framework for overall liquidity risk 
management--including internal stress testing--is important as part of 
enhanced liquidity standards, the Board also believes that a 
standardized, minimum liquidity risk requirement is an important 
component of a comprehensive liquidity risk framework for large, 
complex institutions. Accordingly, the Board participated in the 
international agreement on liquidity standards and sought comment on a 
proposed liquidity coverage ratio based on the Basel III LCR (proposed 
U.S. LCR) in October 2013.\49\ Consistent with the Basel III LCR, the 
proposed U.S. LCR would require internationally active banking 
organizations and nonbank financial companies supervised by the Board 
to hold an amount of high-quality liquid assets sufficient to meet 
expected net cash outflows under a supervisory stress scenario over a 
30-day time horizon.\50\ The proposed U.S. LCR would also apply a less 
stringent, modified liquidity coverage ratio to bank holding companies 
with total consolidated assets between $50 billion and $250 billion 
that do not meet the thresholds for an internationally active banking 
organization.\51\
---------------------------------------------------------------------------

    \48\ Basel III: International framework for liquidity risk 
measurement, standards and monitoring (December 2010), available at: 
http://www.bis.org/publ/bcbs188.pdf; Basel III: The Liquidity 
Coverage Ratio and liquidity risk monitoring tools (January 2013), 
available at: http://www.bis.org/publ/bcbs238.htm.
    \49\ See Liquidity Coverage Ratio: Liquidity Risk Measurement, 
Standards, and Monitoring, 78 FR 71818 (November 29, 2013).
    \50\ Id. The proposed U.S. LCR would apply to all bank holding 
companies, certain savings and loan holding companies, and 
depository institutions with more than $250 billion in total assets 
or more than $10 billion in on-balance sheet foreign exposure, and 
to their consolidated subsidiaries that are depository institutions 
with $10 billion or more in total consolidated assets. The proposed 
U.S. LCR would also apply to nonbank financial companies supervised 
by the Board that do not have significant insurance operations and 
to their consolidated subsidiaries that are depository institutions 
with $10 billion or more in total consolidated assets.
    \51\ Id. For instance, the modified liquidity coverage ratio 
standard is based on a 21-calendar day stress scenario rather than a 
30-calendar day stress scenario.
---------------------------------------------------------------------------

    The proposed U.S. LCR and the enhanced liquidity requirements 
included in this rule were designed to complement one another. Whereas 
the final rule's internal liquidity stress-test requirements provide a 
view of an individual firm under multiple scenarios, and include 
assumptions tailored to the specific products and risk profile of the 
company, the standardized measure of liquidity adequacy that would be 
provided by the proposed U.S. LCR would facilitate a transparent 
assessment of firms' liquidity positions under a standard stress 
scenario and facilitate comparison across firms. Both requirements 
would enhance the liquidity position of bank holding companies while 
requiring robust liquidity risk management practices.
2. Framework for Managing Liquidity Risk
a. Board of Directors
    The domestic proposal would have required the board of directors of 
a bank holding company with total consolidated assets of $50 billion or 
more to oversee the company's liquidity risk management processes, and 
to review and approve the liquidity risk management strategies, 
policies, and procedures established by senior management. As part of 
these responsibilities, the board of directors would have been required 
to establish the bank holding company's liquidity risk tolerance at 
least annually. The proposal defined liquidity risk tolerance as the 
acceptable level of liquidity risk that a company may assume in 
connection with its operating strategies. The preamble to the proposed 
rule explained that the liquidity risk tolerance should reflect the 
board of directors' assessment of tradeoffs between the costs and 
benefits of liquidity, and should be articulated in a way that all 
levels of management can clearly understand and properly apply the 
articulated approach to all aspects of liquidity risk management 
throughout the organization.
    The proposed rule would have required the board of directors to 
review information provided by senior management at least semi-annually 
to determine whether the company is managed in accordance with the 
established liquidity risk tolerance. The proposal also would have 
required the board of directors to review and approve the bank holding 
company's contingency funding plan \52\ at least annually and whenever 
the company materially revises the plan.
---------------------------------------------------------------------------

    \52\ The contingency funding plan is the company's compilation 
of policies, procedures, and action plans for managing liquidity 
stress events, as described more fully in section III.C.5 of this 
preamble.
---------------------------------------------------------------------------

    Some commenters asserted that the governance requirements for the 
board of directors in the proposal should be more flexible. Commenters 
also criticized the proposed rule for assigning what they described as 
operational responsibilities to the board of directors and the risk 
committee, and argued that those responsibilities were more appropriate 
for senior management. While some commenters believed that the board of 
directors should have responsibility for approving liquidity risk 
policies, others stated that the proposed responsibilities would 
interfere with directors' oversight duties, perhaps shifting their 
focus from areas presenting more significant risks than liquidity risk. 
Similarly, other commenters requested flexibility to reflect their 
varying business models, or to allow companies to respond to changing 
business conditions. One commenter suggested that the Board make 
directors and chief executive officers personally responsible for 
liquidity risk management and require them to attest to the soundness 
of liquidity risk estimates.
    The Board believes that the board of directors should have 
responsibility for oversight of liquidity risk management because the 
directors have ultimate responsibility for the direction of the entire 
company, but that certain risk management responsibilities are 
appropriately assigned to senior management. Accordingly, in response 
to comments, the Board has adjusted the requirements of the final rule.
    The final rule requires the board of directors to approve the 
company's

[[Page 17254]]

liquidity risk tolerance at least annually, receive, and review 
information from senior management at least semi-annually to determine 
whether the bank holding company is operating in accordance with its 
established liquidity risk tolerance, and to approve and periodically 
review the liquidity risk management strategies, policies, and 
procedures established by senior management. Unlike the proposal, 
however, it assigns responsibility for reviewing and approving the 
contingency funding plan to the risk committee, as further discussed 
below. In addition, the text of the final rule locates the obligations 
of the board of directors in a separate paragraph from the 
responsibilities of the risk committee to clarify these 
responsibilities.
    The final rule does not assign personal responsibility to directors 
and chief executive officers for liquidity risk management or require 
them to attest to the soundness of liquidity risk estimates. The Board 
typically does not apply personal liability to directors and chief 
executive officers and believes that assigning responsibility to the 
board of directors is sufficient for achieving the Board's safety and 
soundness goals.
b. Risk Committee
    The proposal would have required the risk committee or a designated 
subcommittee of the risk committee to review and approve the liquidity 
costs, benefits, and risk of each significant new business line and 
each significant new product before the company implements the business 
line or offers the product. It would have required the risk committee 
to consider whether the liquidity risk of the new strategy or product 
under both current and stressed conditions would be within the 
established liquidity risk tolerance. In addition, the risk committee 
or designated subcommittee would have been required at least annually 
to review and approve significant business lines and products to 
determine whether the liquidity risk of each aligns with the company's 
liquidity risk tolerance. The proposal would also have required the 
risk committee or a designated subcommittee thereof to review the cash 
flow projections, approve liquidity risk limits, and review and approve 
elements relating to liquidity stress tests at least quarterly, 
periodically to review the independent validation of the liquidity 
stress tests produced under the rule,\53\ and to establish procedures 
governing the content of senior management reports on the liquidity 
risk profile of the company and other information provided regarding 
compliance with the rule.
---------------------------------------------------------------------------

    \53\ The independent validation and liquidity stress testing 
requirements are described more fully in section III.C.3 and 8 of 
this preamble.
---------------------------------------------------------------------------

    Commenters asserted that the requirements for the risk committee 
inappropriately dictated the frequency of reviews of various liquidity 
reports and limits and asserted that the requirements inappropriately 
included operational responsibilities. As an alternative, one commenter 
stated that the risk committee should be required only to review 
material stress-testing practices, methodologies, and assumptions, with 
discretion as to the level of review. Another commenter requested that 
the Board clarify ``significant'' in reference to the risk committee's 
obligations regarding significant business lines and products.
    In response to these comments, the Board has modified the 
requirement to require senior management, rather than the risk 
committee, to review and approve new products and business lines and 
evaluate liquidity costs, benefits, and risks related to each new 
business line and product that could have a significant effect on the 
company's liquidity risk profile and to annually review the liquidity 
risk of each significant business line and product.\54\ Similarly, in 
response to the concern that the proposed quarterly reviews would be 
operational duties inappropriate for the risk committee, the final rule 
requires senior management, and not the risk committee, to perform 
these reviews.
---------------------------------------------------------------------------

    \54\ The Board is clarifying that a ``significant'' business 
line or product is one that could have a significant effect on the 
company's liquidity risk profile.
---------------------------------------------------------------------------

    In addition, as described above, the final rule requires the risk 
committee or a designated subcommittee thereof,\55\ rather than the 
board of directors, to review and approve the contingency funding plan 
at least annually and whenever the company materially revises the plan. 
The Board believes that this change is appropriate given that the risk 
committee is responsible for understanding the liquidity risks 
associated with different business lines and products and is composed 
of a subset of directors with the appropriate level of risk-management 
expertise to conduct an in-depth review of the contingency funding 
plan. While the directors of the board should understand and 
periodically review the contingency funding plan, the risk committee 
and senior management have close proximity to the operational-level 
details included in the contingency funding plan and can evaluate and 
modify the contingency funding plan as needed.
---------------------------------------------------------------------------

    \55\ For purposes of the rule's liquidity risk management 
requirements, a designated subcommittee of the risk committee must 
be composed of members of the board of directors.
---------------------------------------------------------------------------

c. Senior Management
    The proposed rule would have established responsibilities for the 
senior management of a bank holding company with total consolidated 
assets of $50 billion or more, including requirements to establish and 
implement liquidity risk management strategies, policies, and 
procedures and to oversee the development and implementation of 
liquidity risk measurement, monitoring and reporting systems, cash-flow 
projections, liquidity stress testing and associated buffers, specific 
limits, and the contingency funding plan. The proposed rule also would 
have required senior management to report regularly to the risk 
committee, or designated subcommittee thereof, on the liquidity risk 
profile of the company and provide other information, as necessary, to 
the board of directors or risk committee. The Board noted in the 
preamble to the proposed rule that it would expect management to report 
as frequently as conditions warrant, but no less frequently than 
quarterly. The Board is finalizing these requirements substantially as 
proposed.
    As explained above, the proposed rule required the risk committee 
to review and approve the liquidity risk management strategies, 
policies, and procedures established by senior management, and the 
Board has reassigned certain responsibilities from the risk committee 
to senior management in response to comments. Specifically, the final 
rule requires senior management to review and approve new products and 
business lines and evaluate liquidity costs, benefits, and risks 
related to each new business line and product that could have a 
significant effect on the company's liquidity risk profile and to 
annually review the liquidity risk of each significant business line 
and product. It requires senior management to establish the liquidity 
risk limits specified in the final rule (as discussed in section 
III.C.6 of this preamble), and to review the company's compliance with 
those limits at least quarterly. In addition, it requires senior 
management to review the cash flow projections required by the final 
rule at least quarterly (as discussed in section III.C.4 of this 
preamble) and to review and approve certain aspects of the liquidity

[[Page 17255]]

stress testing framework (as discussed in sections III.C.8 and 9 of 
this preamble) at specified intervals. Senior management must conduct 
more frequent reviews than those required in the final rule if the 
financial condition of the company or market conditions indicate that 
the liquidity risk tolerance, business strategies and products, or 
contingency funding plan of the company should be reviewed or modified.
    In the Board's view, this change is appropriate given that senior 
management has the appropriate level of seniority and expertise to 
conduct these reviews. Senior management maintains proximity to the 
operational-level details that comprise such reports and limit 
structures. In addition, senior management is required to update the 
risk committee or the board of directors on a regular basis, and is 
thereby in a position to raise issues to the risk committee or board of 
director's attention, as appropriate. The Board notes that a company 
may assign the responsibilities assigned to senior management described 
above to its chief risk officer, as this officer would be considered a 
member of the senior management of a company.
3. Independent Review
    Under the proposed rule, a bank holding company with total 
consolidated assets of $50 billion or more would have been required to 
establish and maintain a review function to evaluate its liquidity risk 
management that was independent of management functions that execute 
funding. The Board is finalizing the substance of these requirements as 
proposed. The Board believes that an independent review function is a 
critical element of a sound liquidity risk management governance 
program. As such, the independent review function is required to review 
and evaluate the adequacy and effectiveness of the bank holding 
company's liquidity risk management processes regularly, but no less 
frequently than annually. It is also required to assess whether the 
company's liquidity risk management function complies with applicable 
laws, regulations, supervisory guidance, and sound business practices. 
To the extent permitted by applicable law, the independent review 
function must also report material liquidity risk management issues in 
writing to the board of directors or the risk committee for corrective 
action.
    An appropriate internal review conducted by the independent review 
function should address all relevant elements of the liquidity risk 
management processes, 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, and evaluate the liquidity 
risk management processes, document their review, and recommend 
solutions for any identified weaknesses.
    One commenter requested that the Board clarify whether the 
independent review function is required to be independent of the 
liquidity risk management function. The Board is clarifying that the 
independent review function is not required to be independent of the 
liquidity risk management function. However, in the final rule, 
consistent with the proposal, the independent review function must be 
independent of management functions that execute funding (e.g., the 
treasury function).
    As discussed in section III.C.8 of this preamble, the Board has 
revised the proposed requirement that liquidity stress test processes 
and assumptions be independently validated to require that the 
liquidity stress test processes and assumptions be subject to 
independent review, subject to review by the chief risk officer. This 
is reflected in the final rule text.
4. Cash-Flow Projections
    The proposed rule would have required a bank holding company with 
total consolidated assets of $50 billion or more to produce 
comprehensive projections that project short-term and long-term cash 
flows from assets, liabilities, and off-balance sheet exposures. The 
required projections would have included 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 have an impact on liquidity over appropriate 
time periods. The proposal would have required firms to identify and 
quantify discrete and cumulative cash-flow mismatches over these time 
periods. The proposed rule also would have required firms to produce 
analyses that incorporated reasonable assumptions regarding the future 
behavior of assets, liabilities, and off-balance sheet exposures in 
projected cash flows and reflected the company's capital structure, 
risk profile, complexity, activities, size, and other appropriate risk-
related factors. The proposal would have also required the company 
adequately to document its cash flow methodology and assumptions and 
conduct short-term cash-flow projections daily and long-term cash flows 
on a monthly basis.
    Commenters suggested that instead of requiring a specific type of 
cash-flow projection, the final rule should allow each company to 
formulate liquidity and funding projections in a manner most 
appropriate for its business model. As an example, commenters asserted 
that the prescribed method did not accurately measure the liquidity 
risk for bank holding companies with large broker-dealer subsidiaries. 
Commenters asserted that it was unnecessary to produce frequent cash-
flow projections when companies have ample liquidity, and therefore the 
requirement should be graduated to reflect different market or firm-
specific circumstances. Other commenters generally criticized the 
proposed time horizons as inflexible and unnecessary. One commenter 
asked the Board to confirm that it does not expect firms to develop 
cash-flow projections over horizons longer than one year.
    The Board believes that standardized cash-flow projections 
performed over a range of time horizons, updated daily for short-term 
projections and monthly for long-term projections, are appropriate for 
all bank holding companies with total consolidated assets of $50 
billion or more to capture shifts in liquidity vulnerabilities over 
time. The Board believes that the proposal provided sufficient 
flexibility for bank holding companies subject to the rule to adapt the 
cash-flow projection requirements to their particular circumstances, 
such as if they have significant broker-dealer activities. The final 
rule clarifies that cash-flow projections must provide sufficient 
detail to reflect the capital structure, risk profile, complexity, 
currency exposure, activities, and size of the bank holding company, 
including, where appropriate, analyses by business line, currency, or 
legal entity, and must be performed, at a minimum, over short and long-
term time horizons. Accordingly, the Board is finalizing the rule 
substantially as proposed.
    While the final rule implements a minimum standard for frequency of 
projections, more frequent cash-flow reports may be appropriate for 
companies with more complex risk profiles or for all companies during 
times of stress. Similarly, while the final rule does not require cash-
flow projections over time horizons longer than one year, it may be 
appropriate for companies to produce cash-flow projections for longer 
time periods, for instance to account for long-term debt maturities, if 
circumstances warrant.

[[Page 17256]]

5. Contingency Funding Plan
    As part of a robust regulatory framework to promote comprehensive 
liquidity risk management, the proposal would have required a bank 
holding company to establish and maintain a contingency funding plan. 
As described in the proposal, a contingency funding plan is a 
compilation of policies, procedures, and action plans for managing 
liquidity stress events that, together, provide a plan for responding 
to a liquidity crisis. Under the proposed rule, the contingency funding 
plan would have been required to be commensurate with the company's 
capital structure, risk profile, complexity, activities, size and 
established liquidity risk tolerance. The proposal also would have 
required the contingency funding plan to be updated annually or more 
often if necessary. Under the proposed rule, the contingency funding 
plan would have included two components: A quantitative assessment and 
an event-management process. The proposed rule also would have required 
the contingency funding plan to include procedures for monitoring risk.
    In the quantitative assessment, a bank holding company would have 
been required to identify stress events that have a significant impact 
on the company's liquidity, assess the level and nature of the impact 
on the bank holding company's liquidity of such stress events, and 
assess available funding sources and needs during identified liquidity 
stress events. Liquidity stress events could include a deterioration in 
asset quality, a widening of credit default swap spreads, or other 
events that call into question the company's ability to meet its 
obligations. The required analysis would have included all material on- 
and off-balance sheet cash flows and their related effects and would 
have required a firm to incorporate information generated by liquidity 
stress testing to determine liquidity needs and funding sources. The 
proposed rule would also have required a bank holding company to 
identify alternative funding sources that may be accessed during 
identified liquidity stress events. The preamble to the proposed rule 
observed that since some of these alternative funding sources will 
rarely be used in the normal course of business, a bank holding company 
should conduct advance planning and periodic testing (as further 
discussed below) to make sure that the funding sources are available 
when needed, and put into place administrative procedures and 
agreements. The preamble to the proposed rule also noted that discount 
window credit may be incorporated into contingency funding plans as a 
potential source of funds in a manner consistent with the terms 
provided by the Federal Reserve Banks, and that contingency funding 
plans that incorporate borrowing from the discount window should 
specify the actions that the company will take to replace discount 
window borrowing with more permanent funding, including the proposed 
time frame for these actions.
    The proposal would have required the contingency funding plan to 
include an event-management process that set forth procedures for 
managing liquidity during identified liquidity stress events. The 
proposed rule would have also required the contingency funding plan to 
include procedures for monitoring emerging liquidity stress events and 
for identifying early warning indicators of emerging liquidity stress 
events that are tailored to a bank holding company's capital structure, 
risk profile, complexity, activities, size, and other appropriate risk-
related factors. The preamble to the proposed rule noted that such 
early warning indicators may include, but are not limited to, negative 
publicity concerning an asset class owned by the bank holding company, 
potential deterioration in the bank holding company's financial 
condition, widening debt or credit default swap spreads, and increased 
concerns over the funding of off-balance-sheet items.
    Finally, the proposed rule would have required a bank holding 
company periodically to test the components of the contingency funding 
plan to assess its reliability during liquidity stress events, 
including trial runs of the operational elements of the contingency 
funding plan to ensure that they work as intended during a liquidity 
stress event. The preamble to the proposed rule noted that the tests 
should include operational simulations to test communications, 
coordination, and decision-making involving relevant managers, 
including managers at relevant legal entities within the corporate 
structure, as well as methods the bank holding company intends to use 
to access alternate funding.
    Some commenters supported the domestic proposal's approach to 
contingency funding planning, finding it sufficiently flexible to 
accommodate firms' liquidity risk management practices. Other 
commenters, however, criticized the proposed requirement that 
contingency funding plans incorporate the quantitative results of 
liquidity stress tests and be updated annually. Instead, these 
commenters asserted that the Board should allow management to have a 
contingency funding plan that outlines qualitative strategies to 
address a variety of scenarios that may be generically implemented in 
the face of an actual crisis, rather than require management 
mechanically to update every aspect of the contingency funding plan at 
set intervals. Commenters also expressed concern that requiring an 
institution to book transactions as a means of testing the plan could 
be detrimental to the financial institution overall. Instead, they 
asserted that bank holding companies should be able to adequately test 
components of the contingency funding plan through ``war room'' 
simulations.
    The Board is clarifying that it does not expect every aspect of the 
contingency funding plan to be modified at set intervals. For example, 
many of the qualitative items in a contingency funding plan, such as 
the event-management process, reporting requirements, contact lists, 
scenario descriptions, and general stress testing assumptions will not 
change at every review period. At the same time, the Board continues to 
believe that an appropriate time interval for reviewing and updating 
(as necessary) key aspects of the contingency funding plan is important 
to the maintenance of an effective and relevant contingency funding 
plan. Because a firm's balance sheet changes over time, the analysis 
must be refreshed at regular intervals to ensure its ongoing relevance. 
Additionally, while the qualitative aspects of a contingency funding 
plan are important, quantitative analysis is necessary to achieve a 
higher level of effectiveness in identifying the size, scope, and 
timing of potential liquidity needs and liquidity resources that are 
available to meet those needs. The contingency funding plan must be 
updated whenever changes to market and idiosyncratic conditions would 
have a material impact on the plan.
    Regarding testing, the Board is clarifying in connection with the 
final rule that, in some cases, effective implementation of the 
contingency funding plan for a bank holding company should include, in 
part, periodic liquidation of assets, including portions of the bank 
holding company's liquidity buffer, which can be through outright sale 
or repo of buffer assets. In the Board's experience, many aspects of 
the contingency plan can actually be tested with trades executed, and 
with advance notification to counterparties that a simulation is taking 
place, without sending a distress signal to the marketplace, and such 
exercises are critical in demonstrating treasury

[[Page 17257]]

control over assets and an ability to convert the assets into cash to 
be used to offset outflows. However, testing the contingency funding 
plan does not necessarily require the booking of transactions for each 
contingency funding option. Rather, the focus of the contingency 
funding plan testing requirements is on the operational aspects of such 
sources, which can often be tested via ``table top'' or ``war room'' 
type exercises.
    One commenter requested that the Board clarify whether a bank 
holding company may include advances from Federal Home Loan Banks 
(FHLBs) in its contingency funding plan. The Board is clarifying that 
lines of credit, such as FHLB advances, may be included as sources of 
funds in contingency funding plans; however, firms should consider the 
characteristics of such funding and how the counterparties may behave 
in times of stress. For example, counterparties may require more 
collateral with greater haircuts in a time of stress, and accordingly 
this possibility should also be considered when including these 
potential sources of liquidity in a company's contingency funding plan.
    Discount window credit may be incorporated into contingency funding 
plans as a potential source of funds for a bank holding company 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.
    The Board is also modifying the event-management process 
requirement to provide that a bank holding company must identify the 
circumstances in which it will implement its contingency funding plan. 
These circumstances must include a failure to meet any minimum 
liquidity requirement established by the Board, which may include a 
final version of the proposed U.S. LCR, if adopted by the Board. 
Accordingly, the Board believes it is important that a company include 
a failure to meet any minimum requirement the Board may impose in the 
future in its considerations of when to implement its contingency 
funding plan. With the exception of these modifications, the Board is 
adopting the substance of the proposed contingency funding planning 
requirements without change.
6. Liquidity Risk Limits
    To enhance management of liquidity risk, the proposed rule would 
have required a bank holding company with total consolidated assets of 
$50 billion or more to establish and maintain limits on potential 
sources of liquidity risk, including three specified sources of 
liquidity risk: Concentrations of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and 
other liquidity risk identifiers; the amount of liabilities that mature 
within various time horizons; and off-balance sheet exposures and other 
exposures that could create funding needs during liquidity stress 
events.\56\
---------------------------------------------------------------------------

    \56\ Such exposures may be contractual or non-contractual 
exposures, and include unfunded loan commitments, lines of credit 
supporting asset sales or securitizations, collateral requirements 
for derivative transactions, and a letter of credit supporting a 
variable demand note.
---------------------------------------------------------------------------

    Several commenters suggested that the specific limits in the 
proposal were too constraining, and requested that the Board 
incorporate increased flexibility into the limits. The Board believes 
that the specific types of limits enumerated are critical components of 
the liquidity risk management framework, as they address concentration, 
time horizons, and off-balance sheet exposures, each of which is an 
element of liquidity risk management that may prove critical during a 
crisis. The Board notes, further, that the final rule requires each 
bank holding company to establish limits appropriate to its size, 
complexity, capital structure, risk profile, and activities, among 
other things. The final rule therefore requires a bank holding company 
to address these types of liquidity risk, but does not establish a 
particular limit for any given company. The Board believes, therefore, 
that the final rule provides sufficient flexibility for each bank 
holding company to establish appropriately individualized limits, and 
is finalizing this aspect of the proposal without change.
7. Collateral, Legal Entity, and Intraday Liquidity Risk Monitoring
    The proposed rule would have required a bank holding company with 
total consolidated assets of $50 billion or more to monitor liquidity 
risk related to collateral positions, liquidity risks across the 
enterprise, and intraday liquidity positions. Under the proposal, a 
company would have been required to establish and maintain procedures 
for monitoring assets it has pledged as collateral for an obligation or 
position, and assets that are available to be pledged. To promote 
effective monitoring across a banking organization, the proposed rule 
would have required a company 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. As stated in the proposal, the company should maintain 
sufficient liquidity in light of possible obstacles to cash movements 
between specific legal entities or between separately regulated 
entities are recognized in normal times and during liquidity stress 
events.
    The proposed rule would have required a bank holding company to 
establish and maintain procedures for monitoring its intraday liquidity 
risk exposure. To ensure that liquidity risk is appropriately 
monitored, the Board explained in the preamble to the proposed rule 
that it expects a bank holding company to provide for integrated 
oversight of intraday exposures within the operational risk and 
liquidity risk functions. The Board also observed that it expects the 
procedures for monitoring and managing intraday liquidity positions to 
reflect, in stringency and complexity, the scope of operations of the 
company.
    Commenters expressed concern about the monitoring standards, 
stating that they were inflexible and burdensome. For example, 
commenters asserted that each company should be able to decide which 
intraday metrics should be tracked. In addition, some commenters 
asserted that smaller institutions might struggle to meet the 
monitoring requirements related to the intraday liquidity position. 
However, some commenters opined that larger institutions, such as 
institutions involved with payments processing, should be held to a 
higher standard.
    Intraday liquidity monitoring is an important component of the 
liquidity risk management process for a bank holding company engaged in 
significant payment, settlement, and clearing activities. Given the 
interdependencies that exist among payment systems, a bank holding 
company with more than $50 billion in total consolidated assets that is 
unable to meet critical payments has the potential to lead to systemic 
disruptions that can prevent the smooth functioning of payments systems 
and money markets. Furthermore, the Board believes that the monitoring 
requirements are appropriate for all bank holding companies with total 
consolidated assets of $50 billion or more. To the extent that such a 
bank holding company has higher intraday risk, the final rule would 
require more monitoring. As a result, the Board is

[[Page 17258]]

finalizing the substance of the monitoring standards as proposed.
8. Liquidity Stress Testing
a. Overview
    Under the proposal, bank holding companies with total consolidated 
assets of $50 billion or more would have been required to perform 
regular stress tests on cash-flow projections by identifying liquidity 
stress scenarios based on the company's full set of activities, 
exposures and risks, both on- and off-balance sheet, and by taking into 
account non-contractual sources of risks, such as reputational risks. 
The proposed rule would have then required an assessment of the effects 
of those scenarios on the company's cash flow and liquidity. Under the 
proposed rule, the bank holding company would have used the results of 
the stress tests to determine the size of its liquidity buffer, and 
would have incorporated information generated by stress testing into 
the quantitative component of the contingency funding plan. Although 
many commenters were generally supportive of the goals of the liquidity 
stress testing in the domestic proposal, some expressed specific 
concerns about the proposed requirements, as discussed below.
b. Scope and Frequency
    The proposed rule would have required a bank holding company to 
conduct liquidity stress tests at least monthly, as well as to maintain 
the capacity for ``ad hoc'' stress tests to address unexpected 
circumstances. Several commenters argued that the proposed frequency of 
liquidity stress testing was excessive and suggested that stress 
testing should be conducted semiannually and supplemented by monitoring 
of the liquidity position of the firm through management of established 
metrics. One commenter stated that stress testing should be required 
less frequently for smaller organizations than for larger ones.
    The Board believes that frequent liquidity stress testing is an 
essential part of a robust liquidity stress test regime. Regular stress 
testing is particularly important for effective evaluation of liquidity 
resources and risk management because of the dynamic nature of a firm's 
liquid assets, inflows, and outflows. Frequent evaluations of the 
firm's position against a scenario where regular sources of liquidity 
could rapidly vanish or be curtailed are essential to understanding the 
firm's readiness for an unanticipated liquidity stress event. The Board 
therefore believes that the requirement for monthly stress testing is 
appropriate and is finalizing this requirement as proposed. The Board 
observes that this requirement is consistent with current supervisory 
expectations that bank holding companies conduct liquidity stress tests 
regularly.\57\ In addition, the Board believes that most bank holding 
companies subject to the rule already conduct liquidity stress tests at 
the frequency required by the rule. The Board further observes that the 
final rule, like the proposal, provides flexibility within the stress-
testing framework for stress testing to be tailored based on a firm's 
size, complexity, and operations. This tailoring may require analyses 
by business line or legal entity, as well as stress scenarios that use 
more time horizons than the minimum required by the final rule.
---------------------------------------------------------------------------

    \57\ See the Interagency Liquidity Risk Policy Statement, supra 
note 47.
---------------------------------------------------------------------------

c. Liquidity Stress Testing Scenario Requirements
    The proposal would have required a bank holding company with total 
consolidated assets of $50 billion or more to incorporate in its stress 
tests a minimum of three stress scenarios that could significantly 
impact the company's liquidity. These would have included scenarios to 
account for adverse market conditions, an idiosyncratic stress event, 
and combined market and idiosyncratic stresses. The stress scenarios 
would have also been required to address the potential for market 
disruptions and the actions of other market participants experiencing 
simultaneous stress. The proposal would also have required a bank 
holding company's stress tests to include a minimum of four periods 
over which the relevant stressed projections extend: Overnight, 30-day, 
90-day, and one-year time horizons, and additional time horizons as 
appropriate. Furthermore, as explained in the proposal, stress testing 
should be sufficiently dynamic that it would be able to incorporate a 
variety of changes in the bank holding company's internal position and 
external circumstances, including risks that may arise over time from 
idiosyncratic events, macroeconomic and financial market developments, 
or a combination thereof.\58\ Therefore, additional scenarios, based on 
the company's financial condition, size, complexity, risk profile, 
scope of operations, or activities, should be used as needed to ensure 
that all of the significant aspects of liquidity risks to the company 
have been modeled.
---------------------------------------------------------------------------

    \58\ 77 FR 594, 607.
---------------------------------------------------------------------------

    The proposed rule would have required a bank holding company's 
liquidity stress testing comprehensively to address its activities, 
exposures, and risks, including off-balance sheet exposures. The 
preamble to the proposal indicated that stress testing should address 
non-contractual sources of risk, such as reputational risk, and risk 
arising from the covered company's use of sponsored vehicles that issue 
debt instruments periodically to the markets, such as asset-backed 
commercial paper and similar conduits.
    Many commenters supported these proposed liquidity stress testing 
requirements because they were flexible and permitted bank holding 
companies to develop their own liability run-off factors and other 
assumptions. One commenter objected to the Board's statement in the 
proposal that a bank holding company should incorporate liquidity risks 
arising from sponsored vehicles in its liquidity stress tests, 
asserting that sponsored vehicles have a broad diversity of risk. The 
Board has adopted the substance of the proposed liquidity stress 
testing requirements as proposed, and has adjusted certain aspects of 
the regulatory language to clarify the minimum requirements set forth 
in the rule. With respect to sponsored vehicles, the Board reiterates 
that bank holding companies should include sponsored vehicles and 
similar conduits in their stress tests, as these vehicles received 
unanticipated support from some banking institutions in the recent 
financial crisis, and similar liquidity risks may arise in the future.
    Under the proposal, a bank holding company would have been required 
to discount the fair 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 volatility of the asset, and to have diversified 
sources of funding throughout each stress test planning horizon. The 
final rule maintains these requirements, but in light of comments 
received on the proposed liquidity buffer discussed below, excludes 
cash and securities issued by the United States, a U.S. government 
agency,\59\ or a U.S. government-sponsored enterprise,\60\ from the 
diversification

[[Page 17259]]

requirement. However, a bank holding company should ensure that 
concentrations in all assets, including those excluded from the rule's 
diversification requirement, are appropriate in light of the risk 
profile of the bank holding company and market conditions.
---------------------------------------------------------------------------

    \59\ A U.S. government agency is defined in the proposed rule as 
an agency or instrumentality of the United States whose obligations 
are fully and explicitly guaranteed as to the timely payment of 
principal and interest by the full faith and credit of the United 
States.
    \60\ A U.S. government-sponsored enterprise 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 United States.
---------------------------------------------------------------------------

    Similarly, bank holding companies are expected to make conservative 
assumptions about the types of cash-flow sources that would be 
available over a 30-day stress period. The final rule clarifies that a 
line of credit may qualify as a cash flow source for purposes of a 
stress test with a planning horizon that exceeds 30 days, but not for 
purposes of a stress test with a planning horizon of 30 days or less. 
In addition, net cash outflows may include some cash inflows, but these 
should be generally limited to contractual maturities within the 30 
days.
    In addition to the stress-testing requirements described above, the 
proposed rule would have established requirements for oversight and 
control functions, including an independent validation function; and 
requirements for management information systems sufficient to enable 
the bank holding company effectively and reliably to collect, sort, and 
aggregate data and other information. Several commenters requested 
clarification of what is meant by the requirement that the stress-
testing process and its assumptions be validated, including 
clarification that the validation function can be an internal function. 
In response to these comments and in light of the potential operational 
burden of validation, the Board has revised the requirement in the 
final rule to require instead that a bank holding company appropriately 
incorporate conservative assumptions in developing its stress test 
scenarios and the other elements of the stress test process and that 
these assumptions take into consideration the company's capital 
structure, risk profile, complexity, activities, size, business lines, 
legal entity or jurisdiction, and other relevant factors, and the 
assumptions must be approved by the chief risk officer and subject to 
independent review as described in section III.C.3 of this preamble.
    In addition to the changes described above, the final rule includes 
technical, non-substantive revisions that clarify the liquidity stress 
testing requirements.
9. Liquidity Buffer
    The proposed rule would have required a bank holding company with 
total consolidated assets of $50 billion or more to hold highly liquid 
assets (known as a buffer) sufficient to meet liquidity needs as 
identified by the internal stress test. The proposal would have 
required the liquidity buffer to be composed of unencumbered highly 
liquid assets sufficient to meet projected net cash outflows for 30 
days over the range of liquidity stress scenarios used in the internal 
stress testing.
    A commenter argued that requiring companies to comply with a 30-day 
buffer requirement may induce companies to create stress scenarios 
without the appropriate level of severity. In its supervisory reviews, 
the Board will review the companies' scenarios to ensure that they are 
sufficiently severe to expose key funding vulnerabilities, and the 
Board intends to reinforce these expectations. The final rule provides 
that the liquidity buffer must be sufficient to meet the projected net 
stressed cash flow need over the 30-day planning horizon of a liquidity 
stress test under each of an adverse market condition scenario, an 
idiosyncratic stress event scenario, and a combined market and 
idiosyncratic stresses scenario.
a. Criteria for Highly Liquid Assets
    The proposed definition of highly liquid assets included cash and 
securities issued or guaranteed by the U.S. government, a U.S. 
government agency, or a U.S. government-sponsored enterprise, because 
these securities have remained liquid even during prolonged periods of 
severe liquidity stress. In addition, recognizing that other assets 
could also be highly liquid, the proposed definition included a 
provision that would allow a bank holding company to include other 
types of assets in the buffer if the bank holding company demonstrated 
to the satisfaction of the Board that those assets: (i) Have low credit 
and market risk; (ii) are traded in an active secondary two-way market 
that has observable market prices, committed market makers, a large 
number of market participants, and a high trading volume; and (iii) are 
types of assets that investors historically have purchased in periods 
of financial market distress during which liquidity has been impaired.
    Several commenters asserted that the criteria for highly liquid 
assets were too limited, and requested further guidance on the full 
range of assets that might qualify. These commenters also requested 
that correlation statistics, performance comparisons to benchmark 
securities or indices, and portfolio diversification benefits be 
considered among eligibility criteria. The commenters asked the Board 
to revise the definition of highly liquid assets specifically to 
enumerate a broader scope of assets, such as foreign sovereign 
obligations and obligations issued by multi-lateral development and 
central banks; claims against central banks of acceptable sovereign 
issuers; gold; FHLB borrowing capacity; committed lines of credit; 
inventory positions (including equities) maintained by the broker-
dealer operations of a bank holding company, if any; municipal 
securities; shares of money market mutual funds holding U.S. government 
securities; and collateral accepted by the discount window. One 
commenter suggested that the Board establish a mechanism whereby the 
Board would regularly notify firms of other approved highly liquid 
asset categories. By contrast, one commenter asserted that the proposal 
was too permissive, and that bank holding companies should only be 
allowed to include cash and short-term U.S. government securities in 
their buffer.
    Liquidity characteristics of assets may vary under different types 
of stress scenarios. The proposed definition of highly liquid asset 
provided companies discretion to determine whether an asset would be 
liquid under a particular scenario. The Board also believes that 
restricting the assets available for liquidity coverage to cash and 
securities issued or guaranteed by the United States, a U.S. government 
agency, or a U.S. government-sponsored enterprise is unnecessarily 
limited, and could have negative effects on market liquidity generally. 
As a result, consistent with the proposal, the final rule defines 
highly liquid assets to include cash, securities issued or guaranteed 
by the United States, a U.S. government agency, or a U.S. government-
sponsored enterprise, and any other asset that a bank holding company 
demonstrates to the satisfaction of the Board meets defined 
characteristics of liquidity.
    Assets that are high-quality liquid assets under the proposed U.S. 
LCR (which include equities included in the S&P 500 index or comparable 
indices and investment grade corporate bonds) would be liquid under 
most scenarios; however, the bank holding company would be required to 
make the demonstration to the Board required by the final rule, meet 
the diversification requirement discussed below, and ensure that the 
inclusion of these assets

[[Page 17260]]

in the buffer would be appropriate taking into consideration the 
liquidity risk profile of the company. A bank holding company is 
required to assign appropriate haircuts to all highly liquid assets, 
including assets that qualify as high-quality liquid assets under the 
proposed U.S. LCR: those haircuts may be different from the haircuts 
assigned in the proposed U.S. LCR.
    Some commenters expressed concern that the specified criteria for 
highly liquid assets would result in institutions holding a narrow band 
of asset classes, including concentrations in sovereign debt, and 
opined that limiting the criteria could lead to increased financial 
stability risks. As explained above, the Board believes the specified 
criteria for the buffer are not overly constraining and allow for a 
diverse set of assets to be included in the liquidity buffer. The Board 
believes that, in some cases, sovereign debt issued by foreign 
countries will meet the criteria for highly liquid assets, and the 
criteria should not result in undue concentrations in those asset 
classes. In addition, the diversification requirement (as discussed in 
more detail below) is included in the final rule specifically to 
address the problem of inappropriate asset concentration in the buffer 
generally. Additionally, supervisors will scrutinize any concentrations 
in assets held to meet the buffer requirement as they evaluate overall 
whether the composition of a company's buffer is appropriately tailored 
to its specific liquidity risks.
    Several commenters requested clarification on how to account for 
reverse repo transactions, particularly those secured by highly liquid 
assets, in the buffer and how the tenor of the agreement would play a 
role in the availability of the asset in a company's highly liquid 
asset calculation under the proposed rule. The Board clarifies that if 
firms are able to rehypothecate collateral they hold that has been 
pledged to them to secure a loan (but have not done so), they may count 
that collateral as a highly liquid asset with appropriate haircuts. 
Appropriate haircuts and measurements of inflows and outflows would 
depend on the specific terms of the reverse repo transaction. Inflows 
related to secured loans can be considered in the measurement of net 
cash need, but the firm should also consider the stress scenario and 
reputational factors to determine if they would continue to renew and 
make new loans.
b. Requirement That Assets Be Unencumbered
    In order to ensure that liquid assets held by a bank holding 
company to meet liquidity needs under stress would be freely available 
for sale or pledge at all times in order to generate funds for the 
company, the proposal required that highly liquid assets in the 
liquidity buffer be unencumbered. The proposed definition of 
unencumbered, with respect to an asset, was that (i) the asset is not 
pledged, does not secure, collateralize, or provide credit enhancement 
to any transaction, and is not subject to any lien; (ii) the asset is 
free of legal, contractual, or other restrictions on the ability of the 
company to sell or transfer; and (iii) the asset is not designated as a 
hedge on a trading position.
    A number of commenters criticized the definition of 
``unencumbered'' in the proposed rule. Some commenters expressed 
concern that the proposed definition excluded assets that are 
technically encumbered but, as they can be freed from encumbrance at 
any point, are typically treated as unencumbered by bank holding 
companies for liquidity management purposes. As examples of such 
``technically'' encumbered assets, the commenters mentioned: (i) Assets 
pledged to central banks; (ii) assets pledged to a clearing 
counterparty in excess of the amounts required for clearing; and (iii) 
assets subject to ordinary course ``banker's liens'' that apply to 
exposures held in depository accounts or custody accounts.
    Other commenters expressed concern that the definition of 
unencumbered assets in the proposed rule assumes that a firm must 
actually sell an asset in order to generate liquidity from it, 
asserting that this is inconsistent with the economic reality of 
liquidity risk management. In particular, these commenters asserted 
that assets that hedge trading positions should not be treated as 
encumbered, as companies can still monetize the asset. They argued 
that, whether the asset is a trading position or a hedge on a trading 
position, a company would still be able to generate liquidity from the 
asset through repurchase agreements or central bank facilities. The 
commenters recommended that the definition of ``unencumbered'' assets 
include assets that are comingled with or used as hedges on trading 
positions or pledged to clearing houses, and asserted that a 
requirement that assets be segregated in order to qualify as 
unencumbered would add operational complexity and cost to the practice 
of liquidity risk management, without a commensurate benefit. Finally, 
one commenter suggested that highly liquid assets pledged to an FHLB 
pursuant to a blanket lien that the FHLB does not require as collateral 
for outstanding advances and other extensions of credit should be 
deemed unencumbered, as these assets could be released for use 
elsewhere without diminishing the level of outstanding advances.
    The Board is modifying the proposed definition of ``unencumbered'' 
in the final rule to allow assets that are used as a hedge position to 
meet the definition, as long as they otherwise meet the other criteria 
in the definition. The Board believes this change is appropriate to 
reduce the potential operational burden cited by commenters in 
identifying and isolating such assets. Further, the Board does not 
believe that this change would substantially impede the ability of bank 
holding companies, under most stressed situations, to generate 
liquidity from these assets as needed. Generally, under the final rule, 
an asset would be unencumbered if the company is able to demonstrate 
that it has the ability to monetize the asset and that the proceeds 
could be made available to the liquidity management function of the 
company without conflicting with a business risk or management strategy 
of the company. The Board also believes that assets that are pledged to 
a central bank or a U.S. government-sponsored enterprise, including 
FHLBs (if the asset is not securing credit that has been extended and 
remains outstanding), may be considered as unencumbered. This provision 
is added to the final rule's definition of unencumbered.
    However, the Board believes it is generally not appropriate for a 
bank holding company to include assets pledged to a counterparty for 
provisional needs as unencumbered highly liquid assets. In response to 
commenters' questions regarding assets pledged to a clearing 
counterparty in excess of the amounts required for clearing and assets 
subject to ``banker's liens,'' the Board believes these assets must be 
considered encumbered in most scenarios, as their encumbrance is an 
ongoing requirement for conducting business with such counterparties, 
potentially complicating the use of these assets to offset potential 
outflows in times of stress.
    As further support to ensure that highly liquid assets in the 
buffer are available for a bank holding company's liquidity needs, the 
bank holding company should periodically monetize a representative 
portion of its highly liquid assets, through repo or outright sale, in 
order to test its access to the

[[Page 17261]]

market and the effectiveness of its processes for monetization. In 
addition, the Board would expect the quantity of assets included in the 
liquidity buffer to vary by the stress scenario type. For example, in 
computing the liquidity buffer under a scenario in which a banking 
organization may expect to be forced to post additional collateral 
(such as a scenario involving idiosyncratic financial deterioration), a 
bank holding company that has pledged securities in excess of 
contractual requirements would count a lower portion (or none at all) 
of the excess pledged assets in its buffer.
c. Discounting and Diversification of Assets in the Liquidity Buffer
    As discussed above, in computing the amount of an asset included in 
the liquidity buffer, the bank holding company must discount the fair 
value of the asset to reflect any credit risk and market volatility of 
the asset. Several commenters asked for more clarification on computing 
the discounts that would be applied to assets included in the buffer. 
Such discounts should vary depending upon the type and severity of the 
scenario and should reflect a wide range of risks that could limit a 
company's ability to liquidate the asset, including discounts 
associated with currency conversions. The final rule does not dictate 
the discount percentages that would apply to asset classes in the final 
rule because the stress tests are based on firm-specific assumptions 
and a variety of securities, and the appropriate discount percentage 
may vary based upon the institution to which the stress is applied.
    In addition, the proposal provided that the pool of unencumbered 
highly liquid assets included in the liquidity buffer must be 
sufficiently diversified by instrument type, counterparty, geographic 
market, and other liquidity risk identifiers. One commenter suggested 
that U.S. and foreign sovereign securities be excluded from these 
diversification requirements. The final rule clarifies that the 
diversification requirement which applies to most buffer assets does 
not apply to U.S. Treasuries and U.S. agency securities because of 
their demonstrated liquid nature under stressed conditions.
    In judging the amount of a particular asset class that will be 
included in its liquidity buffer, a bank holding company should 
consider all the liquidity risks of the asset class. For instance, the 
Board observes that currency matching of projected cash inflows and 
outflows is an important aspect of liquidity risk that a bank holding 
company should account for in its stress tests and that the risks 
associated with currency mismatches should be incorporated in a 
company's liquidity buffer.
d. Use of the Buffer
    The proposal did not provide guidance on the circumstances under 
which a banking organization would be able to use the assets in its 
liquidity buffer. Commenters requested clarification and provided 
suggestions relating to the usability of the buffer. One commenter 
requested that the Board clarify in the rule that, during times of 
stress, companies may use the liquidity buffer, temporarily falling 
below the minimum requirement without any adverse outcomes.
    While a banking organization generally would be required to 
maintain an amount of liquid assets in order to meet its 30-day stress 
projections, there are circumstances under which permitting the banking 
organization to use these assets would be beneficial for the safety and 
soundness of the firm and potentially for financial stability. 
Therefore, the Board anticipates that any supervisory decisions in 
response to a reduction of a banking organization's liquidity buffer 
will take into consideration the particular circumstances surrounding 
the reduction. If a banking organization is experiencing idiosyncratic 
or systemic stress and is otherwise practicing good liquidity risk 
management, the Board expects that supervisors would observe the 
company closely as it uses its liquid resources and work with the 
company to determine how to rebuild these resources once the stress has 
passed, through a plan or similar process. However, a supervisory or 
enforcement action may be appropriate when a company's buffer is 
reduced substantially, or falls below its stressed liquidity needs as 
identified by the stress test, because of operational issues or 
inadequate liquidity risk management. Under these circumstances, as 
with other regulatory violations, a bank holding company may be 
required to enter into a written agreement if it does not meet the 
proposed minimum requirement within an appropriate period of time. As 
discussed further below, a bank holding company is required to develop 
a contingency funding plan in which it must identify liquidity stress 
events and design an event management process that sets out its 
procedures for managing liquidity during identified liquidity stress 
events. These procedures must anticipate reductions and subsequent 
replenishment of highly liquid assets.
10. Short-Term Debt Limits
    In the preamble to the proposed rule, the Board noted that the 
Dodd-Frank Act contemplates additional enhanced prudential standards, 
including a limit on short-term debt, and requested comment on whether 
it should establish short-term debt limits in the future. Several 
respondents were in favor of implementing additional limits on short-
term funding. One proponent suggested such limits would help render a 
bank's funding structure more stable in times of market disruption, 
asserting that there are shortcomings related to over-reliance on 
stress testing. Another commenter suggested that a short-term debt 
limit could work in conjunction with the proposed U.S. LCR, a net 
stable funding ratio requirement (NSFR),\61\ and single counterparty 
credit limits to mitigate the risk of a disruption in repo markets. 
However, several commenters asserted that short-term debt limits were 
inappropriate. Some commenters asserted that a limit on short-term debt 
would not enhance prudent liquidity risk management, and argued that 
short-term debt levels should be overseen by prudential supervision on 
a bank-by-bank basis. One commenter argued that the appropriate level 
of short-term debt maintained by a company depends upon the mix of its 
assets and liabilities, and that limits on short-term debt are best 
addressed as part of limit-setting around liquidity stress testing. 
Although the Board is not adopting a short-term debt limit requirement 
in connection with the final rule, the Board is continuing to study and 
evaluate the benefits to systemic stability from imposing limits on 
short-term debt.
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    \61\ While the Basel III LCR is focused on measuring liquidity 
resilience over a short-term period of severe stress, the NSFR is 
designed to promote resilience over a one-year time horizon by 
creating additional incentives for banking organizations and other 
financial companies that would be subject to the standard to fund 
their activities with stable sources and encouraging a sustainable 
maturity structure of assets and liabilities. Currently, the NSFR is 
in an international observation period, and global implementation is 
scheduled for 2018. See Basel Committee principles for liquidity 
risk management, supra note 47.
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D. Debt-to-Equity Limits for Bank Holding Companies

    Section 165(j) of the Dodd-Frank Act provides that the Board must 
require a bank holding company to maintain a debt-to-equity ratio of no 
more than 15-to-1 if the Council determines 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 or foreign

[[Page 17262]]

banking organization poses to the financial stability of the United 
States.\62\ The Board is required to promulgate regulations to 
establish procedures and timelines for compliance with section 165(j).
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    \62\ The Dodd-Frank 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. These factors include, 
among other things, the extent of the leverage of the company, the 
nature, scope, size, scale, concentration, interconnectedness, and 
mix of the activities of the company, and the importance of the 
company as a source of credit for U.S. households, businesses, and 
State and local governments and as a source of liquidity for the 
U.S. financial system. The statute expressly exempts any federal 
home loan bank from the debt-to-equity ratio requirement. See 12 
U.S.C. 5366(j)(1).
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    The domestic proposal defined key terms used in the statute and 
established a process for applying the debt-to-equity ratio. Under the 
proposal, ``debt'' and ``equity'' would have had the same meaning as 
``total liabilities'' and ``total equity capital'' respectively, as 
calculated in an identified company's reports of financial condition. 
The 15-to-1 debt-to-equity ratio would have been calculated as the 
ratio of total liabilities to total equity capital minus goodwill. A 
bank holding company for which the Council has made the grave threat 
determination 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 
bank holding company would have been required to come into compliance 
with the 15-to-1 debt-to-equity ratio requirement. The proposal would 
have permitted 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 would have been required in writing not less than 30 
days prior to the expiration of the existing time period for 
compliance, and the proposal would have required the company to 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 have reviewed 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 the 
proposed rule 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.
    Some commenters requested that the Board clarify the language of 
``pose a grave threat to the financial stability of the United 
States,'' arguing that the statutory meaning is vague. However, the 
Board's rule establishes the process after the Council makes the 
``grave threat'' determination. Because the Council makes the 
determination of whether a company ``poses a grave threat to the 
financial stability of the United States,'' the Council is the 
appropriate party to provide clarity on the grave threat standard.
    Some commenters argued that the substitution of ``total 
liabilities'' for the statutory term ``debt'' would be inappropriate, 
especially as applied to insurance companies. According to commenters, 
under statutory accounting principles, insurers account for future 
liabilities arising from underwritten insurance policies and hold 
reserves in anticipation of those future liabilities, which are treated 
as liabilities under accounting rules. Other commenters contended that 
the measure was duplicative and unnecessary of other measures of 
leverage, and, as applied to insurance companies, should exclude 
separate accounts. Another commenter suggested that the measure should 
focus on activities, arguing that insurance companies measure leverage 
differently from banks when evaluating the impact of debt issuance on 
capital adequacy and on financial condition.
    There are several common methods of calculating a debt-to-equity 
ratio, including taking the measure of total liabilities to total 
equity. The Board chose to define ``debt'' on the basis of ``total 
liabilities'' as included a company's report of financial condition as 
set forth on the Board's Form FR Y-9C because the measure of ``total 
liabilities'' is well understood, objective, transparent, and readily 
available across all bank holding companies. The alternatives suggested 
by commenters, which would require the Board to identify categories of 
liabilities that would be included as ``debt'' or to trace liabilities 
to certain activities of an institution, would result in a non-
transparent system that may result in arbitrary distinctions between 
certain types of liabilities. In addition, in response to concerns 
about the debt-to-equity ratio as a duplicative measure, the Board 
notes that these ratios measure leverage as a ratio of assets to equity 
rather than debt to equity. With regard to the application of the 
measure to insurance companies, as further described above, the final 
rule does not apply the standards to nonbank financial companies 
supervised by the Board, and the Board will consider such comments in 
connection with the application of these standards to nonbank financial 
companies supervised by the Board.
    Some commenters suggested that the Board define ``equity'' as 
``tangible common equity,'' rather than ``total equity capital.'' 
Commenters argued that tangible common equity would be understood and 
able to absorb losses in times of financial stress, whereas ``total 
equity capital'' would include components such as unrealized gains on 
securities available for sale and accumulated net gains on cash-flow 
hedges that are unlikely to be available to absorb losses in times of 
financial stress. To maintain balance with the broad definition of 
``debt'' as ``total liabilities,'' the final rule maintains the 
definition of ``equity'' as ``total equity capital.'' While the Board 
agrees with commenters that ``tangible common equity'' is more able to 
absorb losses in times of stress, the Board notes that a bank holding 
company subject to this determination will remain subject to the common 
equity tier 1 capital ratio and capital conservation buffers, which are 
based on a definition of ``common equity tier 1'' that is more 
stringent than ``tangible common equity.'' Accordingly, a bank holding 
company subject to this determination will be required to maintain 
loss-absorbing capital independent of the debt-to-equity ratio.
    Commenters also provided views on the proposed time period in which 
a company would have been required to comply with the debt-to-equity 
ratio. Some commenters argued that a shorter period, such as 120 days, 
would be warranted if a company posed a grave threat to U.S. financial 
stability. In contrast, another commenter suggested that the Board 
preserve flexibility to grant additional extensions where more rapid 
efforts to achieve full compliance may cause a ``fire sale'' of assets. 
The Board is adopting the requirements as proposed because the 
combination of the initial 180-day period with the two potential 90-day 
extension periods balances the certainty of a fixed timetable for a 
company to come into compliance with regulatory flexibility if 
additional time is appropriate. Like the proposed rule, the final rule 
does not establish a specific set of actions to be taken by a company 
in order to comply

[[Page 17263]]

with the debt-to-equity ratio requirement. The company would, however, 
be expected to come into compliance with the ratio in a manner that is 
consistent with the company's safe and sound operation and the 
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 Board has amended the final rule for 
bank holding companies to reflect the procedures for requesting an 
extension of time in the text of the regulation, making it consistent 
with the rule for foreign banking organizations.

IV. Enhanced Prudential Standards for Foreign Banking Organizations

A. Background

1. Considerations in Developing the Proposal
    The Board is responsible for the overall supervision and regulation 
of the U.S. operations of all foreign banking organizations.\63\ 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.\64\ Under the Board's historic framework for foreign 
banking organizations, supervisors have monitored the individual legal 
entities of the U.S. operations of these companies, and the Federal 
Reserve has aggregated 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. 
In addition, the Federal Reserve has relied on the home country 
supervisor to supervise a foreign banking organization on a global 
basis consistent with international standards, and has relied on the 
foreign banking organization to support its U.S. operations under both 
normal and stressed conditions.
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    \63\ 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).
    \64\ For example, the 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 OCC, the 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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    As discussed in the proposal, 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.\65\ In 2008, U.S. branches and agencies provided more than $600 
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.\66\ 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.
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    \65\ 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.
    \66\ 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: http://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 became increasingly concentrated, 
interconnected, and complex after the mid-1990s. By 2007, the top ten 
foreign banking organizations accounted for over 60 percent of foreign 
banking organizations' U.S. assets, up from 40 percent in 1995.\67\ 
Moreover, U.S. broker-dealer assets of large foreign banking 
organizations as a share of their U.S. assets grew rapidly after the 
mid-1990s.\68\ In 2012, five of the top-ten U.S. broker-dealers were 
owned by foreign banking organizations. 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.\69\
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    \67\ 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).
    \68\ 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).
    \69\ See Form FFIEC 002.
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2. The Financial Stability Mandate of the Dodd-Frank Act
    In response to the financial crisis, Congress enacted the Dodd-
Frank Act, which included multiple measures to promote the financial 
stability of the United States.\70\ Section 165 of the Dodd-Frank Act 
directs the Board to establish enhanced prudential standards in order 
to prevent or mitigate risks to U.S. financial stability that could 
arise from the material financial distress or failure or ongoing 
activities of U.S. and foreign banking organizations that have total 
consolidated assets of $50 billion or more. The enhanced prudential 
standards for foreign banking organizations must include risk-based and 
leverage capital, liquidity, stress test, and risk management and risk 
committee requirements, resolution plan and credit exposure report 
requirements, concentration limits, and a debt-to-equity limit for 
companies that pose a grave threat to the financial stability of the 
United States. Section 165 also authorizes the Board to establish a 
contingent capital requirement, enhanced public disclosures, short-term 
debt limits, and ``other prudential standards'' that the Board 
determines are ``appropriate.''
---------------------------------------------------------------------------

    \70\ S. Rep. No. 111-176, p. 2 (April 15, 2010).
---------------------------------------------------------------------------

    In applying section 165 to a foreign-based bank holding company, 
the Dodd-Frank Act 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

[[Page 17264]]

United States.\71\ Section 165 also directs the Board to take into 
account differences among nonbank financial companies, bank holding 
companies, and foreign banking organizations based on a number of 
factors.\72\
---------------------------------------------------------------------------

    \71\ 12 U.S.C. 5365(b)(2). Section 165(b)(2) of the Dodd-Frank 
Act refers to ``foreign-based bank holding company.'' Section 102 of 
the Dodd-Frank Act defines ``bank holding company'' for purposes of 
Title I of the Dodd-Frank Act to include foreign banking 
organizations that are treated as bank holding companies under 
section 8(a) of the International Banking Act (12 U.S.C. 3106(a)).
    \72\ These factors are described in section I.A of this 
preamble.
---------------------------------------------------------------------------

3. Summary of the Proposal
    In December 2012, the Board sought comment on the foreign proposal. 
The proposal presented a set of targeted 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 in section 165 of the Dodd-Frank Act.\73\ In the 
proposal, the Board sought to implement section 165 in a manner that 
enhanced the Board's current regulatory framework for foreign banking 
organizations in order to mitigate the risks posed to U.S. financial 
stability by the U.S. activities of foreign banking organizations. 
These proposed changes were designed to facilitate consistent 
regulation and supervision of the U.S. operations of large foreign 
banking organizations. The proposed changes would have also bolstered 
the capital and liquidity positions of the U.S. operations of foreign 
banking organizations to improve their resiliency in adverse economic 
and financial conditions, and help them withstand deteriorations in 
asset-quality as well as funding shocks. Together, these changes were 
expected to increase the resiliency of the U.S. operations of foreign 
banking organizations during normal and stressed periods. A summary of 
the major components of the proposal is set forth below.
---------------------------------------------------------------------------

    \73\ The proposal also addressed early remediation requirements 
in Dodd-Frank Act section 166. As noted above, the Board is not 
adopting a final rule relating to section 166 at this time.
---------------------------------------------------------------------------

a. Structural Requirements
    Presently, foreign banking organizations operate through a variety 
of structures in the United States. This diversity in structure 
presented significant challenges to the Board's task of applying the 
standards mandated by the Dodd-Frank Act both consistently across the 
U.S. operations of foreign banking organizations, and in comparable 
ways to large U.S. bank holding companies and foreign banking 
organizations. The foreign proposal would have applied a structural 
enhanced prudential 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) \74\ would have been required to form a 
U.S. intermediate holding company. The foreign banking organization 
would have been required to hold its interest in 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, through the U.S. intermediate 
holding company.
---------------------------------------------------------------------------

    \74\ Under the proposal, U.S. non-branch assets would have been 
calculated 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 have been 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.
---------------------------------------------------------------------------

    As noted in the proposal, the U.S. intermediate holding company 
requirement would have provided 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 have provided 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. A foreign banking organization would have been permitted 
to continue to operate in the United States through branches and 
agencies subject to the enhanced prudential standards included in the 
proposal for U.S. branches and agencies of foreign banks.\75\
---------------------------------------------------------------------------

    \75\ The proposal would have referred to all U.S. branches and 
U.S. agencies of a foreign bank as the ``U.S. branch and agency 
network.'' The final rule does not use the defined term ``U.S. 
branch and agency network,'' and simply refers to ``U.S. branches 
and U.S. agencies of a foreign bank.
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b. Capital Requirements
    Under the proposal, a U.S. intermediate holding company would have 
been subject to the same risk-based and leverage capital standards 
applicable to U.S. bank holding companies, regardless of whether it 
controlled a subsidiary depository institution. These standards include 
minimum risk-based and leverage capital requirements and applicable 
capital buffers. In addition, under the proposal, U.S. intermediate 
holding companies with total consolidated assets of $50 billion or more 
would have been subject to the capital plan rule.\76\ Furthermore, any 
foreign banking organization with total consolidated assets of $50 
billion or more generally would have been required to meet home country 
risk-based and leverage capital standards at the consolidated level 
that are consistent with internationally-agreed risk-based capital and 
leverage standards published by the Basel Committee (Basel Capital 
Framework), including the risk-based capital and leverage requirements 
included in Basel III, on an ongoing basis.\77\ Absent home-country 
standards consistent with the Basel Capital Framework, a foreign 
banking organization would have been required to demonstrate to the 
Board's satisfaction that it would have met Basel Capital Framework 
standards at the consolidated level were those standards applied.
---------------------------------------------------------------------------

    \76\ See 12 CFR 225.8.
    \77\ See Basel III: A global framework for more resilient banks 
and banking systems (December 2010), available at: http://www.bis.org/publ/bcbs189.pdf. Consistency with the internationally-
agreed standards would be measured in accordance with the transition 
period set forth in the Basel Capital Framework.
---------------------------------------------------------------------------

    The risk-based and leverage capital requirements were intended to 
strengthen the capital position of the U.S. operations of foreign 
banking organizations and provide a consolidated capital treatment for 
these operations. Aligning the capital requirements for U.S. 
intermediate holding companies formed by foreign banking organizations 
and U.S. bank holding companies is in line with long-standing 
international capital agreements, which provide flexibility to host 
jurisdictions to establish capital requirements on a national treatment 
basis for local subsidiaries of foreign banking organizations.
c. Risk Management Requirements
    The proposal would have required 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 total consolidated assets 
of $50 billion or more and combined U.S. assets of $50 billion or more 
would have been required to employ a U.S. chief risk officer and 
implement enhanced risk

[[Page 17265]]

management requirements generally consistent with the requirements in 
the domestic proposal. However, the foreign proposal would have 
implemented these requirements in a manner that provided some 
flexibility for foreign banking organizations and recognized the 
complexity in applying risk-management standards to foreign banking 
organizations that maintain U.S. branches and agencies, as well as bank 
and nonbank subsidiaries.
d. Liquidity Requirements
    The proposal would have applied a set of enhanced liquidity 
standards to the U.S. operations of foreign banking organizations with 
total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more that were comparable to those proposed 
for large U.S. bank holding companies in the domestic proposal. These 
standards include requirements to conduct monthly liquidity stress 
tests over a series of time intervals out to one year, and to hold a 
buffer of highly liquid assets to cover the first 30 days of stressed 
cash-flow needs. These standards were 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 if 
U.S. dollar funding channels became strained and short-term debt could 
not easily be rolled over.
    Under the proposal, the liquidity buffer would have separately 
applied to the U.S. branches and agencies of a foreign bank 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 
have required the U.S. intermediate holding company to maintain the 
entire 30-day buffer in the United States. In recognition that U.S. 
branches and agencies are not separate legal entities from their parent 
foreign bank but can assume liquidity risk in the United States, the 
proposal would have required the U.S. branches and agencies of a 
foreign bank to maintain the first 14 days of their 30-day liquidity 
buffer in the United States and would have permitted the U.S. branches 
and agencies to meet the remainder of this requirement at the 
consolidated level.
e. Stress Testing
    The proposal would have implemented stress-test requirements for a 
U.S. intermediate holding company in a manner parallel to those applied 
to U.S. bank holding companies.\78\ The parallel implementation would 
have helped to ensure that U.S. intermediate holding companies have 
sufficient capital in the United States to withstand a severely adverse 
stress scenario. In addition, a foreign banking organization with total 
consolidated assets of $50 billion or more that maintained U.S. 
branches and agencies would have been required to be subject to a 
consolidated capital stress testing regime that is broadly consistent 
with the stress-test requirements in the United States. If the foreign 
banking organization had combined U.S. assets of $50 billion or more, 
the proposal would have required it to provide information to the Board 
regarding the results of the consolidated stress tests.
---------------------------------------------------------------------------

    \78\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October 
12, 2012).
---------------------------------------------------------------------------

    The foreign proposal also included single counterparty credit 
limits and early remediation requirements. However, these standards are 
still under development and so are not discussed here.
4. Targeted Adjustments to Foreign Bank Regulation
a. Policy Considerations for the Proposal
    As discussed above, the Federal Reserve traditionally has relied on 
the home-country supervisor to supervise a foreign banking organization 
on a global basis, consistent with international standards, which are 
intended to address the risks posed by the consolidated organization 
and to help achieve global competitive equity. The Federal Reserve has 
relied on the parent foreign banking organization to support its U.S. 
operations under both normal and stressed conditions.\79\ The proposal 
would have adjusted this traditional approach by requiring a foreign 
banking organization to organize its U.S. subsidiaries under a single 
U.S. intermediate holding company and applying enhanced prudential 
standards to the U.S. intermediate holding company.
---------------------------------------------------------------------------

    \79\ 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).
---------------------------------------------------------------------------

    Some commenters supported the proposal as an enhancement of U.S. 
financial stability and expressed the view that the proposal would 
reduce reliance on a foreign banking organization to keep its U.S. 
entities solvent, particularly where both the home-country parent and 
the U.S. operations come under simultaneous stress. However, other 
commenters questioned the need for such adjustment and asserted that 
the Board already has adequate tools and information for supervising 
the U.S. operations of foreign banking organizations. Commenters 
asserted that the goals of the proposal could be achieved without, for 
example, the U.S. intermediate holding company requirement. For 
example, as an alternative to the proposal, some commenters suggested 
that the Board supplement its existing regulatory approach by requiring 
more information from home-country supervisors. Another commenter 
suggested that, instead of finalizing the proposed rules, the Board 
condition exemptions to regulatory requirements on the receipt of 
appropriate information and use its strength-of-support assessment 
process \80\ as a framework for evaluating home-country regulation.
---------------------------------------------------------------------------

    \80\ See, e.g., Supervision & Regulation Letter 00-14 (October 
23, 2000).
---------------------------------------------------------------------------

    Congress directed the Board to adopt enhanced prudential standards 
for foreign banking organizations in order to mitigate risks to U.S. 
financial stability posed by foreign banking organizations. As 
discussed above, the concentration, complexity, and interconnectedness 
of the U.S. operations of foreign banking organizations present risks 
to U.S. financial stability that are not addressed by the traditional 
framework. The modifications to the Board's current supervisory 
approach suggested by commenters--such as providing the Federal Reserve 
with additional information, or building upon the existing strength-of-
support framework--would not provide a consistent platform for 
regulating and supervising the U.S. operations of foreign banking 
organizations or facilitate the application of enhanced prudential 
standards to the U.S. non-branch operations of a foreign banking 
organization.
    Many commenters suggested that the Board did not adequately tailor 
the enhanced prudential standards set forth in the proposal to the 
systemic risk posed by foreign banking organizations. According to 
these commenters, the proposal did not reflect consideration of either 
the meaningful differences among foreign banking organizations in their 
systemic risk characteristics or whether actual threats to U.S. 
financial stability would justify the requirement for a given foreign 
banking organization. One commenter expressed the view that only a very 
small subset of foreign banking organizations has the potential to 
present risks to U.S. financial stability. Others asserted that a 
global consolidated assets measure would overstate the U.S. systemic 
risk posed

[[Page 17266]]

by many foreign banking organizations. Similarly, other commenters 
observed that many foreign banking organizations do not rely on their 
U.S. branches as a net source of U.S. dollar funding for their non-U.S. 
operations.
    The Dodd-Frank Act requires the Board to impose enhanced prudential 
standards on all foreign banking organizations with global consolidated 
assets of $50 billion or more, and contemplates that the Board will 
tailor the requirements depending on the risk presented to U.S. 
financial stability by these institutions. The Board believes that the 
measures included in the final rule are appropriate for managing the 
risks to U.S. financial stability that may be posed by such firms. The 
standards that the Board has developed are tailored such that a foreign 
banking organization with U.S. operations that pose less risk will 
generally make fewer changes to their U.S. operations to come into 
compliance with the new standards. For instance, the standards 
applicable to foreign banking organizations with total consolidated 
assets of $50 billion or more but combined U.S. assets of less than $50 
billion are substantially less as compared to those applicable to 
foreign banking organizations with combined U.S. assets of $50 billion 
or more. In addition, as explained in more detail in section IV.B of 
this preamble, a foreign banking organization with less than $50 
billion in U.S. non-branch assets will not be required to form a U.S. 
intermediate holding company. The liquidity requirements applicable to 
a foreign banking organization with combined U.S. operations of $50 
billion or more are calibrated such that a foreign banking organization 
whose U.S. operations have maturity-matched cash inflows and outflows 
is unlikely to be substantially affected by these requirements. The 
risk-based capital rules applicable to U.S. intermediate holding 
companies also calibrate capital requirements to the level of risk 
posed by the assets and off-balance sheet exposures of the U.S. 
intermediate holding company, including the degree of 
interconnectivity. Foreign banking organizations that already maintain 
sufficient risk-based or leverage capital at their U.S. operations will 
not have to reallocate to or raise capital for those operations.
    The proposal also described recent modifications to the regulation 
of internationally active banks adopted or contemplated by other 
national authorities.\81\ These modifications include increased local 
liquidity and capital requirements, limits on intragroup exposures of 
domestic banks to foreign subsidiaries, and requirements to prioritize 
or segregate home country retail operations. Commenters argued that it 
would be premature for the Board to modify its regulatory approach 
before these adjustments are complete. Commenters also argued that the 
Board should consider home-country legal or political developments that 
could potentially limit a foreign bank parent's ability to support its 
U.S. operations in the overall context of factors that would determine 
a foreign banking organization's practical ability to support its U.S. 
operations.
---------------------------------------------------------------------------

    \81\ See 77 FR 76631 note 13.
---------------------------------------------------------------------------

    While the Board considered these modifications and legal and 
political developments as factors in its assessment of the likelihood 
that a foreign bank parent will be willing and able to support its U.S. 
operations in the future, the proposal and the final rule respond to a 
broader set of considerations that are intended to address the 
financial stability risks posed by the U.S. operations of foreign 
banking organizations. While the Board recognizes the important 
initiatives under development in other countries, the Board does not 
believe it is appropriate to await the outcomes of such initiatives 
before adopting enhanced prudential standards to address risks to U.S. 
financial stability. As discussed below, the Board will monitor 
supervisory approaches that are implemented throughout the world and 
may take further action in the future as appropriate.
    Some commenters asserted that the proposal's narrative describing 
the period leading up to and during the financial crisis omitted the 
role that foreign banking organizations played in supporting financial 
stability, such as through acquisitions of failed bank and nonbank 
operations of U.S. financial companies. One commenter stated that 
foreign banking organizations undertook such acquisitions with an 
expectation that cross-border supervisory and regulatory standards 
would not be significantly disrupted.
    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. The Board 
acknowledges that there have been significant developments, both in the 
United States and overseas, to strengthen capital positions since the 
crisis. However, these changes in the international regulatory 
landscape, and the likelihood of changes still to come, are not a 
substitute for enhancing regulation of the foreign banking 
organizations that have large U.S. operations and pose risks to U.S. 
financial stability.
    While the Board acknowledges that some foreign banking 
organizations undertook cross-border acquisitions during the financial 
crisis, the crisis also highlighted weaknesses in the existing 
framework for supervising, regulating, and otherwise constraining the 
risks of major financial companies, including the U.S. operations of 
foreign banking organizations. The Board believes the requirements 
contained in the final rule are appropriate in light of the statutory 
directive to impose enhanced prudential standards on domestic and 
foreign firms that address these risks, and by the Board's mandate to 
minimize risks to U.S. financial stability.
    Some commenters argued that the proposal would prevent foreign 
banking organizations from managing capital and liquidity on a 
centralized basis. These commenters asserted that the proposal would 
inhibit diversification of risk and could reduce a foreign banking 
organization's flexibility to respond to stress in other parts of the 
organization on a continual basis. These commenters also indicated that 
they expected the proposed requirements to increase the need for 
foreign banking organizations to take advantage of ``lender of last 
resort'' government facilities, because banks that currently manage 
capital and liquidity on a centralized basis would lose the ability 
efficiently to move those resources to the branches or operations that 
need it the most.
    While the proposed requirements could incrementally increase costs 
and reduce flexibility of internationally active banks that primarily 
manage their capital and liquidity on a centralized basis, they would 
increase the resiliency of the U.S. operations of a foreign banking 
organization, the ability of the U.S. operations to respond to stresses 
in the United States, and the stability of the U.S. financial system. A 
firm that relies significantly on centralized resources may not be able 
to provide support to all parts of its organization. The Board believes 
that the final rule reduces the need for a foreign banking organization 
to contribute additional capital and liquidity to its U.S. operations 
during times of home-country or other international stresses, thereby 
reducing the likelihood that a banking organization that comes under 
stress in multiple jurisdictions will be required to choose which of 
its operations to support. Finally, the Board

[[Page 17267]]

notes that requiring foreign banking organizations to maintain 
financial resources in the jurisdictions in which they operate 
subsidiaries is consistent with existing Basel Committee agreements and 
international regulatory practice. U.S. banking organizations operate 
in overseas markets that apply local regulatory requirements to 
commercial and investment banking activities conducted in locally 
incorporated subsidiaries of foreign banks. In the Board's view, the 
final rule establishes a regulatory approach to foreign banking 
organizations that is similar in substance to that in other 
jurisdictions.
b. Taking Into Account Home-Country Standards
    In applying section 165 to a foreign-based bank holding company, 
the Dodd-Frank Act directs the Board 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.\82\ This direction 
requires the Board to consider the regulatory regimes applicable to 
foreign banking organizations abroad when designing the enhanced 
prudential standards for foreign banking organizations.
---------------------------------------------------------------------------

    \82\ See supra note 71.
---------------------------------------------------------------------------

    Commenters argued that the Board did not adequately take into 
account home country standards when developing the proposal. For 
instance, commenters urged the Board to rely on home country standards 
in applying the enhanced prudential standards, absent a material 
inconsistency that could be addressed through targeted U.S. regulation. 
Other commenters suggested that the Board incorporate a ``substituted 
compliance'' framework into the rule, which would defer to home-country 
standards where the home country has adopted standards similar to those 
included in the proposal.
    The Board has taken into account home country standards as required 
by section 165 in the development of the proposed and final rules. In 
recognition of the home-country standards and the home-country 
supervisory regime applicable to foreign banks, the final rule 
continues to permit foreign banks to operate through branches and 
agencies in the United States on the basis of their home-country 
capital. Accordingly, the final rule does not apply risk-based or 
leverage capital standards or stress testing standards to U.S. branches 
and agencies of foreign banking organizations. In addition, the 
proposed and final risk management standards provide flexibility for 
foreign banking organizations to rely on home-country governance 
structures to implement certain elements of the final rule's risk-
management requirements by generally permitting a foreign banking 
organization to establish its U.S. risk committee as a committee of its 
global board of directors.
    While taking home country standards into account, the final rule 
recognizes that foreign jurisdictions do not calibrate or construct 
their home country standards to address U.S. exposures or the potential 
impact of those exposures on the U.S. financial system.\83\ The 
consideration of the home country standards applicable to foreign 
banking organizations must be done in light of the general purpose of 
section 165, which is ``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 these firms. 
The final rule, with the requirement that large foreign banking 
organizations establish a U.S. intermediate holding company and look to 
home country standards in operating branches in the United States, 
attempts to balance these two considerations.\84\
---------------------------------------------------------------------------

    \83\ Section 165(b)(2) requires the Board to give due regard to 
the principle of national treatment and equality of competitive 
opportunity. In addition, section 165(b)(3)(A) requires the Board to 
``take into account differences among nonbank financial companies 
supervised by the Board of Governors and bank holding companies 
[with total consolidated assets of $50 billion or more], based on 
the factors described in section 113(a) and (b) of the Dodd-Frank 
Act,'' which include ``the amount and nature of the United States 
financial assets of the company,'' ``the amount and nature of the 
liabilities of the company used to fund activities and operations in 
the United States, including the degree of reliance on short-term 
funding,'' and ``the extent and nature of the United States related 
off-balance-sheet exposures of the company.'' The proposed enhanced 
prudential standards were designed to ensure that financial 
resources required to be maintained in the United States would 
appropriately take into account the U.S. financial assets, 
liquidity, and off-balance-sheet exposures of, and the systemic risk 
posed by, the U.S. operations of foreign banking organizations, in 
accordance with the statutory factors.
    \84\ Where courts have reviewed agency interpretations of 
statutes which require an agency to ``take into account'' a number 
of factors, courts have given the agencies broad discretion to 
balance those factors. Courts require that the agency compile a 
record on which it based its decision, but generally defer to the 
expertise of the agency in determining how to apply the factors and 
the relative weight given to each factor. See Lignite Energy v. EPA, 
198 F.3d 930 (D.C. Cir. 1999); Weyerhaeuser v. EPA, 590 F.2d 1011 
(D.C. Cir. 1978); National Wildlife Federation v. EPA, 286 F.3d 554 
(D.C. Cir. 2002); Trans World Airlines, Inc. v. Civil Aeronautics 
Board, 637 F.2d 62 (2d Cir. 1980).
---------------------------------------------------------------------------

    Commenters argued that the Board is required to engage in an 
institution-specific analysis of comparable consolidated home-country 
standards because of the statute's use of the singular term ``foreign 
financial company.'' Commenters further argued that that directive 
requires the Board to consider the home-country regime applicable to a 
foreign banking organization and the effect of that regime on the U.S. 
operations of the specific foreign banking organization.\85\
---------------------------------------------------------------------------

    \85\ Section 165(b)(2) provides: ``In applying the standards set 
forth in paragraph (1) to any foreign nonbank financial company 
supervised by the Board of Governors or foreign-based bank holding 
company, the Board shall--(A) give due regard to the principle of 
national treatment and equality of competitive opportunity, and (B) 
take into account the extent to which the foreign 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 observes that the statute permits it to promulgate 
standards by regulation and permits the Board to tailor standards by 
category of institution, suggesting that Congress did not require an 
institution-specific analysis in establishing the standards. 
Furthermore, the final rule applies an institution-specific analysis in 
evaluating comparable consolidated home-country standards in 
determining whether the home-country capital and stress test standards 
meet the requirements of the final rule, as discussed further in those 
sections of the preamble. With respect to all standards, the Board's 
supervisory approach will be tailored to the size and complexity of the 
company.
    Other commenters argued that, because of parallel statutory 
language regarding home country standards, the Board's implementation 
of section 165 should parallel its implementation of the Gramm-Leach-
Bliley Act provision \86\ regarding a foreign banking organization's 
ability to qualify as a financial holding company.\87\ These provisions 
of the Gramm-Leach-Bliley Act do not reference home-country standards, 
and, furthermore, were not motivated by the financial stability 
concerns that motivated Title I of the Dodd-Frank Act. Therefore, in

[[Page 17268]]

interpreting the standards the Board must apply to foreign banking 
organizations under section 165 of the Dodd-Frank Act, the Board does 
not believe that the Gramm-Leach-Bliley Act provisions are controlling.
---------------------------------------------------------------------------

    \86\ Section 141 of Public Law 106-102, 113 stat. 1139 (1999) 
(providing that, in permitting a foreign banking organization to 
engage in expanded financial activities permissible for a bank 
holding company that is a financial holding company, ``the Board 
shall apply comparable capital and management standards to a foreign 
bank that operates a branch or agency or owns or controls a 
commercial lending company in the United States, giving due regard 
to the principle of national treatment and equality of competitive 
opportunity.'')
    \87\ See 12 CFR 225.90 (requiring that a foreign banking 
organization be well capitalized and well managed and setting forth 
the standards to determine whether a foreign banking organization is 
well capitalized and well managed).
---------------------------------------------------------------------------

c. National Treatment
    The Dodd-Frank Act requires the Board to give due regard to 
national treatment and equality of competitive opportunity, which 
generally means that foreign banking organizations operating in the 
United States should be treated no less favorably than similarly-
situated U.S. banking organizations and should generally be subject to 
the same restrictions and obligations in the United States as those 
that apply to the domestic operations of U.S. banking organizations.
    While some commenters endorsed the proposal as facilitating equal 
treatment of large foreign banking organizations and domestic bank 
holding companies, other commenters suggested that particular elements 
of the proposal did not give adequate regard to the principle of 
national treatment. For instance, many commenters argued that foreign 
banking organizations were disadvantaged by the fact that the enhanced 
prudential standards would apply to them on a sub-consolidated level 
(meaning, only to their U.S. operations), whereas the standards would 
apply to U.S. bank holding companies on a consolidated basis.
    The principles of national treatment and equality of competitive 
opportunity were central considerations in the design of the enhanced 
prudential standards for foreign banking organizations. The standards 
applied to the U.S. operations of foreign banking organizations are 
broadly consistent with the standards applicable to U.S. bank holding 
companies. In particular, a U.S. firm that proposes to conduct both 
banking operations and nonbank financial operations must (with a few 
limited exceptions) form a bank holding company or savings and loan 
holding company subject to supervision and regulation by the Board. The 
U.S. intermediate holding company requirement subjects foreign banking 
organizations with large U.S. banking operations to comparable 
organizational and prudential standards. Foreign banking organizations 
operating in the United States generally are treated no less favorably, 
and are subject to similar restrictions and obligations, as similarly-
situated U.S. banking organizations.
    To the extent that there are differences in the application of the 
standards for U.S. bank holding companies and foreign banks, the 
differences generally reflect the structural differences between 
foreign banking organizations' operations in the United States and U.S. 
bank holding companies. For instance, because the final rule permits 
U.S. branches and agencies of foreign banks to continue to operate on 
the basis of the foreign bank's capital, the final rule does not impose 
capital or stress testing requirements on U.S. branches and agencies of 
foreign banks.
    Commenters' concerns regarding national treatment with respect to 
particular enhanced prudential standards, and the Board's response to 
such concerns, are discussed further in the relevant section below 
describing each prudential standard.
d. International Regulatory Cooperation
    Many commenters asserted that the proposal represented a retreat 
from the Board's past practice of international regulatory coordination 
and cooperation. These commenters stated that the Board's international 
commitments place a strong emphasis on cooperation, sharing of 
information, and coordination for internationally active banks. Many of 
these commenters urged the Board to follow the G-20's call for 
regulatory cooperation, and asserted that the Board should work within 
the international fora to address its concerns about systemic 
stability.\88\ Several commenters requested that the Board conduct a 
quantitative impact study on the effect of the proposal or on 
particular aspects of the proposal before adopting a final rule. One 
commenter suggested that the Board should recommend steps that banking 
organizations and regulators could take to foster international 
cooperation and asserted that the Board should work through 
international agreements by, for example, obtaining pledges among 
regulators to maintain intra-group services and support, requiring home 
country consultation before host country supervisors may make 
managerial changes, and providing a sunset date for any provision of 
the final rule that is addressed by an international agreement in the 
future.
---------------------------------------------------------------------------

    \88\ For example, commenters cited ``Declaration: Summit on 
Financial Markets and the World Economy'' (Nov. 15, 2008), available 
at: http://www.g20.utoronto.ca/2008/2008declarationlll5.html; and 
``The G-20 Toronto Summit Declaration'' (June 26-27, 2010), 
available at: http://www.g20.utoronto.ca/2010/to-communique.html.
---------------------------------------------------------------------------

    The Board has long worked to foster cooperation among international 
regulators, and actively participates in international efforts to 
improve cooperation among supervisors around the world. As a general 
matter, these supervisors have responded to the lessons learned during 
the recent financial crisis by enhancing the supervisory and regulatory 
standards that apply to their banking organizations. The Board has been 
working closely with its international counterparts and through 
international fora, such as the Basel Committee and the FSB, to develop 
common approaches that strengthen financial stability as well as the 
regulation of financial organizations. While these efforts often lead 
to unified approaches, such as the Basel III capital and liquidity 
frameworks, in some cases countries move at different paces and develop 
supplemental solutions that are tailored to the legal framework, 
regulatory system, and industry structure in each jurisdiction. For 
example, the United States has required U.S. banking organizations to 
meet a minimum leverage ratio since the 1980s, and the United States 
has long had strict activity restrictions on companies that control 
banks.
    The Board will continue to work with its international counterparts 
to strengthen the global financial system and financial stability. As 
regulatory and supervisory standards are implemented throughout the 
world, the Board and its international supervisory colleagues will gain 
further insight into which approaches are most effective in improving 
the resilience of banking organizations and in protecting financial 
stability, and the Board will take further action as appropriate.
    While the Board considered commenters' proposals for various 
regulatory agreements, the Board is concerned that such proposals may 
not adequately address risks to U.S. financial stability. Localized 
stress on internationally active financial institutions may trigger 
divergent national interests and increase systemic instability. 
Commenters' concerns regarding regulatory fragmentation also should be 
mitigated by the final rule's emphasis on the Basel Capital Framework, 
both in the United States and overseas. With respect to commenters' 
proposals for sunset dates, the Board intends to take further action as 
necessary depending on the outcomes of international regulatory 
agreements, but does not believe that a sunset provision in the final 
rule would be appropriate.
    Several commenters focused on the potential effect of the proposal 
on cross-border resolution. One commenter approved of the proposal on 
the grounds that requiring a U.S. intermediate

[[Page 17269]]

holding company for large foreign banking organizations would create a 
consolidated U.S. legal entity that can be spun off from a troubled 
parent or placed into receivership under Title II of the Dodd-Frank 
Act. However, most commenters asserted that the proposal would present 
impediments to effective cross-border resolution. Commenters argued 
that the Board was signaling that it lacks confidence in cross-border 
resolution, which could reduce other regulators' incentives to 
cooperate, both in advance of and during a crisis. The Board notes, 
however, that multiple jurisdictions apply prudential requirements to 
commercial and investment banking activities conducted in locally 
incorporated subsidiaries of foreign banks. In the Board's view, and as 
noted above, the final rule will result in a regulatory approach that 
is substantively similar to that which now exists in some other 
jurisdictions, and is therefore not inconsistent with coordinated 
resolution. Further, a U.S. intermediate holding company would 
facilitate an orderly cross-border resolution of a foreign banking 
organization with large U.S. subsidiaries by providing one top-tier 
U.S. holding company to interface with the parent foreign banking 
organization in a single-point-of-entry resolution conducted by its 
home country resolution authority (which is the preferred resolution 
strategy of many foreign banking organizations) or to serve as the 
focal point of a separate resolution of the U.S. operations of a 
foreign banking organization in a multiple-point-of-entry resolution 
(which is the preferred resolution strategy of other foreign banking 
organizations).
    Commenters also asserted that the Board had not shown that it 
adequately considered the risks to financial stability that could 
result from measures taken by other jurisdictions in response to the 
final rule. Most of these commenters asserted that the proposal could 
invite retaliatory measures from other jurisdictions, and argued that 
fragmented, nationalized financial regulation would make the United 
States less financially stable. The Board has considered the 
possibility that the proposal may affect the environment for U.S. 
banking organizations operating overseas. As noted above, U.S. banking 
organizations already operate in a number of overseas markets that 
apply local regulatory requirements to their local commercial banking 
and investment banking subsidiaries. In addition, the United Kingdom, 
which is host to substantial operations of U.S. banking organizations, 
applies local liquidity standards to commercial banking and broker-
dealer subsidiaries of non-U.K. banks operating in their market that 
are similar to the requirements included in the Board's proposal. While 
most other jurisdictions have not imposed similar liquidity 
requirements on branches and agencies, the Board took into account the 
particular role of U.S. branches and agencies in funding markets, 
especially in U.S.-dollar denominated short-term wholesale funding 
markets, in its evaluation of measures for protecting U.S. financial 
stability, and has determined that the requirements imposed upon 
branches and agencies that operate in the United States are 
appropriate. With respect to requests for quantitative impact studies 
on the proposal as a whole or on aspects of the proposal in particular, 
as noted above, the Board and its international supervisory colleagues 
will gain further insight into which regulatory approaches are most 
effective in improving the resilience of banking organizations and in 
protecting financial stability over time, and the Board will take 
further action as appropriate.
    Some commenters expressed concern that the proposal could 
jeopardize transatlantic trade agreement negotiations, or that the 
proposal was protectionist and antithetical to fair, free and open 
markets. The final rule, however, provides no barriers to entry or 
operation in the United States that contravene national treatment. The 
final rule imposes requirements on foreign banking organizations that 
are comparable to those required of U.S. organizations and are based in 
prudential regulation.

B. U.S. Intermediate Holding Company Requirement

    Under the proposal, foreign banking organizations with total 
consolidated assets of $50 billion or more and U.S. non-branch assets 
of $10 billion or more \89\ would have been required to form a U.S. 
intermediate holding company. The foreign banking organization would 
have been required to hold its interest in 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, through the U.S. intermediate 
holding company.
---------------------------------------------------------------------------

    \89\ Under the proposal, U.S. non-branch assets would have been 
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).
---------------------------------------------------------------------------

1. Adopting the U.S. Intermediate Holding Company Requirement as an 
Additional Prudential Standard
    Some commenters questioned whether the Board could adopt the U.S. 
intermediate holding company requirement because it is not an 
enumerated standard in section 165. In support of their view, 
commenters argued that the U.S. intermediate holding company was a 
policy measure that would be appropriately established through the 
legislative, rather than the rulemaking, process. Commenters argued 
that the Board's authority to adopt ``additional prudential standards'' 
gives the Board flexibility to create targeted prudential requirements 
such as contingent capital and short-term debt requirements, and 
characterized the U.S. intermediate holding company requirement as a 
more significant change not within that authority. These commenters 
also contended that the fact that Congress had provided for the 
establishment of a U.S. intermediate holding company in other sections 
of the Dodd-Frank Act in different contexts suggested that Congress did 
not intend for a U.S. intermediate holding company to be used in 
establishing enhanced prudential standards under section 165.\90\ 
Commenters also questioned whether the Board had adequately 
demonstrated that the proposed U.S. intermediate holding company 
standard was appropriate to address the financial stability concerns 
posed by the U.S. operations of foreign banking organizations.
---------------------------------------------------------------------------

    \90\ See sections 167(b) and 626 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Section 165 does not itself require that a foreign banking 
organization establish a U.S. intermediate holding company. However, 
section 165 permits the Board to establish any additional prudential 
standard for covered companies if the Board determines that the 
standard is appropriate. Section 165 does not define what it means for 
an additional prudential standard to be appropriate, although it would 
be consistent with the standards of legal interpretation to look to the 
purpose of the authority to impose the requirement. In this case, 
section 165 specifically explains that its purpose is 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 large, interconnected financial institutions.\91\ The 
U.S. intermediate holding company requirement directly addresses the 
risks to the financial stability of the United

[[Page 17270]]

States by increasing the resiliency of the U.S. operations of large 
foreign banking organizations. Foreign banking organizations with U.S. 
non-branch assets of $50 billion or more are large, complex, and 
interconnected institutions, and generally have a U.S. risk profile 
similar to U.S. bank holding companies of total consolidated assets of 
$50 billion or more. The U.S. intermediate holding company requirement 
also provides for consistent application of capital, liquidity, and 
other prudential requirements across the U.S. non-branch operations of 
the foreign banking organization and a single nexus for risk management 
of those U.S. non-branch operations, facilitating application of the 
mandatory enhanced prudential standards, increasing the safety and 
soundness of and providing for consolidated supervision of these 
operations. Last, the U.S. intermediate holding company requirement 
facilitates a level playing field between foreign and U.S. banking 
organizations operating in the United States, in furtherance of 
national treatment and competitive equity. For these reasons, the Board 
believes that the U.S. intermediate holding company is an appropriate 
additional enhanced prudential standard under section 165, in 
furtherance of the statutory directive to prevent or mitigate risks to 
U.S. financial stability.
---------------------------------------------------------------------------

    \91\ Section 165(a)(1) of the Dodd-Frank Act; 12 U.S.C. 
5365(a)(1).
---------------------------------------------------------------------------

    While commenters argued that the inclusion of an intermediate 
holding company requirement in other sections of the Dodd-Frank Act 
suggests that Congress did not intend for the Board to adopt the 
requirement in connection with Dodd-Frank Act section 165, the Board 
believes that the provisions that commenters cite serve to acknowledge 
the U.S. intermediate holding company as a tool to facilitate the 
supervision of financial activities of a company by requiring the 
company to move the activities into or under a single entity.\92\ The 
U.S. intermediate holding company requirement would assist in the 
supervision of financial activities of the U.S. intermediate holding 
company, while permitting subsidiaries held under section 2(h)(2) of 
the Bank Holding Company Act \93\ to remain outside of the U.S. 
intermediate holding company.
---------------------------------------------------------------------------

    \92\ Under section 167 of the Dodd-Frank Act, the Board may 
require a nonbank financial company that conducts commercial and 
financial activities to establish a U.S. intermediate holding 
company and conduct all or a portion of its financial activities in 
that intermediate holding company. 12 U.S.C. 5367. Similarly, under 
section 626 of the Dodd-Frank Act, the Board may require a 
grandfathered unitary savings and loan holding company that conducts 
commercial activities to establish and conduct all or a portion of 
its financial activities in or through a U.S. intermediate holding 
company, which shall be a savings and loan holding company. 12 
U.S.C. 1467b.
    \93\ As further described below in section IV.B.5 of this 
preamble, the final rule also permits limited types of other 
subsidiaries to be held outside the U.S. intermediate holding 
company.
---------------------------------------------------------------------------

    In establishing the enhanced prudential standards under section 
165, the statute requires the Board to consider a number of factors, 
including those relating to a foreign banking organization's 
complexity. This suggests that the Board could adopt additional 
prudential standards to address such complexity. The Board also is 
authorized by the Bank Holding Company Act,\94\ the Federal Deposit 
Insurance Act,\95\ and the International Banking Act \96\ to ensure 
that bank holding companies and foreign banking organizations operating 
in the United States conduct their operations in a safe and sound 
manner. Consistent with all of these authorities, the provisions in the 
final rule will help the Board supervise foreign banking organizations 
for safety and soundness.
---------------------------------------------------------------------------

    \94\ 12 U.S.C. 1841 et seq.
    \95\ 12 U.S.C. 1818 et seq.
    \96\ 12 U.S.C. 3101 et seq.
---------------------------------------------------------------------------

    In addition to the requirements of the final rule, foreign banking 
organizations will continue to be subject to Board rules and guidance 
that are otherwise applicable. For instance, a foreign banking 
organization will be subject to all applicable requirements in the Bank 
Holding Company Act, Regulation Y, and Regulation K.\97\ In addition, 
U.S. intermediate holding companies that are bank holding companies 
will generally be subject to the rules and regulations applicable to a 
bank holding company (other than the enhanced prudential standards for 
bank holding companies set forth in this final rule or otherwise as 
specifically provided).
---------------------------------------------------------------------------

    \97\ 12 U.S.C. 1841 et seq; 12 CFR Part 211; 12 CFR Part 225.
---------------------------------------------------------------------------

2. Restructuring Costs
    Some commenters expressed concern that the costs of the corporate 
reorganization necessary to comply with the proposed U.S. intermediate 
holding company requirement would not be justified by the financial 
stability benefit of the requirement. Commenters argued that the 
initial costs of the proposal could be in the hundreds of millions of 
dollars, and one commenter estimated that the one-time cost of coming 
into compliance with the proposal could be $100 million to $250 
million, with annual ongoing costs of $25-50 million (excluding tax 
costs). Commenters cited a variety of costs for restructuring their 
operations to transfer subsidiaries to the intermediate holding 
company, including obtaining valuation opinions and third-party 
consents, restructuring transaction-booking trade flows, reallocating 
assets, revising employment contracts, and novating contracts and 
guarantees. Commenters also cited the costs of creating additional 
management and governance structures and systems for calculating 
capital; modifying information technology systems; establishing new 
governance and funding mechanisms; and issuing equity instead of debt 
to capitalize the U.S. intermediate holding company. Other commenters 
focused on the range of processes, tools, and resources that would need 
to be deployed to manage stress-testing requirements. Commenters also 
observed that U.S. bank holding companies would not be subject to the 
costs of the reorganization.\98\
---------------------------------------------------------------------------

    \98\ Commenters also expressed concern that foreign banking 
organizations using the advanced approaches risk-based capital rules 
would be forced to develop U.S.-specific models for calculating 
risk-weighted assets, and urged the Board to permit foreign banking 
organizations to use methodologies approved by home-country 
supervisors. In the final rule, and as described further below, U.S. 
intermediate holding companies are not subject to the advanced 
approaches risk-based capital rules, regardless of whether they meet 
the thresholds for application of those rules.
---------------------------------------------------------------------------

    Commenters also expressed concern that the tax costs of 
restructuring the U.S. operations would be significant. The tax costs 
cited included foreign transfer taxes and other non-U.S. costs, as well 
as costs imposed by the U.S. tax authorities and various state taxes. 
One commenter requested that the Board discuss with tax authorities or 
other relevant authorities the application of a simple accounting and 
tax treatment for transferring subsidiaries to a U.S. intermediate 
holding company. Commenters also specifically cited the applicability 
of the U.S. tax consolidation rules and the effect of the European 
Commission's proposal for a financial transaction tax.
    Commenters argued that these costs were exacerbated by the proposed 
one-year transition period, particularly in light of the costs 
associated with complying with other regulatory initiatives. Some 
commenters argued that the Board should provide a 2-year or 36-month 
transition period, and other commenters requested that the transition 
period be harmonized with the transition period for the agreements 
reached by the Basel Committee in Basel III or the adoption of other 
jurisdictions' comparable regulations.
    The restructuring costs cited by commenters will in many cases 
depend on the existing complexity of a given foreign banking 
organization's U.S.

[[Page 17271]]

operations. Some foreign banking organizations subject to the U.S. 
intermediate holding company requirement in the final rule may have 
complex operations that will require substantial reorganization to 
comply with the requirement. Other foreign banking organizations, 
however, may already hold the bulk of their assets under an existing 
holding company structure or in a small number of subsidiaries. 
Accordingly, the Board does not believe that all foreign banking 
organizations will incur substantial costs in reorganizing their U.S. 
operations. On the whole, the Board believes that the financial 
stability benefits of the U.S. intermediate holding company, as 
discussed above, outweigh the costs of the one-time reorganization.
    In order to permit foreign banking organizations to conduct the 
necessary restructuring in an orderly way, the final rule extends the 
transition period for forming a U.S. intermediate holding company until 
July 1, 2016, for foreign banking organizations that meet or exceed the 
relevant asset threshold on July 1, 2015. Under the final rule, a 
foreign banking organization that meets or exceeds the threshold for 
formation of a U.S. intermediate holding company (U.S. non-branch 
assets of $50 billion) on July 1, 2015, is required to organize its 
U.S. operations such that most of its U.S. subsidiaries are held by the 
U.S. intermediate holding company by July 1, 2016. Such a foreign 
banking organization and its U.S. intermediate holding company must be 
in compliance with the enhanced prudential standards (other than the 
leverage ratio and the stress-testing requirements) on that date.
    The final rule provides additional transition time for completing 
the structural reorganization for foreign banking organizations that 
must form a U.S. intermediate holding company by July 1, 2016. As 
commenters explained, many foreign banking organizations' operational 
structures arose through historical acquisitions that may be costly or 
complicated to reorganize. By July 1, 2016, the U.S. intermediate 
holding company must hold the foreign banking organization's ownership 
interest in any U.S. bank holding company subsidiary and any depository 
institution subsidiary and in U.S. subsidiaries representing 90 percent 
of the foreign banking organization's assets not held by the bank 
holding company or depository institution. The final rule provides a 
foreign banking organization until July 1, 2017, to transfer its 
ownership interest in any residual U.S. subsidiaries to the U.S. 
intermediate holding company. This additional accommodation should 
mitigate some tax and restructuring costs for foreign banking 
organizations with numerous small nonbank subsidiaries, while ensuring 
that the majority of a foreign banking organization's U.S. non-branch 
assets are held by the U.S. intermediate holding company and are 
subject to enhanced prudential standards, consistent with safety and 
soundness and mitigation of systemic stability risks by July 1, 2016.
    The Board also extended the compliance period for a foreign banking 
organization that meets or exceeds the threshold for formation of a 
U.S. intermediate holding company after July 1, 2015. Under the final 
rule, a foreign banking organization that meets or exceeds the asset 
threshold after July 1, 2015, would be required to establish a U.S. 
intermediate holding company beginning on the first day of the ninth 
quarter after it meets or exceeds the asset threshold, unless that time 
is accelerated or extended by the Board in writing. These extended 
transition periods should mitigate the tax and reorganization costs by 
providing affected foreign banking organizations additional time to 
plan and execute the required restructuring in the way that most 
comports with their tax-planning and internal organizational needs.
3. Scope of the Application of the U.S. Intermediate Holding Company 
Requirement
    Commenters also proposed modifications to the application of the 
U.S. intermediate holding company requirement. For instance, some 
commenters argued that the Board should impose the U.S. intermediate 
holding company requirement based on a case-by-case assessment of the 
immediate or actual risks posed by an individual foreign banking 
organization or its U.S. operations. In this context, several 
commenters suggested that foreign banking organizations owned by 
sovereign wealth funds should be exempt from the requirement to form a 
U.S. intermediate holding company. By contrast, some commenters argued 
that a case-by-case determination for a U.S. intermediate holding 
company would subject foreign banking organizations to too much 
uncertainty. Others suggested that the Board should create a waiver for 
or exempt from the U.S. intermediate holding company requirement any 
foreign banking organization that is able to demonstrate a comparable 
home country supervisory regime, that has U.S. subsidiaries deemed to 
be adequately capitalized or managed, or that poses no danger to 
systemic stability in the United States. Some commenters asserted that 
the Board should differentiate between the risks posed by foreign 
banking organizations and should apply stricter requirements to foreign 
banking organizations with predominantly broker-dealer operations. A 
number of commenters suggested that the Board raise the asset threshold 
for the U.S. intermediate holding company requirement, expressing the 
view that a foreign banking organization should be required to form a 
U.S. intermediate holding company when its U.S. non-branch assets were 
equal to or greater than $50 billion, rather than $10 billion.
    The Board chose to base the proposed U.S. intermediate holding 
company requirement on asset size because it is a measure that is 
objective, transparent, readily available, and comparable among foreign 
banking organizations. The Board believes that imposing the U.S. 
intermediate holding company requirement based on a case-by-case 
assessment of the immediate or actual risks, by the identity of the 
ultimate shareholder, or by an evaluation of the practices of the home-
country regulator would be less transparent for foreign banking 
organizations and market participants, and would create too much 
uncertainty. The lack of transparency may limit the ability of foreign 
banking organizations to anticipate whether they would be subject to 
the U.S. intermediate holding company requirement in the future and 
limit their ability to make strategic decisions about their U.S. 
operations. Furthermore, if the Board were to impose a U.S. 
intermediate holding company requirement on a case-by-case basis as 
suggested by commenters, market participants may view the imposition of 
a U.S. intermediate holding company requirement as a signal that the 
Board has concerns about a particular foreign banking organization's 
parent company, U.S. operations, or home-country supervisor, and could 
cause market participants to limit their exposure to that firm or other 
firms from that country, thereby increasing stress in the market. In 
addition, a case-by-case assessment may result in disparate treatment 
of foreign banking organizations that compete in the same markets. 
Accordingly, the final rule would base the U.S. intermediate holding 
company requirement on the size of the firm's U.S. non-branch assets 
and does not provide for any exemptions or waivers based on the factors 
described by commenters.
    In light of these comments, however, the Board reviewed the 
proposed $10 billion threshold in light of the applicable 
considerations under section 165, including the systemic risk posed

[[Page 17272]]

by operations of this size and the Board's authority to tailor 
application of the standards pursuant to section 165(a)(2). Based on 
its review, the Board has determined that it would be appropriate to 
raise the threshold in the final rule for the U.S. intermediate holding 
company requirement from $10 billion to $50 billion of U.S. non-branch 
assets. This threshold will reduce the burden on a foreign banking 
organization with a smaller U.S. presence, but will maintain the U.S. 
intermediate holding company requirement for the larger foreign banking 
organizations that present greater risks to U.S. financial 
stability.\99\ Moreover, the Board believes that establishing a minimum 
threshold for forming a U.S. intermediate holding company at $50 
billion helps to advance the principle of national treatment and 
equality of competitive opportunity in the United States by more 
closely aligning standards applicable to the U.S. non-branch operations 
of foreign banking organizations under section 165 with the threshold 
for domestic U.S. bank holding companies that are subject to enhanced 
prudential standards under Title I of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \99\ See, e.g. Supervision and Regulation Assessments for Bank 
Holding Companies and Savings and Loan Holding Companies With Total 
Consolidated Assets of $50 billion or More and Nonbank Financial 
Companies Supervised by the Federal Reserve, 78 FR 52391 (August 23, 
2013) (``Larger companies are often more complex companies, with 
associated risks that play a large role in determining the 
supervisory resources necessary in relation to that company. The 
largest companies, because of their increased complexity, risk, and 
geographic footprints, usually receive more supervisory 
attention.'').
---------------------------------------------------------------------------

    Some commenters argued that the final rule should exempt foreign 
banking organizations that do not have a U.S. insured depository 
subsidiary from the U.S. intermediate holding company requirement. 
Other commenters expressed concern that the proposal would impose 
minimum capital requirements for banks or bank holding companies on 
U.S. intermediate holding companies without subsidiary insured 
depository institutions. The Board believes that imposing these 
standards on a foreign bank's U.S. operations is warranted, regardless 
of whether the foreign bank has a U.S. insured depository institution, 
and therefore has not adopted this suggested change in the final rule. 
First, all foreign banking organizations subject to the final rule have 
banking operations in the United States (either through a U.S. branch 
or agency, or through a bank holding company subsidiary). Foreign 
banking organizations that have branches and agencies are treated as if 
they were bank holding companies for purposes of the Bank Holding 
Company Act and the Dodd-Frank Act.\100\ In addition, by statute, both 
uninsured and insured U.S. branches and agencies of foreign banks may 
receive Federal Reserve advances on the same terms and conditions that 
apply to domestic insured state member banks. The risks to financial 
stability presented by foreign banking organizations with U.S. branches 
and agencies generally are not dependent on whether the foreign banking 
organization has a U.S. insured depository institution. In many cases, 
insured depository institution subsidiaries of foreign banks form a 
small percentage of their U.S. assets. Accordingly, the final rule 
applies the U.S. intermediate holding company requirement to all 
foreign banking organizations that meet the asset threshold and have a 
banking presence in the United States, regardless of whether they own a 
U.S. insured depository institution.\101\ The Board notes that a 
foreign bank that has a banking presence through a U.S. branch or 
agency (in lieu of or in addition to operating an insured depository 
institution) would be permitted to continue to operate the branch or 
agency outside of the U.S. intermediate holding company.
---------------------------------------------------------------------------

    \100\ 12 U.S.C. 3106(a); 12 U.S.C. 5311(a).
    \101\ The final rule also provides that a top-tier foreign 
banking organization that is organized in any ``State'' of the 
United States (including the Commonwealth of Puerto Rico, the 
Commonwealth of the Northern Mariana Islands, American Samoa, Guam, 
or the United States Virgin Islands) will not be subject to the 
requirements applicable to foreign banking organizations. These 
organizations qualify as bank holding companies under the Bank 
Holding Company Act, are fully subject to U.S. capital and other 
regulatory requirements, and thus are subject to the enhanced 
prudential standards applicable to domestic bank holding companies.
---------------------------------------------------------------------------

    One commenter asserted that the U.S. intermediate holding company 
requirement should be an alternative to any domestic regulatory-capital 
surcharge that would be imposed on a U.S. intermediate holding company 
with a parent that is a global systemically-important bank. The Board 
is considering the appropriate framework for domestic systemically-
important banking organizations, and will consider such comments in 
connection with any rulemaking relating to domestic systemically-
important banking organizations.
4. Method for Calculating the Asset Threshold
    Several commenters expressed views on the proposed method for 
calculating U.S. non-branch assets for purposes of applying the U.S. 
intermediate holding company requirement. Under the proposal, a foreign 
banking organization generally would have calculated its U.S. non-
branch assets by taking 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) for the previous four quarters. 
Some commenters argued that foreign banking organizations should be 
allowed to exclude certain assets from the calculation of total 
combined U.S. assets, including low-risk assets, such as U.S. 
government bonds, cash, or U.S. Treasuries; assets of regulated U.S. 
broker-dealer subsidiaries; high-quality liquid assets; and reserves on 
deposit at Federal Reserve Banks. Conversely, one commenter suggested 
that combined U.S. assets should include consideration of off-balance 
sheet exposures at the U.S. top-tier holding company. As discussed in 
greater detail in section IV.B.5 of this preamble, commenters also 
suggested that certain subsidiaries be excluded from the U.S. 
intermediate holding company requirement and that assets held by these 
subsidiaries be excluded from the calculation of U.S. non-branch 
assets.
    After considering these comments, the Board has determined to 
finalize the definition of U.S. non-branch assets largely as proposed. 
In general, the Board believes that a foreign banking organization 
should measure its U.S. non-branch assets using a similar methodology 
to that used by a U.S. bank holding company to measure its total 
consolidated assets for purposes of section 165. In calculating its 
total consolidated assets for purposes of the enhanced prudential 
standards in section 165, a U.S. bank holding company includes all on-
balance sheet assets, including those associated with low-risk 
activities and functionally regulated subsidiaries, and does not 
include off-balance sheet exposures. Furthermore, the Board believes 
that a simple approach to the calculation of U.S. non-branch assets is 
appropriate and will facilitate planning for foreign banking 
organizations, particularly for those that are near the threshold for 
formation of a U.S. intermediate holding company. Accordingly, and 
consistent with the final rule's requirement to move virtually all 
subsidiaries under the U.S. intermediate holding company, discussed 
further below, the final rule's definition of U.S. non-branch assets 
includes all on-balance sheet assets (other than assets held by a 
section 2(h)(2) company or by a DPC branch subsidiary).
    The proposal would have permitted a foreign banking organization to 
reduce

[[Page 17273]]

its U.S. non-branch assets 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. Commenters supported this aspect of the proposal and 
recommended that the final rule also exclude, for purposes of this 
calculation, intercompany balances and transactions between U.S. 
subsidiaries and U.S. branches and agencies, and between the U.S. 
intermediate holding company's subsidiaries and non-U.S. affiliates.
    The final rule requires a foreign banking organization to reduce 
its U.S. non-branch assets by the amount corresponding to any balances 
and transactions between any top tier U.S. subsidiaries that would be 
eliminated in consolidation were a U.S. intermediate holding company 
already formed. The final rule does not permit a foreign banking 
organization to reduce its U.S. non-branch assets by the amount 
corresponding to balances and transactions between U.S. subsidiaries, 
on the one hand, and branches or agencies or non-U.S. affiliates, on 
the other. The purpose of netting intercompany balances between U.S. 
subsidiaries that would be eliminated in consolidation is to mirror, as 
closely as possible, the assets of the final consolidated U.S. 
intermediate holding company. As the final rule does not provide for 
consolidated treatment of branches and agencies or non-U.S. affiliates 
with the U.S. intermediate holding company, netting would not be 
appropriate in this context.
5. Formation of the U.S. Intermediate Holding Company
    Under the proposal, a foreign banking organization that met the 
U.S. non-branch asset threshold for U.S. intermediate holding company 
formation would have been 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 proposal defined the term 
``subsidiary'' to include any company directly or indirectly 
``controlled'' by another company. The foreign banking organization 
would have ``control'' of a U.S. company, and thus be required to move 
that company under the U.S. intermediate holding company, if it (i) 
directly or indirectly, or acting through one or more other persons, 
owned, controlled, or had power to vote 25 percent or more of any class 
of voting securities of the company; (ii) controlled in any manner the 
election of a majority of the directors or trustees of the company; or 
(iii) directly or indirectly exercised a controlling influence over the 
management or policies of the company.\102\ The proposal would have 
provided an exception for U.S. subsidiaries held under section 2(h)(2) 
of the Bank Holding Company Act. Section 2(h)(2) of the Bank Holding 
Company Act allows qualifying foreign banking organizations to retain 
certain interests in foreign commercial firms that conduct business in 
the United States.\103\
---------------------------------------------------------------------------

    \102\ 12 U.S.C. 1841(a)(2).
    \103\ In permitting this exception, the Board has taken into 
account the nonfinancial activities and affiliations of a foreign 
banking organization. The proposal would have also provided the 
Board with authority to approve multiple U.S. intermediate holding 
companies or alternative organizational structures, as further 
discussed in section IV.B.5 of this preamble.
---------------------------------------------------------------------------

    Commenters provided several comments on the use of the Bank Holding 
Company Act definition of ``control'' for identifying companies to be 
held under the U.S. intermediate holding company. In addition, 
commenters suggested other types of subsidiaries that should be 
excluded from the requirement to transfer U.S. subsidiaries to a U.S. 
intermediate holding company, and requested clarification regarding the 
circumstances in which the Board may permit exceptions to the U.S. 
intermediate holding company requirement. These comments are discussed 
below.
a. The Definition of ``Control''
    First, several commenters argued that the Bank Holding Company Act 
definition of ``control'' would require a foreign banking organization 
to hold a broader set of entities through its U.S. intermediate holding 
company than commenters viewed as necessary to achieve the goals of the 
proposal. Commenters suggested a variety of alternatives to the Board's 
use of the Bank Holding Company Act definition, including requesting 
that the Board adopt a 25 percent threshold (as is used in the 
resolution plan rule \104\), a tailor-made standard for Title I of the 
Dodd-Frank Act, a standard under which a foreign banking organization 
would be required to hold any subsidiary that it ``practically 
controlled'' through the U.S. intermediate holding company, or a GAAP 
consolidation standard. Other commenters asserted that the Board should 
permit an exemption for subsidiaries that are only partially owned, 
particularly if integrating those subsidiaries into a U.S. intermediate 
holding company would disrupt their traditional reporting and 
consolidation structures. Commenters also asserted that a foreign 
banking organization might not have or be able to obtain sufficient 
information to determine whether it has direct or indirect control of 
U.S. companies under the Bank Holding Company Act definition of 
control.
---------------------------------------------------------------------------

    \104\ 12 CFR 243.2.
---------------------------------------------------------------------------

    The Board based its incorporation of the Bank Holding Company Act 
definition of ``control'' on the Dodd-Frank Act, which incorporates 
that definition.\105\ Moreover, the use of this definition maintains 
regulatory parity between foreign banking organizations' U.S. 
operations and U.S. bank holding companies. The Bank Holding Company 
Act definition of ``control'' does not require a shareholder to have 
absolute control over management and policies of a banking organization 
or other company in order to exert a significant amount of control over 
the management and policies of that organization, or to be exposed to 
the direct or indirect risks (e.g., reputational risks) incurred by 
that subsidiary. To the extent that a foreign banking organization is 
able to exercise such control, the Board believes it is appropriate for 
the ownership interest in that subsidiary to be held by the U.S. 
intermediate holding company and subject to the risk-management regime 
applied to the U.S. intermediate holding company's operations.
---------------------------------------------------------------------------

    \105\ Section 2 of the Dodd-Frank Act; 12 U.S.C. 5301.
---------------------------------------------------------------------------

    As a general matter, although foreign banking organizations 
expressed concern that they might not be able to determine whether they 
or any of their subsidiaries own more than 25 percent of or exert a 
controlling influence over an entity, the Board believes that a foreign 
banking organization should have that information about its 
holdings.\106\ To the extent that a foreign banking organization needs 
time to gather this information, the extended transition period, 
described above in section II.B.2 of the preamble, will enable this due 
diligence process. With respect to comments requesting that the Board 
adopt a 25 percent standard or tailor-made standard, the definition of 
control is based on the Dodd-Frank Act. Moreover, as noted, the Board 
believes that it is important to maintain parity with bank holding 
companies in determining which companies are ``subsidiaries.'' The 
Board understands that the application of the control definition may 
not be appropriate in all cases, and has provided a mechanism

[[Page 17274]]

for granting exemptions from the requirement in the final rule, as 
described below.
---------------------------------------------------------------------------

    \106\ For instance, foreign banking organizations are required 
to file the Report of Changes in Organizational Structure (Form Y-
10) upon the acquisition of control of a nonbanking entity.
---------------------------------------------------------------------------

b. Exemptions for Specific Subsidiaries
    Commenters also provided examples of subsidiaries that they 
asserted should not be required to be held within the U.S. intermediate 
holding company, including: (1) Subsidiaries that do not pose a 
material risk to U.S. financial stability, or subsidiaries below a de 
minimis asset or liability threshold, such as subsidiaries with no more 
than $1 billion or $10 billion in total consolidated assets; (2) 
subsidiaries that are fully and unconditionally guaranteed by the 
parent, conduits for funding, or U.S. subsidiaries of foreign financial 
subsidiaries; (3) property casualty insurers; (4) investment funds, 
including registered and unregistered funds under the Investment 
Company Act of 1940; (5) branch subsidiaries, particularly those that 
are significantly related to the U.S. branch's operations; (6) 
investments held in satisfaction of debts previously contracted in good 
faith (DPC assets); (7) non-U.S. subsidiaries of the foreign banking 
organization, even if they were held by a U.S. subsidiary; and (8) 
joint ventures with another foreign banking organization. Commenters 
asserted that requiring funding subsidiaries, in particular, to be 
transferred to the U.S. intermediate holding company would increase 
funding costs for foreign banking organizations. Some commenters also 
asked the Board to exclude non-U.S. subsidiaries that are consolidated 
under the U.S. intermediate holding company from U.S. regulations.
    As discussed above, the Board is adopting a transparent, objective 
threshold standard for determining whether a U.S. intermediate holding 
company is required and which entities must be held by that company. 
Excluding the subsidiaries described above would be at odds with the 
transparency and objectivity of the standard, and, furthermore, would 
limit the extent to which these subsidiaries would be subject to 
enhanced prudential standards in a manner consistent with U.S. bank 
holding companies. The Board believes it is necessary for virtually all 
legal entities incorporated in the United States, including those 
mentioned above, to be organized under the U.S. intermediate holding 
company. This will facilitate application of the capital, liquidity, 
and other enhanced prudential standards to the operations of these 
subsidiaries, promoting the financial stability goals discussed 
earlier. Also, as discussed above, one of the aims of the proposal, and 
of the final rule, is to provide a platform for consistent supervision 
and regulation of the U.S. operations of a foreign banking 
organization. The alternatives suggested by commenters would undermine 
these goals.
    Commenters also requested exclusions for merchant banking 
subsidiaries or U.S. subsidiaries engaged in or holding non-financial 
assets, such as private equity investments in non-financial assets, or 
oil and gas and other similar investments from the U.S. intermediate 
holding company requirement. In the final rule, the Board has also 
decided not to exclude from the U.S. intermediate holding company 
requirement such subsidiaries. These types of subsidiaries have 
historically been included within a consolidated banking organization 
subject to supervision by the Board.
    In response to comments regarding DPC assets, the final rule 
provides an exemption from the requirement to hold U.S. subsidiaries 
through the U.S. intermediate holding company for DPC branch 
subsidiaries, defined as subsidiaries of a U.S. branch or a U.S. agency 
acquired, or formed to hold assets acquired, in the ordinary course of 
business and for the sole purpose of securing or collecting debt 
previously contracted in good faith by that branch or agency. To the 
extent the liabilities in satisfaction of which such assets are held 
pertain to the U.S. branch or agency, it is appropriate for the branch 
or agency to continue holding the assets and dispose of them. Such DPC 
assets may only be held for a short term (typically two to five years) 
during which the banking organization (in this case, the branch or 
agency) must make good-faith efforts to dispose of the assets.\107\ 
Accordingly, the Board does not believe that it is necessary to require 
foreign banking organizations to transfer such subsidiaries to the U.S. 
intermediate holding company.
---------------------------------------------------------------------------

    \107\ See 12 CFR 225.140.
---------------------------------------------------------------------------

    In response to commenters' requests for clarity regarding its 
approach to non-U.S. subsidiaries of a U.S. intermediate holding 
company, the Board will apply the enhanced prudential standards to the 
consolidated operations of a U.S. intermediate holding company, which 
would include the foreign subsidiaries of a U.S. intermediate holding 
company.
    Commenters also asked whether the foreign banking organization's 
entire ownership interest in a controlled subsidiary would need to be 
transferred to the U.S. intermediate holding company, or whether 
foreign banking organizations could maintain dual ownership of a U.S. 
subsidiary through the parent and the U.S. intermediate holding 
company. Commenters asserted that so long as a subsidiary was 
consolidated with the U.S. intermediate holding company, it should be 
unnecessary for the foreign banking organization to transfer its 
minority interest in the U.S. subsidiary to the U.S. intermediate 
holding company. In the final rule, in response to these comments, the 
Board is clarifying the types and amount of interests that must be 
transferred to the U.S. intermediate holding company.
    The final rule provides that a foreign banking organization must 
transfer all of its ownership interests in a U.S. subsidiary (other 
than a section 2(h)(2) company or DPC branch subsidiary) to the U.S. 
intermediate holding company, and may not retain any ownership interest 
in the U.S. subsidiary directly or through other subsidiaries of the 
foreign banking organization. The Board believes that the U.S. 
intermediate holding company's role as a consistent platform for 
supervision, regulation and risk-management could be undermined by 
allowing multiple ownership structures for U.S. subsidiaries and 
attendant uncertainties as to the U.S. intermediate holding company's 
control over the U.S. subsidiaries. The transition periods should 
mitigate the difficulties a foreign banking organization may experience 
in transferring its ownership interest in its U.S. subsidiaries to the 
U.S. intermediate holding company.
c. Alternative Organizational Structures
    The proposal would have provided the Board with authority to permit 
a foreign banking organization to establish multiple U.S. intermediate 
holding companies or to use an alternative organizational structure to 
hold its U.S. operations. The proposal expressly provided that the 
Board would consider exercising this authority when a foreign banking 
organization controls multiple lower-tier foreign banking organizations 
that have separate U.S. operations or 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 have provided 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.
    Although commenters supported this aspect of the proposal, they 
also

[[Page 17275]]

requested that the Board clarify the circumstances under which it would 
permit alternative U.S. intermediate holding company structures. As 
discussed above, commenters requested that the Board provide an 
exception to a foreign banking organization to the extent that the 
foreign banking organization does not have sufficient control to cause 
a U.S. subsidiary to be made a subsidiary of its intermediate holding 
company. Other commenters suggested that the Board permit certain 
foreign banking organizations, such as holding companies with multiple, 
separate banking operations in the United States, to form multiple U.S. 
intermediate holding companies depending on the global entity's 
structure or other considerations. Commenters cited a variety of 
potential justifications for multiple U.S. intermediate holding 
companies, such as limiting disruption of existing businesses, 
restructuring costs, or tax considerations. Some commenters asked that 
they be allowed to designate a lower-tier entity as the U.S. 
intermediate holding company in order to avoid restructuring costs. 
Others argued that the Board should allow a foreign banking 
organization with a subsidiary insured depository institution to form 
separate U.S. intermediate holding companies above bank and nonbank 
operations, and not apply capital standards to the U.S. intermediate 
holding company with nonbank operations.
    The final rule provides that the Board may permit alternate or 
multiple U.S. intermediate holding company structures. In determining 
whether to permit an alternate structure, the final rule provides that 
the Board may consider whether applicable home country law would 
prevent the foreign banking organization from controlling its U.S. 
subsidiaries through a single U.S. intermediate holding company, or 
where the activities, scope of operations, or structure of the foreign 
banking organization's subsidiaries in the United States warrant 
consideration of alternative structures, such as where a foreign 
banking organization controls multiple lower-tier foreign banking 
organizations that have separate U.S. operations. If it authorizes the 
formation of more than one intermediate holding company by a foreign 
banking organization, the Board generally will treat any additional 
U.S. intermediate holding company as a U.S. intermediate holding 
company with $50 billion or more in total consolidated assets, even if 
its assets are below that threshold. In the narrow circumstance where 
the Board permits a foreign banking organization to hold its interest 
in a U.S. subsidiary outside of a U.S. intermediate holding company 
(for instance, where a foreign banking organization demonstrates that 
it cannot transfer its ownership interest in the subsidiary to the U.S. 
intermediate holding company or otherwise restructure its investment), 
the Board expects to require passivity commitments or other supervisory 
agreements to limit the exposure to and transactions between the U.S. 
intermediate holding company and the U.S. subsidiary that remains 
outside of the U.S. intermediate holding company.
    With respect to requests that the Board permit a company to 
designate a lower-tier subsidiary as the U.S. intermediate holding 
company or permit multiple U.S. intermediate holding companies over 
different types of functionally regulated subsidiaries, the Board does 
not expect to permit an alternative structure where the purpose or 
primary effect of the alternate structure is to reduce the impact of 
the Board's regulatory capital rules or other prudential requirements. 
Thus, the Board would be unlikely to permit a foreign banking 
organization to form a separate U.S. intermediate holding company for 
the sole purpose of holding a nonbank subsidiary separate from the 
banking operations, other than under circumstances of the types noted 
above, or to designate a company that is not the top-tier company in 
the United States as the U.S. intermediate holding company.
d. Corporate Form, Designation of Existing Company, and Dissolution of 
the U.S. Intermediate Holding Company
    The proposal would have required a U.S. intermediate holding 
company to be organized under the laws of the United States, any of the 
fifty states of the United States, or the District of Columbia. While 
the proposal generally would have provided 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 the proposal. In addition, the U.S. 
intermediate holding company would have been required to have a board 
of directors or equivalent thereto to help ensure a strong, centralized 
corporate governance system.
    Commenters generally supported the flexibility provided in the 
proposal, but also requested that the Board permit the U.S. 
intermediate holding company to be a foreign legal entity. Some 
commenters asked the Board to clarify who might be permitted to sit on 
the board of directors of the U.S. intermediate holding company, 
observing that state law may govern citizenship requirements for 
members of the board of directors.
    In the final rule, the Board has retained the flexibility for U.S. 
intermediate holding companies to choose a corporate form, provided 
that the U.S. intermediate holding company is organized under the laws 
of the United States, any of the fifty states thereof, or the District 
of Columbia. The final rule does not permit the U.S. intermediate 
holding company to be a foreign legal entity, as this would limit the 
Board's ability to supervise the U.S. operations of a foreign banking 
organization in a manner similar to the operations of a U.S. bank 
holding company and therefore could complicate application of the 
enhanced prudential standards. To the extent that state law affects the 
membership of the board of directors, the U.S. intermediate holding 
company will need to be in compliance with the law of the state in 
which it is chartered. In addition, as discussed in section IV.D.2 of 
this preamble, a U.S. intermediate holding company must establish and 
maintain a risk committee to oversee the risks of its operations.
    Several commenters observed that the requirement to form a U.S. 
intermediate holding company could disrupt the existing capitalization 
structure of a foreign banking organization's U.S. operations. Among 
other things, commenters asked the Board to clarify whether a foreign 
banking organization would be required to form a new holding company or 
whether it could instead designate an existing company as the U.S. 
intermediate holding company. One of these commenters requested that 
the Board allow a newly-formed top-tier U.S. intermediate holding 
company to include in common equity tier 1 minority interest any 
minority interest arising from the issuance of common shares by the 
subsidiary bank holding company.
    The final rule clarifies that a foreign banking organization may 
designate an existing entity as the U.S. intermediate holding company, 
provided that that entity is the top-tier entity in the United States. 
While the final rule does not provide that a bank holding company 
subsidiary could be treated as a depository institution for purposes of 
the recognition of minority interest, a foreign banking organization 
that has a bank holding company subsidiary can designate that bank 
holding company as its U.S. intermediate holding company. Doing so 
would allow the foreign

[[Page 17276]]

banking organization to use the bank holding company's existing capital 
as the U.S. intermediate holding company's capital, which should 
address some of the concerns regarding inclusion of minority interests 
in capital. The Board also has discretion during the transition period 
to address particular and idiosyncratic issues that may arise in 
connection with a foreign banking organization's reorganization.
    Commenters also requested clarification on whether a foreign 
banking organization required to form a U.S. intermediate holding 
company would need to maintain the U.S. intermediate holding company if 
its assets fall below the applicable threshold. In response to this 
comment, the Board is clarifying that a foreign banking organization 
may dissolve the U.S. intermediate holding company if its U.S. non-
branch assets fall below the $50 billion threshold for four consecutive 
quarters. If the foreign banking organization's U.S. non-branch assets 
were, subsequently, to exceed the $50 billion threshold for four 
consecutive quarters, the foreign banking organization would be 
required to re-form its U.S. intermediate holding company and hold its 
entire ownership interest in such subsidiaries through the U.S. 
intermediate holding company. If the foreign banking organization 
retains an entity that is a bank holding company, that bank holding 
company would be subject to certain of the enhanced prudential 
standards if it had over $10 billion in assets, such as risk-management 
standards and stress testing standards applicable to domestic bank 
holding companies.
    Consistent with the proposal, the final rule generally does not 
require a foreign banking organization to transfer assets held through 
a U.S. branch or agency to the U.S. intermediate holding company. 
However, subsidiaries of branches and agencies, other than DPC branch 
subsidiaries, are required to be transferred to the U.S. intermediate 
holding company. Some commenters expressed concerns that foreign 
banking organizations might attempt to relocate risky activities from 
the U.S. intermediate holding company to a U.S. branch or agency. The 
Board intends to monitor how foreign banking organizations adapt their 
operations in response to the U.S. intermediate holding company 
requirement, including whether foreign banking organizations relocate 
activities from U.S. subsidiaries into their U.S. branches and 
agencies.
e. Implementation Plan
    The proposal would have required a foreign banking organization to 
notify the Board after it had formed its U.S. intermediate holding 
company. Commenters generally supported this requirement, but a number 
of commenters requested that the Board clarify the process for forming 
a U.S. intermediate holding company and transferring U.S. subsidiaries 
to that company.
    The final rule does not prescribe a process by which a foreign 
banking organization must complete the required transfer of ownership 
to the U.S. intermediate holding company by the date set forth in the 
final rule. In response to commenters requesting guidance on the 
process that the Board envisions for transferring ownership interests 
to the U.S. intermediate holding company, the final rule includes the 
requirement that a foreign banking organization submit an 
implementation plan outlining its proposed process to come into 
compliance with the final rule's requirements. Requiring an 
implementation plan will facilitate dialogue between the organization 
and the Federal Reserve early in the process to help ensure that the 
plan is consistent with the transition period and the Board's 
expectations for compliance.
    A foreign banking organization's implementation plan must contain a 
list of its U.S. subsidiaries and more detailed information relating to 
U.S. subsidiaries either that the foreign banking organization is not 
required to hold through its U.S. intermediate holding company (i.e., 
section 2(h)(2) companies or DPC branch subsidiaries) or for which the 
foreign banking organization intends to seek an exemption from the U.S. 
intermediate holding company requirement. The implementation plan must 
also contain a projected timeline for the transfer by the foreign 
banking organization of its ownership interest in U.S. subsidiaries to 
the U.S. intermediate holding company, a timeline of all planned 
capital actions or strategies for capital accumulation that will 
facilitate the U.S. intermediate holding company's compliance with the 
risk-based and leverage capital requirements, and quarterly pro forma 
financial statements for the U.S. intermediate holding company covering 
the period from January 1, 2015 to January 1, 2018. In addition, the 
implementation plan must include a description of the risk management 
and liquidity stress testing practices of the foreign banking 
organization, and a description of how the foreign banking organization 
intends to come into compliance with those requirements. Through the 
supervisory process, the Board may request that a foreign banking 
organization include additional information in its implementation plan. 
A foreign banking organization is not required to file routine updates 
to its implementation plan; however, the foreign banking organization 
should notify the Board if it anticipates that it will deviate 
materially from the plan.
    The implementation plan must be submitted on or before January 1, 
2015, from each foreign banking organization that has U.S. non-branch 
assets of $50 billion or more as of June 30, 2014. The Board 
acknowledges, however, that a foreign banking organization that is 
above the threshold on that date may try to reduce its U.S. non-branch 
assets prior to the date on which it would be required to form a U.S. 
intermediate holding company. In such case, the implementation plan 
would be required to contain a description of the foreign banking 
organization's plan for reducing its U.S. non-branch assets below $50 
billion for four consecutive quarters prior to July 1, 2016, consistent 
with safety and soundness. The Board may also require an implementation 
plan from a foreign banking organization that meets or exceeds the 
threshold for formation of a U.S. intermediate holding company after 
June 30, 2014, if the Board determines that an implementation plan is 
appropriate for that foreign banking organization. The Board would 
expect to evaluate all implementation plans, including those expressing 
the intent to reduce assets, for reasonableness and achievability.
    Two commenters requested that the Board consider waivers of section 
23A of the Federal Reserve Act for institutions subject to the proposal 
in order to facilitate transfers to the U.S. intermediate holding 
company. The final rule is not the appropriate vehicle in which to 
grant or deny such waivers. Any request for a waiver will be considered 
under the processes set forth in section 23A of the Federal Reserve 
Act, which require notice and non-objection from the FDIC.\108\ The 
Board expects that companies will identify instances in which such 
waivers may be necessary in connection with their implementation plans.
---------------------------------------------------------------------------

    \108\ 12 U.S.C. 371c.

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[[Page 17277]]

f. Interaction of the U.S. Intermediate Holding Company Requirement 
With Other Regulatory Requirements
i. Other Regulatory Regimes
    Commenters also requested clarification about the interaction 
between the proposal and the rules proposed by the Commodity Futures 
Trading Commission (CFTC) under section 710 of the Dodd-Frank Act. The 
Board has brought the comment to the attention of the CFTC for 
consideration in their rulemaking process, which is still ongoing.
ii. Source of Strength
    Commenters asked whether the Board expects a U.S. intermediate 
holding company to serve as a source of strength for its subsidiaries 
that are not insured depository institutions. The Board is clarifying 
that the final rule does not require a U.S. intermediate holding 
company to serve as a source of strength for its subsidiaries that are 
not insured depository institutions. The final rule does not affect any 
other source of strength obligations that would otherwise apply to the 
U.S. intermediate holding company.\109\
---------------------------------------------------------------------------

    \109\ See, e.g., 12 U.S.C. 1831o-1.
---------------------------------------------------------------------------

iii. ``Fed Lite'' Provisions of the Bank Holding Company Act
    Section 5(c)(3) of the Bank Holding Company Act, commonly known as 
the ``Fed lite'' provision, prohibits the Board from imposing ``rules, 
guidelines, standards, or requirements on any functionally regulated 
subsidiary of a bank holding company.'' \110\ Commenters argued that 
the U.S. intermediate holding company requirement was inconsistent with 
these provisions. In support of their argument, they described the U.S. 
intermediate holding company requirement as ``targeted'' towards 
imposing capital requirements on broker-dealer affiliates of foreign 
banking organizations, and asserted that the proposal is the equivalent 
of doing indirectly what the Board cannot do directly. These commenters 
also asserted that the proposal would impose additional regulatory 
burdens on broker-dealers owned by foreign banking organizations 
compared to stand-alone domestic broker-dealers, and thereby would 
violate national treatment.
---------------------------------------------------------------------------

    \110\ 12 U.S.C. 1844(c)(3).
---------------------------------------------------------------------------

    The final rule applies to the U.S. operations of all foreign 
banking organizations, regardless of whether they have significant 
broker-dealer activities, and requires a foreign banking organization 
to place all U.S. subsidiaries (other than section 2(h)(2) companies 
and DPC branch subsidiaries) under a U.S. intermediate holding company, 
regardless of the type of subsidiary. Accordingly, U.S. intermediate 
holding companies will have a range of functionally regulated 
subsidiaries, including broker-dealers, insurance companies, and 
insured depository institutions, and some may have larger functionally 
regulated subsidiaries than others. The final rule imposes rules on the 
U.S. intermediate holding company, not on functionally regulated 
subsidiaries of the foreign banking organization, in the same way that 
those rules are applied to domestic bank holding companies, including 
those with significant broker-dealer activities. Accordingly, the rule 
does not target foreign banking organizations with broker-dealer 
activities.
    Under section 165(b)(4), the Board is required to consult with the 
primary financial regulator of a functionally regulated subsidiary 
before imposing any prudential requirements under section 165 that are 
likely to have a significant impact on that functionally regulated 
subsidiary. The Board consulted with the relevant primary financial 
regulators, including the SEC, the OCC, the CFTC, and the FDIC in 
establishing the U.S. intermediate holding company requirement, thus 
satisfying its statutory obligation. More generally, and consistent 
with its current practice, the Board intends to coordinate with 
functional regulators in the ordinary course of supervising compliance 
with the enhanced prudential standards.
    Last, the Board notes that the final rule applies only to those 
foreign banking organizations that have a banking presence, such as a 
branch or an agency, in the United States. Accordingly, the broker-
dealer subsidiaries of those foreign banking organizations are not 
similarly situated to stand-alone broker-dealers or broker-dealers 
owned by foreign banks without a U.S. banking presence. Foreign banking 
organizations with a banking presence in the United States are subject 
to regulation by the Board, whereas those other entities are not.
6. Virtual U.S. Intermediate Holding Company
    A few commenters suggested that in order to mitigate the costs of 
the proposal, rather than requiring formation of a U.S. intermediate 
holding company, the Board should permit a ``virtual'' U.S. 
intermediate holding company. According to the commenters, a foreign 
banking organization opting to adopt a virtual U.S. intermediate 
holding company structure would calculate, measure and report its 
capital and liquidity as if its U.S. subsidiaries were consolidated 
under a U.S. intermediate holding company, and would be subject to 
examination and safety and soundness review, but no intermediate 
holding company would actually exist, and no reorganization would 
therefore be necessary. If needed, additional capital or liquidity 
would be provided to one or more of the foreign banking organization's 
major U.S. subsidiaries. The commenters argued that the subsidiaries 
could be resolved if necessary. Some commenters suggested that the 
``virtual'' U.S. intermediate holding company house all U.S. 
subsidiaries of the foreign banking organization, while others 
suggested that the ``virtual'' intermediate holding company house only 
the systemically-significant nonbank U.S.-based subsidiaries of the 
foreign banking organization.
    As discussed in the proposal, and as described further above, the 
wide variety of foreign banking organization structures and operations 
make it difficult to consistently apply enhanced prudential standards 
to foreign banking organizations' U.S. operations using a virtual U.S. 
intermediate holding company approach. However, the final rule would 
not permit an institution to form a ``virtual'' U.S. intermediate 
holding company. A virtual U.S. intermediate holding company would 
retain a fractured organizational structure that can reduce the 
effectiveness of attempts of the foreign banking organization to manage 
the risks of its U.S. operations. It also would not enable the Board to 
apply the enhanced prudential standards transparently and consistently 
across the U.S. operations of foreign banking organizations, hindering 
achievement of the policy goals and implementation of section 165 of 
the Dodd-Frank Act.
    The Board believes that a ``virtual'' U.S. intermediate holding 
company would not provide a consistent platform for supervision and 
regulation comparable to a U.S. intermediate holding company. For 
example, determining the appropriate risk management structure and the 
location of capital and liquidity for a ``virtual'' U.S. intermediate 
holding company would require a case-by-case supervisory assessment, 
which, as described above, would not address the risks that foreign 
banking organizations with $50 billion in U.S. non-branch assets pose 
to U.S. financial stability. In addition, the ``virtual'' U.S. 
intermediate holding company would not have a centralized risk 
function, which would

[[Page 17278]]

hinder risk management at the U.S. intermediate holding company.
    Last, the Board believes that a virtual structure would also not 
materially enhance the ability to resolve the U.S. operations of a 
foreign banking organization. Given the substantial uncertainty 
surrounding the operational challenges of a ``virtual'' U.S. 
intermediate holding company, and attendant concerns regarding whether 
the ``virtual'' U.S. intermediate holding company can effectively 
mitigate the systemic risk posed by a foreign banking organization with 
more than $50 billion in U.S. non-branch assets, the Board is not 
permitting foreign banking organizations to comply with the final rule 
by using a ``virtual'' U.S. intermediate holding company.
7. Transitional Application of the Enhanced Prudential Standards to a 
Bank Holding Company That Is a Subsidiary of a Foreign Banking 
Organization
    The proposed rule provided that a U.S. intermediate holding company 
that was a bank holding company would be subject to the enhanced 
prudential standards applicable to U.S. intermediate holding companies 
and not to the standards applicable to U.S. bank holding companies, 
regardless of whether the company had total consolidated assets of $50 
billion or more. The final rule adopts the approach set forth in the 
proposed rule. It further clarifies that, prior to the formation of the 
U.S. intermediate holding company, a bank holding company with total 
consolidated assets of $50 billion or more controlled by a foreign 
banking organization is subject to the enhanced prudential standards 
applicable to bank holding companies that are contained in this final 
rule beginning on January 1, 2015 and ending on the date on which the 
U.S. intermediate holding company formed or designated by the parent 
foreign banking organization becomes subject to parallel requirements 
under the foreign final rule.
    As discussed below in sections IV.C.1 and IV.F.1 of this preamble, 
the final rule generally delays the application of the leverage capital 
requirements and stress test requirements to the U.S. intermediate 
holding company until January 1, 2018 and October 1, 2017, 
respectively. The final rule clarifies that each subsidiary bank 
holding company and insured depository institution of a foreign banking 
organization must continue to comply with the applicable leverage 
requirements under the Board's Regulation Q (12 CFR Part 217) and 
stress testing requirements under subparts F, G, or H of Regulation YY, 
as applicable, until the U.S. intermediate holding company becomes 
subject to those requirements under the final rule. If the foreign 
banking organization designated an existing bank holding company as its 
U.S. intermediate holding company, that bank holding company would 
continue to be subject to capital requirements under 12 CFR Part 217 
until December 31, 2017, and stress test requirements under subparts F, 
G, or H of Regulation YY until September 30, 2017.
    The Board may accelerate the application of the leverage and stress 
testing requirements to a U.S. intermediate holding company if it 
determines that the foreign banking organization has taken actions to 
evade the application of this subpart. Actions to evade application of 
the subpart would include, for instance, the transfer of assets from a 
bank holding company subsidiary to the U.S. intermediate holding 
company in order to minimize application of the leverage requirements 
prior to January 1, 2018.
    The final rule also includes a reservation of authority for the 
Board to modify application of the enhanced prudential standards during 
the transition period if appropriate to accommodate the organizational 
structure of a foreign banking organization or characteristics specific 
to such foreign banking organization and the modification is 
appropriate and consistent with the capital structure, size, 
complexity, risk profile, scope of operations, or financial condition 
of the U.S. intermediate holding company, safety and soundness, and the 
financial stability mandate of section 165 of the Dodd-Frank Act. As 
foreign banking organizations engage in the restructuring necessary to 
come into compliance with the final rule, the Board retains the 
authority to address idiosyncratic issues and discontinuities arising 
out of the application of the enhanced prudential standards to the U.S. 
operations. For example, the Board could use this authority where a 
temporary location for capital would significantly reduce capital at a 
holding company through application of the minority interest rules.

C. Capital Requirements

    Section 165(b) of the Dodd-Frank Act requires the Board to impose 
enhanced risk-based and leverage capital requirements on foreign 
banking organizations with $50 billion or more of total consolidated 
assets. The proposal would have required a U.S. intermediate holding 
company, including a U.S. intermediate holding company that does not 
have a subsidiary depository institution, to comply with the Board's 
risk-based and leverage capital requirements as if it were a bank 
holding company. The proposal would also have applied the Board's 
capital plan rule to U.S. intermediate holding companies with total 
consolidated assets of $50 billion or more in light of the more 
significant risks posed by these firms. The proposal would have 
required 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.
    As discussed below, the final rule would adopt the proposal largely 
as proposed, but in order to reduce burden on U.S. intermediate holding 
companies that meet the thresholds for application of the advanced 
approaches risk-based capital rules (the advanced approaches rules), 
the final rule would provide that such U.S. intermediate holding 
companies do not have to comply with the advanced approaches rules, 
even where the U.S. intermediate holding company is a bank holding 
company.
1. Risk-Based and Leverage Capital Requirements Applicable to U.S. 
Intermediate Holding Companies
    The proposal would have applied the Board's risk-based and leverage 
capital rules to the U.S. intermediate holding company. Thus, under the 
proposal (following implementation of the revised capital framework), 
the U.S. intermediate holding company would have been required to meet 
a minimum common equity tier 1 risk-based capital requirement of 4.5 
percent, a minimum tier 1 risk-based capital requirement of 6 percent, 
a total risk-based capital requirement of 8 percent, and a minimum 
leverage ratio of tier 1 capital to average total consolidated assets 
of 4 percent (the generally-applicable leverage ratio). In addition, 
U.S. intermediate holding companies with total consolidated assets of 
$250 billion or more or on-balance sheet foreign exposure equal to $10 
billion or more would have been required to meet a minimum 
supplementary leverage ratio, which takes into account off-balance 
sheet exposures, of 3 percent. The U.S. intermediate holding company 
would have been subject to the capital conservation buffer, and, if 
applicable, the countercyclical capital buffer, which would limit the 
U.S. intermediate holding company's ability to make capital 
distributions and certain discretionary bonus payments if it did

[[Page 17279]]

not hold a specified amount of common equity tier 1 capital in excess 
of the amount necessary to meet its minimum risk-based capital 
requirements. As the U.S. intermediate holding company would 
consolidate the U.S. subsidiaries of the foreign banking organization, 
the U.S. intermediate holding company would have been required to 
comply with these requirements based on the exposures and capital of 
its U.S. subsidiaries (and the subsidiaries thereof).
a. Comments on Capital Requirements for the U.S. Intermediate Holding 
Company
1. U.S. Financial Markets and U.S. Financial Stability
    The risk-based and leverage capital requirements proposed to apply 
to U.S. intermediate holding companies were intended to strengthen the 
capital position of U.S. operations of foreign banking organizations in 
furtherance of section 165's financial stability mandate. However, 
commenters expressed concern that the proposal would instead have 
negative effects on U.S. financial markets and U.S. financial 
stability. Commenters asserted that the requirements would create 
incentives for foreign banking organizations to reduce their U.S. 
activities, particularly repo activities. According to commenters, 
foreign banking organizations, particularly smaller firms dominated by 
broker-dealer operations, would reduce assets to avoid requirements, 
and firms would reconsider any strategies to expand in the United 
States. In the view of these commenters, these assets and activities 
would shift to U.S. bank holding companies and unregulated 
institutions, concentrating financial assets and activities in fewer 
entities and increasing systemic instability. Commenters also asserted 
that the proposed leverage capital requirements would penalize firms 
with low-risk assets and create incentives for foreign banking 
organizations to increase the riskiness of their balance sheets.
    Many of these comments rest on implicit assumptions about the costs 
of the proposed capital requirements and assume that a foreign banking 
organization would choose to reduce its activities rather than comply 
with the requirements under the final rule. Some foreign banking 
organizations, however, will be able to meet the new U.S. intermediate 
holding company capital requirements by retaining more earnings in 
their U.S. operations or by contributing equity capital held at the 
parent to the U.S. intermediate holding company without having to do an 
external capital raise.
    In addition, commenters' arguments that the proposal would increase 
systemic instability by increasing concentration among U.S. bank 
holding companies fail to account for the broader changes in the 
regulatory environment in which the foreign banking organizations and 
their U.S. competitors operate. The Board has made a number of 
enhancements to its regulation and supervision of bank holding 
companies and foreign banking organizations in the years following the 
financial crisis. As a result of these enhancements and the final rule, 
U.S. bank holding companies with consolidated assets of $50 billion or 
more are subject to enhanced prudential standards parallel to those 
applied to U.S. intermediate holding companies, thus balancing the 
effect of the foreign proposal on competition and concentration of 
activities among domestic and foreign banking organizations. With 
respect to commenters' assertions that foreign banking organizations 
will reduce their activities in response to the final rule, the Board 
believes, on balance, that if a large foreign banking organization or a 
domestic bank holding company were to reduce its systemic footprint in 
response to the final rule, this would be consistent with the Board's 
overall goal of financial stability.
    In response to commenters' assertions that the final rule will 
concentrate activities in unregulated financial institutions, the Board 
will continue to monitor the migration of risk from the regulated 
banking system to unregulated entities, and to inform its policy 
decisions with the results of its monitoring.
    Some commenters asserted that the proposed requirements for both 
U.S. bank holding companies and U.S. intermediate holding companies 
were too low, and should be strengthened. The Board notes that the 
final rule is one component of the Board's comprehensive reforms to 
improve the resiliency of large U.S. banking organizations and the U.S. 
operations of foreign banking organizations and systemic stability, and 
should be considered in the context of those comprehensive reforms. 
More generally, the Board continues to review requirements and consider 
policy actions as necessary to address emerging risks.
2. Consolidated Capital at the Parent and Parent Support
    Multiple commenters asserted that the Board should rely on the 
capital adequacy of the foreign banking organization and not impose 
capital requirements separately on the U.S. intermediate holding 
company. Commenters argued that a foreign banking organization would in 
practice support its operations in the United States to avoid the 
reputational and legal consequences of permitting a subsidiary in a 
host jurisdiction to fail. Commenters noted that European banks 
provided funding to their U.S. operations during the Eurozone crisis of 
2011 as an example of such support. Commenters also opined that the 
proposal could accelerate withdrawal of foreign banking organizations 
from U.S. markets in the event of a home-country crisis, because it 
would be hard for such entities to justify maintaining capital and 
liquidity in the United States.
    The Board agrees with commenters that the financial strength of the 
foreign bank parent, and its reputation, are important to that 
institution's ability to support its U.S. operations. The final rule 
takes this into account by allowing foreign banks to continue to 
operate in the United States through branches on the basis of the 
capital of the foreign bank parent. The Board does not believe, 
however, that it is appropriate to rely solely on the expectation that 
a foreign banking organization would support its U.S. operations in 
order to protect the financial stability of the United States. Even if 
the foreign bank parent is financially strong in stable times, multiple 
factors may limit its ability to support its U.S. operations during a 
period of stress. For example, as the proposal observed, home country 
political and legal developments may hamper a foreign bank parent's 
ability to support its offshore affiliates. While foreign banks have 
strong business and reputational incentives to support their U.S. 
operations, to the extent that the U.S. operations of a foreign banking 
organization depend on parent support and the parent foreign banking 
organization experiences financial or other stress, foreign banking 
organizations and their home-country supervisors may be forced to 
choose between the costs involved in supporting U.S. operations and the 
implications for home country operations. Having considered these risks 
to U.S. financial stability and the Dodd-Frank Act's mandate to impose 
enhanced prudential standards, including enhanced risk-based and 
leverage capital requirements, on foreign banking organizations, the 
Board believes it is appropriate to impose capital requirements on U.S. 
intermediate holding companies.

[[Page 17280]]

    Commenters also argued that the proposal did not give adequate 
regard to the principles of national treatment, as required by the 
Dodd-Frank Act, because it would have subjected foreign banking 
organizations to what they described as more stringent capital 
requirements than their U.S. counterparts. Commenters alleged that 
under the proposal, foreign banking organizations would receive no 
credit for capital that may be held in entities outside the United 
States that could otherwise offset the Board's capital requirements. 
Some commenters asserted that the U.S. operations of foreign banking 
organizations could appear riskier on a stand-alone basis than they 
would if considered as part of the consolidated entity.
    The final rule permits U.S. branches and agencies of foreign banks 
to continue to operate on the basis of the foreign bank's capital and 
does not impose capital or stress testing requirements on U.S. branches 
and agencies of foreign banking organizations. Therefore, the final 
rule does give credit to foreign banking organizations for capital held 
at the foreign banking organization because it relies on a home 
country's implementation of the Basel Capital Framework in evaluating 
the capital adequacy of the foreign banking organization. As discussed 
above, notwithstanding capital adequacy at the parent, however, the 
Board believes that it is appropriate for the U.S. intermediate holding 
company to meet capital adequacy standards in the United States 
separately from the parent foreign bank.
    Commenters also argued that the proposed requirements would be 
disruptive to the consolidated entity and would hamper its ability to 
support its global operations. These commenters criticized the 
application of risk-based and leverage capital requirements to the U.S. 
intermediate holding company. They argued not only that the 
requirements would prevent centralized resource management throughout 
the organization, consistent with comments described above in section 
IV.A.4 of this preamble, but also that the proposal would effectively 
and inappropriately raise capital requirements on parent foreign 
banking organizations. Specifically, some commenters asserted that some 
home-country regulation or supervisors would reflect the ``trapping'' 
of capital in the United States by requiring those firms to meet higher 
stand-alone parent capital requirements, or excluding from the parent's 
regulatory capital any capital held in the United States. In either 
case, commenters asserted that the proposal would require foreign 
banking organizations to raise additional capital at the parent, which 
commenters asserted would effectively impose home country capital 
requirements in excess of that required by a home-country's 
implementation of the Basel Capital Framework. Commenters also argued 
that home-country regulations limiting the recognition of minority 
interest in parent capital would create disincentives for foreign 
banking organizations to capitalize their U.S. intermediate holding 
companies through the sale of equity interests in the U.S. intermediate 
holding companies to third parties.
    The Board acknowledges that some home-country regulation may 
require a foreign banking organization that contributes capital to its 
U.S. intermediate holding company or raises capital through sales of 
equity in the U.S. intermediate holding company to reduce its capital 
for purposes of its parent-only or consolidated capital calculations. 
In these cases, the parent may be required to raise additional capital. 
However, even in these instances, the Board believes that it is 
important for a U.S. intermediate holding company to hold capital in 
the United States. To the extent that home country regulations limit a 
foreign banking organization's ability to rely on capital held in the 
United States in calculating consolidated or parent-only capital, the 
Board would be concerned that the foreign banking organization might 
not be able to downstream adequate capital to its U.S. operations 
during a time of significant stress because it could be considered 
undercapitalized under its home-country regime. The Board therefore 
believes that requiring the foreign banking organization to position 
capital at its U.S. intermediate holding company is appropriate to 
protect U.S. financial stability.
    However, to mitigate transitional costs for foreign banking 
organizations and the U.S. economy that may occur from the capital 
requirements and other aspects of the final rule, the final rule 
generally extends the initial compliance date for foreign banking 
organizations from July 1, 2015, to July 1, 2016. Furthermore, the 
leverage ratios of the final rule will not become applicable to the 
U.S. intermediate holding company until January 1, 2018.\111\ This 
transition period should help foreign banking organizations manage the 
costs of moving capital to the United States, and therefore should 
mitigate the impact that capital requirements might otherwise have on 
foreign banking organizations' U.S. activities.
---------------------------------------------------------------------------

    \111\ The final rule also provides that a subsidiary bank 
holding company or insured depository institution prior to formation 
of the U.S. intermediate holding company must continue to comply 
with the leverage capital requirements applied to that bank holding 
company or insured depository institution under the Board's 
Regulation Q (12 CFR Part 217) until December 31, 2017.
---------------------------------------------------------------------------

    Other commenters contended that even if, in the final rule, the 
Board determined not to rely on the adequacy of the parent's 
consolidated capital position, the Board should still modify its 
requirements to recognize types of capital instruments for the U.S. 
intermediate holding company which are in addition to those recognized 
in the Board's revised capital framework. Specifically, the commenters 
suggested that the Board should allow the U.S. intermediate holding 
company to count as capital instruments representing claims on the 
parent, including contingent capital, keepwell agreements, debt, and 
parent guarantees. These commenters suggested that the Board recognize 
these instruments on the grounds that the U.S. intermediate holding 
company would differ from a U.S. bank holding company in the ways it 
would raise capital and that it would be adequately supported by the 
parent through these types of instruments and agreements.
    The final rule does not recognize alternative forms of capital that 
do not meet the criteria for capital instruments under the Board's 
capital rules for bank holding companies. First, the types of capital 
instruments that the Board recognizes in its revised capital framework 
are those that provide sufficient loss-absorbency at times of stress. 
The Board is concerned that the instruments cited by the commenters are 
not similarly loss-absorbent and may be contingent forms of capital 
support that could be curtailed if both the U.S. and the home-country 
operations experienced simultaneous stress. Furthermore, requiring the 
same types of capital instruments for U.S. intermediate holding 
companies and U.S. bank holding companies is consistent with national 
treatment and equality of competitive opportunity.
b. Comments on Applying Capital Regulations at a Sub-Consolidated Level
1. Burdens and Costs of Multiple Systems
    Commenters also criticized the Board for requiring the U.S. 
intermediate holding company to calculate its risk-based and leverage 
capital requirements as a stand-alone entity. Commenters focused on the 
implementation and

[[Page 17281]]

compliance burden of the multiple capital calculations required for 
foreign banking organizations, asserting that they would have to create 
costly and redundant systems for complying with multiple sets of local 
rules. These commenters asserted that requiring compliance with the 
home-country advanced approaches rule (as applicable), home-country 
Basel I rules, U.S. advanced approaches rules (as applicable), and the 
U.S. standardized approach was burdensome and unnecessary for systemic 
stability. In particular, commenters cited the need to create 
additional models for compliance with the U.S. advanced approaches 
rules that would be different from and inconsistent with home-country 
models. Several commenters asked the Board to clarify whether the 
foreign exposures test for application of the advanced approaches rules 
would apply to a U.S. intermediate holding company.
    In response to commenters' concerns regarding the burdens of 
implementing the U.S. advanced approaches rules, the Board has 
determined that the U.S. intermediate holding company will not be 
subject to the advanced approaches rules, even if the U.S. intermediate 
holding company meets the thresholds for application of those rules. 
This exemption also applies to a U.S. intermediate holding company that 
is a bank holding company. A bank holding company subsidiary of a 
foreign banking organization that is subject to the advanced approaches 
rules may opt out of complying with the U.S. advanced approaches rules 
with the Board's prior approval.\112\ This modification responds to 
comments about both duplicative model-based calculations required for 
the U.S. intermediate holding company and whether a U.S. intermediate 
holding company would have sufficient foreign exposures to require 
application of the advanced approaches rules. The capital adequacy of a 
U.S. intermediate holding company will be addressed by standardized 
risk-based capital rules, leverage rules, and capital planning and 
supervisory stress testing requirements.
---------------------------------------------------------------------------

    \112\ U.S. intermediate holding companies may, however, elect to 
comply with the advanced approaches rules.
---------------------------------------------------------------------------

    A U.S. intermediate holding company that meets the threshold for 
the advanced approaches rules will, nonetheless, be subject to the 
other requirements that apply to advanced approaches banking 
organizations, including restrictions on distributions and 
discretionary bonus payments associated with the countercyclical 
capital buffer, the supplementary leverage ratio provided for in 
subpart B of the revised capital framework, and the requirement to 
include accumulated other comprehensive income in regulatory 
capital.\113\ These are aspects of the revised capital framework that 
apply to institutions that meet the thresholds for application of the 
advanced approaches rules, but are not part of the advanced approaches 
rules. The final rule does not, however, require a U.S. intermediate 
holding company that meets the threshold for application of the 
advanced approaches rules to deduct from common equity tier 1 or tier 1 
capital its expected credit loss that exceeds eligible credit reserves, 
because the U.S. intermediate holding company would be subject to the 
standardized approach set forth in the revised capital framework, and 
that deduction is associated with the advanced approaches risk-based 
capital requirements. In addition, a bank holding company that is a 
subsidiary of a foreign banking organization and that currently is 
subject to the advanced approaches rules may, with the Board's prior 
written approval, elect not to comply with the advanced approaches 
rules.
---------------------------------------------------------------------------

    \113\ As discussed above, the final rule provides that a foreign 
banking organization that has a bank holding company subsidiary 
prior to formation of the U.S. intermediate holding company must 
continue to comply with the leverage capital requirements under the 
Board's Regulation Q until December 31, 2017. Under Regulation Q, 
such bank holding company subsidiary of a foreign banking 
organization will be required to calculate and report a 
supplementary leverage ratio, if applicable.
---------------------------------------------------------------------------

    Finally, with respect to commenters' concerns about requiring 
jurisdiction-specific systems for complying with local rules, as noted 
above, consistent with the Basel Capital Framework, multiple 
jurisdictions apply host-country regulation to the locally incorporated 
subsidiaries of global banking organizations. Maintaining operations in 
multiple jurisdictions may therefore require a foreign banking 
organization to create systems that take into account different 
regulatory regimes and approaches. The U.S. intermediate holding 
company requirement, with its attendant risk-based and leverage capital 
requirements, applies only to those institutions with $50 billion or 
more in U.S. non-branch assets, which are institutions that are large 
and sophisticated and capable of implementing such systems. In 
addition, the enhanced prudential standards rely on the Basel Capital 
Framework, with which the foreign banking organizations subject to the 
final rule should already be familiar.
2. Applying the Leverage Ratio to the U.S. Intermediate Holding Company
    Commenters expressed concerns about the burdens of complying with 
both U.S. and home-country leverage requirements, asserting that 
inconsistencies among the standards would force U.S. intermediate 
holding companies to manage to the stricter requirement. Many 
commenters criticized application of the generally-applicable leverage 
ratio of 4 percent to a U.S. intermediate holding company prior to 
adoption of the international leverage ratio provided for in Basel III 
(the Basel III leverage ratio).\114\ Other commenters argued that the 
requirement would result in extraterritorial application of the Board's 
rules, and asserted that having a single global leverage ratio would be 
preferable to having multiple local leverage ratios.
---------------------------------------------------------------------------

    \114\ As part of Basel III, the Basel Committee introduced a 
minimum leverage capital requirement of 3 percent as a backstop 
measure to the risk-based capital requirements, designed to improve 
the resilience of the banking system worldwide by limiting the 
amount of leverage that a banking organization may incur. The Basel 
III leverage ratio is defined as the ratio of tier 1 capital to a 
combination of on- and off-balance sheet exposures.
---------------------------------------------------------------------------

    Consistent with the principle of national treatment, the final rule 
imposes the same leverage capital requirements on U.S. intermediate 
holding companies as it does on U.S. bank holding companies. These 
leverage capital requirements include the generally-applicable leverage 
ratio and the supplementary leverage ratio for U.S. intermediate 
holding companies that meet the scope of application for that ratio. 
These requirements do not result in extraterritorial application of the 
Board's rules, because the final rule applies the leverage ratios only 
to the U.S. operations of the foreign banking organization, and not to 
the foreign banking organization parent. The Board has longstanding 
experience with leverage measures as complements to risk-based capital 
measures. From a safety-and-soundness perspective, each type of 
requirement offsets potential weaknesses of the other, and the two sets 
of requirements working together are more effective than either would 
be in isolation. The Board believes that requiring the U.S. 
intermediate holding company to meet these ratios, as applicable, on 
the basis of its U.S. capital and exposures will strengthen the U.S. 
intermediate holding company's capital position in the same way that it 
strengthens the capital position of U.S. bank holding

[[Page 17282]]

companies.\115\ The Board intends to apply the supplementary leverage 
ratio to a U.S. intermediate holding company that meets the scope of 
application of that ratio based on its U.S. assets and exposures 
because it believes that it will similarly strengthen the capital 
position of a U.S. intermediate holding company.
---------------------------------------------------------------------------

    \115\ The supplementary leverage ratio cited by the commenters, 
which is expected to be implemented internationally in 2018 
consistent with the Basel Capital Framework transition period, is a 
measure that is applied only to the largest, most internationally 
active U.S. banking organizations. The revised capital framework 
requires an advanced approaches banking organization to meet the 
supplementary leverage ratio starting on January 1, 2018, consistent 
with the Basel Capital Framework transitions period.
---------------------------------------------------------------------------

    Many commenters criticized application of the generally-applicable 
leverage ratio to foreign banking organizations with predominantly 
broker-dealer activities in the United States. Some commenters asserted 
that the U.S. intermediate holding companies of several foreign banking 
organizations would be comprised of over 90 percent U.S. broker-dealer 
subsidiary assets, making the generally-applicable leverage ratio 
particularly burdensome. Commenters also argued that if U.S. bank 
holding companies with large broker-dealer subsidiaries were judged on 
a sub-consolidated level, the generally-applicable leverage ratio might 
cause them to appear undercapitalized, and that this illustrated the 
proposal's departure from the principles of national treatment and 
competitive equality. Some of these commenters also objected to the 
application of the generally-applicable leverage ratio to broker-
dealer-dominated U.S. intermediate holding companies on the grounds 
that the generally-applicable leverage ratio treats low-risk broker-
dealer activities as risky, and suggested that the generally-applicable 
leverage ratio exclude what the commenters' characterized as low-risk 
assets or assets meeting the definition of highly liquid assets under 
the rule. Other commenters suggested that as an alternative to the 
generally-applicable leverage ratio, the Board should rely on the 
results of stress tests of risk-based capital measures.
    The final rule does not distinguish between U.S. intermediate 
holding companies on the basis of their activities. While the U.S. 
intermediate holding companies of some foreign banking organizations 
may engage primarily in broker-dealer activities, the U.S. intermediate 
holding companies of other foreign banking organizations will be more 
focused on commercial banking or other financial activities. The 
operations of domestic banking organizations, all of which the Board 
requires to comply with the minimum generally-applicable leverage 
ratio, exhibit a similar level of diversity. Rules applicable to U.S. 
bank holding companies do not vary depending on whether a U.S. bank 
holding company has predominantly broker-dealer operations.\116\ The 
leverage capital requirements contained in the final rule similarly 
apply to a foreign banking organization's U.S. intermediate holding 
company on a consolidated basis regardless of its overall activities.
---------------------------------------------------------------------------

    \116\ See, e.g., 12 CFR part 217.
---------------------------------------------------------------------------

    Moreover, the Board notes that commenters' assertions that certain 
U.S. bank holding companies might not meet the generally-applicable 
leverage ratio if it were applied on a sub-consolidated basis were 
based on commenters' analyses of the generally-applicable leverage 
ratios of the broker-dealer subsidiaries of those bank holding 
companies. These comparisons overlook the capital that U.S. bank 
holding companies maintain at the holding company level or at U.S. 
subsidiaries other than the broker-dealer, and accordingly, are not 
relevant comparisons.
    For all of the reasons discussed in this section, the final rule 
applies leverage requirements to the U.S. intermediate holding company 
as proposed. These leverage requirements include the generally-
applicable leverage ratio of 4 percent and, for U.S. intermediate 
holding companies with total consolidated assets of $250 billion or 
more or total consolidated on-balance sheet foreign exposures of $10 
billion or more, the minimum supplementary leverage ratio of 3 percent. 
To mitigate the transitional burdens cited by commenters, the final 
rule generally delays application of the generally-applicable leverage 
ratio to the U.S. intermediate holding company until January 1, 
2018.\117\ As described above, in section IV.B.7 of this preamble, to 
the extent that the foreign banking organization controlled a U.S. bank 
holding company prior to the formation of the U.S. intermediate holding 
company, that U.S. bank holding company continues to be subject to the 
generally-applicable leverage ratio until the U.S. intermediate holding 
company becomes subject to leverage requirements at the consolidated 
level.
---------------------------------------------------------------------------

    \117\ Consistent with the Basel III transition periods, a 
banking organization that meets or exceeds the thresholds for 
application of the supplementary leverage ratio must maintain a 
minimum supplementary leverage ratio of 3 percent beginning on 
January 1, 2018.
---------------------------------------------------------------------------

c. Disclosure Requirements
    The final rule, by subjecting a U.S. intermediate holding company 
to the Board's regulatory capital rules, also requires a U.S. 
intermediate holding company to make public disclosures according to 
subpart D of the revised capital framework. Some commenters argued that 
the disclosure requirements would disproportionately burden foreign 
banking organizations, which would have to make disclosures at a sub-
consolidated level. The disclosure requirement in subpart D, however, 
has an exception for a subsidiary of a foreign banking organization 
that is subject to comparable public disclosure requirements in its 
home jurisdiction. The Board expects that any parent foreign banking 
organization that is able to certify that it meets home-country 
requirements at a consolidated level that are consistent with the Basel 
Capital Framework will be making public disclosures that are comparable 
to those set forth in subpart D of the revised capital framework. In 
most cases, therefore, a U.S. intermediate holding company will not be 
required to make the disclosures under subpart D of the revised capital 
framework.\118\ For a parent foreign banking organization that is 
unable to demonstrate to the satisfaction of the Board that it meets 
home country standards that are consistent with the Basel Capital 
Framework, the Board will evaluate home-country disclosures for general 
consistency with the disclosures set forth in subpart D of the revised 
capital framework and will notify the parent and the U.S. intermediate 
holding company, through the supervisory process, whether disclosures 
by the U.S. intermediate holding company would be necessary.
---------------------------------------------------------------------------

    \118\ 12 CFR 217.61.
---------------------------------------------------------------------------

2. Capital Planning Requirements
    The foreign proposal provided that all U.S. intermediate holding 
companies with total consolidated assets of $50 billion or more would 
have been required to comply with the capital plan rule in the same 
manner and to the same extent as a bank holding company subject to that 
section.\119\ 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 
Supervision & Regulation Letter 01-01 are not required

[[Page 17283]]

to comply with the capital plan rule until July 21, 2015).\120\
---------------------------------------------------------------------------

    \119\ 12 CFR 225.8. See 76 FR 74631 (December 1, 2011).
    \120\ Supervision & Regulation Letter 01-01 (January 5, 2001), 
available at: http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
---------------------------------------------------------------------------

    Under the foreign proposal, a U.S. intermediate holding company 
with total consolidated assets of $50 billion or more would be required 
to submit an annual capital plan to the Federal Reserve in which it 
demonstrated 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. The 
proposal provided that a U.S. intermediate holding company that is 
unable to satisfy these requirements generally may not make any capital 
distributions (other than those capital distributions with respect to 
which the Board has indicated in writing its non-objection) until it 
provided a satisfactory capital plan to the Board.
    Although some commenters supported the foreign proposal's 
requirement that a U.S. intermediate holding company engage in capital 
planning, others asserted that requiring capital planning at the U.S. 
intermediate holding company level was inappropriate. Commenters 
criticized the foreign proposal's capital planning requirement on 
grounds similar to their overall criticism of the foreign proposal, 
arguing that home-country consolidated capital regulation and parent 
support were sufficient. Commenters argued that capital planning should 
be evaluated in the context of the global organization and consider the 
financial condition of the parent foreign banking organization and 
developments in the foreign banking organization's home country. 
Commenters asserted that in the absence of material concern about a 
foreign banking organization's capital planning process or financial 
strength, the Board should not require the U.S. intermediate holding 
company to meet additional proposed capital standards. Commenters 
suggested that instead of applying the capital plan rule, the Board 
should use the supervisory process to impose dividend distribution 
restrictions or additional capital planning and stress-testing 
requirements on the U.S. intermediate holding company if necessary 
based on the financial condition of the parent foreign banking 
organization.
    Other commenters expressed concern that applying the capital plan 
rule would add a ``hidden buffer'' to the minimum requirements 
applicable to the U.S. intermediate holding company and argued that the 
capital plan rule's 5 percent minimum tier 1 common ratio over a nine-
quarter stress horizon effectively requires the company to hold capital 
in excess of the minimum requirements in the Basel Capital Framework. 
In particular, commenters suggested that applying the capital plan rule 
to U.S. intermediate holding companies with predominantly broker-dealer 
operations would impose significant new regulatory requirements on 
broker-dealers. Commenters also criticized the burdens associated with 
creating a localized capital-planning infrastructure and producing 
multiple calculations of risk-weighted assets and capital in connection 
with capital planning. Some commenters argued that the generally-
applicable leverage ratio should not be applied as part of the capital 
plan rule, or, if applied, should be adjusted for assets collateralized 
by U.S. government or agency debt, or other high-quality collateral.
    The capital plan rule is a critical element of the Board's overall 
capital adequacy framework for large bank holding companies. As applied 
to U.S. intermediate holding companies, the capital plan rule will help 
to ensure that such companies hold capital commensurate with the risks 
they would face under stressed financial conditions and reduce the 
probability of their failure by limiting their capital distributions if 
they are unable to demonstrate the ability to meet minimum capital 
requirements under these stressed financial conditions. While applying 
the requirements to the U.S. intermediate holding company does not 
present a complete picture of the consolidated foreign banking 
organization, it does evaluate whether the foreign banking organization 
holds sufficient capital in the United States to support its U.S. 
operations.
    In addition, the Board believes that applying the standards to U.S. 
intermediate holding companies with total consolidated assets of $50 
billion or more would further national treatment and competitive 
equity. The capital plan rule applies to all bank holding companies 
with total consolidated assets of $50 billion or more and does not 
distinguish between bank holding companies based on their operations. 
Applying these standards to the U.S. intermediate holding company of a 
foreign banking organization in the same way that they are applied to 
U.S. bank holding companies puts these firms on equal footing with U.S. 
bank holding companies that compete in the same markets.
    One commenter stated that the Board should allow surplus capital in 
local entities above regulatory thresholds to be deployable to other 
entities within the group. A U.S. intermediate holding company will be 
permitted to pay dividends or make other capital distributions under 
the same conditions in which a U.S. bank holding company could do so.
    Commenters also had a variety of requests for flexibility in 
capital planning as applied to U.S. intermediate holding companies, 
particularly requesting that the Board permit a U.S. intermediate 
holding company to reflect parent support in its capital plan. The 
Board expects U.S. intermediate holding companies to reflect parent 
support of the U.S. intermediate holding company, through guarantees 
and keepwell agreements, in their capital plan. However, in 
demonstrating an ability to meet minimum capital requirements, U.S. 
intermediate holding companies would not be permitted to reflect these 
agreements as sources of capital. As discussed above in section IV.A.4 
of this preamble, the Board believes that it is important for foreign 
banks to have sufficient capital in the United States to support their 
U.S. operations, and that there may be a number of factors that limit a 
foreign bank's ability to support its U.S. operations during a period 
of stress. Furthermore, several U.S. bank holding company subsidiaries 
of foreign banking organizations already comply with the Board's 
capital planning and stress-testing requirements. Accordingly, the 
Board is finalizing the capital plan requirement for U.S. intermediate 
holding companies as proposed. A U.S. intermediate holding company 
formed by July 1, 2016 will be required to submit its first capital 
plan in January 2017.\121\
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    \121\ The Board intends to expand the reporting panel for the FR 
Y-14 to provide that a U.S. intermediate holding company must begin 
filing the FR Y-14A in the reporting cycle after formation of the 
U.S. intermediate holding company, subject to the transition 
provisions for new reporters of the FR Y-14 schedules.
---------------------------------------------------------------------------

    Commenters suggested that the Board apply any capital planning 
standards in consultation and coordination with home-country 
supervisors. The Board will continue to work with home-country 
supervisors in its supervision of foreign banking organizations and 
their U.S. intermediate holding companies.
3. Parent Capital Requirements
    The proposal provided that a foreign banking organization with 
total consolidated assets of $50 billion or more would have been 
required to certify or otherwise demonstrate to the Board's 
satisfaction that it meets capital adequacy standards at the 
consolidated

[[Page 17284]]

level that are consistent with the Basel Capital Framework, as defined 
below. This requirement was intended to help ensure that the 
consolidated capital base supporting the activities of U.S. branches 
and agencies remains strong, and to lessen the degree to which 
weaknesses at the consolidated foreign parent could undermine the 
financial strength of its U.S. operations.
    The proposal defined the Basel Capital Framework as the regulatory 
capital framework published by the Basel Committee, as amended from 
time to time. This requirement would have included the standards in 
Basel III for minimum risk-based capital ratios, any leverage ratio, 
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 Basel 
III.\122\
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    \122\ Basel III establishes minimum risk-based capital standards 
of 4.5 percent common equity tier 1 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, Basel III 
includes restrictions on capital distributions and certain 
discretionary bonus payments if a banking organization does not hold 
common equity tier 1 sufficient to exceed the minimum risk-weighted 
ratio requirements outlined above by at least 2.5 percent. See 78 FR 
62018.
---------------------------------------------------------------------------

    Under the foreign proposal, a company could 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 proposal provided that the foreign 
banking organization may demonstrate to the Board's satisfaction that 
it meets standards consistent with the Basel Capital Framework.
    In addition, under the foreign proposal, a foreign banking 
organization would have been required to provide to the Board certain 
information on a consolidated basis. This information would have 
included 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 Basel III, 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.\123\ The Board intends to propose separately for 
notice and comment an amendment to the FR Y-7Q to incorporate these 
items.
---------------------------------------------------------------------------

    \123\ This information would have been required to be provided 
as of the close of the most recent quarter and as of the close of 
the most recent audited reporting period.
---------------------------------------------------------------------------

    Commenters asked the Board to clarify how it would assess whether a 
home country's capital standards are consistent with the Basel Capital 
Framework, and urged the Board to be flexible when making such 
determinations, stating that the Board should look for general 
consistency with the Basel Capital Framework, rather than requiring 
point-by-point equivalence. For purposes of the final rule, the Board 
is clarifying that it intends to consider materiality when assessing 
consistency with the Basel standards, including whether the home 
country regulator timely implements any standards made part of the 
Basel Capital Framework. The Board also intends to take into account 
analysis regarding the comparability of capital standards, such as the 
Basel Committee's peer review process.
    The proposal provided that if a foreign banking organization did 
not certify or otherwise demonstrate to the Board's satisfaction that 
it met capital adequacy standards at the consolidated level that were 
consistent with the Basel Capital Framework or provide the required 
information relating to its capital levels and ratios, the Board could 
impose conditions or restrictions relating to the activities or 
business operations of the U.S. operations of the foreign banking 
organization. The proposal further provided that the Board would 
coordinate with any relevant State or Federal regulator in the 
implementation of such conditions or restrictions. The Board is 
finalizing the substance of this provision as proposed. In the event 
that the foreign banking organization does not make the certification 
or provide the required information, the Board expects to impose 
requirements, conditions, or restrictions, including risk-based or 
leverage capital requirements, on or relating to the activities or 
business operations of the U.S. operations of the foreign banking 
organization, but may also take other action as the Board determines is 
appropriate.
    Some commenters requested that the Board establish a standard 
procedure before imposing conditions or restrictions on the U.S. 
operations of foreign banking organizations if the foreign banking 
organization is unable to demonstrate that its home country standards 
are consistent with the Basel Capital Framework. In response to these 
comments, the final rule also includes a notice procedure by which the 
Board would notify a company before it imposes one or more 
requirements, conditions, or restrictions; describe the basis for 
imposing any requirement, condition, or restriction; and provide the 
company an opportunity to request the Board reconsider such 
requirement, condition, or restriction.
    Commenters also urged the Board to allow for flexible application 
of the definition of ``foreign banking organization'' in determining 
whether a foreign banking organization means a top-tier holding company 
or a direct parent of a U.S. subsidiary. As described above in section 
IV.B.5 of this preamble, the Board has reserved flexibility to modify 
the standards as necessary to accommodate alternative organizational 
structures. The Board is therefore finalizing the substance of the 
parent capital requirements as proposed.

D. Risk-Management Requirements for Foreign Banking Organizations

    Section 165(b)(1)(A) of the Dodd-Frank Act requires the Board to 
establish 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 and large foreign banking organizations.\124\ 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 to establish risk 
committees.\125\
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    \124\ 12 U.S.C. 5365(b)(1)(A).
    \125\ 12 U.S.C. 5365(h).
---------------------------------------------------------------------------

    In the proposal, the Board sought to apply the risk-committee and 
chief risk officer requirements proposed for U.S. banking organizations 
to foreign banking organizations in a way that would strengthen a 
foreign banking organization's oversight and risk management of its 
combined U.S. operations and would require a foreign banking 
organization with a large U.S. presence to aggregate and monitor risks 
on a combined U.S. operations basis. The proposal permitted a foreign 
banking organization 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.
    While expressing general support for enhanced risk management 
standards,

[[Page 17285]]

many commenters advocated that the Board rely on local corporate 
governance norms and permit greater flexibility in implementing the 
U.S. risk committee and chief risk officer requirements. Many 
commenters also urged the Board to defer to home country risk-
management standards rather than imposing separate requirements on 
foreign banking organizations, asserting that foreign regulators 
already monitor or plan to monitor risk-management practices and have a 
better perspective on the risk-management practices of a foreign 
banking organization. Some commenters expressed concern about 
separating the U.S. risk-management framework from the global risk-
management framework.
    Additionally, a few commenters asserted that the proposed rule does 
not adequately take into account the extent to which a foreign company 
is subject on a consolidated basis to comparable home country risk-
management standards. One commenter asserted that the Board has 
significantly more authority to tailor the risk-management requirements 
to foreign banking organizations than it exercised in the proposal.
    The Board recognizes that foreign banking organizations generally 
are subject to consolidated risk-management standards in their home 
countries and that many foreign regulators have strengthened their 
risk-management requirements since the financial crisis. However, 
consolidated risk-management practices have not always ensured that a 
foreign banking organization fully understands the risks undertaken by 
its U.S. operations. For example, these practices may limit the ability 
of large foreign banking organizations to aggregate, monitor, and 
report risks across their U.S. legal entities in an effective and 
timely manner. In light of the risks posed to U.S. financial stability 
by foreign banking organizations with a large U.S. presence, the Board 
believes that it is important for such organizations to aggregate and 
monitor risks on a combined U.S. operations basis.
    Consistent with section 165(b)(2) of the Dodd-Frank Act, the Board 
has taken into account the extent to which foreign financial companies 
are subject on a consolidated basis to home country standards that are 
comparable to those applied to financial companies in the United 
States. In deference to existing home-country governance standards, the 
final rule generally provides flexibility for the foreign banking 
organization to locate its U.S. risk committee as either a committee of 
its home office or its U.S. intermediate holding company. For the 
reasons discussed above, the Board believes that foreign banking 
organizations with a sizable U.S. presence should aggregate and monitor 
the risks of their combined U.S. operations to ensure the resiliency of 
such operations. The proposal was tailored to permit foreign banking 
organizations to structure their risk-management functions based on 
their unique circumstances while ensuring strong oversight of risks on 
a combined U.S. operations basis.
    Some commenters asserted that fragmented, country-specific risk-
management requirements could increase operational risk or hinder 
communication regarding risk management within an organization and 
requested that foreign banking organizations be permitted to design 
their own risk-management systems and structures. A few commenters 
asserted that, as an alternative to the proposed rule, the Board should 
work with its foreign counterparts to create an international standard 
for assessing risk-management practices.
    The final rule is intended to address the financial stability risks 
posed by the U.S. operations of foreign banking organizations. The 
framework established by the final rule helps foreign banking 
organizations to effectively aggregate, monitor, and report risks 
across their U.S. legal entities on a timely basis and helps U.S. 
supervisors to understand risks posed to U.S. financial stability by 
the U.S. operations of foreign banking organizations. The Board expects 
that the U.S. risk-management requirements would be integrated and 
coordinated with the foreign banking organization's enterprise-wide 
risk-management practices and therefore would not lead to a fragmented 
approach to risk-management. The Board will continue to work through 
the Basel Committee, the FSB, and other international coordinating 
bodies to promote safe and effective risk-management practices.
    Many commenters asserted that the proposed rule was did not 
adequately consider the diversity among foreign banking organizations 
and that, because foreign banking organizations structure their global 
and U.S. operations in diverse ways, the proposal would be costly to 
implement. Several commenters expressed concern that the proposal was 
too rigid to accommodate the risk profiles of all foreign banking 
organizations, such as foreign banking organizations with significant 
nonbank operations. One commenter asserted that the requirements in the 
proposed rule would be cumbersome if compliance is strictly enforced at 
a foreign banking organization's U.S. subsidiary. Another commenter 
asserted that the proposed rule should not apply to a foreign banking 
organization's U.S. subsidiary that has $50 billion or more in assets 
but does not transact with third parties and is established solely for 
tax, accounting, or administrative purposes.
    The Board recognizes that the level and types of risks posed by 
foreign banking organizations vary based on the size and nature of 
their U.S. operations, and believes that the final rule strikes an 
appropriate balance between mandating specific risk-management 
approaches and permitting foreign banking organizations to structure 
their risk-management oversight as needed to fit their circumstances. 
Furthermore, the Board believes that the requirements of the final rule 
are flexible enough to cover a variety of organizational structures. 
For instance, a foreign banking organization with a branch or agency 
may maintain its U.S. risk committee at either the global board of 
directors or at the U.S. intermediate holding company.\126\
---------------------------------------------------------------------------

    \126\ As further described below, the final rule provides that a 
U.S. intermediate holding company must have its own risk committee.
---------------------------------------------------------------------------

    One commenter asserted that the proposed risk-management 
requirements might not accurately capture U.S. risks because, for 
example, certain trading positions booked by a U.S. broker-dealer may 
be hedged by positions booked at the U.S. branch or outside of the 
United States. Under the final rule, as under the proposal, a foreign 
banking organization must take appropriate measures to ensure that its 
combined U.S. operations provide sufficient information to the U.S. 
risk committee to enable the U.S. risk committee to carry out its 
responsibilities. Thus, a U.S. risk committee should obtain information 
relevant to hedges booked at the U.S. branch. With respect to positions 
booked outside of the United States, the Board expects that a U.S. risk 
committee and U.S. chief risk officer's overview of the risks of the 
foreign banking organization's combined U.S. operations will be 
informed by frequent consultation with the global risk committee and 
global chief risk officer.
    Several commenters stated that the Board's existing framework for 
risk-management oversight of foreign banking organizations is 
sufficiently robust and that the proposal was therefore unnecessary. 
The Board emphasizes that the enhanced U.S. risk-management 
requirements contained in this final rule supplement the Board's 
existing risk-management guidance and

[[Page 17286]]

supervisory expectations for foreign banking organizations.\127\ All 
foreign banking organizations supervised by the Board should continue 
to follow such guidance to ensure appropriate oversight of and 
limitations on risk. The final rule creates additional standards 
regarding the aggregating and monitoring of risks on a combined U.S. 
operations basis. For the reasons discussed above, the Board believes 
that these enhanced prudential standards are important for protecting 
the stability of the U.S. financial system.
---------------------------------------------------------------------------

    \127\ See Supervision and Regulation Letter SR 08-8 (Oct. 16, 
2008), available at: http://www.federalreserve.gov/boarddocs/srletters/2008/SR0808.htm; Supervision and Regulation Letter SR 08-9 
(Oct. 16, 2008), available at: http://www.federalreserve.gov/boarddocs/srletters/2008/SR0809.htm; Supervision and Regulation 
Letter SR 12-17 (December 17, 2012), available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm.
---------------------------------------------------------------------------

1. Risk Committee Requirements for Foreign Banking Organizations With 
$10 Billion or More in Total Consolidated Assets But Less Than $50 
Billion in Combined U.S. Assets
a. General Comments
    Consistent with the requirements of section 165(h) of the Dodd-
Frank Act and with the proposed rule, the final rule requires a foreign 
banking organization with a U.S. presence that has any class of stock 
(or similar interest) that is publicly traded and total consolidated 
assets of $10 billion or more, and a foreign banking organization with 
total consolidated assets of $50 billion or more but combined U.S. 
assets of $50 billion or less, regardless of whether its stock is 
publicly traded, to certify to the Board, on an annual basis, that it 
maintains a U.S. risk committee of its board of directors or equivalent 
home-country governance structure that (1) oversees the U.S. risk-
management policies of the combined U.S. operations of the company, and 
(2) has at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex firms. This 
certification must be filed on an annual basis with the Board 
concurrently with the foreign banking organization's Federal Reserve 
Form FR Y-7, Annual Report of Foreign Banking Organizations. The 
proposed rule would have required the foreign banking organization to 
take appropriate measures to ensure that its combined U.S. operations 
implement the risk management policies overseen by the U.S. risk 
committee, and that 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 the proposal. It 
provided that 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 if the foreign banking 
organization was unable to satisfy these requirements.
    Several commenters asserted that the asset thresholds that would 
subject a foreign banking organization to the risk management and risk 
committee requirements were too low. One commenter urged the Board to 
exempt all foreign banking organizations with less than $50 billion in 
combined U.S. assets. Another commenter proposed an exemption for 
foreign banking organizations with less than $10 billion in combined 
U.S. assets. The asset thresholds governing the overall risk-management 
requirements and the risk committee requirement are set by sections 
165(a) and 165(h) of the Dodd-Frank Act. Accordingly, the Board is 
finalizing this aspect of the proposal without change. The final rule 
also clarifies that a foreign banking organization is a ``publicly 
traded company'' under the statute if any class of stock (or similar 
interest, such as an American Depositary Receipt) is publicly traded.
b. Qualifications of Risk-Committee Members
    Under the proposal, at least one member of the U.S. risk committee 
of a publicly traded foreign banking organization with total 
consolidated assets of $10 billion or more and a foreign banking 
organization with total consolidated assets of $50 billion or more but 
combined U.S. assets of $50 billion or less, regardless of whether it 
was publicly traded, would have been required to have risk-management 
expertise that is commensurate with the capital structure, risk 
profile, complexity, activities, size, and other appropriate risk-
related factors of the foreign banking organization's combined U.S. 
operations. A few commenters urged the Board not to adopt by regulation 
minimum qualifications to fulfill the risk-management expertise 
requirement. These commenters suggested that risk-management expertise 
be left to home-country discretion.
    Although the final rule does not specify by regulation minimum 
educational or professional credentials for a foreign banking 
organization's risk committee members, it is appropriate, in light of 
the requirements of the Dodd-Frank Act, to ensure that at least one 
member of a foreign banking organization's risk committee has risk-
management experience. Under the final rule, a risk committee of 
foreign banking organizations with $10 billion or more in total 
consolidated assets but less than $50 billion in combined U.S. assets 
must include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex firms.\128\ 
Similar to the requirements for risk-management experience for bank 
holding companies with total consolidated assets of at least $10 
billion but less than $50 billion under the domestic rule, experience 
in a nonbanking or nonfinancial field may satisfy the requirements of 
the rule for a foreign banking organization with $10 billion or more in 
total consolidated assets but less than $50 billion in combined U.S. 
assets, as long as the experience includes the identification, 
assessment, and management of risk of large, complex firms. Additional 
discussion of the qualifications necessary for risk-management 
expertise is presented in section III.B.2 of this preamble.
---------------------------------------------------------------------------

    \128\ This provision is consistent with the requirement in 
section 165(h)(3)(C) of the Dodd-Frank Act and mirrors the 
requirement in the Board's final rule for U.S. companies, discussed 
above in section III.B of this preamble. 12 U.S.C. 5365(h)(3)(C).
---------------------------------------------------------------------------

    Consistent with the proposed rule, in order to accommodate the 
diversity in corporate governance practices across different 
jurisdictions, the final rule does not require the U.S. risk committee 
of a foreign banking organization with total consolidated assets of $10 
billion or more but combined U.S. assets of less than $50 billion to 
maintain a specific number of independent directors on the U.S. risk 
committee.\129\
---------------------------------------------------------------------------

    \129\ As described below, the final rule requires a foreign 
banking organization with combined U.S. assets of $50 billion or 
more to maintain an independent director on its U.S. risk committee.
---------------------------------------------------------------------------

2. Risk-Management and Risk Committee Requirements for Foreign Banking 
Organizations With Combined U.S. Assets of $50 Billion or More
    The proposed rule would have established additional requirements 
regarding responsibilities and structure for the U.S. risk committee of 
a foreign banking organization with combined U.S. assets of $50 billion 
or more. In finalizing these requirements, the Board has generally 
sought to maintain consistency with the risk-management requirements 
included in the final rule for domestic companies with total 
consolidated assets of $50 billion or more, with certain adaptations to 
account for the unique characteristics of foreign banking 
organizations.

[[Page 17287]]

a. Responsibilities of U.S. Risk Committee
    Under the proposal, a U.S. risk committee of a foreign banking 
organization with combined U.S. assets of $50 billion or more would 
have been required 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, size, and 
other appropriate risk-related factors of the company's combined U.S. 
operations. The proposal would have required the risk management 
framework for the combined U.S. operations to be consistent with the 
enterprise-wide risk management policies and include enumerated 
policies, procedures, policies, and systems.
    Some commenters opposed the proposed establishment of specific 
roles and responsibilities for the U.S. risk committee. For example, 
one foreign bank stated that the U.S. risk committee should be 
permitted to rely on the parent company's global policies and 
procedures and that establishing stand-alone policies and procedures 
for the company's U.S. operations would be duplicative and result in 
increased costs and complexity. Some commenters requested additional 
clarity regarding the relationship between the U.S. risk committee and 
the global risk-management function. A few commenters also asserted 
that the U.S. risk committee's responsibilities and its relationship to 
management and the board of directors should be left to the discretion 
of the foreign banking organization.
    The required elements of a foreign banking organization's risk 
management framework under the final rule are crucial elements of 
effective risk management and are consistent with international risk-
management standards.\130\ Therefore, because of the risks posed by the 
companies covered by the final rule, the Board believes that it is 
important to specify the responsibilities for their U.S. risk 
committees. Accordingly, the Board is finalizing the responsibilities 
of the U.S. risk committee generally as proposed, with some 
modifications, as discussed below.
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    \130\ See, e.g., ``Principles for Enhancing Corporate 
Governance,'' (October 2010), available at: http://www.bis.org/publ/bcbs176.pdf (stating that large, internationally active banks should 
have a board-level risk committee responsible for overseeing 
implementation of a risk management framework that includes 
procedures for identifying, assessing, monitoring, and reporting key 
risks and risk mitigation measures).
---------------------------------------------------------------------------

    As noted above, the risk management framework for a foreign banking 
organization's U.S. operations must be consistent with its global 
framework, and foreign banking organizations generally may rely on 
their parent company's enterprise-wide risk management policies, as 
long as those policies and procedures fulfill the minimum requirements 
established by the final rule. Consistent with the final rule for bank 
holding companies, as discussed in section III.B of this preamble, the 
final rule requires the U.S. risk committee to approve and periodically 
review the risk-management policies, rather than the risk-management 
practices, of the combined U.S. operations. Additionally, the final 
rule does not require a foreign banking organization to certify that it 
has a U.S. risk committee because the Board expects to gain sufficient 
information through the supervisory process to evaluate whether the 
U.S. risk committee meets the requirements of this section.
    Under the proposal, a U.S. risk committee would have had to meet at 
least quarterly and more frequently as needed, and fully document and 
maintain records of its proceedings, including risk-management 
decisions. One commenter supported the requirement that a U.S. risk 
committee meet quarterly, but another urged the Board not to adopt a 
minimum number of meetings for the U.S. risk committee. Based on its 
supervisory experience, the Board understands that quarterly meetings 
of board committees are standard in the financial industry and the 
Board believes that this standard is consistent with good risk 
management practices, as it helps ensure the risk committee receives 
timely information about the risk profile of the institution. 
Accordingly, the Board is adopting these provisions as proposed. In 
addition to the responsibilities described above, under the proposal, 
the U.S. risk committee would have been responsible for certain 
liquidity risk-management responsibilities. These liquidity risk-
management responsibilities are components of the U.S. risk-management 
framework. The Board has adopted the proposed liquidity risk-management 
responsibilities with some modifications in response to comments and 
other considerations, as further discussed in section IV.E.2.
b. Independent Member of the U.S. Risk Committee
    Under the proposal, the U.S. risk committee of a foreign banking 
organization with combined U.S. assets of $50 billion or more must 
include at least one member who (1) is not 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, and 
(2) is not 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 was adapted from director 
independence requirements of certain U.S. securities exchanges and was 
similar to the requirement in the domestic proposal that the chair of 
the risk committee of a U.S. bank holding company be independent. The 
proposed requirement applied regardless of where the foreign banking 
organization's U.S. risk committee was located.
    A few commenters asserted that the independent director requirement 
is not necessary to achieve the U.S. risk committee's purposes. One 
commenter stated that the independence requirement could hinder the 
efficacy of the U.S. risk committee because the independent director 
would not be familiar with the day-to-day operation of the business. 
One commenter urged the Board to consider allowing foreign banking 
organizations to include an autonomous reporting line to the chief 
executive officer or the board of directors in lieu of an independence 
requirement. Other commenters urged the Board to defer to home country 
independence standards. One commenter stated that the Board should 
focus on the U.S. risk committee's independence from business lines, 
rather than on a particular director's independence from the foreign 
banking organization.
    The Board believes that requiring one member of the U.S. risk 
committee to be independent from the foreign banking organization helps 
to ensure that an objective view of the company's U.S. operations is 
represented on the committee. Further, given the variation in 
independence requirements across jurisdictions, the final rule, 
consistent with the proposal, establishes independence standards to 
ensure consistency among companies subject to the rule. The Board 
therefore believes that the independence standards set out in the 
proposal are appropriate minimum requirements. Thus, the Board is 
adopting the director-

[[Page 17288]]

independence requirements as proposed.
    In addition, the proposal would have required at least one member 
of the U.S. risk committee to have risk-management expertise. In the 
final rule, the risk committee of a foreign banking organization with 
combined U.S. assets of $50 billion or more must include at least one 
member having experience in identifying, assessing, and managing risk 
exposures of large, complex financial firms. This is consistent with 
the final rule's requirement for bank holding companies with total 
consolidated assets of $50 billion or more.
c. Placement of the Risk Committee
    Under the proposal, in most cases, a foreign banking organization 
would have been permitted to maintain its U.S. risk committee either as 
a committee of the global board of directors, on a standalone basis or 
as part of its enterprise-wide risk committee, or as a committee of the 
board of directors of its U.S. intermediate holding company, if 
applicable. The proposal would have required a foreign banking 
organization that has combined U.S. assets of $50 billion or more and 
operates in the United States solely through a U.S. intermediate 
holding company to maintain its U.S. risk committee at the U.S. 
intermediate holding company.
    Several commenters supported the proposed rule's option to house 
the U.S. risk committee at either the U.S. intermediate holding company 
or the parent company. A few commenters urged the Board to permit 
additional flexibility. Two commenters suggested that the Board should 
permit a foreign banking organization to comply with the risk committee 
requirements by establishing a management committee or an independent 
risk-management function. Another foreign bank requested that the final 
rule allow supervisors authority to adjust the risk-management 
requirements where the foreign banking organization operates in the 
United States only through U.S. subsidiaries. One commenter asserted 
that the Board should allow the U.S. risk committee to be placed at a 
company's U.S. branch. One commenter opined that the responsibilities 
of the U.S. risk committee are more important than its placement. Some 
commenters, however, indicated that it would be appropriate for foreign 
banking organizations with large U.S. operations to maintain a risk 
function in the United States rather than in the company's head office.
    The Board believes that it is important to ensure that a senior 
committee of the board of directors of the foreign banking organization 
or of the U.S. intermediate holding company has primary responsibility 
for oversight of the risks of the combined U.S. operations. A 
management or independent committee or representatives of a U.S. branch 
may not have the requisite ability to oversee the risks of the combined 
operations. Under the final rule, the risk committee for the combined 
U.S. operations generally must be a committee either of the global 
board of directors of the foreign banking organization or of the U.S. 
intermediate holding company.\131\
---------------------------------------------------------------------------

    \131\ For those foreign banking organizations that operate in 
the United States solely through U.S. intermediate holding 
companies, the Board also has retained the requirement that such a 
foreign banking organization place its U.S. risk committee at the 
U.S. intermediate holding company as an appropriate means for the 
U.S. risk committee to have exposure to the foreign banking 
organization's U.S. operations and to ensure that the U.S. risk 
committee is accessible to U.S. supervisors.
---------------------------------------------------------------------------

    Furthermore, the final rule requires each U.S. intermediate holding 
company to have a risk committee to oversee the risk function of the 
U.S. intermediate holding company. As described above, the final rule 
raises the threshold for formation of a U.S. intermediate holding 
company from $10 billion to $50 billion in U.S. non-branch assets. In 
consideration of this change, and the systemic footprint of a foreign 
banking organization that is required to form a U.S. intermediate 
holding company, the Board believes that each U.S. intermediate holding 
company must have a risk committee to oversee the risk function of the 
U.S. intermediate holding company. The risk committee of the U.S. 
intermediate holding company may also fulfill the responsibilities of 
the U.S. risk committee described above.
d. U.S. Chief Risk Officer
    Under the proposal, a foreign banking organization with combined 
U.S. operations of $50 billion or more would have been required to 
appoint a U.S. chief risk officer. The U.S. chief risk officer would 
have been required to be employed by the U.S. branch, U.S. agency, U.S. 
intermediate holding company, or other U.S. subsidiary.
i. Responsibilities
    Under the proposal, the U.S. chief risk officer was directly 
responsible for the measurement, aggregation, and monitoring of risks 
undertaken by the company's combined U.S. operations. The U.S. chief 
risk officer would have been directly responsible for the regular 
provision of information to the U.S. risk committee, the global chief 
risk officer, and the Board or Federal Reserve supervisory staff.\132\ 
Such information would have included 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. The proposal also provided that the U.S. chief risk officer 
would be expected to oversee regularly scheduled meetings, as well as 
special meetings, with the Board to assess compliance with its risk-
management responsibilities. The proposal would have required the U.S. 
chief risk officer to be available to respond to supervisory inquiries 
from the Board as needed. The proposal also included several additional 
risk-management responsibilities for which a U.S. chief risk officer 
was directly responsible.
---------------------------------------------------------------------------

    \132\ The reporting would generally take place through the 
traditional supervisory process.
---------------------------------------------------------------------------

    Many commenters asserted that the proposal was overly restrictive 
and advocated for additional flexibility in the U.S. chief risk officer 
role. One commenter asserted that the U.S. chief risk officer 
requirement is unnecessary, so long as the foreign banking organization 
is able to identify an officer inside of the organization to serve as 
the point of contact for the Board regarding U.S. risk-management 
practices. Another commenter asserted that the responsibilities of the 
U.S. chief risk officer should vary depending on the foreign banking 
organization's activities in the United States. On the other hand, one 
commenter stated that the responsibilities assigned to the U.S. chief 
risk officer by the proposed rule were appropriate.
    The Board believes that requiring a foreign banking organization 
with over $50 billion in combined U.S. assets to have a single point of 
contact within a foreign banking organization that is required to 
oversee the management of risks within the organization's combined U.S. 
operations will help reduce the risks posed by foreign banking 
organizations. Such a structure ensures accountability within the 
foreign banking organization and facilitates communication between the 
organization and supervisors. Although the relative emphasis on the 
responsibilities assigned to the U.S. chief risk officer by the final 
rule may vary depending on the foreign banking organization's U.S. 
activities, each responsibility is a crucial component of the role of 
the U.S. chief risk officer for every foreign banking organization with 
a large U.S. presence. Accordingly, the final rule continues to require 
that the

[[Page 17289]]

U.S. chief risk officer report directly and regularly provide to the 
U.S. risk committee and global chief risk officer and regularly meet 
and provide information to the Board regarding risk management and 
compliance with this section. In other cases, consistent with the 
discussion in section III.B.4 of this preamble, the U.S. chief risk 
officer of a foreign banking organization may execute his or her 
responsibilities by working with, or through, others in the 
organization. Accordingly, the final rule requires the U.S. chief risk 
officer to ``oversee'' the execution of certain of the 
responsibilities, rather than to be directly responsible for them.
    In addition, the U.S. chief risk officer is responsible for certain 
liquidity risk-management responsibilities discussed in section IV.E.2 
of this preamble. The final rule includes a cross reference to these 
responsibilities.
ii. Structural Requirements
    Under the proposal, a U.S. chief risk officer generally would have 
reported directly to the U.S. risk committee and the company's global 
chief risk officer. The preamble to the proposal indicated that the 
Board may approve an alternative structure on a case-by-case basis if 
the company demonstrated that the proposed reporting requirements would 
create an exceptional hardship for the company.
    Several commenters advocated for greater flexibility in the 
reporting structure for the U.S. chief risk officer, asserting that 
each company should be able to determine reporting lines consistent 
with its organization and business lines. The Board believes that, in 
general, it is important for the U.S. chief risk officer to report 
directly to both the risk committee and the global chief risk officer 
to ensure that both management and the board are kept apprised of risks 
facing the company's U.S. operations. The Board's ability to approve an 
alternative reporting structure on a case-by-case basis provides for 
sufficient flexibility for companies for which the dual reporting 
structure would be an exceptional hardship. Accordingly, the Board is 
adopting the U.S. chief risk officer reporting structure as proposed.
    In the proposal, the Board noted that it 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. Several commenters opposed this aspect of the proposal and a 
few commenters stated that the Board should not prohibit the U.S. chief 
risk officer from fulfilling other roles within the organization, as it 
may be beneficial for the U.S. chief risk officer to have a broad scope 
of duties. One commenter asserted that the U.S. chief risk officer 
should be permitted to fulfill other responsibilities appropriate for 
his or her level of experience.
    The Board continues to believe that, in order to ensure that the 
U.S. chief risk officer is primarily focused on the risk management 
oversight of the foreign banking organization's combined U.S. 
operations, the U.S. chief risk officer should not fulfill other roles 
within the organization. The separation of the U.S. chief risk 
officer's duties is important to ensure that the oversight of risks 
facing the foreign banking organization's combined U.S. operations is 
not compromised by the U.S. chief risk officer devoting attention to 
other matters within the organization. Accordingly, the Board expects 
that the U.S. chief risk officer's primary responsibility will be risk 
management oversight of the combined U.S. operations of the foreign 
banking organization. The U.S. chief risk officer also should not serve 
as the company's global chief risk officer.
    The proposal would have required the U.S. chief risk officer to be 
employed by the U.S. branch, U.S. agency, U.S. intermediate holding 
company, or another U.S. subsidiary. One commenter stated that 
requiring the U.S. chief risk officer to be employed by a U.S. entity 
would increase parent company costs. However, in order for the U.S. 
chief risk officer to have appropriate exposure to the foreign banking 
organization's U.S. operations and to ensure that the U.S. chief risk 
officer is accessible to U.S. supervisors, the final rule retains the 
requirement that the U.S. chief risk officer be employed by a U.S. 
entity and further clarifies that the U.S. chief risk officer must also 
be located at a U.S. entity.
    The proposal stated that a U.S. chief risk officer must 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. In the proposal, the Board 
solicited comment on whether it should specify by regulation the 
minimum qualifications, including educational attainment and 
professional experience, for a U.S. chief risk officer. Several 
commenters asserted that establishing minimum qualifications for the 
U.S. chief risk officer is unnecessary. These commenters encouraged the 
Board to allow a foreign banking organization to make its own 
determination as to whether a U.S. chief risk officer candidate is 
qualified. A few commenters asserted that the U.S. chief risk officer 
should not be required to hold any specific educational or professional 
qualifications. One commenter supported minimum qualifications for the 
U.S. chief risk officer but noted that, as a practical matter, few 
candidates might initially meet the formal requirements.
    Although a foreign banking organization generally should have 
flexibility to determine the particular qualifications it desires in a 
U.S. chief risk officer, in light of the risks posed by foreign banking 
organizations with combined U.S. assets of $50 billion or more, a U.S. 
chief risk officer should satisfy certain minimum standards. Consistent 
with the Board's final rule for domestic companies, for the reasons set 
forth in section III.B.4 of the preamble, the final rule requires a 
U.S. chief risk officer to have experience in identifying, assessing, 
and managing risk exposures of large, complex financial firms.
    One commenter urged the Board to include other relevant supervisory 
authorities, including state supervisors in the case of state-licensed 
foreign banking organizations, in meetings with the U.S. chief risk 
officer. Consistent with its current practice, the Board expects that 
other relevant supervisory authorities will be involved throughout the 
supervision process as appropriate.
    In addition, the proposal would have required the U.S. chief risk 
officer to receive compensation consistent with providing an objective 
assessment of risks. The Board is finalizing the substance of this 
requirement as proposed.

E. Liquidity Requirements for Foreign Banking Organizations

    Similar to the domestic proposal, the foreign proposal would have 
required a foreign banking organization with combined U.S. assets of 
$50 billion or more to establish a framework for managing liquidity 
risk, conduct monthly liquidity stress tests, and maintain a buffer of 
highly liquid assets to cover cash-flow needs under stressed 
conditions. The proposal would have applied a more limited set of 
liquidity requirements to a foreign banking organization with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
less than $50 billion. These organizations would have been required 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

[[Page 17290]]

or its combined U.S. operations only, conducted consistently with the 
Basel committee principles for liquidity risk management \133\ and 
incorporating 30-day, 90-day, and one-year stress test horizons.\134\
---------------------------------------------------------------------------

    \133\ See Basel Committee principles for liquidity risk 
management, supra note 47.
    \134\ See discussion of reporting of stress test results in 
section III.C.
---------------------------------------------------------------------------

    In certain cases, commenters provided views on the liquidity 
provisions of the proposal that were also applicable to U.S. bank 
holding companies. Many of the comments and final rule changes 
applicable to both the foreign and domestic liquidity requirements have 
been addressed in section III.C of this preamble. Foreign banking 
organizations seeking more information on the adjustments made to the 
proposed enhanced prudential standards should therefore also refer to 
section III.C of this preamble.
1. General Comments
    Several commenters expressed support for the proposed rule, stating 
that many of the requirements would formalize standards already in 
development within the industry and would align with the liquidity 
standards applied by other jurisdictions, including liquidity 
requirements on foreign companies in the United Kingdom. One commenter 
asserted that the proposal would help foreign banking organizations to 
withstand small runs and reduce those institutions' reliance on 
emergency programs. Other commenters raised concerns that the 
requirements, and particularly the proposed liquidity buffer, discussed 
further below, could have a potential negative impact on economic 
growth and reduce the availability of funding in the United States. 
These commenters also argued against the proposal on systemic stability 
grounds, asserting that liquidity would be better managed on an 
integrated or enterprise-wide basis and that local liquidity 
requirements, particularly for branches operating in the United States, 
would significantly compromise the ability of a foreign banking 
organization to manage its liquidity efficiently and effectively on 
global basis. One commenter expressed concern that local liquidity 
requirements in the United States could exacerbate the U.S. financial 
system's exposure to contagion by reducing a foreign banking 
organization's ability to divert liquid assets from U.S. operations to 
address a shock abroad. Another commenter suggested that excess 
liquidity above the minimum amounts required should be permitted to 
flow freely outside of the United States to address needs in other 
parts of a foreign banking organization's operations.
    As discussed above in section IV.A of this preamble, in a 
circumstance where multiple parts of a foreign banking organization 
come under stress simultaneously, a firm that manages its liquidity on 
a centralized basis may not have sufficient resources to provide 
support to all parts of the organization, and indeed, during the recent 
financial crisis, many foreign organizations relied on substantial 
amounts of Federal Reserve lending to meet liquidity needs in the 
United States. Further, as noted above in section IV.A of this 
preamble, foreign banking organizations' increased use of short-term 
funding in the lead-up to the financial crisis exposed them, in certain 
cases, to maturity mismatch. While maturity transformation is central 
to the bank intermediation function, it can also pose risks from both a 
firm-specific perspective and a broader financial stability 
perspective. Therefore, the Board is requiring a foreign banking 
organization to establish a framework for managing liquidity risk and 
stress-test its liquidity in the United States, as well as maintain a 
minimum amount of liquidity in the United States. The liquidity 
requirements contained in the final rule are designed to help address 
these risks.
    The impact of the requirements on a particular foreign banking 
organization will vary based on a variety of factors. The Board 
believes the positive impact of the rule in helping to improve the 
liquidity risk management and position of the U.S. operations of 
foreign banking organizations justifies the required approach. The 
Board notes that the final rule continues to permit foreign banking 
organizations to raise funding in the United States for home-country or 
other overseas operations, provided that they do so in compliance with 
the requirements in the final rule. The Board has calibrated the 
requirements so as not to limit excessively a foreign banking 
organization's ability to manage liquidity risk on a global basis, and 
under the proposal and the final rule excess liquidity held in the 
United States may be used outside the United States to address needs in 
other parts of the foreign banking organization's operations.
    Many commenters asserted that instead of the proposed rule, there 
should be a global agreement on monitoring and managing liquidity on a 
consolidated basis, potentially through standards implemented under the 
Basel Committee principles for liquidity risk management. Several 
commenters suggested that the proposed requirements are not appropriate 
for a foreign banking organization whose home country has fully adopted 
the Basel III LCR. Some commenters requested that the Board exempt from 
the standards foreign banking organizations that meet certain criteria, 
such as strength of supervision in the home jurisdiction, parent 
support, and willingness to provide information, or reduce requirements 
applicable to those entities. Commenters also recommended that instead 
of establishing enhanced prudential standards for liquidity, the Board 
should defer to a foreign banking organization's implementation of 
home-country liquidity standards, particularly where home-country 
standards for liquidity monitoring are comparable to those of the 
proposed enhanced prudential standards, and coordinate with home-
country supervisors to evaluate the liquidity adequacy and risk 
management of the foreign banking organization's U.S. operations. Other 
commenters argued that the proposed liquidity requirements should be 
more closely aligned with the liquidity standards under the Basel 
Committee principles for liquidity risk management. Some stated that 
the proposal would cause confusion as to how the requirements for 
foreign banking organizations would align with the proposed U.S. LCR. 
In addition, one commenter suggested that the Board should synchronize 
the implementation of liquidity standards under section 165 of the 
Dodd-Frank Act with the implementation of the Basel III LCR.
    The Board remains committed to international cooperation among 
supervisors and will continue to work on a bilateral and multilateral 
basis to improve the supervision of international banking 
organizations. At the same time, the Board does not believe that 
deferring to home-country supervisors' liquidity supervision adequately 
addresses foreign banking organizations' liquidity risk in the United 
States and the associated risks to financial stability. The final rule 
will ensure that all foreign banking organizations with combined U.S. 
assets of $50 billion or more have uniform requirements that are also 
consistent with the requirements for domestic institutions. For the 
reasons described in section III.C of this preamble in connection with 
the domestic final rule, above, the Board believes that the final 
liquidity requirements, which are firm-specific in nature, complement 
the Basel III LCR, which is a standard, quantitative liquidity 
requirement. The Board intends through future separate rulemakings to 
implement the

[[Page 17291]]

quantitative liquidity standards included in Basel III for the U.S. 
operations of some or all foreign banking organization with 50 billion 
or more in combined U.S. assets.
    A number of commenters asserted that the proposed liquidity 
requirements were unnecessary to mitigate risks to the U.S. financial 
system posed by the U.S. operations of foreign banking organizations. 
These commenters contended that existing regulations, including section 
23A of the Federal Reserve Act, Financial Industry Regulatory Authority 
rule 10-57, and the SEC's net capital rules already create an effective 
framework to mitigate the liquidity risk of exposures to affiliates. 
Although existing requirements may address aspects of liquidity risks 
at certain subsidiaries, the requirements in the final rule are meant 
to establish a framework to address liquidity risk across a foreign 
banking organization's combined U.S. operations. The existing 
regulations cited by the commenters may be helpful in mitigating risk, 
but they do not address liquidity risk across a foreign banking 
organization's entire U.S. operations.
    One commenter requested that the Board clarify that intercompany 
transactions would be netted for purposes of calculating whether a 
foreign banking organization would be subject to the liquidity 
standards. In calculating combined U.S. assets for determining 
applicability of these requirements, the final rule will rely on 
``Total combined assets of U.S. operations, net of intercompany 
balances and transactions between U.S. domiciled affiliates, branches 
and agencies'' as reported on the FR Y-7 form (as of March 31, 2014), 
which nets interoffice transactions between U.S. entities.
    The final rule requires a foreign banking organization with 
combined U.S. assets of $50 billion or more to establish a framework 
for managing liquidity risk, engage in independent review and cash-flow 
projections, establish a contingency funding plan and specific limits, 
engage in monitoring, stress test its combined U.S. operations and its 
U.S. intermediate holding company and its U.S. branches and agencies 
(if any), and hold certain liquidity buffers. Each of these elements of 
the final rule is discussed below.
2. Framework for Managing Liquidity Risk
    As discussed above in section IV.D of this preamble, the foreign 
proposal would have required foreign banking organizations with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
$50 billion or more to establish a U.S. risk committee to oversee the 
risk management of the combined U.S. operations of the company and to 
appoint a chief risk officer to be responsible for implementing the 
company's risk-management practices for the combined U.S. operations. 
The foreign proposal would have required the U.S. risk committee of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more to oversee the liquidity risk management processes of the U.S. 
operations of the foreign banking organization, and to review and 
approve the liquidity risk management strategies, policies, and 
procedures. As part of these responsibilities, the U.S. risk committee 
would have been required to review and approve the company's liquidity 
risk tolerance for its U.S. operations at least annually. As discussed 
in the preamble to the foreign proposal, in reviewing the liquidity 
risk tolerance of a foreign banking organization's U.S. operations, the 
U.S. risk committee would have been 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 proposal provided that the 
liquidity risk tolerance for the U.S. operations should 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. The liquidity risk tolerance should reflect the 
U.S. risk committee's assessment of tradeoffs between the costs and 
benefits of liquidity. The foreign proposal provided that 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 foreign proposal would have required the U.S. chief risk 
officer to review and approve the liquidity costs, benefits, and risk 
of each significant new business line and significant new product of 
the U.S. operations before the foreign banking organization implements 
the line or offers the product. At least annually, the U.S. chief risk 
officer would have been 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. As 
discussed below, a foreign banking organization with combined U.S. 
assets of $50 billion or more would have also been required to 
establish a contingency funding plan for its combined U.S. operations. 
The U.S. chief risk officer would have been 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 
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 have required the U.S. chief risk officer, at least 
quarterly, to conduct an enumerated set of reviews and to establish 
procedures governing the content of reports on the liquidity risk 
profile of the combined U.S. operations. The proposal would have also 
required the U.S. chief risk officer to review strategies and policies 
for managing liquidity risk established by senior managers and 
regularly report to the U.S. risk committee.
    A few commenters asserted that the proposed governance provisions 
were too limiting and intruded into parallel governance, risk-
management, internal and supervisory reporting, audit and independent 
review, stress-testing, and IT requirements being imposed by foreign 
banking organizations' home jurisdictions. While the Board recognizes 
that foreign banking organizations may be subject to parallel liquidity 
risk management requirements in their home countries, the Board 
believes that foreign banking organizations should specifically manage 
the liquidity risks of their combined U.S. operations through a 
designated U.S. risk committee and U.S. chief risk officer. The 
liquidity risk management requirements of the final rule are informed 
by the liquidity stress that the U.S. operations of foreign banking 
organizations faced during the recent financial crisis and the risks to 
U.S. financial stability that could result if foreign banking 
organizations came under similar stress in the future. As discussed 
above, during the recent crisis, many foreign banking organizations 
experienced funding difficulties in their U.S. operations, and

[[Page 17292]]

the stressed conditions of these operations posed risks to the U.S. 
financial system. The Board believes that sound liquidity risk 
management is vital to ensuring the safety and soundness of the U.S. 
operations of a foreign banking organization and understands that 
companies already employ such practices in order to monitor and manage 
liquidity risk for their U.S. operations.
    The Board has adjusted the responsibilities assigned to the U.S. 
risk committee in the final rule in light of the comments received and 
in keeping with the Interagency Liquidity Risk Policy Statement. The 
final rule requires that, rather than the chief risk officer, the U.S. 
risk committee or a designated subcommittee thereof must review the 
contingency funding plan of the foreign banking organization. The U.S. 
chief risk officer is required to approve each new business line and 
new product and ensure that the liquidity costs, benefits, and risks of 
each new business line and each new product offered, managed or sold 
through the company's combined U.S. operations that could have a 
significant effect on the company's liquidity risk profile are 
consistent with the company's liquidity risk tolerance, and to review 
at least annually significant business lines and products offered, 
managed or sold through the combined U.S. operations to determine 
whether such business or product has anticipated liquidity risk and to 
confirm that the strategy or product is within the established 
liquidity risk tolerance.
    The Board is finalizing the other requirements assigned to the U.S. 
chief risk officer generally as proposed.
3. Independent Review
    Under the proposed rule, a foreign banking organization with 
combined U.S. assets of $50 billion or more would have been 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 have been independent of management functions that 
execute the firm's funding strategy (i.e., the corporate treasury 
function). The independent review function would have been required to 
review and evaluate the adequacy and effectiveness of the U.S. 
operations' liquidity risk management processes regularly, and at least 
annually. The independent review function would also have been 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. The 
proposal provided that an appropriate internal review conducted by the 
independent review function must 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.
    The Board continues to believe these requirements are important to 
a comprehensive liquidity risk management framework and is finalizing 
the independent review requirement as proposed.
4. 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 have required 
comprehensive cash-flow projections for the company's U.S. operations 
that include forecasts of cash flows arising from assets, liabilities, 
and off-balance sheet exposures over short-term and long-term time 
periods, and that identify and quantify discrete and cumulative cash-
flow mismatches over these time periods. The proposed rule would have 
required a foreign banking organization to establish a methodology for 
making cash-flow projections for its U.S. operations; use reasonable 
assumptions regarding the future behavior of assets, liabilities, and 
off-balance sheet exposures in the projections; and adequately document 
its methodology and assumptions.\135\ The preamble to the proposal 
stated that the Board would expect a company to use dynamic analysis of 
cash-flow projections 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. In addition, the proposal would have required the U.S. 
chief risk officer to review cash flow projections at least quarterly, 
and the preamble to the proposal stated that the Board would expect 
senior management periodically to review and approve the assumptions 
used in the cash-flow projections for the U.S. operations to ensure 
that they are reasonable and appropriate.
---------------------------------------------------------------------------

    \135\ The projections would have been required to reflect 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.
---------------------------------------------------------------------------

    Several commenters objected to the proposed cash-flow projection 
requirements on the basis that other liquidity controls, such as the 
liquidity stress tests, already provide an indication of potential 
liquidity issues. The Board believes that the level of detail required 
of cash-flow projections under the proposal is consistent with industry 
standards and that the proposal allows for significant flexibility by 
permitting cash-flow projections to be commensurate with the risk 
profile, complexity, and activities of the U.S. operations. While cash-
flow projections and stress tests may at times identify a common 
element of liquidity exposure, the two exercises are complementary 
tools. Cash-flow projections are most often prepared under business-as-
usual base case scenarios and are useful for identifying any funding 
surpluses or shortfalls on the horizon, while stress tests identify 
funding vulnerabilities based on adverse market conditions and play a 
key role in shaping the institution's contingency planning. The Board 
is adopting the substance of the cash-flow projection requirement 
without change.
    In the proposed rule, the Board requested comment on whether 
foreign banking organizations should be required to provide statements 
of cash flows for all activities conducted in U.S. dollars, without 
reference to whether those activities were conducted through their U.S. 
operations. Several respondents stated generally that any potential 
risk would be better addressed through other means, such as assessments 
of the effectiveness of liquidity risk management (for example, stress 
testing, or the contingency funding plan) conducted by individual banks 
on a global basis. One commenter stated that cash flows associated with 
repos involving U.S. government bonds held by non-U.S. entities should 
be exempted from the requirement because the purpose of such cash flows 
is evident. Further, commenters requested that the Board give due 
consideration to the additional burden caused by such reporting. One 
commenter was generally supportive of a requirement to provide global 
U.S. dollar cash-flow statements but only if foreign banking 
organizations that provide such data are not required to hold capital 
and liquidity buffers in the United States.

[[Page 17293]]

    Though the Board sees value in foreign banking organizations 
producing U.S. dollar cash-flow statements on a periodic basis to help 
identify potential U.S. dollar mismatches, given considerations cited 
by commenters, particularly the estimated resources required to produce 
such a report, the final rule does not require global cash-flow 
statements for activities conducted in U.S. dollars. However, the Board 
continues to consider the issue and may separately seek comment in the 
future on regulatory reporting requirements or information collections 
pertaining to a company's global U.S. dollar flow activities.
5. Contingency Funding Plan
    As part of comprehensive liquidity risk management, the proposal 
would have required a foreign banking organization with combined U.S. 
assets of $50 billion or more to establish and maintain a contingency 
funding plan to set out the company's strategies for addressing 
liquidity needs during liquidity stress events. The contingency funding 
plan would have been required to be commensurate with the foreign 
banking organization's capital structure, risk profile, size, and 
complexity, among other characteristics. The objectives of the 
contingency funding plan were 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. Under the 
proposed rule, the contingency funding plan would have included a 
quantitative assessment, an event-management process, and procedures 
for monitoring emerging liquidity risk events. In addition, a foreign 
banking organization would have been required to test periodically the 
components of its contingency funding plan and to update the 
contingency funding plan annually or more often if necessary.
    One commenter asked whether loans from FHLBs and other similar 
sources of funding, or parent support could be included in the 
contingency funding plan. The Board is clarifying in this preamble that 
lines of credit may be included as sources of funds in contingency 
funding plans; however, firms should consider the characteristics of 
such funding and how the counterparties may behave in times of stress. 
Similarly, the Board expects that parent support may be included in the 
contingency funding plan, but the foreign banking organization must 
consider limitations on those funds, including the probability of 
simultaneous stress.
    As discussed in the proposal, 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 or subsidiary 
U.S. insured depository institutions, 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.
    The Board is generally adopting the contingency funding plan 
requirements as proposed, with modifications consistent with the 
modifications made to the contingency funding plan requirements for 
U.S. bank holding companies discussed in section III.C of this 
preamble. For the reasons discussed in that section, the focus of the 
contingency funding plan requirements is on the operational aspects of 
such sources, which can often be tested via ``table top'' or ``war 
room'' type exercises; however, the implementation of the contingency 
funding plan for a foreign banking organization should include periodic 
liquidation of assets, including portions of the foreign banking 
organization's liquidity buffer in certain instances.
    Under the proposal, as part of its event-management process, a 
foreign banking organization would have been required to identify the 
circumstances in which it will implement its contingency funding plan. 
In order to maintain consistency with the rule applicable to bank 
holding companies, the final rule clarifies that these circumstances 
must include a failure to meet any minimum liquidity requirement 
established by the Board for the foreign banking organization's U.S. 
operations. Foreign banking organizations seeking additional detail on 
the Board's general supervisory expectations for contingency funding 
plans should refer to section III.C.5 of this preamble.
6. Liquidity Risk Limits
    To enhance management of liquidity risk, the proposed rule would 
have required 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 have included 
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. The U.S. operations would also have been 
required to monitor intraday liquidity risk exposure in accordance with 
procedures established by the foreign banking organization.
    A foreign banking organization would additionally have been 
required to monitor its compliance with all limits established and 
maintained under the specific limit requirements. The size of each 
limit would have been required to reflect the U.S. operations' capital 
structure, risk profile, complexity, activities, size, and other 
appropriate risk-related factors, and established liquidity risk 
tolerance.
    One commenter objected to the establishment of specific limits, 
stating that fixed limits could preclude management from taking 
reasonable and necessary actions to remain funded during times of 
stress. The Board views a robust limit structure as an important tool 
in a liquidity risk governance structure and believes that specific 
limits would not prevent a firm from taking necessary actions to manage 
through a crisis. The limits set by the firm must be reflective of the 
foreign banking organization's structure as well as the risk appetite 
set by management and the board of directors. The Board expects that 
there are circumstances that may warrant exceeding a limit threshold; 
for limits to be effective they should be monitored and have escalation 
procedures for any breaches that may include notification of senior 
management, the risk committee, and possibly the Board depending on the 
severity and impact of the limit breach. Therefore the Board is 
adopting the limits in the final rule as proposed.
7. Collateral, Legal Entity, and Intraday Liquidity Risk Monitoring
    The proposed rule would have required 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. Commenters 
primarily objected to the intraday liquidity

[[Page 17294]]

monitoring requirement, stating that collecting and aggregating 
relevant information from all entities under the U.S. intermediate 
holding company would be burdensome. One commenter stated that if 
intraday liquidity monitoring on settlement activities conducted 
through a correspondent bank (a direct participating bank in 
settlement) is expected, it would be impossible unless the 
correspondent bank discloses relevant information (which may require 
some type of regulation to enforce). The Board emphasizes that the 
final rule contains an internal monitoring requirement, which requires 
foreign banking organizations to establish and maintain procedures for 
monitoring intraday liquidity risk on the combined U.S. operations. The 
Board continues to believe intraday liquidity monitoring is an 
important component of the liquidity risk management process and 
therefore the final rule adopts the monitoring requirements as 
proposed.
8. Liquidity Stress Testing
    The proposal would have required a foreign banking organization 
with combined U.S. assets of $50 billion or more to conduct monthly 
liquidity stress tests separately for its U.S. intermediate holding 
company and its U.S. branches and agencies. As noted in the preamble to 
the proposal, the Board believes that stress tests conducted by a 
foreign banking organization can identify vulnerabilities; quantify the 
depth, source, and degree of potential liquidity strain in its U.S. 
operations; and provide information to analyze how severely adverse 
events, conditions, and outcomes would affect the liquidity risk of its 
U.S. branches and agencies and its U.S. intermediate holding company. 
When combined with comprehensive information about an institution's 
funding position, stress testing can serve as an important tool for 
effective liquidity risk management.
    The proposed rule set forth general parameters for companies' 
internal liquidity stress testing and would have required each foreign 
banking organization to take into account its own business model and 
associated exposure to liquidity risks. The proposed rule would have 
required the stress testing to incorporate a range of forward-looking 
stress scenarios that include, at a minimum, separate stress scenarios 
for adverse conditions due to market stress, idiosyncratic stress, and 
combined market and idiosyncratic stresses. To ensure that a company's 
stress testing for its U.S. operations contemplated a range of stress 
events, the proposed rule would have required 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.
    Many commenters asserted that the Board should rely on stress tests 
performed at the home country or consolidated level and not separately 
impose stress-testing requirements for the U.S. operations. Several 
commenters stated that the proposal's assumption that the parent 
foreign banking organization would fail to provide liquidity to the 
U.S. operations under stress is unrealistic. These commenters stated 
that there is a low likelihood that a foreign banking organization 
would sacrifice major subsidiaries to protect the parent without 
failure of the foreign banking organization as well. Commenters 
suggested that the Board should instead use the supervisory process to 
assess resolution plans and determine if additional protections are 
required. One commenter requested clarification on whether a company 
may rely on support from a parent entity or an affiliate for a time 
horizon that is longer than 30 days. Other commenters expressed the 
view that the proposal would be too burdensome.
    The Board agrees that liquidity stress testing at the level of the 
consolidated parent provides valuable information about the 
organization's ability to manage liquidity risk on an enterprise-wide 
basis. The final rule requires the foreign banking organization parent 
of a U.S. intermediate holding company to make available the results of 
home-country liquidity stress testing for Board review. However, the 
Board does not view liquidity stress testing at the parent as a 
substitute for stress testing at the combined U.S. operations. As 
explained above, the Board believes that the U.S. and non-U.S. 
operations of a foreign banking organization could face simultaneous 
funding pressures, which could hinder the ability of the foreign bank 
parent to provide the necessary liquidity support to its U.S. 
operations. Given that risk, the Board does not believe it would be 
appropriate to modify the proposed requirements to reflect an 
assumption that foreign banking organizations would provide such 
liquidity, or to rely solely on the supervisory process to address 
remaining risks. Therefore, as described further below, for purposes of 
the stress test used to calculate the liquidity buffer requirement for 
U.S. intermediate holding companies and U.S. branches and agencies, 
internal cash inflows can only be used to offset internal cash 
outflows. However, the Board is clarifying that in stress tests with 
time horizons longer than 30 days, internal inflows can be considered 
to offset both internal and external outflows. For the reasons 
described in section III.C of this preamble, for stress tests beyond 30 
days, a foreign banking organization may include lines of credit as 
cash flow sources, but should fully consider the constraints associated 
with those lines of credit.
    Commenters also asserted that liquidity stress-tests should be 
tailored to the foreign banking organization's business mix and risk 
profile. One commenter encouraged the Board to clarify that a foreign 
banking organization may apply its own models and assumptions for run-
off rates and haircuts when conducting liquidity stress tests and when 
calculating the liquidity buffer. As discussed above and further below, 
the stress testing requirement is based on internal models. When 
conducting liquidity stress tests and when calculating the liquidity 
buffer, each foreign banking organization, consistent with the rules 
applied to domestic institutions, is required to apply its own models 
and assumptions for run-off rates and haircuts that are appropriate for 
its liquidity risks and business model. The final rule does not require 
a foreign banking organization's U.S. operations to use standardized 
models or assumptions. Accordingly, the liquidity stress tests are 
tailored by their nature to the business mix and risk profile of the 
U.S. operations of the foreign banking organization. In addition, 
because the liquidity stress tests required by the final rule use firm-
derived stress scenarios, the Board would expect the stress scenarios 
to incorporate historical and hypothetical scenarios to assess the 
effect on liquidity of various events and circumstances, including 
variations thereof. As in the proposed rule, the final rule requires a 
company 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 Board expects foreign banking organizations to 
derive their own assumptions (subject to supervisory review) as they 
measure the potential sources and uses of liquidity of the U.S. 
operations under various stress scenarios, rather than simply adopt 
standardized haircuts and runoff rates of assets and liabilities, such 
as those prescribed in the Basel III LCR.

[[Page 17295]]

    Under the final rule, and as discussed above, only those foreign 
banking organizations with $50 billion or more in U.S. non-branch 
assets will be required to form a U.S. intermediate holding company. 
Accordingly, the final rule clarifies that stress testing must be 
conducted for the combined U.S. operations (including the U.S. 
intermediate holding company, if any, or the foreign banking 
organization's U.S. subsidiaries, if there is no U.S. intermediate 
holding company, and any U.S. branches and agencies) and separately for 
each of the U.S. intermediate holding company, if any, and the U.S. 
branches and agencies of the foreign bank. The Board generally expects 
that any liquid assets and cash-flow sources considered for purposes of 
the stress tests would be in the same location and legal entity as the 
outflows.
    In addition to monthly stress testing, the foreign banking 
organization would have been required to conduct more frequent stress 
tests, upon the request of the Board, to address rapidly emerging risks 
or consider the effect of sudden events. The Board could, for example, 
require the U.S. operations of a company to perform additional stress 
tests when there has been a significant deterioration in the company's 
earnings, asset quality, or overall financial condition; when there are 
negative trends or heightened risks 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. The proposal further provided 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 tailoring may require analyses by business line, legal 
entity, or jurisdiction, as well as stress scenarios that use more time 
horizons than the minimum required under the final rule. The Board is 
finalizing these requirements generally as proposed, with 
clarifications to the proposed standards that are consistent with the 
clarifications to the liquidity stress testing requirements for U.S. 
bank holding companies.
    To account for deteriorations in asset valuations when there is 
market stress, the proposed rule would have required the foreign 
banking organization to discount the fair 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 have also required that sources of funding used 
to generate cash to offset projected outflows be diversified by 
collateral, counterparty, or lender (in the case of stress tests longer 
than 30 days for the U.S. intermediate holding company or 14 days for 
the U.S. branch and agency), or other factors associated with the 
liquidity risk of the assets throughout each stress test planning 
horizon. Thus, if a foreign banking organization's U.S. operations held 
high quality assets other than cash and securities issued or guaranteed 
by the U.S. government, a U.S. government agency, or a U.S. government-
sponsored enterprise to meet future outflows, the assets must be 
diversified by collateral and counterparty and other liquidity risk 
identifiers. The Board is finalizing the substance of these 
requirements as proposed.
    The proposed rule would have required that the U.S. operations of a 
foreign banking organization maintain policies and procedures that 
outline those operations' 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 have required the foreign banking organization to have 
an effective system of controls and oversight over the stress test 
function. The final rule maintains these requirements generally as 
proposed.
    The proposal would also have required 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 have been 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. Several 
commenters took issue with the requirement that reports be provided 
within 14 days of completing the stress tests, stating that the 
requirement would present challenges for foreign banking organizations, 
and requesting a longer timeframe. To reduce reporting burden, in the 
final rule, the Board has revised the reporting requirement to require 
that the results of liquidity stress testing must be made available to 
the Board in a timely manner, rather than requiring that the results be 
reported within 14 days.
9. Liquidity Buffer
    The proposal would have required a foreign banking organization to 
hold separate liquidity buffers for its U.S. branches and agencies and 
its U.S. intermediate holding company, if any, that are equal to their 
respective net stressed cash-flow needs as identified by the required 
stress tests. The proposal provided that each calculation of the net 
stressed cash-flow need described below would need to be performed for 
the U.S. branches and agencies and U.S. intermediate holding company 
separately. These calculations assess the stressed cash-flow need both 
with respect to intragroup transactions and transactions with 
unaffiliated parties to quantify the liquidity vulnerabilities of the 
U.S. operations during the 30-day stress horizon. As discussed below, 
the Board has modified some provisions of the proposed requirements in 
the final rule in response to comments. Notably, the final rule only 
requires U.S. branches and agencies to maintain a liquidity buffer for 
days 1 through 14 of a 30-day stress scenario.
a. General Comments on the Liquidity Buffer
    Several commenters argued that the proposed requirement to hold 
liquid assets in the United States would cause foreign banking 
organizations subject to the rule to incur costs that would reduce the 
amount of financing available for long-term lending, and argued that 
the proposal could negatively affect U.S. wholesale investors by 
driving demand for wholesale funding away from the United States or to 
riskier sources of financing. Commenters also stated that the 
requirement to maintain the liquidity buffer in the United States to 
cover potential outflows in the United States would create 
inefficiencies and operational risks, and could cause many foreign 
banking organizations to reconsider and possibly reduce their U.S. 
operations. Commenters argued that the proposal could reduce credit 
availability by disrupting cross-border funding and hedging of 
international transactions, and increasing reliance on local funding. 
One commenter asserted that it would be more appropriate to tailor the 
liquidity buffer to the individual institution's stress situation. 
According to commenters, an individually tailored liquidity buffer, 
which may be larger or smaller than any predefined liquidity buffer, 
would provide greater flexibility to regulators than a ``one-size-fits-
all'' approach and result in a more efficient use of liquidity under 
non-stressed circumstances. Some commenters stated that the buffer 
should be tailored at the time that early remediation is invoked.
    For the reasons described above in section IV.B.3 of this preamble

[[Page 17296]]

regarding the U.S. intermediate holding company, the Board does not 
think that a case-by-case determination for applying the enhanced 
prudential standards to foreign banking organizations is appropriate. 
The final rule allows an institution to tailor the liquidity buffer 
according to the institution's individual liquidity risk profile. The 
Board believes that it is appropriate to have a minimum highly liquid 
asset buffer to offset outflows over the first 30 days for the U.S. 
intermediate holding company and the first 14 days for the U.S. branch 
or agency to ensure that the U.S. operations can withstand a short 
period of severe liquidity stress. The Board also believes that it is 
not appropriate to expect firms to be able to build a buffer just prior 
to or during a stress event to respond to the causes and consequences 
of the stressed liquidity conditions. The liquidity buffer is designed 
so that the firm will have pre-positioned assets that can be used in a 
time of stress to offset outflows. The liquidity buffer is calculated 
based on the firm's liquidity stress-test results, and the stress test 
reflects a firm's capital structure, risk profile, complexity, 
activities, size and other relevant characteristics of the U.S. 
operations. This buffer should give the firm more flexibility in a 
crisis and the pre-positioning of liquidity should give market 
participants more comfort in a firm's ability to meet short-term 
obligations during a crisis.
    Several commenters asserted that the proposed liquidity 
requirements would increase foreign banking organizations' overall 
consolidated liquidity requirement, resulting in a larger overall 
consolidated liquidity buffer. The primary goal of the proposal and the 
final rule is to ensure that firms have adequate liquidity buffers in 
the United States to offset net cash outflows associated with short-
term U.S. liabilities. As a general matter, the Board does not believe 
the final rule will result in a substantially higher consolidated 
liquidity requirement since the requirements included in the final rule 
require liquid assets to be maintained in the U.S. to offset potential 
funding vulnerabilities in the U.S. and the liquidity maintained in the 
United States will often count toward the foreign banking 
organization's consolidated requirement. However, the Board 
acknowledges that the final rule may result in a larger liquidity 
buffer requirement in certain cases, such as where previously 
unidentified areas of risk are measured in a more thorough manner as a 
result of the new requirements.
    The Board also believes that requiring firms to maintain a 
liquidity buffer in the United States to cover potential liquidity 
needs is consistent with global liquidity monitoring and management of 
liquidity risk. The Basel Committee principles for liquidity risk 
management indicate that firms should actively monitor and control 
liquidity risks at the level of individual legal entities and foreign 
subsidiaries as well as the consolidated group. As many commenters 
noted, the Board's proposal is generally consistent with liquidity 
standards currently in place in other jurisdictions, including the 
United Kingdom, to address similar concerns with the operations of 
banks foreign to those jurisdictions.
    One commenter suggested that the proposed buffer requirements were 
not strong enough, noting that during the 2007-2008 financial crisis 
several foreign banking organizations borrowed heavily from the Federal 
Reserve for more than one year to deal with their liquidity stress, and 
urged the Board to require a buffer for more than 30 days. The Board 
believes that a 30-day liquidity buffer balances the need to ensure 
adequate liquidity in individual companies, on the one hand, against 
the availability of adequate liquidity in the market generally, on the 
other, and will help to provide an institution that is under stress 
with the required flexibility to meet its most important funding 
obligations. The Board nonetheless recognizes the importance of 
maintaining liquidity for time periods both longer and shorter than 30 
days and, as such, is requiring that companies conduct stress tests 
over a minimum of four time horizons, including a one-year horizon. 
Consistent with the final rule for bank holding companies, the final 
rule clarifies that the minimum liquidity buffer must be sufficient to 
meet the projected net stressed cash flow need over the 30-day planning 
horizon of a liquidity stress test that incorporates an adverse market 
condition scenario, an idiosyncratic stress event scenario, and a 
combined market and idiosyncratic stresses scenario. The Board expects, 
however, that a foreign banking organization will consider the results 
of its stress tests to determine the appropriate time period for which 
to hold a liquidity buffer. The Board will continue to monitor 
liquidity at individual companies and in the market generally.
b. Calculation of Net Stressed Cash-Flow Need
    The proposed rule provided that the net stressed cash-flow need, 
calculated for each of the U.S. intermediate holding company, if any, 
and the U.S. branches and agencies, would be equal to the sum of (1) 
the net external stressed cash-flow need and (2) the net intragroup 
stressed cash-flow need. The calculation of external and intragroup 
stressed cash-flow needs is conducted separately in order to provide 
different treatment for these two sets of cash flows when determining 
the liquidity buffer needs of the U.S. operations. The proposal would 
have treated these cash flows differently in order to address the risk 
that internal cash-flow sources may not be available in times of 
stress. Specifically, the proposed methodology would have permitted 
internal cash-flow sources of the U.S. branches and agencies or U.S. 
intermediate holding company to offset internal cash-flow needs of the 
U.S. branches and agencies or U.S. intermediate holding company only to 
the extent that the term of the internal cash-flow source is the same 
as, or shorter than, the term of the internal cash-flow need. These 
assumptions reflect the risk that under stressed circumstances, 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. branches 
and agencies of the foreign bank or the U.S. intermediate holding 
company when those funds are most needed.
    Under the proposal, the net external stressed cash-flow need was 
defined as the difference between (1) the amount that the U.S. branches 
and agencies 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. branches and agencies or the U.S. intermediate holding company, 
respectively, over the relevant period in the stress test horizon.
    The net intragroup stressed cash-flow need was defined as the 
greatest daily cumulative cash-flow need of the U.S. branches and 
agencies or a U.S. intermediate holding company, respectively, with 
respect to transactions with the head office and other affiliated 
parties during the stress horizon. The daily cumulative cash-flow need 
was calculated as the sum of the net intragroup cash-flow need 
calculated for that day and the net intragroup cash-flow need 
calculated for each previous day of the stress test horizon. The 
methodology used to calculate the net intragroup stressed cash-flow 
need was designed to provide a foreign banking organization with an 
incentive to minimize maturity

[[Page 17297]]

mismatches in transactions between the U.S. branches and agencies or 
U.S. intermediate holding company, on the one hand, and the company's 
head office or affiliates, on the other hand.
    Figure 1 below illustrates the steps required to calculate the 
components of the liquidity buffer.
[GRAPHIC] [TIFF OMITTED] TR27MR14.000

    Tables 3, 4, and 5, 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 simplification, the cash flows relate 
to uncollateralized positions. For purposes of the example, cash-flow 
needs are represented as negative, and cash-flow sources are 
represented as positive.

                                                Table 3--Example of Net External Stressed Cash-Flow Need
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Day 1           Day 2           Day 3           Day 4           Day 5       Period total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-affiliate cash-flow sources:
    Maturing loans/placements with other firms..........               5               5               6               6               6              28
                                                         -----------------------------------------------------------------------------------------------
        Total non-affiliate cash-flow sources...........               5               5               6               6               6              28
Non-affiliate cash-flow needs:
    Maturing wholesale funding/deposits.................            (12)             (8)             (8)             (7)             (7)            (42)
                                                         -----------------------------------------------------------------------------------------------
        Total non-affiliate cash-flow needs.............            (12)             (8)             (8)             (7)             (7)            (42)
Net external stressed cash-flow need....................             (7)             (3)             (2)             (1)             (1)            (14)
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                               Table 4--Example of Net Intragroup Stressed Cash-Flow Need
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Day 1           Day 2           Day 3           Day 4           Day 5       Period total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affiliate cash-flow sources:
    Maturing loans to parent............................               2               2               3               2               1              10

[[Page 17298]]

 
    Maturing loans to non-U.S. entities.................               0               0               1               1               2               4
                                                         -----------------------------------------------------------------------------------------------
        Total affiliate cash-flow sources...............               2               2               4               3               3              14
Affiliate cash-flow needs:
    Maturing funding from parent........................               0             (4)            (10)               0               0            (14)
    Maturing deposit from non-U.S. entities.............             (1)             (1)             (1)               0               0             (3)
                                                         -----------------------------------------------------------------------------------------------
        Total affiliate cash-flow needs.................             (1)             (5)            (11)               0               0            (17)
Net intragroup cash-flows...............................               1             (3)             (7)               3               3             (3)
Daily cumulative net intragroup cash-flow...............               1             (2)             (9)             (6)             (3)  ..............
Daily cumulative net intragroup cash-flow need..........  ..............             (2)             (9)             (6)             (3)  ..............
Greatest daily cumulative net intragroup cash-flow need.  ..............  ..............             (9)  ..............  ..............  ..............
Net intragroup stressed cash-flow need..................  ..............  ..............             (9)  ..............  ..............             (9)
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Table 5--Example of Net Stressed Cash-Flow Need Calculation
------------------------------------------------------------------------
                                                                  Period
                                                                  total
------------------------------------------------------------------------
Net external stressed cash-flow need...........................     (14)
Net intragroup stressed cash-flow need.........................      (9)
                                                                --------
  Total net stressed cash-flow need calculation................     (23)
Liquidity buffer...............................................       23
------------------------------------------------------------------------

    Many commenters provided views on the proposal's approach to 
intragroup cash flows. For instance, some commenters asserted that 
intragroup cash flows should be available to offset external cash-flow 
needs unless the Board has significant, specific reasons to believe 
that the intragroup cash flows would not be available under stressed 
conditions. Several commenters argued that, at minimum, some internal 
funding sources should be allowed to offset external outflows, and that 
the appropriate level could be tailored to the company or situation, 
depending upon the level of resources available and parent strength.
    The Board believes that it is appropriate to limit the extent to 
which internal inflows may offset external outflows within the 30-day 
period. As shown during the recent financial crisis, a foreign banking 
organization and its U.S. operations could come under simultaneous 
liquidity stress, limiting the ability of the foreign banking 
organization to provide support to its U.S. operations. Additionally, 
during times of stress, unforeseen impediments may arise that do not 
allow the timely repayment of intercompany loans. Accordingly, the 
final rule does not allow internal inflows to offset external cash flow 
needs of a foreign banking organization. Additionally, when determining 
inter-company cash flow needs the Board believes it is critical to 
allow foreign banking organizations to count inflows to meet its 
internal stressed cash-flow needs only to the extent that the term of 
an internal cash-flow source is the same as, or shorter than, the term 
of the internal cash-flow need. This ensures that, to the extent the 
foreign banking organization is reliant on intercompany inflows to 
offset intercompany outflows, they are scheduled to occur at the same 
time or before the outflows, limiting maturity mismatch for internal 
cash flows. The concept of maturity matching ensures that firms with 
outflows at the beginning of the period cannot for purposes of the 
final rule recognize inflows that will occur at the end of the stressed 
period to meet those outflows.
    One commenter expressed the view that the bifurcated treatment of 
internal and external flows would interfere with the ordinary course of 
financial intermediation between affiliates, specifically for foreign 
banking organizations that use their U.S. operations to perform U.S. 
dollar-based activities for other non-U.S. members of their corporate 
group. For example, a foreign banking organization might use a single 
U.S. corporate affiliate to conduct certain transactions, such as 
clearing, hedging, or cash management, on behalf of other non-U.S. 
affiliates, with the U.S. subsidiary receiving funding from its non-
U.S. parent to fund activity with an external counterparty, such as a 
U.S. central counterparty or other clearing and settlement system.
    Though the Board recognizes that the rule could alter the manner in 
which some of the services that U.S. operations have routinely provided 
for the global entity are delivered, the Board also notes that a U.S. 
subsidiary or branch that acts as an intermediary for a non-U.S. 
affiliate or office of the foreign bank parent is subject to liquidity 
risk with respect to the non-U.S. affiliate or other office of the 
foreign bank parent. To the extent the non-U.S. affiliate or office of 
the foreign bank parent booking the transaction experiences liquidity 
stress and is unable to return the funding to the U.S. subsidiary or 
branch, the U.S. subsidiary or branch would need to raise the required 
funds on its own, placing a strain on the U.S. entity.
    Several commenters also raised a concern about securities financing 
transactions, whereby a foreign banking organization would use its U.S. 
subsidiaries or branches to provide access to the U.S. financing 
markets by engaging in matched back-to-back repo, reverse repo and 
other securities lending and borrowing transactions. One commenter 
argued that although these transactions present almost no risk to the 
intermediate entity, which would book two matched, collateralized 
obligations, the methodology of calculating internal and external 
liquidity buffers would prevent the cash due from the affiliate from 
offsetting the U.S. entity's external cash-flow need.
    The Board believes the proposed liquidity buffer calculation 
appropriately addresses the risks associated with the types of back-to-
back financing arrangements commenters describe. For example, if a U.S. 
subsidiary or branch has assumed that the inflows from a maturing 
reverse repo with the head office can be used to offset the outflows 
associated with a maturing repo with an external counterparty, the 
failure of the head office to fulfill its obligation could create an 
incremental liquidity need on the part of the U.S. subsidiary or 
branch. Therefore, the Board believes it is appropriate to require the 
U.S. subsidiary or branch to hold an amount of highly liquid assets 
against this risk based on stress-test results. The amount

[[Page 17299]]

of highly liquid assets may, among other things, reflect the types of 
collateral involved in the back-to-back transactions and the identity 
and type of counterparties. Notably, the leg of the transaction between 
the U.S. subsidiary or branch and the head office generally would not 
be reflected in the net internal cash-flow calculation of the U.S. 
subsidiary or branch if it is secured by highly liquid assets, as net 
internal cash-flow calculations would exclude internal cash-flow 
sources and internal cash-flow needs that are secured by such assets.
    One commenter requested that the final rule clarify that excess 
liquidity above and beyond stress requirements at an entity held by the 
U.S. intermediate holding company (such as a broker-dealer) should be 
available to offset net cash outflows of subsidiaries of the U.S. 
intermediate holding company. Nothing in the rule would prevent a 
foreign banking organization from using any liquidity that is held at a 
subsidiary of the U.S. intermediate holding company to offset potential 
outflows elsewhere within the U.S. intermediate holding company 
structure, to the extent that those funds are freely available to the 
U.S. intermediate holding company.
    Many commenters contended that the final rule should allow U.S. 
intermediate holding companies to deposit cash portions of their 
liquidity buffer with affiliated branches or U.S. agencies. One 
commenter requested that if an organization could not deposit funds at 
an affiliated branch or agency they should be able to maintain their 
buffer at the Federal Reserve. In these commenters' views, the Board 
has ample supervisory authority to prevent evasion or misuse of those 
accounts. While the final rule would allow a U.S. intermediate holding 
company to maintain its liquidity buffer at a subsidiary of the U.S. 
intermediate holding company, allowing the U.S. intermediate holding 
company to maintain its liquidity buffer at the foreign banking 
organization's U.S. branches or agencies is at odds with the 
requirement that external outflows not be offset with internal inflows. 
If a U.S. intermediate holding company were permitted to maintain its 
liquidity buffer at the foreign banking organization's U.S. branches or 
agencies and the U.S. intermediate holding company needed to use assets 
in that buffer to cover outflows during a stress event, that action 
could exacerbate funding problems at the U.S. branches or agencies at a 
point in time when it is already likely to be facing liquidity stress. 
Thus, the final rule adopts this aspect of the proposal without change. 
Organizations that have affiliates within the U.S. intermediate holding 
company with access to the Federal Reserve can maintain portions of 
their buffers at the Federal Reserve; however, for those U.S. 
intermediate holding companies that do not have access to the Federal 
Reserve, the Board believes there are sufficient eligible assets for 
the U.S. intermediate holding company to invest in to maintain an 
appropriate buffer.
    The proposal also would have required the U.S. intermediate holding 
company and the U.S. branches and agencies of a foreign bank to 
maintain the liquidity buffer in the United States. One commenter 
requested that maintenance of the buffer in the United States should 
mean that the U.S. intermediate holding company or the U.S. branches 
and agencies have the power of disposition. The Board is clarifying 
that maintenance of assets in the U.S. means that the assets should be 
reflected on the balance sheet of the U.S. intermediate holding company 
or the U.S. branches or agency. As noted below, the Board anticipates 
that high-quality liquid assets under the proposed U.S. LCR would 
generally be liquid under most scenarios. The Board acknowledges there 
may be highly liquid assets that trade on secondary markets and that in 
order for the U.S. operations of the foreign banking organization to 
own the assets, the assets must be maintained in an offshore custodial 
account. The Board further clarifies that cash held in deposits at 
other banks is a loan and therefore an inflow, not an asset that may be 
counted in the buffer. For the reasons stated above, the Board is 
finalizing the substance of these requirements as proposed. In the 
final rule, the Board has separated the calculations of the net 
stressed cash flow need for U.S. intermediate holding companies and for 
U.S. branches and agencies for readability.
    The proposal also sought comment on three alternative approaches to 
address intragroup transactions in determining the size of the required 
U.S. liquidity buffer: (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; (2) allow the U.S. 
operations to net all intragroup 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 intragroup cash-flow 
sources within the stress horizon; or (3) assume that all intragroup 
cash-flow needs during the relevant stress period mature and roll-off 
at a 100 percent rate and that all intragroup cash-flow sources within 
the relevant stress period are not received (that is, they could not be 
used to offset cash-flow needs).
    Commenters requested that the Board not adopt any of these 
alternative approaches, raising a number of concerns about the 
technical challenges they might pose. The final rule does not adopt 
these alternative proposals. The Board believes it will be in a better 
position to assess the need for additional measures to address 
intragroup transactions, as well as the potential impact of such 
measures on firms, after the requirements contained in the final rule 
are implemented. The Board also expects that the intraday monitoring 
required in the final rule will capture intraday liquidity risk 
(internally and externally) and prompt mitigating action when 
necessary. Therefore, the Board is not adopting these alternative 
approaches as part of the final rule.
c. National Treatment
    Several commenters argued that the limitations on recognizing 
intragroup cash flow sources unfairly affect foreign banking 
organizations, and therefore, the Board did not give adequate regard to 
national treatment in designing the standards. These commenters argued 
that because U.S. bank holding companies are permitted to rely on 
global sources of liquidity to meet liquidity needs identified by their 
internal stress tests, the proposed requirements placed a more 
substantial burden on foreign banking organizations.
    Under the foreign proposal, foreign banking organizations would not 
have been permitted to assume that liquid assets held at the 
consolidated level will be available to offset potential U.S. outflows 
during the first 30 days of a stress scenario. The domestic proposal, 
however, would have allowed U.S. bank holding companies to take into 
account highly liquid assets that they held in foreign jurisdictions, 
while requiring them to recognize foreign outflows, with the 
expectation that local liquidity requirements must be met before an 
asset will be considered a liquidity source to meet U.S. obligations.
    The liquidity requirements applied to foreign banking organizations 
treat intragroup flows differently than the requirements applied to 
U.S. bank holding companies in recognition of the structural 
differences between U.S. and foreign banking organizations. 
Simultaneous funding pressures at the U.S. and non-U.S. operations of 
the foreign banking organization could hinder the ability of the 
foreign bank

[[Page 17300]]

parent to provide the necessary liquidity support to its U.S. 
operations. As explained above, the Board believes that it is important 
for a foreign banking organization to maintain liquidity in the United 
States to support its U.S. operations.
    While the same stresses could affect a U.S. bank holding company, 
through the supervisory process, the Board has and will continue to 
ensure that U.S. bank holding companies maintain sufficient liquid 
assets to offset potential outflows. The Board observes that the 
proposed rules are only one aspect of the enhanced liquidity framework 
applicable to U.S. bank holding companies and foreign companies, and 
that the Board will continue to give due regard to national treatment 
in implementing section 165.
d. Buffers for the U.S. Branches and Agencies of a Foreign Bank
    Under the proposal, a U.S. intermediate holding company and the 
U.S. branches and agencies of a foreign banking organization would have 
been required to maintain a liquidity buffer equal to their respective 
net stressed cash-flow need over a 30-day stress horizon. The proposal 
would have required the U.S. intermediate holding company to maintain 
the entire 30-day buffer in the United States. In recognition that U.S. 
branches and agencies are not separate legal entities from their parent 
foreign bank and can engage only in banking activities by the terms of 
their licenses, the proposal would have required the U.S. branches and 
agencies to maintain days 1 through 14 of their 30-day liquidity buffer 
in the United States, and permitted the remaining requirement to be 
held at the consolidated level.
    Many commenters stated that there should be no separate buffer 
requirement for U.S. branches and agencies. These commenters argued 
that a foreign banking organization could calculate its liquidity 
according to home country regulatory rules and should not be required 
to specifically hold liquidity in its U.S. branches (for example, it 
could continue to manage its liquidity on a consolidated basis 
according to its global liquidity management model). One commenter 
observed that liabilities are generally due and payable at the head 
office as well as the branch. One commenter approved of the Board's 
approach of matching liquidity risk and the liquidity buffer across the 
U.S. branches and agencies rather than on an individual branch basis.
    As discussed in the proposal, the Board proposed the U.S. branch 
and agency liquidity requirements in order to address the risks created 
by reliance on short-term funding by U.S. branches and agencies. U.S. 
branches and agencies exhibited many of the same funding 
vulnerabilities during the crisis as other foreign banking entities. As 
a result, the Board generally is finalizing the requirement for U.S. 
branches and agencies as proposed. However, to reduce the burden on the 
foreign banking organization, the final rule does not require that U.S. 
branches and agencies maintain a buffer for days 15 through 30 of the 
30-day stress scenario.\136\ This recognizes the unique legal structure 
of branches and agencies and addresses the fact that buffer assets 
located outside of the U.S. may not be isolated on the parent 
organization's balance sheet. The Board believes that a buffer 
maintained outside of the U.S. may be a part of the organization's 
global liquidity risk management strategy. The Board expects, however, 
that foreign banking organizations would hold additional liquidity 
resources, either at the home office or in the United States, to 
protect against longer periods of funding pressure at their U.S. 
branches and agencies.
---------------------------------------------------------------------------

    \136\ The final rule clarifies that for U.S. branches and 
agencies, the minimum liquidity buffer must be sufficient to meet 
the first 14 days of the projected net stressed cash flow need over 
the 30-day planning horizon of a liquidity stress test that 
incorporates an adverse market condition scenario, an idiosyncratic 
stress event scenario, and a combined market and idiosyncratic 
stresses scenario.
---------------------------------------------------------------------------

7. Composition of the Liquidity Buffer
    The liquidity buffer under the foreign proposal would have been 
required to be composed of unencumbered highly liquid assets. The 
proposed definition of highly liquid assets included cash and 
securities issued or guaranteed by the U.S. government, a U.S. 
government agency, or a U.S. government-sponsored enterprise because 
these securities have remained liquid even during prolonged periods of 
severe liquidity stress. In addition, recognizing that other assets 
could also be highly liquid, the proposed definition included a 
provision that would allow a foreign banking organization to include 
other types of assets in the foreign banking organization's U.S. 
liquidity buffer if the foreign banking organization demonstrated to 
the satisfaction of the Federal Reserve that those assets: (i) Have low 
credit and market risk; (ii) are traded in an active secondary two-way 
market that has observable market prices, committed market makers, a 
large number of market participants, and a high trading volume; and 
(iii) are types of assets that investors historically have purchased in 
periods of financial market distress during which liquidity is 
impaired. Several commenters requested that the definition of ``highly 
liquid assets'' eligible for inclusion in a covered foreign banking 
organization's liquidity buffer be expanded to include high quality 
foreign sovereign debt, all assets eligible for inclusion in the Basel 
III LCR buffer under the Basel Committee standard, and collateral 
eligible to be pledged at the discount window. One commenter stated 
that the proposed definition would be unduly narrow and that the Board 
should ``preapprove'' additional classes of assets in its final rule to 
provide certainty. Another commenter indicated that high quality 
securities issued by sovereigns are used extensively as collateral and 
their exclusion could disrupt the market for non-U.S. sovereign debt 
and increase systemic risk. One commenter stated that the Board should 
publish guidelines for qualifying assets and clarify the standards it 
would apply to reject an asset, and that these guidelines should be the 
same as those followed by U.S. domestic bank holding companies.
    One commenter requested confirmation from the Board that G-7 
sovereign debt securities held in the United States by a foreign 
banking organization's branches and agencies would be eligible to meet 
the buffer requirement for the first 14 days. Additionally, this 
commenter requested confirmation from the Board that G-7 sovereign debt 
that is pledged as collateral with Federal Reserve banks would be 
eligible for meeting the first 14 days of the branch liquidity buffer 
requirement. One commenter asserted that preapproving U.S. sovereign 
debt but not debt of other sovereigns may provide U.S. bank holding 
companies with an advantage relative to a foreign banking organization. 
For the reasons discussed in connection with the domestic rule in 
section III.C.9 of this preamble, the final rule does not specifically 
enumerate assets other than securities issued or guaranteed by the 
United States, a U.S. government agency, or a U.S. government-sponsored 
enterprise, or eliminate any assets from consideration for inclusion as 
highly liquid assets, although, consistent with the domestic final 
rule, the Board anticipates that high-quality liquid assets under the 
proposed U.S. LCR will qualify as highly liquid assets for purposes of 
the buffer.
    The proposal also provided that highly liquid assets in the 
liquidity buffer must be unencumbered and thus readily available at all 
times to meet a foreign banking organization's liquidity

[[Page 17301]]

needs. The proposal would have defined unencumbered, with respect to an 
asset, to mean that: (i) The asset is not pledged, does not secure, 
collateralize, or provide credit enhancement to any transaction, and is 
not subject to any lien; (ii) the asset is free of legal, contractual, 
or other restrictions on the ability of the company to sell or 
transfer; and (iii) the asset is not designated as a hedge on a trading 
position. Commenters requested clarification as to whether assets used 
to hedge positions would be treated as unencumbered. For the reasons 
described above in section III.C.9 of this preamble, the final rule's 
definition of ``unencumbered'' has been modified.
    Several commenters requested clarification on how to account for 
reverse repo transactions in the buffer, particularly those secured by 
highly liquid assets, and how the tenor of the agreement would play a 
role in the availability of the asset in a company's highly liquid 
asset calculation. The Board has addressed these concepts in section 
III.C.9 of this preamble in connection with the final rule.
    One commenter requested clarification as to whether assets held to 
satisfy the OCC's Capital Equivalency Deposit requirement or state law 
asset-pledge requirements would be considered ``encumbered'' and thus, 
not eligible for inclusion in the proposed liquidity buffer. For 
example, a federally-licensed branch must maintain deposits generally 
equivalent to 5 percent of the branch's total third-party liabilities 
in one or more accounts with unaffiliated banks in the state where the 
branch is located. The commenter objected to considering such assets 
encumbered, as the encumbrance of those assets is the result of unique 
bank regulatory and supervisory requirements and therefore, in the 
commenter's view, these assets should not be viewed as privately 
pledged or encumbered.
    Under the final rule, consistent with the proposal, the Board 
observes that for assets to be considered highly liquid assets, they 
must be available for use in the event of a liquidity stress to 
mitigate cash outflows. Assets required to be pledged to other entities 
or maintained in segregated accounts due to regulatory requirements may 
not be available for use in a stress scenario and thus, should not be 
characterized as highly liquid assets. Should this regulatory 
requirement be certain to be lowered in a prescribed stressed 
environment, the firm could include the portion of highly liquid assets 
that would be made available when simulating such a scenario.
    Several commenters recommended that the Board permit a foreign 
banking organization to hold its liquidity buffer in multiple 
currencies, and asserted that restricting eligible currencies to only 
U.S. dollars was unnecessary and inappropriate, as well as inconsistent 
with the Basel III LCR and home country definitions of highly liquid 
assets. The commenter argued that diversification provided by a mixed-
currency liquidity buffer would be beneficial, and asserted that many 
U.S. branches and subsidiaries have both U.S. dollar and non-U.S.-
dollar liabilities. The commenter also argued that if a branch or 
intermediate holding company's liquidity risk is denominated in another 
currency, the buffer for that risk should be permitted to be in that 
other currency.
    The final rule, like the proposal, does not disqualify foreign-
currency-denominated assets from inclusion in the buffer. However, 
currency matching of projected cash inflows and outflows is an 
important aspect of liquidity risk management that should be monitored 
on a regular basis and accounted for in the composition of a foreign 
banking organization's liquidity buffer. Stress testing should consider 
vulnerabilities associated with currency mismatches of highly liquid 
assets to potential outflows. When determining appropriate haircuts for 
buffer assets, currency mismatches should be considered as well as 
potential frictions associated with currency conversions in certain 
stress scenarios. In order to ensure robust buffer composition, the 
proposed rule would also have required a foreign banking organization 
to impose a discount to the fair value of an asset included in the 
liquidity buffer to reflect any credit risk and market volatility of 
the asset. In addition, the proposed rule would have required the pool 
of unencumbered highly liquid assets to be sufficiently diversified. 
The final rule adopts these provisions as proposed.
    Several commenters requested that the Board clarify when assets in 
the liquidity buffers could be used to meet liquidity needs and the 
potential consequences if such use led to a buffer smaller than the net 
outflows as measured by the stress test. One commenter urged the Board 
to align the final rule with certain components of the Basel III LCR 
that allow firms to use their liquidity buffers in a ``situation of 
financial stress'' and provide guidelines for how banking regulators 
should evaluate a firm's use of its branches' liquidity buffer. The 
Board describes the appropriate parameters for the use of the buffer in 
response to similar comments on the domestic proposal in section 
III.C.9 of this preamble.
10. 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 would have been required 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 only, conducted consistently with the Basel Committee 
principles for liquidity risk management \137\ 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. One commenter asserted that, in the absence of 
effective management and exit strategies from the due from position, 
this level was too high, and that a lower percentage or permitting a 
due to position would be appropriate. The Board proposed the net due 
from limitation as a precautionary measure, because in the event that 
the foreign banking organization does not provide the results of an 
internal liquidity stress test report, the Board would have difficulty 
in assessing the liquidity risk position and management of the foreign 
banking organization. The Board notes that this requirement applies 
only when a foreign banking organization with over $50 billion in total 
consolidated assets but combined U.S. assets of less than $50 billion 
is unable 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 consistently 
with the Basel Committee principles for liquidity risk management. The 
Board believes that these restrictions are appropriate for a company 
that is unable to make such a report, and is finalizing these standards 
as proposed.
---------------------------------------------------------------------------

    \137\ Basel Committee principles for liquidity risk management, 
supra note 47.
---------------------------------------------------------------------------

11. Short-Term Debt Limits
    The Board noted in the preamble to the proposed rule that the Dodd-
Frank

[[Page 17302]]

Act contemplated additional enhanced prudential standards, including a 
limit on short-term debt, and requested comment on whether it should 
establish short term debt limits in addition to, or in place of, the 
Basel Committee principles for liquidity risk management in the future. 
Most commenters felt that establishing short term debt limits would be 
overbroad and that there are other more effective tools in place, and 
that such regulatory requirements are best handled via the Basel III 
LCR and the NSFR and bank-prepared liquidity stress tests. One 
commenter suggested that the Board should refrain from implementing a 
short-term debt limit until after it determined how the other aspects 
of the proposal work in practice. One commenter was in favor of such a 
limit, stating that if a short term debt limit were set low enough, it 
could mitigate the effects of shortfalls in dollar funding caused by 
transient shocks to financial markets.
    As discussed above, the Board has sought comment on the proposed 
U.S. LCR, and it continues to work with the Basel Committee to improve 
the Basel Committee principles for liquidity risk management. The Board 
will continue to evaluate whether short-term debt limits would be 
appropriate in light of the developing liquidity regulatory and 
supervisory framework, and may seek comment on a proposal in the 
future.

F. Stress-Test Requirements for Foreign Banking Organizations

    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. 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.
    On October 9, 2012, the Board issued a final rule implementing the 
supervisory and company-run stress testing requirements for bank 
holding companies with total consolidated assets of $50 billion or more 
and nonbank financial companies supervised by the Board.\138\ 
Concurrently, the Board issued a final rule implementing the company-
run stress testing requirements for bank holding companies with total 
consolidated assets of more than $10 billion but less than $50 
billion.\139\
---------------------------------------------------------------------------

    \138\ See 77 FR 62378 (October 12, 2012).
    \139\ See 77 FR 62396 (October 12, 2012).
---------------------------------------------------------------------------

    The foreign proposal sought to adapt the requirements of the final 
stress testing rules currently applicable to bank holding companies to 
the U.S. operations of foreign banking organizations. Under the 
proposal, U.S. intermediate holding companies with total consolidated 
assets of more than $10 billion but less than $50 billion would have 
been required to conduct annual company-run stress tests. U.S. 
intermediate holding companies with assets of $50 billion or more would 
have been required to conduct semi-annual company-run stress tests and 
would have been subject to annual supervisory stress tests. These 
requirements are similar to the requirements that apply to bank holding 
companies.
    Under the foreign proposal, the remaining U.S. operations of a 
foreign banking organization--the branches and agencies and, to the 
extent that a foreign banking organization does not establish a U.S. 
intermediate holding company, the foreign banking organization's U.S. 
subsidiaries--would have been subject to a separate stress testing 
standard. Under this standard, a foreign banking organization would 
have been required to meet the requirements of its home country stress 
test regime (provided that the home country stress test regime meets 
certain minimum standards). In addition, certain foreign banking 
organizations would have been required to submit the information 
required by the rule.
    The proposal provided that if any of the conditions above were not 
met, then the U.S. branches and agencies of a foreign banking 
organization would have been subject to an asset-maintenance 
requirement and, potentially, other requirements, and the foreign 
banking organization would have been 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. In addition, the foreign 
proposal would have applied 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. Consistent with the approach taken in the final 
stress testing rules for U.S. firms, the proposal would have tailored 
the stress testing requirements based on the size of the U.S. 
operations of the foreign banking organizations.
1. U.S. Intermediate Holding Companies
    Under the proposal, U.S. intermediate holding companies with total 
consolidated assets of more than $10 billion but less than $50 billion 
would have been subject to the annual company-run stress-testing 
requirements set forth in Regulation YY, including the reporting and 
disclosure requirements. As discussed previously, the Board has raised 
the threshold for requiring formation of a U.S. intermediate holding 
company to $50 billion. Accordingly, the final rule does not include 
this provision. A U.S. bank holding company with total consolidated 
assets greater than $10 billion but less than $50 billion that was a 
subsidiary of a foreign banking organization would be subject to 
subpart B (renumbered in connection with this final rule, as described 
above) under the terms of that subpart.
    Under the proposal, U.S. intermediate holding companies with total 
consolidated assets of $50 billion or more would have been subject to 
the annual supervisory and semi-annual company-run stress-testing 
requirements set forth in subparts F and G of Regulation YY.\140\ The 
Board would have conducted an annual supervisory stress test of the 
U.S. intermediate holding company in the same manner as the Board 
conducts supervisory stress tests under subpart F of Regulation YY and 
disclosed the results of the stress test. The U.S. intermediate holding 
company would have been required to report information to the Board to 
support the supervisory stress tests. The U.S. intermediate holding 
company would also have been required to conduct two company-run stress 
tests per year in the same manner as a bank holding company under 
subpart G of Regulation YY. The first test would have used scenarios 
provided by the Board (the annual test) and the second would have used 
scenarios developed by the company (the mid-cycle test). In connection 
with the annual test, the U.S. intermediate holding company would have 
been 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.\141\ In

[[Page 17303]]

connection with the mid-cycle test, the company would have been 
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.
---------------------------------------------------------------------------

    \140\ See 77 FR 62378 (October 12, 2012); 77 FR 62396 (October 
12, 2012).
    \141\ 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).
---------------------------------------------------------------------------

a. General Comments
    While one commenter expressed the view that the stress-testing 
requirements were appropriately calibrated for a foreign banking 
organization without a U.S. branch or agency, other commenters 
expressed views that the Board should fully defer to the home country 
stress-testing regimes and receive information on home-country reports, 
rather than impose stress-testing requirements on the U.S. intermediate 
holding companies. Commenters argued that stress testing is most 
effective when applied on a consolidated basis, and that requiring U.S. 
intermediate holding companies to conduct a separate stress test would 
be redundant and would not accurately reflect the ability of the U.S. 
intermediate holding company to absorb losses. Several commenters 
requested that the Board align U.S. intermediate holding company stress 
tests with stress tests conducted by the foreign banking organization, 
and permit the U.S. intermediate holding company to follow the stress-
testing framework, methodology, and timing used by the foreign bank in 
its home country stress tests. In these commenters' views, aligning the 
requirements would avoid conflicts, inconsistent results, and 
duplicative efforts.
    The Board agrees that stress testing at the level of the 
consolidated parent provides valuable information about the 
organization's ability to maintain adequate capital through stressed 
circumstances on an enterprise-wide basis. The final rule requires the 
foreign banking organization parent of a U.S. intermediate holding 
company to be subject to a home-country stress testing regime and to 
report the results of those stress tests to the Board. However, these 
parent stress tests are not a substitute for stress tests at the U.S. 
intermediate holding company level, which provide information on the 
capital adequacy of the U.S. intermediate holding company and on its 
ability to support its U.S. operations during a period of stress. As 
discussed in sections IV.A and IV.C of this preamble, the Board 
believes that it is important for the U.S. operations of a foreign 
banking organization to hold capital in the United States with respect 
to their operations, and for the same reasons, U.S. intermediate 
holding companies should be able to demonstrate an ability to absorb 
losses and continue operations in times of stress.
    While the Board recognizes that the stress tests conducted at the 
U.S. intermediate holding company might involve different assumptions 
than those conducted at the foreign bank parent, the stress test 
conducted by the U.S. intermediate holding company will be consistent 
with and comparable to those conducted by similarly-sized U.S. firms. 
The Board uses a consistent stress-testing approach across companies to 
conduct the supervisory stress test and requires companies to conduct 
company-run stress tests under the supervisory stress test scenarios to 
permit supervisors, firms, and the public to facilitate comparison of 
the results across companies. Similarly, the Board prescribes a set of 
capital action assumptions for holding companies to use in their 
company-run stress tests, uses those same capital assumptions in its 
supervisory stress test, and discloses the results of its stress test 
during the same timeframe that bank holding companies are required to 
disclose the results of their company-run stress tests. Permitting U.S. 
intermediate holding companies to deviate from the stress-test 
requirements for U.S. bank holding companies in favor of the regime in 
the home country of their foreign bank parents would reduce 
comparability across companies and with the results of the Board's 
supervisory stress tests.
    One commenter argued that the proposed U.S. intermediate holding 
company requirements would increase operating costs and could 
potentially misalign U.S. intermediate holding company and foreign 
banking organization risk management, creating the possibility of 
operational risk. For instance, one commenter suggested that a foreign 
bank might maintain hedges of trades booked at the U.S. broker-dealer 
outside of the United States, so that these hedges would not be 
reflected in the stress tests. Commenters noted that foreign banking 
organizations are already subject to Basel III and home-country 
supervision, and that the Board should focus on building international 
regulatory networks. Commenters also requested that the Board allow 
U.S. intermediate holding companies to account for the capital and 
financial strength of the parent and support from the parent and 
affiliates in stress testing projections, provided the U.S. 
intermediate holding company can demonstrate that the parent could 
provide support under a given scenario.
    During periods of financial stress, subsidiaries of foreign banking 
organizations may not be able to rely on support from their home-
country parent, and therefore, these subsidiaries should have the 
ability to absorb losses and maintain ready access to funding, meet 
obligations to creditors and other counterparties, and continue to 
serve as credit intermediaries without assuming such support. 
Accordingly, under the final rule, a U.S. intermediate holding company 
must project its regulatory capital ratios in its stress tests without 
additional consideration of possible support from its home-country 
parent. As noted above in section IV.D of this preamble, the Board 
expects the U.S. risk-management requirements under the final rule to 
be integrated and coordinated with the foreign banking organization's 
enterprise-wide risk-management practices, and therefore the Board 
believes that the final rule will not lead to a fragmented approach to 
risk management.
    Some commenters argued that the Board did not adequately take into 
account home country standards in developing the proposed stress 
testing requirements and that the proposed requirements were 
inconsistent with national treatment because they required stress 
testing at a subsidiary level, rather than at the consolidated parent 
level. According to these commenters, the proposal could result in 
extraterritorial application if U.S. authorities imposed stricter 
requirements on foreign banking organizations than home-country 
supervisors.
    The final rule relies on the home-country stress-test regime in 
applying stress-testing requirements to branches and agencies of 
foreign banks, in recognition that branches and agencies of foreign 
banks are not separate legal entities from their parent foreign 
bank.\142\ It imposes stress-testing standards on U.S. intermediate 
holding companies because they are separate legal entities, and may not 
be able to rely on support from their home-country parent in times of 
stress as discussed above. In addition, the stress-testing requirements 
promote market discipline for foreign banking organizations and U.S. 
bank holding companies by ensuring that all banking organizations with 
$50 billion or more in assets in the United States are subject to 
comparable stress-testing requirements. Bank holding companies with 
over $50 billion in total consolidated assets--including some bank 
holding companies owned by foreign banking organizations--are already 
subject to

[[Page 17304]]

stress-test requirements. Furthermore, foreign subsidiaries of U.S. 
bank holding companies may be required to comply with stress-test 
requirements imposed by host-country regulators, and in some 
circumstances, may be subject to requirements similar to those included 
in the final rule.
---------------------------------------------------------------------------

    \142\ The Board notes that the requirement to take into account 
comparable home country standards pursuant to section 165(b)(2) does 
not by its terms apply to the stress testing requirement in section 
165(i) of the Dodd-Frank Act.
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b. Reporting and Disclosure
    Under the proposal, U.S. intermediate holding companies would have 
been subject to reporting obligations in connection with their company-
run and supervisory stress tests, and would have been required to 
publicly disclose the results of their company-run stress tests. In 
connection with the annual stress test, a U.S. intermediate holding 
company would have been 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.\143\ In connection with 
the mid-cycle test, the company would have been 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. The U.S. intermediate holding company would have been 
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.
---------------------------------------------------------------------------

    \143\ As noted above, 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).
---------------------------------------------------------------------------

    Commenters suggested that the reporting requirements should be more 
limited for U.S. intermediate holding companies than for U.S. bank 
holding companies, which are required to file the Board's Forms FR Y-
14A, Q, and M (Capital Assessments and stress testing (FR Y-14)), 
because U.S. intermediate holding companies are likely to be nonpublic 
subsidiaries of foreign banking organizations.
    The Board uses the FR Y-14 regulatory report to receive information 
necessary to support its supervisory stress test and for it to review 
the stress tests that a company conducts. Because U.S. intermediate 
holding companies will be required to conduct company-run stress tests 
and will be subject to the Board's supervisory stress test, it will be 
necessary for U.S. intermediate holding companies to file similar 
regulatory reports with the Board. Moreover, the Board notes that some 
wholly-owned U.S. bank holding company subsidiaries of foreign banking 
organizations have already filed the FR Y-14 in connection with their 
first supervisory stress test. The Board intends to expand the 
reporting panel for the FR Y-14 to provide that a U.S. intermediate 
holding company must begin filing the FR Y-14A in the reporting cycle 
after formation of the U.S. intermediate holding company, subject to 
the transition provisions for new reporters of the FR Y-14 schedules. 
For U.S. intermediate holding companies formed by July 1, 2016, the 
first FR Y-14A report is expected to be due in January 2017.
    Commenters also criticized the proposed stress-testing disclosure 
requirements. Some commenters stated that publication of stress-test 
results should not be required because U.S. intermediate holding 
companies do not operate separately from their foreign bank parents. 
One commenter argued that U.S. intermediate holding companies are 
unlikely to have external equity shareholders, and disclosure of 
stress-test results would be likely to confuse the parent foreign 
banking organization's investors without a corresponding benefit. In 
addition, one commenter argued that requiring public disclosure of U.S. 
intermediate holding company stress-test results would disadvantage 
foreign banking organizations, which would publish on a U.S. 
intermediate holding company level, against their U.S. peers, which 
could publish on a total bank holding company level. Another commenter 
suggested that the Board should consult with industry and individual 
U.S. intermediate holding companies before disclosing stress-test 
results.
    The Board believes that the public disclosure of the results of 
supervisory and company-run stress tests helps to provide valuable 
information to market participants, enhance transparency, and 
facilitate market discipline. While a U.S. intermediate holding company 
may not have external shareholders, the company's external creditors, 
counterparties, and clients would benefit from the enhanced information 
about the capital adequacy of the U.S. intermediate holding company. 
Further, public disclosure is a key component of the stress-test 
requirements mandated by the Dodd-Frank Act. The Dodd-Frank Act 
requires disclosure by all financial companies, including bank holding 
companies that are not publicly traded.\144\
---------------------------------------------------------------------------

    \144\ 12 U.S.C. 165(i)(2)(C)(iv).
---------------------------------------------------------------------------

    The final rule's stress-testing disclosure requirements for U.S. 
intermediate holding companies set only the minimum standard of 
disclosure and would not limit the ability of a foreign banking 
organization or its U.S. intermediate holding company to publish 
additional information on the stress test results. For instance, to the 
extent that a U.S. intermediate holding company's disclosures are 
different from disclosures required of the foreign parent, the foreign 
banking organization could describe the differences between the stress 
testing methodologies that led to the divergent results. The final rule 
maintains the timing and content of the disclosures in order to 
facilitate the comparability of stress tests results across companies 
subject to Dodd-Frank Act stress tests.
c. Timing of Stress Tests
    Several commenters requested that the Board provide additional time 
for foreign banks to come into compliance. Some commenters suggested 
that the Board allow two or three years to phase in the stress-test 
requirements, suggesting that this additional time would give time for 
markets and firms to adjust and for policymakers to monitor and modify 
the stress-test regime as necessary. More specifically, one commenter 
suggested that the Board phase in application of the rule, such that in 
the initial years of the framework, U.S. intermediate holding companies 
would be required to conduct stress tests and report to the Board, but 
would not be required to publicly report the results or be sanctioned 
for deficiencies. This commenter cited the Board's treatment of U.S. 
bank holding companies with over $50 billion in total consolidated 
assets that participated in the Capital Plan Review exercise as 
precedent for this approach.
    Commenters indicated that a phase-in period would be particularly 
important for those U.S. intermediate holding companies that do not own 
U.S. depository institutions and are not currently subject to the 
Board's stress-testing regimes. Similarly, one commenter suggested that 
a longer phase-in period would be appropriate for foreign banks with 
U.S. assets of less than $50 billion, as they would face a more onerous 
implementation process. One commenter also suggested that the Board 
should allow extensions as necessary for additional time to meet the 
structural requirements of the proposal. As discussed previously in 
section II.B of this preamble, the Board has extended the compliance 
period for

[[Page 17305]]

all companies in order to give them adequate time to comply with all of 
the standards, including the stress testing standards. The stress-test 
cycle for a U.S. intermediate holding company formed by July 1, 2016 
will begin in October 2017.\145\
---------------------------------------------------------------------------

    \145\ The final rule also provides that if the foreign banking 
organization parent of the U.S. intermediate holding company has a 
subsidiary bank holding company or insured depository institution 
that was subject to the Board's stress-testing requirements prior to 
formation of the U.S. intermediate holding company, the subsidiary 
bank holding company or insured depository institution will continue 
to be subject to the applicable stress-testing requirements until 
September 30, 2017, after which time the stress testing requirements 
will be applied at the U.S. intermediate holding company level.
---------------------------------------------------------------------------

2. Stress-Test Requirements for Branches and Agencies of Foreign Banks 
With Combined U.S. Assets of $50 Billion or More
    In addition to the U.S. intermediate holding company requirements 
described above, the proposal provided that 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 included 
an annual supervisory stress test conducted by the foreign banking 
organization's home-country supervisor.\146\ Alternatively, 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 would have met the 
requirements. In either case, the proposal provided that in order to be 
recognized by the stress-testing framework of the proposed rule, the 
home-country capital stress-testing regime must set forth requirements 
for governance and controls of stress testing practices by relevant 
management and the board of directors (or equivalent thereof) of the 
foreign banking organization. The foreign banking organization would 
have been required to conduct such stress tests or be subject to a 
supervisory stress test and meet any minimum standards set by its home-
country supervisor with respect to the stress tests.
---------------------------------------------------------------------------

    \146\ For these purposes, the central bank may be the home 
country supervisor provided that the requirements of the rule are 
met.
---------------------------------------------------------------------------

    Many commenters expressed broad support for the approach to stress 
tests for U.S. branches and agencies. These commenters expressed the 
view that the proposed stress-test framework would provide additional 
insight to U.S.-specific capital adequacy assessments and contains 
straightforward and common-sense steps. Some commenters requested more 
information about the Board's metrics for evaluating whether a home-
country stress testing framework is consistent with Dodd-Frank Act 
stress testing. Commenters asked for clarification that the elements 
described above are the only elements required to satisfy the 
requirement that stress tests be broadly consistent with the U.S. 
stress-testing requirements, and others suggested that the comparison 
should not match the U.S. stress testing regime point-by-point to the 
home-country regime. Other commenters requested more clarity on desired 
home-country requirements for governance and controls over stress 
tests. Some commenters asked that the Board provide flexibility for 
small deviations from the enumerated standard, for example, allowing 
for a multi-year rather than annual, stress test cycle.
    The Board believes that all elements set forth in the final rule 
are appropriate standards for stress testing, and a home-country stress 
test must meet all of the elements of the final rule. For instance, the 
requirement that a company conduct a stress test at least annually 
ensures that the stress test results do not become stale and signifies 
that stress tests are integrated into the home-country supervisory 
process. Similarly, the requirement that stress testing practices be 
subject to governance and controls by relevant management and the board 
of directors (or equivalent thereof) of the foreign banking 
organization helps to ensure that the stress tests produce meaningful 
results that inform a company's business and risk management decisions, 
and that those tests function as intended. The rule requires governance 
and controls of stress testing practices by relevant management and the 
board of directors (or equivalent thereof) of the foreign banking 
organization but is flexible regarding appropriate standards for 
governance and controls because of the variety of risk-management 
structures and practices across countries. A foreign banking 
organization could satisfy the governance standards required under the 
final rule by maintaining appropriate oversight of stress-testing 
practices, policies and procedures, and the use of stress-test results 
by senior management and the board of directors in their decision-
making. Similarly, a foreign banking organization could meet the 
standards for controls by adopting process verification, model 
validation, documentation, and internal audit.
    Under the proposal, if the U.S. branches and agencies of a foreign 
banking organization with combined U.S. assets of $50 billion or more 
were providing funding to the foreign banking organization's non-U.S. 
offices and non-U.S. affiliates on a net basis over a stress test 
cycle, the foreign banking organization would have also been required 
to demonstrate to the Board that it has adequate capital to withstand 
stressed conditions. Commenters requested clarification on what 
standards the Board would apply to determine whether a foreign banking 
organization that has U.S. branches and agencies in a net ``due from'' 
position with respect to the foreign bank parent or its international 
affiliates has adequate capital to ``absorb losses in stressed 
conditions.'' Commenters expressed the view that the operative 
standards should be based on the foreign banking organization's own 
home country stress testing regime, and not, for example, on Board-
defined criteria. In light of these comments, the Board has removed 
this requirement in the final rule. In the event that a foreign banking 
organization were in a net ``due from'' position, the Board would seek 
more information from the foreign banking organization regarding the 
results of its supervisory stress test and may take other supervisory 
actions. However, the Board does not intend to make a formal 
determination that the foreign banking organization has adequate 
capital to ``absorb losses in stressed conditions.''
3. Information Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More
    Under the proposal, a foreign banking organization with combined 
U.S. assets of $50 billion or more would have been required to submit 
key information regarding the results of its home-country stress test 
that included: 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 any changes in regulatory capital ratios.\147\ 
One commenter suggested that, if a home-country supervisory authority 
applies robust stress tests broadly comparable to those in the United 
States, the stress-testing reporting

[[Page 17306]]

requirements should be waived for those foreign banking organizations.
---------------------------------------------------------------------------

    \147\ Commenters asked for clarification as to whether the 
reporting requirements apply to foreign banking organizations with 
total consolidated assets of $50 billion or more, or foreign banking 
organizations with U.S. assets of $50 billion or more. The final 
rule clarifies that the reporting requirements apply only to foreign 
banking organizations with combined U.S. assets of $50 billion or 
more.
---------------------------------------------------------------------------

    Commenters also asked for clarification on the exact reporting 
requirements, particularly if the level of detail will be similar to 
that for the Board's FR Y-14A. Some commenters suggested that the Board 
tailor the proposal's information reporting requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or more 
to match the content and timing of home country stress testing. 
Commenters also asserted that if home-country stress tests are 
concluded on a different cycle than the Board's preferred cycle, the 
Board should accept results from the home-country stress tests at a 
reasonable interval after their completion. Similarly, commenters 
argued that if home-country stress tests do not produce the Board's 
requested metrics, the Board should accept alternative metrics, 
provided they are generally effective in depicting the soundness of the 
institution.
    The proposed reporting requirements were intended to provide the 
Board with important information regarding stress test results. The 
stress test report serves an important purpose, as it allows the Board 
better to understand the capital adequacy of the foreign banking 
organization, its ability to support its U.S. operations, and the 
nature of the home-country stress testing regime. The Board clarifies 
that it does not presently intend to require a specific reporting form 
for a foreign banking organization to use to report its company-run 
stress test results and has attempted to minimize any conflict with 
home-country standards regarding the timing and content of a foreign 
banking organization's stress tests. Further, the Board has not 
mandated a specific timeline for when a stress test must be conducted. 
By January 5 of each year, the foreign banking organization must report 
on its stress-testing activities and results, but that report can 
consist of the most recent stress test conducted by the home-country 
supervisor or the foreign banking organization, provided that the 
foreign banking organization is subject to capital stress testing at 
least annually.
    If a foreign banking organization is subject to slightly different 
home country stress testing metrics, the Board would expect to accept 
those metrics, provided they included sufficient information on the 
foreign banking organization's losses, revenues, changes in expected 
loan losses, income, and capital under stressed conditions. While a 
foreign banking organization could choose to provide the same type of 
information as included on the FR Y-14A to report on the results of its 
stress test, a more abbreviated report could satisfy the foreign 
banking organization's requirements. Thus, these requirements should 
not conflict with the timing or content of the foreign banking 
organization's home country stress-testing requirements.
    Commenters also requested that the Board take appropriate 
precautions to protect the confidentiality of information relating to 
home country stress-test results provided to the Board, including by 
treating all stress-test results as confidential supervisory 
information exempt from disclosure under the Freedom of Information Act 
and, if necessary, entering into confidentiality agreements with the 
foreign banking organization or its home-country regulators. According 
to these commenters, decisions regarding the extent of public 
disclosure of a foreign banking organization's stress tests results 
should lie solely with the home-country supervisor. In response, the 
Board notes that it would maintain the confidentiality of any 
information submitted to the Board with respect to stress-testing 
results in accordance with the Board's rules regarding availability of 
information.\148\ The Board has no plans to disclose the results of 
foreign banking organization home-country stress tests.
---------------------------------------------------------------------------

    \148\ See 12 CFR part 261; see also 5 U.S.C. 552(b).
---------------------------------------------------------------------------

4. Additional Information Required From a Foreign Banking Organization 
With U.S. Branches and Agencies That Are in an Aggregate Net Due From 
Position
    Under the proposal, if the U.S. branches and agencies of a foreign 
banking organization were in a net due from position to the foreign 
bank parent or its foreign affiliates on an aggregate basis, calculated 
as the average daily position over the last stress test cycle (from 
October 1 of a given year through September 30 of the next year), the 
foreign banking organization would have been required to report 
additional information to the Board regarding its stress tests. The 
additional information would have included 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. As 
described in the proposal, the heightened information requirements 
reflect the greater risk to U.S. creditors and U.S. financial stability 
that may be 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 have been required to 
provide this information by January 5 of each calendar year, unless 
extended by the Board in writing.
    Commenters requested clarification on what additional information 
the Board would require to evaluate the ability of the foreign banking 
organization to absorb losses in stressed conditions. The exact 
additional information that the Board will require when the U.S. branch 
and agency network is in a net due from position to the foreign bank 
parent or its foreign affiliates will be determined on a case-by-case 
basis, accounting for the size, complexity, and business activities of 
the foreign banking organization and its U.S. operations. For instance, 
the Board may require additional information on particular portfolios 
or business lines located in the United States, or that have a 
significant connection to the foreign banking organization's U.S. 
operations. The Board expects that the information regarding a foreign 
banking organization's methodologies will include those employed to 
estimate losses, revenues, and changes in capital positions. 
Information must be provided for all elements of the stress tests, 
including loss estimation, revenue estimation, projections of the 
balance sheet and risk-weighted assets, and capital levels and ratios.
5. Supplemental Requirements for Foreign Banking Organizations With 
Combined U.S. Assets of $50 Billion or More That Do Not Comply With 
Stress-Testing Requirements
    Under the proposal, if a foreign banking organization with combined 
U.S. assets of $50 billion or more did not meet the stress-test 
requirements above, the Board would have required its U.S. branches and 
agencies to meet an asset-maintenance requirement by maintaining 
eligible assets equal to 108 percent of third-party liabilities. The 
mechanics of this asset-maintenance requirement generally would align 
with the asset-maintenance requirements that may apply to U.S. branches 
and agencies under existing federal or state rules. In addition, the 
foreign banking organization would have been 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). 
The stress test of such subsidiary could have

[[Page 17307]]

been conducted separately or as part of an enterprise-wide stress 
test.\149\
---------------------------------------------------------------------------

    \149\ The final rule clarifies that the Board must approve an 
enterprise-wide stress test in order for it to satisfy the 
requirements of this section.
---------------------------------------------------------------------------

    In addition to the asset-maintenance requirement and the 
subsidiary-level stress testing requirement described above, the 
proposal would have permitted the Board to impose intragroup funding 
restrictions, or increased local liquidity requirements, on the U.S. 
branches and agencies of a foreign bank, as well as any U.S. subsidiary 
that is not part of a U.S. intermediate holding company. Under the 
proposal, 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 have provided the company with a 
notification no later than 30 days before the Board proposed to apply 
the funding restrictions or increase local liquidity requirements.
    The proposal provided that the notification would include the basis 
for imposing the additional requirement. Within 14 calendar days of 
receipt of the notification, the proposal provided that the foreign 
banking organization could request in writing that the Board reconsider 
the requirement, including an explanation as to why the reconsideration 
should be granted. The Board would then have been required to respond 
in writing within 14 calendar days of receipt of the company's request. 
The proposal also would have required the foreign banking organization 
to report summary information about the results of the stress test to 
the Board on an annual basis.
    Several commenters argued that none of the supplemental 
requirements should be mandatory, and that the Board should retain 
discretion to impose penalties based on financial stability risks or a 
deficiency in home country standards or reporting. Commenters further 
suggested that before imposing any penalties based on inadequacy of 
home country standards, the Federal Reserve should discuss the 
penalties with home-country supervisors. In addition, commenters 
asserted that the Federal Reserve should ensure that any penalties do 
not conflict with requirements prescribed by state supervisors or home-
country supervisors. Commenters argued that asset-maintenance 
requirements are typically under the jurisdiction of the state or the 
OCC, that the Board should eliminate the requirement or coordinate with 
states and the OCC, and that unilateral Board action may result in 
confusion and cause undue burden.
    The Board believes that the mandatory asset-maintenance requirement 
is a clear, transparent regulatory response to companies that are 
unable to satisfy the stress-test requirements. In most cases, the 
Board anticipates that it would notify home-country supervisors and any 
relevant state and federal banking supervisors before the requirement 
is imposed. As requested by commenters, the Board notes that the 
consolidated branch and agency asset-maintenance requirements would not 
pre-empt state asset-maintenance requirements or otherwise affect the 
ability of state supervisors to impose asset-maintenance requirements. 
Given that asset-maintenance requirements are a common supervisory 
tool, the use of an asset-maintenance requirement is unlikely to 
conflict with requirements prescribed by a home-country supervisor.
    Commenters also addressed the proposed calculation of the asset-
maintenance requirement. One commenter suggested that the Board should 
not calculate asset maintenance on an aggregate basis for all U.S. 
branches and agencies of a foreign bank. According to the commenter, 
this approach fails to consider that eligible assets may reside in 
different state jurisdictions or experience varying rates of 
deterioration.
    The final rule retains the proposed calculation of the asset-
maintenance requirement. The Board believes that applying an asset-
maintenance requirement on a consolidated branch or agency basis is 
appropriate in this context because this asset-maintenance requirement 
is triggered by the adequacy of the foreign banking organization's 
stress testing on a consolidated basis, not because of weaknesses at a 
particular U.S. branch or agency. The requirements of this rule do not 
supersede any existing asset-maintenance requirements that U.S. 
branches and agencies of a foreign bank may be subject to, and U.S. 
branches and agencies of a foreign bank will be expected to meet both 
the requirements under the final rule and any state-level asset-
maintenance requirements.
    Other commenters suggested that the Board expand the definition of 
eligible assets for asset-maintenance requirements, either to include 
all assets that are permitted for investment purposes by a U.S. bank, 
with appropriate haircuts to adequately reflect any credit risk 
associated with such assets, or to align the assets with the assets 
available under the liquidity coverage ratio. Under the proposal, 
definitions of the terms ``eligible assets'' and ``liabilities'' were 
generally consistent with the definitions of the terms ``eligible 
assets'' and ``liabilities requiring cover'' used in the New York State 
Superintendent's regulations.\150\ The proposal, and final rule, align 
the definition of ``eligible assets'' with the asset-maintenance 
requirements that are familiar to many U.S. branches and agencies under 
existing rules.
---------------------------------------------------------------------------

    \150\ 3 NYCRR Sec.  322.3-322.4.
---------------------------------------------------------------------------

    The final rule makes minor adjustments to the proposed definition 
of eligible assets. In the proposal, eligible assets would have 
excluded amounts due from the home office, other offices and 
affiliates, including income accrued but uncollected on such amounts; 
however, the definition would have permitted the Board to treat amounts 
due from other offices or affiliates located in the United States as 
eligible assets. The Board has determined that such treatment would be 
inappropriate, and has removed that provision from the final rule. In 
addition, the Board has removed the specific valuation rules for Brady 
Bonds and precious metals. If Brady Bonds qualify as marketable debt 
securities, they would be valued at their principal amount or market 
value, whichever is lower, consistent with the final rule. Precious 
metals and other assets not listed in the final rule would be valued as 
recorded on the general ledger (reduced by the amount of any 
specifically allocated reserves held in the United States and recorded 
on the general ledger of the U.S. branch or U.S. agency in connection 
with such assets).
    One commenter suggested that the asset-maintenance provisions, 
taken together with intragroup funding restrictions and local liquidity 
requirements, may be too onerous and seriously limit the types of 
assets or investments that an institution could hold. The commenter 
also argued that the timing for intragroup funding restrictions may be 
impractical if serious liquidity issues exist. Under the final rule, 
the Board has retained discretion in applying the intragroup funding 
restrictions and local liquidity requirements, and, on a case-by-case 
basis, will assess whether the interaction of these additional 
restrictions with the asset-maintenance requirement would have results 
other that the intended increase in safety and soundness. The Board has 
modified the notice provisions to provide that, if a company requests a 
reconsideration of the requirement, the Board will respond in writing 
to the company's request for

[[Page 17308]]

reconsideration prior to applying the condition, but not necessarily 
within 14 days.
    The preamble to the foreign proposal raised a question as to 
whether the Board should consider conducting supervisory loss estimates 
on the U.S. branches and agencies of large foreign banking 
organizations, or whether the Board should consider requiring a foreign 
banking organization to conduct internal stress tests of its U.S. 
branches and agencies. Several commenters suggested that the Board 
should not impose additional requirements on the U.S. branches and 
agencies of a foreign banking organization, asserting that such 
additional collection would be burdensome but not meaningful. However, 
one commenter argued that the Board should gather data from such 
networks similar to the data gathered from U.S. bank holding companies, 
conduct supervisory loss estimates, and require foreign banking 
organizations to conduct internal stress test on their U.S. branch and 
agency networks to equalize the treatment with foreign-owned 
subsidiaries and also with U.S. banks.
    The Board has decided against imposing such additional requirements 
at this time. U.S. branches and agencies do not hold capital separately 
from their parent foreign banking organization, and the losses on 
assets borne by the branch or agency would be due and payable by the 
parent. For these reasons, the branch would be required to make a 
number of assumptions that would reduce the utility of the analysis, 
and in the Board's view, the cost and burden to firms of conducting the 
test would therefore at present outweigh the supervisory benefit.
6. Stress-Test Requirements for Foreign Banking Organizations With 
Total Consolidated Assets of More Than $50 Billion But Combined U.S. 
Assets of Less Than $50 Billion
    Under the proposal, a foreign banking organization with total 
consolidated assets of $50 billion or more but combined U.S. assets of 
less than $50 billion would have been required to be subject to a home-
country stress testing regime that satisfied the same requirements 
applied to foreign banking organizations with combined U.S. assets of 
$50 billion or more. Under these requirements, the home-country stress 
testing regime would have been required to include an annual 
supervisory capital stress test or an annual supervisory evaluation and 
review of a company-run stress test, and requirements for governance 
and controls of the stress-testing practices by relevant management and 
the board of directors (or equivalent thereof) of the company. A 
foreign banking organization with total consolidated assets of $50 
billion or more but combined U.S. assets of less than $50 billion would 
have been required to meet the minimum standards set by its home-
country supervisor with respect to the stress tests.
    If a foreign banking organization did not meet the stress-testing 
standards above, the Board would require the foreign banking 
organization's U.S. branches and agencies, as applicable, to maintain 
eligible assets equal to 105 percent of third-party liabilities, 
calculated on an aggregate basis. As discussed in the proposal, the 
Board would require a 105 percent asset-maintenance requirement 
(instead of the 108 percent requirement applied to foreign banking 
organizations with combined U.S. assets of $50 billion or more) in 
light of the more limited risks to U.S. financial stability posed by 
foreign banking organizations with combined U.S. assets of less than 
$50 billion as compared to risks posed by foreign banking organizations 
with a larger presence. In addition, the proposal would have required 
the foreign banking organization to conduct an annual stress test of 
its U.S. subsidiaries (other than a section 2(h)(2) company).\151\ The 
company would have been required to report high-level summary 
information about the results of such stress test to the Board on an 
annual basis.
---------------------------------------------------------------------------

    \151\ As described above in section IV.B of this preamble, a 
foreign banking organization with U.S. non-branch assets of less 
than $50 billion would not be required to form a U.S. intermediate 
holding company.
---------------------------------------------------------------------------

    Some commenters argued that the asset-maintenance requirement 
should be parallel regardless of the size of the institution. The final 
rule maintains the 105 percent requirement for an institution with a 
smaller U.S. presence in light of its smaller systemic footprint. In 
addition, the final rule clarifies that an enterprise-wide stress test 
conducted by a foreign banking organization is subject to the Board's 
approval to the extent it is used to satisfy the U.S. subsidiary stress 
testing requirement.
7. 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.\152\ The 
proposal would apply the stress-testing requirements to foreign banking 
organizations with total consolidated assets of more than $10 billion 
but less than $50 billion and foreign savings and loan holding 
companies with total consolidated assets of more than $10 billion that 
were consistent with the requirements described in section III.F.7 
above applicable to foreign banking organizations with total 
consolidated assets of $50 billion or more but combined U.S. assets of 
less than $50 billion.
---------------------------------------------------------------------------

    \152\ Section 165(i)(2) of the Dodd-Frank Act; 12 U.S.C. 
5363(i)(2).
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    Commenters suggested that the Board should not apply stress-testing 
requirements for smaller foreign banking organizations with less than 
$50 billion in combined U.S. assets, asserting that these entities may 
not pose any risks to U.S. financial stability. These commenters argued 
that the Board has discretion to use U.S. assets rather than global 
assets as the threshold for application under section 165(i)(2) of the 
Dodd-Frank Act. One commenter also suggested that the Board exempt 
foreign banking organizations from jurisdictions where similar banks 
are subject to consolidated supervision.
    Section 165(i)(2) of the Dodd-Frank Act states that ``financial 
companies that have total consolidated assets of more than 
$10,000,000,000 and are regulated by a primary Federal financial 
regulatory agency shall conduct annual stress tests.'' Accordingly, the 
final rule applies to these companies. However, foreign banking 
organizations with less than $50 billion in combined U.S. assets are 
likely to pose more limited risks to U.S. financial stability than 
larger companies. Accordingly, the Board sought in the final rule to 
minimize any undue regulatory burden on those companies by allowing 
them to use a home-country stress test, while ensuring that the 
requirements meet the statutory requirements of the Dodd-Frank Act. 
Responses to other comments received on these standards are discussed 
in section III.F.6 of this preamble.

G. Debt-to-Equity Limits for Foreign Banking Organizations

    Section 165(j) provides that the Board must require a foreign 
banking organization to maintain a debt-to-equity ratio of no more than 
15-to-1 if the Council determines 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

[[Page 17309]]

risk that such foreign banking organization poses to the financial 
stability of the United States.\153\ The Board is required to 
promulgate regulations to establish procedures and timelines for 
compliance with section 165(j).\154\
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    \153\ 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. The statute expressly exempts any federal 
home loan bank from the debt to equity ratio requirement. See 12 
U.S.C. 5366(j)(1).
    \154\ 12 U.S.C. 5366(j)(3).
---------------------------------------------------------------------------

    The proposal would have implemented 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. branches and agencies 
as an equivalent to a debt-to-equity limitation. 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. The proposal provided that 
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 proposal would have permitted 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. The proposal provided that 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.
    Consistent with comments received on the domestic proposal, some 
commenters argued that the substitution of ``total liabilities'' for 
the statutory term ``debt'' would be inappropriate, especially as 
applied to insurance companies. As discussed in detail in section III.D 
of this preamble, the Board chose to define ``debt'' and ``equity'' on 
the basis of ``total liabilities'' and ``total equity capital'' 
included in a company's report of financial condition. Commenters also 
noted that the section 165(j) debt-to-equity ratio is not based on any 
applicable international standard and could prompt reciprocal measures 
from foreign governments, and one commenter stated that the debt-to-
equity limits should be integrated into a single equity standard 
applied at the parent level. Two of the commenters argued that the 
Board should consult with home country regulators before imposing the 
debt-to-equity ratio. One commenter asserted that asset-maintenance 
requirements are typically the jurisdiction of the state or the OCC, 
and that the Board's asset-maintenance requirement was unnecessary.
    While the Board recognizes that section 165(j) debt-to-equity ratio 
is not an international standard, it is a standard that is required by 
the Dodd-Frank Act and is imposed after the Council (and not the Board) 
makes the ``grave threat'' determination. Were the Council to make such 
a determination regarding a foreign banking organization, the Board 
expects that it or the Council would notify the appropriate home 
country regulator before the expiration of the compliance period. For 
the reasons described above in section IV.F of this preamble, the Board 
believes that the asset-maintenance requirement is an appropriate 
standard. The Board is adopting the debt-to-equity requirements as 
proposed.

V. Administrative Law Matters

A. Regulatory Flexibility Act

    The Board has considered the potential impact of the final rule on 
small companies in accordance with the Regulatory Flexibility Act (5 
U.S.C. 603(b)). Based on its analysis and for the reasons stated below, 
the Board believes that the final rule will not have a significant 
economic impact on a substantial number of small entities. 
Nevertheless, the Board is publishing a final regulatory flexibility 
analysis.
    Under regulations issued by the Small Business Administration 
(``SBA''), a small entity includes a depository institution, bank 
holding company, or savings and loan holding company with total assets 
of $500 million or less (a small banking organization).\155\ The final 
rule establishes risk committee and company-run stress test 
requirements for bank holding companies and foreign banking 
organizations with total consolidated assets of more than $10 billion 
and establishes enhanced prudential standards for bank holding 
companies and foreign banking organizations with total consolidated 
assets of $50 billion or more. Companies that are subject to the final 
rule therefore substantially exceed the $175 or $500 million asset 
threshold at which a banking entity is considered a ``small entity'' 
under SBA regulations.\156\
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    \155\ 13 CFR 121.201.
    \156\ 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 standards. 
See 12 U.S.C. 5365(a)(2)(B). However, neither the Board nor the 
Council has the authority to lower such threshold.
---------------------------------------------------------------------------

    The Board did not receive any comments on the proposed rules 
regarding their impact on small entities. In light of the foregoing, 
the Board does not believe that the final rule would have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    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 number is 7100-0350. 
The Board reviewed the final rule under the authority delegated to the 
Board by OMB. The Board did not receive any specific comments on the 
PRA; however, most commenters expressed concern about the amount of 
burden imposed by the requirements of the rule.
    The final rule contains requirements subject to the PRA. The 
reporting requirements are found in sections 252.122(b)(1)(iii); 
252.132(a), (b), and (d); 252.143(a), (b), and (c); 252.144(a), (b), 
and (d); 252.145(a); 252.146(c)(1)(iii); 252.153(a)(3); 252.153(c)(3); 
252.153(d); 252.154(a), (b), and (c); 252.157(b); 252.158(c)(1);

[[Page 17310]]

252.158(c)(2); and 252.158(d)(1)(ii).\157\ The recordkeeping 
requirements are found in sections 252.34(e)(3), 252.34(f), 252.34(h), 
252.35(a)(7), 252.153(e)(5), 252.156(e), 252.156(g), and 252.157(a)(7). 
The disclosure requirements are found in section 252.153(e)(5). These 
information collection requirements would implement section 165 of the 
Dodd-Frank Act, as mentioned in the Abstract below.
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    \157\ Most of the recordkeeping requirements for Subpart D 
pertaining to the Liquidity Requirements have been addressed in the 
Funding and Liquidity Risk Management Guidance (FR 4198; OMB No. 
7100-0326). Only new recordkeeping requirements are being addressed 
with this final rulemaking.
---------------------------------------------------------------------------

    The reporting requirements in sections 252.153(b)(2) and 
252.153(e)(5) 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: 
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets NW., Washington, DC 20551. A copy of the comments may also be 
submitted to the OMB desk officer: 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, Agency Desk Officer.
Proposed Revisions, With Extension, to the Following Information 
Collection
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Regulation YY (Enhanced 
Prudential Standards).
    Agency Form Number: Reg YY.
    OMB Control Number: 7100-0350.
    Frequency of Response: Annual, semiannual, quarterly, and on 
occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, U.S. bank holding companies, 
savings and loan holding companies, nonbank financial companies, 
foreign banking organizations, U.S. intermediate holding companies, 
foreign saving 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 
implement enhanced prudential standards for bank holding companies and 
foreign banking organizations with total consolidated assets of $50 
billion or more. The enhanced prudential standards include risk-based 
and leverage capital requirements, liquidity standards, requirements 
for overall risk management (including establishing a risk committee), 
stress test requirements, and debt-to-equity limits for companies that 
the Financial Stability Oversight Council has determined pose a grave 
threat to financial stability.
Reporting Requirements
    Section 252.122(b)(1)(iii) (formerly section 252.264(b)(2) in the 
proposed rule) would require, unless the Board otherwise determines in 
writing, a foreign banking organization with total consolidated assets 
of more than $10 billion but less than $50 billion or a foreign savings 
and loan holding company with total consolidated assets of $10 billion 
or more that does not meet the home-country stress testing standards 
set forth in the rule to report on an annual basis a summary of the 
results of the stress test to the Board that includes 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 aggregate 
losses, pre-provision net revenue, total loan loss provisions, net 
income before taxes and pro forma regulatory capital ratios required to 
be computed by the home-country supervisor of the foreign banking 
organization or foreign savings and loan holding company and any other 
relevant capital ratios, and an explanation of the most significant 
causes for any changes in regulatory capital ratios.
    Section 252.132(a) would require a foreign banking organization 
with a class of stock (or similar interest) that is publicly traded and 
total consolidated assets of at least $10 billion but less than $50 
billion, must, on an annual basis, certify to the Board that it 
maintains a committee of its global board of directors (or equivalent 
thereof), on a standalone basis or as part of its enterprise-wide risk 
committee (or equivalent thereof) that (1) oversees the risk management 
policies of the combined U.S. operations of the foreign banking 
organization and (2) includes at least one member having experience in 
identifying, assessing, and managing risk exposures of large, complex 
firms.
    Section 252.132(b) would require the certification to be filed on 
an annual basis with the Board concurrently with the Annual Report of 
Foreign Banking Organizations (FR Y-7; OMB No. 7100-0297).
    Section 252.132(d) would require that if a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.
    Section 252.143(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 certify to the Board that it meets 
capital adequacy standards on a consolidated basis established by its 
home-country supervisor that are consistent with the Basel Capital 
Framework. Home country capital adequacy standards that are consistent 
with the Basel Capital Framework include all minimum risk-based capital 
ratios, any minimum leverage ratio, and all restrictions based on any 
applicable capital buffers set forth in Basel III, each as applicable 
and as implemented in accordance with the Basel III, including any 
transitional provisions set forth

[[Page 17311]]

therein. In the event that a home-country supervisor has not 
established capital adequacy standards that are consistent with the 
Basel Capital Framework, the foreign banking organization must 
demonstrate to the satisfaction of the Board that it would meet or 
exceed capital adequacy standards on a consolidated basis that are 
consistent with the Basel Capital Framework were it subject to such 
standards.
    Section 252.143(b) would require a foreign banking organization 
with total consolidated assets of $50 billion or more to provide to the 
Board reports relating to its compliance with the capital adequacy 
measures concurrently with filing the Capital and Asset Report for 
Foreign Banking Organizations (FR Y-7Q; OMB No. 7100-0125).
    Section 252.143(c) would require that if a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, conditions, or restrictions, including 
risk-based or leverage capital requirements, relating to the activities 
or business operations of the U.S. operations of the foreign banking 
organization. The Board will coordinate with any relevant State or 
Federal regulator in the implementation of such requirements, 
conditions, or restrictions. If the Board determines to impose one or 
more requirements, conditions, or restrictions under this paragraph, 
the Board will notify the company before it applies any requirement, 
condition or restriction, and describe the basis for imposing such 
requirement, condition, or restriction. Within 14 calendar days of 
receipt of a notification under this paragraph, the company may request 
in writing that the Board reconsider the requirement, condition, or 
restriction. The Board will respond in writing to the company's request 
for reconsideration prior to applying the requirement, condition, or 
restriction.
    Section 252.144(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, on an annual basis, certify to the 
Board that it maintains a committee of its global board of directors 
(or equivalent thereof), on a standalone basis or as part of its 
enterprise-wide risk committee (or equivalent thereof) that (1) 
oversees the risk management policies of the combined U.S. operations 
of the foreign banking organization and (2) includes at least one 
member having experience in identifying, assessing, and managing risk 
exposures of large, complex firms.
    Section 252.144(b) would require the certification to be filed on 
an annual basis with the Board concurrently with its FR Y-7.
    Section 252.144(d) would require that if a foreign banking 
organization does not satisfy the requirements of that section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition, or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.
    Section 252.145(a) (formerly section 252.231(a) in the proposed 
rule) 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 foreign banking organization or the 
combined U.S. operations of the foreign banking organization.
    Section 252.146(c)(1)(iii) would require, unless the Board 
otherwise determines in writing, a foreign banking organization with 
total consolidated assets of more than $50 billion but combined U.S. 
assets of less than $50 billion that does not meet does not meet the 
home-country stress testing standards set forth in the rule to report 
on an annual basis a summary of the results of the stress test to the 
Board that includes 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 aggregate losses, pre-provision net revenue, 
total loan loss provisions, net income before taxes and 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 an explanation of the most significant causes for 
any changes in regulatory capital ratios.
    Section 252.153(a)(3) (formerly section 252.203(b) in the proposed 
rule) would require that within 30 days of establishing or designating 
a U.S. intermediate holding company, a foreign banking organization 
with U.S. non-branch 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 252.153(c)(3) (formerly section 252.202(b) in the proposed 
rule) would require a foreign banking organization with U.S. non-branch 
assets of $50 billion or more that submits a request to establish or 
designate multiple U.S. intermediate holding companies to be submitted 
to the Board 180 days before the foreign banking organization forms a 
U.S. intermediate holding company. A request not to transfer any 
ownership interest in a subsidiary must be submitted to the Board 
either 180 days before the foreign banking organization acquires the 
ownership interest in such U.S. subsidiary, or in a shorter period of 
time if permitted by the Board. The request must include a description 
of why the request should be granted and any other information the 
Board may require.
    Section 252.153(d) \158\ would require a foreign banking 
organization that, as of June 30, 2014, has U.S. non-branch assets of 
$50 billion or more to submit an implementation plan to the Board by 
January 1, 2015, unless that time is accelerated or extended by the 
Board. An implementation plan must contain (1) a list of all U.S. 
subsidiaries controlled by the foreign banking organization setting 
forth the ownership interest in each subsidiary and an organizational 
chart showing the ownership hierarchy; (2) for each U.S. subsidiary 
that is a section 2(h)(2) company or a debts previously contracted in 
good faith (DPC) branch subsidiary, the name, asset size, and a 
description of why the U.S. subsidiary qualifies as a section 2(h)(2) 
or a DPC

[[Page 17312]]

branch subsidiary; (3) for each U.S. subsidiary for which the foreign 
banking organization expects to request an exemption from the 
requirement to transfer all or a portion of its ownership interest in 
the subsidiary to the U.S. intermediate holding company, the name, 
asset size, and a description of the reasons why the foreign banking 
organization intends to request that the Board grant it an exemption 
from the U.S. intermediate holding company requirement; (4) a projected 
timeline for the transfer by the foreign banking organization of its 
ownership interest in U.S. subsidiaries to the U.S. intermediate 
holding company, and quarterly pro forma financial statements for the 
U.S. intermediate holding company, including pro forma regulatory 
capital ratios, beginning December 31, 2015, to January 1, 2018; (5) a 
projected timeline for, and description of, all planned capital actions 
or strategies for capital accretion that will facilitate the U.S. 
intermediate holding company's compliance with the risk-based and 
leverage capital requirements set forth in paragraph (e)(2) of this 
section; (6) a description of the risk-management practices of the 
combined U.S. operations of the foreign banking organization and a 
description of how the foreign banking organization and U.S. 
intermediate holding company will come into compliance with the final 
rule's requirements; and (7) a description of the current liquidity 
stress testing practices of the U.S. operations of the foreign banking 
organization and a description of how the foreign banking organization 
and U.S. intermediate holding company will come into compliance with 
the final rule's requirements.
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    \158\ This reporting requirement was added in response to a 
public comment received asking for further clarity on the 
requirements and process for foreign banking organizations to re-
organize its U.S. legal entities under one intermediate holding 
company.
---------------------------------------------------------------------------

    If a foreign banking organization plans to reduce its U.S. non-
branch assets below $50 billion for four consecutive quarters prior to 
July 1, 2016, the foreign banking organization may submit a plan that 
describes how it intends to reduce its U.S. non-branch assets below $50 
billion and any other information the Board determines is appropriate.
    The Board may require a foreign banking organization that meets or 
exceeds the threshold for application of this section after June 30, 
2014, to submit an implementation plan containing the information 
described above if the Board determines that an implementation plan is 
appropriate for such foreign banking organization.
    Section 252.154(a) 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 certify to the Board that it meets 
capital adequacy standards on a consolidated basis established by its 
home-country supervisor that are consistent with the regulatory capital 
framework published by the Basel Committee on Banking Supervision, as 
amended from time to time (Basel Capital Framework). Home country 
capital adequacy standards that are consistent with the Basel Capital 
Framework include all minimum risk-based capital ratios, any minimum 
leverage ratio, and all restrictions based on any applicable capital 
buffers set forth in Basel III, each as applicable and as implemented 
in accordance with the Basel III, including any transitional provisions 
set forth therein. In the event that a home-country supervisor has not 
established capital adequacy standards that are consistent with the 
Basel Capital Framework, the foreign banking organization must 
demonstrate to the satisfaction of the Board that it would meet or 
exceed capital adequacy standards at the consolidated level that are 
consistent with the Basel Capital Framework were it subject to such 
standards.
    Section 252.154(b) would require a foreign banking organization 
with total consolidated assets of $50 billion or more to provide to the 
Board reports relating to its compliance with the capital adequacy 
measures concurrently with filing the FR Y-7Q.
    Section 252.154(c) would require that if a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.
    Section 252.157(b) (formerly section 252.226(c) in the proposed 
rule) would require a foreign banking organization with combined U.S. 
assets of $50 billion or more to make available to the Board, in a 
timely manner, the results of any liquidity internal stress tests and 
establishment of liquidity buffers required by regulators in its home 
jurisdiction. The report required under this paragraph must include the 
results of its liquidity stress test and liquidity buffer, if required 
by the laws or regulations implemented in the home jurisdiction, or 
expected under supervisory guidance.
    Section 252.158(c)(1) (formerly section 252.263(b)(1) in the 
proposed rule) would require a foreign banking organization with 
combined U.S. assets of $50 billion or more to report to the Board by 
January 5 of each calendar year, unless such date is extended by the 
Board, summary information 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 any changes in 
regulatory capital ratios.
    Section 252.158(c)(2) (formerly section 252.263(b)(2) in the 
proposed rule) would require that if, on a net basis, the U.S. branches 
and agencies of a foreign banking organization with combined U.S. 
assets of $50 billion or more provide funding to the foreign banking 
organization's non-U.S. offices and non-U.S. affiliates, calculated as 
the average daily position over a stress test cycle for a given year, 
the foreign banking organization must report the following information 
to the Board by January 5 of each calendar year, unless such date is 
extended by the Board (1) a detailed description of the methodologies 
used in the stress test, including those employed to estimate losses, 
revenues, and changes in capital positions; (2) estimates of realized 
losses or gains on available-for-sale and held-to-maturity securities, 
trading and counterparty losses, if applicable; and loan losses (dollar 
amount and as a percentage of average portfolio balance) in the 
aggregate and by material sub-portfolio; and (3) any additional 
information that the Board requests.
    Section 252.158(d)(1)(ii) (formerly section 252.263(c)(2) in the 
proposed rule) would require a foreign banking organization with 
combined U.S. assets

[[Page 17313]]

of $50 billion or more that does not meet the home-country stress 
testing standards set forth in the rule and provide requested 
information to the Board must to the extent that a foreign banking 
organization has not formed a U.S. intermediate holding company, 
conduct an annual stress test of its U.S. subsidiaries to determine 
whether those subsidiaries have the capital necessary to absorb losses 
as a result of adverse economic conditions and report on an annual 
basis a summary of the results of that stress test of this section to 
the Board that includes the qualitative and quantitative information 
required for home country supervisory stress and any other information 
specified by the Board.
Recordkeeping Requirements
    Section 252.34(e)(3) (formerly section 252.61 in the proposed rule) 
would require a bank holding company with total consolidated assets of 
$50 billion or more to adequately document its methodology for making 
cash flow projections and the included assumptions and submit such 
documentation to the risk committee.
    Section 252.34(f) (formerly section 252.58 in the proposed rule) 
would require a bank holding company with total consolidated assets of 
$50 billion or more to establish and maintain a contingency funding 
plan that sets out the company's strategies for addressing liquidity 
needs during liquidity stress events. The contingency funding plan must 
be commensurate with the company's capital structure, risk profile, 
complexity, activities, size, and established liquidity risk tolerance. 
The company must update the contingency funding plan at least annually, 
and when changes to market and idiosyncratic conditions warrant. The 
contingency funding plan must include specified quantitative elements.
    The contingency funding plan must include an event management 
process that sets out the bank holding company's procedures for 
managing liquidity during identified liquidity stress events. 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 company's capital 
structure, risk profile, complexity, activities, and size.
    Section 252.34(h)(1) (formerly section 252.60(a) in the proposed 
rule) would require a bank holding company with total consolidated 
assets of $50 billion or more to establish and maintain policies and 
procedures to monitor assets that have been, or are available to be, 
pledged as collateral in connection with transactions to which it or 
its affiliates are counterparties and sets forth minimum standards for 
those procedures.
    Section 252.34(h)(2) (formerly section 252.60(b) in the proposed 
rule) would require a bank holding company with total consolidated 
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, taking into account legal and regulatory restrictions on the 
transfer of liquidity between legal entities.
    Section 252.34(h)(3) (formerly section 252.60(c) in the proposed 
rule) would require a bank holding company with total consolidated 
assets of $50 billion or more to establish and maintain procedures for 
monitoring intraday liquidity risk exposure. These procedures must 
address how the management of the bank holding company will (1) monitor 
and measure expected daily gross liquidity inflows and outflows, (2) 
manage and transfer collateral to obtain intraday credit, (3) identify 
and prioritize time-specific obligations so that the bank holding 
company can meet these obligations as expected and settle less critical 
obligations as soon as possible, (4) control the issuance of credit to 
customers where necessary, and (5) consider the amounts of collateral 
and liquidity needed to meet payment systems obligations when assessing 
the bank holding company's overall liquidity needs.
    Section 252.35(a)(7) (formerly section 252.56(c) in the proposed 
rule) would require a bank holding company with total consolidated 
assets of $50 billion or more to establish and maintain policies and 
procedures governing its liquidity stress testing practices, 
methodologies, and assumptions that provide for the incorporation of 
the results of liquidity stress tests in future stress testing and for 
the enhancement of stress testing practices over time. The bank holding 
company would establish and maintain a system of controls and oversight 
that is designed to ensure that its liquidity stress testing processes 
are effective in meeting the final rule's stress testing requirements. 
The bank holding company would 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 
liquidity stress testing.
    Section 252.156(e) (formerly section 252.228 in 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 that sets out the foreign banking 
organization'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 the established liquidity risk tolerance for the 
combined U.S. operations. The foreign banking organization must update 
the contingency funding plan for its combined U.S. operations at least 
annually, and when changes to market and idiosyncratic conditions 
warrant. The contingency funding plan must include specified 
quantitative elements.
    The contingency funding plan for a foreign banking organization's 
combined U.S. operations must include an event management process that 
sets out the foreign banking organization's procedures for managing 
liquidity during identified liquidity stress events for the combined 
U.S. operations as set forth in the final rule. 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, and size of the foreign banking organization and its 
combined U.S. operations.
    Section 252.156(g)(1) (formerly section 252.230(a) in the proposed 
rule) would require a foreign banking organization with combined U.S. 
assets of $50 billion or more to establish and maintain policies and 
procedures to monitor assets that have been or are available to be 
pledged as collateral in connection with transactions to which entities 
in its U.S. operations are counterparties. These policies and 
procedures must provide that the foreign banking organization (1) 
calculates all of the collateral positions for its combined U.S. 
operations on a weekly basis (or more frequently, as directed by the 
Board), specifying the value of pledged assets relative to the amount 
of security required under the relevant contracts and the value of 
unencumbered assets available to be pledged, (2) monitors the levels of 
unencumbered assets available to be pledged by legal entity, 
jurisdiction, and currency exposure, (3) monitors shifts in the foreign 
banking organization's funding patterns, including shifts between 
intraday, overnight, and term pledging of collateral, and (4) tracks 
operational and timing requirements associated with accessing 
collateral at

[[Page 17314]]

its physical location (for example, the custodian or securities 
settlement system that holds the collateral).
    Section 252.156(g)(2) (formerly section 252.230(b) in 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 for its combined U.S. operations, taking into account legal and 
regulatory restrictions on the transfer of liquidity between legal 
entities.
    Section 252.156(g)(3) (formerly section 252.230(c) in 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 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) maintain, manage and transfer collateral to 
obtain intraday credit, (3) identify and prioritize time-specific 
obligations so that the foreign banking organizations can meet these 
obligations as expected and settle less critical obligations as soon as 
possible, (4) control the issuance of credit to customers where 
necessary, and (5) 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.
    Section 252.157(a)(7) (formerly section 252.230(c) in the proposed 
rule) would require 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, to establish and maintain policies 
and procedures governing its liquidity stress testing practices, 
methodologies, and assumptions that provide for the incorporation of 
the results of liquidity stress tests in future stress testing and for 
the enhancement of stress testing practices over time. The foreign 
banking organization must establish and maintain a system of controls 
and oversight that is designed to ensure that its liquidity stress 
testing processes are effective in meeting the requirements of this 
section. The 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.
Recordkeeping and Disclosure Requirements
    Section 252.153(e)(5) (formerly section 252.262 in the proposed 
rule) would require a U.S. intermediate holding company to comply with 
the requirements of this subparts E and F of this part and any 
successor regulation in the same manner as a bank holding company.
Other Changes
    The following subparts have been renumbered, no content has been 
changed. ``Subpart F--Supervisory Stress Test Requirements for Covered 
Companies'' is now ``Subpart E--Supervisory Stress Test Requirements 
for U.S. Bank Holding Companies with $50 Billion or More in Total 
Consolidated Assets and Nonbank Financial Companies Supervised by the 
Board.'' ``Subpart G--Company-Run Stress Test Requirements for Covered 
Companies'' is now ``Subpart F--Company-Run Stress Test Requirements 
for U.S. Bank Holding Companies with $50 Billion or More in Total 
Consolidated Assets and Nonbank Financial Companies Supervised by the 
Board.'' ``Subpart H--Company-Run Stress Test Requirements for Banking 
Organizations With Total Consolidated Assets Over $10 Billion That Are 
Not Covered Companies'' is now ``Subpart B--Company-Run Stress Test 
Requirements for Certain U.S. Banking Organizations with Total 
Consolidated Assets Over $10 Billion and less than $50 Billion.''
Estimated Paperwork Burden
    Estimated Burden per Response:
Reporting Burden
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More But Combined U.S. Assets of Less Than $50 Billion
    Section 252.143(a) and (b)--1 hour.
    Section 252.143(c)--10 hours.
    Section 252.144(a) and (b)--1 hour.
    Section 252.144(d)--10 hours.
    Section 252.145(a)--50 hours.
    Section 252.146(c)(1)(iii)--80 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More and Combined U.S. Assets of $50 Billion or More
    Section 252.154(a) and (b)--1 hour.
    Section 252.154(c)--10 hours.
    Section 252.157(b)--40 hours.
    Section 252.158(c)(1)--40 hours.
    Section 252.158(c)(2)--40 hours.
    Section 252.158(d)(1)(ii)--80 hours.
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More and U.S. Non-Branch Assets of $50 Billion or More
    Section 252.153(a)(3)--20 hours.
    Section 252.153(c)(3)--160 hours.
    Section 252.153(d)--Initial setup 750 hours.
Foreign Banking Organizations and Foreign Savings and Loan Holding 
Companies With Total Consolidated Assets Over $10 Billion and Less Than 
$50 Billion
    Section 252.122(b)(1)(iii)--80 hours.
Publicly Traded Foreign Banking Organizations With Total Consolidated 
Assets Equal to or Greater Than $10 Billion and Less Than $50 Billion
    Section 252.132(a) and (b)--1 hour.
    Section 252.132(d)--10 hours.
Recordkeeping Burden
Bank Holding Companies With Total Consolidated Assets of $50 Billion or 
More
    Sections 252.34(e)(3), 252.34(f), 252.34(h), and 252.35(a)(7)--200 
hours (Initial setup 160 hours).
Intermediate Holding Companies
    Section 252.153(e)(5)--40 hours (Initial setup 280 hours).
Foreign Banking Organizations With Total Consolidated Assets of $50 
Billion or More and Combined U.S. Assets of $50 Billion or More
    Sections 252.156(e), 252.156(g), and 252.157(a)(7)--200 hours 
(Initial setup 160 hours).
Disclosure Burden
Intermediate Holding Companies
    Section 252.153(e)(5)--80 hours (Initial setup 200 hours).
    Number of respondents: 24 U.S. bank holding companies with total 
consolidated assets of $50 billion or more, 46 U.S. bank holding 
companies with total consolidated assets over $10 billion and less than 
$50 billion, 21 state member banks with total consolidated assets over 
$10 billion, 39 savings and loan holding companies with total 
consolidated assets over $10 billion, 24 foreign banking organizations 
with total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more, 17 U.S. intermediate holding companies, 
and 102 foreign banking organizations with total consolidated assets of 
more than $10 billion and combined U.S. assets of less than $50 
billion.
    Current estimated annual burden: 59,320 hours (48,080 hours for 
initial

[[Page 17315]]

setup and 11,240 hours for ongoing compliance).
    Proposed revisions only estimated annual burden: 59,226 hours 
(31,990 hours for initial setup and 27,236 hours for ongoing 
compliance).
    Total estimated annual burden: 118,546 hours (80,070 hours for 
initial setup and 38,476 hours for ongoing compliance).

C. 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 invited comment on whether the proposed rule 
was written plainly and clearly, or whether there were ways the Board 
could make the rule easier to understand. The Board received no 
comments on these matters and believes that the final rule is written 
plainly and clearly.

List of Subjects in 12 CFR Part 252

    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 preamble, the Board of Governors of 
the Federal Reserve System further amends part 252, as amended on March 
11, 2014, at 79 FR 13498, effective April 15, 2014, as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
1. The authority citation for part 252 is revised to read as follows:

    Authority:  12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 3101 et seq., 3101 
note, 3904, 3906-3909, 4808, 5362, 5365, 5367, and 5368.


0
2. Subpart A is added to read as follows:
Subpart A--General Provisions
Sec.
252.1 Authority and purpose.
252.2 Definitions.
252.3 Reservation of authority.
252.4 Nonbank financial companies supervised by the Board.

Subpart A--General Provisions


Sec.  252.1  Authority and purpose.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (the Board) under sections 162, 165, 167, and 
168 of Title I of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376, 
1423-1432, 12 U.S.C. 5362, 5365, 5367, and 5368); section 9 of the 
Federal Reserve Act (12 U.S.C. 321-338a); section 5(b) of the Bank 
Holding Company Act (12 U.S.C. 1844(b)); section 10(g) of the Home 
Owners' Loan Act, as amended (12 U.S.C. 1467a(g)); sections 8 and 39 of 
the Federal Deposit Insurance Act (12 U.S.C. 1818(b) and 1831p-1); the 
International Banking Act (12 U.S.C. 3101 et seq.); the Foreign Bank 
Supervision Enhancement Act (12 U.S.C. 3101 note); and 12 U.S.C. 3904, 
3906-3909, and 4808.
    (b) Purpose. This part implements certain provisions of section 165 
of the Dodd-Frank Act (12 U.S.C. 5365), which require the Board to 
establish enhanced prudential standards for bank holding companies and 
foreign banking organizations with total consolidated assets of $50 
billion or more, nonbank financial companies supervised by the Board, 
and certain other companies.


Sec.  252.2  Definitions.

    Unless otherwise specified, the following definitions apply for 
purposes of this part:
    (a) Affiliate has the same meaning as in section 2(k) of the Bank 
Holding Company Act (12 U.S.C. 1841(k)) and section 225.2(a) of the 
Board's Regulation Y (12 CFR 225.2(a)).
    (b) Applicable accounting standards means U.S. generally accepted 
accounting principles, international financial reporting standards, or 
such other accounting standards that a company uses in the ordinary 
course of its business in preparing its consolidated financial 
statements.
    (c) 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)).
    (d) Board means the Board of Governors of the Federal Reserve 
System.
    (e) Combined U.S. operations of a foreign banking organization 
means:
    (1) Its U.S. branches and agencies, if any; and
    (2)(i) If the foreign banking organization has established a U.S. 
intermediate holding company, the U.S. intermediate holding company and 
the subsidiaries of such U.S. intermediate holding company; or
    (ii) If the foreign banking organization has not established a U.S. 
intermediate holding company, the U.S. subsidiaries of the foreign 
banking organization (excluding any section 2(h)(2) company, if 
applicable), and subsidiaries of such U.S. subsidiaries.
    (f) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (g) 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.
    (h) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (i) DPC branch subsidiary means any subsidiary of a U.S. branch or 
a U.S. agency acquired, or formed to hold assets acquired, in the 
ordinary course of business and for the sole purpose of securing or 
collecting debt previously contracted in good faith by that branch or 
agency.
    (j) Foreign banking organization has the same meaning as in section 
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)), provided that 
if the top-tier foreign banking organization is incorporated in or 
organized under the laws of any State, the foreign banking organization 
shall not be treated as a foreign banking organization for purposes of 
this part.
    (k) FR Y-7Q means the Capital and Asset Report for Foreign Banking 
Organizations reporting form.
    (l) FR Y-7 means the Annual Report of Foreign Banking Organizations 
reporting form.
    (m) FR Y-9C means the Consolidated Financial Statements for Holding 
Companies reporting form.
    (n) 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.
    (o) Non-U.S. affiliate means any affiliate of a foreign banking 
organization that is incorporated or organized in a country other than 
the United States.
    (p) Publicly traded means an instrument that is 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:

[[Page 17316]]

    (i) Is registered with, or approved by, a non-U.S. 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 price within a 
reasonable time period conforming with trade custom.
    (3) A company can rely on its determination that a particular non-
U.S.-based securities exchange provides a liquid two-way market unless 
the Board determines that the exchange does not provide a liquid two-
way market.
    (q) 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)).
    (r) State means any state, commonwealth, territory, or possession 
of the United States, the District of Columbia, the Commonwealth of 
Puerto Rico, the Commonwealth of the Northern Mariana Islands, American 
Samoa, Guam, or the United States Virgin Islands.
    (s) Subsidiary has the same meaning as in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813).
    (t) 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) 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)).
    (v) U.S. branches and agencies means the U.S. branches and U.S. 
agencies of a foreign banking organization.
    (w) U.S. government agency means an agency or instrumentality of 
the United States whose obligations are fully and explicitly guaranteed 
as to the timely payment of principal and interest by the full faith 
and credit of the United States.
    (x) U.S. government-sponsored enterprise 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 United 
States.
    (y) U.S. intermediate holding company means the top-tier U.S. 
company that is required to be established pursuant to Sec.  252.153.
    (z) U.S. subsidiary means any subsidiary that is incorporated in or 
organized under the laws of the United States or in any State, 
commonwealth, territory, or possession of the United States, the 
Commonwealth of Puerto Rico, the Commonwealth of the North Mariana 
Islands, the American Samoa, Guam, or the United States Virgin Islands.


Sec.  252.3  Reservation of authority.

    (a) 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 or leverage 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.
    (b) Modifications or extensions of this part. The Board may extend 
or accelerate any compliance date of this part if the Board determines 
that such extension or acceleration is appropriate. In determining 
whether an extension or acceleration is appropriate, the Board will 
consider the effect of the modification on financial stability, the 
period of time for which the modification would be necessary to 
facilitate compliance with this part, and the actions the company is 
taking to come into compliance with this part.


Sec.  252.4  Nonbank financial companies supervised by the Board.

    (a) U.S. nonbank financial companies supervised by the Board. The 
Board will establish enhanced prudential standards for a nonbank 
financial company supervised by the Board that is incorporated in or 
organized under the laws of the United States or any State (U.S. 
nonbank financial company) by rule or order. In establishing such 
standards, the Board will consider the factors set forth in sections 
165(a)(2) and (b)(3) of the Dodd-Frank Act, including:
    (1) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the U.S. nonbank 
financial company;
    (2) The degree to which the U.S. nonbank financial company is 
already regulated by one or more primary financial regulatory agencies; 
and
    (3) Any other risk-related factor that the Board determines is 
appropriate.
    (b) Foreign nonbank financial companies supervised by the Board. 
The Board will establish enhanced prudential standards for a nonbank 
financial company supervised by the Board that is organized or 
incorporated in a country other than the United States (foreign nonbank 
financial company) by rule or order. In establishing such standards, 
the Board will consider the factors set forth in sections 165(a)(2), 
(b)(2), and (b)(3) of the Dodd-Frank Act, including:
    (1) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the foreign nonbank 
financial company;
    (2) 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
    (3) Any other risk-related factor that the Board determines is 
appropriate.
* * * * *
0
3. Subpart C is added to read as follows:
Subpart C--Risk Committee Requirement for Publicly Traded Bank Holding 
Companies With Total Consolidated Assets Equal to or Greater Than $10 
Billion and Less Than $50 Billion
Sec.
252.20 [Reserved].
252.21 Applicability.
252.22 Risk committee requirement for publicly traded bank holding 
companies with total consolidated assets of $10 billion or more.

Subpart C--Risk Committee Requirement for Publicly Traded Bank 
Holding Companies With Total Consolidated Assets of $10 Billion or 
Greater and Less Than $50 Billion


Sec.  252.20  [Reserved].


Sec.  252.21  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions of paragraph (c) of this section, a bank holding company 
with any class of stock that is publicly traded must comply with the 
risk-committee requirements set forth in this subpart beginning on the 
first day of the ninth quarter following the later of the date on which 
its total consolidated assets equal or exceed $10 billion and the date 
on which any class of its stock becomes publicly traded.

[[Page 17317]]

    (b) Total consolidated assets. Total consolidated assets of a bank 
holding company for purposes of this subpart are equal to its 
consolidated assets, calculated based on the average of the bank 
holding company's total consolidated assets in the four most recent 
quarters as reported quarterly on its FR Y-9C. If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, total consolidated assets means the average of 
its total consolidated assets, as reported on the FR Y-9C, for the most 
recent quarter or consecutive quarters, as applicable. Total 
consolidated assets are measured on the as-of date of the most recent 
FR Y-9C used in the calculation of the average.
    (c) Initial applicability provisions. A bank holding company that, 
as of June 30, 2014, has total consolidated assets of $10 billion or 
more and has a class of stock that is publicly traded must comply with 
the requirements of this subpart beginning on July 1, 2015.
    (d) Cessation of requirements. A bank holding company will remain 
subject to the requirements of this subpart until the earlier of the 
date on which:
    (1) Its reported total consolidated assets on the FR Y-9C are below 
$10 billion for each of four consecutive calendar quarters;
    (2) It becomes subject to the requirements of subpart D of this 
part; and
    (3) It ceases to have a class of stock that is publicly traded.


Sec.  252.22  Risk committee requirement for publicly traded bank 
holding companies with total consolidated assets of $10 billion or 
more.

    (a) Risk committee. A bank holding company with any class of stock 
that is publicly traded and total consolidated assets of $10 billion or 
more must maintain a risk committee that approves and periodically 
reviews the risk-management policies of its global operations and 
oversees the operation of its global risk-management framework.
    (b) Risk-management framework. The bank holding company's global 
risk-management framework must be commensurate with its structure, risk 
profile, complexity, activities, and size and must include:
    (1) Policies and procedures establishing risk-management 
governance, risk-management procedures, and risk-control infrastructure 
for its global operations; and
    (2) Processes and systems for implementing and monitoring 
compliance with such policies and procedures, including:
    (i) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including regarding emerging risks, and 
ensuring effective and timely implementation of actions to address 
emerging risks and risk-management deficiencies for its global 
operations;
    (ii) Processes and systems for establishing managerial and employee 
responsibility for risk management;
    (iii) Processes and systems for ensuring the independence of the 
risk-management function; and
    (iv) Processes and systems to integrate risk management and 
associated controls with management goals and its compensation 
structure for its global operations.
    (c) Corporate governance requirements. The risk committee must:
    (1) Have a formal, written charter that is approved by the bank 
holding company's board of directors.
    (2) Meet at least quarterly, and otherwise as needed, and fully 
document and maintain records of its proceedings, including risk-
management decisions.
    (d) Minimum member requirements. The risk committee must:
    (1) Include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex firms; and
    (2) Be chaired by a director who:
    (i) Is not an officer or employee of the bank holding company and 
has not been an officer or employee of the bank holding company during 
the previous three years;
    (ii) Is not a member of the immediate family, as defined in section 
225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a 
person who is, or has been within the last three years, an executive 
officer of the bank holding company, as defined in section 215.2(e)(1) 
of the Board's Regulation O (12 CFR 215.2(e)(1)); and
    (iii)(A) Is an independent director under Item 407 of the 
Securities and Exchange Commission's Regulation S-K (17 CFR 
229.407(a)), if the bank holding company has an outstanding class of 
securities traded on an 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) (national 
securities exchange); or
    (B) Would qualify as an independent director under the listing 
standards of a national securities exchange, as demonstrated to the 
satisfaction of the Board, if the bank holding company does not have an 
outstanding class of securities traded on a national securities 
exchange.

0
4. Subpart D is added to read as follows:
Subpart D--Enhanced Prudential Standards for Bank Holding Companies 
With Total Consolidated Assets of $50 Billion or More
Sec.
252.30 Scope.
252.31 Applicability.
252.32 Risk-based and leverage capital and stress test requirements.
252.33 Risk-management and risk committee requirements.
252.34 Liquidity risk-management requirements.
252.35 Liquidity stress testing and buffer requirements.

Subpart D--Enhanced Prudential Standards for Bank Holding Companies 
With Total Consolidated Assets of $50 Billion or More


Sec.  252.30  Scope.

    This subpart applies to bank holding companies with total 
consolidated assets of $50 billion or more. Total consolidated assets 
of a bank holding company are equal to the consolidated assets of the 
bank holding company, as calculated in accordance with Sec.  252.31(b).


Sec.  252.31  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions of paragraphs (c) and (e) of this section, a bank holding 
company must comply with the risk-management and risk-committee 
requirements set forth in Sec.  252.33 and the liquidity risk-
management and liquidity stress test requirements set forth in 
Sec. Sec.  252.34 and 252.35 beginning on the first day of the fifth 
quarter following the date on which its total consolidated assets equal 
or exceed $50 billion.
    (b) Total consolidated assets. Total consolidated assets of a bank 
holding company for purposes of this subpart are equal to its 
consolidated assets, calculated based on the average of the bank 
holding company's total consolidated assets in the four most recent 
quarters as reported quarterly on the FR Y-9C. If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, total consolidated assets means the average of 
its total consolidated assets, as reported on the FR Y-9C, for the most 
recent quarter or consecutive quarters, as applicable. Total 
consolidated assets are measured on the as-of date of the most recent 
FR Y-9C used in the calculation of the average.
    (c) Initial applicability. A bank holding company that, as of June 
30, 2014, has total consolidated assets of

[[Page 17318]]

$50 billion or more, as calculated according to paragraph (b) of this 
section, must comply with the risk-management and risk-committee 
requirements set forth in Sec.  252.33 and the liquidity risk-
management and liquidity stress test requirements set forth in 
Sec. Sec.  252.34 and 252.35, beginning on January 1, 2015.
    (d) Cessation of requirements. Except as provided in paragraph (e) 
of this section, a bank holding company is subject to the risk-
management and risk committee requirements set forth in Sec.  252.33 
and the liquidity risk-management and liquidity stress test 
requirements set forth in Sec. Sec.  252.34 and 252.35 until its 
reported total consolidated assets on the FR Y-9C are below $50 billion 
for each of four consecutive calendar quarters.
    (e) Applicability for bank holding companies that are subsidiaries 
of foreign banking organizations. In the event that a bank holding 
company that has total consolidated assets of $50 billion or more is 
controlled by a foreign banking organization, such bank holding company 
is subject to the risk-management and risk committee requirements set 
forth in Sec.  252.33 and the liquidity risk-management and liquidity 
stress test requirements set forth in Sec. Sec.  252.34 and 252.35 
beginning on January 1, 2015 and ending on June 30, 2016. Beginning on 
July 1, 2016, the U.S. intermediate holding company established or 
designated by the foreign banking organization must comply with the 
risk-management and risk committee requirements set forth in Sec.  
252.153(e)(3) and the liquidity risk-management and liquidity stress 
test requirements set forth in Sec.  252.153(e)(4).


Sec.  252.32  Risk-based and leverage capital and stress test 
requirements.

    A bank holding company with total consolidated assets of $50 
billion or more must comply with, and hold capital commensurate with 
the requirements of, any regulations adopted by the Board relating to 
capital planning and stress tests, in accordance with the applicability 
provisions set forth therein.


Sec.  252.33  Risk-management and risk committee requirements.

    (a) Risk committee--(1) General. A bank holding company with total 
consolidated assets of $50 billion or more must maintain a risk 
committee that approves and periodically reviews the risk-management 
policies of the bank holding company's global operations and oversees 
the operation of the bank holding company's global risk-management 
framework. The risk committee's responsibilities include liquidity 
risk-management as set forth in Sec.  252.34(b).
    (2) Risk-management framework. The bank holding company's global 
risk-management framework must be commensurate with its structure, risk 
profile, complexity, activities, and size and must include:
    (i) Policies and procedures establishing risk-management 
governance, risk-management procedures, and risk-control infrastructure 
for its global operations; and
    (ii) Processes and systems for implementing and monitoring 
compliance with such policies and procedures, including:
    (A) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including regarding emerging risks, and 
ensuring effective and timely implementation of actions to address 
emerging risks and risk-management deficiencies for its global 
operations;
    (B) Processes and systems for establishing managerial and employee 
responsibility for risk management;
    (C) Processes and systems for ensuring the independence of the 
risk-management function; and
    (D) Processes and systems to integrate risk management and 
associated controls with management goals and its compensation 
structure for its global operations.
    (3) Corporate governance requirements. The risk committee must:
    (i) Have a formal, written charter that is approved by the bank 
holding company's board of directors;
    (ii) Be an independent committee of the board of directors that 
has, as its sole and exclusive function, responsibility for the risk-
management policies of the bank holding company's global operations and 
oversight of the operation of the bank holding company's global risk-
management framework;
    (iii) Report directly to the bank holding company's board of 
directors;
    (iv) Receive and review regular reports on not less than a 
quarterly basis from the bank holding company's chief risk officer 
provided pursuant to paragraph (b)(3)(ii) of this section; and
    (v) Meet at least quarterly, or more frequently as needed, and 
fully document and maintain records of its proceedings, including risk-
management decisions.
    (4) Minimum member requirements. The risk committee must:
    (i) Include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex financial 
firms; and
    (ii) Be chaired by a director who:
    (A) Is not an officer or employee of the bank holding company and 
has not been an officer or employee of the bank holding company during 
the previous three years;
    (B) Is not a member of the immediate family, as defined in section 
225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a 
person who is, or has been within the last three years, an executive 
officer of the bank holding company, as defined in section 215.2(e)(1) 
of the Board's Regulation O (12 CFR 215.2(e)(1)); and
    (C)(1) Is an independent director under Item 407 of the Securities 
and Exchange Commission's Regulation S-K (17 CFR 229.407(a)), if the 
bank holding company has an outstanding class of securities traded on 
an 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) (national securities exchange); or
    (2) Would qualify as an independent director under the listing 
standards of a national securities exchange, as demonstrated to the 
satisfaction of the Board, if the bank holding company does not have an 
outstanding class of securities traded on a national securities 
exchange.
    (b) Chief risk officer--(1) General. A bank holding company with 
total consolidated assets of $50 billion or more must appoint a chief 
risk officer with experience in identifying, assessing, and managing 
risk exposures of large, complex financial firms.
    (2) Responsibilities. (i) The chief risk officer is responsible for 
overseeing:
    (A) The establishment of risk limits on an enterprise-wide basis 
and the monitoring of compliance with such limits;
    (B) The implementation of and ongoing compliance with the policies 
and procedures set forth in paragraph (a)(2)(i) of this section and the 
development and implementation of the processes and systems set forth 
in paragraph (a)(2)(ii) of this section; and
    (C) The management of risks and risk controls within the parameters 
of the company's risk control framework, and monitoring and testing of 
the company's risk controls.
    (ii) The chief risk officer is responsible for reporting risk-
management deficiencies and emerging risks to the risk committee and 
resolving risk-management deficiencies in a timely manner.

[[Page 17319]]

    (3) Corporate governance requirements. (i) The bank holding company 
must ensure that the compensation and other incentives provided to the 
chief risk officer are consistent with providing an objective 
assessment of the risks taken by the bank holding company; and
    (ii) The chief risk officer must report directly to both the risk 
committee and chief executive officer of the company.


Sec.  252.34  Liquidity risk-management requirements.

    (a) Responsibilities of the board of directors--(1) Liquidity risk 
tolerance. The board of directors of a bank holding company with total 
consolidated assets of $50 billion or more must:
    (i) Approve the acceptable level of liquidity risk that the bank 
holding company may assume in connection with its operating strategies 
(liquidity risk tolerance) at least annually, taking into account the 
bank holding company's capital structure, risk profile, complexity, 
activities, and size; and
    (ii) Receive and review at least semi-annually information provided 
by senior management to determine whether the bank holding company is 
operating in accordance with its established liquidity risk tolerance.
    (2) Liquidity risk-management strategies, policies, and procedures. 
The board of directors must approve and periodically review the 
liquidity risk-management strategies, policies, and procedures 
established by senior management pursuant to paragraph (c)(1) of this 
section.
    (b) Responsibilities of the risk committee. The risk committee (or 
a designated subcommittee of such committee composed of members of the 
board of directors) must approve the contingency funding plan described 
in paragraph (f) of this section at least annually, and must approve 
any material revisions to the plan prior to the implementation of such 
revisions.
    (c) Responsibilities of senior management--(1) Liquidity risk. (i) 
Senior management of a bank holding company with total consolidated 
assets of $50 billion or more must establish and implement strategies, 
policies, and procedures designed to effectively manage the risk that 
the bank holding company's financial condition or safety and soundness 
would be adversely affected by its inability or the market's perception 
of its inability to meet its cash and collateral obligations (liquidity 
risk). The board of directors must approve the strategies, policies, 
and procedures pursuant to paragraph (a)(2) of this section.
    (ii) Senior management must oversee the development and 
implementation of liquidity risk measurement and reporting systems, 
including those required by this section and Sec.  252.35.
    (iii) Senior management must determine at least quarterly whether 
the bank holding company is operating in accordance with such policies 
and procedures and whether the bank holding company is in compliance 
with this section and Sec.  252.35 (or more often, if changes in market 
conditions or the liquidity position, risk profile, or financial 
condition warrant), and establish procedures regarding the preparation 
of such information.
    (2) Liquidity risk tolerance. Senior management must report to the 
board of directors or the risk committee regarding the bank holding 
company's liquidity risk profile and liquidity risk tolerance at least 
quarterly (or more often, if changes in market conditions or the 
liquidity position, risk profile, or financial condition of the company 
warrant).
    (3) Business lines or products. (i) Senior management must approve 
new products and business lines and evaluate the liquidity costs, 
benefits, and risks of each new business line and each new product that 
could have a significant effect on the company's liquidity risk 
profile. The approval is required before the company implements the 
business line or offers the product. In determining whether to approve 
the new business line or product, senior management must consider 
whether the liquidity risk of the new business line or product (under 
both current and stressed conditions) is within the company's 
established liquidity risk tolerance.
    (ii) Senior management must review at least annually significant 
business lines and products to determine whether any line or product 
creates or has created any unanticipated liquidity risk, and to 
determine whether the liquidity risk of each strategy or product is 
within the company's established liquidity risk tolerance.
    (4) Cash-flow projections. Senior management must review the cash-
flow projections produced under paragraph (e) of this section at least 
quarterly (or more often, if changes in market conditions or the 
liquidity position, risk profile, or financial condition of the bank 
holding company warrant) to ensure that the liquidity risk is within 
the established liquidity risk tolerance.
    (5) Liquidity risk limits. Senior management must establish 
liquidity risk limits as set forth in paragraph (g) of this section and 
review the company's compliance with those limits at least quarterly 
(or more often, if changes in market conditions or the liquidity 
position, risk profile, or financial condition of the company warrant).
    (6) Liquidity stress testing. Senior management must:
    (i) Approve the liquidity stress testing practices, methodologies, 
and assumptions required in Sec.  252.35(a) at least quarterly, and 
whenever the bank holding company materially revises its liquidity 
stress testing practices, methodologies or assumptions;
    (ii) Review the liquidity stress testing results produced under 
Sec.  252.35(a) at least quarterly;
    (iii) Review the independent review of the liquidity stress tests 
under Sec.  252.34(d) periodically; and
    (iv) Approve the size and composition of the liquidity buffer 
established under Sec.  252.35(b) at least quarterly.
    (d) Independent review function. (1) A bank holding company with 
total consolidated assets of $50 billion or more must establish and 
maintain a review function that is independent of management functions 
that execute funding to evaluate its liquidity risk management.
    (2) The independent review function must:
    (i) Regularly, but no less frequently than annually, review and 
evaluate the adequacy and effectiveness of the company's liquidity risk 
management processes, including its liquidity stress test processes and 
assumptions;
    (ii) Assess whether the company's liquidity risk-management 
function complies with applicable laws, regulations, supervisory 
guidance, and sound business practices; and
    (iii) Report material liquidity risk management issues to the board 
of directors or the risk committee in writing for corrective action, to 
the extent permitted by applicable law.
    (e) Cash-flow projections. (1) A bank holding company with total 
consolidated assets of $50 billion or more must produce comprehensive 
cash-flow projections that project cash flows arising from assets, 
liabilities, and off-balance sheet exposures over, at a minimum, short- 
and long-term time horizons. The bank holding company must update 
short-term cash-flow projections daily and must update longer-term 
cash-flow projections at least monthly.
    (2) The bank holding company must establish a methodology for 
making cash-flow projections that results in projections that:
    (i) Include cash flows arising from contractual maturities, 
intercompany transactions, new business, funding

[[Page 17320]]

renewals, customer options, and other potential events that may impact 
liquidity;
    (ii) Include reasonable assumptions regarding the future behavior 
of assets, liabilities, and off-balance sheet exposures;
    (iii) Identify and quantify discrete and cumulative cash flow 
mismatches over these time periods; and
    (iv) Include sufficient detail to reflect the capital structure, 
risk profile, complexity, currency exposure, activities, and size of 
the bank holding company and include analyses by business line, 
currency, or legal entity as appropriate.
    (3) The bank holding company must adequately document its 
methodology for making cash flow projections and the included 
assumptions and submit such documentation to the risk committee.
    (f) Contingency funding plan. (1) A bank holding company with total 
consolidated assets of $50 billion or more must establish and maintain 
a contingency funding plan that sets out the company's strategies for 
addressing liquidity needs during liquidity stress events. The 
contingency funding plan must be commensurate with the company's 
capital structure, risk profile, complexity, activities, size, and 
established liquidity risk tolerance. The company must update the 
contingency funding plan at least annually, and when changes to market 
and idiosyncratic conditions warrant.
    (2) Components of the contingency funding plan--(i) Quantitative 
assessment. The contingency funding plan must:
    (A) Identify liquidity stress events that could have a significant 
impact on the bank holding company's liquidity;
    (B) Assess the level and nature of the impact on the bank holding 
company's liquidity that may occur during identified liquidity stress 
events;
    (C) Identify the circumstances in which the bank holding company 
would implement its action plan described in paragraph (f)(2)(ii)(A) of 
this section, which circumstances must include failure to meet any 
minimum liquidity requirement imposed by the Board;
    (D) Assess available funding sources and needs during the 
identified liquidity stress events;
    (E) Identify alternative funding sources that may be used during 
the identified liquidity stress events; and
    (F) Incorporate information generated by the liquidity stress 
testing required under Sec.  252.35(a) of this subpart.
    (ii) Liquidity event management process. The contingency funding 
plan must include an event management process that sets out the bank 
holding company's procedures for managing liquidity during identified 
liquidity stress events. The liquidity event management process must:
    (A) Include an action plan that clearly describes the strategies 
the company will use to respond to liquidity shortfalls for identified 
liquidity stress events, including the methods that the company will 
use to access alternative funding sources;
    (B) Identify a liquidity stress event management team that would 
execute the action plan described in paragraph (f)(2)(ii)(A) of this 
section;
    (C) Specify the process, responsibilities, and triggers for 
invoking the contingency funding plan, describe the decision-making 
process during the identified liquidity stress events, and describe the 
process for executing contingency measures identified in the action 
plan; and
    (D) Provide a mechanism that ensures effective reporting and 
communication within the bank holding company and with outside parties, 
including the Board and other relevant supervisors, counterparties, and 
other stakeholders.
    (iii) 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 company's capital structure, risk profile, complexity, activities, 
and size.
    (iv) Testing. The bank holding company must periodically test:
    (A) The components of the contingency funding plan to assess the 
plan's reliability during liquidity stress events;
    (B) The operational elements of the contingency funding plan, 
including operational simulations to test communications, coordination, 
and decision-making by relevant management; and
    (C) The methods the bank holding company will use to access 
alternative funding sources to determine whether these funding sources 
will be readily available when needed.
    (g) Liquidity risk limits--(1) General. A bank holding company with 
total consolidated assets of $50 billion or more must monitor sources 
of liquidity risk and establish limits on liquidity risk, including 
limits on:
    (i) Concentrations in sources of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and as 
applicable, other forms of liquidity risk;
    (ii) The amount of liabilities that mature within various time 
horizons; and
    (iii) Off-balance sheet exposures and other exposures that could 
create funding needs during liquidity stress events.
    (2) Size of limits. Each limit established pursuant to paragraph 
(g)(1) of this section must be consistent with the company's 
established liquidity risk tolerance and must reflect the company's 
capital structure, risk profile, complexity, activities, and size.
    (h) Collateral, legal entity, and intraday liquidity risk 
monitoring. A bank holding company with total consolidated assets of 
$50 billion or more must establish and maintain procedures for 
monitoring liquidity risk as set forth in this paragraph.
    (1) Collateral. The bank holding company must establish and 
maintain policies and procedures to monitor assets that have been, or 
are available to be, pledged as collateral in connection with 
transactions to which it or its affiliates are counterparties. These 
policies and procedures must provide that the bank holding company:
    (i) Calculates all of its collateral positions on a weekly basis 
(or more frequently, as directed by the Board), specifying the value of 
pledged assets relative to the amount of security required under the 
relevant contracts and the value of unencumbered assets available to be 
pledged;
    (ii) Monitors the levels of unencumbered assets available to be 
pledged by legal entity, jurisdiction, and currency exposure;
    (iii) Monitors shifts in the bank holding company's funding 
patterns, such as 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) Legal entities, currencies and business lines. The bank holding 
company must establish and maintain procedures for monitoring and 
controlling liquidity risk exposures and funding needs within and 
across significant legal entities, currencies, and business lines, 
taking into account legal and regulatory restrictions on the transfer 
of liquidity between legal entities.
    (3) Intraday exposures. The bank holding company must establish and 
maintain procedures for monitoring intraday liquidity risk exposure. 
These procedures must address how the management of the bank holding 
company will:

[[Page 17321]]

    (i) Monitor and measure expected daily gross liquidity inflows and 
outflows;
    (ii) Manage and transfer collateral to obtain intraday credit;
    (iii) Identify and prioritize time-specific obligations so that the 
bank holding company can meet these obligations as expected and settle 
less critical obligations as soon as possible;
    (iv) Manage the issuance of credit to customers where necessary; 
and
    (v) Consider the amounts of collateral and liquidity needed to meet 
payment systems obligations when assessing the bank holding company's 
overall liquidity needs.


Sec.  252.35  Liquidity stress testing and buffer requirements.

    (a) Liquidity stress testing requirement--(1) General. A bank 
holding company with total consolidated assets of $50 billion or more 
must conduct stress tests to assess the potential impact of the 
liquidity stress scenarios set forth in paragraph (a)(3) on its cash 
flows, liquidity position, profitability, and solvency, taking into 
account its current liquidity condition, risks, exposures, strategies, 
and activities.
    (i) The bank holding company must take into consideration its 
balance sheet exposures, off-balance sheet exposures, size, risk 
profile, complexity, business lines, organizational structure, and 
other characteristics of the bank holding company that affect its 
liquidity risk profile in conducting its stress test.
    (ii) In conducting a liquidity stress test using the scenarios 
described in paragraphs (a)(3)(i) and (iii) of this section, the bank 
holding company must address the potential direct adverse impact of 
associated market disruptions on the bank holding company and 
incorporate the potential actions of other market participants 
experiencing liquidity stresses under the market disruptions that would 
adversely affect the bank holding company.
    (2) Frequency. The liquidity stress tests required under paragraph 
(a)(1) of this section must be performed at least monthly. The Board 
may require the bank holding company to perform stress testing more 
frequently.
    (3) Stress scenarios. (i) Each liquidity stress test conducted 
under paragraph (a)(1) of this section must include, at a minimum:
    (A) A scenario reflecting adverse market conditions;
    (B) A scenario reflecting an idiosyncratic stress event for the 
bank holding company; and
    (C) A scenario reflecting combined market and idiosyncratic 
stresses.
    (ii) The bank holding company must incorporate additional liquidity 
stress scenarios into its liquidity stress test, as appropriate, based 
on its financial condition, size, complexity, risk profile, scope of 
operations, or activities. The Board may require the bank holding 
company to vary the underlying assumptions and stress scenarios.
    (4) Planning horizon. Each stress test conducted under paragraph 
(a)(1) of this section must include an overnight planning horizon, a 
30-day planning horizon, a 90-day planning horizon, a one-year planning 
horizon, and any other planning horizons that are relevant to the bank 
holding company's liquidity risk profile. For purposes of this section, 
a ``planning horizon'' is the period over which the relevant stressed 
projections extend. The bank holding company must use the results of 
the stress test over the 30-day planning horizon to calculate the size 
of the liquidity buffer under paragraph (b) of this section.
    (5) Requirements for assets used as cash-flow sources in a stress 
test. (i) To the extent an asset is used as a cash flow source to 
offset projected funding needs during the planning horizon in a 
liquidity stress test, the fair market value of the asset must be 
discounted to reflect any credit risk and market volatility of the 
asset.
    (ii) Assets used as cash-flow sources during a planning horizon 
must be diversified by collateral, counterparty, borrowing capacity, 
and other factors associated with the liquidity risk of the assets.
    (iii) A line of credit does not qualify as a cash flow source for 
purposes of a stress test with a planning horizon of 30 days or less. A 
line of credit may qualify as a cash flow source for purposes of a 
stress test with a planning horizon that exceeds 30 days.
    (6) Tailoring. Stress testing must be tailored to, and provide 
sufficient detail to reflect, a bank holding company's capital 
structure, risk profile, complexity, activities, and size.
    (7) Governance--(i) Policies and procedures. A bank holding company 
with total consolidated assets of $50 billion or more must establish 
and maintain policies and procedures governing its liquidity stress 
testing practices, methodologies, and assumptions that provide for the 
incorporation of the results of liquidity stress tests in future stress 
testing and for the enhancement of stress testing practices over time.
    (ii) Controls and oversight. A bank holding company with total 
consolidated assets of $50 billion or more must establish and maintain 
a system of controls and oversight that is designed to ensure that its 
liquidity stress testing processes are effective in meeting the 
requirements of this section. The controls and oversight must ensure 
that each liquidity 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 bank holding company's capital structure, risk 
profile, complexity, activities, size, business lines, legal entity or 
jurisdiction, and other relevant factors. The assumptions must be 
approved by the chief risk officer and be subject to the independent 
review under Sec.  252.34(d) of this subpart.
    (iii) Management information systems. The bank holding company 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 liquidity stress testing.
    (b) Liquidity buffer requirement. (1) A bank holding company with 
total consolidated assets of $50 billion or more must maintain a 
liquidity buffer that is sufficient to meet the projected net stressed 
cash-flow need over the 30-day planning horizon of a liquidity stress 
test conducted in accordance with paragraph (a) of this section under 
each scenario set forth in paragraph (a)(3)(i) through (iii) of this 
section.
    (2) Net stressed cash-flow need. The net stressed cash-flow need 
for a bank holding company is the difference between the amount of its 
cash-flow need and the amount of its cash flow sources over the 30-day 
planning horizon.
    (3) Asset requirements. The liquidity buffer must consist of highly 
liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii) 
of this section:
    (i) Highly liquid asset. A highly liquid asset includes:
    (A) Cash;
    (B) Securities issued or guaranteed by the United States, a U.S. 
government agency, or a U.S. government-sponsored enterprise; or
    (C) Any other asset that the bank holding company demonstrates to 
the satisfaction of the Board:
    (1) Has low credit risk and low market risk;
    (2) 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

[[Page 17322]]

within one day and settled at that price within a reasonable time 
period conforming with trade custom; and
    (3) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
has been impaired.
    (ii) Unencumbered. An asset is unencumbered if it:
    (A) Is free of legal, regulatory, contractual, or other 
restrictions on the ability of such company promptly to liquidate, sell 
or transfer the asset; and
    (B) Is either:
    (1) Not pledged or used to secure or provide credit enhancement to 
any transaction; or
    (2) Pledged to a central bank or a U.S. government-sponsored 
enterprise, to the extent potential credit secured by the asset is not 
currently extended by such central bank or U.S. government-sponsored 
enterprise or any of its consolidated subsidiaries.
    (iii) Calculating the amount of a highly liquid asset. In 
calculating the amount of a highly liquid asset included in the 
liquidity buffer, the bank holding company must discount the fair 
market value of the asset to reflect any credit risk and market price 
volatility of the asset.
    (iv) Diversification. The liquidity buffer must not contain 
significant concentrations of highly liquid assets by issuer, business 
sector, region, or other factor related to the bank holding company's 
risk, except with respect to cash and securities issued or guaranteed 
by the United States, a U.S. government agency, or a U.S. government-
sponsored enterprise.

0
5. Subpart L is added to read as follows:
Subpart L--Company-Run Stress Test Requirements for Foreign Banking 
Organizations and Foreign Savings and Loan Holding Companies With Total 
Consolidated Assets Over $10 Billion and Less Than $50 Billion
Sec.
252.120 Definitions.
252.121 Applicability.
252.122 Capital stress testing requirements.

Subpart L--Company-Run Stress Test Requirements for Foreign Banking 
Organizations and Foreign Savings and Loan Holding Companies With 
Total Consolidated Assets Over $10 Billion but Less Than $50 
billion


Sec.  252.120  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Eligible asset means any asset of the U.S. branch or U.S. 
agency held in the United States that is recorded on the general ledger 
of a U.S. branch or U.S. agency of the foreign banking organization 
(reduced by the amount of any specifically allocated reserves held in 
the United States and recorded on the general ledger of the U.S. branch 
or U.S. agency in connection with such assets), subject to the 
following exclusions and, for purposes of this definition, as modified 
by the rules of valuation set forth in paragraph (a)(2) of this 
section.
    (1) The following assets do not qualify as eligible assets:
    (i) Equity securities;
    (ii) Any assets classified as loss at the preceding examination by 
a regulatory agency, outside accountant, or the bank's internal loan 
review staff;
    (iii) 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;
    (iv) Any amounts due from the home office, other offices and 
affiliates, including income accrued but uncollected on such amounts;
    (v) 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;
    (vi) Prepaid expenses and unamortized costs, furniture and fixtures 
and leasehold improvements; and
    (vii) 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) 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 80 percent, 
respectively;
    (iii) With respect to an asset classified value impaired, the 
amount representing the allocated transfer risk reserve that would be 
required for such exposure at a domestically chartered bank is valued 
at 0 and the residual exposure is valued at 80 percent; and
    (iv) Real estate located in the United States and carried on the 
accounting records as an asset are valued at net book value or 
appraised value, whichever is less.
    (b) 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.
    (c) Liabilities of all U.S. branches and agencies of a foreign 
banking organization means all liabilities of all U.S. branches and 
agencies of the foreign banking organization, including acceptances and 
any other liabilities (including contingent liabilities), but 
excluding:
    (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.
    (d) Pre-provision net revenue means revenue less expenses before 
adjusting for total loan loss provisions.
    (e) Stress test cycle has the same meaning as in subpart F of this 
part.
    (f) 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.  252.121  Applicability.

    (a) Applicability for foreign banking organizations with total 
consolidated assets of more than $10 billion but less than $50 
billion--(1) General applicability. Subject to the initial 
applicability provisions of paragraph (a)(3) of this section, a foreign 
banking organization must comply with the stress test requirements set 
forth in this section beginning on the first day of the ninth quarter 
following the date on which its total consolidated assets exceed $10 
billion.
    (2) Total consolidated assets. For purposes of this subpart, total 
consolidated assets of a foreign banking organization are equal to the 
average of the total assets for the two most recent periods as reported 
by the foreign banking organization on the FR Y-7. Total consolidated 
assets are measured on the as-of date of the most recent FR Y-7 used in 
the calculation of the average.
    (3) Initial applicability. A foreign banking organization that, as 
of June 30, 2015, has total consolidated assets of $10 billion or more 
must comply with the requirements of this subpart beginning on July 1, 
2016.
    (4) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of this subpart until the earlier of 
the date on which:

[[Page 17323]]

    (i) Its reported total consolidated assets on the FR Y-7 are below 
$10 billion for each of four consecutive calendar quarters; and
    (ii) It becomes subject to the requirements of subpart N or subpart 
O of this subpart, as applicable.
    (b) Applicability for foreign savings and loan holding companies 
with total consolidated assets of more than $10 billion--(1) General. A 
foreign savings and loan holding company must comply with the stress 
test requirements set forth in this section beginning on the first day 
of the ninth quarter following the date on which its total consolidated 
assets exceed $10 billion.
    (2) Total consolidated assets. Total consolidated assets of a 
foreign savings and loan holding company for purposes of this subpart 
are equal to the average of total assets for the four most recent 
consecutive quarters as reported by the foreign savings and loan 
holding company on its applicable regulatory report. If the foreign 
savings and loan holding company has not filed four regulatory reports, 
total consolidated assets are equal to the average of total assets as 
reported for the most recent period or consecutive periods. Total 
consolidated assets are measured on the as-of date of the most recent 
regulatory reporting form used in the calculation of the average.
    (3) Cessation of requirements. A foreign savings and loan holding 
company will remain subject to requirements of this subpart until the 
date on which the foreign savings and loan holding company's total 
consolidated assets on its applicable regulatory report are below $10 
billion for each of four consecutive calendar quarters.


Sec.  252.122  Capital stress testing requirements.

    (a) In general. (1) A foreign banking organization with total 
consolidated assets of more than $10 billion but less than $50 billion 
and a foreign savings and loan holding company with total consolidated 
assets of more than $10 billion must:
    (i) Be subject on a consolidated basis to a capital stress testing 
regime by its home-country supervisor that meets the requirements of 
paragraph (a)(2) of this section; and
    (ii) Conduct such stress tests or be subject to a supervisory 
stress test and meet any minimum standards set by its home-country 
supervisor with respect to the stress tests.
    (2) The capital stress testing regime of a foreign banking 
organization or foreign savings and loan holding company's home-country 
supervisor must include:
    (i) An annual supervisory capital stress test conducted by the 
relevant home-country supervisor or an annual evaluation and review by 
the home-country supervisor of an internal capital adequacy stress test 
conducted by the foreign banking organization; and
    (ii) Requirements for governance and controls of stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof).
    (b) Additional standards. (1) Unless the Board otherwise determines 
in writing, 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 must:
    (i) Maintain eligible assets in its U.S. branches and agencies 
that, on a daily basis, are not less than 105 percent of the average 
value over each day of the previous calendar quarter of the total 
liabilities of all branches and agencies operated by the foreign 
banking organization in the United States;
    (ii) Conduct an annual stress test of its U.S. subsidiaries to 
determine whether those subsidiaries have the capital necessary to 
absorb losses as a result of adverse economic conditions; and
    (iii) Report on an annual basis a summary of the results of the 
stress test to the Board that includes 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 aggregate losses, 
pre-provision net revenue, total loan loss provisions, net income 
before taxes and pro forma regulatory capital ratios required to be 
computed by the home-country supervisor of the foreign banking 
organization or foreign savings and loan holding company and any other 
relevant capital ratios, and an explanation of the most significant 
causes for any changes in regulatory capital ratios.
    (2) An enterprise-wide stress test that is approved by the Board 
may meet the stress test requirement of paragraph (b)(1)(ii) of this 
section.

0
6. Subpart M is added to read as follows:
Subpart M--Risk Committee Requirement for Publicly Traded Foreign 
Banking Organizations With Total Consolidated Assets Equal to or 
Greater Than $10 Billion and Less Than $50 Billion
Sec.
252.130 [Reserved].
252.131 Applicability.
252.132 Risk-committee requirements for foreign banking 
organizations with total consolidated assets of $10 billion or more 
but less than $50 billion.

Subpart M--Risk Committee Requirement for Publicly Traded Foreign 
Banking Organizations With Total Consolidated Assets of at Least 
$10 Billion but Less Than $50 Billion


Sec.  252.130  [Reserved].


Sec.  252.131  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions of paragraph (c) of this section, a foreign banking 
organization with total consolidated assets of at least $10 billion but 
less than $50 billion and any class of stock (or similar interest) that 
is publicly traded must comply with the risk-committee requirements set 
forth in this subpart beginning on the first day of the ninth quarter 
following the later of the date on which its total consolidated assets 
equal or exceed $10 billion and the date on which any class of its 
stock (or similar interest) becomes publicly traded.
    (b) Total consolidated assets. For purposes of this subpart, total 
consolidated assets of a foreign banking organization for purposes of 
this subpart are equal to the average of the total assets for the two 
most recent periods as reported by the foreign banking organization on 
the FR Y-7. Total consolidated assets are measured on the as-of date of 
the most recent FR Y-7 used in the calculation of the average.
    (c) Initial applicability. A foreign banking organization that, as 
of June 30, 2015, has total consolidated assets of $10 billion or more 
and has a class of stock (or similar interest) that is publicly traded 
must comply with the risk-committee requirements of this section 
beginning on July 1, 2016.
    (d) Cessation of requirements. A foreign banking organization will 
remain subject to the risk-committee requirements of this section until 
the earlier of the date on which: (i) its reported total consolidated 
assets on the FR Y-7 are below $10 billion for each of four consecutive 
calendar quarters; (ii) it becomes subject to the requirements of 
subpart N of this part; and (iii) it ceases to have a class of stock 
(or similar interest) that is publicly traded.


Sec.  252.132  Risk-committee requirements for foreign banking 
organizations with total consolidated assets of $10 billion or more but 
less than $50 billion.

    (a) U.S. risk committee certification. A foreign banking 
organization with a class of stock (or similar interest) that is 
publicly traded and total consolidated assets of at least $10 billion 
but less than $50 billion, must, on an annual basis, certify to the 
Board that it maintains a committee of its global

[[Page 17324]]

board of directors (or equivalent thereof), on a standalone basis or as 
part of its enterprise-wide risk committee (or equivalent thereof) 
that:
    (1) Oversees the risk management policies of the combined U.S. 
operations of the foreign banking organization; and
    (2) Includes at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex firms.
    (b) 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 FR Y-7.
    (c) 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 
policies overseen by the U.S. risk committee described in paragraph (a) 
of this section, 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.
    (d) Noncompliance with this section. If a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.

0
7. Subpart N is added to read as follows:
Subpart N--Enhanced Prudential Standards for Foreign Banking 
Organizations With Total Consolidated Assets of $50 Billion or More But 
Combined U.S. Assets of Less Than $50 Billion
Sec.
252.140 Scope.
252.141 [Reserved].
252.142 Applicability.
252.143 Risk-based and leverage capital requirements for foreign 
banking organizations with total consolidated assets of $50 billion 
or more but combined U.S. assets of less than $50 billion.
252.144 Risk-management and risk committee requirements for foreign 
banking organizations with total consolidated assets of $50 billion 
or more but combined U.S. assets of less than $50 billion.
252.145 Liquidity risk-management requirements for foreign banking 
organizations with total consolidated assets of $50 billion or more 
but combined U.S. assets of less than $50 billion.
252.146 Capital stress testing requirements for foreign banking 
organizations with total consolidated assets of $50 billion or more 
but combined U.S. assets of less than $50 billion.

Subpart N--Enhanced Prudential Standards for Foreign Banking 
Organizations With Total Consolidated Assets of $50 Billion or More 
But Combined U.S. Assets of Less Than $50 Billion


Sec.  252.140  Scope.

    This subpart applies to foreign banking organizations with total 
consolidated assets of $50 billion or more, but combined U.S. assets of 
less than $50 billion. Total consolidated assets of a foreign banking 
organization are equal to the consolidated assets of the foreign 
banking organization, and combined U.S. assets of a foreign banking 
organization are equal to the sum of the consolidated assets of each 
top-tier U.S. subsidiary of the foreign banking organization (excluding 
any section 2(h)(2) company, if applicable) and the total assets of 
each U.S. branch and U.S. agency of the foreign banking organization, 
each as defined in section Sec.  252.142(b).


Sec.  252.141  [Reserved].


Sec.  252.142  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions in paragraph (c) of this section, a foreign banking 
organization with total consolidated assets of $50 billion or more and 
combined U.S. assets of less than $50 billion must comply with the 
capital requirements, risk-management and risk committee requirements, 
liquidity risk-management requirements, and the capital stress testing 
requirements set forth in this subpart beginning on the first day of 
the ninth quarter following the date on which its total consolidated 
assets equal or exceed $50 billion.
    (b) Asset measures--(1) Total consolidated assets. Total 
consolidated assets of a foreign banking organization are equal to the 
consolidated assets of the foreign banking organization. For purposes 
of this subpart, ``total consolidated assets'' are calculated as the 
average of the foreign banking organization's total assets for the four 
most recent consecutive quarters as reported by the foreign banking 
organization on the FR Y-7Q. If the foreign banking organization has 
not filed the FR Y-7Q for the four most recent consecutive quarters, 
the Board shall use an average of the foreign banking organization's 
total consolidated assets reported on its most recent two FR Y-7Qs. 
Total consolidated assets are measured on the as-of date of the most 
recent FR Y-7Q used in the calculation of the average.
    (2) Combined U.S. assets. Combined U.S. assets of a foreign banking 
organization are equal to the sum of the consolidated assets of each 
top-tier U.S. subsidiary of the foreign banking organization (excluding 
any section 2(h)(2) company, if applicable) and the total assets of 
each U.S. branch and U.S. agency of the foreign banking organization. 
For purposes of this subpart, combined U.S. assets are calculated as 
the average of the total combined assets of U.S. operations for the 
four most recent consecutive quarters as reported by the foreign 
banking organization on the FR Y-7Q, or, if the foreign banking 
organization has not reported this information on the FR Y-7Q for each 
of the four most recent consecutive quarters, the average of the 
combined U.S. assets for the most recent quarter or consecutive 
quarters as reported on the FR Y-7Q. Combined U.S. assets are measured 
on the as-of date of the most recent FR Y-7Q used in the calculation of 
the average. 0
    (c) Initial applicability. A foreign banking organization that, as 
of June 30, 2015, has total consolidated assets of $50 billion or more 
but combined U.S. assets of less than $50 billion must comply with the 
capital requirements, risk-management requirements, liquidity 
requirements, and the capital stress test requirements set forth in 
this subpart beginning on July 1, 2016.
    (d) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements set forth in this subpart until its 
reported total assets on the FR Y-7Q are below $50 billion for each of 
four consecutive calendar quarters, or it becomes subject to the 
requirements of subpart O of this part.

[[Page 17325]]

Sec.  252.143  Risk-based and leverage capital requirements for foreign 
banking organizations with total consolidated assets of $50 billion or 
more but combined U.S. assets of less than $50 billion.

    (a) General requirements. (1) A foreign banking organization with 
total consolidated assets of $50 billion or more and combined U.S. 
assets of less than $50 billion must certify to the Board that it meets 
capital adequacy standards on a consolidated basis established by its 
home-country supervisor that are consistent with the regulatory capital 
framework published by the Basel Committee on Banking Supervision, as 
amended from time to time (Basel Capital Framework).
    (i) For purposes of this paragraph, home-country capital adequacy 
standards that are consistent with the Basel Capital Framework include 
all minimum risk-based capital ratios, any minimum leverage ratio, and 
all restrictions based on any applicable capital buffers set forth in 
``Basel III: A global regulatory framework for more resilient banks and 
banking systems'' (2010) (Basel III Accord), each as applicable and as 
implemented in accordance with the Basel III Accord, including any 
transitional provisions set forth therein.
    (ii) [Reserved]
    (2) In the event that a home-country supervisor has not established 
capital adequacy standards that are consistent with the Basel Capital 
Framework, the foreign banking organization must demonstrate to the 
satisfaction of the Board that it would meet or exceed capital adequacy 
standards on a consolidated basis that are consistent with the Basel 
Capital Framework were it subject to such standards.
    (b) Reporting. A foreign banking organization with total 
consolidated assets of $50 billion or more and combined U.S. assets of 
less than $50 billion must provide to the Board reports relating to its 
compliance with the capital adequacy measures described in paragraph 
(a) of this section concurrently with filing the FR Y-7Q.
    (c) Noncompliance with the Basel Capital Framework. If a foreign 
banking organization does not satisfy the requirements of this section, 
the Board may impose requirements, conditions, or restrictions, 
including risk-based or leverage capital requirements, relating to the 
activities or business operations of the U.S. operations of the foreign 
banking organization. The Board will coordinate with any relevant State 
or Federal regulator in the implementation of such requirements, 
conditions, or restrictions. If the Board determines to impose one or 
more requirements, conditions, or restrictions under this paragraph, 
the Board will notify the company before it applies any requirement, 
condition or restriction, and describe the basis for imposing such 
requirement, condition, or restriction. Within 14 calendar days of 
receipt of a notification under this paragraph, the company may request 
in writing that the Board reconsider the requirement, condition, or 
restriction. The Board will respond in writing to the company's request 
for reconsideration prior to applying the requirement, condition, or 
restriction.


Sec.  252.144  Risk-management and risk committee requirements for 
foreign banking organizations with total consolidated assets of $50 
billion or more but combined U.S. assets of less than $50 billion.

    (a) U.S. risk committee certification. A foreign banking 
organization with total consolidated assets of $50 billion or more and 
combined U.S. assets of less than $50 billion must, on an annual basis, 
certify to the Board that it maintains a committee of its global board 
of directors (or equivalent thereof), on a standalone basis or as part 
of its enterprise-wide risk committee (or equivalent thereof) that:
    (1) Oversees the risk management policies of the combined U.S. 
operations of the foreign banking organization; and
    (2) Includes at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex firms.
    (b) 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 FR Y-7.
    (c) 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 
policies overseen by the U.S. risk committee described in paragraph (a) 
of this section, and that 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.
    (d) Noncompliance with this section. If a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition, or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.


Sec.  252.145  Liquidity risk-management requirements for foreign 
banking organizations with total consolidated assets of $50 billion or 
more but 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 foreign banking organization or the combined U.S. operations of 
the foreign banking organization. Such liquidity stress test must be 
conducted consistently with the Basel Committee principles for 
liquidity risk management and must incorporate 30-day, 90-day, and one-
year stress-test horizons. The ``Basel Committee 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.
    (b) A foreign banking organization 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.


Sec.  252.146  Capital stress testing requirements for foreign banking 
organizations with total consolidated assets of $50 billion or more but 
combined U.S. assets of less than $50 billion.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Eligible asset means any asset of the U.S. branch or U.S. 
agency held in the United States that is recorded on the general ledger 
of a U.S. branch or U.S.

[[Page 17326]]

agency of the foreign banking organization (reduced by the amount of 
any specifically allocated reserves held in the United States and 
recorded on the general ledger of the U.S. branch or U.S. agency in 
connection with such assets), subject to the following exclusions and, 
for purposes of this definition, as modified by the rules of valuation 
set forth in paragraph (a)(1)(ii) of this section.
    (i) The following assets do not qualify as eligible assets:
    (A) Equity securities;
    (B) Any assets classified as loss at the preceding examination by a 
regulatory agency, outside accountant, or the bank's internal loan 
review staff;
    (C) 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;
    (D) Any amounts due from the home office, other offices and 
affiliates, including income accrued but uncollected on such amounts;
    (E) 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;
    (F) Prepaid expenses and unamortized costs, furniture and fixtures 
and leasehold improvements; and
    (G) Any other asset that the Board determines should not qualify as 
an eligible asset.
    (ii) The following rules of valuation apply:
    (A) A marketable debt security is valued at its principal amount or 
market value, whichever is lower;
    (B) 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 80 percent, 
respectively;
    (C) With respect to an asset classified value impaired, the amount 
representing the allocated transfer risk reserve that would be required 
for such exposure at a domestically chartered bank is valued at 0 and 
the residual exposure is valued at 80 percent; and
    (D) Real estate located in the United States and carried on the 
accounting records as an asset are valued at net book value or 
appraised value, whichever is less.
    (2) Liabilities of all U.S. branches and agencies of a foreign 
banking organization means all liabilities of all U.S. branches and 
agencies of the foreign banking organization, including acceptances and 
any other liabilities (including contingent liabilities), but 
excluding:
    (i) 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
    (ii) Reserves for possible loan losses and other contingencies.
    (3) Pre-provision net revenue means revenue less expenses before 
adjusting for total loan loss provisions.
    (4) Stress test cycle has the same meaning as in subpart F of this 
part.
    (5) 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.
    (b) In general. (1) A foreign banking organization with total 
consolidated assets of more than $50 billion and combined U.S. assets 
of less than $50 billion must:
    (i) Be subject on a consolidated basis to a capital stress testing 
regime by its home-country supervisor that meets the requirements of 
paragraph (b)(2) of this section; and
    (ii) Conduct such stress tests or be subject to a supervisory 
stress test and meet any minimum standards set by its home-country 
supervisor with respect to the stress tests.
    (2) The capital stress testing regime of a foreign banking 
organization's home-country supervisor must include:
    (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 stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the foreign banking organization;
    (c) Additional standards. (1) Unless the Board otherwise determines 
in writing, a foreign banking organization that does not meet each of 
the requirements in paragraphs (b)(1) and (2) of this section must:
    (i) Maintain eligible assets in its U.S. branches and agencies 
that, on a daily basis, are not less than 105 percent of the average 
value over each day of the previous calendar quarter of the total 
liabilities of all branches and agencies operated by the foreign 
banking organization in the United States;
    (ii) Conduct an annual stress test of its U.S. subsidiaries to 
determine whether those subsidiaries have the capital necessary to 
absorb losses as a result of adverse economic conditions; and
    (iii) Report on an annual basis a summary of the results of the 
stress test to the Board that includes 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 aggregate losses, 
pre-provision net revenue, total loan loss provisions, net income 
before taxes and 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 an explanation 
of the most significant causes for any changes in regulatory capital 
ratios.
    (2) An enterprise-wide stress test that is approved by the Board 
may meet the stress test requirement of paragraph (c)(1)(ii) of this 
section.

0
8. Subpart O is added to read as follows:
Subpart O--Enhanced Prudential Standards for Foreign Banking 
Organizations With Total Consolidated Assets of $50 Billion or More and 
Combined U.S. Assets of $50 Billion or More
Sec.
252.150 Scope.
252.151 [Reserved].
252.152 Applicability.
252.153 U.S. intermediate holding company requirement for foreign 
banking organizations with U.S. non-branch assets of $50 billion or 
more.
252.154 Risk-based and leverage capital requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or 
more.
252.155 Risk-management and risk committee requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or 
more.
252.156 Liquidity risk-management requirements for foreign banking 
organizations with combined U.S. assets of $50 billion or more.
252.157 Liquidity stress testing and buffer requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or 
more.
252.158 Capital stress testing requirements for foreign banking 
organizations with combined U.S. assets of $50 billion or more.

[[Page 17327]]

Subpart O--Enhanced Prudential Standards for Foreign Banking 
Organizations With Total Consolidated Assets of $50 Billion or More 
and Combined U.S. Assets of $50 Billion or More


Sec.  252.150  Scope.

    (a) This subpart applies to foreign banking organizations with 
total consolidated assets of $50 billion or more and combined U.S. 
assets of $50 billion or more. Foreign banking organizations with 
combined U.S. assets of $50 billion or more and U.S. non-branch assets 
of $50 billion or more are also subject to the U.S. intermediate 
holding company requirement contained in Sec.  252.153.
    (b) Total consolidated assets of a foreign banking organization are 
equal to the consolidated assets of the foreign banking organization. 
Combined U.S. assets of a foreign banking organization are equal to the 
sum of the consolidated assets of each top-tier U.S. subsidiary of the 
foreign banking organization (excluding any section 2(h)(2) company, if 
applicable) and the total assets of each U.S. branch and U.S. agency of 
the foreign banking organization. U.S. non-branch assets are equal to 
the sum of the consolidated assets of each top-tier U.S. subsidiary of 
the foreign banking organization (excluding any section 2(h)(2) company 
and DPC branch subsidiary, if applicable).


Sec.  252.151  [Reserved].


Sec.  252.152  Applicability.

    (a) General applicability. Subject to the initial applicability 
provisions in paragraph (c) of this section, a foreign banking 
organization must:
    (1) Comply with the requirements of this subpart (other than the 
U.S. intermediate holding company requirement set forth in Sec.  
252.153) beginning on the first day of the ninth quarter following the 
date on which its combined U.S. assets equal or exceed $50 billion; and
    (2) Comply with the U.S. intermediate holding company requirement 
set forth in Sec.  252.153 beginning on the first day of the ninth 
quarter following the date on which its U.S. non-branch assets equal or 
exceed $50 billion.
    (b) Asset measures--(1) Combined U.S. assets. Combined U.S. assets 
of a foreign banking organization are equal to the sum of the 
consolidated assets of each top-tier U.S. subsidiary of the foreign 
banking organization (excluding any section 2(h)(2) company, if 
applicable) and the total assets of each U.S. branch and U.S. agency of 
the foreign banking organization. For purposes of this subpart, 
``combined U.S. assets'' are calculated as the average of the total 
combined assets of U.S. operations for the four most recent consecutive 
quarters as reported by the foreign banking organization on the FR Y-
7Q, or, if the foreign banking organization has not reported this 
information on the FR Y-7Q for each of the four most recent consecutive 
quarters, the average of the combined U.S. assets for the most recent 
quarter or consecutive quarters as reported on the FR Y-7Q. Combined 
U.S. assets are measured on the as-of date of the most recent FR Y-7Q 
used in the calculation of the average.
    (2) U.S. non-branch assets. U.S. non-branch assets are equal to the 
sum of the consolidated assets of each top-tier U.S. subsidiary of the 
foreign banking organization (excluding any section 2(h)(2) company and 
DPC branch subsidiary, if applicable).
    (i) For purposes of this subpart, U.S. non-branch assets of a 
foreign banking organization are calculated as the average of the sum 
of the total consolidated assets of the top-tier U.S. subsidiaries of 
the foreign banking organization (excluding any section 2(h)(2) company 
and DPC branch subsidiary) for the four most recent consecutive 
quarters, as reported to the Board on the FR Y-7Q, or, if the foreign 
banking organization has not reported this information on the FR Y-7Q 
for each of the four most recent consecutive quarters, the average for 
the most recent quarter or consecutive quarters as reported on the FR 
Y-7Q.
    (ii) In calculating U.S. non-branch assets, a foreign banking 
organization must reduce its U.S. non-branch assets calculated under 
this paragraph by the amount corresponding to balances and transactions 
between a top-tier U.S. subsidiary and any other top-tier U.S. 
subsidiary (excluding any 2(h)(2) company or DPC branch subsidiary) to 
the extent such items are not already eliminated in consolidation.
    (iii) U.S. non-branch assets are measured on the as-of date of the 
most recent FR Y-7Q used in the calculation of the average.
    (c) Initial applicability. (1) A foreign banking organization that, 
as of June 30, 2015, has combined U.S. assets of $50 billion or more 
must comply with the requirements of this subpart, as applicable, 
beginning on July 1, 2016.
    (2) A foreign banking organization that, as of June 30, 2015, has 
U.S. non-branch assets of $50 billion or more must comply with the 
requirements of this subpart beginning on July 1, 2016. In addition, 
the foreign banking organization must:
    (i) By July 1, 2016, establish a U.S. intermediate holding company 
and transfer its entire ownership interest in any bank holding company 
subsidiary (if not designated as its U.S. intermediate holding 
company), any insured depository institution subsidiary, and U.S. 
subsidiaries holding at least 90 percent of its U.S. non-branch assets 
not owned by such subsidiary bank holding company or insured depository 
institution subsidiary, if any, as such assets are measured as of June 
30, 2015, to the U.S. intermediate holding company; and
    (ii) By July 1, 2017, hold its ownership interest in all U.S. 
subsidiaries (other than section 2(h)(2) companies and DPC branch 
subsidiaries) through its U.S. intermediate holding company.
    (d) Cessation of requirements--(1) Enhanced prudential standards 
applicable to the foreign banking organization. Subject to paragraph 
(d)(2) of this section, a foreign banking organization will remain 
subject to the applicable requirements of this subpart until its 
reported combined U.S. assets on the FR Y-7Q are below $50 billion for 
each of four consecutive calendar quarters.
    (2) Intermediate holding company requirement. A foreign banking 
organization will remain subject to the U.S. intermediate holding 
company requirement set forth in Sec.  252.153 until the sum of the 
total consolidated assets of the top-tier U.S. subsidiaries of the 
foreign banking organization (excluding any section 2(h)(2) company and 
DPC branch subsidiary) is below $50 billion for each of four 
consecutive calendar quarters.


Sec.  252.153  U.S. intermediate holding company requirement for 
foreign banking organizations with U.S. non-branch assets of $50 
billion or more.

    (a) Requirement to form a U.S. intermediate holding company. (1) A 
foreign banking organization with U.S. non-branch assets of $50 billion 
or more must establish a U.S. intermediate holding company, or 
designate an existing subsidiary that meets the requirements of 
paragraph (a)(2) of this section, as its U.S. intermediate holding 
company.
    (2) The U.S. intermediate holding company must be:
    (i) Organized under the laws of the United States, any one of the 
fifty states of the United States, or the District of Columbia; and
    (ii) Be governed by a board of directors or managers that is 
elected or appointed by the owners and that operates in an equivalent 
manner, and

[[Page 17328]]

has equivalent rights, powers, privileges, duties, and 
responsibilities, to a board of directors of a company chartered as a 
corporation under the laws of the United States, any one of the fifty 
states of the United States, or the District of Columbia.
    (3) Notice. Within 30 days of establishing or designating a U.S. 
intermediate holding company under this section, a foreign banking 
organization must provide to the Board:
    (i) A description of the U.S. intermediate holding company, 
including its name, location, corporate form, and organizational 
structure;
    (ii) A certification that the U.S. intermediate holding company 
meets the requirements of this subpart; and
    (iii) Any other information that the Board determines is 
appropriate.
    (b) Holdings and regulation of the U.S. intermediate holding 
company--(1) General. Subject to paragraph (c) of this section, a 
foreign banking organization that is required to form a U.S. 
intermediate holding company under paragraph (a) of this section must 
hold its entire ownership interest in any U.S. subsidiary (excluding 
each section 2(h)(2) company or DPC branch subsidiary, if any) through 
its U.S. intermediate holding company.
    (2) Reporting. Each U.S. intermediate holding company shall submit 
information in the manner and form prescribed by the Board.
    (3) Examinations and inspections. The Board may examine or inspect 
any U.S. intermediate holding company and each of its subsidiaries and 
prepare a report of their operations and activities.
    (c) Alternative organizational structure--(1) General. Upon a 
written request by a foreign banking organization, the Board may permit 
the foreign banking organization: to establish or designate multiple 
U.S. intermediate holding companies; use an alternative organizational 
structure to hold its combined U.S. operations; or not transfer its 
ownership interests in certain subsidiaries to its U.S. intermediate 
holding company.
    (2) Factors. In making a determination under paragraph (c)(1) of 
this section, the Board may consider whether applicable law would 
prohibit the foreign banking organization from owning or controlling 
one or more of its U.S. subsidiaries through a single U.S. intermediate 
holding company, or whether circumstances otherwise warrant an 
exception based on the foreign banking organization's activities, scope 
of operations, structure, or similar considerations.
    (3) Request. A request under this section to establish or designate 
multiple U.S. intermediate holding companies must be submitted to the 
Board 180 days before the foreign banking organization must form a U.S. 
intermediate holding company. A request not to transfer any ownership 
interest in a subsidiary must be submitted to the Board either 180 days 
before the foreign banking organization acquires the ownership interest 
in such U.S. subsidiary, or in a shorter period of time if permitted by 
the Board. The request must include a description of why the request 
should be granted and any other information the Board may require.
    (4) Conditions. (i) The Board may grant relief under this section 
upon such conditions as the Board deems appropriate, including, but not 
limited to, requiring the U.S. operations of the relevant foreign 
banking organization to comply with additional enhanced prudential 
standards, or requiring such foreign banking organization to enter into 
supervisory agreements governing such alternative organizational 
structure.
    (ii) If the Board permits a foreign banking organization to form 
two or more U.S. intermediate holding companies under this section and 
one or more of those U.S. intermediate holding companies does not meet 
an asset threshold governing applicability of any section of this 
subpart, such U.S. intermediate holding company shall be required to 
comply with those subparts as though it met or exceeded the applicable 
thresholds.
    (iii) The Board may modify the application of any section of this 
subpart to a foreign banking organization that is required to form a 
U.S. intermediate holding company or to such U.S. intermediate holding 
company if appropriate to accommodate the organizational structure of 
the foreign banking organization or characteristics specific to such 
foreign banking organization and such modification is appropriate and 
consistent with the capital structure, size, complexity, risk profile, 
scope of operations, or financial condition of each U.S. intermediate 
holding company, safety and soundness, and the financial stability 
mandate of section 165 of the Dodd-Frank Act.
    (d) Implementation plan--(1) General. A foreign banking 
organization must, by January 1, 2015, submit an implementation plan to 
the Board, if the sum of the total consolidated assets of the U.S. 
subsidiaries of the foreign banking organization, in aggregate, exceed 
$50 billion as of June 30, 2014 (excluding any section 2(h)(2) company 
and DPC branch subsidiary and reduced by amounts corresponding to 
balances and transactions between a top-tier U.S. subsidiary and any 
other top-tier U.S. subsidiary (excluding any 2(h)(2) company or DPC 
branch subsidiary) to the extent such items are not already eliminated 
in consolidation). The Board may accelerate or extend the date by which 
the implementation plan must be filed.
    (2) Mandatory elements of implementation plan. An implementation 
plan must contain:
    (i) A list of all U.S. subsidiaries controlled by the foreign 
banking organization setting forth the ownership interest in each 
subsidiary and an organizational chart showing the ownership hierarchy;
    (ii) For each U.S. subsidiary that is a section 2(h)(2) company or 
a DPC branch subsidiary, the name, asset size, and a description of why 
the U.S. subsidiary qualifies as a section 2(h)(2) or a DPC branch 
subsidiary;
    (iii) For each U.S. subsidiary for which the foreign banking 
organization expects to request an exemption from the requirement to 
transfer all or a portion of its ownership interest in the subsidiary 
to the U.S. intermediate holding company, the name, asset size, and a 
description of the reasons why the foreign banking organization intends 
to request that the Board grant it an exemption from the U.S. 
intermediate holding company requirement;
    (iv) A projected timeline for the transfer by the foreign banking 
organization of its ownership interest in U.S. subsidiaries to the U.S. 
intermediate holding company, and quarterly pro forma financial 
statements for the U.S. intermediate holding company, including pro 
forma regulatory capital ratios, for the period from December 31, 2015 
to January 1, 2018;
    (v) A projected timeline for, and description of, all planned 
capital actions or strategies for capital accretion that will 
facilitate the U.S. intermediate holding company's compliance with the 
risk-based and leverage capital requirements set forth in paragraph 
(e)(2) of this section;
    (vi) A description of the risk-management practices of the combined 
U.S. operations of the foreign banking organization and a description 
of how the foreign banking organization and U.S. intermediate holding 
company will come into compliance with Sec.  252.155; and
    (vii) A description of the current liquidity stress testing 
practices of the U.S. operations of the foreign banking organization 
and a description of how the foreign banking organization and

[[Page 17329]]

U.S. intermediate holding company will come into compliance with 
Sec. Sec.  252.156 and 252.157.
    (3) If a foreign banking organization plans to reduce its U.S. non-
branch assets below $50 billion for four consecutive quarters prior to 
July 1, 2016, the foreign banking organization may submit a plan that 
describes how it intends to reduce its U.S. non-branch assets below $50 
billion and any other information the Board determines is appropriate, 
instead of the information described in paragraph (d)(2) of this 
section.
    (4) The Board may require a foreign banking organization that meets 
or exceeds the threshold for application of this section after June 30, 
2014 to submit an implementation plan containing the information 
described in paragraph (d)(2) of this section if the Board determines 
that an implementation plan is appropriate.
    (e) Enhanced prudential standards for U.S. intermediate holding 
companies--(1) Applicability--(i) Ongoing application. Subject to the 
initial applicability provisions in paragraph (e)(1)(ii) of this 
section, a U.S. intermediate holding company must comply with the 
capital, risk management, and liquidity requirements set forth in 
paragraphs (e)(2) through (4) of this section beginning on the date it 
is required to be established, and must comply with the stress test 
requirements set forth in paragraph (e)(5) beginning with the stress 
test cycle the calendar year following that in which it becomes subject 
to regulatory capital requirements.
    (ii) Initial applicability--(A) General. A U.S. intermediate 
holding company required to be established by July 1, 2016 must comply 
with the risk-based capital and capital plan requirements, risk 
management, and liquidity requirements set forth in paragraphs (e)(2) 
through (4) of this section beginning on July 1, 2016.
    (B) Transition provisions for leverage. (1) A U.S. intermediate 
holding company required to be established by July 1, 2016 must comply 
with the leverage capital requirements set forth in paragraph (e)(2)(i) 
of this section beginning on January 1, 2018, provided that each 
subsidiary bank holding company and insured depository institution 
controlled by the foreign banking organization immediately prior to the 
establishment or designation of the U.S. intermediate holding company, 
and each bank holding company and insured depository institution 
acquired by the foreign banking organization after establishment of the 
intermediate holding company, is subject to leverage capital 
requirements under 12 CFR part 217 until December 31, 2017.
    (2) The Board may accelerate the application of the leverage ratio 
to a U.S. intermediate holding company if it determines that the 
foreign banking organization has taken actions to evade the application 
of this subpart.
    (C) Transition provisions for stress testing. (1) A U.S. 
intermediate holding company required to be established by July 1, 2016 
must comply with the stress test requirements set forth in paragraph 
(e)(5) of this section beginning on October 1, 2017, provided that each 
subsidiary bank holding company and insured depository institution 
controlled by the foreign banking organization immediately prior to the 
establishment or designation of the U.S. intermediate holding company, 
and each bank holding company and insured depository institution 
acquired by the foreign banking organization after establishment of the 
intermediate holding company, must comply with the stress test 
requirements in subparts B, E, or F of this subpart, as applicable, 
until September 30, 2017.
    (2) The Board may accelerate the application of the stress testing 
requirements to a U.S. intermediate holding company if it determines 
that the foreign banking organization has taken actions to evade the 
application of this subpart.
    (2) Capital requirements for a U.S. intermediate holding company--
(i) Risk-based capital and leverage requirements. (A) A U.S. 
intermediate holding company must calculate and meet all applicable 
capital adequacy standards set forth in 12 CFR part 217 and any 
successor regulation, other than subpart E of 12 CFR part 217 and any 
successor regulation, and comply with all restrictions associated with 
applicable capital buffers, in the same manner as a bank holding 
company.
    (B) A U.S. intermediate holding company may choose to comply with 
subpart E of 12 CFR part 217.
    (C) Notwithstanding 12 CFR 217.100(b), if a bank holding company is 
a subsidiary of a foreign banking organization that is subject to this 
section and the bank holding company is subject to subpart E of 12 CFR 
part 217, the bank holding company, with the Board's prior written 
approval, may elect not to comply with subpart E of 12 CFR 217.
    (ii) Capital planning. A U.S. intermediate holding company must 
comply with section 225.8 of Regulation Y and any successor regulation 
in the same manner as a bank holding company.
    (3) Risk management and risk committee requirements--(i) General. A 
U.S. intermediate holding company must establish and maintain a risk 
committee that approves and periodically reviews the risk management 
policies and oversees the risk-management framework of the U.S. 
intermediate holding company. The risk committee must be a committee of 
the board of directors of the U.S. intermediate holding company (or 
equivalent thereof). The risk committee may also serve as the U.S. risk 
committee for the combined U.S. operations required pursuant to Sec.  
252.155(a).
    (ii) Risk-management framework. The U.S. intermediate holding 
company's risk-management framework must be commensurate with the 
structure, risk profile, complexity, activities, and size of the U.S. 
intermediate holding company and consistent with the risk management 
policies for the combined U.S. operations of the foreign banking 
organization. The framework must include:
    (A) Policies and procedures establishing risk-management 
governance, risk-management procedures, and risk-control infrastructure 
for the U.S. intermediate holding company; and
    (B) Processes and systems for implementing and monitoring 
compliance with such policies and procedures, including:
    (1) Processes and systems for identifying and reporting risks and 
risk-management deficiencies at the U.S. intermediate holding company, 
including regarding emerging risks and ensuring effective and timely 
implementation of actions to address emerging risks and risk-management 
deficiencies;
    (2) Processes and systems for establishing managerial and employee 
responsibility for risk management of the U.S. intermediate holding 
company;
    (3) Processes and systems for ensuring the independence of the 
risk-management function of the U.S. intermediate holding company; and
    (4) Processes and systems to integrate risk management and 
associated controls with management goals and the compensation 
structure of the U.S. intermediate holding company.
    (iii) Corporate governance requirements. The risk committee of the 
U.S. intermediate holding company must meet at least quarterly and 
otherwise as needed, and must fully document and maintain records of 
its proceedings, including risk-management decisions.

[[Page 17330]]

    (iv) Minimum member requirements. The risk committee must:
    (A) Include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex financial 
firms; and
    (B) 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 foreign banking organization or its affiliates during the 
previous three years; and
    (2) Is not a member of the immediate family, as defined in section 
225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(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 foreign banking organization or its 
affiliates.
    (v) The U.S. intermediate holding company must take appropriate 
measures to ensure that it implements the risk management policies for 
the U.S. intermediate holding company and it provides sufficient 
information to the U.S. risk committee to enable the U.S. risk 
committee to carry out the responsibilities of this subpart.
    (4) Liquidity requirements. A U.S. intermediate holding company 
must comply with the liquidity risk-management requirements in Sec.  
252.156 and conduct liquidity stress tests and hold a liquidity buffer 
pursuant to Sec.  252.157.
    (5) Stress test requirements. A U.S. intermediate holding company 
must comply with the requirements of subparts E and F of this part and 
any successor regulation in the same manner as a bank holding company.


Sec.  252.154  Risk-based and leverage capital requirements for foreign 
banking organizations with combined U.S. assets of $50 billion or more.

    (a) General requirements. (1) A foreign banking organization with 
combined U.S. assets of $50 billion or more must certify to the Board 
that it meets capital adequacy standards on a consolidated basis 
established by its home-country supervisor that are consistent with the 
regulatory capital framework published by the Basel Committee on 
Banking Supervision, as amended from time to time (Basel Capital 
Framework).
    (i) For purposes of this paragraph, home-country capital adequacy 
standards that are consistent with the Basel Capital Framework include 
all minimum risk-based capital ratios, any minimum leverage ratio, and 
all restrictions based on any applicable capital buffers set forth in 
``Basel III: A global regulatory framework for more resilient banks and 
banking systems'' (2010) (Basel III Accord), each as applicable and as 
implemented in accordance with the Basel III Accord, including any 
transitional provisions set forth therein.
    (ii) [Reserved]
    (2) In the event that a home-country supervisor has not established 
capital adequacy standards that are consistent with the Basel Capital 
Framework, the foreign banking organization must demonstrate to the 
satisfaction of the Board that it would meet or exceed capital adequacy 
standards at the consolidated level that are consistent with the Basel 
Capital Framework were it subject to such standards.
    (b) Reporting. A foreign banking organization with combined U.S. 
assets of $50 billion or more must provide to the Board reports 
relating to its compliance with the capital adequacy measures described 
in paragraph (a) of this section concurrently with filing the FR Y-7Q.
    (c) Noncompliance with the Basel Capital Framework. If a foreign 
banking organization does not satisfy the requirements of this section, 
the Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions. If the Board determines to 
impose one or more requirements, conditions, or restrictions under this 
paragraph, the Board will notify the company before it applies any 
requirement, condition or restriction, and describe the basis for 
imposing such requirement, condition, or restriction. Within 14 
calendar days of receipt of a notification under this paragraph, the 
company may request in writing that the Board reconsider the 
requirement, condition, or restriction. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the requirement, condition, or restriction.


Sec.  252.155  Risk-management and risk-committee requirements for 
foreign banking organizations with combined U.S. assets of $50 billion.

    (a) U.S. risk committee--(1) General. Each foreign banking 
organization with combined U.S. assets of $50 billion or more must 
maintain a U.S. risk committee that approves and periodically reviews 
the risk management policies of the combined U.S. operations of the 
foreign banking organization and oversees the risk-management framework 
of such combined U.S. operations. The U.S. risk committee's 
responsibilities include the liquidity risk-management responsibilities 
set forth in Sec.  252.156(a).
    (2) Risk-management framework. The foreign banking organization's 
risk-management framework for its combined U.S. operations must be 
commensurate with the structure, risk profile, complexity, activities, 
and size of its combined U.S. operations and consistent with its 
enterprise-wide risk management policies. The framework must include:
    (i) Policies and procedures establishing risk-management 
governance, risk-management procedures, and risk-control infrastructure 
for the combined U.S. operations of the foreign banking organization; 
and
    (ii) Processes and systems for implementing and monitoring 
compliance with such policies and procedures, including:
    (A) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including regarding emerging risks, on a 
combined U.S. operations basis and ensuring effective and timely 
implementation of actions to address emerging risks and risk-management 
deficiencies;
    (B) Processes and systems for establishing managerial and employee 
responsibility for risk management of the combined U.S. operations;
    (C) Processes and systems for ensuring the independence of the 
risk-management function of the combined U.S. operations; and
    (D) Processes and systems to integrate risk management and 
associated controls with management goals and the compensation 
structure of the combined U.S. operations.
    (3) Placement of the U.S. risk committee. (i) A foreign banking 
organization that conducts its operations in the United States solely 
through a U.S. intermediate holding company must maintain its U.S. risk 
committee as a committee of the board of directors of its U.S. 
intermediate holding company (or equivalent thereof).
    (ii) A foreign banking organization that conducts its operations 
through U.S. branches or U.S. agencies (in addition to through its U.S. 
intermediate holding company, if any) may maintain its U.S. risk 
committee either:
    (A) As a committee of the global board of directors (or equivalent 
thereof), on a standalone basis or as a joint committee with its 
enterprise-wide risk committee (or equivalent thereof); or

[[Page 17331]]

    (B) As a committee of the board of directors of its U.S. 
intermediate holding company (or equivalent thereof), on a standalone 
basis or as a joint committee with the risk committee of its U.S. 
intermediate holding company required pursuant to Sec.  252.153(e)(3).
    (4) Corporate governance requirements. The U.S. risk committee must 
meet at least quarterly and otherwise as needed, and must fully 
document and maintain records of its proceedings, including risk-
management decisions.
    (5) Minimum member requirements. The U.S. risk committee must:
    (i) Include at least one member having experience in identifying, 
assessing, and managing risk exposures of large, complex financial 
firms; and
    (ii) Have at least one member who:
    (A) Is not an officer or employee of the foreign banking 
organization or its affiliates and has not been an officer or employee 
of the foreign banking organization or its affiliates during the 
previous three years; and
    (B) Is not a member of the immediate family, as defined in Sec.  
225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a 
person who is, or has been within the last three years, an executive 
officer, as defined in Sec.  215.2(e)(1) of the Board's Regulation O 
(12 CFR 215.2(e)(1)) of the foreign banking organization or its 
affiliates.
    (b) U.S. chief risk officer--(1) General. A foreign banking 
organization with combined U.S. assets of $50 billion or more or its 
U.S. intermediate holding company, if any, must appoint a U.S. chief 
risk officer with experience in identifying, assessing, and managing 
risk exposures of large, complex financial firms.
    (2) Responsibilities. (i) The U.S. chief risk officer is 
responsible for overseeing:
    (A) The measurement, aggregation, and monitoring of risks 
undertaken by the combined U.S. operations;
    (B) The implementation of and ongoing compliance with the policies 
and procedures for the foreign banking organization's combined U.S. 
operations set forth in paragraph (a)(2)(i) of this section and the 
development and implementation of processes and systems set forth in 
paragraph (a)(2)(ii) of this section; and
    (C) The management of risks and risk controls within the parameters 
of the risk-control framework for the combined U.S. operations, and the 
monitoring and testing of such risk controls.
    (ii) The U.S. chief risk officer is responsible for reporting risks 
and risk-management deficiencies of the combined U.S. operations, and 
resolving such risk-management deficiencies in a timely manner.
    (3) Corporate governance and reporting. The U.S. chief risk officer 
must:
    (i) Receive compensation and other incentives consistent with 
providing an objective assessment of the risks taken by the combined 
U.S. operations of the foreign banking organization;
    (ii) Be employed by and located in the U.S. branch, U.S. agency, 
U.S. intermediate holding company, if any, or another U.S. subsidiary;
    (iii) Report directly to the U.S. risk committee and 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, 
unless the Board approves an alternative reporting structure based on 
circumstances specific to the foreign banking organization;
    (iv) Regularly provide 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 foreign banking 
organization'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; and
    (v) Meet regularly and as needed with the Board to assess 
compliance with the requirements of this section.
    (4) Liquidity risk-management requirements. The U.S. chief risk 
officer must undertake the liquidity risk-management responsibilities 
set forth in Sec.  252.156(b).
    (c) 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 
policies overseen by the U.S. risk committee described in paragraph (a) 
of this section, 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.
    (d) Noncompliance with this section. If a foreign banking 
organization does not satisfy the requirements of this section, the 
Board may impose requirements, 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 State or Federal regulator in the implementation of such 
requirements, conditions, or restrictions.


Sec.  252.156  Liquidity risk-management requirements for foreign 
banking organizations with combined U.S. assets of $50 billion.

    (a) Responsibilities of the U.S. risk committee. (1) The U.S. risk 
committee established by a foreign banking organization pursuant to 
Sec.  252.155(a) (or a designated subcommittee of such committee 
composed of members of the board of directors (or equivalent thereof) 
of the U.S. intermediate holding company or the foreign banking 
organization, as appropriate) must:
    (i) Approve at least annually the acceptable level of liquidity 
risk that the foreign banking organization may assume in connection 
with the operating strategies for its combined U.S. operations 
(liquidity risk tolerance), with concurrence from the foreign banking 
organization's board of directors or its enterprise-wide risk 
committee, taking into account the capital structure, risk profile, 
complexity, activities, size of the foreign banking organization and 
its combined U.S. operations and the enterprise-wide liquidity risk 
tolerance of the foreign banking organization; and
    (ii) Receive and review information provided by the senior 
management of the combined U.S. operations at least semi-annually to 
determine whether the combined U.S. operations are operating in 
accordance with the established liquidity risk tolerance and to ensure 
that the liquidity risk tolerance for the combined U.S. operations is 
consistent with the enterprise-wide liquidity risk tolerance 
established for the foreign banking organization.
    (iii) Approve the contingency funding plan for the combined U.S. 
operations described in paragraph (e) of this section at least annually 
and whenever the foreign banking organization revises its contingency 
funding plan, and approve any material revisions to the contingency 
funding plan for the combined U.S. operations prior to the 
implementation of such revisions.
    (b) Responsibilities of the U.S. chief risk officer--(1) Liquidity 
risk. 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 established by senior management 
of the U.S. operations for managing the risk that the financial 
condition or safety and soundness of the foreign banking organization's 
combined U.S. operations

[[Page 17332]]

would be adversely affected by its inability or the market's perception 
of its inability to meet its cash and collateral obligations (liquidity 
risk).
    (2) Liquidity risk tolerance. The U.S. chief risk officer of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more must review information provided by the senior management of 
the U.S. operations to determine whether the combined U.S. operations 
are operating in accordance with the established liquidity risk 
tolerance. The U.S. chief risk officer must regularly, and, at least 
semi-annually, report to the foreign banking organization's U.S. risk 
committee and enterprise-wide risk committee, or the equivalent thereof 
(if any) (or a designated subcommittee of such committee composed of 
members of the relevant board of directors (or equivalent thereof)) on 
the liquidity risk profile of the foreign banking organization's 
combined U.S. operations and whether it is operating in accordance with 
the established liquidity risk tolerance for the U.S. operations, and 
must establish procedures governing the content of such reports.
    (3) Business lines or products. (i) The U.S. chief risk officer of 
a foreign banking organization with combined U.S. assets of $50 billion 
or more must approve new products and business lines and evaluate the 
liquidity costs, benefits, and risks of each new business line and each 
new product offered, managed or sold through the foreign banking 
organization's combined U.S. operations that could have a significant 
effect on the liquidity risk profile of the U.S. operations of the 
foreign banking organization. The approval is required before the 
foreign banking organization implements the business line or offers the 
product through its combined U.S. operations. In determining whether to 
approve the new business line or product, the U.S. chief risk officer 
must consider whether the liquidity risk of the new business line or 
product (under both current and stressed conditions) is within the 
foreign banking organization's established liquidity risk tolerance for 
its combined U.S. operations.
    (ii) The U.S. risk committee must review at least annually 
significant business lines and products offered, managed or sold 
through the combined U.S. operations to determine whether each business 
line or product creates or has created any unanticipated liquidity 
risk, and to determine whether the liquidity risk of each strategy or 
product is within the foreign banking organization's established 
liquidity risk tolerance for its combined U.S. operations.
    (4) Cash-flow projections. The U.S. chief risk officer of a foreign 
banking organization with combined U.S. assets of $50 billion or more 
must review the cash-flow projections produced under paragraph (d) of 
this section at least quarterly (or more often, if changes in market 
conditions or the liquidity position, risk profile, or financial 
condition of the foreign banking organization or the U.S. operations 
warrant) to ensure that the liquidity risk of the foreign banking 
organization's combined U.S. operations is within the established 
liquidity risk tolerance.
    (5) Liquidity risk limits. The U.S. chief risk officer of a foreign 
banking organization with combined U.S. assets of $50 billion or more 
must establish liquidity risk limits as set forth in paragraph (f) of 
this section and review the foreign banking organization's compliance 
with those limits at least quarterly (or more often, if changes in 
market conditions or the liquidity position, risk profile, or financial 
condition of the U.S. operations of the foreign banking organization 
warrant).
    (6) Liquidity stress testing. The U.S. chief risk officer of a 
foreign banking organization with combined U.S. assets of $50 billion 
or more must:
    (i) Approve the liquidity stress testing practices, methodologies, 
and assumptions required in Sec.  252.157(a) at least quarterly, and 
whenever the foreign banking organization materially revises its 
liquidity stress testing practices, methodologies or assumptions;
    (ii) Review the liquidity stress testing results produced under 
Sec.  252.157(a) of this subpart at least quarterly; and
    (iii) Approve the size and composition of the liquidity buffer 
established under Sec.  252.157(c) of this subpart at least quarterly.
    (c) Independent review function. (1) A foreign banking organization 
with combined U.S. assets of $50 billion or more must establish and 
maintain a review function that is 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.
    (2) The independent review function must:
    (i) Regularly, but 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, including its liquidity stress test processes and 
assumptions;
    (ii) Assess whether the foreign banking organization's liquidity 
risk management function of its combined U.S. operations complies with 
applicable laws, regulations, supervisory guidance, and sound business 
practices; and
    (iii) Report material liquidity risk management issues to the U.S. 
risk committee and the enterprise-wide risk committee in writing for 
corrective action, to the extent permitted by applicable law.
    (d) Cash-flow projections. (1) 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 project 
cash flows arising from assets, liabilities, and off-balance sheet 
exposures over, at a minimum, short- and long-term time horizons. The 
foreign banking organization must update short-term cash-flow 
projections daily and must update longer-term cash-flow projections at 
least monthly.
    (2) The foreign banking organization must establish a methodology 
for making cash-flow projections for its combined U.S. operations that 
results in projections which:
    (i) Include cash flows arising from contractual maturities, 
intercompany transactions, new business, funding renewals, customer 
options, and other potential events that may impact liquidity;
    (ii) Include reasonable assumptions regarding the future behavior 
of assets, liabilities, and off-balance sheet exposures;
    (iii) Identify and quantify discrete and cumulative cash-flow 
mismatches over these time periods; and
    (iv) Include sufficient detail to reflect the capital structure, 
risk profile, complexity, currency exposure, activities, and size of 
the foreign banking organization and its combined U.S. operations, and 
include analyses by business line, currency, or legal entity as 
appropriate.
    (e) Contingency funding plan. (1) A foreign banking organization 
with combined U.S. assets of $50 billion or more must establish and 
maintain a contingency funding plan for its combined U.S. operations 
that sets out the foreign banking organization'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 the 
established liquidity risk tolerance for the combined U.S. operations. 
The foreign banking organization must update the

[[Page 17333]]

contingency funding plan for its combined U.S. operations at least 
annually, and when changes to market and idiosyncratic conditions 
warrant.
    (2) Components of the contingency funding plan--(i) Quantitative 
assessment. The contingency funding plan for the combined U.S. 
operations must:
    (A) Identify liquidity stress events that could have a significant 
impact on the liquidity of the foreign banking organization and its 
combined U.S. operations;
    (B) 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;
    (C) Identify the circumstances in which the foreign banking 
organization would implement its action plan described in paragraph 
(e)(2)(ii)(A) of this section, which circumstances must include failure 
to meet any minimum liquidity requirement imposed by the Board on the 
foreign banking organization's U.S. operations;
    (D) Assess available funding sources and needs during the 
identified liquidity stress events;
    (E) Identify alternative funding sources that may be used during 
the identified liquidity stress events; and
    (F) Incorporate information generated by the liquidity stress 
testing required under Sec.  252.157(a) of this subpart.
    (ii) Liquidity event management process. The contingency funding 
plan for the combined U.S. operations must include an event management 
process that sets out the foreign banking organization's procedures for 
managing liquidity during identified liquidity stress events for the 
combined U.S. operations. The liquidity event management process must:
    (A) Include an action plan that clearly describes the strategies 
that the foreign banking organization 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;
    (B) Identify a liquidity stress event management team that would 
execute the action plan in paragraph (e)(2)(i) of this section for the 
combined U.S. operations;
    (C) Specify the process, responsibilities, and triggers for 
invoking the contingency funding plan, describe the decision-making 
process during the identified liquidity stress events, and describe the 
process for executing contingency measures identified in the action 
plan; and
    (D) 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.
    (iii) Monitoring. The contingency funding plan for the combined 
U.S. operations 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, and size of the foreign banking organization 
and its combined U.S. operations.
    (iv) Testing. A foreign banking organization must periodically 
test:
    (A) The components of the contingency funding plan to assess the 
plan's reliability during liquidity stress events;
    (B) The operational elements of the contingency funding plan, 
including operational simulations to test communications, coordination, 
and decision-making by relevant management; and
    (C) 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.
    (f) Liquidity risk limits--(1) General. A foreign banking 
organization with combined U.S. assets of $50 billion or more must 
monitor sources of liquidity risk and establish limits on liquidity 
risk for the combined U.S. operations, including limits on:
    (i) Concentrations in sources of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and if 
applicable, other forms of liquidity risk;
    (ii) The amount of liabilities that mature within various time 
horizons; and
    (iii) Off-balance sheet exposures and other exposures that could 
create funding needs during liquidity stress events.
    (2) Size of limits. Each limit established pursuant to paragraph 
(f)(1) of this section must be consistent with the established 
liquidity risk tolerance for the combined U.S. operations and reflect 
the capital structure, risk profile, complexity, activities, and size 
of the combined U.S. operations.
    (g) Collateral, legal entity, and intraday liquidity risk 
monitoring. A foreign banking organization with combined U.S. assets of 
$50 billion or more must establish and maintain procedures for 
monitoring liquidity risk as set forth in this paragraph.
    (1) Collateral. The foreign banking organization must establish and 
maintain policies and procedures to monitor assets that have been or 
are available to be pledged as collateral in connection with 
transactions to which entities in its U.S. operations are 
counterparties. These policies and 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), specifying the value of pledged assets relative to the 
amount of security required under the relevant contracts and the value 
of unencumbered assets available to be pledged;
    (ii) Monitors the levels of unencumbered assets available to be 
pledged by legal entity, jurisdiction, and currency exposure;
    (iii) Monitors shifts in the foreign banking organization's funding 
patterns, including 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) Legal entities, currencies and business lines. The foreign 
banking organization must establish and maintain procedures for 
monitoring and controlling liquidity risk exposures and funding needs 
of its combined U.S. operations, within and across significant legal 
entities, currencies, and business lines and taking into account legal 
and regulatory restrictions on the transfer of liquidity between legal 
entities.
    (3) Intraday exposure. The 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:
    (i) Monitor and measure expected daily inflows and outflows;
    (ii) Maintain, manage and transfer collateral to obtain intraday 
credit;
    (iii) Identify and prioritize time-specific obligations so that the 
foreign banking organizations can meet these obligations as expected 
and settle less critical obligations as soon as possible;
    (iv) Control the issuance of credit to customers where necessary; 
and
    (v) 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.

[[Page 17334]]

Sec.  252.157  Liquidity stress testing and buffer requirements for 
foreign banking organizations with combined U.S. assets of $50 billion.

    (a) Liquidity stress testing requirement--(1) General. (i) A 
foreign banking organization with combined U.S. assets of $50 billion 
or more must conduct stress tests to separately assess the potential 
impact of liquidity stress scenarios on the cash flows, liquidity 
position, profitability, and solvency of:
    (A) Its combined U.S. operations as a whole;
    (B) Its U.S. branches and agencies on an aggregate basis; and
    (C) Its U.S. intermediate holding company, if any.
    (ii) Each liquidity stress test required under this paragraph 
(a)(1) must use the stress scenarios described in paragraph (a)(3) of 
this section and take into account the current liquidity condition, 
risks, exposures, strategies, and activities of the U.S. operations.
    (iii) The liquidity stress tests required under this paragraph 
(a)(1) must take into consideration the balance sheet exposures, off-
balance sheet exposures, size, risk profile, complexity, business 
lines, organizational structure and other characteristics of the 
foreign banking organization and its combined U.S. operations that 
affect the liquidity risk profile of the U.S. operations.
    (iv) In conducting a liquidity stress test using the scenarios 
described in paragraphs (a)(3)(i) and (iii) of this section, the bank 
holding company must address the potential direct adverse impact of 
associated market disruptions on the foreign banking organization's 
combined U.S. operations and the related indirect effect such impact 
could have on the combined U.S. operations of the foreign banking 
organization and incorporate the potential actions of other market 
participants experiencing liquidity stresses under the market 
disruptions that would adversely affect the foreign banking 
organization or its combined U.S. operations.
    (2) Frequency. The liquidity stress tests required under paragraph 
(a)(1) of this section must be performed at least monthly. The Board 
may require the foreign banking organization to perform stress testing 
more frequently than monthly.
    (3) Stress scenarios. (i) Each liquidity stress test conducted 
under paragraph (a)(1) of this section must include, at a minimum:
    (A) A scenario reflecting adverse market conditions;
    (B) A scenario reflecting an idiosyncratic stress event for the 
U.S. branches/agencies and the U.S. intermediate holding company, if 
any; and
    (C) a scenario reflecting combined market and idiosyncratic 
stresses.
    (ii) The foreign banking organization must incorporate additional 
liquidity stress scenarios into its liquidity stress test as 
appropriate based on the financial condition, size, complexity, risk 
profile, scope of operations, or activities of the combined U.S. 
operations, the U.S. branches and agencies, and the U.S. intermediate 
holding company, as applicable. The Board may require the foreign 
banking organization to vary the underlying assumptions and stress 
scenarios.
    (4) Planning horizon. Each stress test conducted under paragraph 
(a)(1) of this section must include an overnight planning horizon, a 
30-day planning horizon, a 90-day planning horizon, a 1-year planning 
horizon, and any other planning horizons that are relevant to the 
liquidity risk profile of the combined U.S. operations, the U.S. 
branches and agencies, and the U.S. intermediate holding company, if 
any. For purposes of this section, a ``planning horizon'' is the period 
over which the relevant stressed projections extend. The foreign 
banking organization must use the results of the stress test over the 
30-day planning horizon to calculate the size of the liquidity buffers 
under paragraph (c) of this section.
    (5) Requirements for assets used as cash-flow sources in a stress 
test. (i) To the extent an asset is used as a cash flow source to 
offset projected funding needs during the planning horizon in a 
liquidity stress test, the fair market value of the asset must be 
discounted to reflect any credit risk and market volatility of the 
asset.
    (ii) Assets used as cash-flow sources during the planning horizon 
must be diversified by collateral, counterparty, borrowing capacity, or 
other factors associated with the liquidity risk of the assets.
    (iii) A line of credit does not qualify as a cash flow source for 
purposes of a stress test with a planning horizon of 30 days or less. A 
line of credit may qualify as a cash flow source for purposes of a 
stress test with a planning horizon that exceeds 30 days.
    (6) Tailoring. Stress testing must be tailored to, and provide 
sufficient detail to reflect, the capital structure, risk profile, 
complexity, activities, and size of the combined U.S. operations of the 
foreign banking organization and, as appropriate, the foreign banking 
organization as a whole.
    (7) Governance--(i) 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 governing its 
liquidity stress testing practices, methodologies, and assumptions that 
provide for the incorporation of the results of liquidity stress tests 
in future stress testing and for the enhancement of stress testing 
practices over time.
    (ii) Controls and oversight. The foreign banking organization must 
establish and maintain a system of controls and oversight that is 
designed to ensure that its liquidity stress testing processes are 
effective in meeting the requirements of this section. The controls and 
oversight must ensure that each liquidity 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 U.S. 
chief risk officer and subject to independent review consistent with 
the standards set out in Sec.  252.156(c).
    (iii) Management information systems. The 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.
    (b) Reporting of liquidity stress tests required by home-country 
regulators. A foreign banking organization with combined U.S. assets of 
$50 billion or more must make available to the Board, in a timely 
manner, the results of any liquidity internal stress tests and 
establishment of liquidity buffers required by regulators in its home 
jurisdiction. The report required under this paragraph must include the 
results of its liquidity stress test and liquidity buffer, if required 
by the laws or regulations implemented in the home jurisdiction, or 
expected under supervisory guidance.
    (c) Liquidity buffer requirement--(1) General. A foreign banking 
organization with combined U.S. assets of $50 billion or more must 
maintain a liquidity buffer for its U.S. intermediate holding company, 
if any, calculated in accordance with paragraph (c)(2) of this section, 
and a separate liquidity buffer for its U.S. branches and agencies, if 
any, calculated in accordance with paragraph (c)(3) of this section.

[[Page 17335]]

    (2) Calculation of U.S. intermediate holding company buffer 
requirement. (i) The liquidity buffer for the U.S. intermediate holding 
company must be sufficient to meet the projected net stressed cash-flow 
need over the 30-day planning horizon of a liquidity stress test 
conducted in accordance with paragraph (a) of this section under each 
scenario set forth in paragraphs (a)(3)(i) through (iii) of this 
section.
    (ii) Net stressed cash-flow need. The net stressed cash-flow need 
for the U.S. intermediate holding company is equal to the sum of its 
net external stressed cash-flow need (calculated pursuant to paragraph 
(c)(2)(iii) of this section) and its net internal stressed cash-flow 
need (calculated pursuant to paragraph (c)(2)(iv) of this section) over 
the 30-day planning horizon.
    (iii) Net external stressed cash-flow need calculation. 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.
    (iv) Net internal stressed cash-flow need calculation--(A) General. 
The net internal stressed cash-flow need for the U.S. intermediate 
holding company equals the greater of:
    (1) The greatest daily cumulative net intragroup cash-flow need 
over the 30-day planning horizon as calculated under paragraph 
(c)(2)(iv)(B) of this section; and
    (2) Zero.
    (B) Daily cumulative net intragroup cash-flow need calculation. The 
daily cumulative net intragroup cash-flow need for the U.S. 
intermediate holding company for purposes of paragraph (c)(2)(iv)(A) of 
this section is calculated as follows:
    (1) Daily cumulative net intragroup cash-flow need. For any given 
day in the stress-test horizon, the daily cumulative net intragroup 
cash-flow need is a daily cumulative net intragroup cash flow that is 
greater than zero.
    (2) Daily cumulative net intragroup cash flow. For any given day of 
the planning horizon, the daily cumulative net intragroup cash flow 
equals the sum of the net intragroup cash flow calculated for that day 
and the net intragroup cash flow calculated for each previous day of 
the stress-test horizon, as calculated in accordance with paragraph 
(c)(2)(iv)(C) of this section.
    (C) Net intragroup cash flow. For any given day of the stress-test 
horizon, the net intragroup cash flow equals the difference between:
    (1) The amount of cash-flow needs resulting from transactions 
between the U.S. intermediate holding company and its affiliates 
(including any U.S. branch or U.S. agency) for that day of the planning 
horizon; and
    (2) The amount of cash-flow sources resulting from transactions 
between the U.S. intermediate holding company and its affiliates 
(including any U.S. branch or U.S. agency) for that day of the planning 
horizon.
    (D) Amounts secured by highly liquid assets. For the purposes of 
calculating net intragroup cash flow under this paragraph, the amounts 
of intragroup cash-flow needs and intragroup cash-flow sources that are 
secured by highly liquid assets (as defined in paragraph (c)(7) of this 
section) must be excluded from the calculation.
    (3) Calculation of U.S. branch and agency liquidity buffer 
requirement. (i) The liquidity buffer for the foreign banking 
organization's U.S. branches and agencies must be sufficient to meet 
the projected net stressed cash-flow need of the U.S. branches and 
agencies over the first 14 days of a stress test with a 30-day planning 
horizon, conducted in accordance with paragraph (a) of this section 
under the scenarios described in paragraphs (a)(3)(i) through (iii) of 
this section.
    (ii) Net stressed cash-flow need. The net stressed cash-flow need 
of the U.S. branches and agencies of a foreign banking organization is 
equal to the sum of its net external stressed cash-flow need 
(calculated pursuant to paragraph (c)(3)(iii) of this section) and net 
internal stressed cash-flow need (calculated pursuant to paragraph 
(c)(3)(iv) of this section) over the first 14 days of the 30-day 
planning horizon.
    (iii) Net external stressed cash-flow need calculation. (A) The net 
external stressed cash-flow need of the U.S. branches and agencies 
equals the difference between:
    (1) The projected amount of cash-flow needs that results from 
transactions between the U.S. branches and agencies and entities other 
than the foreign bank's non-U.S. offices and its U.S. and non-U.S. 
affiliates; and
    (2) The projected amount of cash-flow sources that results from 
transactions between the U.S. branches and agencies and entities other 
than the foreign bank's non-U.S. offices and its U.S. and non-U.S. 
affiliates.
    (iv) Net internal stressed cash-flow need calculation--(A) General. 
The net internal stressed cash-flow need of the U.S. branches and 
agencies of the foreign banking organization equals the greater of:
    (1) The greatest daily cumulative net intragroup cash-flow need 
over the first 14 days of the 30-day planning horizon, as calculated 
under paragraph (c)(3)(iv)(B) of this section; and
    (2) Zero.
    (B) Daily cumulative net intragroup cash-flow need calculation. The 
daily cumulative net intragroup cash-flow need of the U.S. branches and 
agencies of a foreign banking organization for purposes of paragraph 
(c)(3)(iv) of this section is calculated as follows:
    (1) Daily cumulative net intragroup cash-flow need. For any given 
day of the stress-test horizon, the daily cumulative net intragroup 
cash-flow need of the U.S. branches and agencies means a daily 
cumulative net intragroup cash flow that is greater than zero.
    (2) Daily cumulative net intragroup cash flow. For any given day of 
the planning horizon, the daily cumulative net intragroup cash flow of 
the U.S. branches and agencies equals the sum of the net intragroup 
cash flow calculated for that day and the net intragroup cash flow 
calculated for each previous day of the planning horizon, each as 
calculated in accordance with this paragraph (c)(3)(iv)(C) of this 
section.
    (C) Net intragroup cash flow. For any given day of the planning 
horizon, the net intragroup cash flow must equal the difference 
between:
    (1) The amount of projected cash-flow needs resulting from 
transactions between a U.S. branch or U.S. agency and the foreign 
bank's non-U.S. offices and its affiliates; and
    (2) The amount of projected cash-flow sources resulting from 
transactions between a U.S. branch or U.S. agency and the foreign 
bank's non-U.S. offices and its affiliates.
    (D) Amounts secured by highly liquid assets. For the purposes of 
calculating net intragroup cash flow of the U.S. branches and agencies 
under this paragraph, the amounts of intragroup cash-flow needs and 
intragroup cash-flow sources that are secured by highly liquid assets 
(as defined in paragraph (c)(7) of this section) must be excluded from 
the calculation.
    (4) Location of liquidity buffer--(i) 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

[[Page 17336]]

be held in an account located at a U.S. branch or U.S. agency of the 
affiliated foreign banking organization or other affiliate that is not 
controlled by the U.S. intermediate holding company.
    (ii) U.S. branches and agencies. The U.S. branches and agencies of 
a foreign banking organization 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 the foreign 
banking organization's U.S. intermediate holding company or other 
affiliate.
    (7) Asset requirements. The liquidity buffer required in this 
section for the U.S. intermediate holding company or the U.S. branches 
and agencies must consist of highly liquid assets that are 
unencumbered, as set forth below:
    (i) Highly liquid asset. The asset must be a highly liquid asset. 
For these purposes, a highly liquid asset includes:
    (A) Cash;
    (B) Securities issued or guaranteed by the United States, a U.S. 
government agency, or a U.S. government-sponsored enterprise; or
    (C) Any other asset that the foreign banking organization 
demonstrates to the satisfaction of the Board:
    (1) Has low credit risk and low market risk;
    (2) 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
    (3) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
has been impaired.
    (ii) Unencumbered. The asset must be unencumbered. For these 
purposes, an asset is unencumbered if it:
    (A) Is free of legal, regulatory, contractual, or other 
restrictions on the ability of such company promptly to liquidate, sell 
or transfer the asset; and
    (B) Is either:
    (1) Not pledged or used to secure or provide credit enhancement to 
any transaction; or
    (2) Pledged to a central bank or a U.S. government-sponsored 
enterprise, to the extent potential credit secured by the asset is not 
currently extended by such central bank or U.S. government-sponsored 
enterprise or any of its consolidated subsidiaries.
    (iii) Calculating the amount of a highly liquid asset. In 
calculating the amount of a highly liquid asset included in the 
liquidity buffer, the bank holding company must discount the fair 
market value of the asset to reflect any credit risk and market price 
volatility of the asset.
    (iv) Diversification. The liquidity buffer must not contain 
significant concentrations of highly liquid assets by issuer, business 
sector, region, or other factor related to the foreign banking 
organization's risk, except with respect to cash and securities issued 
or guaranteed by the United States, a U.S. government agency, or a U.S. 
government-sponsored enterprise.


Sec.  252.158  Capital stress testing requirements for foreign banking 
organizations with combined U.S. assets of $50 billion or more.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Eligible asset means any asset of the U.S. branch or U.S. 
agency held in the United States that is recorded on the general ledger 
of a U.S. branch or U.S. agency of the foreign banking organization 
(reduced by the amount of any specifically allocated reserves held in 
the United States and recorded on the general ledger of the U.S. branch 
or U.S. agency in connection with such assets), subject to the 
following exclusions, and, for purposes of this definition, as modified 
by the rules of valuation set forth in paragraph (a)(1)(ii) of this 
section.
    (i) The following assets do not qualify as eligible assets:
    (A) Equity securities;
    (B) Any assets classified as loss at the preceding examination by a 
regulatory agency, outside accountant, or the bank's internal loan 
review staff;
    (C) 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;
    (D) Any amounts due from the home office, other offices and 
affiliates, including income accrued but uncollected on such amounts;
    (E) 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;
    (F) Prepaid expenses and unamortized costs, furniture and fixtures 
and leasehold improvements; and
    (G) Any other asset that the Board determines should not qualify as 
an eligible asset.
    (ii) The following rules of valuation apply:
    (A) A marketable debt security is valued at its principal amount or 
market value, whichever is lower;
    (B) 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 80 percent, 
respectively;
    (C) With respect to an asset classified value impaired, the amount 
representing the allocated transfer risk reserve that would be required 
for such exposure at a domestically chartered bank is valued at 0 and 
the residual exposure is valued at 80 percent; and
    (D) Real estate located in the United States and carried on the 
accounting records as an asset are valued at net book value or 
appraised value, whichever is less.
    (2) Liabilities of all U.S. branches and agencies of a foreign 
banking organization means all liabilities of all U.S. branches and 
agencies of the foreign banking organization, including acceptances and 
any other liabilities (including contingent liabilities), but 
excluding:
    (i) 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
    (ii) Reserves for possible loan losses and other contingencies.
    (3) Pre-provision net revenue means revenue less expenses before 
adjusting for total loan loss provisions.
    (4) Stress test cycle has the same meaning as in subpart F of this 
part.
    (5) 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.
    (b) In general. (1) A foreign banking organization with combined 
U.S. assets of $50 billion or more and that has a U.S. branch or U.S. 
agency must:
    (i) Be subject on a consolidated basis to a capital stress testing 
regime by its home-country supervisor that meets the requirements of 
paragraph (b)(2) of this section;
    (ii) Conduct such stress tests or be subject to a supervisory 
stress test and meet any minimum standards set by its home-country 
supervisor with respect to the stress tests; and
    (iii) Provide to the Board the information required under paragraph 
(c) of this section.

[[Page 17337]]

    (2) The capital stress testing regime of a foreign banking 
organization's home-country supervisor must include:
    (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 stress testing 
practices by relevant management and the board of directors (or 
equivalent thereof) of the foreign banking organization;
    (c) Information requirements--(1) In general. A foreign banking 
organization with combined U.S. assets of $50 billion or more must 
report to the Board by January 5 of each calendar year, unless such 
date is extended by the Board, summary information 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 any changes 
in regulatory capital ratios.
    (2) Additional information required for foreign banking 
organizations in a net due from position. If, on a net basis, the U.S. 
branches and agencies of a foreign banking organization with combined 
U.S. assets of $50 billion or more provide funding to the foreign 
banking organization's non-U.S. offices and non-U.S. affiliates, 
calculated as the average daily position over a stress test cycle for a 
given year, the foreign banking organization must report the following 
information to the Board by January 5 of each calendar year, unless 
such date is extended by the Board:
    (i) A detailed description of the methodologies used in the stress 
test, including those employed to estimate losses, revenues, and 
changes in capital positions;
    (ii) Estimates of realized losses or gains on available-for-sale 
and held-to-maturity securities, trading and counterparty losses, if 
applicable; and loan losses (dollar amount and as a percentage of 
average portfolio balance) in the aggregate and by material sub-
portfolio; and
    (iii) Any additional information that the Board requests.
    (d) Imposition of additional standards for capital stress tests. 
(1) Unless the Board otherwise determines in writing, a foreign banking 
organization that does not meet each of the requirements in paragraph 
(b)(1) and (2) of this section must:
    (i) Maintain eligible assets in its U.S. branches and agencies 
that, on a daily basis, are not less than 108 percent of the average 
value over each day of the previous calendar quarter of the total 
liabilities of all U.S. branches and agencies of the foreign banking 
organization; and
    (ii) To the extent that a foreign banking organization has not 
established a U.S. intermediate holding company, conduct an annual 
stress test of its U.S. subsidiaries to determine whether those 
subsidiaries have the capital necessary to absorb losses as a result of 
adverse economic conditions; and report to the Board on an annual basis 
a summary of the results of the stress test that includes the 
information required under paragraph (b)(1) of this section and any 
other information specified by the Board.
    (2) An enterprise-wide stress test that is approved by the Board 
may meet the stress test requirement of paragraph (d)(1)(ii) of this 
section.
    (3) Intragroup funding restrictions or liquidity requirements for 
U.S. operations. If a foreign banking organization does not meet each 
of the requirements in paragraphs (b)(1) and (2) of this section, the 
Board may require the U.S. branches and agencies of the foreign banking 
organization and, if the foreign banking organization has not 
established a U.S. intermediate holding company, any U.S. subsidiary of 
the foreign banking organization, to maintain a liquidity buffer or be 
subject to intragroup funding restrictions.
    (e) Notice and response. If the Board determines to impose one or 
more conditions under paragraph (d)(3) of this section, the Board will 
notify the company before it applies the condition, and describe the 
basis for imposing the condition. Within 14 calendar days of receipt of 
a notification under this paragraph, the company may request in writing 
that the Board reconsider the requirement. The Board will respond in 
writing to the company's request for reconsideration prior to applying 
the condition.

0
9. Subpart U is added to read as follows:
Subpart U--Debt-to-Equity Limits for U.S. and Foreign Banking 
Organizations
Sec.
252.220 Debt-to-equity limits for U.S. bank holding companies.
252.221 Debt-to-equity limits for foreign banking organizations.

Subpart U--Debt-to-Equity Limits for U.S. Bank Holding Companies 
and Foreign Banking Organizations


Sec.  252.220  Debt-to-equity limits for U.S. bank holding companies.

    (a) Definitions--(1) Debt-to-equity ratio means the ratio of a 
company's total liabilities to a company's total equity capital less 
goodwill.
    (2) Debt and equity have the same meaning as ``total liabilities'' 
and ``total equity capital,'' respectively, as reported by a bank 
holding company on the FR Y-9C.
    (b) Notice and maximum debt-to-equity ratio requirement. The 
Council, or the Board on behalf of the Council, will provide written 
notice to a bank holding company to the extent that the Council makes a 
determination, pursuant to section 165(j) of the Dodd-Frank Act, that a 
bank holding company 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. Beginning no later than 
180 days after receiving written notice from the Council or from the 
Board on behalf of the Council, the bank holding company must achieve 
and maintain a debt-to-equity ratio of no more than 15-to-1.
    (c) Extension. The Board may, upon request by the bank holding 
company 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 (b) of this section for up to 
two additional periods of 90 days each, if the Board determines that 
the identified 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 bank holding 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.

[[Page 17338]]

    (d) Termination. The debt-to-equity ratio requirement in paragraph 
(b) of this section shall cease to apply to a bank holding company as 
of the date it receives notice from the Council of a determination that 
the bank holding 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.


Sec.  252.221  Debt-to-equity limits for foreign banking organizations.

    (a) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) 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.
    (2) Debt-to-equity ratio means the ratio of total liabilities to 
total equity capital less goodwill.
    (3) Eligible assets and liabilities of all U.S. branches and 
agencies of a foreign bank have the same meaning as in Sec.  
252.158(a).
    (b) 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, or if the foreign 
banking organization has not established a U.S. intermediate holding 
company, and any U.S. subsidiary (excluding any section 2(h)(2) company 
or DPC branch subsidiary, if applicable), must achieve and maintain a 
debt-to-equity ratio of no more than 15-to-1; and
    (2) The U.S. branches and agencies of the foreign banking 
organization must maintain eligible assets in its U.S. branches and 
agencies that, on a daily basis, are not less than 108 percent of the 
average value over each day of the previous calendar quarter of the 
total liabilities of all branches and agencies operated by the foreign 
banking organization in the United States.
    (c) Extension. The Board may, upon request by a 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 (b) 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 foreign banking organization has made good faith 
efforts to comply with the debt-to-equity ratio requirement and that 
each extension would be in the public interest.
    (d) Termination. The requirements in paragraph (b) 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 (b) of this 
section are no longer necessary.

    By order of the Board of Governors of the Federal Reserve 
System, March 11, 2014.
Michael J. Lewandowski,
Associate Secretary of the Board.
[FR Doc. 2014-05699 Filed 3-21-14; 8:45 am]
BILLING CODE 6210-01-P