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

FEDERAL RESERVE SYSTEM
12 CFR Part 252
[Regulation YY; Docket No. 1438]
RIN 7100 AD 86

Enhanced Prudential Standards and
Early Remediation Requirements for
Foreign Banking Organizations and
Foreign Nonbank Financial Companies
Board of Governors of the
Federal Reserve System (Board).
ACTION: Proposed rule; request for
public comment.

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AGENCY:

SUMMARY: The Board is requesting
comment on proposed rules that would
implement the enhanced prudential
standards required to be established
under section 165 of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act or Act)
and the early remediation requirements
required to be established under section
166 of the Act for foreign banking
organizations and foreign nonbank
financial companies supervised by the
Board. The enhanced prudential
standards include risk-based capital and
leverage requirements, liquidity
standards, risk management and risk
committee requirements, singlecounterparty credit limits, stress test
requirements, and a debt-to-equity limit
for companies that the Financial
Stability Oversight Council has
determined pose a grave threat to
financial stability.
DATES: Comments should be received on
or before March 31, 2013.
ADDRESSES: You may submit comments,
identified by Docket No. R–1438 and
RIN 7100 AD 86 by any of the following
methods:
• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email:
regs.comments@federalreserve.gov.
Include docket and RIN numbers in the
subject line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Robert deV. Frierson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available from
the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,

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unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Streets NW., Washington, DC 20551)
between 9:00 a.m. and 5:00 p.m. on
weekdays.
FOR FURTHER INFORMATION CONTACT:

Mark E. Van Der Weide, Senior
Associate Director, (202) 452–2263, or
Molly E. Mahar, Senior Supervisory
Financial Analyst, (202) 973–7360,
Division of Banking Supervision and
Regulation; or Ann Misback, Associate
General Counsel, (202) 452–3788, or
Christine Graham, Senior Attorney,
(202) 452–3005, Legal Division.
U.S. Intermediate Holding Company
Requirement: Molly E. Mahar, Senior
Supervisory Financial Analyst, (202)
973–7360, or Elizabeth MacDonald,
Senior Supervisory Financial Analyst,
(202) 475–6316, Division of Banking
Supervision and Regulation; or
Benjamin W. McDonough, Senior
Counsel, (202) 452–2036, April C.
Snyder, Senior Counsel, (202) 452–
3099, or David Alexander, Senior
Attorney, (202) 452–2877, Legal
Division.
Risk-Based Capital Requirements and
Leverage Limits: Anna Lee Hewko,
Assistant Director, (202) 530–6260, or
Elizabeth MacDonald, Senior
Supervisory Financial Analyst, (202)
475–6316, Division of Banking
Supervision and Regulation; or
Benjamin W. McDonough, Senior
Counsel, (202) 452–2036, or April C.
Snyder, Senior Counsel, (202) 452–
3099, Legal Division.
Liquidity Requirements: Mary Aiken,
Manager, (202) 721–4534, Division of
Banking Supervision and Regulation; or
April C. Snyder, Senior Counsel, (202)
452–3099, Legal Division.
Single-Counterparty Credit Limits:
Molly E. Mahar, Senior Supervisory
Financial Analyst, (202) 973–7360, or
Jordan Bleicher, Supervisory Financial
Analyst, (202) 973–6123, Division of
Banking Supervision and Regulation; or
Pamela G. Nardolilli, Senior Counsel,
(202) 452–3289, Patricia P. Yeh,
Counsel, (202) 912–4304, Anna M.
Harrington, Senior Attorney, (202) 452–
6406, or Kerrie M. Brophy, Attorney,
(202) 452–3694, Legal Division.
Risk Management and Risk
Committee Requirements: Pamela A.
Martin, Senior Supervisory Financial
Analyst, (202) 452–3442, Division of
Banking Supervision and Regulation; or
Jonathan D. Stoloff, Special Counsel,
(202) 452–3269, or Jeremy C. Kress,

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Attorney, (202) 872–7589, Legal
Division.
Stress Test Requirements: Tim Clark,
Senior Associate Director, (202) 452–
5264, Lisa Ryu, Assistant Director, (202)
263–4833, David Palmer, Senior
Supervisory Financial Analyst, (202)
452–2904, or Joseph Cox, Financial
Analyst, (202) 452–3216, Division of
Banking Supervision and Regulation; or
Benjamin W. McDonough, Senior
Counsel, (202) 452–2036, or Christine E.
Graham, Senior Attorney, (202) 452–
3005, Legal Division.
Debt-to-Equity Limits for Certain
Covered Companies: Elizabeth
MacDonald, Senior Supervisory
Financial Analyst, (202) 475–6316,
Division of Banking Supervision and
Regulation; or Benjamin W.
McDonough, Senior Counsel, (202) 452–
2036, or David Alexander, Senior
Attorney, (202) 452–2877, Legal
Division.
Early Remediation Framework:
Barbara J. Bouchard, Senior Associate
Director, (202) 452–3072, Molly E.
Mahar, Senior Supervisory Financial
Analyst, (202) 973–7360, or Linda W.
Jeng, Senior Supervisory Financial
Analyst, (202) 475–6315, Division of
Banking Supervision and Regulation; or
Jay R. Schwarz, Counsel, (202) 452–
2970, Legal Division.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Overview of the Proposal
III. Requirement To Form a U.S. Intermediate
Holding Company
IV. Risk-Based Capital Requirements and
Leverage Limits
V. Liquidity Requirements
VI. Single-Counterparty Credit Limits
VII. Risk Management and Risk Committee
Requirements
VIII. Stress Test Requirements
IX. Debt-to-Equity Limits
X. Early Remediation
XI. Administrative Law Matters

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

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
The Board recognizes the important
role that foreign banking organizations
play in the U.S. financial sector. The
presence of foreign banking
organizations in the United States has
brought competitive and countercyclical
benefits to U.S. markets. This preamble
describes a set of proposed adjustments
to the Board’s regulation of the U.S.
operations of foreign banking
organizations to address risks posed by
those entities and to implement the
enhanced prudential standards and
early remediation requirements in
sections 165 and 166 of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act or Act).
The proposed adjustments are
consistent with the Board’s longstanding policy of national treatment
and equality of competitive opportunity
between the U.S. operations of foreign
banking organizations and U.S. banking
firms.

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Current Approach To Regulating U.S.
Operations of Foreign Banking
Organizations
The Board is responsible for the
overall supervision and regulation of the
U.S. operations of all foreign banking
organizations.1 Other federal and state
regulators are responsible for
supervising and regulating certain parts
of the U.S. operations of foreign banking
organizations, such as branches,
agencies, or bank and nonbank
subsidiaries.2
Under the current U.S. supervision
framework for foreign banking
organizations, supervisors monitor the
individual legal entities of the U.S.
operations of these companies, and the
Federal Reserve aggregates information
it receives through its own supervisory
process and from other U.S. supervisors
1 International Banking Act of 1978 (12 U.S.C.
3101 et seq.) and Foreign Bank Supervision
Enhancement Act of 1991 (12 U.S.C. 3101 note). For
purposes of this proposal, a foreign banking
organization is a foreign bank that has a banking
presence in the United States by virtue of operating
a branch, agency, or commercial lending company
subsidiary in the United States or controlling a bank
in the United States; or any company of which the
foreign bank is a subsidiary.
2 For example, the Securities and Exchange
Commission (SEC) is the primary financial
regulatory agency with respect to any registered
broker-dealer, registered investment company, or
registered investment adviser of a foreign banking
organization. State insurance authorities are the
primary financial regulatory agencies with respect
to the insurance subsidiaries of a foreign banking
organization. The Office of the Comptroller of the
Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), and the state banking
authorities have supervisory authority over the
national and state bank subsidiaries and federal and
state branches and agencies of foreign banking
organizations, respectively, in addition to the
Board’s supervisory and regulatory responsibilities
over some of these entities.

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to form a view of the financial condition
of the combined U.S. operations of the
company. The Federal Reserve and
other U.S. regulators also work with
regulators in other national jurisdictions
to help ensure that all internationally
active banks operating in the United
States are supervised in accordance
with a consistent set of core capital and
other prudential requirements.
International standards are intended to
address the risks posed by the
consolidated organization and to help
achieve global competitive equity.
Under this approach, the Federal
Reserve oversees operations in the
United States, but also relies on the
home country supervisor to supervise a
foreign banking organization on a global
basis consistent with international
standards and relies on the foreign
banking organization to support its U.S.
operations under both normal and
stressed conditions.
Under this regulatory and supervisory
framework, foreign banking
organizations have structured their U.S.
operations in ways that promote
maximum efficiency of capital and
liquidity management at the
consolidated level. Permissible U.S.
structures for foreign banking
organizations have included crossborder branching and holding direct and
indirect bank and nonbank subsidiaries.
U.S. banking law and regulation also
allow well-managed and wellcapitalized foreign banking
organizations to conduct a wide range of
bank and nonbank activities in the
United States on conditions comparable
to those applied to U.S. banking
organizations.3 Further, as a general
matter, a top-tier U.S. bank holding
company subsidiary of a foreign banking
organization that qualifies as a financial
holding company has not been required
to comply with the Board’s capital
standards since 2001 pursuant to
Supervision and Regulation (SR) Letter
01–01.4
As a result of this flexibility granted
to foreign banking organizations in the
United States, the current population of
foreign banking organizations is
structurally diverse. Some foreign
banking organizations conduct U.S.
banking activities directly through a
branch or agency; others own U.S.
depository institutions through a U.S.based bank holding company; and still
others own a U.S. depository institution
directly. Most large foreign banking
organizations also conduct a range of
3 12

U.S.C. 1843(l)(1); 12 CFR 225.90.
SR Letter 01–01 (January 5, 2001), available
at http://www.federalreserve.gov/boarddocs/
srletters/2001/sr0101.htm.
4 See

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nonbank activities through separate
nonbank subsidiaries. Similar to the
largest, most complex U.S. banking
organizations, some of the largest
foreign banking organizations with
operations in the United States maintain
dozens of separate U.S. legal entities,
many of which are engaged in nonbank
activities.
The structural diversity and
consolidated management of capital and
liquidity permitted under the current
approach has facilitated cross-border
banking and increased global flows of
capital and liquidity. However, the
increase in concentration, complexity,
and interconnectedness of the U.S.
operations of foreign banking
organizations and the financial stability
lessons learned during the crisis have
raised questions about the continued
suitability of this approach.
Additionally, the Congressional
mandate included in the Dodd-Frank
Act requires the Board to impose
enhanced prudential standards on large
foreign banking organizations. Congress
also directed the Board to strengthen the
capital standards applied to U.S. bank
holding company subsidiaries of foreign
banking organizations by adopting the
so-called ‘‘Collins Amendment’’ to the
Dodd-Frank Act. Specifically, section
171 of the Dodd-Frank Act requires a
top-tier U.S. bank holding company
subsidiary of a foreign banking
organization that had relied on SR Letter
01–01 to meet the minimum capital
requirements established for U.S. bank
holding companies by July 21, 2015.
The following sections provide a
description of changes in the U.S.
activities of large foreign banking
organizations during the period that
preceded the financial crisis and the
financial stability risks posed by the
U.S. operations of these companies that
motivate certain elements of this
proposal.
Shifts in the U.S. Activities of Foreign
Banking Organizations
Many of the core elements of the
Federal Reserve’s current approach to
the supervision of foreign banking
organizations were designed more than
a decade ago, when the U.S. presence of
foreign banking organizations was
significantly less complex. Although
foreign banking organizations expanded
steadily in the United States during the
1970s, 1980s, and 1990s, their activities
here posed limited risks to overall U.S.
financial stability. Throughout this
period, the U.S. operations of foreign
banking organizations were largely net
recipients of funding from their parent
institutions and their activities were

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generally limited to traditional lending
to home-country and U.S. clients.5
The profile of foreign bank operations
in the United States changed
substantially in the period preceding the
financial crisis. U.S. branches and
agencies of foreign banking
organizations as a group moved from a
position of receiving funding from their
parent organizations on a net basis in
1999 to providing significant funding to
non-U.S. affiliates by the mid-2000s.6 In
2008, U.S. branches and agencies
provided more than $700 billion on a
net basis to non-U.S. affiliates. As U.S.
operations of foreign banking
organizations received less funding, on
net, from their parent companies over
the past decade, they became more
reliant on less stable, short-term U.S.
dollar wholesale funding, contributing
in some cases to a buildup in maturity
mismatches. Trends in the global
balance sheets of foreign banking
organizations from this period reveal
that short-term U.S. dollar funding
raised in the United States was used to
provide long-term U.S. dollardenominated project and trade finance
around the world as well as to finance
non-U.S. affiliates’ investments in U.S.
dollar-denominated asset-backed
securities.7 Because U.S. supervisors, as
host authorities, have more limited
access to timely information on the
global operations of foreign banking
organizations than to similar
information on U.S.-based banking
5 The U.S. branches and agencies of foreign banks
that borrowed from their parent organizations and
lent those funds in the United States (lending
branches) held roughly 60 percent of all foreign
bank branch and agency assets in the United States
during the 1980s and 1990s. See, Report of Assets
and Liabilities of U.S. Branches and Agencies of
Foreign Banks (Form FFIEC 002). Commercial and
industrial lending continued to account for a large
part of foreign bank branch and agency balance
sheets through the 1990s. Id. In addition, U.S.
branches and agencies of foreign banks held large
amounts of cash during the 1980s and 1990s, in part
to meet asset-maintenance and asset-pledge
requirements put in place by regulators. Id.
6 Many U.S. branches of foreign banks shifted
from the ‘‘lending branch’’ model to a ‘‘funding
branch’’ model, in which U.S. branches of foreign
banks borrowed large volumes of U.S. dollars to
upstream to their foreign bank parents. These
‘‘funding branches’’ went from holding 40 percent
of foreign bank branch assets in the mid-1990s to
holding 75 percent of foreign bank branch assets by
2009. See Form FFIEC 002.
7 The amount of U.S. dollar-denominated assetbacked securities and other securities held by
Europeans increased significantly from 2003 to
2007, much of it financed by U.S. short-term dollardenominated liabilities of European banks. See Ben
S. Bernanke, Carol Bertaut, Laurie Pounder
DeMarco, and Steven Kamin, International Capital
Flows and the Returns to Safe Assets in the United
States, 2003–2007, Board of Governors of the
Federal Reserve System International Finance
Discussion Papers Number 1014 (February 2011),
available at www.federalreserve.gov/pubs/ifdp/
2011/1014/ifdp1014.htm.

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organizations, the totality of the risk
profile of the U.S. operations of a
foreign banking organization can be
obscured when these U.S. entities fund
activities outside the United States,
such as occurred in recent years.
In addition to funding vulnerabilities,
the U.S. operations of foreign banking
organizations have become increasingly
concentrated, interconnected, and
complex since the mid-1990s. Ten
foreign banking organizations now
account for roughly two-thirds of
foreign banking organizations’ thirdparty U.S. assets, up from 40 percent in
1995.8 Moreover, U.S. broker-dealer
assets of large foreign banking
organizations as a share of their thirdparty U.S. assets have grown rapidly
since the mid-1990s. Five of the top-ten
U.S. broker-dealers are currently owned
by foreign banking organizations.9 In
contrast, commercial and industrial
lending originated by U.S. branches and
agencies of foreign banking
organizations as a share of their thirdparty U.S. liabilities dropped after
2003.10
Financial Stability Risks Posed by U.S.
Operations of Foreign Banking
Organizations
The financial stability risks associated
with the increased capital market
activity and shift in funding practices of
the U.S. operations of foreign banking
organizations in the period preceding
the financial crisis became apparent
during and after the crisis. The large
intra-firm cross-border flows that grew
rapidly in the period leading up to the
crisis created vulnerabilities for the U.S.
operations of foreign banking
organizations. While some foreign
banking organizations were aided by
their ability to move liquidity freely
during the crisis, this model also created
a degree of cross-currency funding risk
and heavy reliance on swap markets
that proved destabilizing.11 In many
cases, foreign banking organizations that
relied heavily on short-term U.S. dollar
liabilities were forced to sell U.S. dollar
assets and reduce lending rapidly when
that funding source evaporated. This
deleveraging imposed further stress on
8 See Forms FR Y–9C, FFIEC 002, FR 2886B,
FFIEC 031/041, FR–Y7N/S, X–17A–5 Part II (SEC
Form 1695), and X–17A–5 Part IIA (SEC Form
1696).
9 See Forms FR Y–9C, FFIEC 002, FR–Y7, FR
2886B, FFIEC 031/041, FR–Y7N/S, X–17A–5 Part II
(SEC Form 1695), and X–17A–5 Part IIA (SEC Form
1696).
10 See Form FFIEC 002.
11 Committee on the Global Financial System,
Funding patterns and liquidity management of
internationally active banks, CGFS Papers No 39
(May 2010), available at http://www.bis.org/publ/
cgfs39.pdf.

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financial market participants, thereby
compounding the risks to U.S. financial
stability.
Although the United States did not
experience a destabilizing failure of a
foreign banking organization during the
crisis, some foreign banking
organizations required extraordinary
support from home- and host-country
central banks and governments. For
example, the Federal Reserve provided
considerable amounts of liquidity to
both the U.S. branches and U.S. brokerdealer subsidiaries of foreign banking
organizations during the financial crisis.
While foreign banking organizations
recently have reduced the scope and
risk profile of their U.S. operations and
have shown more stable funding
patterns in response to these events,
some have continued to face periodic
funding and other stresses since the
crisis. For example, as concerns about
the euro zone rose in 2011, U.S. money
market funds dramatically pulled back
their lending to large euro-area banks,
reducing lending to these firms by
roughly $200 billion over a four-month
period.12
Risks to Host Countries
Beyond the United States, events in
the global financial community
underscore the risks posed by the
operations of large multinational
banking organizations to host country
financial sectors. The failure of several
internationally active financial firms
during the crisis revealed that the
location of capital and liquidity is
critical in a resolution. In some cases,
capital and liquidity related to
operations abroad were trapped at the
home entity. For example, the Icelandic
banks held significant deposits
belonging to citizens and residents of
other countries, who could not access
their funds once those banks came
under pressure. Actions by government
authorities during the crisis period
highlighted the fact that, while a foreign
bank regulatory regime designed to
accommodate centralized management
of capital and liquidity can promote
efficiency during good times, it can also
increase the chances of home and host
jurisdictions placing restrictions on the
cross-border movement of assets at the
moment of a crisis, as local operations
come under severe strain and repayment
of local creditors is called into question.
Resolution regimes and powers remain
nationally based, complicating the
resolution of firms with large crossborder operations.
In response to financial stability risks
highlighted during the crisis and
12 See

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
ongoing challenges associated with the
resolution of large cross-border firms,
several other national authorities have
adopted modifications to or have
considered proposals to modify their
regulation of internationally active
banks within their geographic
boundaries. Modifications adopted or
under consideration include increased
requirements for liquidity to cover local
operations of domestic and foreign
banks and nonbanks, limits on
intragroup exposures of domestic banks
to foreign subsidiaries, and
requirements to prioritize or segregate
home country retail operations.13
Actions by a home country to
constrain a banking organization’s
ability to provide support to its foreign
operations, as well as the diminished
likelihood that home-country
governments of large banking
organizations would provide a backstop
to their banks’ foreign operations, have
called into question one of the
fundamental elements of the Board’s
current approach to supervising foreign
banking organizations—the ability of the
Board, as a host supervisor, to rely on
a foreign banking organization to act as
a source of strength to its U.S.
operations when the foreign banking
organization is under stress.
The issues described above–growth
over time in U.S. financial stability risks
posed by foreign banking organizations
individually and as a group, the need to
minimize destabilizing pro-cyclical
ring-fencing in a crisis, persistent
impediments to effective cross-border
resolution, and limitations on parent
support–together underscore the need
for enhancements to foreign bank
regulation in the United States.

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Overview of Statutory Requirements
Sections 165 and 166 of the DoddFrank Act direct the Board to impose a
package of enhanced prudential
standards on bank holding companies,
13 See, e.g., Financial Services Authority,
Strengthening Liquidity Standards (October 2009),
available at www.fsa.gov.uk/pubs/policy/
ps09_16.pdf; Financial Services Authority, The
Turner Review: A regulatory response to the global
banking crisis (March 2009), available at
www.fsa.gov.uk/pubs/other/turner_review.pdf;
Financial Services Authority, A regulatory response
to the global banking crisis (March 2009), available
at http://www.fsa.gov.uk/pubs/discussion/
dp09_02.pdf; Independent Commission on Banking,
Final Report Recommendations (September 2011),
available at http://bankingcommission.s3.
amazonaws.com/wp-content/uploads/2010/07/ICBFinal-Report.pdf; and State Secretariat for
International Financial Matters SIF, Final report of
the ‘too big to fail’ commission of experts: Final
report of the Commission of Experts for limiting the
economic risks posed by large companies
(September 30, 2010), available at
www.sif.admin.ch/dokumentation/00514/00519/
00592/index.html?lang=en.

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including foreign banking organizations,
with total consolidated assets of $50
billion or more and nonbank financial
companies the Financial Stability
Oversight Council (Council) has
designated for supervision by the Board
(nonbank financial companies
supervised by the Board).14 These
stricter prudential standards for large
U.S. bank holding companies, foreign
banking organizations, and nonbank
financial companies supervised by the
Board required under section 165 of the
Dodd-Frank Act must include enhanced
risk-based capital and leverage
requirements, enhanced liquidity
requirements, enhanced risk
management and risk committee
requirements, resolution planning
requirements, single-counterparty credit
limits, stress test requirements, and a
debt-to-equity limit for companies that
the Council has determined pose a grave
threat to financial stability.
Section 166 of the Dodd-Frank Act
requires the Board to establish a
regulatory framework for the early
remediation of financial weaknesses for
the same set of companies in order to
minimize the probability that such
companies will become insolvent and
the potential harm of such insolvencies
to the financial stability of the United
States.15 Further, the Dodd-Frank Act
authorizes, but does not require, the
Board to establish additional enhanced
prudential standards relating to
contingent capital, public disclosures,
short-term debt limits, and such other
prudential standards as the Board
determines appropriate.16
The Dodd-Frank Act requires the
enhanced prudential standards
established by the Board under section
165 to be more stringent than those
standards applicable to other bank
holding companies and nonbank
financial companies that do not present
similar risks to U.S. financial stability.17
The standards must also increase in
stringency based on the systemic
footprint and risk characteristics of
companies subject to section 165.18
Generally, the Board has authority
under section 165 to tailor the
application of the standards, including
differentiating among companies subject
to section 165 on an individual basis or
14 See

12 U.S.C. 5311(a)(1) (providing that foreign
banking organizations are treated as bank holding
companies for purposes of Title I of the Dodd-Frank
Act). See infra note 24, for a description of a foreign
banking organization.
15 See 12 U.S.C. 5366(b).
16 See 12 U.S.C. 5365(b)(1)(B).
17 See 12 U.S.C. 5365(a)(1)(A).
18 See 12 U.S.C. 5365(a)(1)(B). Under section
165(a)(1)(B), the enhanced prudential standards
must increase in stringency, based on the
considerations listed in section 165(b)(3).

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by category.19 In applying section 165 to
foreign banking organizations, the Act
also directs the Board to give due regard
to the principle of national treatment
and equality of competitive opportunity
and to take into account the extent to
which the foreign banking organization
is subject, on a consolidated basis, to
home country standards that are
comparable to those applied to financial
companies in the United States.20
The Board has already issued
proposed and final rules implementing
certain elements of sections 165 and 166
of the Dodd-Frank Act. The Board and
the FDIC jointly issued a final rule to
implement the resolution plan
requirement in section 165(d) of the
Dodd-Frank Act for foreign and U.S.
companies that became effective on
November 30, 2011, and expect to
implement periodic reporting of credit
exposures at a later date.21 Section
165(d) establishes requirements that
large foreign banking organizations,
large U.S. bank holding companies, and
nonbank companies supervised by the
Board submit periodically to the Board
and the FDIC a plan for rapid and
orderly resolution under the U.S.
Bankruptcy Code in the event of
material financial distress or failure.
In December 2011, the Board
proposed a set of enhanced prudential
standards and early remediation
requirements for U.S. bank holding
companies with total consolidated
assets of $50 billion or more and U.S.
nonbank financial companies
supervised by the Board that included
risk-based capital and leverage
requirements, liquidity requirements,
single-counterparty credit limits, overall
risk management and risk committee
requirements, stress test requirements, a
debt-to-equity limit, and early
remediation requirements (December
2011 proposal). On October 9, 2012, the
Board issued a final rule implementing
the supervisory and company-run stress
testing requirements included in the
December 2011 proposal for U.S. bank
holding companies with total
consolidated assets of $50 billion or
more and U.S. nonbank financial
19 See 12 U.S.C. 5365(b)(3). In addition, the Board
must, as appropriate, adapt the required standards
in light of any predominant line of business of a
company for which particular standards may not be
appropriate. 12 U.S.C. 5365(b)(3)(D).
20 12 U.S.C. 5365(a)(2).
21 See 76 FR 67323 (November 1, 2011). In
response to concerns expressed by commenters
about the clarity of key definitions and the scope
of the proposed credit exposure reporting
requirement, the Board and FDIC postponed
finalizing the credit exposure reporting
requirement.

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

companies supervised by the Board.22
Concurrently, the Board issued a final
rule implementing the company-run
stress testing requirements for U.S. bank
holding companies with total
consolidated assets of more than $10
billion but less than $50 billion as well
as state member banks and savings and
loan holding companies with total
consolidated assets of more than $10
billion.23
The proposed standards for foreign
banking organizations are broadly
consistent with the standards proposed
for large U.S. bank holding companies
and nonbank financial companies
supervised by the Board in the
December 2011 proposal. In general,
differences between this proposal and
the December 2011 proposal reflect the
different regulatory framework and
structure under which foreign banking
organizations operate, and do not reflect
potential modifications that may be
made to the December 2011 proposal for
U.S. bank holding companies. The
Board is currently in the process of
reviewing comments on the remaining
standards in the December 2011
proposal and is considering
modifications to the proposal in
response to those comments. Comments
on this proposal will help inform how
the enhanced prudential standards
should be applied differently to foreign
banking organizations.
II. Overview of the Proposal
The Board is requesting comment on
proposed rules to implement the
provisions of sections 165 and 166 of
the Dodd-Frank Act for foreign banking
organizations with total consolidated
assets of $50 billion or more and foreign
nonbank financial companies
supervised by the Board.24 The proposal
includes: risk-based capital and leverage
requirements, liquidity requirements,
single-counterparty credit limits, overall
risk management and risk committee
requirements, stress test requirements, a
debt-to-equity limit for companies that
the Council has determined pose a grave
threat to financial stability, and early
remediation requirements. As described
below, the Board is also proposing a
22 See

12 CFR Part 252, Subparts F and G.
12 CFR Part 252, Subpart H.
24 For purposes of this proposal, foreign banking
organization is a foreign bank that has a banking
presence in the United States by virtue of operating
a branch, agency, or commercial lending company
subsidiary in the United States or controlling a bank
in the United States; or any company of which the
foreign bank is a subsidiary. A foreign nonbank
financial company supervised by the Board is a
nonbank financial company incorporated or
organized in a country other than the United States
that the Council has designated for Board
supervision. No such designations have been made.

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23 See

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supplemental enhanced standard: a
requirement for certain foreign banking
organizations to form a U.S.
intermediate holding company, which
would generally serve as a U.S. top-tier
holding company for the U.S.
subsidiaries of the company. The Board
is not proposing any other enhanced
prudential standards at this time, but
continues to consider whether adopting
any additional standards would be
appropriate.
By setting forth comprehensive
enhanced prudential standards and an
early remediation framework for large
foreign banking organizations, the
proposal would create an integrated set
of requirements that are intended to
increase the resiliency of the U.S.
operations of large foreign banking
organizations and minimize damage to
the U.S. financial system and the U.S.
economy in the event such a company
fails. The proposed rules, which
increase in stringency with the level of
systemic risk posed by and the risk
characteristics of the U.S. operations of
the company, would provide incentives
for large foreign banking organizations
to reduce the riskiness of their U.S.
operations and to consider the costs that
their failure or distress would impose
on the U.S. financial system.
In applying section 165 to foreign
banking organizations, the Act directs
the Board to give due regard to the
principle of national treatment and
equality of competitive opportunity.25
As discussed above, the proposal
broadly adopts the standards set forth in
the December 2011 proposal to ensure
equality of competitive opportunity, as
modified appropriately for foreign
banking organizations. Modifications
address the fact that foreign banking
organizations may operate in the United
States through direct branches and
agencies. The proposal also recognizes
that not all foreign banking
organizations that meet the statutory
asset size thresholds, particularly those
with a small U.S. presence, present the
same level of risk to U.S. financial
stability. As a result, the proposal would
apply a reduced set of requirements to
foreign banking organizations with
combined U.S. assets of less than $50
billion in light of the reduced risk that
these companies pose to U.S. financial
stability.
The Act also directs the Board in
implementing section 165 to take into
account the extent to which a foreign
banking organization is subject on a
consolidated basis to home country
standards that are comparable to those
applied to financial companies in the
25 12

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Fmt 4701

United States. In developing the
proposal, the Board has taken into
account home country standards in
balance with financial stability
considerations and concerns about
extraterritorial application of U.S.
enhanced prudential standards. The
proposed capital and stress testing
standards rely on home country
standards to a significant extent with
respect to a foreign banking
organization’s U.S. branches and
agencies because branches and agencies
are not separate legal entities and are
not required to hold capital separately
from their parent organizations. In
addition, the proposed risk management
standards would provide flexibility for
foreign banking organizations to rely on
home country governance structures to
implement certain proposed risk
management requirements.
The Dodd-Frank Act requires the
Board to apply enhanced prudential
standards to any foreign nonbank
financial company supervised by the
Board. Consistent with this statutory
requirement, the proposal would also
apply the enhanced prudential
standards, other than the intermediate
holding company requirement, to a
foreign nonbank financial company
supervised by the Board. In addition,
the proposal would set forth the criteria
that the Board would consider to
determine whether a U.S. intermediate
holding company should be established
by a foreign nonbank financial
company. The Board would expect to
tailor the enhanced prudential
standards to individual foreign nonbank
financial companies, as necessary, upon
designation by the Council.
Consultation With the Council
The Board consulted with the Council
by providing periodic updates to
agencies represented on the Council and
their staff on the development of the
proposed enhanced prudential
standards for foreign banking
organizations. The proposal reflects
comments provided to the Board as a
part of this consultation process. The
Board also intends to consult with each
Council member agency that primarily
supervises a functionally regulated
subsidiary or depository institution
subsidiary of a foreign banking
organization subject to this proposal
before imposing prudential standards or
any other requirements pursuant to
section 165 that are likely to have a
significant impact on such subsidiary.26
26 See

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A. Scope of Application
This proposal would implement
enhanced prudential standards under
section 165 of the Dodd-Frank Act and
early remediation requirements under
section 166 of the Act for foreign
banking organizations with total
consolidated assets of $50 billion or
more. The proposal also would
implement the risk committee and stress
testing standards set forth in sections
165(h) and (i) of the Act that apply to
a larger group of foreign banking
organizations and, with respect to stress

testing, foreign savings and loan holding
companies.
In addition, foreign banking
organizations with total consolidated
assets of $50 billion or more and
combined U.S. assets (excluding U.S.
branch and agency assets) of $10 billion
or more would be required to form a
U.S. intermediate holding company that
directly would be subject to enhanced
prudential standards.27 Foreign banking
organizations with total consolidated
assets of $500 billion or more would
also be subject to more stringent singlecounterparty credit limits.

76633

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

TABLE 1—SCOPE OF APPLICATION FOR FBOS
Global assets

U.S. assets

> $10 billion and .......
< $50 billion

n/a ....................

> $50 billion ..............

< $50 billion ......

> $50 billion ..............

> $50 billion ......

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

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

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The U.S. operations of foreign
banking organizations with total
consolidated assets of $50 billion or
more would be subject to the enhanced
prudential standards of this proposal.
Total consolidated assets for a foreign
banking organization would include its
global consolidated assets, calculated as
the four-quarter average of total assets
reported on the foreign banking
organization’s quarterly regulatory
report filed with the Board, the Capital
27 Combined U.S. assets (excluding U.S. branch
and agency assets) would be equal to the average
of the total assets of each top-tier U.S. subsidiary
of the foreign banking organization (excluding any
section 2(h)(2) company) on a consolidated basis for
the four most recent consecutive quarters as
reported by the foreign banking organization on its
Capital and Asset Report for Foreign Banking
Organizations (FR Y–7Q). If a foreign banking
organization had not filed the FR Y–7Q for each of
the four most recent consecutive quarters,
combined U.S. assets would be based on the most
recent quarter or consecutive quarters as reported
on FR Y–7Q (or as determined under applicable

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and Asset Report for Foreign Banking
Organizations (FR Y–7Q).29
Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or
More
As explained above, the proposal
would apply more stringent standards to
the U.S. operations of foreign banking
organizations that have a more
significant presence in the United
States. The U.S. operations of a foreign
banking organization with combined
U.S. assets of $50 billion or more
(including U.S. branch and agency
assets) would be subject to more
accounting standards, if no FR Y–7Q has been
filed). A foreign banking organization would be
permitted to reduce its combined U.S. assets
(excluding the total assets of each U.S. branch and
agency of the foreign banking organization) by the
amount corresponding to balances and transactions
between any U.S. subsidiaries that would be
eliminated in consolidation were a U.S.
intermediate holding company already formed.
28 Foreign banking organizations with assets of
$500 billion or more and U.S. IHCs with assets of
$500 billion or more would be subject to stricter
limits.

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stringent liquidity standards, risk
management standards, stress testing
requirements, and early remediation
requirements than would apply to the
U.S. operations of other foreign banking
organizations. The proposal would
measure combined U.S. assets of a
foreign banking organization as the sum
of (i) the average of the total assets of
each U.S. branch and agency of the
foreign banking organization for the four
most recent consecutive quarters as
reported by the foreign bank on the
Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks
(FFIEC 002) 30 and (ii) the average of the
29 If the foreign banking organization had not filed
the FR Y–7Q for each of the four most recent
consecutive quarters, total consolidated assets
would be based on the average of the foreign
banking organization’s total assets for the most
recent quarter or consecutive quarters as reported
on the FR Y–7Q (or as determined under applicable
accounting standards, if no FR Y–7Q has been
filed).
30 If the foreign bank had not filed the FFIEC 002
for each of the four most recent consecutive
quarters, the foreign bank should use the most

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total consolidated assets of its U.S.
intermediate holding company for the
four most recent consecutive quarters as
reported to the Board on the U.S.
intermediate holding company’s
Consolidated Financial Statements for
Bank Holding Companies (FR Y–9C).31
If the foreign banking organization had
not established a U.S. intermediate
holding company, combined U.S. assets
would include the average of the total
consolidated assets of each top-tier U.S.
subsidiary of the foreign banking
organization (other than a section
2(h)(2) company).32
In any case, for this purpose, the
company would be permitted to exclude
from the calculation of its combined
U.S. assets the amount corresponding to
balances and transactions between any
U.S. subsidiaries that would be
eliminated in consolidation were a U.S.
intermediate holding company already
formed. The company may also exclude
balances and transactions between any
U.S. subsidiary and any U.S. branch or
agency. The company would be
required to reflect balances and
transactions between the U.S. subsidiary
or U.S. branch or agency, on the one
hand, and the foreign bank’s non-U.S.
offices and other non-U.S. affiliates, on
the other.
Several Dodd-Frank Act rulemakings
require the calculation of combined U.S.
assets and combined U.S. risk-weighted
assets. The Board expects to standardize
this calculation, as appropriate, and
implement reporting requirements on
the FR Y–7Q through the regulatory
report development process.
In addition, if a foreign banking
organization’s U.S. intermediate holding
company itself had total consolidated
assets of $50 billion or more, the U.S.
intermediate holding company would
recent quarter or consecutive quarters as reported
on FFIEC 002 (or as determined under applicable
accounting standards, if no FFIEC 002 has been
filed).
31 All U.S. intermediate holding companies
would be required to file Form FR Y–9C, regardless
of whether they control a bank. If the U.S.
intermediate holding company had not filed an FR
Y–9C for each of the four most recent consecutive
quarters, the U.S. intermediate holding company
should use the most recent quarter or consecutive
quarters as reported on FR Y–9C (or as determined
under applicable accounting standards, if no FR Y–
9C had been filed).
32 A ‘‘section 2(h)(2) company’’ would be defined
to have the same meaning as in section 2(h)(2) of
the Bank Holding Company Act (12 U.S.C. 2(h)(2))
and section 211.23(f)(3) or (f)(5) of the Board’s
Regulation Y. If the foreign banking organization
had not filed the relevant reporting form for each
of the four most recent consecutive quarters, total
consolidated assets would be based on the average
of the foreign banking organization’s total assets for
the most recent quarter or consecutive quarters as
reported on the relevant reporting form (or as
determined under applicable accounting standards,
if no reporting form has been filed).

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be subject to more stringent
requirements in addition to those that
would apply to all U.S. intermediate
holding companies, including higher
capital standards, stress testing
standards, and early remediation
requirements. In addition, a U.S.
intermediate holding company with
total consolidated assets of $500 billion
or more would be subject to stricter
single-counterparty credit limits.
Foreign Banking Organizations and
Foreign Savings and Loan Holding
Companies With Total Consolidated
Assets of More Than $10 Billion
The proposal also would implement
the risk management and stress testing
provisions of section 165 that apply to
a broader set of entities than the other
standards in section 165 of the DoddFrank Act. Section 165(h) of the DoddFrank Act requires any publicly traded
bank holding company with $10 billion
or more in total consolidated assets to
establish a risk committee.33 The Board
proposes to apply this requirement to
any foreign banking organization with
publicly traded stock and total
consolidated assets of $10 billion or
more and any foreign banking
organization, regardless of whether its
stock is publicly traded, with total
consolidated assets of $50 billion or
more.
Section 165(i)(2) requires any
financial company with more than $10
billion in total consolidated assets that
is regulated by a primary federal
financial regulator to conduct annual
company-run stress tests.34 The Board,
as the primary federal financial
regulatory agency for foreign banking
organizations and foreign savings and
loan holding companies, proposes to
apply certain stress test requirements to
any foreign banking organization and
foreign savings and loan holding
company with more than $10 billion in
total consolidated assets.35 Finally, a
33 12

U.S.C. 5365(h).
U.S.C. 5365(i)(2). The Dodd-Frank Act
defines primary financial regulatory agency in
section 2 of the Act. See 12 U.S.C. 5301(12).
35 For a savings and loan holding company, ‘‘total
consolidated assets’’ would be defined as the
average of the total assets reported by the foreign
savings and loan holding company on its applicable
regulatory report for the four most recent
consecutive quarters, or if not reported, as
determined under applicable accounting standards.
Consistent with the methodology used to calculate
‘‘total consolidated assets’’ of a foreign banking
organization, if the foreign savings and loan holding
company had not filed the applicable reporting
form for each of the four most recent consecutive
quarters, total consolidated assets would be based
on the average of the foreign savings and loan
holding company’s total consolidated assets, as
reported on the company’s regulatory report, for the
most recent quarter or consecutive quarters. There
34 12

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U.S. intermediate holding company that
has total consolidated assets of $10
billion or more would be subject to
certain company-run stress test
requirements.
The proposed stress test and risk
management requirements applicable to
each set of companies are explained in
detail below.
Foreign Nonbank Financial Companies
Under the Dodd-Frank Act, the
Council generally may determine that a
U.S. or foreign nonbank financial
company should be subject to
supervision by the Board if it
determines that material financial
distress at the company, or the nature,
scope, size, scale, concentration,
interconnectedness, or mix of the
activities of the company, could pose a
threat to the financial stability of the
United States.36 Upon such a
determination, the Board is required to
apply the enhanced prudential
standards under section 165 of the Act
and the early remediation requirements
under section 166 of the Act to a
nonbank financial company supervised
by the Board. The Board may also
determine whether to require the foreign
nonbank financial company to establish
a U.S. intermediate holding company
under section 167 of the Act. At present,
the Council has not designated any
nonbank financial companies for
supervision by the Board.
Consistent with the Dodd-Frank Act,
this proposal would establish the
general framework for application of the
enhanced prudential standards and the
early remediation requirements
applicable to a foreign nonbank
financial company supervised by the
Board. In addition, the proposal would
set forth the criteria that the Board
would use to consider whether a U.S.
intermediate holding company should
be established by a foreign nonbank
financial company.
In applying the proposed enhanced
prudential standards to foreign nonbank
financial companies supervised by the
Board, the Board expects to tailor the
application of the standards to different
companies on an individual basis or by
category, taking into consideration their
capital structure, riskiness, complexity,
financial activities, size, and any other
risk-related factors that the Board deems
appropriate.37 The Board also would
review whether enhanced prudential
standards as applied to particular
are currently no foreign savings and loan holding
companies.
36 See 12 U.S.C. 5315; see also 77 FR 21637 (April
11, 2012) (final rule regarding the Council’s
authority under section 113 of the Dodd-Frank Act).
37 12 U.S.C. 5365(a)(2).

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
foreign nonbank financial companies
would give due regard to the principle
of national treatment and equality of
competitive opportunity and would take
into account the extent to which the
foreign nonbank financial company is
subject on a consolidated basis to home
country standards that are comparable
to those applied to financial companies
in the United States. The Board expects
to issue an order that provides clarity on
how the enhanced prudential standards
would apply to a particular foreign
nonbank financial company once the
company is designated by the Council.
Question 1: Should the Board require
a foreign nonbank financial company
supervised by the Board to establish a
U.S. intermediate holding company?
Why or why not? What activities,
operations, or subsidiaries should the
foreign nonbank financial company be
required to conduct or hold under the
U.S. intermediate holding company?
Question 2: If the Board required a
foreign nonbank financial company
supervised by the Board to form a U.S.
intermediate holding company, how
should the Board modify the manner in
which the enhanced prudential
standards and early remediation
requirements would apply to the U.S.
intermediate holding company, if at all?
What specific characteristics of a foreign
nonbank financial company should the
Board consider when determining how
to apply the enhanced prudential
standards and the early remediation
requirements to such a company?

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B. Summary of the Major Elements of
the Proposal
The proposal would implement
sections 165 and 166 through
requirements that enhance the Board’s
current regulatory framework for foreign
banking organizations in order to better
mitigate the risks posed to U.S. financial
stability by the U.S. activities of foreign
banking organizations. These changes
would provide a platform for consistent
regulation and supervision of the U.S.
operations of large foreign banking
organizations. The changes would also
bolster the capital and liquidity
positions of the U.S. operations of
foreign banking organizations to
improve their resiliency to asset quality
or funding shocks and may mitigate
certain challenges associated with the
resolution of the U.S. operations of a
large foreign banking organization.
Together, these changes should increase
the resiliency of the U.S. operations of
foreign banking organizations during
normal and stressed periods. The Board
seeks comment on all elements of this
proposal.

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Enhanced Structural, Capital, and
Liquidity Requirements
The proposal would mandate a more
standardized structure for the U.S. bank
and nonbank subsidiaries of foreign
banking organizations in order to
enhance regulation and supervision of
their combined U.S. operations. Foreign
banking organizations with total
consolidated assets of $50 billion or
more and with combined U.S. assets
(excluding the total assets of each U.S.
branch and agency of the foreign
banking organization) of $10 billion or
more would be required to establish a
top-tier U.S. intermediate holding
company over all U.S. bank and
nonbank subsidiaries of the company,
except for any company held under
section 2(h)(2) of the Bank Holding
Company Act.38 The U.S. intermediate
holding company would be subject to
the enhanced prudential standards of
this proposal and would not be
separately subject to the enhanced
prudential standards applicable to U.S.
bank holding companies.
The U.S. intermediate holding
company requirement would provide
consistency in the application of
enhanced prudential standards to the
U.S. operations of foreign banking
organizations with a large U.S.
subsidiary presence. In addition, a U.S.
intermediate holding company structure
would provide the Board, as umbrella
supervisor of the U.S. operations of
foreign banking organizations, with a
more uniform platform on which to
implement its supervisory program
across the U.S. operations of foreign
banking organizations. In the case of a
foreign banking organization with large
subsidiaries in the United States, the
U.S. intermediate holding company
could also help facilitate the resolution
of those U.S. subsidiaries. A foreign
banking organization would be
permitted to continue to operate in the
United States through branches and
agencies, albeit subject to the enhanced
prudential standards included in the
proposal for U.S. branch and agency
networks.39
The proposed rule would apply the
risk-based capital and leverage rules
that are applicable to U.S. bank holding
companies to U.S. intermediate holding
companies of foreign banking
organizations, including U.S.
intermediate holding companies that do
not have a depository institution
subsidiary. U.S. intermediate holding
companies with total consolidated

assets of $50 billion or more would also
be subject to the capital plan rule.40 In
addition, any foreign banking
organization with total consolidated
assets of $50 billion or more generally
would be required to meet its home
country’s risk-based capital and leverage
standards at the consolidated level that
are consistent with internationally
agreed risk-based capital and leverage
standards, including the risk-based
capital and leverage requirements
included in the Basel III agreement, on
an ongoing basis as that framework is
scheduled to take effect.41
The proposal would also generally
apply the same set of liquidity risk
management standards to the U.S.
operations of foreign banking
organizations with combined U.S. assets
of $50 billion or more that would be
required under the December 2011
proposal for large U.S. bank holding
companies. These standards would
include a requirement to conduct
monthly liquidity stress tests over a
series of time intervals out to one year,
and to hold a buffer of high quality
liquid assets to cover the first 30 days
of stressed cash flow needs. These
standards are designed to increase the
resiliency of the U.S. operations of
foreign banking organizations during
times of stress and to reduce the risk of
asset fire sales when U.S. dollar funding
channels are strained and short-term
debt cannot easily be rolled over.
Under the proposal, the liquidity
buffer would separately apply to the
U.S. branch and agency network and the
U.S. intermediate holding company of a
foreign banking organization with
combined U.S. assets of $50 billion or
more. The proposal would require the
U.S. intermediate holding company to
maintain the entire 30-day buffer in the
United States to maintain consistency
with requirements for large U.S. bank
holding companies. In recognition that
U.S. branches and agencies are not
separate legal entities from their parent
foreign bank and can engage only in
traditional banking activities by the
terms of their licenses, the proposal
would require the U.S. branch and
agency network to maintain the first 14
days of its 30-day liquidity buffer in the
United States and would permit the U.S.
branch and agency network to meet the
remainder of its requirement at the
consolidated level.
40 See

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

38 12

U.S.C. 1841(c)(2).
branch and agency network would be
defined to include all U.S. branches and U.S.
agencies of a foreign bank subject to this proposal.
39 U.S.

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

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Risk Management Requirements
The proposal would require any
foreign banking organization with
publicly traded stock and total
consolidated assets of $10 billion or
more and any foreign banking
organization, regardless of whether its
stock is publicly traded, with total
consolidated assets of $50 billion or
more to certify that it maintains a U.S.
risk committee. In addition, a foreign
banking organization with combined
U.S. assets of $50 billion or more would
be required to employ a U.S. chief risk
officer and implement enhanced risk
management requirements in a manner
that is generally consistent with the

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requirements in the December 2011
proposal. However, the proposal would
also implement these requirements in a
manner that provides some flexibility
for foreign banking organizations and
recognizes the complexity in applying
standards to foreign banking
organizations that maintain a U.S.
branch and agency network and bank
and nonbank subsidiaries.
Stress Testing
The proposal would implement stress
test requirements for a U.S. intermediate
holding company in a manner parallel
to those required of a U.S. bank holding
company.42 The parallel
implementation would help to ensure
that U.S. intermediate holding
companies have sufficient capital in the
United States to withstand a severely
adverse stress scenario. As provided in
more detail in section VIII of this
preamble, a foreign banking
organization with total consolidated
assets of $50 billion or more that
maintains a U.S. branch and agency
network could satisfy the proposal’s
stress test requirements applicable to
the U.S. branch and agency network if
it is subject to a consolidated capital
stress testing regime that is broadly
consistent with the stress test
requirements in the United States and,
if it has combined U.S. assets of $50
billion or more, provides information to
the Board regarding the results of the
consolidated stress tests.
Early Remediation
The recent financial crisis revealed
that the condition of large U.S. and
foreign banking organizations can
deteriorate rapidly even during periods
when their reported capital ratios and
other financial positions are well above
minimum requirements. The proposal
would implement early remediation
requirements for foreign banking
organizations with total consolidated
assets of $50 billion or more in a
manner generally consistent with the
December 2011 proposal. All foreign
banking organizations subject to the
regime would be subject to the same set
of triggers; however, only foreign
banking organizations with combined
U.S. assets of $50 billion or more would
be subject to mandatory remedial
actions.
C. Considerations in Developing the
Proposal
While this proposal would implement
some standards that require a more
direct allocation of capital and liquidity
42 See

77 FR 62378 (October 12, 2012); 77 FR
62396 (October 12, 2012).

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resources to U.S. operations than the
Board’s current approach to foreign
bank regulation, the proposal should be
viewed as supplementing rather than
departing from existing supervisory
practice. The proposal would continue
to allow foreign banking organizations
to operate branches and agencies in the
United States and would generally
allow U.S. branches and agencies to
continue to meet capital requirements at
the consolidated level. Similarly, the
proposal would not impose a cap on
cross-border intra-group flows, thereby
allowing foreign banking organizations
in sound financial condition to continue
to obtain U.S. dollar funding for their
global operations through their U.S.
operations. The proposal would,
however, regulate liquidity risk in the
U.S. operations of foreign banking
organizations in a way that increases
their resiliency to changes in the
availability of funding.
Requiring capital and liquidity buffers
in a specific jurisdiction of operation
below the consolidated level may
incrementally increase costs and reduce
flexibility of internationally active
banks that manage their capital and
liquidity on a centralized basis.
However, managing liquidity and
capital within jurisdictions can have
benefits not just for financial stability
generally, but also for firms themselves.
During the crisis, more decentralized
global banks relied less on crosscurrency funding and were less exposed
to disruptions in international
wholesale funding and foreign exchange
swap markets than more centralized
banks.43
The Board considered implementing
the enhanced prudential standards
required under the Dodd-Frank Act for
foreign banking organizations by
extending the Federal Reserve’s current
approach to foreign bank regulation to
include ongoing and more detailed
assessments of each firm’s home
country regulatory and resolution
regimes and each firm’s consolidated
financial condition. While this type of
analysis is an important part of ongoing
supervisory efforts, such an approach to
financial stability regulation, on its own,
could significantly increase regulatory
uncertainty and lead to meaningful
inconsistencies in the U.S. regulatory
regime for foreign and U.S. companies.
In addition, as host supervisor, the
Board is limited in its ability to assess
the financial condition of a foreign
banking organization on a timely basis,
inhibiting complete analysis of the
43 Committee on the Global Financial System,
Funding patterns and liquidity management of
internationally active banks, supra note 11.

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

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Additional Information Requests
The Board recognizes that the U.S.
operations of foreign banking
organizations represent only one part of
the global consolidated company and as
such will be affected by developments
at the consolidated and U.S. operations
levels. In addition, U.S. branches and
agencies are direct offices of the foreign
banking organization and are not subject
to U.S. capital requirements or
restrictions in the United States on
providing funding to their parent. As a
result, the Board anticipates that U.S.
supervisors of foreign banking
organizations would continue to require
information about the overall financial
condition of the consolidated entity.
Requests for information on the
consolidated operations of foreign
banking organizations that are part of
this proposal or the Federal Reserve’s
broader supervisory process would be
more frequent for those companies that
pose more material risk to U.S. financial
stability. Information requests may also
increase in frequency in cases when the
condition of the consolidated foreign
banking organization has shown signs of
deterioration, when the Federal Reserve
has significant concerns about the
willingness or ability of the foreign
banking organization to provide support
to its U.S. operations, when the U.S.
operations of a foreign banking
organization represent a large share of
the global firm, or when risk
management decisions for the U.S.
operations are largely made at the
consolidated level.
Question 3: Does the proposal
effectively promote the policy goals
stated in this preamble and help
mitigate the challenges with crossborder supervision discussed above? Do
any aspects of the policy create undue
burden for supervised institutions?
D. Timing of Application
The proposal would provide an
extended phase-in period to allow
foreign banking organizations time to
implement the proposed requirements.
For foreign banking organizations that
meet the total consolidated asset
threshold of $50 billion and, as
applicable, the combined U.S. asset
threshold of $50 billion as of July 1,
2014, the enhanced prudential
standards required under this proposal
would apply beginning on July 1,
2015.44
44 The proposed debt-to-equity ratio limitation,
which applies upon a determination by the Council

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Foreign banking organizations that
become subject to the requirements of
the proposal after July 1, 2014, would be
required to form a U.S. intermediate
holding company beginning 12 months
after they reach the total consolidated
asset threshold of $50 billion, unless
accelerated or extended by the Board in
writing. These foreign banking
organizations would be required to
comply with the enhanced prudential
standards (other than stress test
requirements and the capital plan rule)
beginning on the same date they are
required to establish a U.S. intermediate
holding company, unless accelerated or
extended by the Board. Stress test
requirements and the capital plan rule
would be applied in October of the year
after that in which the foreign banking
organization is required to establish a
U.S. intermediate holding company.
Question 4: What challenges are
associated with the proposed phase-in
schedule?
Question 5: What other considerations
should the Board address in developing
any phase-in of the proposed
requirements?
III. Requirement To Form a U.S.
Intermediate Holding Company
A. Background
As noted previously, foreign banking
organizations operate in the United
States under a variety of structures.
Some foreign banking organizations
conduct banking activities directly
through a U.S. branch or agency; others
own U.S. depository institutions
through a U.S.-based bank holding
company; and still others own a U.S.
depository institution directly. Most
large foreign banking organizations also
conduct a range of nonbank activities
through separate nonbank subsidiaries,
which may or may not be under a U.S.based bank holding company. Many
foreign banking organizations do not
have a single top-tier U.S. entity through
which to apply prudential requirements
to their combined U.S. operations.
Section 165 requires the Board to
impose enhanced prudential standards
on foreign banking organizations with
total consolidated assets of $50 billion
or more in a manner that preserves
national treatment and reduces risk to
U.S. financial stability. Given the
current variety in structures, applying
these standards consistently across the
U.S. operations of foreign banking
that a foreign banking organization with total
consolidated assets of $50 billion or more poses a
grave threat to the financial stability of the United
States and that the imposition of a debt to equity
requirement is necessary to mitigate such risk,
would apply beginning on the effective date of the
final rule.

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

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B. Intermediate Holding Company
Requirements for Foreign Banking
Organizations With Combined U.S.
Assets (Excluding U.S. Branch and
Agency Assets) of $10 Billion or More
As noted, the proposal would require
a foreign banking organization with total
consolidated assets of $50 billion or
more and combined U.S. assets
(excluding U.S. branch and agency
assets) of $10 billion or more to
establish a U.S. intermediate holding
company.45 The Board has chosen the
$10 billion threshold because it is
aligned with the $10 billion threshold
established by the Dodd-Frank Act for
stress test and risk management
requirements.
A foreign banking organization that
meets the asset thresholds would be
required to establish a U.S. intermediate
holding company on July 1, 2015,
unless that time is extended by the
Board in writing. A foreign banking
organization that crosses the asset
thresholds after July 1, 2014 would be
required to establish a U.S. intermediate
holding company 12 months after it
crossed the asset threshold, unless that
time is accelerated or extended by the
Board in writing.
A foreign banking organization that
establishes a U.S. intermediate holding
company would be required to hold its
interest in any U.S. subsidiary, other
than a section 2(h)(2) company, through
the U.S. intermediate holding company.
The term subsidiary would be defined
using the Bank Holding Company Act
definition of control, such that a foreign
banking organization would be required
to transfer its interest in any U.S.
company, including interests in joint
ventures, for which it: (i) Directly or
indirectly or acting through one or more
other persons owns, controls, or has
power to vote 25 percent or more of any
class of voting securities of the
company; (ii) controls in any manner
the election of a majority of the directors
or trustees of the company; or (iii)
directly or indirectly exercises a
controlling influence over the
management or policies of the company.
U.S. subsidiaries held under section
2(h)(2) of the Bank Holding Company
Act are not required to be held under
the U.S. intermediate holding company.
Section 2(h)(2) of the Bank Holding
45 Combined U.S. assets (excluding U.S. branch
and agency assets) would be based on the total
consolidated assets of each top-tier U.S. subsidiary
of the foreign banking organization (excluding any
section 2(h)(2) company). A company would be
permitted to reduce its combined U.S. assets for this
purpose by the amount corresponding to balances
and transactions between any U.S. subsidiaries that
would be eliminated in consolidation were a U.S.
intermediate holding company already formed.

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Company Act allows qualifying foreign
banking organizations to retain their
interest in foreign commercial firms that
conduct business in the United States.
This long-standing statutory exception
was enacted in recognition of the fact
that some foreign jurisdictions do not
impose a clear separation between
banking and commerce. The current
proposal would not require foreign
banking organizations to hold section
2(h)(2) investments under the U.S.
intermediate holding company because
these commercial firms have not been
subject to Board supervision, are not
integrated into the U.S. financial
operations of foreign banking
organizations, and foreign banking
organizations often cannot restructure
their foreign commercial investments.
The proposal would also require the
foreign banking organization to transfer
to the U.S. intermediate holding
company any controlling interests in
U.S. companies acquired pursuant to
merchant banking authority.
In exceptional circumstances, the
proposal would provide the Board with
authority to permit a foreign banking
organization to establish multiple U.S.
intermediate holding companies or use
an alternative organizational structure to
hold its U.S. operations. For example,
the Board may exercise this authority
when a foreign banking organization
controls multiple lower-tier foreign
banking organizations that have separate
U.S. operations. In addition, the Board
may exercise this authority when, under
applicable home country law, the
foreign banking organization may not
control its U.S. subsidiaries through a
single U.S. intermediate holding
company. Finally, the proposal would
provide the Board with authority on an
exceptional basis to approve a modified
U.S. organizational structure based on
the foreign banking organization’s
activities, scope of operations, structure,
or similar considerations.
The proposal would not require a
foreign banking organization to transfer
any assets associated with a U.S. branch
or agency to the U.S. intermediate
holding company. Congress has
permitted foreign banking organizations
to establish branches and agencies in
the United States if they meet specific
standards, and has chosen not to require
foreign banks to conduct their banking
business in the United States only
through subsidiary U.S. depository
institutions. Excluding U.S. branches
and agencies from the intermediate
holding company requirement would
also preserve flexibility for foreign
banking organizations to operate
directly in the United States based on
the capital adequacy of their

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consolidated organization, subject to
proposed enhanced prudential
standards applicable to the U.S. branch
and agency networks.
After issuing a final rule, the Board
intends to monitor how foreign banking
organizations adapt their operations in
response to the structural requirement,
including whether foreign banking
organizations relocate activities from
U.S. subsidiaries into their U.S. branch
and agency networks.
Question 6: What opportunities for
regulatory arbitrage exist within the
proposed framework, if any? What
additional requirements should the
Board consider applying to a U.S.
branch and agency network to ensure
that U.S. branch and agency networks
do not receive favorable treatment under
the enhanced prudential standards
regime?
Question 7: Should the Board
consider an alternative asset threshold
for purposes of identifying the
companies required to form a U.S.
intermediate holding company, and if
so, what alternative threshold should be
considered and why? What other
methodologies for calculating a
company’s total U.S. assets would better
serve the purposes of the proposal?
Question 8: Should the Board provide
an exclusive list of exemptions to the
intermediate holding company
requirement or provide exceptions on a
case-by-case basis?
Question 9: Is the definition of U.S.
subsidiary appropriate for purposes of
determining which entities should be
held under the U.S. intermediate
holding company?
Question 10: Should the Board
consider exempting any other categories
of companies from the requirement to be
held under the U.S. intermediate
holding company, such as controlling
investments in U.S. subsidiaries made
by foreign investment vehicles that
make a majority of their investments
outside of the United States, and if so,
which categories of companies?
Question 11: What, if any, tax
consequences, international or
otherwise, could present challenges to a
foreign banking organization seeking to
(1) reorganize its U.S. subsidiaries under
a U.S. intermediate holding company
and (2) operate on an ongoing basis in
the United States through a U.S.
intermediate holding company that
meets the corporate form requirements
described in the proposal?
Question 12: What other costs would
be associated with forming a U.S.
intermediate holding company? Please
be specific and describe accounting or
other operating costs.

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Question 13: What impediments in
home country law exist that could
prohibit or limit the formation of a
single U.S. intermediate holding
company?
Notice Requirements
To reduce burden on foreign banking
organizations, the Board proposes to
adopt an after-the-fact notice procedure
for the formation of a U.S. intermediate
holding company and the changes in
corporate structure required by this
proposal. Under the proposal, within 30
days of establishing a U.S. intermediate
holding company, a foreign banking
organization would be required to
provide to the Board: (1) A description
of the U.S. intermediate holding
company, including its name, location,
corporate form, and organizational
structure, (2) a certification that the U.S.
intermediate holding company meets
the requirements of this section, and (3)
any other information that the Board
determines is appropriate.
Question 14: Should the Board adopt
an alternative process in addition to, or
in lieu of, the post-notice procedure
described above? For example, should
the Board require a before-the-fact
application? Why or why not?

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Corporate Form
The proposal would require that a
U.S. intermediate holding company be
organized under the laws of the United
States, any state, or the District of
Columbia. While the proposal generally
provides flexibility in the corporate
form of the U.S. intermediate holding
company, the U.S. intermediate holding
company could not be structured in a
manner that would prevent it from
meeting the requirements in subparts K
through R of this proposal.46
Under the risk management
requirements of subpart O, the U.S.
intermediate holding company would
be required to have a board of directors
or equivalent thereto to help ensure a
strong, centralized corporate governance
system.
Applicable Standards and Supervision
Under the proposal, a U.S.
intermediate holding company would
be subject to the enhanced prudential
standards set forth in this proposal. In
addition, a U.S. intermediate holding
company would be subject to
comparable regulatory reporting
requirements and inspection
requirements to those described in
section 225.5 of the Board’s Regulation
46 The proposal would not require the U.S.
intermediate holding company to be wholly owned.
Thus, a U.S. intermediate holding company could
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Y (12 CFR 225.5) that apply to a bank
holding company.
The proposal would also provide that
a U.S. intermediate holding company
would be subject to the enhanced
prudential standards of this proposal,
and would not be separately subject to
the enhanced prudential standards
applicable to U.S. bank holding
companies, regardless of whether the
company would also meet the scope of
application of those provisions. In doing
so, the proposal intends to minimize
uncertainty about the timing or
applicability of certain requirements
and to ensure that all U.S. intermediate
holding companies of foreign banking
organizations are subject to consistent
rules.
In connection with this and other
rulemakings, the Board is conducting a
review of existing supervisory guidance
to identify guidance that may be
relevant to the operations and activities
of a U.S. intermediate holding company
that does not have a bank subsidiary.
The Board proposes to apply such
guidance to U.S. intermediate holding
companies on a rolling basis, either by
revising and reissuing the guidance or
by publishing a notification that
references the applicable guidance.
IV. Risk-Based Capital Requirements
and Leverage Limits
A. Background
The financial crisis revealed that
internationally agreed bank capital
requirements were too low, the
definition of capital was too weak, and
the risk weights assigned to certain asset
classes were not proportional to their
actual risk. The financial crisis also
demonstrated that in the resolution of a
failing financial firm, the location of
capital is critical and that companies
that managed resources on a
decentralized basis were generally less
exposed to disruptions in international
markets than those that solely managed
resources on a centralized basis.
The international regulatory
community has made substantial
progress on strengthening consolidated
bank capital standards in response to
the crisis. The Basel Committee on
Banking Supervision’s (BCBS)
comprehensive reform package, ‘‘Basel
III: A global regulatory framework for
more resilient banks and banking
systems’’ (Basel III Accord), has
significantly enhanced the strength of
international consolidated capital
standards by raising minimum
standards, more conservatively defining
qualification standards for regulatory
capital, and establishing a framework
for capital conservation when capital

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levels do not remain well above the
minimum standards.47
While Basel III improves the
standards for quantity and quality of
consolidated capital of internationally
active banking organizations, it does not
address the capitalization of host
country operations of an internationally
active banking organization. Moreover,
lack of access to timely information on
the consolidated capital position of the
parent organization can limit the ability
of host supervisors to respond to
changes in consolidated capital
adequacy, creating a risk of large losses
in the host country operations of the
foreign bank if the parent becomes
distressed or fails.
The Board’s current approach to
capital regulation of the U.S. operations
of foreign banking organizations was
designed to provide them with the
flexibility to manage capital on a global
consolidated basis, while helping to
promote global competitive equity with
U.S. banking organizations. Under the
current approach, in order to establish
a branch, agency, commercial lending
company, or bank subsidiary in the
United States, a foreign bank is required
to maintain capital levels at the
consolidated parent organization that
are equivalent to those required of a
U.S. banking organization. In making
equivalency determinations, the Board
has allowed foreign banking
organizations to use home country
capital standards if those standards are
consistent with the standards
established by the BCBS. To the extent
that a foreign banking organization
controls a U.S. depository institution
subsidiary, the U.S. depository
institution subsidiary is subject to the
same set of risk-based capital and
leverage requirements that apply to
other U.S. depository institutions. Any
functionally regulated nonbank
subsidiaries of foreign banking
organizations are subject to capital
requirements at the individual nonbank
subsidiary level as may be established
by primary federal or state regulators.
Pursuant to the Board’s SR Letter 01–01,
as a general matter, a U.S. bank holding
company subsidiary of a foreign banking
organization that qualifies as a financial
holding company has not been required
to comply with the Board’s capital
standards since 2001.48 This approach
47 See

Basel III Accord, supra note 40.
cases in which the Board determined that a
foreign bank operating a U.S. branch, agency, or
commercial lending company was well-capitalized
and well-managed under standards comparable to
those of U.S. banks controlled by financial holding
companies, the Board has applied a presumption
that the foreign banking organization had sufficient
48 In

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has been predicated on the basis of the
foreign bank parent maintaining
sufficient consolidated capital levels to
act as a source of support to its U.S.
operations under stressed conditions.
Several factors have prompted a
targeted reassessment of the Board’s
traditional primary reliance on
consolidated capital requirements in
implementing capital regulation for U.S.
subsidiaries of foreign banking
organizations. These factors include the
financial stability risk posed by the U.S.
operations of the largest foreign banking
organizations, questions about the
ability and willingness of parent foreign
banking organizations to act as a source
of support to their U.S. operations
during stressed periods, and challenges
associated with cross-border resolution
that create incentives for home and host
jurisdictions to restrict cross-border
intra-group capital flows when banking
organizations face difficulties.
The Board has considered these
factors in determining how best to
implement section 165 of the DoddFrank Act, which directs the Board to
impose enhanced risk-based capital and
leverage requirements on foreign
banking organizations with total
consolidated assets of $50 billion or
more.49 In addition, the Board has
considered section 171 of the DoddFrank Act, which requires top-tier U.S.
bank holding company subsidiaries of
foreign banking organizations that relied
on SR Letter 01–01 to meet U.S. capital
standards that are not less than the
standards generally applicable to U.S.
depository institutions beginning in
July, 2015.50
As described below, the proposal
would subject U.S. intermediate holding
companies to the capital standards
applicable to U.S. bank holding
companies. This would both strengthen
the capital position of U.S. subsidiaries
of foreign banking organizations and
provide parity in the capital treatment
for U.S. bank holding companies and
the U.S. subsidiaries of foreign banking
organizations on a consolidated basis.
The proposal would also subject U.S.
intermediate holding companies with
total consolidated assets of $50 billion
or more to the Board’s capital plan rule
(12 CFR 225.8) in light of the more
significant risks posed by these firms.
Aligning the capital requirements
between U.S. subsidiaries of foreign
banking organizations on a consolidated
basis and U.S. bank holding companies
is also consistent with long-standing
financial strength and resources to support its
banking activities in the United States.
49 12 U.S.C. 5365(b).
50 12 U.S.C. 5371(b)(4)(E).

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international capital agreements, which
provide flexibility to host jurisdictions
to set capital requirements for local
subsidiaries of foreign banking
organizations, so long as national
treatment is preserved.
The proposal would allow U.S.
branch and agency networks of foreign
banking organizations with total
consolidated assets of $50 billion or
more to continue to meet U.S. capital
equivalency requirements at the
consolidated level. Specifically, the
proposal would require a foreign
banking organization to certify that it
meets on an ongoing basis home country
capital adequacy standards that are
consistent with the Basel Capital
Framework, as defined below. This
requirement is intended to help ensure
that the consolidated capital base
supporting the activities of U.S.
branches and agencies remains strong,
and that weaknesses at the consolidated
foreign parent do not undermine the
financial strength of its direct U.S.
operations.
B. Risk-Based Capital Requirements
Applicable to U.S. Intermediate Holding
Companies
This proposal would require all U.S.
intermediate holding companies of
foreign banking organizations with total
consolidated assets of $50 billion or
more, regardless of whether the U.S.
intermediate holding company controls
a depository institution, to calculate and
meet any applicable capital adequacy
standards, including minimum riskbased capital and leverage requirements
and any restrictions based on capital
adequacy, in the same manner and to
the same extent as a U.S. bank holding
company in accordance with any capital
standards established by the Board for
bank holding companies. Currently, the
Board’s rules for calculating minimum
capital requirements for bank holding
companies are found at 12 CFR part 225,
Appendix A (general risk-based capital
rule), 12 CFR part 225, Appendix D
(leverage rule), 12 CFR part 225,
Appendix E (market risk rule), and 12
CFR part 225, Appendix G (advanced
approaches risk-based capital rule). A
U.S. intermediate holding company that
met the applicability thresholds under
the market risk rule or the advanced
approaches risk-based capital rule
would be required to use those rules to
calculate its minimum risk-based capital
requirements, in addition to the general
risk-based capital requirements and the
leverage rule.
The Board, along with the other
banking agencies, has proposed
revisions to its capital requirements that
would include implementation in the

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United States of the Basel III Accord.51
The Board anticipates that the capital
adequacy standards for U.S. bank
holding companies on July 1, 2015, will
incorporate the standards in the Basel III
Accord.
A U.S. intermediate holding company
established on July 1, 2015, would be
required to comply with the capital
adequacy standards on that date, unless
that time is accelerated or extended by
the Board in writing. A U.S.
intermediate holding company that is
required to be established after July 1,
2015, would be required to comply with
the capital adequacy standards
applicable to bank holding companies
beginning on the date it is established,
unless that time is accelerated or
extended by the Board in writing.
The Board may also, through a
separate, future rulemaking, apply a
quantitative risk-based capital surcharge
in the United States to a U.S.
intermediate holding company that is
determined to be a domestic
systemically important banking
organization (D–SIB), consistent with
the proposed BCBS D–SIB regime or
similar framework.52
Question 15: Are there provisions in
the Board’s Basel III proposals that
would be inappropriate to apply to U.S.
intermediate holding companies?
U.S. Intermediate Holding Companies
With Total Consolidated Assets of $50
Billion or More
All U.S. intermediate holding
companies with total consolidated
assets of $50 billion or more would be
required to comply with section 225.8 of
Regulation Y (capital plan rule) in the
same manner and to the same extent as
a bank holding company subject to that
section.53 The capital plan rule
currently applies to all U.S. domiciled
bank holding companies with total
consolidated assets of $50 billion or
more (except that U.S. domiciled bank
holding companies with total
consolidated assets of $50 billion or
more that are relying on SR Letter 01–
01 are not required to comply with the
capital plan rule until July 21, 2015).
51 In June 2012, the Board, together with the OCC
and FDIC, published three notices of proposed
rulemaking to implement the Basel III Accord in the
United States. See 77 FR 52792 (August 30, 2012);
77 FR 52888 (August 30, 2012); 77 FR 52978
(August 30, 2012) (collectively, the Basel III
proposals). These proposed requirements, if
adopted in final form, are expected to form the basis
for the capital regime applicable to U.S. bank
holding companies.
52 BCBS, A framework for dealing with domestic
systemically important banks (August 1, 2012),
available at http://www.bis.org/publ/bcbs224.pdf.
53 12 CFR 225.8. See 76 FR 74631 (December 1,
2011).

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

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consolidated level that are consistent
with the Basel Capital Framework. The
proposal defines the Basel Capital
Framework as the regulatory capital
framework published by the BCBS, as
amended from time to time. This
requirement would include the
standards in the Basel III Accord for
minimum risk-based capital ratios and
restrictions and limitations if capital
conservation buffers above the
minimum ratios are not maintained, as
these requirements would come into
effect under the transitional provisions
included in the Basel III Accord.54
A company may satisfy this
requirement by certifying that it meets
the capital adequacy standards
established by its home country
supervisor, including with respect to the
types of capital instruments that would
satisfy requirements for common equity
tier 1, additional tier 1, and tier 2 capital
and for calculating its risk-weighted
assets, if those capital adequacy
standards are consistent with the Basel
Capital Framework. If a foreign banking
organization’s home country standards
are not consistent with the Basel Capital
Framework, the foreign banking
organization may demonstrate to the
Board’s satisfaction that it meets
standards consistent with the Basel
Capital Framework.
In addition, a foreign banking
organization would be required to
provide to the Board certain information
on a consolidated basis. This
information would include its riskbased capital ratios (including its tier 1
risk-based capital ratio and total riskbased capital ratio and amount of tier 1
capital and tier 2 capital), risk-weighted
assets, and total assets and, consistent
with the transition period in the Basel
III Accord, the common equity tier 1
ratio, leverage ratio and amount of
common equity tier 1 capital, additional
tier 1 capital, and total leverage assets
on a consolidated basis.55
Under the proposal, a foreign banking
organization with total consolidated
assets of $50 billion or more as of July
1, 2014, would be required to comply
with the proposed certification
54 The Basel III Accord establishes the following
minimum risked-based capital standards: 4.5
percent tier 1 common equity to risk-weighted
assets, 6.0 percent tier 1 capital to risk-weighted
assets, and 8.0 percent total capital to risk-weighted
assets. In addition, the Basel III Accord includes
restrictions on capital distributions and certain
discretionary bonus payments if a banking
organization does not hold tier 1 common equity
sufficient to exceed the minimum risk-weighted
ratio requirements outlined above by at least 2.5
percent. See Basel III Accord, supra note 40.
55 This information would have to be provided as
of the close of the most recent quarter and as of the
close of the most recent audited reporting period.

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beginning on July 1, 2015, unless that
time is extended by the Board in
writing. A foreign banking organization
that exceeds the $50 billion asset
threshold after July 1, 2014, would be
required to comply with the proposed
requirements beginning 12 months after
it crossed the asset threshold, unless
that time is accelerated or extended by
the Board in writing.
The proposal would not apply the
current minimum leverage ratio for U.S.
bank holding companies to a foreign
banking organization. However, the
international leverage ratio set forth in
the Basel III Accord is expected to be
implemented internationally in 2018. At
that time, the proposal would require
foreign banking organizations subject to
this requirement to certify or otherwise
demonstrate that they comply with the
international leverage ratio, consistent
with the Basel Capital Framework.
If a foreign banking organization
cannot provide the certification or
otherwise demonstrate to the Board that
it meets capital adequacy standards at
the consolidated level that are
consistent with the Basel Capital
Framework, the proposal would provide
that the Board may impose conditions
or restrictions relating to the activities
or business operations of the U.S.
operations of the foreign banking
organization. In implementing any
conditions or restrictions, the Board
would coordinate with any relevant U.S.
licensing authority.
In addition, through a separate
rulemaking, the Board may introduce a
consolidated capital surcharge
certification requirement for a foreign
banking organization that maintains
U.S. operations and that is designated
by the BCBS as a global systemically
important banking organization (G–
SIBs). The surcharge amount would be
aligned with the international
requirement.56
Question 17: What challenges would
foreign banking organizations face in
complying with the proposed enhanced
capital standards framework described
above? What alternatives should the
Board consider? Provide detailed
descriptions for alternatives.
Question 18: What concerns, if any,
are raised by the proposed requirement
that a foreign banking organization
calculate regulatory capital ratios in
accordance with home country rules
that are consistent with the Basel
Accord, as amended from time to time?
How might the Federal Reserve refine
56 BCBS, Global systemically important banks:
assessment methodology and the additional loss
absorbency requirement (November 2011), available
at http://www.bis.org/publ/bcbs207.pdf.

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

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

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banking organizations used their U.S.
operations to raise short-term U.S.
dollar debt in U.S. markets to fund
longer-term assets held in other
jurisdictions. The vulnerabilities
associated with this activity are difficult
for U.S. supervisors to monitor, due to
their lack of access to timely
information on the global U.S. dollar
balance sheets of the consolidated
banking organization. While additional
information on the global consolidated
company would partially alleviate this
problem, U.S. supervisors are likely to
remain at a significant information
disadvantage relative to home country
authorities, which limits U.S.
supervisors’ ability to fully assess the
liquidity resiliency of the consolidated
firm. Further, liquidity crises tend to
occur rapidly, leaving banking
organizations and supervisors limited
time to react and increasing the
importance of local management of
liquidity sources to cover local
vulnerabilities.
Sole reliance on consolidated
liquidity risk management of foreign
banking organizations has also resulted
in a disadvantageous funding structure
for the U.S. operations of many firms
relative to their home country
operations. Many foreign banking
organizations provide funding to their
U.S. branches on a short-term basis and
receive funding from their U.S. branches
on a longer-term basis.
To address these risks and help
ensure parallel treatment of U.S. and
foreign banking organizations operating
in the United States that pose risk to
U.S. financial stability, this proposal
would implement a set of liquidity
requirements for foreign banking
organizations that build on the core
provisions of the Board’s SR Letter 10–
6, ‘‘Interagency Policy Statement on
Funding and Liquidity Risk
Management’’ issued March 2010
(Interagency Liquidity Risk Policy
Statement).59 These requirements are
broadly consistent with risk
management requirements proposed for
U.S. bank holding companies in the
December 2011 proposal.
In general, the liquidity requirements
in this proposal would establish a
regulatory framework for the
management of liquidity risk for the
U.S. operations of foreign banking
organizations with combined U.S. assets
of $50 billion or more. The proposal
would also require the U.S. operations
of these companies to conduct monthly
59 SR Letter 10–6, Interagency Policy Statement
on Funding and Liquidity Risk Management (March
2010), available at http://www.federalreserve.gov/
boarddocs/srletters/2010/sr1006.htm.

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

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of less than $50 billion, reflecting the
lower risk these firms present to U.S.
financial stability. Generally, these
foreign banking organizations would not
be subject to the full set of liquidity
requirements in the proposal, but would
be required to report to the Board the
results of an internal liquidity stress test
for the combined U.S. operations on an
annual basis. The proposal requires that
this internal test be conducted in a
manner consistent with BCBS principles
for liquidity risk management.60
The liquidity risk management
requirements in this proposal represent
an initial set of enhanced liquidity
requirements for foreign banking
organizations with $50 billion or more
in combined U.S. assets that would be
broadly consistent with the December
2011 proposal. The Board intends
through future separate rulemakings to
implement the quantitative liquidity
standards included in the Basel III
Accord for the U.S. operations of some
or all foreign banking organizations with
$50 billion or more in combined U.S.
assets, consistent with the international
timeline.
Question 20: Is the Board’s approach
to enhanced liquidity standards for
foreign banking organizations with
significant U.S. operations appropriate?
Why or why not?
Question 21: Are there other
approaches that would more effectively
enhance liquidity standards for these
companies? If so, provide detailed
examples and explanations.
Question 22: The Dodd-Frank Act
contemplates additional enhanced
prudential standards, including a limit
on short-term debt. Should the Board
adopt a short-term debt limit in addition
to, or in place of, the Basel III liquidity
requirements in the future? Why or why
not?

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B. Liquidity Requirements for Foreign
Banking Organizations With Combined
U.S. Assets of $50 Billion or More
In general, the liquidity requirements
proposed for foreign banking
organizations with combined U.S. assets
of $50 billion or more would fall into
three broad categories. First, the
proposal would establish a framework
for the management of liquidity risk.
Second, the proposal would require
these foreign banking organizations to
conduct monthly liquidity stress tests.
Third, each such company would be
required to maintain a buffer of highly
liquid assets primarily in the United
60 See BCBS, Principles for Sound Liquidity Risk
Management and Supervision (September 2008)
(BCBS principles for liquidity risk management),
available at http://www.bis.org/publ/bcbs144.htm.

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States to cover cash flow needs under
stressed conditions.
A foreign banking organization with
combined U.S. assets of $50 billion or
more on July 1, 2014, would be required
to comply with the proposed liquidity
requirements on July 1, 2015, unless
that time is extended by the Board in
writing. A foreign banking organization
whose combined U.S. assets exceeded
$50 billion after July 1, 2014, would be
required to comply with the proposed
liquidity standards beginning 12 months
after it crossed the $50 billion asset
threshold, unless that time is
accelerated or extended by the Board in
writing.
Framework for Managing Liquidity Risk
A critical element of sound liquidity
risk management is effective corporate
governance, consisting of oversight of a
company’s liquidity risk management
by its board of directors and the
appropriate risk management committee
and executive officers.
As discussed further below in section
VII of this preamble, the proposal would
require that a foreign banking
organization with combined U.S. assets
of $50 billion or more establish a risk
committee to oversee the risk
management of the combined U.S.
operations of the company.61 The
proposal would also require a foreign
banking organization with combined
U.S. assets of $50 billion or more to
appoint a U.S. chief risk officer with
responsibility for implementing the
company’s risk management practices
for the combined U.S. operations.
The U.S. risk committee would be
required to review and approve the
company’s liquidity risk tolerance for its
U.S. operations at least annually, with
the concurrence of the company’s board
of directors or the enterprise-wide risk
committee (if a different committee than
the U.S. risk committee).62 In reviewing
its liquidity risk tolerance, the U.S. risk
committee would be required to
consider the capital structure, risk
profile, complexity, activities, and size
of the company’s U.S. operations in
order to help ensure that the established
liquidity risk tolerance is appropriate
for the company’s business strategy with
respect to its U.S. operations and the
role of those operations in the U.S.
financial system. The liquidity risk
61 The U.S. risk committee can be the foreign
banking organization’s enterprise-wide risk
committee, as described in section VII of this
preamble, as long as the enterprise-wide risk
committee specifically assumes the specified
responsibilities just described.
62 Liquidity risk tolerance is the acceptable level
of liquidity risk the company may assume in
connection with its operating strategies for its
combined U.S. operations.

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

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company as a whole or for the combined
U.S. operations specifically.
As part of ongoing liquidity risk
management within the U.S. operations,
the proposal would require the U.S.
chief risk officer to, at least quarterly,
review the cash flow projections to
ensure compliance with the liquidity
risk tolerance; review and approve the
liquidity stress test practices,
methodologies, and assumptions;
review the liquidity stress test results;
approve the size and composition of the
liquidity buffer; review and approve the
specific limits on potential sources of
liquidity risk and review the company’s
compliance with those limits; and
review liquidity risk management
information systems necessary to
identify, measure, monitor, and control
liquidity risk. In addition, the U.S. chief
risk officer would be required to
establish procedures governing the
content of reports on the liquidity risk
profile of the combined U.S. operations.

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Additional Responsibilities of the U.S.
Chief Risk Officer
Under the proposed rule, the U.S.
chief risk officer would be required to
review the liquidity risk management
strategies and policies and procedures
established by senior management of the
combined U.S. operations of the foreign
banking organization. These strategies
and policies and procedures should
include those relating to liquidity risk
measurement and reporting systems,
cash flow projections, liquidity stress
testing, liquidity buffer, contingency
funding plan, specific limits, and
monitoring procedures required under
the proposed rule. The proposal also
would require the U.S. chief risk officer
to review information provided by the
senior management of the U.S.
operations to determine whether those
operations are managed in accordance
with the established liquidity risk
tolerance. The U.S. chief risk officer
would additionally be required to report
at least semi-annually to the U.S. risk
committee and enterprise-wide risk
committee (or designated subcommittee
thereof) on the liquidity risk profile of
the combined U.S. operations of the
company, and to provide other relevant
and necessary information to the U.S.
risk committee and the enterprise-wide
risk committee to ensure that the U.S.
operations are managed within the
established liquidity risk tolerance.
Independent Review
Under the proposed rule, a foreign
banking organization with combined
U.S. assets of $50 billion or more would
be required to establish and maintain an
independent review function to evaluate

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the liquidity risk management of its
combined U.S. operations. The review
function would be independent of
management functions that execute
funding (the treasury function). The
independent review function would be
required to review and evaluate the
adequacy and effectiveness of the U.S.
operations’ liquidity risk management
processes regularly, but no less
frequently than annually. It would also
be required to assess whether the U.S.
operations’ liquidity risk management
complies with applicable laws,
regulations, supervisory guidance, and
sound business practices, and to report
statutory and regulatory noncompliance
and other material liquidity risk
management issues to the U.S. risk
committee and the enterprise-wide risk
committee (or designated subcommittee)
in writing for corrective action.
An appropriate internal review
conducted by the independent review
function should address all relevant
elements of the liquidity risk
management process for the U.S.
operations, including adherence to the
established policies and procedures,
and the adequacy of liquidity risk
identification, measurement, and
reporting processes. Personnel
conducting these reviews should seek to
understand, test, document, and
evaluate the liquidity risk management
processes, and recommend solutions to
any identified weaknesses.
Cash Flow Projections
To ensure that a foreign banking
organization with combined U.S. assets
of $50 billion or more has a sound
process for identifying and measuring
liquidity risk, the proposed rule would
require comprehensive projections for
the company’s U.S. operations that
include forecasts of cash flows arising
from assets, liabilities, and off-balance
sheet exposures over appropriate time
periods, and identify and quantify
discrete and cumulative cash flow
mismatches over these time periods.
The proposed rule would specifically
require the company to provide cash
flow projections for the U.S. operations
over short-term and long-term time
horizons that are appropriate to the
capital structure, risk profile,
complexity, activities, size, and other
risk-related factors of the U.S.
operations.63
The proposed rule states that a foreign
banking organization must establish a
methodology for making its cash flow
projections for its U.S. operations, and
63 A company would be required to update shortterm cash flow projections daily, and update longterm cash flow projections at least monthly.

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

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
Liquidity Stress Test Requirements
The proposal would require a foreign
banking organization with combined
U.S. assets of $50 billion or more to
conduct monthly liquidity stress tests
separately on its U.S. intermediate
holding company and its U.S. branch
and agency network. By considering
how severely adverse events,
conditions, and outcomes would affect
the liquidity risk of its U.S. branch and
agency network and its U.S.
intermediate holding company, the
company can identify vulnerabilities;
quantify the depth, source, and degree
of potential liquidity strain in its U.S.
operations; and analyze the possible
effects. When combined with
comprehensive information about an
institution’s funding position, stress
testing can serve as an important tool for
effective liquidity risk management.
In conducting liquidity stress test, the
foreign banking organization would be
required to separately identify adverse
liquidity stress scenarios and assess the
effects of these scenarios on the cash
flow and liquidity of each of the U.S.
branch and agency network and the U.S.
intermediate holding company. In
addition to monthly stress testing, the
U.S. operations of the foreign banking
organization must be prepared to
conduct ‘‘ad hoc’’ stress tests to address
rapidly emerging risks or consider the
effect of sudden events, upon the
request of the Board. The Board may, for
example, require the U.S. operations of
a company to perform additional stress
tests where there has been a significant
deterioration in the company’s earnings,
asset quality, or overall financial
condition; when there are negative
trends or heightened risk associated
with a particular product line of the
U.S. operations; or when there are
increased concerns over the company’s
funding of off-balance sheet exposures
related to U.S. operations.
Effective stress testing should include
adverse scenario analyses that
incorporate historical and hypothetical
scenarios to assess the effect on
liquidity of various events and
circumstances, including variations
thereof. At a minimum, a company
would be required to incorporate stress
scenarios for its U.S. operations that
account for adverse conditions due to
market stress, idiosyncratic stress, and
combined market and idiosyncratic
stresses. Additional scenarios should be
used as needed to ensure that all of the
significant aspects of liquidity risks to
the relevant U.S. operations have been
modeled. The proposed rule would also
require that the stress testing addresses
the potential for market disruptions to

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have an adverse effect on the company’s
combined U.S. operations, and the
potential actions of other market
participants experiencing liquidity
stresses under the same market
disruption. The stress tests should
appropriately consider how stress
events would adversely affect not only
the U.S. operations on a standalone
basis, but also how idiosyncratic or
market-related stresses on other
operations of the company may affect
the U.S. operations’ liquidity.
Stress testing should address the full
set of activities, exposures and risks,
both on- and off-balance sheet, of the
U.S. operations, and address noncontractual sources of risks, such as
reputational risks. For example, stress
testing should address potential
liquidity issues arising from use of
sponsored vehicles that issue debt
instruments periodically to the markets,
such as asset-backed commercial paper
and similar conduits. Under stress
scenarios, elements of the U.S.
operations may be contractually
required, or compelled in the interest of
mitigating reputational risk, to provide
liquidity support to such a vehicle.
Effective liquidity stress testing
should be conducted over a variety of
different time horizons to adequately
capture rapidly developing events, and
other conditions and outcomes that may
materialize in the near or long term. To
ensure that a company’s stress testing
for its U.S. operations contemplates
such events, conditions, and outcomes,
the proposed rule would require that the
stress scenarios use a minimum of four
time horizons including an overnight, a
30-day, a 90-day, and a one-year time
horizon. Additional time horizons may
be necessary to reflect the capital
structure, risk profile, complexity,
activities, size, and other relevant
factors of the company’s combined U.S.
operations.
The proposal further provides that
liquidity stress testing must be tailored
to, and provide sufficient detail to
reflect the capital structure, risk profile,
complexity, activities, size, and other
relevant characteristics of the U.S.
operations. This requirement is
intended to ensure that stress testing
under the proposed rule would be tied
directly to the business profile and the
regulatory environment of the U.S.
operations.64 The requirement also
64 For example, applicable statutory and
regulatory restrictions on companies, including
restrictions on the transferability of assets between
legal entities, would need to be incorporated. These
restrictions include sections 23A and 23B of the
Federal Reserve Act (12 U.S.C. 371c and 371c–1)
and Regulation W (12 CFR part 223), which govern

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76645

addresses relevant risk areas, provides
for an appropriate level of aggregation,
and captures appropriate risk drivers,
internal and external influences, and
other key considerations that may affect
the liquidity position of the U.S.
operations and the company as a whole.
In order to fully assess the institution’s
liquidity risk profile, stress testing by
business line or legal entity or stress
scenarios that use additional time
horizons may be necessary beyond the
tests described above.
A foreign banking organization must
assume that, for the first 30 days of a
liquidity stress horizon, only highly
liquid assets that are unencumbered
may be used as cash flow sources to
meet projected funding needs for the
U.S. operations. For time periods
beyond the first 30 days of a liquidity
stress scenario, highly liquid assets that
are unencumbered and other
appropriate funding sources may be
used.65
Liquidity stress testing for the U.S.
operations should account for
deteriorations in asset valuations when
there is market stress. Accordingly, the
proposed rule would require
discounting the fair market value of an
asset that is used as a cash flow source
to offset projected funding needs in
order to reflect any credit risk and
market price volatility of the asset. The
proposed rule would also require that
sources of funding used to generate cash
to offset projected outflows be
diversified by collateral, counterparty,
or borrowing capacity, or other factors
associated with the liquidity risk of the
assets throughout each stress test time
horizon. Thus, if U.S. operations hold
high quality assets other than cash and
securities issued or guaranteed by the
U.S. government, a U.S. government
agency,66 or a U.S. governmentsponsored entity,67 to meet future
outflows, the assets must be diversified
by collateral, counterparty, or borrowing
capacity, and other liquidity risk
identifiers.
covered transactions between banks and their
affiliates.
65 The liquidity buffer and the definitions of
unencumbered and highly liquid asset are
discussed below.
66 A U.S. government agency is defined in the
proposed rule as an agency or instrumentality of the
U.S. government whose obligations are fully and
explicitly guaranteed as to the timely payment of
principal and interest by the full faith and credit of
the U.S. government.
67 A U.S. government-sponsored entity is defined
in the proposed rule as an entity originally
established or chartered by the U.S. government to
serve public purposes specified by the U.S.
Congress, but whose obligations are not explicitly
guaranteed by the full faith and credit of the U.S.
government.

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The proposed rule would require that
the U.S. operations maintain policies
and procedures that outline its liquidity
stress testing practices, methodologies,
and assumptions, and provide for the
enhancement of stress testing practices
as risks change and as techniques
evolve. The proposal would also require
the company to provide to the Board the
results of its stress test for U.S.
operations on a monthly basis within 14
days of the end of each month.
Foreign banking organizations also
would be required to provide to the
Board a summary of the results of any
liquidity stress test and liquidity buffers
established by their home country
regulators, on a quarterly basis and
within 14 days of completion of the
stress test. This information is required
to demonstrate how vulnerabilities
identified within its U.S. operations will
be covered by a buffer being held by the
company for its global operations and
how vulnerabilities outside the United
States may affect its U.S. operations.
The Board may require additional
information from foreign banking
organizations whose U.S. operations
significantly rely on the foreign parent
for funding with respect to their home
country liquidity stress tests and
buffers.
Question 24: What challenges will
foreign banking organizations face in
formulating and implementing liquidity
stress testing described in the proposed
rule? What changes, if any, should be
made to the proposed liquidity stress
testing requirements (including the
stress scenario requirements) to ensure
that analyses of the stress testing will
provide useful information for the
management of a company’s liquidity
risk? What alternatives to the proposed
liquidity stress testing requirements,
including the stress scenario
requirements, should the Board
consider? What additional parameters
for the liquidity stress tests should the
Board consider defining?
Liquidity Buffer
To withstand liquidity stress under
adverse conditions, a company
generally needs a sufficient supply of
liquid assets that can be sold or pledged
to obtain funds needed to meet its
obligations. During the financial crisis,
financial companies that experienced
severe liquidity difficulties often held
insufficient liquid assets to meet their
liquidity needs, which had increased
sharply as market sources of funding
became unavailable. Accordingly, the
proposed rule would require a company
to maintain a liquidity buffer of
unencumbered highly liquid assets for
its U.S. operations to meet the cash flow

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needs identified under the required
stress tests described above.
The proposal would require separate
liquidity buffers for a foreign banking
organization’s U.S. branch and agency
network and its U.S. intermediate
holding company that are equal to their
respective net stressed cash flow needs
as identified by the required stress test.
Each calculation of the net stressed cash
flow need described below must be
performed for the U.S. branch and
agency network and U.S. intermediate
holding company separately. These
calculations assess the stressed cash
flow need both with respect to
intracompany transactions and
transactions with unaffiliated parties to
quantify the liquidity vulnerabilities of
the U.S. operations during the 30-day
stress horizon.
Liquidity Buffer Calculation
Under the proposal, each U.S. branch
and agency network and U.S.
intermediate holding company must
maintain a liquidity buffer equal to its
net stressed cash flow need over a 30day stress horizon. The net stressed cash
flow need is equal to the sum of (1) the
net external stressed cash flow need and
(2) the net internal stressed cash flow
need. The calculation of external and
internal stressed cash flow needs is
conducted separately in order to
provide different treatment of these two
sets of cash flows when sizing the
liquidity buffer needs of the U.S.
operations. The proposal treats these
cash flows differently to minimize the
ability of a foreign banking organization
to meet its external net stressed cash
flow needs with intragroup cash flows.
This approach is aimed at addressing
the risk that the U.S. operations of a
foreign banking organization and its
non-U.S. operations will face funding
pressures simultaneously.
A U.S. intermediate holding company
would be required to calculate its
liquidity buffer based on both net
internal stressed cash flow needs and
net external stressed cash flow needs, as
described below, for the entire 30-day
stress period, and maintain the assets
comprising the liquidity buffer in the
United States. To avoid evasion of these
requirements, cash assets counted in the
liquidity buffer of the U.S. intermediate
holding company may not be held in an
account located at an affiliate of the U.S.
intermediate holding company.
The U.S. branch and agency network
would also be required to hold liquid
assets in the United States to meet a
portion of its 30-day liquidity buffer.
The liquidity buffer requirement for a
U.S. branch and agency network is
calculated using a different

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methodology than the U.S. intermediate
holding company because U.S. branches
and agencies are not separate legal
entities from the foreign bank and can
engage only in traditional banking
activities by the terms of their licenses.
For day 1 through day 14 of the 30day stress period, the U.S. branch and
agency network would be required to
take into account net internal stressed
cash flow needs and net external
stressed cash flow needs. The U.S.
branch and agency network would be
required to maintain highly liquid assets
sufficient to cover its net stressed cash
flow needs for day 1 through day 14 in
the United States. Consistent with the
treatment of the U.S. intermediate
holding company, cash assets counted
in the 14-day liquidity buffer of the U.S.
branch and agency network may not be
held in an account located at the U.S.
intermediate holding company, head
office, or other affiliate. For day 15
through day 30 of the stress test horizon,
the U.S. branch and agency network
would be permitted to maintain its
liquidity buffer to meet net stressed cash
flow needs outside of the United States,
provided that the company has
demonstrated to the satisfaction of the
Board that the company has and is
prepared to provide, or its affiliate has
and would be required to provide,
highly liquid assets to the U.S. branch
and agency network sufficient to meet
the liquidity needs of the operations of
the U.S. branch and agency network for
day 15 through day 30 of the stress test
horizon. The U.S. branch and agency
network would be permitted to calculate
the liquidity buffer for day 15 through
day 30 based on its external stressed
cash flow need only because the buffer
may be maintained at the parent level.
Under the proposal, the net external
stressed cash flow need is the difference
between (1) the amount that the U.S.
branch and agency network or the U.S.
intermediate holding company,
respectively, must pay unaffiliated
parties over the relevant period in the
stress test horizon and (2) the amount
that unaffiliated parties must pay the
U.S. branch and agency network or the
U.S. intermediate holding company,
respectively, over the relevant period in
the stress test horizon.
The net internal stressed cash flow
need is the greatest daily cumulative
cash flow need of a U.S. branch and
agency network or a U.S. intermediate
holding company, respectively, with
respect to transactions with the head
office and other affiliated parties
identified during the stress horizon. The
daily cumulative cash flow need is
calculated as the sum of the net
intracompany cash flow need calculated

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for that day and the net intracompany
cash flow need calculated for each
previous day of the stress test horizon.
The methodology used to calculate the
net internal stressed cash flow need is
designed to provide a foreign banking
organization with an incentive to
minimize maturity mismatches in
transactions between the U.S. branch
and agency network or U.S.
intermediate holding company, on the
one hand, and the company’s head
office or affiliates, on the other hand.

The methodology allows intracompany
cash flow sources of a U.S. branch and
agency network or U.S. intermediate
holding company to offset intracompany
cash flow needs of a U.S. branch and
agency network or U.S. intermediate
holding company only to the extent the
term of the intracompany cash flow
source is the same as or shorter than the
term of the intracompany cash flow
need. As noted above, these
assumptions reflect the risk that during
a stress scenario, the U.S. operations,

the head office, and other affiliated
counterparties may come under stress
simultaneously. Under such a scenario,
the head office may be unable or
unwilling to return funds to the U.S.
branch and agency network or the U.S.
intermediate holding company when
those funds are most needed.
Figure 1 below illustrates the steps
required to calculate the components of
the liquidity buffer.

The tables below set forth an example
of a calculation of net stressed cash flow
need as required under the proposal,

using a stress period of five days. For
purposes of the example, cash flow
needs are represented as negative, and

cash flow sources are represented as
positive.

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Example of net external stressed cash flow need
Day

Day

Day

Day

Day

Period

1

2

3

4

5

Total

5

5

6

6

6

28

5

5

6

6

6

28

(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)

Non-affiliate cash flow sources
Maturing loans/placements with
other firms

Total non-affiliate cash flow sources

Non-affiliate cash flow needs
Maturing wholesale
funding/deposits

Example of net internal stressed cash flow need
Day

Day

Day

Day

Day

Period

1

2

3

4

5

Total

Maturing loans to parent

2

2

3

2

1

10

Maturing loans to non-U.S. entities

0

0

1

1

2

4

2

2

4

3

3

14

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Total affiliate cash flow sources

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76649

Affiliate cash flow needs
0

(4)

(10)

0

0

(14)

(1)

(1)

(1)

0

0

(3)

Total affiliate cash flow needs

(1)

(5)

(11)

0

0

(17)

Net intracompany cash flows

1

(3)

(7)

3

3

(3)

1

(2)

(9)

(6)

(3)

(2)

(9)

(6)

(3)

Maturing funding from parent
Maturing deposit from non-U.S.
entities

Daily cumulative net intracompany
cash flow
Daily cumulative net intracompany
cash flow need
Greatest daily cumulative net

(9)
intracompany cash flow need

(9)

Net internal stressed cash flow need

(9)

Example of net stressed cash flow need calculation
Period
Total
Net external stressed cash flow need

(14)

Net internal stressed cash flow need

(9)

Total net stressed cash flow need

(23)

BILLING CODE 6210–01–C

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calculation

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

As discussed above, the proposed
liquidity framework provides an
incentive for companies to match the
maturities of cash flow needs and cash
flow sources from affiliates, due to the
likely high correlation between liquidity
stress events in the U.S. operations and
non-U.S. operations of a foreign banking
organization. However, the Board
recognizes that there may be appropriate
alternatives and seeks comment on
other approaches to addressing
intracompany transactions in
determining the size of the required U.S.
liquidity buffer. The Board seeks
comment on the following additional
methods or approaches for calculating
the net internal stressed cash flow need
requirement:
(1) Assume that any cash flows
expected to be received by U.S.
operations from the head office or
affiliates are received one day after the
scheduled maturity date. This would
help ensure that the U.S. operations
receive any payments owed by affiliates
before having to make payments to
affiliates, thereby preventing intraday
arbitrage of the proposed maturity
matching requirement.
(2) Allow the U.S. operations to net
all intracompany cash flow needs and
sources over the entire stress period,
regardless of the maturities within the
stress horizon, but apply a 50 percent
haircut to all intracompany cash flow
sources within the stress horizon. This
approach could simplify the calculation
and reduce compliance burden, but
provides less incentive for foreign
banking organizations to achieve
maturity matches for their U.S.
operations within the stress horizon.
(3) Assume that all intracompany cash
flow needs during the relevant stress
period mature and roll-off at a 100
percent rate and that all intracompany
cash flow sources within the relevant
stress period are not received (that is,
they could not be used to offset cash
flow needs). This approach would
simplify the calculation, but assumes
that the parent would make none of its
contractual payments to the U.S.
subsidiary or U.S. branch and agency
network may be an unreasonable
assumption even under conservatively
stressed scenarios. Alternatively, this
approach could be used as a heightened
standard that could be imposed if the
Board has particular concerns about of
the ability or willingness of the parent
company to serve as a source of
strength.
Question 25: The Board requests
feedback on the proposed approach to
intragroup flows as well as the
described alternatives. What are the
advantages and disadvantages of the

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alternatives versus the treatment in the
proposal? Are there additional
alternative approaches to intracompany
cash flows that the Board should
consider? Provide detailed answers and
supporting data where available.
Question 26: Should U.S. branch and
agency networks be required to cover
net internal stressed cash flow needs for
days 15 to 30 of the required stress
scenario within the United States?
Should U.S. branch and agency
networks be required to hold the entire
30-day liquidity buffer in the United
States?
Under the proposed rule, only highly
liquid assets that are unencumbered
may be included in a liquidity buffer for
a U.S. intermediate holding company or
U.S. branch and agency network. Assets
in the liquidity buffer need to be easily
and immediately convertible to cash
with little or no loss of value. Thus,
cash or securities issued or guaranteed
by the U.S. government, a U.S.
government agency, or a U.S.
government-sponsored entity are
included in the proposed definition of
highly liquid assets. In addition, under
the proposed rule, other assets may be
included in the liquidity buffer as
highly liquid assets if a company
demonstrates to the satisfaction of the
Board that an asset:
(i) Has low credit risk (low risk of
default) and low market risk (low price
volatility); 68
(ii) Is traded in an active secondary
two-way market that has committed
market makers and independent bona
fide offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a reasonable time period
conforming with trade custom; and
(iii) Is a type of asset that investors
historically have purchased in periods
of financial market distress during
which liquidity is impaired (flight to
quality). For example, certain ‘‘plain
vanilla’’ corporate bonds (that is, bonds
that are neither structured products nor
subordinated debt) issued by a
nonfinancial company with a strong
financial profile have been reliable
sources of liquidity in the repo market
during past stressed conditions. Assets
with the above characteristics may meet

the definition of a highly liquid asset as
proposed.
The highly liquid assets in the
liquidity buffer should be readily
available at all times to meet the
liquidity needs of the U.S. operations.
Accordingly, the assets must be
unencumbered. Under the proposed
rule, an asset would be unencumbered
if: (i) The asset is not pledged, does not
secure, collateralize or provide credit
enhancement to any transaction, and is
not subject to any lien, or, if the asset
has been pledged to a Federal Reserve
bank or a U.S. government-sponsored
entity, the asset has not been used; (ii)
the asset is not designated as a hedge on
a trading position under the Board’s
market risk rule; 69 and (iii) there are no
legal or contractual restrictions on the
ability of the company to promptly
liquidate, sell, transfer, or assign the
asset.
Question 27: The Board requests
comment on all aspects of the proposed
definitions of highly liquid assets and
unencumbered. What, if any, other
assets should be specifically listed in
the definition of highly liquid assets?
Why should these other assets be
included? Are the criteria for identifying
additional assets for inclusion in the
definition of highly liquid assets
appropriate? If not, how and why
should the Board revise the criteria?
Question 28: Should the Board
require matching of liquidity risk and
the liquidity buffer at the individual
branch level rather than allowing the
firm to consolidate across U.S. branch
and agency networks? Why or why not?
Question 29: Should U.S.
intermediate holding companies be
allowed to deposit cash portions of their
liquidity buffer with affiliated branches
or U.S. entities? Why or why not?
Question 30: In what circumstances
should the cash portion of the liquidity
buffer be permitted to be held in a
currency other than U.S. dollars?
Question 31: Should the Board
provide more clarity around when the
liquidity buffer would be allowed to be
used to meet liquidity needs during
times of stress? What standards would
be appropriate for usage of the liquidity
buffer?
Question 32: Are there situations in
which compliance with the proposed
rule would hinder a foreign banking
organization from employing
appropriate liquidity risk management
practices? Provide specific detail.

68 Generally, market risk is the risk of loss that
could result from broad market movements, such as
changes in the general level of interest rates, credit
spreads, equity prices, foreign exchange rates, or
commodity prices. See 12 CFR part 225, appendix
E.

69 The Board’s market risk rule defines a trading
position as a position that is held by a company for
the purpose of short-term resale or with the intent
of benefiting from actual or expected short-term
price movements, or to lock-in arbitrage profits. See
12 CFR part 225, appendix E.

Composition of the Liquidity Buffer

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Contingency Funding Plan
The proposed rule would require a
foreign banking organization with
combined U.S. assets of $50 billion or
more to establish and maintain a
contingency funding plan for its
combined U.S. operations. The
objectives of the contingency funding
plan are to provide a plan for
responding to a liquidity crisis, to
identify alternate liquidity sources that
the U.S. operations can access during
liquidity stress events, and to describe
steps that should be taken to ensure that
the company’s sources of liquidity are
sufficient to fund its operating costs and
meet its commitments while minimizing
additional costs and disruption.
The contingency funding plan should
set out the company’s strategies for
addressing liquidity needs during
liquidity stress events. Under the
proposed rule, the contingency funding
plan would be required to be
commensurate with the U.S. operations
and the company’s capital structure,
risk profile, complexity, activities, size,
other relevant factors, and established
liquidity risk tolerance. The
contingency funding plan should also
specify the contingency funding plans
related to specific legal entities,
including the U.S. branch and agency
network and U.S. intermediate holding
company. A company would be
required to update the contingency
funding plan for its U.S. operations at
least annually, or whenever changes to
market and idiosyncratic conditions
warrant an update.
Under the proposed rule, the
contingency funding plan would
include four components: A quantitative
assessment, an event management
process, monitoring requirements, and
testing requirements. Under the
quantitative assessment, a company
must: (i) Identify liquidity stress events
that have a significant effect on the U.S.
operations’ liquidity; (ii) assess the level
and nature of the effect on the U.S.
operations’ liquidity that may occur
during identified liquidity events; (iii)
assess available funding sources and
needs during the identified liquidity
stress events; and (iv) identify
alternative funding sources that may be
used during the liquidity stress events.
A liquidity stress event that may have
a significant effect on a company’s
liquidity would include deterioration in
asset quality, ratings downgrades,
widening of credit default swap spreads,
operating losses, declining financial
institution equity prices, negative press
coverage, or other events that call into
question the company or its U.S.

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operations’ ability to meet its
obligations.
The contingency funding plan should
delineate the various levels of stress
severity that can occur during the stress
event, and identify the various stages for
each type of event. The events, stages,
and severity levels should include
temporary disruptions, as well as those
that might be intermediate or longer
term. To meet the requirements of the
proposal, the contingency funding plan
must assess available funding sources
and needs during identified liquidity
stress events for the company’s
combined U.S. operations. This should
include an analysis of the potential
erosion of available funding at
alternative stages or severity levels of
each stress event, as well as the
identification of potential cash flow
mismatches that may occur during the
various stress levels. A company is
expected to base its analysis on realistic
assessments of the behavior of funds
providers during the event, and should
incorporate alternative funding sources.
The analysis should include all material
on- and off-balance sheet cash flows and
their related effects on the combined
U.S. operations. The result should be a
realistic analysis of the cash inflows,
outflows, and funds available to the
combined U.S. operations at different
time intervals during the identified
liquidity stress event.
Liquidity pressures are likely to
spread from one funding source to
another during significant liquidity
stress events. Accordingly, the proposed
rule would require a company to
identify alternative funding sources that
may be accessed by the combined U.S.
operations during identified liquidity
stress events. Any legal or other
restrictions that exist that may limit the
ability of funding sources to be used by
different legal entities within the U.S.
operations should be identified. Since
some of these alternative funding
sources will rarely be used in the
normal course of business, the U.S.
operations should conduct advance
planning and periodic testing to ensure
that the funding sources are available
when needed. Administrative
procedures and agreements are also
expected to be in place before the U.S.
operations needs to access the
alternative funding sources.
Discount window credit may be
incorporated into contingency funding
plans as a potential source of funds for
a foreign bank’s U.S. branches and
agencies, in a manner consistent with
terms provided by Federal Reserve
Banks. For example, primary credit is
currently available on a collateralized
basis for financially sound institutions

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as a backup source of funds for shortterm funding needs. Contingency
funding plans that incorporate
borrowing from the discount window
should specify the actions that would be
taken to replace discount window
borrowing with more permanent
funding, and include the proposed time
frame for these actions.
Under the proposed rule, the
contingency funding plan must also
include an event management process
that sets out procedures for managing
liquidity during identified liquidity
stress events. This process must include
an action plan that clearly describes the
strategies the combined U.S. operations
of the company would use to respond to
liquidity shortfalls for identified
liquidity stress events, including the
methods that the company or its
combined U.S. operations would use to
access the alternative funding sources
identified in the quantitative
assessment.
Under the proposed rule, the event
management process must also identify
a liquidity stress event management
team that would execute the action plan
described above and specify the process,
responsibilities, and triggers for
invoking the contingency funding plan,
escalating the responses described in
the action plan, decision-making during
the identified liquidity stress events,
and executing contingency measures
identified in the action plan for the U.S.
operations.
In addition, to promote the flow of
necessary information during a period
of liquidity stress, the proposed rule
would require the event management
process to include a mechanism that
ensures effective reporting and
communication within the company
and its combined U.S. operations and
with outside parties, including the
Board and other relevant supervisors,
counterparties, and other stakeholders.
The proposal would also impose
monitoring requirements on the
company’s combined U.S. operations so
that the U.S. operations would be able
to proactively position themselves into
progressive states of readiness as
liquidity stress events evolve. These
requirements include procedures for
monitoring emerging liquidity stress
events and for identifying early warning
indicators of emerging liquidity stress
events that are tailored to a company’s
capital structure, risk profile,
complexity, activities, size, and other
relevant factors. Such early warning
indicators may include negative
publicity concerning an asset class
owned by the company, potential
deterioration in the company’s financial
condition, widening debt or credit

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default swap spreads, and increased
concerns over the funding of offbalance-sheet items.
The proposed rule would require a
company to periodically test the
components of the U.S. operations’
contingency funding plan to assess its
reliability during liquidity stress events.
Such testing would include trial runs of
the operational elements of the
contingency funding plan to ensure that
they work as intended during a liquidity
stress event. These tests would include
operational simulations to test
communications, coordination, and
decision making involving relevant
managers, including managers at
relevant legal entities within the
corporate structure.
A company would also be required to
periodically test the methods it will use
to access alternate funding for its U.S.
operations to determine whether these
sources of funding would be readily
available when needed. For example,
the Board expects that a company
would test the operational elements of
a contingency funding plan that are
associated with lines of credit, the
Federal Reserve discount window, or
other secured borrowings, since efficient
collateral processing during a liquidity
stress event is especially important for
such funding sources.

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Specific Limits
To enhance management of liquidity
risk, the proposed rule would require a
foreign banking organization with
combined U.S. assets of $50 billion or
more to establish and maintain limits on
potential sources of liquidity risk.
Proposed limitations would include
limits on: concentrations of funding by
instrument type, single-counterparty,
counterparty type, secured and
unsecured funding, and other liquidity
risk identifiers; the amount of specified
liabilities that mature within various
time horizons; and off-balance sheet
exposures and other exposures that
could create funding needs during
liquidity stress events.70 The U.S.
operations would also be required to
monitor intraday liquidity risk exposure
in accordance with procedures
established by the foreign banking
organization.
A foreign banking organization would
additionally be required to monitor its
compliance with all limits established
and maintained under the specific limit
requirements. The size of each limit
70 Such exposures may be contractual or noncontractual exposures, and include such liabilities
as unfunded loan commitments, lines of credit
supporting asset sales or securitizations, collateral
requirements for derivative transactions, and letters
of credit supporting variable demand notes.

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must reflect the U.S. operations’ capital
structure, risk profile, complexity,
activities, size, and other appropriate
risk related factors, and established
liquidity risk tolerance.
Question 33: Should foreign banking
organizations with a large U.S. presence
be required to establish and maintain
limits on other potential sources of
liquidity risk in addition to the specific
sources listed in the proposed rule? If
so, identify these additional sources of
liquidity risk.
Monitoring
The proposed rule would require a
foreign banking organization with
combined U.S. assets of $50 billion or
more to monitor liquidity risk related to
collateral positions of the U.S.
operations, liquidity risks across its U.S.
operations, and intraday liquidity
positions for its combined U.S.
operations, each as described below.
Collateral Positions
Under the proposed rule, a foreign
banking organization with combined
U.S. assets of $50 billion or more would
be required to establish and maintain
procedures for monitoring assets of the
combined U.S. operations it has pledged
as collateral for an obligation or
position, and assets that are available to
be pledged. The procedures must
address the ability of the company with
respect to its combined U.S. operations
to:
(i) Calculate all of the collateral
positions of the U.S. operations on a
weekly basis (or more frequently as
directed by the Board due to financial
stability risks or the financial condition
of the U.S. operations), including the
value of assets pledged relative to the
amount of security required under the
contract governing the obligation for
which the collateral was pledged, and
the unencumbered assets available to be
pledged;
(ii) Monitor the levels of available
collateral by legal entity (including the
U.S. branch and agency networks and
U.S. intermediate holding company),
jurisdiction, and currency exposure;
(iii) Monitor shifts between intraday,
overnight, and term pledging of
collateral; and
(iv) Track operational and timing
requirements associated with accessing
collateral at its physical location (for
example, the custodian or securities
settlement system that holds the
collateral).
Legal Entities, Currencies, and Business
Lines
Regardless of its organizational
structure, it is critical that a company

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actively monitor and control liquidity
risks at the level of individual U.S. legal
entities and the U.S. operations as a
whole. Such monitoring would
aggregate data across multiple systems
to develop a U.S. operation-wide view
of liquidity risk exposure and identify
constraints on the transferability of
liquidity within the organization.
To promote effective monitoring
across the combined U.S. operations,
the proposed rule would require a
foreign banking organization with
combined U.S. assets of $50 billion or
more to establish and maintain
procedures for monitoring and
controlling liquidity risk exposures and
funding needs within and across
significant legal entities, currencies, and
business lines within its combined U.S.
operations. In addition, the proposed
rule would require the company to take
into account legal and regulatory
restrictions on the transfer of liquidity
between legal entities.71 The company
should ensure that legal distinctions
and possible obstacles to cash
movements between specific legal
entities or between separately regulated
entities are recognized for the combined
U.S. operations.
Intraday Liquidity
Intraday liquidity monitoring is an
important component of the liquidity
risk management process for a company
engaged in significant payment,
settlement, and clearing activities and is
generally an operational risk
management function. Given the
interdependencies that exist among
payment systems, the inability of large
complex organizations’ to meet critical
payments has the potential to lead to
systemic disruptions that can prevent
the smooth functioning of payments
systems and money markets. In addition
to the proposed requirements, to ensure
that liquidity risk is also appropriately
monitored, the Board expects foreign
banking organizations subject to these
requirements to provide for integrated
oversight of intraday exposures within
the operational risk and liquidity risk
functions of its U.S. operations. The
Board also expects that the stringency of
the procedures for monitoring and
managing intraday liquidity positions
would reflect the complexity and scope
of the U.S. operations.
Question 34: The Board requests
comment on all aspects of the proposed
rule. Specifically, what aspects of the
proposed rule present implementation
71 For example, such restrictions include sections
23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c–1) and Regulation W (12 CFR part
223), which govern covered transactions between
banks and their affiliates.

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challenges and why? What alternative
approaches to liquidity risk
management should the Board consider?
Are the liquidity management
requirements of this proposal too
specific or too narrowly defined? If, so
explain how. Responses should be
detailed as to the nature and effect of
these challenges and should address
whether the Board should consider
implementing transitional arrangements
in the proposal to address these
challenges.
C. Liquidity Requirements for Foreign
Banking Organizations With Total
Consolidated Assets of $50 Billion or
More and Combined U.S. Assets of Less
Than $50 Billion
Under the proposal, a foreign banking
organization with $50 billion or more in
total consolidated assets and combined
U.S. assets of less than $50 billion must
report to the Board on an annual basis
the results of an internal liquidity stress
test for either the consolidated
operations of the company or its
combined U.S. operations only,
conducted consistently with the BCBS
principles for liquidity risk management
and incorporating 30-day, 90-day, and
one-year stress test horizons. A
company that does not comply with this
requirement must cause its combined
U.S. operations to remain in a net due
to funding position or a net due from
funding position with non-U.S.
affiliated entities equal to no more than
25 percent of the third-party liabilities
of its combined U.S. operations on a
daily basis.
A foreign banking organization with
total consolidated assets of $50 billion
or more and combined U.S. assets of
less than $50 billion on July 1, 2014,
would be required to comply with the
proposed liquidity requirements on July
1, 2015, unless that time is extended by
the Board in writing. A foreign banking
organization with combined U.S. assets
of less than $50 billion that crosses the
$50 billion total consolidated asset
threshold after July 1, 2014 would be
required to comply with these standards
beginning 12 months after it crosses the
asset threshold, unless that time is
accelerated or extended by the Board in
writing.
VI. Single-Counterparty Credit Limits

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A. Background
During the financial crisis, some of
the largest financial firms in the world
collapsed or nearly did so, with
significant financial stability
consequences for the United States and
the global financial system.
Counterparties of a failing firm were

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

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interest and consistent with the
purposes of section 165(e).74
In the December 2011 proposal, the
Board sought comment on regulations
that would implement these limits for
large U.S. bank holding companies and
nonbank financial companies
supervised by the Board.75 The
comment period for the December 2011
proposal has closed, and the Board
received a large volume of comments on
the single-counterparty credit limit.
Many comments focused on the
proposed valuation methodologies for
derivatives and securities financing
transactions, the proposal to use a lower
threshold for exposures between major
covered companies and major
counterparties, and the treatment of
exposures to foreign sovereigns and
central counterparties. The Board is
currently in the process of reviewing
comments on the standards in the
December 2011 proposal and is
considering modifications to the
proposal in response to those
comments. Comments on this proposal
will help inform how the singlecounterparty credit limits should be
applied differently to foreign banking
organizations.
Consistent with the December 2011
proposal, the proposal would impose a
two-tier single-counterparty credit limit
on foreign banking organizations. First,
the proposal would impose a 25 percent
net credit exposure limit between a U.S.
intermediate holding company or the
combined U.S. operations of a foreign
banking organization and a single
unaffiliated counterparty. It would
prohibit a U.S. intermediate holding
company from having aggregate net
credit exposure to any single
unaffiliated counterparty in excess of 25
percent of the U.S. intermediate holding
company’s capital stock and surplus.
Similarly, it would prohibit the
combined U.S. operations of a foreign
banking organization from having
aggregate net credit exposure to any
single unaffiliated counterparty in
excess of 25 percent of the consolidated
capital stock and surplus of the foreign
banking organization.
Second, the proposal would impose a
more stringent net credit exposure limit
between a U.S. intermediate holding
company or a foreign banking
organization with total consolidated
assets of $500 billion or more (major
U.S. intermediate holding company and
major foreign banking organization) and
financial counterparties of similar size
74 See
75 77

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(major counterparty).76 This more
stringent limit would be consistent with
the stricter limit established for major
U.S. bank holding companies and U.S.
nonbank financial companies
supervised by the Board. The stricter
limit was proposed to be 10 percent in
the December 2011 proposal.
In response to weaknesses in the large
exposures regimes observed in the
crisis, the BCBS has established a
working group to examine singlecounterparty credit limit regimes across
jurisdictions and evaluate potential
international standards. If an
international agreement on large
exposure limits for banking
organizations is reached, the Board may
amend this proposed rule, as necessary,
to achieve consistency with the
international approach.

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B. Single-Counterparty Credit Limit
Applicable to Foreign Banking
Organizations and U.S. Intermediate
Holding Companies
Under the proposal, a foreign banking
organization that exceeds the $50 billion
asset threshold or, for any more
stringent limit that is established, the
$500 billion asset threshold, as of July
1, 2014, would be required to comply
with the proposed single-counterparty
credit limits on July 1, 2015, unless that
time is extended by the Board in
writing. A foreign banking organization
that exceeds the $50 billion or, for any
more stringent limit that is established,
the $500 billion asset threshold, after
July 1, 2014, would be required to
comply with the proposed singlecounterparty credit limits beginning 12
months after it crossed the relevant asset
threshold, unless that time is
accelerated or extended by the Board in
writing.
Similarly, a U.S. intermediate holding
company that is required to be
established on July 1, 2015, would be
required to comply with the proposed
single-counterparty credit limits
beginning on July 1, 2015, unless that
time is extended by the Board in
writing. A U.S. intermediate holding
company established after July 1, 2015,
would be required to comply with the
proposed single-counterparty credit
limits, including any more stringent
limit that is established, beginning on
the date it is required to be established,
unless that time is accelerated or
extended by the Board in writing. A
U.S. intermediate holding company that
76 Major counterparty would be defined to
include a bank holding company or foreign banking
organization with total consolidated assets of $500
billion or more, and their respective subsidiaries,
and any nonbank financial company supervised by
the Board.

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meets the $500 billion threshold after
July 1, 2015, would be required to
comply with any stricter proposed
single-counterparty credit limit
applicable to major U.S. intermediate
holding companies beginning 12
months after it becomes a major U.S.
intermediate holding company, unless
that time is accelerated or extended by
the Board in writing.
Scope of the Proposed Rule
In calculating its net credit exposure
to a counterparty, a foreign banking
organization or U.S. intermediate
holding company would generally be
required to take into account exposures
of its U.S. subsidiaries to the
counterparty.77 Similarly, exposure to a
counterparty would include exposures
to any subsidiaries of the counterparty.
Consistent with the December 2011
proposal, a company is treated as a
subsidiary when it is directly or
indirectly controlled by another
company. A company controls another
company if it: (i) Owns or controls with
the power to vote 25 percent or more of
a class of voting securities of the
company; (ii) owns or controls 25
percent or more of the total equity of the
company; or (iii) consolidates the
company for financial reporting
purposes. The proposed rule’s
definition of control differs from that in
the Bank Holding Company Act and the
Board’s Regulation Y in order to provide
a simpler, more objective definition of
control.78
The proposed definition may be
underinclusive in certain situations. For
instance, by operation of the proposed
definition of ‘‘subsidiary,’’ a fund or
vehicle that is sponsored or advised by
a U.S. intermediate holding company or
any part of the combined U.S.
operations would not be considered a
subsidiary of the U.S. intermediate
holding company or the combined U.S.
operations unless it was ‘‘controlled’’ by
the U.S. intermediate holding company
or any part of the combined U.S.
operations.79 A special purpose vehicle
would not be a subsidiary of the U.S.
intermediate holding company or the
combined U.S. operations unless it was
similarly ‘‘controlled.’’ The Board
contemplates that it may use its
reservation of authority to look through
77 Because a foreign banking organization
calculates only the credit exposure of its U.S.
operations, it would be required to include
exposure only of its U.S. subsidiaries.
78 See 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e)(1).
79 The same issued is raised with respect to the
treatment of funds sponsored and advised by
counterparties. Such funds or vehicles similarly
would not be considered to be part of the
counterparty under the proposed rule’s definition of
control.

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a special purpose vehicle either to the
issuer of the underlying assets in the
vehicle or to the sponsor. In the
alternative, the Board may require a U.S.
intermediate holding company or any
part of the combined U.S. operations to
look through to the underlying assets of
a special purpose vehicle, but only if the
special purpose vehicle failed certain
discrete concentration tests (such as
having fewer than 20 underlying
exposures).
Section 165(e) directs the Board to
limit credit exposure of a foreign
banking organization to ‘‘any
unaffiliated company.’’ 80 Consistent
with the December 2011 proposal, the
proposal would include foreign
sovereign entities in the definition of
counterparty to limit the vulnerability of
a foreign banking organization’s U.S.
operations to default by a single
sovereign state. The severe distress or
failure of a sovereign entity could have
effects that are comparable to those
caused by the failure of a financial firm
or nonfinancial corporation. The Board
believes that the authority in the DoddFrank Act and the Board’s general safety
and soundness authority in associated
banking laws are sufficient to
encompass sovereign governments in
the definition of counterparty in this
manner.81 As described below, the
proposal would provide an exemption
from the limits established in this
subpart for exposures to a foreign
banking organization’s home country
sovereign entity.
Question 35: What challenges would
a foreign banking organization face in
implementing the requirement that all
subsidiaries of the U.S. intermediate
holding company and any part of the
combined U.S. operations are subject to
the proposed single-counterparty credit
limit?
Question 36: Because a foreign
banking organization may have strong
80 12 U.S.C. 5365(e)(2)–(3). ‘‘Company’’ is defined
for purposes of the proposed rule to mean a
corporation, partnership, limited liability company,
depository institution, business trust, special
purpose entity, association, or similar organization.
81 See 12 U.S.C. 5365(b)(1)(B)(iv) (allowing the
Board to establish additional prudential standards
as the Board, on its own or pursuant to a
recommendation made by the Council in
accordance with section 115 of the Dodd-Frank Act,
determines are appropriate) and 12 U.S.C. 5368
(providing the Board with general rulemaking
authority); see also section 5(b) of the Bank Holding
Company Act (12 U.S.C. 1844(b)); and section 8(b)
of Federal Deposit Insurance Act (12 U.S.C.
1818(b)). Section 5(b) of the Bank Holding Company
Act provides the Board with the authority to issue
such regulations and orders as may be necessary to
enable it to administer and carry out the purposes
of the Bank Holding Company Act. Section 8(b) of
the Federal Deposit Insurance Act allows the Board
to issue to bank holding companies an order to
cease and desist from unsafe and unsound
practices.

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
incentives to provide support in times
of distress to certain U.S.-based funds or
vehicles that it sponsors or advises, the
Board seeks comment on whether such
funds or vehicles should be included as
part of the U.S. intermediate holding
company or the combined U.S.
operations of the foreign banking
organization for purposes of this rule.
Question 37: How should exposures
to SPVs and their underlying assets and
sponsors be treated? What other
alternatives should the Board consider?
Question 38: Should the definition of
‘‘counterparty’’ differentiate between
types of exposures to a foreign sovereign
entity, including exposures to local
governments? Should exposures to a
company controlled by a foreign
sovereign entity be included in the
exposure to that foreign sovereign
entity?
Question 39: What additional credit
exposures to foreign sovereign entities
should be exempted from the
limitations of the proposed rule?

common equity. This would be
consistent with the post-crisis global
regulatory move toward tier 1 common
equity as the primary measure of loss
absorbing capital for internationally
active banking firms. For example, Basel
III introduces a specific tier 1 common
equity requirement and uses tier 1
common equity measures in its capital
conservation buffer and countercyclical
buffer.84 In addition, the BCBS capital
surcharge framework for G–SIBs builds
on the tier 1 common equity
requirement in Basel III.85 Further, the
Board focused on tier 1 common equity
in the Supervisory Capital Assessment
Program (SCAP) conducted in early
2009 and again in the Comprehensive
Capital Analysis and Review (CCAR)
exercises conducted in 2011 and 2012 to
assess the capacity of bank holding
companies to absorb projected losses.86
Question 40: What other alternatives
to the proposed definitions of capital
stock and surplus should the Board
consider?

Definition of Capital Stock and Surplus
The credit exposure limit is
calculated based on the capital stock
and surplus of the U.S. intermediate
holding company and the foreign
banking organization, respectively.82
Under the proposed rule, capital stock
and surplus of a U.S. intermediate
holding company is the sum of the
company’s total regulatory capital as
calculated under the risk-based capital
adequacy guidelines applicable to that
U.S. intermediate holding company in
subpart L and the balance of the
allowance for loan and lease losses of
the U.S. intermediate holding company
not included in tier 2 capital under the
capital adequacy guidelines in subpart L
of this proposal. This definition of
capital stock and surplus is generally
consistent with the definition of the
same term in the Board’s Regulations O
and W and the OCC’s national bank
lending limit regulation.83
In light of differences in international
accounting standards, the capital stock
and surplus of a foreign banking
organization would not reflect the
balance of the allowance for loan and
lease losses not included in tier 2
capital. Instead, the term would be
defined to include the total regulatory
capital of such company on a
consolidated basis, as determined in
accordance with section 252.212(c) of
the proposed rule.
An alternative measure of ‘‘capital
stock and surplus’’ might focus on

Credit Exposure Limit
As discussed above, the proposal
would impose a 25 percent limit on all
U.S. intermediate holding companies
and the combined U.S. operations of
foreign banking organizations. In
addition, a more stringent limit on
major U.S. intermediate holding
companies and the combined U.S.
operations of major foreign banking
organizations would be set, consistent
with the stricter limit established for
major U.S. bank holding companies and
U.S. nonbank financial companies
supervised by the Board.
The more stringent limit for major
U.S. intermediate holding companies
and major foreign banking organizations
is consistent with the Dodd-Frank Act’s
direction to impose stricter limits on
companies as necessary to mitigate risks
to U.S. financial stability. The Board
recognizes, however, that size is only a
rough proxy for the systemic footprint of
a company. Additional factors specific
to a firm—including the nature, scope,
scale, concentration,
interconnectedness, and mix of its
activities, its leverage, and its off-

82 See

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

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84 See

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

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balance-sheet exposures, among other
factors—may be determinative of a
company’s systemic footprint. For
example, the BCBS proposal on capital
surcharges for systemically important
banking organizations uses a twelve
factor approach to determine the
systemic importance of a global banking
organization.87 Moreover, the Board
recognizes that drawing a line through
the foreign banking organization
population and imposing stricter limits
on exposures between the combined
U.S. operations of major foreign banking
organizations or major U.S. intermediate
holding companies and their respective
major counterparties may not take into
account nuances that might be captured
by other approaches.
Question 41: Should the Board adopt
a more nuanced approach, like the
BCBS approach, in determining which
foreign banking organizations and U.S.
intermediate holding companies would
be treated as major foreign banking
organizations or major U.S. intermediate
holding companies or which
counterparties should be considered
major counterparties?
Question 42: Should the Board
introduce more granular categories of
foreign banking organizations or U.S.
intermediate holding companies to
determine the appropriate credit
exposure limit? If so, how could such
granularity best be accomplished?
Measuring Gross Credit Exposure
The proposal specifies how the gross
credit exposure of a credit transaction
should be calculated for each type of
credit transaction defined in the
proposed rule. For purposes of
describing the limit, the discussion
below refers to U.S. intermediate
holding companies and, with respect to
their combined U.S. operations, foreign
banking organizations as ‘‘covered
entities.’’
The proposed valuation rules are
consistent with those set forth in the
December 2011 proposal, other than the
proposed valuation for derivatives
exposures of U.S. branches and agencies
that are subject to a qualifying master
netting agreement. When calculating a
U.S. branch or agency’s gross credit
exposure to a counterparty for a
derivative contract that is subject to a
qualifying master netting agreement
(and is not an eligible credit derivative
or an eligible equity derivative
purchased from an eligible protection
provider), a foreign banking
87 See BCBS, Global systemically important
banks: assessment methodology and the additional
loss absorbency requirement (November 2011),
supra note 55.

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organization could choose either to use
the Basel II-based exposure at default
calculation set forth in the Board’s
advanced approaches capital rules (12
CFR part 225, appendix G, § 32(c)(6)
provided that the collateral recognition
rules of the proposed rule would apply)
or to use the gross valuation
methodology for derivatives not subject
to a qualified master netting agreements.
The approach recognizes that a qualified
master netting agreement to which the
U.S. branch or agency is subject may
cover exposures of the foreign bank
outside of the U.S. branch and agency
network.
Consistent with the December 2011
proposal, the proposed rule includes the
statutory attribution rule that provides
that a covered entity must treat a
transaction with any person as a credit
exposure to a counterparty to the extent
the proceeds of the transaction are used
for the benefit of, or transferred to, that
counterparty. The proposal adopts a
minimal scope of application of this
attribution rule in order to minimize
burden on foreign banking
organizations.
Question 43: The Board seeks
comment on all aspects of the valuation
methodologies included in the proposed
rule.
Question 44: The Board requests
comment on whether the proposed
scope of the attribution rule is
appropriate or whether additional
regulatory clarity around the attribution
rule would be appropriate. What
alternative approaches to applying the
attribution rule should the Board
consider? What is the potential cost or
burden of applying the attribution rule
as described above?

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Net Credit Exposure
The proposal describes how a covered
entity would convert gross credit
exposure amounts to net credit exposure
amounts by taking into account eligible
collateral, eligible guarantees, eligible
credit and equity derivatives, other
eligible hedges (that is, a short position
in the counterparty’s debt or equity
security), and for securities financing
transactions, the effect of bilateral
netting agreements. The proposed
treatment described below is consistent
with the treatment proposed in the
December 2011 proposal.
Eligible Collateral
In computing its net credit exposure
to a counterparty for a credit
transaction, the proposal would permit
a covered entity to reduce its gross
credit exposure on a transaction by the
adjusted market value of any eligible
collateral. Eligible collateral is generally

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defined consistently with the December
2011 proposal, but the proposal clarifies
that eligible collateral would not
include any debt or equity securities
(including convertible bonds) issued by
an affiliate of the U.S. intermediate
holding company or by any part of the
combined U.S. operations.
If a covered entity chooses to reduce
its gross credit exposure by the adjusted
market value of eligible collateral, the
covered entity would be required to
include the adjusted market value of the
eligible collateral when calculating its
gross credit exposure to the issuer of the
collateral.
Question 45: Should the list of eligible
collateral be broadened or narrowed?
Should a covered entity be able to use
its own internal estimates for collateral
haircuts as permitted under Appendix G
to Regulation Y?
Question 46: Is recognizing the
fluctuations in the value of eligible
collateral appropriate?
Question 47: What is the burden
associated with the proposed rule’s
approach to changes in the eligibility of
collateral?
Question 48: Is the approach to
eligible collateral that allows the
covered entity to choose whether or not
to recognize eligible collateral and shift
credit exposure to the issuer of eligible
collateral appropriate?
Unused Credit Lines
In computing its net credit exposure
to a counterparty for a credit line or
revolving credit facility, the proposal
would permit a covered entity to reduce
its gross credit exposure by the amount
of the unused portion of the credit
extension. To qualify for this reduction,
the covered entity cannot have any legal
obligation to advance additional funds
under the facility until the counterparty
provides collateral in the amount that is
required with respect to that unused
portion of the facility. In addition, the
credit contract would be required to
specify that any used portion of the
credit extension must be fully secured at
all times by high-quality of collateral.88
Question 49: What alternative
approaches, if any, to the proposed
treatment of the unused portion of
certain credit facilities should the Board
consider?
88 Collateral must be either (i) cash; (ii)
obligations of the United States or its agencies; (iii)
obligations directly and fully guaranteed as to
principal and interest by, the Federal National
Mortgage Association or the Federal Home Loan
Mortgage Corporation, only while operating under
the conservatorship or receivership of the Federal
Housing Finance Agency, and any additional
obligations issued by a U.S. government sponsored
entity as determined by the Board; or (iv)
obligations of the home country sovereign entity.

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Eligible Guarantees
In calculating its net credit exposure
to the counterparty, the proposal would
require a covered entity to reduce its
gross credit exposure to the
counterparty by the amount of any
eligible guarantee from an eligible
protection provider.89
The Board proposes to require gross
exposure be reduced by the amount of
an eligible guarantee in order to ensure
that concentrations in exposures to
guarantors are captured by the regime.
This requirement is meant to limit the
ability of the covered entity to extend
loans or other forms of credit to a large
number of high risk borrowers that are
guaranteed by a single guarantor. As is
the case with eligible collateral, in no
event would a covered entity’s gross
credit exposure to an eligible protection
provider with respect to an eligible
guarantee be in excess of its gross credit
exposure to the original counterparty on
the credit transaction prior to the
recognition of the eligible guarantee.
Question 50: Are there any additional
or alternative requirements the Board
should place on eligible protection
providers to ensure their capacity to
perform on their guarantee obligations?
Question 51: Should a covered entity
have the choice of whether or not to
fully shift exposures to eligible
protection providers in the case of
eligible guarantees or to divide an
exposure between the original
counterparty and the eligible protection
provider in some manner?
Eligible Credit and Equity Derivatives
In the case when the covered entity is
a protection purchaser of eligible credit
and equity derivatives, the proposal
would require a covered entity to reduce
its credit exposure by the notional
amount of those derivatives. To be
recognized for purposes of calculating
net credit exposure, hedges must meet
the definitions of eligible credit and
equity derivative hedges.90 These
89 Eligible protection provider would mean an
entity (other than the foreign banking organization
or an affiliate thereof) that is one of the following
types of entities: a sovereign entity; the Bank for
International Settlements, the International
Monetary Fund, the European Central Bank, the
European Commission, or a multilateral
development bank; a Federal Home Loan Bank; the
Federal Agricultural Mortgage Corporation; a U.S.
depository institution; a bank holding company; a
savings and loan holding company; a registered
broker dealer; an insurance company; a foreign
banking organization; a non-U.S.-based securities
firm or a non-U.S.-based insurance company that is
subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository
institutions, securities broker-dealers, or insurance
companies; or a qualifying central counterparty.
90 By contrast, when the covered entity is the
protection provider, any credit or equity derivative

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derivatives must meet certain criteria,
including that the derivative be written
by an eligible protection provider.91
Other Eligible Hedges
In addition to eligible credit and
equity derivatives, the proposal would
permit a covered entity to reduce
exposure to a counterparty by the face
amount of a short sale of the
counterparty’s debt or equity security.
Question 52: What types of
derivatives should be eligible for
mitigating gross credit exposure?
Question 53: What alternative
approaches, if any, should the Board
consider to capture the risk mitigation
benefits of proxy or portfolio hedges or
to permit U.S. intermediate holding
companies or any part of the combined
U.S. operations to use internal models
to measure potential exposures to sellers
of credit protection?
Question 54: Would a more
conservative approach to eligible credit
or equity derivative hedges be more
appropriate, such as one in which the
U.S. intermediate holding company or
any part of the combined U.S.
operations would be required to
recognize gross notional credit exposure
both to the original counterparty and the
eligible protection provider?
Netting of Securities Financing
Transactions
In calculating its credit exposure to a
counterparty, the proposal would
permit a covered entity to net the gross
credit exposure amounts of (i) its
repurchase and reverse repurchase
transactions with a counterparty, and
(ii) its securities lending and borrowing
transactions with a counterparty, in
each case, where the transactions are
subject to a bilateral netting agreement
with that counterparty.
Compliance

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Under the proposal, a foreign banking
organization would be required to
comply with the requirements of the
proposed rule on a daily basis as of the
end of each business day and must
submit a monthly compliance report
demonstrating its daily compliance. A
foreign banking organization must
ensure the compliance of its U.S.
intermediate holding company and its
combined U.S. operations. If either the
U.S. intermediate holding company or
written by the covered entity would be included in
the calculation of the covered entity’s gross credit
exposure to the reference obligor.
91 The same types of organizations that are
eligible protection providers for the purposes of
eligible guarantees are eligible protection providers
for purposes of eligible credit and equity
derivatives.

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the combined U.S. operations is not in
compliance, both of the U.S.
intermediate holding company and the
U.S. operations would be prohibited
from engaging in any additional credit
transactions with such a counterparty,
except in cases when the Board
determines that such additional credit
transactions are necessary or
appropriate to preserve the safety and
soundness of the foreign banking
organization or financial stability. In
considering special temporary
exceptions, the Board may impose
supervisory oversight and reporting
measures that it determines are
appropriate to monitor compliance with
the foregoing standards.
Question 55: What temporary
exceptions should the Board consider, if
any?
Exemptions
Section 165(e)(6) of the Dodd-Frank
Act permits the Board to exempt
transactions from the definition of the
term ‘‘credit exposure’’ for purposes of
this subsection, if the Board finds that
the exemption is in the public interest
and is consistent with the purposes of
this subsection. The proposal would
provide exemptions to the credit
exposure limit for exposures to the
United States and its agencies, Federal
National Mortgage Association and the
Federal Home Loan Mortgage
Corporation (while these entities are
operating under the conservatorship or
receivership of the Federal Housing
Finance Agency), and a foreign banking
organization’s home country sovereign
entity. The exemption for a foreign
banking organization’s home country
sovereign would recognize that a foreign
banking organization’s U.S. operations
may have exposures to its home country
sovereign entity that are required by
home country laws or are necessary to
facilitate the normal course of business
for the consolidated company.
In addition, the proposal would also
provide an exception for intraday credit
exposure to a counterparty. This
exemption would help minimize the
effect of the rule on the payment and
settlement of financial transactions,
which often involve large exposure but
are settled on an intraday basis. The
Board would have authority to exempt
any transaction in the public interest
and consistent with the purposes of the
proposal.92
Question 56: Would additional
exemptions for foreign banking
organizations be appropriate? Why or
why not?
92 See

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VII. Risk Management
A. Background
The recent financial crisis highlighted
the need for large, complex financial
companies to have more robust
enterprise-wide risk management. A
number of companies that experienced
material financial distress or failed
during the crisis had significant
deficiencies in key areas of risk
management. Recent reviews of risk
management practices of banking
organizations conducted by the Senior
Supervisors Group (SSG) illustrated
these deficiencies.93
The SSG found that business line and
senior risk managers did not jointly act
to address a company’s risks on an
enterprise-wide basis and business line
managers made decisions in isolation.
In addition, treasury functions were not
closely aligned with risk management
processes, preventing market and
counterparty risk positions from being
readily assessed on an enterprise-wide
basis.
The risk management weaknesses
revealed during the financial crisis
among large U.S. bank holding
companies were also apparent in the
U.S. operations of large foreign banking
organizations. Moreover, consolidated
risk management practices across
foreign banking organizations, while
efficient from a global perspective, have
at times limited U.S. supervisors’ ability
to understand the risks posed to U.S.
financial stability by the U.S. operations
of foreign banks. Further, centralized
risk management practices that focus on
risk by business line have generally
limited the ability of large foreign
banking organizations to effectively
aggregate, monitor, and report risks
across their U.S. legal entities on a
timely basis.
Section 165(b)(1)(A) of the DoddFrank Act requires the Board to
establish overall risk management
requirements as part of the enhanced
prudential standards to ensure that
strong risk management standards are
part of the regulatory and supervisory
framework for large bank holding
companies, including foreign banking
organizations, and nonbank companies
supervised by the Board.94 Section
165(h) of the Dodd-Frank Act directs the
Board to issue regulations requiring
publicly traded bank holding companies
with total consolidated assets of $10
billion or more and publicly traded
93 See 2008 SSG Report, supra note 56; 2009 SSG
Report, supra note 57.
94 12 U.S.C. 5365(b)(1)(A).

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nonbank companies supervised by the
Board to establish risk committees.95
In its December 2011 proposal, the
Board proposed to establish enhanced
risk management standards for U.S.
bank holding companies with total
consolidated assets of $50 billion or
more and U.S. nonbank financial
companies supervised by the Board, to
address weakness in risk management
practices that had emerged during the
crisis. The December 2011 proposal
would (i) require oversight of enterprisewide risk management by a stand-alone
risk committee of the board of directors
and chief risk officer; (ii) reinforce the
independence of a firm’s risk
management function; and (iii) ensure
appropriate expertise and stature for the
chief risk officer. The Board also
proposed to require U.S. bank holding
companies with total consolidated
assets of $10 billion or more that are
publicly traded companies to establish
an enterprise-wide risk committee of the
board of directors.
This proposal would apply the
requirements of the December 2011
proposal to foreign banking
organizations in a way that strengthens
foreign banking organizations’ oversight
and risk management of their combined
U.S. operations and requires foreign
banking organizations with a large U.S.
presence to aggregate and monitor risks
on a combined U.S. operations basis.
The proposal would permit a foreign
banking organization some flexibility to
structure the oversight of the risks of its
U.S. operations in a manner that is
efficient and effective in light of its
broader enterprise-wide risk
management structure.
The proposal includes a general
requirement that foreign banking
organizations that are publicly traded
with total consolidated assets of $10
billion or more and all foreign banking
organizations, regardless of whether
their stock is publicly traded, with total
consolidated assets of $50 billion or
more certify that they maintain a risk
committee to oversee the U.S.
operations of the company. The
proposal would set forth additional
requirements for the U.S. risk committee
of a foreign banking organization with
combined U.S. assets of $50 billion or
more and would require these
companies to appoint a U.S. chief risk
officer in charge of implementing and
maintaining a risk management
framework for the company’s combined
U.S. operations.
The Board emphasizes that the
enhanced U.S. risk management
requirements contained in this proposal
95 12

U.S.C. 5365(h).

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supplement the Board’s existing risk
management guidance and supervisory
expectations for foreign banking
organizations.96 All foreign banking
organizations supervised by the Board
should continue to follow such
guidance to ensure appropriate
oversight of and limitations on risk.
B. Risk Committee Requirements for
Foreign Banking Organizations With
$10 Billion or More in Consolidated
Assets
Consistent with the requirements of
section 165(h) of the Dodd-Frank Act,
the proposal would require a foreign
banking organization with publicly
traded stock and total consolidated
assets of $10 billion or more or a foreign
banking organization, regardless of
whether its stock is publicly traded,
with total consolidated assets of $50
billion or more, to certify to the Board,
on an annual basis, that it maintains a
committee that (1) oversees the U.S. risk
management practices of the company,
and (2) has at least one member with
risk management expertise. This
certification must be filed with the
Board concurrently with the foreign
banking organization’s Form FR Y–7.
At least one member of a U.S. risk
committee would be required to have
risk management expertise that is
commensurate with the capital
structure, risk profile, complexity,
activities, and size of the foreign
banking organization’s combined U.S.
operations. The requisite level of risk
management expertise for a company’s
U.S. risk committee should be
commensurate with the capital
structure, risk profile, complexity,
activities, and size of the company’s
combined U.S. operations. Thus, the
Board expects that the U.S. risk
committee of a foreign banking
organization that poses greater risks to
the U.S. financial system would have
members with commensurately greater
risk management expertise than the U.S.
risk committees of other companies
whose combined U.S. operations pose
less systemic risk.
Generally, a foreign banking
organization would be permitted to
maintain its U.S. risk committee either
as a committee of its global board of
directors (or equivalent thereof) or as a
committee of the board of directors of
the U.S. intermediate holding company.
If the U.S. risk committee is a committee
of the global board of directors, it may
be organized on a standalone basis or as
96 See SR Letter 08–8 (October 16, 2008), available
at http://fedweb.frb.gov/fedweb/bsr/srltrs/
SR0808.htm, and SR Letter 08–9 (October 16, 2008),
available at http://fedweb.frb.gov/fedweb/bsr/srltrs/
SR0809.htm.

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part of the enterprise-wide risk
committee (or equivalent thereof). A
foreign banking organization with
combined U.S. assets of $50 billion or
more that conducts its operations in the
United States solely through a U.S.
intermediate holding company would
be required to maintain its U.S. risk
committee at its U.S. intermediate
holding company.
In order to accommodate the diversity
in corporate governance philosophies
across countries, the proposal would not
require the U.S. risk committee of a
foreign banking organization with
combined U.S. assets of less than $50
billion to maintain a specific number of
independent directors on the U.S. risk
committee.97 Further, a foreign banking
organization’s enterprise-wide risk
committee may fulfill the
responsibilities of the U.S. risk
committee, unless the foreign banking
organization has combined U.S. assets
of $50 billion or more and operates in
the United States solely through a U.S.
intermediate holding company.
Under the proposal, foreign banking
organization with publicly traded stock
and total consolidated assets of $10
billion or more or a foreign banking
organization, regardless of whether its
stock is publicly traded, with total
consolidated assets of $50 billion or
more as of July 1, 2014, would be
required to comply with the proposed
risk committee certification requirement
on July 1, 2015, unless that time is
extended by the Board in writing. A
foreign banking organization that
crossed the relevant asset threshold after
July 1, 2014 would be required to
comply with the proposed risk
committee certification requirement
beginning 12 months after it crosses the
relevant asset threshold, unless that
time is accelerated or extended by the
Board in writing.
Question 57: Should the Board
require that a company’s certification
under section 252.251 of the proposal
include a certification that at least one
member of the U.S. risk committee
satisfies director independence
requirements? Why or why not?
Question 58: Should the Board
consider requiring that all U.S. risk
committees required under the proposal
not be housed within another committee
or be part of a joint committee, or limit
the other functions that the U.S. risk
committee may perform? Why or why
not?
97 As described below, foreign banking
organizations with combined U.S. assets of $50
billion or more would be required to maintain an
independent director on its U.S. risk committee.

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C. Risk Management Requirements for
Foreign Banking Organizations With
Combined U.S. Assets of $50 Billion or
More
The proposal would establish
additional requirements for the U.S. risk
committee of a foreign banking
organization with combined U.S. assets
of $50 billion or more relating to the
committee’s responsibilities and
structure. Each foreign banking
organization with combined U.S. assets
of $50 billion or more would also be
required to appoint a U.S. chief risk
officer in charge of overseeing and
implementing the risk management
framework of the company’s combined
U.S. operations. In general, the Board
has sought to maintain consistency with
the risk management requirements
included in the December 2011
proposal, with certain adaptations to
account for the unique characteristics of
foreign banking organizations.
A foreign banking organization with
combined U.S. assets of $50 billion or
more on July 1, 2014, would be required
to comply with the proposed risk
management requirements on July 1,
2015, unless that time is extended by
the Board in writing. A foreign banking
organization whose combined U.S.
assets exceeded $50 billion after July 1,
2014 would be required to comply with
the proposed risk management
standards beginning 12 months after it
crosses the asset threshold, unless that
time is accelerated or extended by the
Board in writing.
Responsibilities of the U.S. Risk
Committee
The proposal would require a U.S.
risk committee to review and approve
the risk management practices of the
combined U.S. operations and to
oversee the operation of an appropriate
risk management framework that is
commensurate with the capital
structure, risk profile, complexity,
activities, and size of the company’s
combined U.S. operations.
The risk management framework for
the combined U.S. operations must be
consistent with the enterprise-wide risk
management framework of the foreign
banking organization and must include:
• Policies and procedures relating to
risk management governance, risk
management practices, and risk control
infrastructure for the combined U.S.
operations of the company;
• Processes and systems for
identifying and reporting risks and risk
management deficiencies, including
emerging risks, on a combined U.S.
operations basis;
• Processes and systems for
monitoring compliance with the

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policies and procedures relating to risk
management governance, practices, and
risk controls across the company’s
combined U.S. operations;
• Processes designed to ensure
effective and timely implementation of
corrective actions to address risk
management deficiencies;
• Specification of management and
employees’ authority and independence
to carry out risk management
responsibilities; and
• Integration of risk management and
control objectives in management goals
and compensation structure of the
company’s combined U.S. operations.
The proposal would require that a
U.S. risk committee meet at least
quarterly and as needed, and that the
committee fully document and maintain
records of its proceedings, including
risk management decisions.
The Board expects that members of a
U.S. risk committee of a foreign banking
organization with combined U.S. assets
of $50 billion or more generally would
have an understanding of risk
management principles and practices
relevant to the U.S. operations of their
company. U.S. risk committee members
generally should also have experience
developing and applying risk
management practices and procedures,
measuring and identifying risks, and
monitoring and testing risk controls
with respect to banking organizations.
Question 59: As an alternative to the
proposed U.S. risk committee
requirement, should the Board consider
requiring each foreign banking
organization with combined U.S. assets
of $50 billion or more to establish a risk
management function solely in the
United States, rather than permitting the
U.S. risk management function to be
located in the company’s home office?
Why or why not? If so, how should such
a function be structured?
Question 60: Should the Board
consider requiring or allowing a foreign
banking organization to establish a
‘‘U.S. risk management function’’ that is
based in the United States but not
associated with a board of directors to
oversee the risk management practices
of the company’s combined U.S.
operations? What are the benefits and
drawbacks of such an approach?
Question 61: Should the Board
consider allowing a foreign banking
organization with combined U.S. assets
of $50 billion or more that has a U.S.
intermediate holding company
subsidiary and operates no branches or
agencies in the United States the option
to comply with the proposal by
maintaining a U.S. risk committee of the
company’s global board of directors?
Why or why not?

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Question 62: Is the scope of review of
the risk management practices of the
combined U.S. operations of a foreign
banking organization appropriate? Why
or why not?
Question 63: What unique ownership
structures of foreign banking
organizations would present challenges
for such companies to comply with the
requirements of the proposal? Should
the Board incorporate flexibility for
companies with unique or
nontraditional ownership structures
into the rule, such as more than one toptier company? If so, how?
Question 64: Is it appropriate to
require the U.S. risk committee of a
foreign banking organization to meet at
least quarterly? If not, what alternative
requirement should be considered and
why?
Independent Member of the U.S. Risk
Committee
The proposal would require the U.S.
risk committee of a foreign banking
organization with combined U.S. assets
of $50 billion or more to include at least
one member who is not (1) an officer or
employee of the company or its affiliates
and has not been an officer or employee
of the company or its affiliates during
the previous three years, or (2) a
member of the immediate family of a
person who is, or has been within the
last three years, an executive officer of
the company or its affiliates. This
requirement would apply regardless of
where the U.S. risk committee was
located.
This requirement is adapted from
director independence requirements of
certain U.S. securities exchanges and is
similar to the requirement in the
December 2011 proposal that the
director of the risk committee of a U.S.
bank holding company or nonbank
financial company supervised by the
Board be independent.98
Question 65: Should the Board
require that a member of the U.S. risk
committee comply with the director
independence standards? Why or why
not?
Question 66: Should the Board
consider specifying alternative or
additional qualifications for director
independence? If so, describe the
alternative or additional qualifications.
Should the Board require that the chair
of a U.S. risk committee satisfy the
98 The December 2011 proposal would require
that the director be independent either under the
SEC’s regulations, or, if the domestic company was
not publicly traded, the company be able to
demonstrate to the Federal Reserve that the director
would qualify as an independent director under the
listing standards of a national securities exchange
if the company were publicly traded.

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director independence standards,
similar to the requirements in the
December 2011 proposal for large
U.S.bank holding companies?

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U.S. Chief Risk Officer
The proposal would require a foreign
banking organization with combined
U.S. assets of $50 billion or more or its
U.S. intermediate holding company
subsidiary to appoint a U.S. chief risk
officer that is employed by a U.S.
subsidiary or U.S. office of the foreign
banking organization. The U.S. chief
risk officer would be required to have
risk management expertise that is
commensurate with the capital
structure, risk profile, complexity,
activities, and size of the combined U.S.
operations of a foreign banking
organization with combined U.S. assets
of $50 billion or more. In addition, the
U.S. chief risk officer would be required
to receive appropriate compensation
and other incentives to provide an
objective assessment of the risks taken
by the company’s combined U.S.
operations. The Board expects that the
primary responsibility of the U.S. chief
risk officer would be risk management
oversight of the combined U.S.
operations and that the U.S. chief risk
officer would not also serve as the
company’s global chief risk officer.
In general, a U.S. chief risk officer
would report directly to the U.S. risk
committee and the company’s global
chief risk officer. However, the Board
may approve an alternative reporting
structure on a case-by-case basis if the
company demonstrates that the
proposed reporting requirements would
create an exceptional hardship for the
company.
Question 67: Would it be appropriate
for the Board to permit the U.S. chief
risk officer to fulfill other
responsibilities, including with respect
to the enterprise-wide risk management
of the company, in addition to the
responsibilities of section 252.253 of
this proposal? Why or why not?
Question 68: What are the challenges
associated with the U.S. chief risk
officer being employed by a U.S. entity?
Question 69: Should the Board
consider approving alternative reporting
structures for a U.S. chief risk officer on
a case-by-case basis if the company
demonstrates that the proposed
reporting requirements would create an
exceptional hardship or under other
circumstances?
Question 70: Should the Board
consider specifying by regulation the
minimum qualifications, including
educational attainment and professional
experience, for a U.S. chief risk officer?

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Under the proposal, the U.S. chief risk
officer would be required to directly
oversee the measurement, aggregation,
and monitoring of risks undertaken by
the company’s combined U.S.
operations. The proposal would require
a U.S. chief risk officer to directly
oversee the regular provision of
information to the U.S. risk committee,
the global chief risk officer, and the
Board or Federal Reserve supervisory
staff.99 Such information would include
information regarding the nature of and
changes to material risks undertaken by
the company’s combined U.S.
operations, including risk management
deficiencies and emerging risks, and
how such risks relate to the global
operations of the company.
In addition, the U.S. chief risk officer
would be expected to oversee regularly
scheduled meetings, as well as special
meetings, with the Board or Federal
Reserve supervisory staff to assess
compliance with its risk management
responsibilities. This would require the
U.S. chief risk officer to be available to
respond to supervisory inquiries from
the Board as needed.
The proposal includes additional
responsibilities for which a U.S. chief
risk officer must have direct oversight,
including:
• Implementation of and ongoing
compliance with appropriate policies
and procedures relating to risk
management governance, practices, and
risk controls of the company’s combined
U.S. operations and monitoring
compliance with such policies and
procedures;
• Development appropriate processes
and systems for identifying and
reporting risks and risk management
deficiencies, including emerging risks,
on a combined U.S. operations basis;
• Management risk exposures and
risk controls within the parameters of
the risk control framework for the
company’s combined U.S. operations;
• Monitoring and testing of the risk
controls of the combined U.S.
operations; and
• Ensuring that risk management
deficiencies with respect to the
company’s combined U.S. operations
are resolved in a timely manner.
Question 71: What alternative
responsibilities for the U.S. chief risk
officer should the Board consider?
Question 72: Should the Board
require each foreign banking
organization with total consolidated
assets of $50 billion or more and
combined U.S. assets of less than $50
billion to designate an employee to
99 The reporting would generally take place
through the traditional supervisory process.

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serve as a liaison to the Board regarding
the risk management practices of the
company’s combined U.S. operations? A
liaison of this sort would meet annually,
and as needed, with the appropriate
supervisory authorities at the Board and
be responsible for explaining the risk
management oversight and controls of
the foreign banking organization’s
combined U.S. operations. Would these
requirements be appropriate? Why or
why not?
VIII. Stress Test Requirements
A. Background
The Board has long held the view that
a banking organization should operate
with capital levels well above its
minimum regulatory capital ratios and
commensurate with its risk profile.100 A
banking organization should also have
internal processes for assessing its
capital adequacy that reflect a full
understanding of its risks and ensure
that it holds capital commensurate with
those risks.101 Stress testing is one tool
that helps both bank supervisors and a
banking organization measure the
sufficiency of capital available to
support the banking organization’s
operations throughout periods of
economic and financial stress.102
The Board has previously highlighted
the use of stress testing as a means to
better understand the range of a banking
organization’s potential risk
exposures.103 In particular, as part of its
100 See 12 CFR part 225, Appendix A; see also SR
Letter 99–18, Assessing Capital Adequacy in
Relation to Risk at Large Banking Organizations and
Others with Complex Risk Profiles (July 1, 1999)
(SR 99–18), available at http://
www.federalreserve.gov/boarddocs/srletters/1999/
SR9918.HTM.
101 See SR Letter 09–4, Applying Supervisory
Guidance and Regulations on the Payment of
Dividends, Stock Redemptions, and Stock
Repurchases at Bank Holding Companies (March
27, 2009) (SR 09–4), available at http://
www.federalreserve.gov/boarddocs/srletters/2009/
SR0904.htm .
102 A full assessment of a company’s capital
adequacy must take into account a range of risk
factors, including those that are specific to a
particular industry or company.
103 See, e.g., Supervisory Guidance on Stress
Testing for Banking Organizations With More Than
$10 Billion in Total Consolidated Assets, 77 FR
29458 (May 17, 2012); SR 10–6, Interagency Policy
Statement on Funding and Liquidity Risk
Management (March 17, 2010), available at http://
www.federalreserve.gov/boarddocs/srletters/2010/
sr1006.htm; Supervision and Regulation Letter 10–
1, Interagency Advisory on Interest Rate Risk
(January 11, 2010), available at http://
www.federalreserve.gov/boarddocs/srletters/2010/
sr1001.htm; SR 09–4, supra note 99; SR Letter 07–
1, Interagency Guidance on Concentrations in
Commercial Real Estate (January 4, 2007), available
at http://www.federalreserve.gov/boarddocs/
srletters/2007/SR0701.htm; Supervisory Review
Process of Capital Adequacy (Pillar 2) Related to the
Implementation of the Basel II Advanced Capital
Framework, 73 FR 44620 (July 31, 2008); SCAP

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effort to stabilize the U.S. financial
system during the recent financial crisis,
the Board, along with other federal
financial regulatory agencies, conducted
stress tests of large, complex bank
holding companies through the
Supervisory Capital Assessment
Program (SCAP). Building on the SCAP
and other supervisory work coming out
of the crisis, the Board initiated the
annual Comprehensive Capital Analysis
and Review (CCAR) in late 2010 to
assess the capital adequacy and the
internal capital planning processes of
large, complex bank holding companies
and to incorporate stress testing as part
of the Board’s regular supervisory
program for large bank holding
companies.
The global regulatory community has
also emphasized the role of stress
testing in risk management. Stress
testing is an important element of
capital adequacy assessments under
Pillar 2 of the Basel II framework, and
in 2009, the BCBS promoted principles
for sound stress testing practices and
supervision.104 The BCBS recently
reviewed the implementation of these
stress testing principles at its member
countries and concluded that, while
countries are in various stages of
maturity in their implementation of the
BCBS’s principles, stress testing has
become a key component of the
supervisory assessment process as well
as a tool for contingency planning and
communication.105
Section 165(i)(1) of the Dodd-Frank
Act requires the Board to conduct
annual stress tests of bank holding
companies with total consolidated
assets of $50 billion or more, including
foreign banking organizations, and
nonbank financial companies
supervised by the Board. In addition,
section 165(i)(2) requires the Board to
issue regulations establishing
requirements for certain regulated
financial companies, including foreign
banking organizations and foreign
savings and loan holding companies
with total consolidated assets of more
than $10 billion, to conduct companyrun stress tests.
The December 2011 proposal
included provisions that would
implement the stress testing provisions
in section 165(i) of the Dodd-Frank Act
for U.S. companies. On October 9, 2012,
Overview of Results and CCAR Overview of
Results, supra note 85.
104 See BCBS, Principles for sound stress testing
practices and supervision, (May 2009), available at
http://www.bis.org/publ/bcbs155.pdf.
105 See BCBS, Peer review of supervisory
authorities’ implementation of stress testing
principles, (April 2012), available at http://
www.bis.org/publ/bcbs218.pdf.

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the Board issued a final rule
implementing the supervisory and
company-run stress testing requirements
for U.S. bank holding companies with
total consolidated assets of $50 billion
or more and U.S. nonbank financial
companies supervised by the Board.106
Concurrently, the Board issued a final
rule implementing the company-run
stress testing requirements for U.S. bank
holding companies with total
consolidated assets of more than $10
billion but less than $50 billion.107
This proposed rule seeks to adapt the
requirements of the final stress testing
rules currently applicable to U.S. bank
holding companies to the U.S.
operations of foreign banking
organizations. The proposal would
subject U.S. intermediate holding
companies to the Board’s stress testing
rules as if they were U.S. bank holding
companies, in order to ensure national
treatment and equality of competitive
opportunity. As a result, U.S.
intermediate holding companies with
total consolidated assets of more than
$10 billion but less than $50 billion
would be required to conduct annual
company-run stress tests. U.S.
intermediate holding companies with
assets of $50 billion or more would be
required to conduct semi-annual
company-run stress tests and would be
subject to annual supervisory stress
tests.
The proposal takes a different
approach to the U.S. branches and
agencies of a foreign banking
organization because U.S. branches and
agencies do not hold capital separately
from their parent foreign banking
organization. Accordingly, the proposal
also would apply stress testing
requirements to the U.S. branches and
agencies by first evaluating whether the
home country supervisor for the foreign
banking organization conducts a stress
test and, if so, whether the stress testing
standards applicable to the consolidated
foreign banking organization in its home
country are broadly consistent with U.S.
stress testing standards.
Consistent with the approach taken in
the final stress testing rules for U.S.
firms, the proposal would tailor the
stress testing requirements based on the
size of the U.S. operations of the foreign
banking organizations.

106 See
107 See

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B. Stress Test Requirements for U.S.
Intermediate Holding Companies
U.S. Intermediate Holding Companies
With Total Consolidated Assets of $50
Billion or More
U.S. intermediate holding companies
with total consolidated assets of $50
billion or more would be subject to the
annual supervisory and semi-annual
company-run stress testing requirements
set forth in subparts F and G of
Regulation YY.108 A U.S. intermediate
holding company that meets the $50
billion total consolidated asset
threshold as of July 1, 2015, would be
required to comply with the stress
testing final rule requirements
beginning with the stress test cycle that
commences on October 1, 2015, unless
that time is extended by the Board in
writing. A U.S. intermediate holding
company that meets the $50 billion total
consolidated asset threshold after July 1,
2015, would be required to comply with
the stress test requirements beginning in
October of the calendar year after the
year in which the U.S. intermediate
holding company is established or
otherwise crosses the $50 billion total
consolidated asset threshold, unless that
time is accelerated or extended by the
Board in writing.
In accordance with subpart G of
Regulation YY, U.S. intermediate
holding companies with total
consolidated assets of $50 billion or
more would be required to conduct two
company-run stress tests per year, with
one test using scenarios provided by the
Board (the ‘‘annual’’ test) and the other
using scenarios developed by the
company (the ‘‘mid-cycle’’ test). In
connection with the annual test, the
U.S. intermediate holding company
would be required to file a regulatory
report containing the results of its stress
test with the Board by January 5 of each
year and publicly disclose a summary of
the results under the severely adverse
scenario between March 15 and March
31.109 In connection with the mid-cycle
test, the company would be required to
file a regulatory report containing the
results of this stress test by July 5 of
each year and disclose a summary of
results between September 15 and
September 30.
Concurrently with the U.S.
intermediate holding company’s annual
company-run stress test, the Board
would conduct a supervisory stress test
in accordance with subpart F of
108 See 77 FR 62378 (October 12, 2012); 77 FR
62396 (October 12, 2012).
109 The annual company-run stress tests would
satisfy some of a large intermediate holding
company’s proposed obligations under the Board’s
capital plan rule (12 CFR 225.8).

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Regulation YY of the U.S. intermediate
holding company using scenarios
identical to those provided for the
annual company-run stress test. The
U.S. intermediate holding company
would be required to file regulatory
reports that contain information to
support the Board’s supervisory stress
tests. The Board would disclose a
summary of the results of its
supervisory stress test no later than
March 31 of each calendar year.

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U.S. Intermediate Holding Companies
With Total Consolidated Assets More
Than $10 Billion But Less Than $50
Billion
U.S. intermediate holding companies
with total consolidated assets of more
than $10 billion but less than $50
billion would be subject to the annual
company-run stress testing requirements
set forth in subpart H of Regulation YY.
A U.S. intermediate holding company
subject to this requirement as of July 1,
2015, would be required to comply with
the requirements of the stress testing
final rules beginning with the stress test
cycle that commences on October 1,
2015, unless that time is extended by
the Board in writing. A U.S.
intermediate holding company that
becomes subject to this requirement
after July 1, 2015, would comply with
the final rule stress testing requirements
beginning in October of the calendar
year after the year in which the U.S.
intermediate holding company is
established, unless that time is
accelerated or extended by the Board in
writing.
U.S. intermediate holding companies
with total consolidated assets of more
than $10 billion but less than $50
billion would be required to conduct
one company-run stress test per year,
using scenarios provided by the Board.
In connection with the stress test, a U.S.
intermediate holding company would
be required to file a regulatory report
containing the results of its stress test
with the Board by March 31 of each year
and publicly disclose a summary of the
results of its stress test under the
severely adverse scenario between June
15 and June 30.
C. Stress Test Requirements for Foreign
Banking Organizations With Combined
U.S. Assets of $50 Billion or More
In order to satisfy the proposed stress
test requirements, a foreign banking
organization with combined U.S. assets
of $50 billion or more must be subject
to a consolidated capital stress testing
regime that includes either an annual
supervisory capital stress test conducted
by the foreign banking organization’s
home country supervisor or an annual

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evaluation and review by the foreign
banking organization’s home country
supervisor of an internal capital
adequacy stress test conducted by the
foreign banking organization. In either
case, the home country capital stress
testing regime must set forth
requirements for governance and
controls of the stress testing practices by
relevant management and the board of
directors (or equivalent thereof) of the
foreign banking organization.
A foreign banking organization with
combined U.S. assets of $50 billion or
more on July 1, 2014, would be required
to comply with the proposal beginning
in October 2015, unless that time is
extended by the Board in writing. A
foreign banking organization that
exceeds the $50 billion combined U.S.
asset threshold after July 1, 2014, would
be required to comply with the
requirements of the proposal
commencing in October of the calendar
year after the company becomes subject
to the stress test requirement, unless
that time is accelerated or extended by
the Board in writing.
Question 73: What other standards
should the Board consider to determine
whether a foreign banking
organization’s home country stress
testing regime is broadly consistent with
the capital stress testing requirements of
the Dodd-Frank Act?
Question 74: Should the Board
consider conducting supervisory loss
estimates on the U.S. branch and agency
networks of large foreign banking
organizations by requiring U.S. branches
and agencies to submit data similar to
that required to be submitted by U.S.
bank holding companies with total
consolidated assets of $50 billion or
more on the FR Y–14? Alternatively,
should the Board consider requiring
foreign banking organizations to
conduct internal stress tests on their
U.S. branch and agency networks?
Information Requirements for Foreign
Banking Organizations With Combined
U.S. Assets of $50 Billion or More
The proposal would require a foreign
banking organization with combined
U.S. assets of $50 billion or more to
submit information regarding the results
of its home country stress test. The
information must include: a description
of the types of risks included in the
stress test; a description of the
conditions or scenarios used in the
stress test; a summary description of the
methodologies used in the stress test;
estimates of the foreign banking
organization’s projected financial and
capital condition; and an explanation of
the most significant causes for the
changes in regulatory capital ratios.

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When the U.S. branch and agency
network is in a net due from position to
the foreign bank parent or its foreign
affiliates, calculated as the average daily
position from October–October of a
given year, the foreign banking
organization would be required to report
additional information to the Board
regarding its stress tests. The additional
information would include a more
detailed description of the
methodologies used in the stress test,
detailed information regarding the
organization’s projected financial and
capital position over the planning
horizon, and any additional information
that the Board deems necessary in order
to evaluate the ability of the foreign
banking organization to absorb losses in
stressed conditions. The heightened
information requirements reflect the
greater risk to U.S. creditors and U.S.
financial stability posed by U.S.
branches and agencies that serve as
funding sources to their foreign parent.
All foreign banking organizations
with combined U.S. assets of $50 billion
or more would be required to provide
this information by January 5 of each
calendar year, unless extended by the
Board in writing. The confidentiality of
any information submitted to the Board
with respect to stress testing results
would be determined in accordance
with the Board’s rules regarding
availability of information.110
Supplemental Requirements for Foreign
Banking Organizations With Combined
U.S. Assets of $50 Billion or More That
Do Not Comply With Stress Testing
Requirements
Asset Maintenance Requirement
If a foreign banking organization with
combined U.S. assets of $50 billion or
more does not meet the stress test
requirements above, the Board would
require its U.S. branch and agency
network to maintain eligible assets
equal to 108 percent of third-party
liabilities (asset maintenance
requirement). The 108 percent asset
maintenance requirement reflects the 8
percent minimum risk-based capital
standard currently applied to U.S.
banking organizations.
The proposal generally aligns the
mechanics of the asset maintenance
requirement with the asset maintenance
requirement that may apply to U.S.
branches and agencies under existing
federal or state rules. Under the
proposal, definitions of the terms
‘‘eligible assets’’ and ‘‘liabilities’’ are
generally consistent with the definitions
of the terms ‘‘eligible assets’’ and
110 See

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
‘‘liabilities requiring cover’’ used in the
New York State Superintendent’s
Regulations.111
Question 75: Should the Board
consider alternative asset maintenance
requirements, including definitions of
eligible assets or liabilities under cover
or the percentage?
Question 76: Do the proposed asset
maintenance requirement pose any
conflict with any asset maintenance
requirements imposed on a U.S. branch
or agency by another regulatory
authority, such as the FDIC or the OCC?
Stress Test of U.S. Subsidiaries
If a foreign banking organization with
combined U.S. assets of $50 billion or
more does not meet the stress testing
requirements, the foreign banking
organization would be required to
conduct an annual stress test of any U.S.
subsidiary not held under a U.S.
intermediate holding company (other
than a section 2(h)(2) company),
separately or as part of an enterprisewide stress test, to determine whether
that subsidiary has the capital necessary
to absorb losses as a result of adverse
economic conditions.112 The foreign
banking organization would be required
to report summary information about
the results of the stress test to the Board
on an annual basis.
Question 77: What alternative
standards should the Board consider for
foreign banking organizations that do
not have a U.S. intermediate holding
company and are not subject to broadly
consistent stress testing requirements?
What types of challenges would the
proposed stress testing regime present?
Intragroup Funding Restrictions or
Local Liquidity Requirements
In addition to the asset maintenance
requirement and the subsidiary-level
stress test requirement described above,
the Board may impose intragroup
funding restrictions on the U.S.
operations of a foreign banking
organization with combined U.S. assets
of $50 billion or more that does not
satisfy the stress testing requirements.
The Board may also impose increased
local liquidity requirements with
respect to the U.S. branch and agency
network or on any U.S. subsidiary that
is not part of a U.S. intermediate
holding company. If the Board
determines that it should impose
intragroup funding restrictions or
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111 3

NYCRR § 322.3–322.4.
described above under section III of this
preamble, a foreign banking organization with
combined U.S. assets (excluding assets held by a
branch or agency or by a section 2(h)(2) company)
of less than $10 billion would not be required to
form a U.S. intermediate holding company.
112 As

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increased local liquidity requirements
as a result of failure to meet the Board’s
stress testing requirements under this
proposal, the Board would notify the
company no later than 30 days before it
proposes to apply additional standards.
The notification will include the basis
for imposing the additional
requirement. Within 14 calendar days of
receipt of a notification under this
paragraph, the foreign banking
organization may request in writing that
the Board reconsider the requirement,
including an explanation as to why the
reconsideration should be granted. The
Board will respond in writing within 14
calendar days of receipt of the
company’s request.
Question 78: Should the Board
consider alternative prudential
standards for U.S. operations of foreign
banking organizations that are not
subject to home country stress test
requirements that are consistent with
those applicable to U.S. banking
organizations or do not meet the
minimum standards set by their home
country regulator?
D. Stress Test Requirements for Other
Foreign Banking Organizations and
Foreign Savings and Loan Holding
Companies With Total Consolidated
Assets of More Than $10 Billion
The Dodd-Frank Act requires the
Board to impose stress testing
requirements on its regulated entities
(including bank holding companies,
state member banks, and savings and
loan holding companies) with total
consolidated assets of more than $10
billion.113 Thus, this proposal would
apply stress testing requirements to
foreign banking organizations with total
consolidated assets of more than $10
billion, but combined U.S. assets of less
than $50 billion, and foreign savings
and loan holding companies with total
consolidated assets of more than $10
billion.
In order to satisfy the proposed stress
testing requirements, a foreign banking
organization or foreign savings and loan
holding company described above must
be subject to a consolidated capital
stress testing regime that includes either
an annual supervisory capital stress test
conducted by the company’s country
supervisor or an annual evaluation and
review by the company’s home country
supervisor of an internal capital
adequacy stress test conducted by the
company. In either case, the home
country capital stress testing regime
must set forth requirements for
governance and controls of the stress
113 Section 165(i)(2) of the Dodd-Frank Act; 12
U.S.C. 5363(i)(2).

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76663

testing practices by relevant
management and the board of directors
(or equivalent thereof) of the company.
These companies would not be subject
to separate information requirements
imposed by the Board related to the
results of their stress tests.
If a foreign banking organization or a
foreign savings and loan holding
company described above does not meet
the proposed stress test requirements,
the Board would require its U.S. branch
and agency network, as applicable, to
maintain eligible assets equal to 105
percent of third-party liabilities (asset
maintenance requirement). The 105
percent asset maintenance requirement
reflects the more limited risks that these
companies pose to U.S. financial
stability.
In addition, companies that do not
meet the stress testing requirements
would be required to conduct an annual
stress test of any U.S. subsidiary not
held under a U.S. intermediate holding
company (other than a section 2(h)(2)
company), separately or as part of an
enterprise-wide stress test, to determine
whether that subsidiary has the capital
necessary to absorb losses as a result of
adverse economic conditions.114 The
company would be required to report
high-level summary information about
the results of the stress test to the Board
on an annual basis.
Question 79: Should the Board
consider providing a longer phase-in for
foreign banking organizations with
combined U.S. assets of less than $50
billion?
Question 80: Is the proposed asset
maintenance requirement calibrated
appropriately to reflect the risks to U.S.
financial stability posed by these
companies?
Question 81: What alternative
standards should the Board consider for
foreign banking organizations that do
not have a U.S. intermediate holding
company and are not subject to
consistent stress testing requirements?
What types of challenges would the
proposed stress testing regime present?
The proposal would require any
foreign banking organization or foreign
savings and loan holding company that
meets the $10 billion asset threshold as
of July 1, 2014 to comply with the
proposed stress testing requirements
beginning in October 2015, unless that
time is extended by the Board in
writing. A foreign banking organization
or foreign savings and loan holding
114 As described above under section III of this
preamble, a foreign banking organization with
combined U.S. assets (excluding assets held by a
branch or agency or by a section 2(h)(2) company)
of less than $10 billion would not be required to
form a U.S. intermediate holding company.

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

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IX. Debt-to-Equity Limits
Section 165(j) of the Act provides that
the Board must require a foreign
banking organization with total
consolidated assets of $50 billion or
more to maintain a debt-to-equity ratio
of no more than 15-to-1, upon a
determination by the Council that such
company poses a grave threat to the
financial stability of the United States
and that the imposition of such
requirement is necessary to mitigate the
risk that such company poses to the
financial stability of the United
States.115 The Board is required to
promulgate regulations to establish
procedures and timelines for
compliance with section 165(j).116
The proposal would implement the
debt-to-equity ratio limitation with
respect to a foreign banking organization
by applying a 15-to-1 debt-to-equity
limitation on its U.S. intermediate
holding company and any U.S.
subsidiary not organized under a U.S.
intermediate holding company (other
than a section 2(h)(2) company), and a
108 percent asset maintenance
requirement on its U.S. branch and
agency network. Unlike the other
provisions of this proposal, the debt-toequity ratio limitation would be
effective on the effective date of the
final rule.
Under the proposal, a foreign banking
organization for which the Council has
made the determination described above
would receive written notice from the
Council, or from the Board on behalf of
the Council, of the Council’s
determination. Within 180 calendar
days from the date of receipt of the
notice, the foreign banking organization
must come into compliance with the
proposal’s requirements. The proposed
rule does not establish a specific set of
actions to be taken by a company in
order to comply with the debt-to-equity
ratio requirement; however, the
company would be expected to come
into compliance with the ratio in a
manner that is consistent with the
company’s safe and sound operation
and preservation of financial stability.
115 The Act requires that, in making its
determination, the Council must take into
consideration the criteria in Dodd-Frank Act
sections 113(a) and (b) and any other risk-related
factors that the Council deems appropriate. See 12
U.S.C. 5366(j)(1).
116 12 U.S.C. 5366(j)(3).

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For example, a company generally
would be expected to make a good faith
effort to increase equity capital through
limits on distributions, share offerings,
or other capital raising efforts prior to
liquidating margined assets in order to
achieve the required ratio.
The proposal would permit a
company subject to the debt-to-equity
ratio requirement to request up to two
extension periods of 90 days each to
come into compliance with this
requirement. Requests for an extension
of time to comply must be received in
writing by the Board not less than 30
days prior to the expiration of the
existing time period for compliance and
must provide information sufficient to
demonstrate that the company has made
good faith efforts to comply with the
debt-to-equity ratio requirement and
that each extension would be in the
public interest. In the event that an
extension of time is requested, the
Board would review the request in light
of the relevant facts and circumstances,
including the extent of the company’s
efforts to comply with the ratio and
whether the extension would be in the
public interest.
A company would no longer be
subject to the debt-to-equity ratio
requirement of this subpart as of the
date it receives notice of a
determination by the Council that the
company no longer poses a grave threat
to the financial stability of the United
States and that the imposition of a debtto-equity requirement is no longer
necessary.
Question 82: What alternatives to the
definitions and procedural aspects of
the proposed rule regarding a company
that poses a grave threat to U.S.
financial stability should the Board
consider?
X. Early Remediation
A. Background
The recent financial crisis revealed
that the condition of large banking
organizations can deteriorate rapidly
even during periods when their reported
capital ratios are well above minimum
regulatory requirements. The crisis also
revealed fundamental weaknesses in the
U.S. regulatory community’s tools to
deal promptly with emerging issues.
Section 166 of the Dodd-Frank Act
was designed to address these problems
by directing the Board to establish a
regulatory framework for the early
remediation of financial weaknesses of
U.S. bank holding companies and
foreign banking organizations with total
consolidated assets of $50 billion or
more and nonbank companies
supervised by the Board. Such a

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framework would minimize the
probability that such companies will
become insolvent and mitigate the
potential harm of such insolvencies to
the financial stability of the United
States.117 The Dodd-Frank Act requires
the Board to define measures of a
company’s financial condition,
including regulatory capital, liquidity
measures, and other forward-looking
indicators that would trigger remedial
action. The Dodd-Frank Act also
mandates that remedial action
requirements increase in stringency as
the financial condition of a company
deteriorates and include: (i) Limits on
capital distributions, acquisitions, and
asset growth in the early stages of
financial decline; and (ii) capital
restoration plans, capital raising
requirements, limits on transactions
with affiliates, management changes,
and asset sales in the later stages of
financial decline.118
The December 2011 proposal would
establish a regime for early remediation
of U.S. bank holding companies with
total consolidated assets of $50 billion
or more and nonbank financial
companies supervised by the Board.
This proposal would adapt the
requirements of the December 2011
proposal to the U.S. operations of
foreign banking organizations, tailored
to address the risk to U.S. financial
stability posed by the U.S. operations of
foreign banking organizations and
taking into consideration their structure.
Similar to the December 2011
proposal, the proposed rule sets forth
four levels of remediation. The
proposed triggers would be based on
capital, stress tests, risk management,
liquidity risk management, and market
indicators. As in the December 2011
proposal, this proposal does not include
an explicit quantitative liquidity trigger
because such a trigger could exacerbate
funding pressures at the U.S. operations
of foreign banking organizations, rather
than provide for early remediation of
issues. Remediation standards are
tailored for each level of remediation
and include restrictions on growth and
capital distributions, intragroup funding
restrictions, liquidity requirements,
changes in management, and, if needed,
actions related to the resolution or
termination of the combined U.S.
operations of the company. The U.S.
operations of foreign banking
organizations with combined U.S. assets
of $50 billion or more that meet the
relevant triggers would automatically be
subject to the remediation standards
upon a trigger event, while the U.S.
117 See
118 12

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
operations of foreign banking
organizations with a more limited U.S.
presence would be subject to those
remediation standards on a case-by-case
basis.
A foreign banking organization with
total consolidated assets of $50 billion
or more on July 1, 2014, would be
required to comply with the proposed
early remediation requirements on July
1, 2015, unless that time is extended by
the Board in writing. A foreign banking

organization whose total consolidated
assets exceed $50 billion after July 1,
2014 would be required to comply with
the proposed early remediation
standards beginning 12 months after it
became subject to the early remediation
requirements, unless that time is
accelerated or extended by the Board in
writing.
In implementing the proposed rule,
the Board expects to notify the home
country supervisor of a foreign banking

organization, the primary regulators of a
foreign banking organization’s U.S.
offices and subsidiaries, and the FDIC as
the U.S. operations of the foreign
banking organization enter into or
change remediation levels.
Tables 2 and 3, below, provide a
summary of all triggers and associated
remediation actions in this proposed
rule.

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TABLE 2—EARLY REMEDIATION TRIGGERS FOR FOREIGN BANKING ORGANIZATIONS

Risk-based capital/leverage
(U.S. IHC)

Risk-based capital/leverage
(parent)

Stress tests
(U.S. IHC)

Level 1
(Heightened
Supervisory
Review
(HSR)).

The firm has demonstrated
capital structure or capital
planning weaknesses,
even though the firm:
Maintains risk-based capital
ratios that exceed all minimum risk-based and requirements established
under subpart L by [200–
250] basis points or more;
or
Maintains applicable leverage ratio(s) that exceed all
minimum leverage requirements established under
subpart L by [75–100]
basis points or more.

The firm has demonstrated
capital structure or capital
planning weaknesses,
even though the firm:
Maintains risk-based capital
ratios that exceed all minimum risk-based and requirements established
under subpart L by [200–
250] basis points or more;
or
Maintains an applicable leverage ratio that exceed
all minimum leverage requirements established
under subpart L by [75–
100] basis points or more.

Level 2 ..........
(Initial remediation).

Any risk-based capital ratio
is less than [200–250]
basis points above a minimum applicable riskbased capital requirement
established under subpart
L; or
Any leverage ratio is less
than [75–125] basis points
above a minimum applicable leverage requirement
established under subpart
L.

Any risk-based capital ratio
is less than [200–250]
basis points above a minimum applicable riskbased capital requirement
established under subpart
L; or
Any applicable leverage ratio
is less than [75–125] basis
points above a minimum
applicable leverage requirement established
under subpart L.

The firm does
not comply
with the
Board’s
capital plan
or stress
testing
rules, even
though regulatory capital ratios
exceed minimum requirements
under the
supervisory
stress test
severely adverse scenario.
Under the supervisory
stress test
severely adverse scenario, the
firm’s tier 1
common
risk-based
capital ratio
falls below
5% during
any quarter
of the nine
quarter
planning horizon.

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Enhanced risk
management
and risk committee standards
(U.S. combined operations)

Enhanced liquidity risk
management
standards
(U.S. combined operations)

Firm has
manifested
signs of
weakness in
meeting enhanced risk
management or risk
committee
requirements.

Firm has
manifested
signs of
weakness in
meeting the
enhanced liquidity risk
management standards.

The median
value of any
market indicator over
the breach
period
crosses the
trigger
threshold.

Firm has demonstrated
multiple deficiencies in
meeting the
enhanced
risk management
and risk
committee
requirements.

Firm has demonstrated
multiple deficiencies in
meeting the
enhanced liquidity risk
management standards.

n.a.

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Market indicators
(parent or
U.S. IHC as
applicable)

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TABLE 2—EARLY REMEDIATION TRIGGERS FOR FOREIGN BANKING ORGANIZATIONS—Continued

Level 3 (Recovery).

Level 4 (Recommended
resolution).

Enhanced risk
management
and risk committee standards
(U.S. combined operations)

Enhanced liquidity risk
management
standards
(U.S. combined operations)

Market indicators
(parent or
U.S. IHC as
applicable)

Risk-based capital/leverage
(U.S. IHC)

Risk-based capital/leverage
(parent)

Stress tests
(U.S. IHC)

Any risk-based capital ratio
is less than a minimum
applicable risk-based capital requirement established under subpart L; or
Any applicable leverage ratio
is less than a minimum
applicable leverage requirement established
under subpart L.
Or for two complete consecutive calendar quarters:
Any risk-based capital ratio
is less than [200–250]
basis points above a minimum applicable riskbased capital requirement
established under subpart
L; or
Any leverage ratio is less
than [75–125] basis points
above a minimum applicable leverage requirement
established under subpart
L.
Any risk-based capital ratio
is more than [100–250]
basis points below a minimum applicable riskbased capital requirement
established under subpart
L; or
Any applicable leverage ratio
is more than [50–150]
basis points below a minimum applicable leverage
requirement established
under subpart L.

Any risk-based capital ratio
is less than a minimum
applicable risk-based capital requirement established under subpart L; or
Any applicable leverage ratio
is less than a minimum
applicable leverage requirement established
under subpart L.
Or for two complete consecutive calendar quarters:
Any risk-based capital ratio
is less than [200–250]
basis points above a minimum applicable riskbased capital requirement
established under subpart
L; or
Any leverage ratio is less
than [75–125] basis points
above a minimum applicable leverage requirement
established under subpart
L.
Any risk-based capital ratio
is more than [100–250]
basis points below a minimum applicable riskbased capital requirement
established under subpart
L; or
Any applicable leverage ratio
is more than [50–150]
basis points below a minimum applicable leverage
requirement established
under subpart L.

Under the severely adverse scenario, the
firm’s tier 1
common
risk-based
capital ratio
falls below
3% during
any quarter
of the nine
quarter
planning horizon.

Firm is in substantial noncompliance
with enhanced risk
management and
risk committee requirements.

Firm is in substantial noncompliance
with enhanced liquidity risk
management standards.

n.a.

n.a. ................

n.a. ................

n.a. ................

n.a.

TABLE 3—REMEDIATION ACTIONS FOR FOREIGN BANKING ORGANIZATIONS

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Risk-based capital/leverage
(U.S. IHC or parent level)

Stress tests
(U.S. IHC)

Enhanced risk
management
and risk committee requirements
(U.S. combined operations)

Enhanced
liquidity risk
management
standards
(U.S. combined operations)

Market indicators
(parent or U.S.
IHC as applicable)

Level 1 (Heightened supervisory review) ..

For foreign banking organizations with $50 billion or more of global consolidated assets:
The Board will conduct a targeted supervisory review of the combined U.S. operations to evaluate
whether the combined U.S. operations are experiencing financial distress or material risk management weaknesses, including with respect to exposures to the foreign banking organization, such
that further decline of the combined U.S. operations is probable.

Level 2 (Initial Remediation) ......................

For foreign banking organizations with $50 billion or more in U.S. assets:
Æ U.S. IHC capital distributions (e.g., dividends and buybacks) are restricted to
no more than 50% of the average of the firm’s net income in the previous two
quarters.
Æ U.S. branches and agency network must remain in a net due to position to
head office and non-U.S. affiliates.
Æ U.S. branch and agency network must hold 30-day liquidity buffer in the
United States (not required in level 3).

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TABLE 3—REMEDIATION ACTIONS FOR FOREIGN BANKING ORGANIZATIONS—Continued

Risk-based capital/leverage
(U.S. IHC or parent level)

Stress tests
(U.S. IHC)

Enhanced risk
management
and risk committee requirements
(U.S. combined operations)

Enhanced
liquidity risk
management
standards
(U.S. combined operations)

Market indicators
(parent or U.S.
IHC as applicable)

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Æ U.S. IHC and U.S. branch and agency network face restrictions on growth
(no more than 5% growth in total assets or total risk-weighted assets per quarter or per annum), and must obtain prior approval before directly or indirectly
acquiring controlling interest in any company.
Æ Foreign banking organization must enter into non-public MOU to improve
U.S. condition.
Æ U.S. IHC and U.S. branch and agency network may be subject to other limitations and conditions on their conduct or activities as the Board deems appropriate.
Æ For foreign banking organizations with less than $50 billion in U.S. assets:
Supervisors may undertake some or all of the actions outlined above on a
case-by-case basis.
Level 3 (Recovery) .....................................

For foreign banking organizations with $50 billion or more in U.S. assets:
Æ Foreign banking organization must enter into written agreement that specifying that the U.S. IHC must take appropriate actions to restore its capital to or
above the applicable minimum capital requirements and take such other remedial actions as prescribed by the Board.
Æ U.S. IHC is prohibited from making capital distributions.
Æ U.S. branch and agency network must remain in a net due to position to office and non-U.S. affiliates.
Æ U.S. branch and agency network is subject to a 108% asset maintenance requirement.
Æ U.S. IHC and U.S. branch and agency network will be subject to a prohibition
on growth, and must obtain prior approval before directly or indirectly acquiring
controlling interest in any company.
Æ Foreign banking organization and U.S. IHC are prohibited from increasing
pay or paying bonus to U.S. senior management.
Æ U.S. IHC may be required to remove culpable senior management.
Æ U.S. IHC and U.S. branch and agency network may be subject to other limitations and conditions on their conduct or activities as the Board deems appropriate.
For foreign banking organizations with less than $50 billion in U.S. assets: Supervisors may undertake some or all of the actions outlined above on a caseby-case basis.

n.a.

Level 4 (Recommended Resolution) .........

The Board will consider
whether the combined
U.S. operations of the foreign banking organization
warrant termination or resolution based on the financial decline of the U.S.
combined operations, the
factors contained in section 203 of the DoddFrank Act as applicable, or
any other relevant factor.
If such a determination is
made, the Board will take
actions that include recommending to the appropriate financial regulatory
agencies that an entity
within the U.S. branch or
agency network be terminated or that a U.S. subsidiary be resolved.

n.a.

B. Early Remediation Triggering Events
The proposal would establish early
remediation triggers based on the riskbased capital and leverage, stress tests,

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n.a.

liquidity risk management, and risk
management standards set forth in the
other subparts of this proposal. These
triggers are broadly consistent with the

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triggers set forth in the December 2011
proposal but are modified to reflect the
structure of foreign banking
organizations. Consistent with the

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December 2011 proposal, the proposal
also includes early remediation triggers
based on market indicators.
As noted above, the Board is currently
in the process of reviewing comments
on the remaining standards in the
December 2011 proposal and is
considering modifications to the
proposal in response to those
comments. Comments on this proposal
will help inform how the enhanced
prudential standards should be applied
differently to foreign banking
organizations.

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Risk-Based Capital and Leverage
The proposed risk-based capital and
leverage triggers for the U.S. operations
of foreign banking organizations are
based on the risk-based capital and
leverage standards set forth in subpart L
of this proposal applicable to U.S.
intermediate holding companies and
foreign banking organizations. If a home
country supervisor establishes higher
minimum capital ratios for a foreign
banking organization, the Board will
consider the foreign banking
organization’s capital with reference to
the minimum capital ratios set forth in
the Basel III Accord, rather than the
home country supervisor’s higher
standards.
The capital triggers for each level of
remediation reflect deteriorating levels
of risk-based capital and leverage levels.
The level 1 capital triggers are based on
the Board’s qualitative assessment of the
capital levels of a foreign banking
organization or U.S. intermediate
holding company. The capital triggers
for levels 2, 3 and 4 of early remediation
are based on the quantitative measures
of the capital ratios of a foreign banking
organization or U.S. intermediate
holding company relative to the
minimum capital ratios applicable to
that entity. The Board is considering a
range of numbers that would establish
these levels at this time, as set forth
below and in the proposal. The final
rule will include specific levels for the
capital triggers for levels 2, 3, and 4 of
early remediation, and the Board
expects that the levels in the final rule
will be within, or near to, the proposed
range. The Board seeks comment on the
numbers within the range.
Question 83: Should the Board
consider a level outside of the specified
range? Why or why not?
Level 1 Capital Trigger
Level 1 remediation would be
triggered based on a determination by
the Board that a foreign banking
organization’s or a U.S. intermediate
holding company’s capital position has
evidenced signs of deterioration. The

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U.S. operations of a foreign banking
organization would be subject to level 1
remediation if the Board determined
that the capital position of the foreign
banking organization or the U.S.
intermediate holding company were not
commensurate with the level and nature
of the risks to which it is exposed in the
United States. This trigger would apply
even if the foreign banking organization
or U.S. intermediate holding company
maintained risk-based capital ratios that
exceed any applicable minimum
requirements under subpart L of the
proposal by [200–250] basis points or
more or leverage ratios that exceed any
applicable minimum requirements by
[75–125] basis points or more. The
qualitative nature of the proposed level
1 capital trigger is consistent with the
level 1 remedial action, the heightened
supervisory review described below.
In addition, level 1 remediation
would be triggered if the U.S.
intermediate holding company of a
foreign banking organization fell out of
compliance with the Board’s capital
plan rule.119
Level 2 Capital Trigger
The U.S. operations of a foreign
banking organization would be subject
to level 2 remediation when any riskbased capital ratio of the foreign
banking organization or the U.S.
intermediate holding company fell
below [200–250] basis points above the
minimum applicable risk-based capital
requirements under subpart L of this
proposal, or any applicable leverage
ratio of the foreign banking organization
or the U.S. intermediate holding
company fell below [75–125] basis
points above the minimum applicable
leverage requirements under subpart L
of this proposal.
For a foreign banking organization,
the applicable level of risk-based capital
ratios and minimum leverage ratio
would be those established by the Basel
III Accord, including relevant transition
provisions, calculated in accordance
with home country standards that are
consistent with the Basel Capital
Framework. As proposed, a U.S.
intermediate holding company’s
minimum risk-based capital ratios and
leverage ratios would be the same as
those that apply to U.S. bank holding
companies.
Assuming implementation of the
Basel III Accord and the U.S. Basel III
proposals, after the transition period,
the relevant minimum risk-based capital
ratios applicable to the foreign banking
119 Only U.S. intermediate holding companies
with total consolidated assets of $50 billion or more
would be subject to the capital plan rule.

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organization and the U.S. intermediate
holding company would be a 4.5
percent risk-based tier 1 common ratio,
6.0 percent risk-based tier 1 ratio, and
8.0 percent risk-based total capital ratio.
Thus, the level 2 trigger would be
breached if any of the foreign banking
organization’s or U.S. intermediate
holding company’s risk-based capital
ratios fell below a [6.5–7.0] percent tier
1 common, [8.0–8.5] percent tier 1, or
[10.0–10.5] percent total risk-based
capital ratio.
Similarly, assuming implementation
of the Basel III Accord and the U.S.
Basel III proposals, after the transition
period, the relevant minimum leverage
ratio applicable to a foreign banking
organization would be the international
leverage ratio of 3.0 percent, and the
relevant minimum leverage ratio(s)
applicable to a U.S. intermediate
holding company would be the U.S.
leverage ratio of 4.0 percent, and, if the
U.S. intermediate holding company is
subject to the advanced approaches
rule,120 a supplementary leverage ratio
of 3.0 percent. Thus, the level 2 trigger
would be breached if the foreign
banking organization’s leverage ratio fell
below [3.75–4.25] or if the U.S.
intermediate holding company’s U.S.
leverage ratio fell below [4.75–5.25]
percent or its supplementary leverage
ratio fell below [3.75–4.25] percent, if
applicable.
Level 3 Capital Trigger
The level 3 trigger would be breached
where either: (1) for two complete
consecutive quarters, any risk-based
capital ratio of the foreign banking
organization or the U.S. intermediate
holding company fell below [200–250]
basis points above the minimum
applicable risk-based capital ratios
under subpart L, or any leverage ratio of
the foreign banking organization or the
U.S. intermediate holding company fell
below [75–125] basis points above any
minimum applicable leverage ratio
under subpart L; or (2) any risk-based
capital ratio or leverage ratio of the
foreign banking organization or the U.S.
intermediate holding company fell
below the minimum applicable riskbased capital ratio or leverage ratio
under subpart L.
Level 4 Capital Trigger
For the U.S. operations of a foreign
banking organization, the level 4 trigger
would be breached where any of the
120 A U.S. intermediate holding company would
be subject to the advanced approaches rules if its
total consolidated assets are $250 billion or more
or its consolidated total on-balance sheet foreign
exposures are $10 billion or more. See 12 CFR part
225, appendix G.

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foreign banking organization’s or U.S.
intermediate holding company’s riskbased capital ratios fell [100–200] basis
points or more below the applicable
minimum risk-based capital ratios
under subpart L or where any of the
foreign banking organization’s or U.S.
intermediate holding company’s
leverage ratios fell [50–150] basis points
or more below applicable leverage
requirements under subpart L.
Question 84: The Board seeks
comment on the proposed risk-based
capital and leverage triggers. What is the
appropriate level within the proposed
ranges above and below minimum
requirements that should be established
for the triggers in a final rule? Provide
support for your answer.
Question 85: The Board seeks
comment on how and to what extent the
proposed risk-based capital and leverage
triggers should be aligned with the
capital conservation buffer of 250 basis
points presented in the Basel III rule
proposal.
Question 86: What alternative or
additional risk-based capital or leverage
triggering events, if any, should the
Board adopt? Provide a detailed
explanation of such alternative
triggering events with supporting data.

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Stress Tests
Under subpart P of this proposal, U.S.
intermediate holding companies with
total consolidated assets of $50 billion
or more would be subject to supervisory
and company-run stress tests, and all
other U.S. intermediate holding
companies would be subject to annual
company-run stress tests. The proposal
would use the stress test regime as an
early remediation trigger, as stress tests
can provide a forward-looking indicator
of a company’s ability to absorb losses
in stressed conditions.
The stress test triggers for level 2 and
3 remediation would be based on the
results of the Board’s supervisory stress
test of a U.S. intermediate holding
company with total consolidated assets
of $50 billion or more. Foreign banking
organizations that do not own U.S.
intermediate holding companies that
meet the $50 billion asset threshold
would not be subject to the triggers for
levels 2 and 3 remediation.
Level 1 Stress Test Trigger
The U.S. operations of a foreign
banking organization would enter level
1 of early remediation if a U.S.
intermediate holding company is not in
compliance with the proposed rules
regarding stress testing, including the
company-run and supervisory stress test
requirements applicable to U.S.
intermediate holding companies.

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Level 2 Stress Test Trigger
The U.S. operations of a foreign
banking organization would enter level
2 remediation if the results of a
supervisory stress test of its U.S.
intermediate holding company reflect a
tier 1 common risk-based capital ratio of
less than 5.0 percent, under the severely
adverse scenario during any quarter of
the nine-quarter planning horizon. A
severely adverse scenario is defined as
a set of conditions that affect the U.S.
economy or the financial condition of a
U.S. intermediate holding and that
overall are more severe than those
associated with the adverse scenario,
and may include trading or other
additional components.121
Level 3 Stress Test Trigger
The U.S. operations of a foreign
banking organization would enter level
3 remediation if the results of a
supervisory stress test of its U.S.
intermediate holding company reflect a
tier 1 common risk-based capital ratio of
less than 3.0 percent, under the severely
adverse scenario during any quarter of
the nine-quarter planning horizon.
Question 87: What additional factors
should the Board consider when
incorporating stress test results into the
early remediation framework for foreign
banking organizations? What alternative
forward looking triggers should the
Board consider in addition to or in lieu
of stress test triggers?
Question 88: Is the severely adverse
scenario appropriately incorporated as a
triggering event? Why or why not?
Risk Management
Material weaknesses and deficiencies
in risk management contribute
significantly to a firm’s decline and
ultimate failure. Under the proposal, if
the Board determines that the U.S.
operations of a foreign banking
organization have failed to comply with
the enhanced risk management
provisions of subpart O of the proposed
rule, the U.S. operations of the foreign
banking organization would be subject
to level 1, 2, or 3 remediation,
depending on the severity of the
compliance failure.
Thus, for example, level 1
remediation would be triggered if the
Board determines that any part of the
U.S. operations of a foreign banking
organization had manifested signs of
weakness in meeting the proposal’s
enhanced risk management and risk
committee requirements.
Similarly, level 2 remediation would
be triggered if the Board determines that
any part of the company’s combined
121 77

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U.S. operations has demonstrated
multiple deficiencies in meeting the
enhanced risk management or risk
committee requirements, and level 3
remediation would be triggered if the
Board determines that any part of the
company’s combined U.S. operations is
in substantial noncompliance with the
enhanced risk management and risk
committee requirements of the proposal.
Question 89: The Board seeks
comment on triggers tied to risk
management. Should the Board consider
specific risk management triggers tied to
particular events? If so, what might such
triggers involve? How should failure to
promptly address material risk
management weaknesses be addressed
by the early remediation regime? Under
such circumstances, should companies
be moved to progressively more
stringent levels of remediation, or are
other actions more appropriate? Provide
a detailed explanation.
Liquidity Risk Management
The Dodd-Frank Act provides that the
measures of financial condition to be
included in the early remediation
framework must include liquidity
measures. This proposal would
implement liquidity risk management
triggers related to the liquidity risk
management standards in subpart M of
this proposal. The level of remediation
to which the U.S. operations of a foreign
banking organization would be subject
would vary depending on the severity of
the compliance failure.
The U.S. operations of a foreign
banking organization would be subject
to level 1 remediation if the Board
determines that any part of the
combined U.S. operations of the
company has manifested signs of
weakness in meeting the proposal’s
enhanced liquidity risk management
standards. Similarly, the U.S. operations
of a foreign banking organization would
be subject to level 2 remediation if the
Board determines that any part of its
combined U.S. operations has
demonstrated multiple deficiencies in
meeting the enhanced liquidity risk
management standards of this proposal,
and level 3 remediation would be
triggered if the Board determines that
any part of its combined U.S. operations
is in substantial noncompliance with
the enhanced liquidity risk management
standards.
Market Indicators
Section 166(c)(1) of the Dodd-Frank
Act directs the Board, in defining
measures of a foreign banking
organization’s condition, to utilize
‘‘other forward-looking indicators.’’ A
review of market indicators in the lead

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up to the recent financial crisis reveals
that market-based data often provided
an early signal of deterioration in a
company’s financial condition.
Moreover, numerous academic studies
have concluded that market information
is complementary to supervisory
information in uncovering problems at
financial companies.122 Accordingly,
the Board is considering whether to use
a variety of market-based triggers
designed to capture both emerging
idiosyncratic and systemic risk across
foreign banking organizations in the
early remediation regime.
The market-based triggers would
trigger level 1 remediation, prompting
heighted supervisory review of the
financial condition and risk
management of a foreign banking
organization’s U.S. operations. In
addition to the Board’s authority under
section 166 of the Dodd-Frank Act, the
Board may also use other supervisory
authority to cause the U.S. operations of
a foreign banking organization to take
appropriate actions to address the
problems reviewed by the Board under
level 1 remediation.
The Board recognizes that marketbased early remediation triggers—like
all early warning metrics—have the
potential to trigger remediation for firms
that have no material weaknesses (false
positives) and fail to trigger remediation
for firms whose financial condition has
deteriorated (false negatives), depending
on the sample, time period and
thresholds chosen. Further, the Board
notes that if market indicators are used
to trigger corrective actions in a
regulatory framework, market prices
may adjust to reflect this use and
potentially become less revealing over
time. Accordingly, the Board is not
proposing to use market-based triggers
to subject the U.S. operations of a
foreign banking organization directly to
remediation levels 2, 3, or 4 at this time.
The Board expects to review this
approach after gaining additional
experience with the use of market data
in the supervisory process.
Given that the informational content
and availability of market data will
change over time, the Board also
proposes to publish for notice and
comment the market-based triggers and
122 See, e.g., Berger, Davies, and Flannery,
Comparing Market and Supervisory Assessments of
Bank Performance: Who Knows What When?,
Journal of Money, Credit, and Banking, 32 (3), at
641–667 (2000). Krainer and Lopez, How Might
Financial Market Information Be Used for
Supervisory Purposes?, FRBSF Economic Review, at
29–45 (2003). Furlong and Williams, Financial
Market Signals and Banking Supervision: Are
Current Practices Consistent with Research
Findings?, FRBSF Economics Review, at 17–29
(2006).

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thresholds on an annual basis (or less
frequently depending on whether the
Board determines that changes to an
existing regime would be appropriate),
rather than specifying these triggers in
this proposal. In order to ensure
transparency, the Board’s disclosure of
market-based triggers would include
sufficient detail to allow the process to
be replicated in general form by market
participants. While the Board is not
proposing market-based triggers at this
time, it seeks comment on the potential
use of market indicators for the U.S.
operations of foreign banking
organizations described in section G—
Potential market indicators and
potential trigger design.
Question 90: Should the Board
include market indicators described in
section G—Potential market indicators
and potential trigger design of this
preamble in the early remediation
regime for the U.S. operations of foreign
banking organizations? If not, what
other market indicators or forwardlooking indicators should the Board
include?
Question 91: How should the Board
consider the liquidity of an underlying
security when it chooses indicators for
the U.S. operations of foreign banking
organizations?
Question 92: Should the Board
consider using market indicators to
move the U.S. operations of foreign
banking organizations directly to level 2
(initial remediation)? If so, what time
thresholds should be considered for
such a trigger? What would be the
drawbacks of such a second trigger?
Question 93: To what extent do these
indicators convey different information
about the short-term and long-term
performance of foreign banking
organizations that should be taken into
account for the supervisory review?
Question 94: Should the Board use
peer comparisons to trigger heightened
supervisory review for foreign banking
organizations? How should the peer
group be defined for foreign banking
organizations?
Question 95: How should the Board
account for overall market movements
in order to isolate idiosyncratic risk of
foreign banking organizations?
C. Notice and Remedies
Under the proposal, the Board would
notify a foreign banking organization
when it determines that a remediation
trigger event has occurred and will
provide a description of the remedial
actions that would apply to the U.S.
operations of the foreign banking
organization as a result of the trigger.
The U.S. operations of a foreign banking
organization would remain subject to

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the requirements imposed by early
remediation until the Board notifies the
foreign banking organization that its
financial condition or risk management
no longer warrants application of the
requirement. In addition, a foreign
banking organization has an affirmative
duty to notify the Board of triggering
events and other changes in
circumstances that could result in
changes to the early remediation
provisions that apply to it.
Question 96: What additional
monitoring requirements should the
Board impose to ensure timely
notification of trigger breaches?
D. Early Remediation Requirements for
Foreign Banking Organizations with
Combined U.S. Assets of $50 Billion or
More
Level 1 Remediation (Heightened
Supervisory Review)
The first level of remediation for the
U.S. operations of foreign banking
organizations with combined U.S. assets
of $50 billion or more would consist of
heightened supervisory review of the
U.S. operations of the foreign banking
organization. In conducting the review,
the Board would evaluate whether the
U.S. operations of a foreign banking
organization are experiencing financial
distress or material risk management
weaknesses, including with respect to
exposures that the combined operations
have to the foreign banking
organization, such that further decline
of the combined U.S. operations is
probable.
The Board may also use other
supervisory authority to cause the U.S.
operations of a foreign banking
organization to take appropriate actions
to address the problems reviewed by the
Board under level 1 remediation.
Level 2 Remediation (Initial
Remediation)
The Dodd-Frank Act provides that
remedial actions of companies in the
initial stages of financial decline must
include limits on capital distributions,
acquisitions, and asset growth. The
proposal would implement these
remedial actions for the U.S. operations
of foreign banking organizations with
combined U.S. assets of $50 billion or
more that have breached a level 2 trigger
by imposing limitations on its U.S.
intermediate holding company, its U.S.
branch and agency network, and its
combined U.S. operations.
Upon a level 2 trigger event, the U.S.
intermediate holding company of a
foreign banking organization would be
prohibited from making capital
distributions in any calendar quarter in

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an amount that exceeded 50 percent of
the average of its net income for the
preceding two calendar quarters. Capital
distributions would be defined
consistently with the Board’s capital
plan rule (12 CFR 225.8) to include any
redemption or repurchase of any debt or
equity capital instrument, a payment of
common or preferred stock dividends, a
payment that may be temporarily or
permanently suspended by the issuer on
any instrument that is eligible for
inclusion in the numerator of any
minimum regulatory capital ratio, and
any similar transaction that the Board
determines to be in substance a
distribution of capital. The limitation
would help to ensure that U.S.
intermediate holding companies
preserve capital through retained
earnings during the earliest periods of
financial stress. Prohibiting a weakened
company from distributing more than 50
percent of its recent earnings should
promote the company’s ability to build
a capital cushion to absorb additional
potential losses while still allowing the
firm some room to pay dividends and
repurchase shares.123 This cushion is
important to making the company’s
failure less likely, and also to minimize
the external costs that the company’s
distress or possible failure could impose
on markets and the United States
economy generally.
The U.S. branches and agencies of a
foreign banking organization in level 2
remediation would also be subject to
limitations. While in level 2
remediation, the U.S. branch and agency
network would be required to remain in
a net due to position to the foreign
banking organization’s non-U.S. offices
and to non-U.S. affiliates. The U.S.
branch and agency network would also
be required to maintain a liquid asset
buffer in the United States sufficient to
cover 30 days of stressed outflows,
calculated as the sum of net external
stressed cash flow needs and net
internal stressed cash flow needs for the
full 30-day period. However, this
requirement would cease to apply were
the foreign banking organization to
become subject to level 3 remediation.
In addition, the U.S. operations of the
foreign banking organization in level 2
remediation would be subject to growth
limitations. The foreign banking
organization would be prohibited from
allowing the average daily total assets or
average daily total risk-weighted assets
123 The Board notes that the capital conservation
buffer implemented under the Basel III Accord is
similarly designed to impose increasingly stringent
restrictions on capital distributions and employee
bonus payments by banking organizations as their
capital ratios approach regulatory minima. See
Basel III Accord, supra note 40.

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of its combined U.S. operations in any
calendar quarter to exceed average daily
total assets and average daily total riskweighted assets, respectively, during the
preceding calendar quarter by more
than 5 percent. Similarly, it would be
prohibited from allowing the average
daily total assets or average daily total
risk-weighted assets of its combined
U.S. operations in any calendar year to
exceed average daily total assets and
average daily total risk-weighted assets,
respectively, during the preceding
calendar year by more than 5 percent.
These restrictions on asset growth are
intended to prevent the consolidated
U.S. operations of foreign banking
organizations that are encountering the
initial stages of financial difficulties
from growing at a rate inconsistent with
preserving capital and focusing on
resolving material financial or risk
management weaknesses. A 5 percent
limit should generally be consistent
with reasonable growth in the normal
course of business.
In addition to existing requirements
for prior Board approval to make certain
acquisitions or establishing new
branches or other offices, the foreign
banking organization would also be
prohibited, without prior Board
approval, from establishing a new
branch, agency, or representative office
in the United States; engaging in any
new line of business in the United
States; or directly or indirectly acquiring
a controlling interest (as defined in the
proposal) in any company that would be
required to be a subsidiary of a U.S.
intermediate holding company under
the proposal. This would include
acquiring controlling interests in U.S.
nonbank companies engaged in
financial activities. Non-controlling
acquisitions, such as the acquisition of
less than 5 percent of the voting shares
of a company, generally would not
require prior approval. The level 2
remediation restriction on acquisitions
of controlling interests in companies
would also prevent foreign banking
organizations that are experiencing
initial stages of financial difficulties
from materially increasing their size in
the United States or their systemic
interconnectedness to the United States.
Under this provision, the Board would
evaluate the materiality of acquisitions
on a case-by-case basis to determine
whether approval is warranted.
Acquisitions of non-controlling interests
would continue to be permitted to allow
the U.S. operations of foreign banking
organizations to proceed with ordinary
business functions (such as equity
securities dealing) that may involve
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companies that do not rise to the level
of control.
Question 97: Should the Board
provide an exception to the prior
approval requirement for de minimis
acquisitions or other acquisitions in the
ordinary course? If so, how would this
exception be drafted in a narrow way so
as not to subvert the intent of this
restriction?
A foreign banking organization
subject to level 2 remediation would be
required to enter into a non-public
memorandum of understanding, or
other enforcement action acceptable to
the Board. In addition, the Board may
impose limitations or conditions on the
conduct or activities of the combined
U.S. operations of the foreign banking
organization as the Board deems
appropriate and consistent with the
purposes of Title I of the Dodd-Frank
Act. Those may include limitations or
conditions deemed necessary to
improve the safety and soundness of the
consolidated U.S. operations of the
foreign banking organization, promote
financial stability, or limit the external
costs of the potential failure of the
foreign banking organization or its
affiliates.
Level 3 Remediation (Recovery)
The Dodd-Frank Act provides that
remediation actions for companies in
later stages of financial decline must
include a capital restoration plan and
capital raising requirements, limits on
transactions with affiliates, management
changes and asset sales. The proposal
would implement these remedial
actions for the U.S. operations of a
foreign banking organization with
combined U.S. assets of $50 billion or
more that has breached a level 3 trigger
by imposing limitations on its U.S.
intermediate holding company, its U.S.
branch and agency network, and its
combined U.S. operations.
A foreign banking organization and its
U.S. intermediate holding company
would be required to enter into a
written agreement or other formal
enforcement action with the Board that
specifies that the U.S. intermediate
holding company must take appropriate
actions to restore its capital to or above
the applicable minimum risk-based
capital and leverage requirements under
subpart L of this proposal and to take
such other remedial actions as
prescribed by the Board. If the company
fails to satisfy the requirements of such
a written agreement, the company may
be required to divest assets identified by
the Board as contributing to the
financial decline or posing substantial
risk of contributing to further financial
decline of the company.

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The U.S. intermediate holding
company and other U.S. subsidiaries of
a foreign banking organization also
would be prohibited from making
capital distributions.
In addition, the foreign banking
organization in level 3 remediation
would be subject to growth limitations
with respect to its combined U.S.
operations. It would be prohibited from
allowing the average daily total assets or
average daily risk-weighted assets of its
combined U.S. operations in any
calendar quarter to exceed average daily
total assets and average daily riskweighted assets, respectively, during the
preceding calendar quarter. Similarly, it
would be prohibited from allowing the
average daily total assets or average
daily total risk-weighted assets of its
combined U.S. operations in any
calendar year to exceed average daily
total assets and average daily total riskweighted assets, respectively, during the
preceding calendar year.
As in level 2 remediation, in addition
to existing requirements for prior Board
approval to making certain acquisitions
or establishing new branches or other
offices, the foreign banking organization
would be prohibited, with prior Board
approval, from establishing a new
branch, agency, representative office or
place of business in the United States,
engaging in any new line of business in
the United States, or directly or
indirectly acquiring a controlling
interest (as defined in the proposal) in
any company that would be required to
be a subsidiary of a U.S. intermediate
holding company under the proposal.
This would include acquiring
controlling interests in nonbank
companies engaged in financial
activities.
In addition, the foreign banking
organization and its U.S. intermediate
holding company would not be able to
increase the compensation of, or pay
any bonus to, an executive officer whose
primary responsibility pertains to any
part of the combined U.S. operations or
any member of the board of directors (or
its equivalent) of the U.S. intermediate
holding company. The Board could also
require the U.S. intermediate holding
company of a foreign banking
organization in level 3 remediation to
replace its board of directors, or require
the U.S. intermediate holding company
or foreign banking organization to
dismiss U.S. senior executive officers or
the U.S. intermediate holding company
to dismiss members of its board of
directors who have been in office for
more than 180 days, or add qualified
U.S. senior executive officers subject to
approval by the Board. To the extent
that a U.S. intermediate holding

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company’s or U.S. branch and agency
network’s management is a primary
cause of a foreign banking organization’s
level 3 remediation status, the proposal
would allow the Board to take
appropriate action to ensure that such
management could not increase the risk
profile of the company or make its
failure more likely.
Furthermore, the foreign banking
organization would be required to cause
its U.S. branch and agency network to
remain in a net due to position with
respect to the foreign bank’s non-U.S.
offices and non-U.S. affiliates and
maintain eligible assets that equal at
least 108 percent of the U.S. branch and
agency network’s third-party liabilities.
However, the U.S. branch and agency
network would not be subject to the
liquid asset buffer required by level 2
remediation in order to allow the
foreign banking organization to make
use of those assets to mitigate liquidity
stress.
The Board believes that these
restrictions would appropriately limit a
foreign banking organization’s ability to
increase its risk profile in the United
States and ensure maximum capital
conservation when its condition or risk
management failures have deteriorated
to the point that it is subject to level 3
remediation. These restrictions, while
potentially disruptive to aspects of the
company’s U.S. business, are consistent
with the purpose of section 166 of the
Dodd-Frank Act: to arrest a foreign
banking organization’s decline in the
United States and help to mitigate
external costs in the United States
associated with a potential failure.
Under the proposed rule, the Board
has discretion to impose limitations or
conditions on the conduct of activities
at the combined U.S. operations of the
company as the Board deems
appropriate and consistent with Title I
of the Dodd-Frank Act. Taken together,
the mandatory and optional restrictions
and actions of level 3 remediation
provide the Board with important tools
to make a foreign banking organization’s
potential failure less costly to the U.S.
financial system.
Level 4 Remediation (Resolution
Assessment)
Under the proposed rule, if level 4
remediation is triggered, the Board
would consider whether the combined
U.S. operations of the foreign banking
organization warrant termination or
resolution based on the financial
decline of the combined U.S.
operations, the factors contained in
section 203 of the Dodd-Frank Act as
applicable, or any other relevant factor.
If such a determination is made, the

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Board will take actions that include
recommending to the appropriate
financial regulatory agencies that an
entity within the U.S. branch and
agency network be terminated or that a
U.S. subsidiary be resolved.
Question 98: The Board seeks
comment on the proposed mandatory
actions that would occur at each level
of remediation. What, if any, additional
or different restrictions should the
Board impose on distressed foreign
banking organizations or their U.S.
operations?
E. Early Remediation Requirements for
Foreign Banking Organizations With
Total Consolidated Assets of $50 Billion
or More and Combined U.S. Assets of
Less than $50 Billion
The proposal would tailor the
application of the proposed early
remediation regime for the U.S.
operations of foreign banking
organizations with total consolidated
assets of $50 billion or more and
combined U.S. assets of less than $50
billion. The U.S. operations of these
foreign banking organizations would be
subject to the same triggers and
notification requirements applicable to
the U.S. operations of foreign banking
organizations with a larger presence in
the United States. When the Board is
aware that a foreign banking
organization breached a trigger, the
Board may apply any of the remedial
provisions that would be applicable to
a foreign banking organization with
combined U.S. assets of $50 billion or
more. In exercising this authority, the
Board will consider the activities, scope
of operations, structure, and risk to U.S.
financial stability posed by the foreign
banking organization.
F. Relationship to Other Laws and
Requirements
The early remediation regime that
would be established by the proposed
rule would supplement rather than
replace the Board’s other supervisory
processes with respect to the U.S.
operations of foreign banking
organizations. The proposed rule would
not limit the Board’s supervisory
authority, including authority to initiate
supervisory actions to address
deficiencies, unsafe or unsound
conduct, practices, conditions, or
violations of law. For example, the
Board may respond to signs of a foreign
banking organization’s or a U.S.
intermediate holding company’s
financial stress by requiring corrective
measures in addition to remedial
actions required under the proposed
rule. The Board also may use other
supervisory authority to cause a foreign

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with a remaining maturity of at least 5
years over the Treasury rate with the
same maturity or the LIBOR swap rate
as published by Bloomberg.

banking organization or U.S.
intermediate holding company to take
remedial actions enumerated in the
early remediation regime on a basis
other than a triggering event.
G. Potential Market Indicators and
Potential Trigger Design
As noted above in section B—Early
Remediation Triggering Events, the
Board is considering whether to use
market indicators as a level 1 trigger. In
considering market indicators to
incorporate into the early remediation
regime, the Board focused on indicators
that have significant information
content, that is for which prices quotes
are available for foreign banking
organizations, and provide a sufficiently
early indication of emerging or potential
issues. The Board is considering using
the following or similar market-based
indicators in its early remediation
framework for the U.S. operations of
foreign banking organizations:

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1. Equity-Based Indicators
Expected default frequency (EDF).
EDF measures the expected probability
of default in the next 365 days. EDFs
could be calculated using Moody’s KMV
RISKCALC model.
Marginal expected shortfall (MES).
The MES of a financial institution is
defined as the expected loss on its
equity when the overall market declines
by more than a certain amount. Each
financial institution’s MES depends on
the volatility of its stock price, the
correlation between its stock price and
the market return, and the co-movement
of the tails of the distributions for its
stock price and for the market return.
The Board may use MES calculated
following the methodology of Acharya,
Pederson, Phillipon, and Richardson
(2010). MES data are available at
http://vlab.stern.nyu.edu/welcome/risk.
Market Equity Ratio. The market
equity ratio could be defined as the ratio
of market value of equity to market
value of equity plus book value of debt.
Option-implied volatility. The optionimplied volatility of a firm’s stock price
is calculated from out-of-the-money
option prices using a standard option
pricing model, for example as reported
as an annualized standard deviation in
percentage points by Bloomberg.
2. Debt-Based Indicators
Credit default swaps (CDS). The
Board would refer to CDS offering
protection against default on a 5-year
maturity, senior unsecured bond by a
financial institution.
Subordinated debt (bond) spreads.
The Board would refer to financial
companies’ subordinated bond spreads

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3. Considerations for Foreign Banking
Organizations
The Board recognizes that some
market indicators may not be available
for foreign banking organizations and
that market indicators for different
foreign banking organizations are not
traded with the same frequency and
therefore may not contain the same level
of informational content. Further, the
Board anticipates analyzing market
indicators available for both U.S.
subsidiaries of foreign banking
organizations, if available and the
consolidated foreign banking
organization. The use of market
indicators at the consolidated level is
appropriate for foreign banking
organizations since the U.S. operations
are likely to be affected by any
deterioration in financial condition of
the consolidated company.
Question 99: The Board seeks
comment on the proposed approach to
market-based triggers detailed below,
alternative specifications of marketbased indicators, and the potential
benefits and challenges of introducing
additional market-based triggers for
remediation levels 2, 3, or 4 of the
proposal. In addition, the Board seeks
comment on the sufficiency of
information content in market-based
indicators generally.
Proposed Trigger Design
The Board’s proposed market
indicator-based regime would trigger
heightened supervisory review when
any of a foreign banking organization’s
indicators cross a threshold based on
different percentiles of historical
distributions. The triggers described
below have been designed based on
observations for U.S. financial
institutions but are indicative of the
approach the Board anticipates
proposing for foreign banking
organizations.
Time-variant triggers capture changes
in the value of a company’s marketbased indicator relative to its own past
performance and the past performance
of its peers. Peer groups would be
determined on an annual basis. Current
values of indicators, measured in levels
and changes, would be evaluated
relative to a foreign banking
organization’s own time series (using a
rolling 5-year window) and relative to
the median of a group of predetermined
low-risk peers (using a rolling 5-year
window), and after controlling for

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market or systematic effects.124 The
value represented by the percentiles for
each signal varies over time as data is
updated for each indicator.
For all time-variant triggers,
heightened supervisory review would
be required when the median value of
at least one market indicator over a
period of 22 consecutive business days,
either measured as its level, its 1-month
change, or its 3-month change, both
absolute and relative to the median of a
group of predetermined low-risk peers,
is above the 95th percentile of the firm’s
or the median peer’s market indicator 5year rolling window time series. The
Board proposes to use time-variant
triggers based on all six market
indicators listed above.
Time-invariant triggers capture
changes in the value of a company’s
market-based indicators relative to the
historical distribution of market-based
variables over a specific fixed period of
time and across a predetermined peer
group. Time-invariant triggers are used
to complement time-variant triggers
since time-variant triggers could lead to
excessively low or high thresholds in
cases where the rolling window covers
only an extremely benign period or a
highly disruptive financial period. The
Board acknowledges that a timeinvariant threshold should be subject to
subsequent revisions when warranted
by circumstances.
As currently contemplated, the Board
would consider all pre-crisis panel data
for the peer group (January 2000December 2006), which contain
observations from the subprime crisis in
the late 1990s and early 2000s as well
as the tranquil period of 2004–2006. For
each market indicator, percentiles of the
historical distributions would be
computed to calibrate time-invariant
thresholds. The Board would focus on
five indicators for time-invariant
triggers, calibrated to balance between
their propensity to produce false
positives and false negatives: CDS
prices, subordinated debt spreads,
option-implied volatility, EDF and MES.
The market equity ratio is not used in
the time-invariant approach because the
cross-sectional variation of this variable
was not found to be informative of early
issues across financial companies.
Time-invariant thresholds would trigger
heightened supervisory review if the
median value for a foreign banking
organization over 22 consecutive
business days was above the threshold
for any of the market indicators used in
the regime.
124 Market or systemic effects are controlled by
subtracting the median of corresponding changes
from the peer group.

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

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Question 103: Should the Board use a
statistical threshold to trigger
heightened supervisory review or some
other framework?
X. Administrative Law Matters
A. Solicitation of Comments on the Use
of Plain Language
Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat.
1338, 1471, 12 U.S.C. 4809) requires the
federal banking agencies to use plain
language in all proposed and final rules
published after January 1, 2000. The
Board has sought to present the
proposed rule in a simple and
straightforward manner, and invites
comment on the use of plain language.
For example:
• Have we organized the material to
suit your needs? If not, how could the
rule be more clearly stated?
• Are the requirements in the rule
clearly stated? If not, how could the rule
be more clearly stated?
• Do the regulations contain technical
language or jargon that is not clear? If
so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes would make the regulation
easier to understand?
• Would more, but shorter, sections
be better? If so, which sections should
be changed?
• What else could we do to make the
regulation easier to understand?
B. Paperwork Reduction Act Analysis
Request for Comment on Proposed
Information Collection
In accordance with section 3512 of
the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3521) (PRA), the Board
may not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number. The OMB control numbers are
7100–0350, 7100–0125, 7100–0035,
7100–0319, 7100–0073, 7100–0297,
7100–0126, 7100–0128, 7100–0297,
7100–0244, 7100–0300, 7100–NEW,
7100–0342, 7100–0341. The Board
reviewed the proposed rule under the
authority delegated to the Board by
OMB.
The proposed rule contains
requirements subject to the PRA. The
reporting requirements are found in
sections 252.202(b); 252.203(b);
252.212(c)(3); 252.226(c); 252.231(a);
252.262; 252.263(b)(1), (b)(2), (c)(2), and
(d); 252.264(b)(2); and 252.283(b). The

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recordkeeping requirements are found
in sections 252.225(c); 252.226(b)(1);
252.228; 252.229(a); 252.230(a) and (c);
252.252(a); and 252.262. The disclosure
requirements are found in section
252.262. Detailed burden estimates for
these requirements are provided below.
These information collection
requirements would implement section
165 and 166 of the Dodd-Frank Act.
Proposed Revisions to Information
Collections
1. Title of Information Collection:
Reporting, Recordkeeping, and
Disclosure Requirements Associated
with Regulation YY.
Frequency of Response: Annual,
semiannual, and on occasion.
Affected Public: Businesses or other
for-profit.
Respondents: Foreign banking
organizations, U.S. intermediate holding
companies, foreign savings and loan
holding companies, and foreign
nonbank financial companies
supervised by the Board.
Abstract: Section 165 of the DoddFrank Act requires the Board to
establish enhanced prudential standards
on bank holding companies with
consolidated assets of $50 billion or
more and nonbank financial companies
supervised by the Board, and section
166 requires the Board to establish an
early remediation framework for these
companies. The enhanced prudential
standards include risk-based capital and
leverage requirements, liquidity
standards, requirements for overall risk
management (including establishing a
risk committee), single-counterparty
credit limits, stress test requirements,
and debt-to-equity limits for companies
that the Council has determined pose a
grave threat to financial stability. The
proposal would implement these
requirements for foreign banking
organizations with total consolidated
assets of $50 billion or more and foreign
nonbank financial companies
supervised by the Board.
Reporting Requirements
Section 252.202(b) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more that submits a request to the Board
to adopt an alternative organizational
structure to submit its request at least
180 days prior to the date that the
foreign banking organization would
establish the U.S. intermediate holding
company and include a description of
why the request should be granted and
any other information the Board may
require.
Section 252.203(b) would require that
within 30 days of establishing a U.S.

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intermediate holding company, a
foreign banking organization with total
consolidated assets of $50 billion or
more would provide to the Board: (1) A
description of the U.S. intermediate
holding company, including its name,
location, corporate form, and
organizational structure; (2) a
certification that the U.S. intermediate
holding company meets the
requirements of this subpart; and (3) any
other information that the Board
determines is appropriate.
Section 252.226(c) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more and with combined U.S. assets of
$50 billion or more to report (1) the
results of the stress tests for its
combined U.S. operations conducted
under this section to the Board within
14 days of completing the stress test.
The report would include the amount of
liquidity buffer established by the
foreign banking organization for its
combined U.S. operations under
§ 252.227 of the proposal and (2) the
results of any liquidity internal stress
tests and establishment of liquidity
buffers required by regulators in its
home jurisdiction to the Board on a
quarterly basis within 14 days of
completion of the stress test. The report
required under this paragraph would
include the results of its liquidity stress
test and liquidity buffer, if as required
by the laws, regulations, or expected
under supervisory guidance
implemented in the home jurisdiction.
Section 252.231(a) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more and combined U.S. assets of less
than $50 billion to report to the Board
on an annual basis the results of an
internal liquidity stress test for either
the consolidated operations of the
company or its combined U.S.
operations conducted consistent with
the BCBS principles for liquidity risk
management and incorporating 30-day,
90-day and one-year stress test horizons.
Section 252.263(b)(1) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more and combined U.S. assets of $50
billion or more to report summary
information to the Board by January 5 of
each calendar year, unless extended by
the Board, about its stress testing
activities and results, including the
following quantitative and qualitative
information: (1) A description of the
types of risks included in the stress test;
(2) a description of the conditions or
scenarios used in the stress test; (3) a
summary description of the
methodologies used in the stress test; (4)
estimates of: (a) Aggregate losses; (b)

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pre-provision net revenue; (c) Total loan
loss provisions; (d) Net income before
taxes; and (e) Pro forma regulatory
capital ratios required to be computed
by the home country supervisor of the
foreign banking organization and any
other relevant capital ratios; and (5) an
explanation of the most significant
causes for the changes in regulatory
capital ratios.
Section 252.263(b)(2) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more and combined U.S. assets of $50
billion or more whose U.S. branch and
agency network provides funding on a
net basis to its foreign banking
organization’s head office and its nonU.S. affiliates (calculated as the average
daily position over a stress test cycle for
a given year) to report the following
more detailed information to the Board
by the following January 5 of each
calendar year, unless extended by the
Board: (1) A detailed description of the
methodologies used in the stress test,
including those employed to estimate
losses, revenues, total loan loss
provisions, and changes in capital
positions over the planning horizon; (2)
estimates of realized losses or gains on
available-for-sale and held-to-maturity
securities, trading and counterparty
losses, if applicable; loan losses (dollar
amount and as a percentage of average
portfolio balance) in the aggregate and
by sub-portfolio; and (3) any additional
information that the Board requests in
order to evaluate the ability of the
foreign banking organization to absorb
losses in stressed conditions and
thereby continue to support its
combined U.S. operations.
Section 252.263(c)(2) would require
the foreign banking organization with
total consolidated assets of $50 billion
or more and combined U.S. assets of $50
billion or more that does not satisfy the
proposed stress testing requirements
under section 252.262 to separately or
as part of an enterprise-wide stress test
conduct an annual stress test of its U.S.
subsidiaries not organized under a U.S.
intermediate holding company to
determine whether those subsidiaries
have the capital necessary to absorb
losses as a result of adverse economic
conditions. The foreign banking
organization would report a summary of
the results of the stress test to the Board
on an annual basis that includes the
information required under paragraph
(b)(1) of this section.
Section 252.263(d) would require that
if the Board determines to impose one
or more standards under paragraph
(c)(3) of that section on a foreign
banking organization with total
consolidated assets of $50 billion or

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more and combined U.S. assets of $50
billion or more, the Board would notify
the company no later than 30 days
before it proposes to apply additional
standard(s). The notification would
include a description of the additional
standard(s) and the basis for imposing
the additional standard(s). Within 14
calendar days of receipt of a notification
under this paragraph, the foreign
banking organization may request in
writing that the Board reconsider the
requirement that the company comply
with the additional standard(s),
including an explanation as to why the
reconsideration should be granted. The
Board would respond in writing within
14 calendar days of receipt of the
company’s request.
Section 252.264(b)(2) would require a
foreign banking organization with total
consolidated assets of $50 billion or
more and with combined U.S. assets of
less than $50 billion or a foreign savings
and loan holding company with total
consolidated assets of $50 billion or
more to separately, or as part of an
enterprise-wide stress test, conduct an
annual stress test over a nine-quarter
forward-looking planning horizon of its
U.S. subsidiaries to determine whether
those subsidiaries have the capital
necessary to absorb losses as a result of
adverse economic conditions. The
foreign banking organization or foreign
savings and loan holding company
would report a summary of the results
of the stress test to the Board on an
annual basis that includes the
information required under paragraph
§ 252.253(b)(1) of this subpart.
Section 252.283(b) would require a
foreign banking organization to provide
notice to the Board within 5 business
days of the date it determines that one
or more triggering events set forth in
section 252.283 of that subpart has
occurred, identifying the nature of the
triggering event or change in
circumstances.
Recordkeeping Requirements
Sections 252.225(c), 252.226(b)(1),
252.228, 252.229(a), 252.230(a), and
252.230(c) would require foreign
banking organizations with total
consolidated assets of $50 billion or
more and combined U.S. assets of $50
billion or more to adequately document
all material aspects of its liquidity risk
management processes and its
compliance with the requirements of
Subpart M and submit all such
documentation to its U.S. risk
committee.
Section 252.252(a) would require the
U.S. risk committee of a foreign banking
organization with total consolidated
assets of $50 billion or more and

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

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holding company with total
consolidated assets of greater than $10
billion but less than $50 billion, as
determined under that subpart.
Estimated Paperwork Burden for 7100–
0350

Intermediate Holding Companies With
Total Consolidated Assets of More Than
$10 Billion but Less Than $50 Billion
Section 252.262—40 hours (Initial setup
240 hours)

Disclosure Burden

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

Intermediate Holding Companies With
Total Consolidated Assets of $50 Billion
or More

Estimated Burden per Response

Section 252.262—80 hours (Initial setup
200 hours)

Reporting Burden

Number of respondents: 23 foreign
banking
organizations with total
Foreign Banking Organizations With
Total Consolidated Assets of $50 Billion consolidated assets of $50 billion or
more and combined U.S. assets of $50
or More
billion or more, 26 U.S. intermediate
Section 252.202b—160 hours.
holding companies (18 U.S.
Section 252.203b—100 hours.
intermediate holding companies with
Section 252.283b—2 hours.
total consolidated assets of $50 billion
or more), and 113 foreign banking
Foreign Banking Organizations With
Total Consolidated Assets of $50 Billion organizations with total consolidated
assets of more than $10 billion and
or More and Combined U.S. Assets of
combined U.S. assets of less than $50
$50 Billion or More
billion.
Section 252.226c1—40 hours.
Total estimated annual burden:
Section 252.226c2—40 hours.
58,660 hours (19,440 hours for initial
Section 252.263b1—40 hours.
setup and 39,220 hours for ongoing
Section 252.263b2—40 hours.
compliance).
Section 252.263c2—80 hours.
2. Title of Information Collection: The
Section 252.263d—10 hours.
Capital and Asset Report for Foreign
Banking Organizations.
Foreign Banking Organizations With
Frequency of Response: Quarterly.
Total Consolidated Assets of $50 Billion
Affected Public: Businesses or other
or More and Combined U.S. Assets of
for-profit.
Less Than $50 Billion
Respondents: Foreign banking
Section 252.231a—50 hours.
organizations.
Abstract: Section 165 of the DoddIntermediate Holding Companies With
Total Consolidated Assets of More Than Frank Act requires the Board to
establish enhanced prudential standards
$10 Billion but Less Than $50 Billion
on bank holding companies with
Section 252.262—80 hours (Initial setup
consolidated assets of $50 billion or
200 hours)
more and nonbank financial companies
supervised by the Board, and section
Foreign Banking Organizations With
Total Consolidated Assets of More Than 166 requires the Board to establish an
early remediation framework for these
$10 Billion and Combined U.S. Assets
companies. The enhanced prudential
of Less Than $50 Billion and Foreign
standards include risk-based capital and
Savings and Loan Holding Companies
leverage requirements, liquidity
With Total Consolidated Assets of $10
standards, requirements for overall risk
Billion or More
management (including establishing a
Section 252.264b2—80 hours.
risk committee), single-counterparty
credit limits, stress test requirements,
Recordkeeping Burden
and debt-to-equity limits for companies
Foreign Banking Organizations of Total
that the Council has determined pose a
Consolidated Assets of $50 Billion or
grave threat to financial stability. The
More and Combined U.S. Assets of $50
proposal would implement these
Billion or More
requirements for foreign banking
organizations with total consolidated
Sections 252.225c, 252.226b1, 252.228,
252.229a, 252.230a, and 252.230c—200 hours assets of $50 billion or more and foreign
(Initial setup 160 hours).
nonbank financial companies
Section 252.252a—200 hours.
supervised by the Board.
Intermediate Holding Companies With
Total Consolidated Assets of $50 Billion
or More
Section 252.262—40 hours (Initial setup
280 hours)

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Reporting Requirements
Section 252.212(c)(3) would require
that a foreign banking organization with
total consolidated assets of $50 billion
or more provide the following

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
information to the Federal Reserve
concurrently with the Capital and Asset
Report for Foreign Banking
Organizations (FR Y–7Q; OMB No.
7100–0125): (1) the tier 1 risk-based
capital ratio, total risk-based capital
ratio and amount of tier 1 capital, tier
2 capital, risk-weighted assets and total
assets of the foreign banking
organization, as of the close of the most
recent quarter and as of the close of the
most recent audited reporting period; (2)
consistent with the transition period in
the Basel III Accord, the common equity
tier 1 ratio, leverage ratio and amount of
common equity tier 1 capital, additional
tier 1 capital, and total leverage assets
of the foreign banking organization; and
(3) a certification that the foreign
banking organization meets the standard
in (c)(1)(i) of this section.
Estimated Paperwork Burden for 7100–
0125

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

Estimated Burden per Response:
Section 252.212c3 reporting—0.5 hours.
Number of respondents: 107 foreign
banking organizations.
Total estimated annual burden: 214
hours.
In addition to the requirements
discussed above, section 252.203(c)
would require U.S. intermediate holding
companies to submit the following
reporting forms:
• Country Exposure Report (FFIEC
009; OMB No. 7100–0035);
• Country Exposure Information
Report (FFIEC 009a; OMB No. 7100–
0035);
• Risk-Based Capital Reporting for
Institutions Subject to the Advanced
Capital Adequacy Framework (FFIEC
101; OMB No. 7100–0319);
• Financial Statements of Foreign
Subsidiaries of U.S. Banking
Organizations (FR 2314; OMB No. 7100–
0073);
• Abbreviated Financial Statements
of Foreign Subsidiaries of U.S. Banking
Organizations (FR 2314S; OMB No.
7100–0073);
• Annual Report of Holding
Companies (FR Y–6; OMB No. 7100–
0297);
• The Bank Holding Company Report
of Insured Depository Institution’s
Section 23A Transactions with Affiliates
(FR Y–8; OMB No. 7100–0126);
• Consolidated Financial Statements
for Bank Holding Companies (FR Y–9C;
OMB No. 7100–0128);
• Parent Company Only Financial
Statements for Large Bank Holding
Companies (FR Y–9LP; OMB No. 7100–
0128);

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• Financial Statements for Employee
Stock Ownership Plan Bank Holding
Companies (FR Y–9ES; OMB No. 7100–
0128);
• Report of Changes in Organization
Structure (FR Y–10; OMB No. 7100–
0297);
• Financial Statements of U.S.
Nonbank Subsidiaries of U.S. Bank
Holding Companies (FR Y–11; OMB No.
7100–0244);
• Abbreviated Financial Statements
of U.S. Nonbank Subsidiaries of U.S.
Bank Holding Companies (FR Y–11S;
OMB No. 7100–0244);
• Consolidated Bank Holding
Company Report of Equity Investments
in Nonfinancial Companies (FR Y–12;
OMB No. 7100–0300);
• Annual Report of Merchant Banking
Investments Held for an Extended
Period (FR Y–12A; OMB No. 7100–
0300); and
• Banking Organization Systemic
Risk Report (FR Y–15; OMB No. 7100–
NEW). This reporting form will be
implemented in December 2012.125
The Board would increase the
respondent panels for these reporting
forms to include U.S. intermediate
holding companies.
Also, section 252.212(b) would
increase the respondent panels for the
following information collections to
include U.S. intermediate holding
companies with total consolidated
assets of $50 billion or more:
• Recordkeeping and Reporting
Requirements Associated with
Regulation Y (Reg Y–13; OMB No.
7100–0342);
• Capital Assessments and Stress
Testing (FR Y–14M and Q; OMB No.
7100–0341).
Section 252.212 would increase the
respondent panel for the Capital
Assessments and Stress Testing (FR Y–
14A; OMB No. 7100–0341) to include
U.S. intermediate holding companies
with total consolidated assets of $10
billion or more.
Finally, the reporting requirement
found in section 252.245(a) will be
addressed in a separate Federal Register
notice at a later date.
Comments are invited on:
(a) Whether the proposed collections
of information are necessary for the
proper performance of the Federal
Reserve’s functions, including whether
the information has practical utility;
(b) The accuracy of the Federal
Reserve’s estimate of the burden of the
proposed information collections,
including the validity of the
methodology and assumptions used;

(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or startup costs
and costs of operation, maintenance,
and purchase of services to provide
information.
All comments will become a matter of
public record. Comments on aspects of
this notice that may affect reporting,
recordkeeping, or disclosure
requirements and burden estimates
should be sent to the addresses listed in
the ADDRESSES section. A copy of the
comments may also be submitted to the
OMB desk officer for the Agencies: By
mail to U.S. Office of Management and
Budget, 725 17th Street NW., #10235,
Washington, DC 20503 or by facsimile
to 202–395–5806, Attention,
Commission and Federal Banking
Agency Desk Officer.
C. Regulatory Flexibility Act Analysis
In accordance with section 3(a) of the
Regulatory Flexibility Act 126 (RFA), the
Board is publishing an initial regulatory
flexibility analysis of the proposed rule.
The RFA requires an agency either to
provide an initial regulatory flexibility
analysis with a proposed rule for which
a general notice of proposed rulemaking
is required or to certify that the
proposed rule will not have a significant
economic impact on a substantial
number of small entities. Based on its
analysis and for the reasons stated
below, the Board believes that this
proposed rule will not have a significant
economic impact on a substantial
number of small entities. Nevertheless,
the Board is publishing an initial
regulatory flexibility analysis. A final
regulatory flexibility analysis will be
conducted after comments received
during the public comment period have
been considered.
In accordance with sections 165 and
166 of the Dodd-Frank Act, the Board is
proposing to amend Regulation YY (12
CFR 252 et seq.) to establish enhanced
prudential standards and early
remediation requirements applicable for
foreign banking organizations and
foreign nonbank financial companies
supervised by the Board.127 The
enhanced prudential standards include
a requirement to establish a U.S.
intermediate holding company, riskbased capital and leverage requirements,
126 5

125 See

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U.S.C. 601 et seq.
12 U.S.C. 5365 and 5366.

127 See

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

liquidity standards, risk management
and risk committee requirements,
single-counterparty credit limits, stress
test requirements, and debt-to-equity
limits for companies that the Council
has determined pose a grave threat to
financial stability.
Under regulations issued by the Small
Business Administration (SBA), a
‘‘small entity’’ includes those firms
within the ‘‘Finance and Insurance’’
sector with asset sizes that vary from $7
million or less in assets to $175 million
or less in assets.128 The Board believes
that the Finance and Insurance sector
constitutes a reasonable universe of
firms for these purposes because such
firms generally engage in actives that are
financial in nature. Consequently, bank
holding companies or nonbank financial
companies with assets sizes of $175
million or less are small entities for
purposes of the RFA.
As discussed in the Supplementary
Information, the proposed rule generally
would apply to foreign banking
organizations with total consolidated
assets of $50 billion or more, and to
foreign nonbank financial companies
that the Council has determined under
section 113 of the Dodd-Frank Act must
be supervised by the Board and for
which such determination is in effect.
However, foreign banking organizations
with publicly traded stock and total
consolidated assets of $10 billion or
more would be required to establish a
U.S. risk committee. The company-run
stress test requirements part of the
proposal being established pursuant to
section 165(i)(2) of the Act also would
apply to any foreign banking
organization and foreign savings and
loan holding company with more than
$10 billion in total assets. Companies
that are subject to the proposed rule
therefore substantially exceed the $175
million asset threshold at which a
banking entity is considered a ‘‘small
entity’’ under SBA regulations.129 The
proposed rule would apply to a
nonbank financial company designated
by the Council under section 113 of the
Dodd-Frank Act regardless of such a
company’s asset size. Although the asset
size of nonbank financial companies
may not be the determinative factor of
whether such companies may pose
systemic risks and would be designated
by the Council for supervision by the
Board, it is an important
128 13

CFR 121.201.
Dodd-Frank Act provides that the Board
may, on the recommendation of the Council,
increase the $50 billion asset threshold for the
application of certain of the enhanced prudential
standards. See 12 U.S.C. 5365(a)(2)(B). However,
neither the Board nor the Council has the authority
to lower such threshold.

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129 The

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consideration.130 It is therefore unlikely
that a financial firm that is at or below
the $175 million asset threshold would
be designated by the Council under
section 113 of the Dodd-Frank Act
because material financial distress at
such firms, or the nature, scope, size,
scale, concentration,
interconnectedness, or mix of it
activities, are not likely to pose a threat
to the financial stability of the United
States.
As noted above, because the proposed
rule is not likely to apply to any
company with assets of $175 million or
less, if adopted in final form, it is not
expected to apply to any small entity for
purposes of the RFA. The Board does
not believe that the proposed rule
duplicates, overlaps, or conflicts with
any other Federal rules. In light of the
foregoing, the Board does not believe
that the proposed rule, if adopted in
final form, would have a significant
economic impact on a substantial
number of small entities supervised.
Nonetheless, the Board seeks comment
on whether the proposed rule would
impose undue burdens on, or have
unintended consequences for, small
organizations, and whether there are
ways such potential burdens or
consequences could be minimized in a
manner consistent with sections 165
and 166 of the Dodd-Frank Act.
List of Subjects in 12 CFR Part 252
12 CFR Chapter II
Administrative practice and
procedure, Banks, Banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons stated in the
Supplementary Information, the Board
of Governors of the Federal Reserve
System proposes to amend 12 CFR part
252 as follows:
PART 252—ENHANCED PRUDENTIAL
STANDARDS (REGULATION YY)
1. The authority citation for part 252
shall read as follows:
Authority: 12 U.S.C. 321–338a, 481–486,
1818, 1828, 1831n, 1831o, 1831p–l, 1831w,
1835, 1844(b), 3904, 3906–3909, 4808, 5365,
5366, 5367, 5368, 5371.

2. Add Subpart A to read as follows:
Subpart A—General Provisions
Sec.
252.1 [Reserved]
252.2 Authority, purpose, and reservation
of authority for foreign banking
130 See

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organizations and foreign nonbank
financial companies supervised by the
Board.
252.3 Definitions.

Subpart A—General Provisions
§ 252.1

[Reserved]

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

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

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
separate operations of such foreign
banks.
(d) Foreign nonbank financial
companies. (1) In general. The following
subparts of this part will apply to a
foreign nonbank financial company
supervised by the Board, unless the
Board determines that application of
those subparts, or any part thereof,
would not be appropriate:
(i) Subpart L—Risk-Based Capital
Requirements and Leverage Limits for
Covered Foreign Banking Organizations;
(ii) Subpart M—Liquidity
Requirements for Covered Foreign
Banking Organizations;
(iii) Subpart N—Single-Counterparty
Credit Limits for Covered Foreign
Banking Organizations;
(iv) Subpart O—Risk Management for
Covered Foreign Banking Organizations;
(v) Subpart P—Stress Test
Requirements for Covered Foreign
Banking Organizations and Other
Foreign Companies;
(vi) Subpart Q—Debt-to-Equity Limits
for Certain Covered Foreign Banking
Organizations; and
(vii) Subpart R—Early Remediation
Framework for Covered Foreign Banking
Organizations.
(2) Intermediate holding company
criteria. In determining whether to
apply subpart K (Intermediate Holding
Company Requirement for Covered
Foreign Banking Organizations) to a
foreign nonbank financial company
supervised by the Board in accordance
with section 167 of the Dodd-Frank Act
(12 U.S.C. 5367), the Board will
consider the following criteria regarding
the foreign nonbank financial company:
(i) The structure and organization of
the U.S. activities and subsidiaries of
the foreign nonbank financial company;
(ii) The riskiness, complexity,
financial activities, and size of the U.S.
activities and subsidiaries of a foreign
nonbank financial company, and the
interconnectedness of those U.S.
activities and subsidiaries with foreign
activities and subsidiaries of the foreign
banking organization;
(iii) The extent to which an
intermediate holding company would
help to prevent or mitigate risks to the
financial stability of the United States
that could arise from the material
financial distress or failure, or ongoing
activities, of the foreign nonbank
financial company;
(iv) The extent to which the foreign
nonbank financial company is subject to
prudential standards on a consolidated
basis in its home country that are
administered and enforced by a
comparable foreign supervisory
authority; and

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(v) Any other risk-related factor that
the Board determines appropriate.
§ 252.3

Definitions.

Unless otherwise specified, the
following definitions will apply for
purposes of subparts K through R of this
part:
Affiliate means any company that
controls, is controlled by, or is under
common control with, another
company.
Applicable accounting standards
means U.S. generally applicable
accounting principles (GAAP),
international financial reporting
standards (IFRS), or such other
accounting standards that a company
uses in the ordinary course of its
business in preparing its consolidated
financial statements.
Bank has the same meaning as in
section 225.2(b) of the Board’s
Regulation Y (12 CFR 225.2(b)).
Bank holding company has the same
meaning as in section 2(a) of the Bank
Holding Company Act (12 U.S.C.
1841(a)) and section 225.2(c) of the
Board’s Regulation Y (12 CFR 225.2(c)).
Combined U.S. operations means,
with respect to a foreign banking
organization:
(1) Any U.S. intermediate holding
company and its consolidated
subsidiaries;
(2) Any U.S. branch or U.S. agency;
and
(3) Any other U.S. subsidiary of the
foreign banking organization that is not
a section 2(h)(2) company.
Company means a corporation,
partnership, limited liability company,
depository institution, business trust,
special purpose entity, association, or
similar organization.
Control has the same meaning as in
section 2(a) of the Bank Holding
Company Act (12 U.S.C. 1841(a)), and
the terms controlled and controlling
shall be construed consistently with the
term control.
Depository institution has the same
meaning as in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
FFIEC 002 means the Report of Assets
and Liabilities of U.S. Branches and
Agencies of Foreign Banks reporting
form.
Foreign bank has the same meaning as
in section 211.21(n) of the Board’s
Regulation K (12 CFR 211.21(n)).
Foreign banking organization has the
same meaning as in section 211.21(o) of
the Board’s Regulation K (12 CFR
211.21(o)).
Foreign nonbank financial company
supervised by the Board means a
company incorporated or organized in a
country other than the United States

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that the Council has determined under
section 113 of the Dodd-Frank Act (12
U.S.C. 5323) shall be supervised by the
Board and for which such determination
is still in effect.
FR Y–7Q means the Capital and Asset
Report for Foreign Banking
Organizations reporting form.
FR Y–9C means the Consolidated
Financial Statements for Bank Holding
Companies reporting form.
Non-U.S. affiliate means any affiliate
that is incorporated or organized in a
country other than the United States.
Nonbank financial company
supervised by the Board means a
company that the Council has
determined under section 113 of the
Dodd-Frank Act (12 U.S.C. 5323) shall
be supervised by the Board and for
which such determination is still in
effect.
Publicly traded means traded on:
(1) Any exchange registered with the
U.S. Securities and Exchange
Commission as a national securities
exchange under section 6 of the
Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(2) Any non-U.S.-based securities
exchange that:
(i) Is registered with, or approved by,
a national securities regulatory
authority; and
(ii) Provides a liquid, two-way market
for the instrument in question, meaning
that there are enough independent bona
fide offers to buy and sell so that a sales
price reasonably related to the last sales
price or current bona fide competitive
bid and offer quotations can be
determined promptly and a trade can be
settled at such a price within a
reasonable time period conforming with
trade custom. A company can rely on its
determination that a particular nonU.S.-based exchange provides a liquid
two-way market unless the Board
determines that the exchange does not
provide a liquid two-way market.
Section 2(h)(2) company has the same
meaning as in section 2(h)(2) of the
Bank Holding Company Act (12 U.S.C.
1841(h)(2)).
Subsidiary has the same meaning as
in section 225.2(o) of Regulation Y (12
CFR 225.2(o)).
U.S. agency has the same meaning as
the term ‘‘agency’’ in section 211.21(b)
of the Board’s Regulation K (12 CFR
211.21(b)).
U.S. branch has the same meaning as
the term ‘‘branch’’ in section 211.21(e)
of the Board’s Regulation K (12 CFR
211.21(e)).
U.S. branch and agency network
means all U.S. branches and U.S.
agencies of a foreign bank.

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U.S. intermediate holding company
means the top-tier U.S. company that is
required to be formed pursuant to
§ 252.202 of subpart K of this part and
that controls the U.S. subsidiaries of a
foreign banking organization.
U.S. subsidiary means any subsidiary
that is organized in the United States or
in any State, commonwealth, territory,
or possession of the United States, the
District of Columbia, the
Commonwealth of Puerto Rico, the
Commonwealth of the North Mariana
Islands, the American Samoa, Guam, or
the United States Virgin Islands.
Subpart J—[Reserved]
3. Add reserved subpart J.
4. Add subpart K to read as follows:

§ 252.201 U.S. intermediate holding
company requirement.

Subpart K—Intermediate Holding Company
Requirement for Covered Foreign Banking
Organizations
Sec.
252.200 Applicability.
252.201 U.S. intermediate holding company
requirement.
252.202 Alternative organizational
structure.
252.203 Corporate form, notice, and
reporting.
252.204 Liquidation of intermediate
holding companies

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

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§ 252.200

Applicability.

(a) In general. (1) Total consolidated
assets. This subpart applies to a foreign
banking organization with total
consolidated assets of $50 billion or
more, as determined based on the
average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign banking organization on its FR
Y–7Q; or
(ii) If the foreign banking organization
has not filed the FR Y–7Q for each of
the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–7Q; or
(iii) If the foreign banking
organization has not yet filed an FR Y–
7Q, as determined under applicable
accounting standards.
(2) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
this subpart unless and until total assets
as reported on its FR Y–7Q are less than
$50 billion for each of the four most
recent consecutive calendar quarters.
(3) Measurement date. For purposes
of paragraphs (a)(1) and (2) of this
section, total assets are measured on the
quarter-end for each quarter used in the
calculation of the average.

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

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

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§ 252.202 Alternative organizational
structure.

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

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

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

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

Subpart L—Risk-Based Capital
Requirements and Leverage Limits for
Covered Foreign Banking
Organizations
§ 252.210

Definitions.

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

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§ 252.211

Applicability.

(a) Foreign banking organizations
with total consolidated assets of $50
billion or more. A foreign banking
organization with total consolidated
assets of $50 billion or more is subject
to the requirements of § 252.212(c) of
this subpart.
(1) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign banking organization on its FR
Y–7Q; or
(ii) If the foreign banking organization
has not filed the FR Y–7Q for each of

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the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–7Q; or
(iii) If the foreign banking
organization has not yet filed an FR Y–
7Q, as determined under applicable
accounting standards.
(2) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§ 252.212(c) of this subpart unless and
until total assets as reported on its FR
Y–7Q are less than $50 billion for each
of the four most recent consecutive
calendar quarters.
(3) Measurement date. For purposes
of this paragraph, total assets are
measured on the last day of the quarter
used in calculation of the average.
(b) U.S. intermediate holding
companies. (1) In general. A U.S.
intermediate holding company is
subject to the requirements of
§ 252.212(a) of this subpart.
(2) U.S. intermediate holding
companies with total consolidated
assets of $50 billion or more. A U.S.
intermediate holding company that has
total consolidated assets of $50 billion
or more also is subject to the
requirements of § 252.212(b) of this
subpart.
(i) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total
consolidated assets:
(A) For the four most recent
consecutive quarters as reported by the
U.S. intermediate holding company on
its FR Y–9C, or
(B) If the U.S. intermediate holding
company has not filed the FR Y–9C for
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–9C, or
(C) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards.
(ii) Cessation of requirements. A U.S.
intermediate holding company will
remain subject to the requirements of
§ 252.212(b) of this subpart unless and
until total assets as reported on its FR
Y–9C are less than $50 billion for each
of the four most recent consecutive
calendar quarters.
(iii) Measurement date. For purposes
of this paragraph, total consolidated
assets are measured on the last day of
the quarter used in calculation of the
average.
(c) Initial applicability. (1) Foreign
banking organizations. A foreign
banking organization that is subject to
the requirements of this subpart as of

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July 1, 2014, under paragraph (a)(1) of
this section must comply with the
requirements of § 252.212(c) of this
subpart beginning on July 1, 2015,
unless that time is extended by the
Board in writing.
(2) U.S. intermediate holding
companies. A U.S. intermediate holding
company that is subject to the
requirements of this subpart as of July
1, 2015, under paragraph (b)(1) or (b)(2)
of this section, must comply with the
requirements of § 252.212(a) and
§ 252.212(b) of this subpart beginning
on July 1, 2015, unless that time is
extended by the Board in writing.
(d) Ongoing applicability. (1) Foreign
banking organizations. A foreign
banking organization that becomes
subject to the requirements of this
subpart after July 1, 2014, under
paragraph (a)(1) of this section, must
comply with the requirements of
§ 252.212(c) of this subpart beginning 12
months after it becomes subject to this
subpart, unless that time is accelerated
or extended by the Board in writing.
(2) U.S. intermediate holding
companies. (i) A U.S. intermediate
holding company that becomes subject
to the requirements of this subpart after
July 1, 2015, under paragraph (b)(1) of
this section, must comply with the
requirements of § 252.212(a) of this
subpart on the date it is required to be
established, unless that time is
accelerated or extended by the Board in
writing.
(ii) A U.S. intermediate holding
company that becomes subject to this
subpart after July 1, 2015, under
paragraph (b)(2) of this section, must
comply with the requirements of
§ 252.212(b) of this subpart beginning in
October of the calendar year after it
becomes subject to those requirements,
unless that time is accelerated or
extended by the Board in writing.
§ 252.212 Enhanced risk-based capital and
leverage requirements.

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

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(b) Capital planning. A U.S.
intermediate holding company with
total consolidated assets of $50 billion
or more must comply with section 225.8
of Regulation Y in the same manner and
to the same extent as a bank holding
company subject to that section.
(c) Foreign banking organizations. (1)
General requirements. A foreign banking
organization with total consolidated
assets of $50 billion or more must:
(i) Certify to the Board that it meets
capital adequacy standards at the
consolidated level that are consistent
with the Basel Capital Framework in
accordance with any capital adequacy
standards established by its home
country supervisor; or
(ii) Demonstrate to the satisfaction of
the Board that it meets capital adequacy
standards at the consolidated level that
are consistent with the Basel Capital
Framework.
(2) Consistency with Basel Capital
Framework. For purposes of paragraph
(c)(1) of this section, consistency with
the Basel Capital Framework shall
require, without limitation, a company
to meet all minimum risk-based capital
ratios, any minimum leverage ratio, and
all restrictions based on applicable
capital buffers set forth in Basel III: A
global regulatory framework for more
resilient banks and banking systems
(2010), each as applicable and as
implemented in accordance with the
Basel Capital Framework, including any
transitional provisions set forth therein.
(3) Reporting. A foreign banking
organization with total consolidated
assets of $50 billion or more must
provide the following information to the
Federal Reserve concurrently with its
FR Y–7Q:
(i) The tier 1 risk-based capital ratio,
total risk-based capital ratio and amount
of tier 1 capital, tier 2 capital, riskweighted assets and total assets of the
foreign banking organization, as of the
close of the most recent quarter and as
of the close of the most recent audited
reporting period; and
(ii) Consistent with the transition
period in the Basel III Accord, the
common equity tier 1 ratio, leverage
ratio and amount of common equity tier
1 capital, additional tier 1 capital, and
total leverage assets of the foreign
banking organization, as of the close of
the most recent quarter and as of the
close of the most recent audited
reporting period.
(4) Noncompliance with the Basel
Capital Framework. If a foreign banking
organization does not satisfy the
requirements of paragraphs (c)(1), (c)(2),
and (c)(3) of this section, the Board may
impose conditions or restrictions
relating to the activities or business

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operations of the U.S. operations of the
foreign banking organization. The Board
will coordinate with any relevant U.S.
licensing authority in the
implementation of such conditions or
restrictions.
6. Add Subpart M to read as follows:
Subpart M—Liquidity Requirements for
Covered Foreign Banking Organizations
Sec.
252.220 Definitions.
252.221 Applicability.
252.222 Responsibilities of the U.S. risk
committee and U.S. chief risk officer.
252.223 Additional responsibilities of the
U.S. chief risk officer.
252.224 Independent review.
252.225 Cash flow projections.
252.226 Liquidity stress testing.
252.227 Liquidity buffer.
252.228 Contingency funding plan
252.229 Specific limits.
252.230 Monitoring.
252.231 Requirements for foreign banking
organizations with combined U.S. assets
of less than $50 billion.

Subpart M—Liquidity Requirements for
Covered Foreign Banking
Organizations
§ 252.220

Definitions.

For purposes of this subpart, the
following definitions apply:
BCBS principles for liquidity risk
management means the document titled
‘‘Principles for Sound Liquidity Risk
Management and Supervision’’
(September 2008) as published by the
Basel Committee on Banking
Supervision, as supplemented and
revised from time to time.
Global headquarters means the chief
administrative office of a company in
the jurisdiction in which the company
is chartered or organized.
Highly liquid assets means:
(1) Cash;
(2) Securities issued or guaranteed by
the U. S. government, a U.S. government
agency, or a U.S. government-sponsored
entity; and
(3) Any other asset that the foreign
banking organization demonstrates to
the satisfaction of the Federal Reserve:
(i) Has low credit risk and low market
risk;
(ii) Is traded in an active secondary
two-way market that has committed
market makers and independent bona
fide offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a reasonable time period
conforming with trade custom; and
(iii) Is a type of asset that investors
historically have purchased in periods
of financial market distress during
which market liquidity is impaired.

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Liquidity means a company’s capacity
to efficiently meet its expected and
unexpected cash flows and collateral
needs at a reasonable cost without
adversely affecting the daily operations
or the financial condition of the foreign
banking organization.
Liquidity risk means the risk that a
company’s financial condition or safety
and soundness will be adversely
affected by its inability or perceived
inability to meet its cash and collateral
obligations.
Unencumbered means, with respect to
an asset, that:
(1) The asset is not pledged, does not
secure, collateralize, or provide credit
enhancement to any transaction, and is
not subject to any lien, or, if the asset
has been pledged to a Federal Reserve
bank or a U.S. government-sponsored
entity, it has not been used;
(2) The asset is not designated as a
hedge on a trading position under the
Board’s market risk rule under 12 CFR
225, appendix E, or any successor
regulation thereto; or
(3) There are no legal or contractual
restrictions on the ability of the foreign
banking organization to promptly
liquidate, sell, transfer, or assign the
asset.
U.S. government agency means an
agency or instrumentality of the U.S.
government whose obligations are fully
and explicitly guaranteed as to the
timely payment of principal and interest
by the full faith and credit of the U.S.
government.
U.S. government-sponsored entity
means an entity originally established or
chartered by the U.S. government to
serve public purposes specified by the
U.S. Congress, but whose obligations are
not explicitly guaranteed by the full
faith and credit of the U.S. government.
§ 252.221

Applicability.

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

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consecutive quarters as reported on the
FFIEC 002; or
(C) If the foreign banking organization
has not yet filed a FFIEC 002 for a U.S.
branch or U.S. agency, as determined
under applicable accounting standards.
(ii) If a U.S. intermediate holding
company has been established, the
average of the total consolidated assets
of the U.S. intermediate holding
company:
(A) For the four most recent
consecutive quarters, as reported to the
Board on the U.S. intermediate holding
company’s FR Y–9C, or
(B) If the U.S. intermediate holding
company has not filed the FR Y–9C for
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–9C, or
(C) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards; and
(iii) If a U.S. intermediate holding
company has not been established, the
average of the total consolidated assets
of each top-tier U.S. subsidiary of the
foreign banking organization (excluding
any section 2(h)(2) company):
(A) For the four most recent
consecutive quarters, as reported to the
Board on the FR Y–7Q; or
(B) If the foreign banking organization
has not yet filed the FR Y–7Q for each
of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–7Q; or
(C) If the foreign banking organization
has not yet filed an FR Y–7Q, as
determined under applicable accounting
standards.
(2) U.S. intercompany transactions.
The company may reduce its combined
U.S. assets calculated under this
paragraph by the amount corresponding
to balances and transactions between
the U.S. subsidiary or U.S. branch or
U.S. agency and any other top-tier U.S.
subsidiary or U.S. branch or U.S. agency
to the extent such items are not already
eliminated in consolidation.
(3) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§§ 252.222 through 252.230 of this
subpart unless and until the sum of the
total assets of each U.S. branch and U.S.
agency as reported on the FFIEC 002
and the total consolidated assets of each
U.S. subsidiary as reported on the FR Y–
9C or FR Y–7Q is less than $50 billion
for each of the four most recent
consecutive calendar quarters.
(4) Measurement date. For purposes
of paragraphs (a)(1) and (a)(3) of this
section, total assets and total

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

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

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

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

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strategies and products, or contingency
funding plan of the foreign banking
organization should be reviewed or
modified.
§ 252.223 Additional responsibilities of the
U.S. chief risk officer.

(a) The U.S. chief risk officer of a
foreign banking organization with
combined U.S. assets of $50 billion or
more must review the strategies and
policies and procedures for managing
liquidity risk established by senior
management of the combined U.S.
operations. The U.S. chief risk officer
must review information provided by
the senior management of the combined
U.S. operations to determine whether
the foreign banking organization is
complying with the established
liquidity risk tolerance for the combined
U.S. operations.
(b) The U.S. chief risk officer must
regularly report to the foreign banking
organization’s U.S. risk committee and
enterprise-wide risk committee (or
designated subcommittee thereof) on the
liquidity risk profile of the foreign
banking organization’s combined U.S.
operations at least semi-annually and
must provide other information to the
U.S. risk committee and the enterprisewide risk committee relevant to
compliance of the foreign banking
organization with the established
liquidity risk tolerance for the U.S.
operations.
§ 252.224

Independent review.

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

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§ 252.225

Cash flow projections.

(a) Requirement. A foreign banking
organization with combined U.S. assets
of $50 billion or more must produce
comprehensive cash flow projections for
its combined U.S. operations in
accordance with the requirements of
this section. Cash flow projections for
the combined U.S. operations must be
tailored to, and provide sufficient detail
to reflect, the capital structure, risk
profile, complexity, activities, size, and
any other relevant factors of the foreign
banking organization and its combined
U.S. operations, including where
appropriate analyses by business line or
legal entity. The foreign banking
organization must update short-term
cash flow projections daily and must
update long-term cash flow projections
at least monthly.
(b) Methodology. A foreign banking
organization with combined U.S. assets
of $50 billion or more must establish a
methodology for making cash flow
projections for its combined U.S.
operations. The methodology must
include reasonable assumptions
regarding the future behavior of assets,
liabilities, and off-balance sheet
exposures.
(c) Cash flow projections. A foreign
banking organization with combined
U.S. assets of $50 billion or more must
produce comprehensive cash flow
projections for its combined U.S.
operations that:
(1) Project cash flows arising from
assets, liabilities, and off-balance sheet
exposures over short-term and long-term
periods that are appropriate to the
capital structure, risk profile,
complexity, activities, size, and other
relevant characteristics of the company
and its combined U.S. operations;
(2) Identify and quantify discrete and
cumulative cash flow mismatches over
these time periods;
(3) Include cash flows arising from
contractual maturities, intercompany
transactions, new business, funding
renewals, customer options, and other
potential events that may impact
liquidity; and
(4) Provide sufficient detail to reflect
the capital structure, risk profile,
complexity, activities, size, and any
other relevant factors with respect to the
company and its combined U.S.
operations.
§ 252.226

Liquidity stress testing.

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

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U.S. branch and agency network and its
U.S. intermediate holding company, as
applicable. The required stress test
analysis must identify liquidity stress
scenarios in accordance with paragraph
(a)(3) of this section that would have an
adverse effect on the U.S. operations of
the foreign banking organization, and
assess the effects of these scenarios on
the cash flows and liquidity of each of
the U.S. branch and agency network and
U.S. intermediate holding company.
The foreign banking organization must
use the results of this stress testing to
determine the size of the liquidity buffer
for each of its U.S. branch and agency
network and U.S. intermediate holding
company required under § 252.227 of
this subpart, and must incorporate the
information generated by stress testing
in the quantitative component of its
contingency funding plan under
§ 252.228 of this subpart.
(2) Frequency. If there is a material
deterioration in the foreign banking
organization’s financial condition,
market conditions, or if other
supervisory concerns indicate that the
monthly stress test required by this
section is insufficient to assess the
liquidity risk profile of the foreign
banking organization’s U.S. operations,
the Board may require the foreign
banking organization to perform stress
testing for its U.S. branch and agency
network and its U.S. intermediate
holding company more frequently than
monthly and to vary the underlying
assumptions and stress scenarios. The
foreign banking organization must be
able to perform more frequent stress
tests in accordance with this section
upon the request of the Board.
(3) Stress scenarios. (i) Stress testing
must incorporate a range of stress
scenarios that may have a significant
adverse impact the liquidity of the
foreign banking organization’s
U.S.operations, taking into
consideration their balance sheet
exposures, off-balance sheet exposures,
business lines, organizational structure,
and other characteristics.
(ii) At a minimum, stress testing must
incorporate separate stress scenarios to
account for adverse conditions due to
market stress, idiosyncratic stress, and
combined market and idiosyncratic
stresses.
(iii) The stress testing must:
(A) Address the potential direct
adverse impact of market disruptions on
the foreign banking organization’s
combined U.S. operations;
(B) Address the potential adverse
impact of market disruptions on the
foreign banking organization and the
related indirect effect such impact could

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have on the combined U.S. operations of
the foreign banking organization; and
(C) Incorporate the potential actions
of other market participants
experiencing liquidity stresses under
market disruptions that would adversely
affect the foreign banking organization
or its combined U.S. operations.
(iv) The stress scenarios must be
forward-looking and must incorporate a
range of potential changes in the
activities, exposures, and risks of the
foreign banking organization and its
combined U.S. operations, as
appropriate, as well as changes to the
broader economic and financial
environment.
(v) The stress scenarios must use a
variety of time horizons. At a minimum,
these time horizons must include an
overnight time horizon, a 30-day time
horizon, 90-day time horizon, and a
one-year time horizon.
(4) Operations included. Stress testing
under this section must
comprehensively address the activities,
exposures, and risks, including offbalance sheet exposures, of the
company’s combined U.S. operations.
(5) Tailoring. Stress testing under this
section must be tailored to, and provide
sufficient detail to reflect, the capital
structure, risk profile, complexity,
activities, size, and other relevant
characteristics of the combined U.S.
operations of the foreign banking
organization and, as appropriate, the
foreign banking organization as a whole.
This may require analyses by business
line or legal entity, and stress scenarios
that use more time horizons than the
minimum required under paragraph
(a)(3)(v) of this section.
(6) Assumptions. A foreign banking
organization subject to this section must
incorporate the following assumptions
in the stress testing required under this
section:
(i) For the first 30 days of a liquidity
stress scenario, only highly liquid assets
that are unencumbered may be used as
cash flow sources to offset projected
cash flow needs as calculated pursuant
to § 252.227 of this subpart;
(ii) For time periods beyond the first
30 days of a liquidity stress scenario,
highly liquid assets that are
unencumbered and other appropriate
funding sources may be used as cash
flow sources to offset projected cash
flow needs as calculated pursuant to
§ 252.227 of this subpart;
(iii) If an asset is used as a cash flow
source to offset projected cash flow
needs as calculated pursuant to
§ 252.227 of this subpart, the fair market
value of the asset must be discounted to
reflect any credit risk and market price
volatility of the asset; and

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(iv) Throughout each stress test time
horizon, assets used as sources of
funding must be diversified by
collateral, counterparty, or borrowing
capacity, or other factors associated
with the liquidity risk of the assets.
(b) Process and systems requirements.
(1) Stress test function. A foreign
banking organization with combined
U.S. assets of $50 billion or more,
within its combined U.S. operations and
its enterprise-wide risk management,
must establish and maintain policies
and procedures that outline its liquidity
stress testing practices, methodologies,
and assumptions; incorporate the results
of liquidity stress tests; and provide for
the enhancement of stress testing
practices as risks change and as
techniques evolve.
(2) Controls and oversight. A foreign
banking organization must have an
effective system of controls and
oversight over the stress test function
described above to ensure that:
(i) Each stress test is designed in
accordance with the requirements of
this section; and
(ii) Each stress test appropriately
incorporates conservative assumptions
with respect to the stress scenario in
paragraph (a)(3) of this section and other
elements of the stress test process,
taking into consideration the capital
structure, risk profile, complexity,
activities, size, and other relevant
factors of the U.S. operations. These
assumptions must be approved by the
U.S. chief risk officer and be subject to
the independent review under § 252.224
of this subpart.
(3) Systems and processes. A foreign
banking organization must maintain
management information systems and
data processes sufficient to enable it to
effectively and reliably collect, sort, and
aggregate data and other information
related to the liquidity stress testing of
its combined U.S. operations.
(c) Reporting Requirements. (1)
Liquidity stress tests required by this
subpart. A foreign banking organization
with combined U.S. assets of $50 billion
or more must report the results of the
stress tests for its combined U.S.
operations conducted under this section
to the Board within 14 days of
completing the stress test. The report
must include the amount of liquidity
buffer established by the foreign
banking organization for its combined
U.S. operations under § 252.227 of this
subpart.
(2) Liquidity stress tests required by
home country regulators. A foreign
banking organization with combined
U.S. assets of $50 billion or more must
report the results of any liquidity
internal stress tests and establishment of

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

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§ 252.227

Liquidity buffer.

(a) General requirement. A foreign
banking organization with combined
U.S. assets of $50 billion or more must
maintain a liquidity buffer for its U.S.
branch and agency network and a
separate buffer for its U.S. intermediate
holding company. Each liquidity buffer
must consist of highly liquid assets that
are unencumbered and that are
sufficient to meet the net stressed cash
flow need over the first 30 days of its
stress test horizon, calculated in
accordance with this section.
(b) Net stressed cash flow need. (1)
U.S. intermediate holding company.
The net stressed cash flow need for a
U.S. intermediate holding company is
equal to the sum of its net external
stressed cash flow need and net internal
stressed cash flow need for the first 30
days of its stress test horizon, each as
calculated under paragraph (c)(1) and
(d)(1) of this section.
(2) U.S. branch and agency network.
(i) For the first 14 days of its stress test
horizon, the net stressed cash flow need
for a U.S. branch and agency network is
equal to the sum of its net external
stressed cash flow need and net internal
stressed cash flow need, each as
calculated in paragraph (c)(2) and (d)(2)
of this section.
(ii) For day 15 through day 30 of its
stress test horizon, the net stressed cash
flow need for a U.S. branch and agency
network is equal to its net external
stressed cash flow need, as calculated
under this paragraph (c)(2).
(c) Net external stressed cash flow
need calculation. (1) U.S. intermediate
holding company. (i) The net external
stressed cash flow need for a U.S.
intermediate holding company equals
the difference between:
(A) The projected amount of cash flow
needs that results from transactions
between the U.S. intermediate holding
company and entities that are not its
affiliates; and
(B) The projected amount of cash flow
sources that results from transactions
between the U.S. intermediate holding
company and entities that are not its
affiliates.
(ii) Each of the projected amounts of
cash flow needs and cash flow sources
must be calculated for the first 30 days

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of its stress test horizon in accordance
with the stress test requirements and
incorporating the stress scenario
required by § 252.226 of this subpart.
(2) U.S. branch and agency network.
(i) The net external stressed cash flow
need for a U.S. branch and agency
network equals the difference between:
(A) The projected amount of cash flow
needs that results from transactions
between the U.S. branch and agency
network and entities other than foreign
banking organization’s head office and
affiliates thereof; and
(B) The projected amount of cash flow
sources that results from transactions
between the U.S. branch and agency
network and entities other than foreign
banking organization’s head office and
affiliates thereof.
(ii) Each of the projected amounts of
cash flow needs and cash flow sources
must be calculated for the first 30 days
of its stress test horizon in accordance
with the stress test requirements and
incorporating the stress scenario
required by § 252.226 of this subpart.
(d) Net internal stressed cash flow
need calculation. (1) U.S. intermediate
holding company. The net internal
stressed cash flow need for a U.S.
intermediate holding company equals
the greater of:
(i) The greatest daily cumulative net
intracompany cash flow need for the
first 30 days of its stress test horizon as
calculated under paragraph (e)(1) of this
section; and
(ii) Zero.
(2) U.S. branch and agency network.
The net internal stressed cash flow need
for a U.S. branch and agency network
equals the greater of:
(i) The greatest daily cumulative net
intracompany cash flow need for the
first 14 days of its stress test horizon, as
calculated under paragraph (b)(5) of this
section; and
(ii) Zero.
(e) Daily cumulative net
intracompany cash flow need
calculation. The daily cumulative net
intracompany cash flow need for the
U.S. intermediate holding company and
the U.S. branch and agency network for
purposes of paragraph (b)(4) of this
section is calculated as follows:
(1) U.S. intermediate holding
company. (i) Daily cumulative net
intracompany cash flow. A U.S.
intermediate holding company’s daily
cumulative net intracompany cash flow
on any given day in the first 30 days of
its stress test horizon equals the sum of
the net intracompany cash flow
calculated for that day and the net
intracompany cash flow calculated for
each previous day of the stress test
horizon, each as calculated in

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accordance with paragraph (e)(1)(ii) of
this section.
(ii) Net intracompany cash flow. For
any day of its stress test horizon, the net
intracompany cash flow equals the
difference between:
(A) The amount of cash flow needs
under the stress scenario required by
§ 252.226 of this subpart resulting from
transactions between the U.S.
intermediate holding company and its
affiliates (including any U.S. branch or
U.S. agency); and
(B) The amount of cash flow sources
under the stress scenario required by
§ 252.226 of this subpart resulting from
transactions between the U.S.
intermediate holding company and its
affiliates (including any U.S. branch or
U.S. agency).
(iii) Daily cumulative net
intracompany cash flow need. Daily
cumulative net intracompany cash flow
need means, for any given day in the
stress test horizon, a daily cumulative
net intracompany cash flow that is
greater than zero.
(2) U.S. branch and agency network.
(i) Daily cumulative net intracompany
cash flows. For the first 14 days of the
stress test horizon, a U.S. branch and
agency network’s daily cumulative net
intracompany cash flow equals the sum
of the net intracompany cash flow
calculated for that day and the net
intracompany cash flow calculated for
each previous day of its stress test
horizon, each as calculated in
accordance with paragraph (e)(2)(ii) of
this section.
(ii) Net intracompany cash flow. For
any day of the stress test horizon, the
net intracompany cash flow must equal
the difference between:
(A) The amount of cash flow needs
under the stress scenario required by
§ 252.226 of this subpart resulting from
transactions between a U.S. branch or
U.S. agency within the U.S. branch and
agency network and the foreign bank’s
non-U.S. offices and its affiliates; and
(B) The amount of cash flow sources
under the stress scenario required by
§ 252.226 of this subpart resulting from
transactions between a U.S. branch or
U.S. agency within the U.S. branch and
agency network and the foreign bank’s
non-U.S. offices and its affiliates.
(iii) Daily cumulative net
intracompany cash flow need. Daily
cumulative net intracompany cash flow
need means, for any given day in the
stress test horizon, a daily cumulative
net intracompany cash flow that is
greater than zero.
(3) Amounts secured by highly liquid
assets. For the purposes of calculating
net intracompany cash flow under this
paragraph, the amounts of intracompany

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

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accordance with paragraph (b) of this
section.
§ 252.228

Contingency funding plan.

(a) Contingency funding plan. A
foreign banking organization must
establish and maintain a contingency
funding plan for its combined U.S.
operations that sets out the company’s
strategies for addressing liquidity needs
during liquidity stress events. The
contingency funding plan must be
commensurate with the capital
structure, risk profile, complexity,
activities, size, and other relevant
characteristics of the company and of its
combined U.S. operations. It must also
be commensurate with the established
liquidity risk tolerance for the combined
U.S. operations. The company must
update the contingency funding plan for
its combined U.S. operations at least
annually, and must update the plan
when changes to market and
idiosyncratic conditions would have a
material impact on the plan.
(b) Components of the contingency
funding plan. (1) Quantitative
Assessment. The contingency funding
plan must:
(i) Identify liquidity stress events that
could have a significant impact on the
liquidity of the foreign banking
organization and its combined U.S.
operations;
(ii) Assess the level and nature of the
impact on the liquidity of the foreign
banking organization and its combined
U.S. operations that may occur during
identified liquidity stress events;
(iii) Assess available funding sources
and needs during the identified
liquidity stress events;
(iv) Identify alternative funding
sources that may be used during the
liquidity stress events; and
(v) In implementing paragraphs
(b)(1)(i) through (iv) of this section,
incorporate information generated by
the liquidity stress testing required
under § 252.226 of this subpart.
(2) Event management process. The
contingency funding plan for a foreign
banking organization’s combined U.S.
operations must include an event
management process that sets out the
company’s procedures for managing
liquidity during identified liquidity
stress events for the combined U.S.
operations. This process must:
(i) Include an action plan that clearly
describes the strategies that the
company will use to respond to
liquidity shortfalls in its combined U.S.
operations for identified liquidity stress
events, including the methods that the
company or the combined U.S.
operations will use to access alternative
funding sources;

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(ii) Identify a liquidity stress event
management team that would execute
the action plan in paragraph (b)(2)(i) of
this section for the combined U.S.
operations;
(iii) Specify the process,
responsibilities, and triggers for
invoking the contingency funding plan,
escalating the responses described in
the action plan, decision-making during
the identified liquidity stress events,
and executing contingency measures
identified in the action plan; and
(iv) Provide a mechanism that ensures
effective reporting and communication
within the combined U.S. operations of
the foreign banking organization and
with outside parties, including the
Board and other relevant supervisors,
counterparties, and other stakeholders.
(3) Monitoring. The contingency
funding plan must include procedures
for monitoring emerging liquidity stress
events. The procedures must identify
early warning indicators that are
tailored to the capital structure, risk
profile, complexity, activities, size, and
other relevant characteristics of the
foreign banking organization and its
combined U.S. operations.
(4) Testing. A foreign banking
organization must periodically test the
components of the contingency funding
plan for its combined U.S. operations to
assess the plan’s reliability during
liquidity stress events.
(i) The company must periodically
test the operational elements of the
contingency funding plan for its
combined U.S. operations to ensure that
the plan functions as intended. These
tests must include operational
simulations to test communications,
coordination, and decision-making
involving relevant managers, including
managers at relevant legal entities
within the corporate structure.
(ii) The company must periodically
test the methods it will use to access
alternative funding sources for its
combined U.S. operations to determine
whether these funding sources will be
readily available when needed.
§ 252.229

Specific limits.

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

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

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§ 252.230

Monitoring.

(a) Collateral monitoring
requirements. A foreign banking
organization with combined U.S. assets
of $50 billion or more must establish
and maintain procedures for monitoring
the assets that it has pledged as
collateral in connection with
transactions to which entities in its U.S.
operations are counterparties and the
assets that are available to be pledged
for its combined U.S. operations.
(1) These procedures must provide
that the foreign banking organization:
(i) Calculates all of the collateral
positions for its combined U.S.
operations on a weekly basis (or more
frequently, as directed by the Board due
to financial stability risks or the
financial condition of the U.S.
operations) including:
(A) The value of assets pledged
relative to the amount of security
required under the contract governing
the obligation for which the collateral
was pledged; and
(B) Unencumbered assets available to
be pledged;
(ii) Monitors the levels of available
collateral by legal entity, jurisdiction,
and currency exposure;
(iii) Monitors shifts between intraday,
overnight, and term pledging of
collateral; and
(iv) Tracks operational and timing
requirements associated with accessing
collateral at its physical location (for
example, the custodian or securities
settlement system that holds the
collateral).
(2) [Reserved]
(b) Legal entities, currencies and
business lines. A foreign banking
organization must establish and
maintain procedures for monitoring and
controlling liquidity risk exposures and
funding needs that are not covered by
§ 252.229 of this subpart or paragraph
(a) of this section, within and across
significant legal entities, currencies, and
business lines for its combined U.S.
operations, and taking into account legal
and regulatory restrictions on the

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transfer of liquidity between legal
entities.
(c) Intraday liquidity positions. A
foreign banking organization must
establish and maintain procedures for
monitoring intraday liquidity risk
exposure for its combined U.S.
operations. These procedures must
address how the management of the
combined U.S. operations will:
(1) Monitor and measure expected
daily inflows and outflows;
(2) Manage and transfer collateral
when necessary to obtain intraday
credit;
(3) Identify and prioritize timespecific obligations so that the foreign
banking organizations can meet these
obligations as expected;
(4) Settle less critical obligations as
soon as possible;
(5) Control the issuance of credit to
customers where necessary; and
(6) Consider the amounts of collateral
and liquidity needed to meet payment
systems obligations when assessing the
overall liquidity needs of the combined
U.S. operations.
§ 252.231 Requirements for foreign
banking organizations with combined U.S.
assets of less than $50 billion

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

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Subpart N—Single-Counterparty Credit
Limits for Covered Foreign Banking
Organizations
§ 252.240

Definitions.

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

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(4) Any guarantee, acceptance, or
letter of credit (including any confirmed
letter of credit or standby letter of
credit) issued on behalf of a
counterparty;
(5) Any purchase of, or investment in,
securities issued by a counterparty;
(6) In connection with a derivative
transaction:
(i) Any credit exposure to a
counterparty, and
(ii) Any credit exposure to the
reference entity (described as a
counterparty for purposes of this
subpart), where the reference asset is an
obligation or equity security of a
reference entity.
(7) Any transaction that is the
functional equivalent of the above, and
any similar transaction that the Board
determines to be a credit transaction for
purposes of this subpart.
Derivative transaction means any
transaction that is a contract, agreement,
swap, warrant, note, or option that is
based, in whole or in part, on the value
of, any interest in, or any quantitative
measure or the occurrence of any event
relating to, one or more commodities,
securities, currencies, interest or other
rates, indices, or other assets.
Eligible collateral means collateral in
which a U.S. intermediate holding
company or any part of the foreign
banking organization’s combined U.S.
operations has a perfected, first priority
security interest (with the exception of
cash on deposit and notwithstanding
the prior security interest of any
custodial agent) or, outside of the
United States, the legal equivalent
thereof and is in the form of:
(1) Cash on deposit with the U.S.
intermediate holding company or any
part of the U.S. operations, the U.S.
branch, or the U.S. agency (including
cash held for the foreign banking
organization or U.S. intermediate
holding company by a third-party
custodian or trustee);
(2) Debt securities (other than
mortgage- or asset-backed securities)
that are bank eligible investments;
(3) Equity securities that are publicly
traded (including convertible bonds);
and
(4) Does not include any debt or
equity securities (including convertible
bonds), issued by an affiliate of the U.S.
intermediate holding company or by
any part of the combined U.S.
operations.
Eligible credit derivative has the same
meaning as in subpart G of the Board’s
Regulation Y (12 CFR part 225,
appendix G).
Eligible equity derivative means an
equity-linked total return swap,
provided that:

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(1) The derivative contract has been
confirmed by the counterparties;
(2) Any assignment of the derivative
contract has been confirmed by all
relevant parties; and
(3) The terms and conditions dictating
the manner in which the derivative
contract is to be settled are incorporated
into the contract.
Eligible guarantee has the same
meaning as in subpart G of the Board’s
Regulation Y (12 CFR part 225,
appendix G).
Eligible protection provider means an
entity (other than the foreign banking
organization or an affiliate thereof) that
is:
(1) A sovereign entity;
(2) The Bank for International
Settlements, the International Monetary
Fund, the European Central Bank, the
European Commission, or a multilateral
development bank;
(3) A Federal Home Loan Bank;
(4) The Federal Agricultural Mortgage
Corporation;
(5) A depository institution;
(6) A bank holding company;
(7) A savings and loan holding
company (as defined in 12 U.S.C.
1467a);
(8) A securities broker or dealer
registered with the SEC under the
Securities Exchange Act of 1934 (15
U.S.C. 78o et seq.);
(9) An insurance company that is
subject to the supervision by a State
insurance regulator;
(10) A foreign banking organization;
(11) A non-U.S.-based securities firm
or a non-U.S.-based insurance company
that is subject to consolidated
supervision and regulation comparable
to that imposed on U.S. depository
institutions, securities broker-dealers, or
insurance companies; or
(12) A qualifying central counterparty.
Equity derivative includes an equitylinked swap, purchased equity-linked
option, forward equity-linked contract,
and any other instrument linked to
equities that gives rise to similar
counterparty credit risks.
Intraday credit exposure means credit
exposure of the U.S. intermediate
holding company or any part of the
combined U.S. operations to a
counterparty that the U.S. intermediate
holding company or any part of the
combined U.S. operations by its terms is
to be repaid, sold, or terminated by the
end of its business day in the United
States.
Immediate family means the spouse of
an individual, the individual’s minor
children, and any of the individual’s
children (including adults) residing in
the individual’s home.
Major counterparty means:

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76689

(1) A bank holding company that has
total consolidated assets of $500 billion
or more, and all of its subsidiaries,
collectively;
(2) A nonbank financial company
supervised by the Board, and all of its
subsidiaries, collectively; and
(3) A major foreign banking
organization, and all of its subsidiaries,
collectively.
Major foreign banking organization
means any foreign banking organization
that has total consolidated assets of
$500 billion or more, calculated
pursuant to § 252.241(a) of subpart.
Major U.S. intermediate holding
company means a U.S. intermediate
holding company that has total
consolidated assets of $500 billion or
more, pursuant to § 252.241(b) of this
subpart.
Qualifying central counterparty has
the same meaning as in subpart G of the
Board’s Regulation Y (12 CFR part 225,
appendix G).
Qualifying master netting agreement
means a legally enforceable written
bilateral agreement that:
(1) Creates a single legal obligation for
all individual transactions covered by
the agreement upon an event of default,
including bankruptcy, insolvency, or
similar proceeding of the counterparty;
(2) Provides the right to accelerate,
terminate, and close-out on a net basis
all transactions under the agreement
and to liquidate or set off collateral
promptly upon an event of default,
including upon event of bankruptcy,
insolvency, or similar proceeding, of the
counterparty, provided that, in any such
case, any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdiction; and
(3) Does not contain a provision that
permits a non-defaulting counterparty to
make lower payments than it would
make otherwise under the agreement, or
no payment at all, to a defaulter or the
estate of a defaulter, even if the
defaulter is a net creditor under the
agreement.
Short sale means any sale of a security
which the seller does not own or any
sale which is consummated by the
delivery of a security borrowed by, or
for the account of, the seller.
Sovereign entity means a central
government (including the U.S.
government) or an agency, department,
ministry, or central bank.
Subsidiary of a specified company
means a company that is directly or
indirectly controlled by the specified
company.
§ 252.241

Applicability.

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

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billion or more. (1) In general. A foreign
banking organization with total
consolidated assets of $50 billion or
more is subject to the general credit
exposure limit set forth in § 252.242(a)
of this subpart.
(2) Major foreign banking
organizations. A foreign banking
organization with total consolidated
assets of $500 billion or more also is
subject to the more stringent credit
exposure limit set forth in § 252.242(b)
of this subpart.
(3) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign banking organization on its FR
Y–7Q; or
(ii) If the foreign banking organization
has not filed the FR Y–7Q for each of
the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–7Q; or
(iii) If the foreign banking
organization has not yet filed an FR Y–
7Q, as determined under applicable
accounting standards.
(4) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§ 252.242(a) and, as applicable,
§ 252.242(b) of this subpart unless and
until total assets as reported on its FR
Y–7Q are less than $50 billion or, as
applicable, $500 billion for each of the
four most recent consecutive calendar
quarters.
(5) Measurement date. For purposes
of this paragraph, total assets are
measured on the last day of the quarter
used in calculation of the average.
(b) U.S. intermediate holding
companies. (1) In general. A U.S.
intermediate holding company is
subject to the general credit exposure
limit set forth in § 252.242(a) of this
subpart.
(2) Major U.S. intermediate holding
companies. A U.S. intermediate holding
company that has total consolidated
assets of $500 billion or more also is
subject to the more stringent credit
exposure limit set forth in § 252.242(c)
of this subpart.
(3) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total
consolidated assets:
(i) For the four most recent
consecutive quarters as reported by the
U.S. intermediate holding company on
its FR Y–9C, or
(ii) If the U.S. intermediate holding
company has not filed the FR Y–9C for

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

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§ 252.242(c) of this subpart beginning 12
months after it becomes subject to those
requirements, unless that time is
accelerated or extended by the Board in
writing.
§ 252.242

Credit exposure limit.

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

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(4) A State and all of its agencies,
instrumentalities, and political
subdivisions (including any
municipalities) collectively; and
(5) A foreign sovereign entity and all
of its agencies, instrumentalities, and
political subdivisions, collectively.
§ 252.243

Gross credit exposure.

(a) Calculation of gross credit
exposure for U.S. intermediate holding
companies and foreign banking
organizations. The amount of gross
credit exposure of a U.S. intermediate
holding company or, with respect to any
part of its combined U.S. operations, a
foreign banking organization (each a
covered entity), to a counterparty is:
(1) In the case of a loan by a covered
entity to a counterparty or a lease in
which a covered entity is the lessor and
a counterparty is the lessee, an amount
equal to the amount owed by the
counterparty to the covered entity under
the transaction.
(2) In the case of a debt security held
by a covered entity that is issued by the
counterparty, an amount equal to:
(i) For trading and available for sale
securities, the greater of the amortized
purchase price or market value of the
security, and
(ii) For securities held to maturity, the
amortized purchase price.
(3) In the case of an equity security
held by a covered entity that is issued
by a counterparty, an amount equal to
the greater of the purchase price or
market value of the security.
(4) In the case of a repurchase
agreement, an amount equal to:
(i) The market value of securities
transferred by a covered entity to the
counterparty, plus
(ii) The amount in paragraph (a)(4)(i)
of this section multiplied by the
collateral haircut in Table 2 applicable

to the securities transferred by the
covered entity to the counterparty.
(5) In the case of a reverse repurchase
agreement, an amount equal to the
amount of cash transferred by the
covered entity to the counterparty.
(6) In the case of a securities
borrowing transaction, an amount equal
to the amount of cash collateral plus the
market value of securities collateral
transferred by the covered entity to the
counterparty.
(7) In the case of a securities lending
transaction, an amount equal to:
(i) The market value of securities lent
by the covered entity to the
counterparty, plus
(ii) The amount in paragraph (a)(7)(i)
of this section multiplied by the
collateral haircut in Table 2 applicable
to the securities lent by the covered
entity to the counterparty.
(8) In the case of a committed credit
line extended by a covered entity to a
counterparty, an amount equal to the
face amount of the credit line.
(9) In the case of a guarantee or letter
of credit issued by the covered entity on
behalf of a counterparty, an amount
equal to the lesser of the face amount or
the maximum potential loss to the
covered entity on the transaction.
(10) In the case of a derivative
transaction between a covered entity
and a counterparty that is not an eligible
credit or equity derivative purchased
from an eligible protection provider and
is not subject to a qualifying master
netting agreement, an amount equal to
the sum of:
(i) The current exposure of the
derivatives contract equal to the greater
of the mark-to-market value of the
derivative contract or zero and
(ii) The potential future exposure of
the derivatives contract, calculated by
multiplying the notional principal

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amount of the derivative contract by the
appropriate conversion factor in Table
1.
(11) In the case of a derivative
transaction:
(i) Between a U.S. intermediate
holding company and a counterparty
that is not an eligible credit or equity
derivative purchased from an eligible
protection provider and is subject to a
qualifying master netting agreement, an
amount equal to the exposure at default
amount calculated in accordance with
12 CFR part 225, appendix G, § 32(c)(6)
(provided that the rules governing the
recognition of collateral set forth in this
subpart shall apply); and
(ii) Between an entity within the
combined U.S. operations and a
counterparty that is not an eligible
credit or equity derivative purchased
from an eligible protection provider and
is subject to a qualifying master netting
agreement between the part of the
combined U.S. operations and the
counterparty, an amount equal to either
the exposure at default amount
calculated in accordance with 12 CFR
part 225, appendix G, § 32(c)(6)
(provided that the rules governing the
recognition of collateral set forth in this
subpart shall apply); or the gross credit
exposure amount calculated under
§ 252.243(a)(10) of this subpart.
(12) In the case of a credit or equity
derivative transaction between a
covered entity and a third party, where
the covered entity is the protection
provider and the reference asset is an
obligation or equity security of the
counterparty, an amount equal to the
lesser of the face amount of the
transaction or the maximum potential
loss to the covered entity on the
transaction.

TABLE 1—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 1

Remaining

maturity 2

Interest rate

Foreign exchange rate

Credit (bankeligible
investment
reference
obligor) 3

Credit (nonbank-eligible
reference
obligor)

0.00

0.01

0.05

0.10

0.06

0.07

0.10

0.005
0.015

0.05
0.075

0.05
0.05

0.10
0.10

0.08
0.10

0.07
0.08

0.12
0.15

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One year or less ....................
Greater than one year and
less than or equal to five
years ...................................
Greater than 5 years ..............

Equity

Precious
metals
(except gold)

Other

1 For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments
in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so
that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 A company must use the column labeled ‘‘Credit (bank-eligible investment reference obligor)’’ for a credit derivative whose reference obligor
has an outstanding unsecured debt security that is a bank eligible investment. A company must use the column labeled ‘‘Credit (non-bank-eligible investment reference obligor)’’ for all other credit derivatives.

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

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§ 252.244

Net credit exposure.

(a) In general. Net credit exposure is
determined by adjusting gross credit
exposure of a U.S. intermediate holding
company, or with respect to its
combined U.S. operations, a foreign
banking organization, in accordance
with the rules set forth in this section.
(b) Calculation of initial net credit
exposure for securities financing
transactions. (1) Repurchase and reverse
repurchase transactions. For repurchase
and reverse repurchase transactions
with a counterparty that are subject to
a bilateral netting agreement, a U.S.
intermediate holding company or, with
respect to its combined U.S. operations,
a foreign banking organization, may use
the net credit exposure associated with
the netting agreement.
(2) Securities lending and borrowing
transactions. For securities lending and
borrowing transactions with a
counterparty that are subject to a
bilateral netting agreement with that
counterparty, a U.S. intermediate
holding company or, with respect to its
combined U.S. operations, a foreign
banking organization, may use the net
credit exposure associated with the
netting agreement.
(c) Eligible collateral. In computing its
net credit exposure to a counterparty for
any credit transaction (including
transactions described in paragraph (b)
of this section), the U.S. intermediate
holding company or, with respect to its
combined U.S. operations, a foreign
banking organization, may reduce its
gross credit exposure (or as applicable,
net credit exposure for transactions
described in paragraph (a) of this
section) on the transaction by the
adjusted market value of any eligible
collateral, provided that:
(1) The U.S. intermediate holding
company or, with respect to its
combined U.S. operations, a foreign
banking organization, includes the
adjusted market value of the eligible
collateral when calculating its gross
credit exposure to the issuer of the
collateral;
(2) The collateral used to adjust the
gross credit exposure of the U.S.

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intermediate holding company or the
combined U.S. operations to a
counterparty is not used to adjust the
gross credit exposure of the U.S.
intermediate holding company or
combined U.S. operations to any other
counterparty; and
(3) In no event will the gross credit
exposure of the U.S. intermediate
holding company or the combined U.S.
operations to the issuer of collateral be
in excess of the gross credit exposure to
the counterparty on the credit
transaction.
(d) Unused portion of certain
extensions of credit. (1) In computing its
net credit exposure to a counterparty for
a credit line or revolving credit facility,
a U.S. intermediate holding company or,
with respect to its combined U.S.
operations, a foreign banking
organization, may reduce its gross credit
exposure by the amount of the unused
portion of the credit extension to the
extent that the U.S. intermediate
holding company or any part of the
combined U.S. operations does not have
any legal obligation to advance
additional funds under the extension of
credit, until the counterparty provides
collateral of the type described in
paragraph (d)(2) of this section in the
amount, based on adjusted market value
(calculated in accordance with
§ 252.240 of this subpart) that is
required with respect to that unused
portion of the extension of credit.
(2) To qualify for this reduction, the
credit contract must specify that any
used portion of the credit extension
must be fully secured by collateral that
is:
(i) Cash;
(ii) Obligations of the United States or
its agencies;
(iii) Obligations directly and fully
guaranteed as to principal and interest
by, the Federal National Mortgage
Association and the Federal Home Loan
Mortgage Corporation, while operating
under the conservatorship or
receivership of the Federal Housing
Finance Agency, and any additional
obligations issued by a U.S. government
sponsored entity as determined by the
Board; or
(iv) Obligations of the foreign banking
organization’s home country sovereign
entity.
(e) Eligible guarantees. (1) In
calculating net credit exposure to a
counterparty for a credit transaction, a
U.S. intermediate holding company or,
with respect to its combined U.S.
operations, a foreign banking

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organization must reduce the gross
credit exposure to the counterparty by
the amount of any eligible guarantees
from an eligible protection provider that
covers the transaction.
(2) The U.S. intermediate holding
company or, with respect to its
combined U.S. operations, the foreign
banking organization, must include the
amount of the eligible guarantees when
calculating its gross credit exposure to
the eligible protection provider.
(3) In no event will the gross credit
exposure of the U.S. intermediate
holding or the combined U.S. operations
to an eligible protection provider with
respect to an eligible guarantee be in
excess of its gross credit exposure to the
counterparty on the credit transaction
prior to recognition of the eligible
guarantee.
(f) Eligible credit and equity
derivatives. (1) In calculating net credit
exposure to a counterparty for a credit
transaction, a U.S. intermediate holding
company or, with respect to its
combined U.S. operations, a foreign
banking organization, must reduce its
gross credit exposure to the
counterparty by the notional amount of
any eligible credit or equity derivative
from an eligible protection provider that
references the counterparty, as
applicable.
(2) The U.S. intermediate holding
company or with respect to its
combined U.S. operations, the foreign
banking organization, includes the face
amount of the eligible credit or equity
derivative when calculating its gross
credit exposure to the eligible protection
provider.
(3) In no event will the gross credit
exposure of the U.S. intermediate
holding company or, with respect to its
combined U.S. operations, the foreign
banking organization, to an eligible
protection provider with respect to an
eligible credit or equity derivative be in
excess of its gross credit exposure to the
counterparty on the credit transaction
prior to recognition of the eligible credit
or equity derivative.
(g) Other eligible hedges. In
calculating net credit exposure to a
counterparty for a credit transaction, a
U.S. intermediate holding company or
with respect to its combined U.S.
operations, a foreign banking
organization, may reduce its gross credit
exposure to the counterparty by the face
amount of a short sale of the
counterparty’s debt or equity security.

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76693

TABLE 2: COLLATERAL HAIRCUTS—
Haircut without currency
mismatch 1

Residual maturity
Sovereign Entities
OECD Country Risk

Classification 2

0–1 ............................

OECD Country Risk Classification 2–3 ..............................

≤1 year ...............................................................................
>1 year, ≤5 years ...............................................................
>5 years .............................................................................
≤1 year ...............................................................................
>1 year, ≤5 years ...............................................................
>5 years .............................................................................

0.005
0.02
0.04
0.01
0.03
0.06

Corporate and Municipal Bonds That Are Bank Eligible Investments
Residual maturity for debt securities
All ........................................................................................
All ........................................................................................
All ........................................................................................

Haircut without currency
mismatch

≤1 year ...............................................................................
>1 year, ≤5 years ...............................................................
>5 years .............................................................................

0.02
0.06
0.12

Other Eligible Collateral
Main index 3 equities (including convertible bonds) ............................................................................................................
Other publicly traded equities (including convertible bonds) ..............................................................................................
Mutual funds ........................................................................................................................................................................

Cash collateral held .............................................................................................................................................................

0.15
0.25
Highest haircut
applicable to any
security in which the
fund can invest.
0

1 In cases where the currency denomination of the collateral differs from the currency denomination of the credit transaction, an additional 8
percent haircut will apply.
2 OECD Country Risk Classification means the country risk classification as defined in Article 25 of the OECD’s February 2011 Arrangement
on Officially Supported Export Credits.
3 Main index means the Standard & Poor’s 500 Index, the FTSE All-World Index, and any other index for which the U.S. intermediate holding
company, or with respect to the combined U.S. operations, the foreign banking organization can demonstrate to the satisfaction of the Federal
Reserve that the equities represented in the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the
Standard & Poor’s 500 Index and FTSE All-World Index.

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§ 252.245

Compliance.

(a) Scope of compliance. A foreign
banking organization must ensure the
compliance of its U.S. intermediate
holding company and combined U.S.
operations with the requirements of this
section on a daily basis at the end of
each business day and submit to the
Board on a monthly basis a report
demonstrating its daily compliance.
(b) Systems. A foreign banking
organization and its U.S. intermediate
holding company must establish and
maintain procedures to monitor
potential changes in relevant law and
monitor the terms of its qualifying
master netting agreements to support a
well-founded position that the
agreements appear to be legal, valid,
binding, and enforceable under the laws
of the relevant jurisdiction.
(c) Noncompliance. If either the U.S.
intermediate holding company or the
foreign banking organization is not in
compliance with this subpart, neither
the U.S. intermediate holding company
nor the combined U.S. operations may
engage in any additional credit
transactions with such a counterparty in
contravention of this subpart, unless the
Board determines that such credit

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transactions are necessary or
appropriate to preserve the safety and
soundness of the foreign banking
organization or U.S. financial stability.
In considering this determination, the
Board will consider whether any of the
following circumstances exist:
(1) A decrease in the U.S.
intermediate holding company’s or
foreign banking organization’s capital
stock and surplus;
(2) The merger of the U.S.
intermediate holding company or
foreign banking organization with a
bank holding company with total
consolidated assets of $50 billion or
more, a nonbank financial company
supervised by the Board, a foreign
banking organization, or U.S.
intermediate holding company; or
(3) A merger of two unaffiliated
counterparties.
(d) Other measures. The Board may
impose supervisory oversight and
reporting measures that it determines
are appropriate to monitor compliance
with this subpart.

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§ 252.246

Exemptions.

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

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

Subpart O—Risk Management for
Covered Foreign Banking
Organizations

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§ 252.250

Applicability.

(a) Foreign banking organizations
with total consolidated assets of $10
billion or more. (1) Publicly traded
foreign banking organizations with total
consolidated assets of $10 billion or
more. A foreign banking organization
with publicly traded stock and total
consolidated assets of $10 billion or
more is subject to the requirements of
§ 252.251 of this subpart.
(2) Foreign banking organizations
with total consolidated assets of $50
billion or more. A foreign banking
organization, regardless of whether its
stock is publicly traded, with total
consolidated assets of $50 billion or
more is subject to the requirements of
§ 252.251 of this subpart and, if
applicable, § 252.254 of this subpart.
(3) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign banking organization on its FR
Y–7Q; or
(ii) If the foreign banking organization
has not filed the FR Y–7Q for each of
the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–7Q; or
(iii) If the foreign banking
organization has not yet filed an FR Y–
7Q, as determined under applicable
accounting standards.
(4) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§ 252.251 of this subpart unless and
until total assets as reported on its FR
Y–7Q are less than $10 billion or $50
billion, as applicable, for each of the
four most recent consecutive calendar
quarters.
(5) Measurement date. For purposes
of this paragraph, total assets are
measured on the last day of the quarter
used in calculation of the average.
(b) Foreign banking organizations
with combined U.S. assets of $50 billion

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or more. A foreign banking organization
with combined U.S. assets of $50 billion
or more is subject to the requirements of
§§ 252.251 through 252.254 of this
subpart.
(1) For purposes of this paragraph,
combined U.S. assets is equal to the sum
of:
(i) The average of the total assets of
each U.S. branch and U.S. agency of the
foreign banking organization:
(A) For the four most recent
consecutive quarters as reported to the
Board on the FFIEC 002, or
(B) If the foreign banking organization
has not filed the FFIEC 002 for a U.S.
branch or U.S. agency for each of the
four most recent consecutive quarters,
for the most recent quarter or
consecutive quarters as reported on the
FFIEC 002, or
(C) If the foreign banking organization
has not yet filed a FFIEC 002 for a U.S.
branch or U.S. agency, as determined
under applicable accounting standards.
(ii) If a U.S. intermediate holding
company has been established, the
average of the total consolidated assets
of the U.S. intermediate holding
company:
(A) For the four most recent
consecutive quarters, as reported to the
Board on the U.S. intermediate holding
company’s FR Y–9C, or
(B) If the U.S. intermediate holding
company has not filed the FR Y–9C for
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–9C, or
(C) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards; and
(iii) If a U.S. intermediate holding
company has not been established, the
average of the total consolidated assets
of each top-tier U.S. subsidiary of the
foreign banking organization (excluding
any section 2(h)(2) company):
(A) For the four most recent
consecutive quarters, as reported to the
Board on the FR Y–7Q; or
(B) If the foreign banking organization
has not yet filed the FR Y–7Q for each
of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–7Q; or
(C) If the foreign banking organization
has not yet filed an FR Y–7Q, as
determined under applicable accounting
standards.
(2) The company may reduce its
combined U.S. assets calculated under
this paragraph by the amount
corresponding to balances and
transactions between the U.S. subsidiary
or U.S. branch or U.S. agency and any

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other top-tier U.S. subsidiary or U.S.
branch to the extent such items are not
already eliminated in consolidation.
(3) A foreign banking organization
will remain subject to the requirements
of §§ 252.251 through 252.254 of this
subpart unless and until the sum of the
total assets of each U.S. branch and U.S.
agency as reported on the FFIEC 002
and the total consolidated assets of each
U.S. subsidiary as reported on the FR Y–
9C or FR Y–7Q are less than $50 billion
for each of the four most recent
consecutive calendar quarters.
(4) For purposes of paragraphs (b)(1)
and (3) of this section, total assets and
total consolidated assets are measured
on the last day of the quarter used in
calculation of the average.
(c) Initial applicability. A foreign
banking organization that is subject to
this subpart as of July 1, 2014, under
paragraphs (a) or (b) of this section,
must comply with the requirements of
this subpart beginning on July 1, 2015,
unless that time is extended by the
Board in writing.
(d) Ongoing applicability. A foreign
banking organization that becomes
subject to this subpart after July 1, 2014,
under paragraphs (a) or (b) of this
section, must comply with the
requirements of this subpart beginning
12 months after it becomes subject to
this subpart, unless that time is
accelerated or extended by the Board in
writing.
§ 252.251

U.S. risk committee certification.

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

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
(ii) As a committee of the board of
directors of its U.S. intermediate
holding company.
(2) If a foreign banking organization
with combined U.S. assets of $50 billion
or more conducts its operations in the
United States solely through a U.S.
intermediate holding company, the
foreign banking organization must
maintain its U.S. risk committee at its
U.S. intermediate holding company.
(c) Timing of certification. The
certification required under paragraph
(a) of this section must be filed on an
annual basis with the Board
concurrently with the Annual Report of
Foreign Banking Organizations (FR Y–
7).
(d) Responsibilities of the foreign
banking organization. The foreign
banking organization must take
appropriate measures to ensure that its
combined U.S. operations implement
the risk management framework
overseen by the U.S. risk committee,
and its combined U.S. operations
provide sufficient information to the
U.S. risk committee to enable the U.S.
risk committee to carry out the
responsibilities of this subpart.
(e) Noncompliance with this section.
If a foreign banking organization is
unable to satisfy the requirements of
this section, the Board may impose
conditions or restrictions relating to the
activities or business operations of the
combined U.S. operations of the foreign
banking organization. The Board will
coordinate with any relevant U.S.
licensing authority in the
implementation of such conditions or
restrictions.

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

(a) Responsibilities of U.S. risk
committee. (1) The U.S. risk committee
of a foreign banking organization with
combined U.S. assets of $50 billion or
more must:
(i) Review and approve the risk
management practices of the combined
U.S. operations; and
(ii) Oversee the operation of an
appropriate risk management framework
for the combined U.S. operations that is
commensurate with the capital
structure, risk profile, complexity,
activities, and size of the company’s
combined U.S. operations and
consistent with the company’s
enterprise-wide risk management
policies. The framework must include:
(A) Policies and procedures relating to
risk management governance, risk
management practices, and risk control

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

(a) U.S. chief risk officer. A foreign
banking organization with combined
U.S. assets of $50 billion or more or its
U.S. intermediate holding company
must appoint a U.S. chief risk officer.
(b) General requirements for U.S.
chief risk officer. A U.S. chief risk
officer must:

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76695

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

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

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

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

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§ 252.260

Definitions.

For purposes of this subpart, the
following definitions apply:
Eligible assets means any asset of the
U.S. branch or U.S. agency (reduced by
the amount of any specifically allocated
reserves established on the books in
connection with such assets) held in the
United States and recorded on the
general ledger of a U.S. branch or U.S.
agency of the foreign bank, subject to
the following exclusions and rules of
valuation.

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(1) The following assets do not qualify
as eligible assets:
(i) Equity securities;
(ii) Any assets classified as loss, and
accrued income on assets classified loss,
doubtful, substandard or value
impaired, at the preceding examination
by a regulatory agency, outside
accountant, or the bank’s internal loan
review staff;
(iii) All amounts due from the home
office, other offices and affiliates,
including income accrued but
uncollected on such amounts, except
that the Board may determine to treat
amounts due from other offices or
affiliates located in the United States as
eligible assets;
(iv) The balance from time to time of
any other asset or asset category
disallowed at the preceding
examination or by direction of the Board
for any other reason until the
underlying reasons for the disallowance
have been removed;
(v) Prepaid expenses and unamortized
costs, furniture and fixtures and
leasehold improvements; and
(vi) Any other asset that the Board
determines should not qualify as an
eligible asset.
(2) The following rules of valuation
apply:
(i) A marketable debt security is
valued at its principal amount or market
value, whichever is lower;
(ii) A restructured foreign debt bond
backed by United States Treasury
obligations (commonly known as Brady
Bonds), whether carried on the books of
the U.S. branch or U.S. agency as a loan
or a security, is allowed at its book
value or market value, whichever is
lower;
(iii) An asset classified doubtful or
substandard at the preceding
examination by a regulatory agency,
outside accountant, or the bank’s
internal loan review staff, is valued at
50 percent and 20 percent, respectively.
(iv) With respect to an asset classified
value impaired, the amount
representing the allocated transfer risk
reserve which would be required for
such exposure at a domestically
chartered bank is valued at 0; and the
residual exposure is valued at 80
percent.
(v) Precious metals are valued at 75
percent of the market value.
(vi) Real estate located in the United
States and carried on the accounting
records as an asset are eligible at net
book value or appraised value,
whichever is less.
Foreign savings and loan holding
company means a savings and loan
holding company as defined in section
10 of the Home Owners’ Loan Act (12

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U.S.C. 1467a(a)) that is incorporated or
organized under the laws of a country
other than the United States.
Liabilities of a U.S. branch and
agency network shall include all
liabilities of the U.S. branch and agency
network, including acceptances and any
other liabilities (including contingent
liabilities), but excluding the following:
(1) Amounts due to and other
liabilities to other offices, agencies,
branches and affiliates of such foreign
banking organization, including its head
office, including unremitted profits; and
(2) Reserves for possible loan losses
and other contingencies.
Pre-provision net revenue means
revenue less expenses before adjusting
for total loan loss provisions.
Stress test cycle has the same meaning
as in subpart G of this part.
Total loan loss provisions means the
amount needed to make reserves
adequate to absorb estimated credit
losses, based upon management’s
evaluation of the loans and leases that
the company has the intent and ability
to hold for the foreseeable future or
until maturity or payoff, as determined
under applicable accounting standards.
§ 252.261

Applicability.

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

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Federal Register / Vol. 77, No. 249 / Friday, December 28, 2012 / Proposed Rules
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–9C, or
(C) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards; and
(iii) If a U.S. intermediate holding
company has not been established, the
average of the total consolidated assets
of each top-tier U.S. subsidiary of the
foreign banking organization (excluding
any section 2(h)(2) company):
(A) For the four most recent
consecutive quarters, as reported to the
Board on the Capital and Asset Report
for Foreign Banking Organizations (FR
Y–7Q); or
(B) If the foreign banking organization
has not yet filed the FR Y–7Q for each
of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–7Q; or
(C) If the foreign banking organization
has not yet filed an FR Y–7Q, as
determined under applicable accounting
standards.
(2) U.S. intercompany transactions.
The company may reduce its combined
U.S. assets calculated under this
paragraph by the amount corresponding
to balances and transactions between
the U.S. subsidiary or U.S. branch or
U.S. agency and any other top-tier U.S.
subsidiary or U.S. branch to the extent
such items are not already eliminated in
consolidation.
(3) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§ 252.263 of this subpart unless and
until the sum of the total assets of each
U.S. branch and U.S. agency as reported
on the FFIEC 002 and the total
consolidated assets of each U.S.
subsidiary as reported on the FR Y–9C
or FR Y–7Q are less than $50 billion for
each of the four most recent consecutive
calendar quarters.
(4) Measurement date. For purposes
of paragraphs (a)(1) and (a)(3) of this
section, total assets and total
consolidated assets are measured on the
last day of the quarter used in
calculation of the average.
(b) Foreign banking organizations
with total consolidated assets of more
than $10 billion but with combined U.S.
assets of less than $50 billion. A foreign
banking organization with total
consolidated assets of more than $10
billion and with combined U.S. assets of
less than $50 billion is subject to the
requirements of § 252.264 of this
subpart.
(1) Total consolidated assets. For
purposes of this paragraph, total

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consolidated assets are determined
based on the average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign banking organization on its
Capital and Asset Report for Foreign
Banking Organizations (FR Y–7Q); or
(ii) If the foreign banking organization
has not filed the FR Y–7Q for each of
the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–7Q; or
(iii) If the foreign banking
organization has not yet filed an FR Y–
7Q, as determined under applicable
accounting standards.
(2) Cessation of requirements. A
foreign banking organization will
remain subject to the requirements of
§ 252.264 of this subpart unless and
until total assets as reported on its FR
Y–7Q are less than $10 billion for each
of the four most recent consecutive
calendar quarters.
(3) Measurement date. For purposes
of this paragraph, total assets are
measured on the last day of the quarter
used in calculation of the average.
(4) Calculation of combined U.S.
assets. For purposes of this paragraph,
combined U.S. assets are determined in
accordance with paragraph (a)(1) of this
section.
(c) Foreign savings and loan holding
companies with total consolidated
assets of more than $10 billion. A
foreign savings and loan holding
company with total consolidated assets
of more than $10 billion is subject to the
requirements of § 252.264 of this
subpart.
(1) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total assets:
(i) For the four most recent
consecutive quarters as reported by the
foreign savings and loan holding
company on the applicable regulatory
report, or
(ii) If the foreign savings and loan
holding company has not filed an
applicable regulatory report for each of
the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
applicable regulatory report, or
(iii) If the foreign savings and loan
holding company has not yet filed a
regulatory report, as determined under
applicable accounting standards.
(2) Cessation of requirements. A
foreign savings and loan holding
company will remain subject to the
requirements § 252.264 of this subpart
unless and until total assets as reported
on its applicable regulatory report are
less than $10 billion for each of the four

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76697

most recent consecutive calendar
quarters.
(3) Measurement date. For purposes
of this paragraph, total assets are
measured on the last day of the quarter
used in calculation of the average.
(d) U.S. intermediate holding
companies. (1) U.S. intermediate
holding companies with total
consolidated assets of $50 billion or
more. A U.S. intermediate holding
company with total consolidated assets
of $50 billion or more is subject to the
requirements of § 252.262(a) of this
subpart.
(2) Other U.S. intermediate holding
companies. A U.S. intermediate holding
company that has total consolidated
assets of more than $10 billion but less
than $50 billion, is subject to the
requirements of § 252.262(b) of this
subpart.
(3) Total consolidated assets. For
purposes of this paragraph, total
consolidated assets are determined
based on the average of the total
consolidated assets:
(i) For the four most recent
consecutive quarters as reported by the
U.S. intermediate holding company on
its FR Y–9C, or
(ii) If the U.S. intermediate holding
company has not filed the FR Y–9C for
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on FR
Y–9C, or
(iii) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards.
(4) Cessation of requirements. A U.S.
intermediate holding company will
remain subject to:
(i) The requirements of § 252.262(a) of
this subpart unless and until total
consolidated assets as reported on its FR
Y–9C are less than $50 billion for each
of the four most recent consecutive
calendar quarters; and
(ii) The requirements of § 252.262(b)
of this subpart unless and until total
consolidated assets as reported on its FR
Y–9C are less than $10 billion for each
of the four most recent consecutive
calendar quarters or the company
becomes subject to § 252.262(a) of this
subpart.
(5) Measurement date. For purposes
of this paragraph, total consolidated
assets are measured on the last day of
the quarter used in calculation of the
average.
(e) Initial applicability. (1) Foreign
banking organizations. A foreign
banking organization or foreign savings
and loan holding company that is
subject to this subpart as of July 1, 2014,
under paragraph (a), (b), or (c) of this

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

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

(a) In general. Unless otherwise
determined in writing by the Board, a
foreign banking organization with
combined U.S. assets of $50 billion or

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more that has a U.S. branch and U.S.
agency network is subject to the
requirements of paragraph (c) of this
section, unless:
(1) The foreign banking organization
is subject to a consolidated capital stress
testing regime by its home country
supervisor that includes:
(i) An annual supervisory capital
stress test conducted by the foreign
banking organization’s home country
supervisor or an annual evaluation and
review by the foreign banking
organization’s home country supervisor
of an internal capital adequacy stress
test conducted by the foreign banking
organization; and
(ii) Requirements for governance and
controls of the stress testing practices by
relevant management and the board of
directors (or equivalent thereof) of the
foreign banking organization.
(2) The foreign banking organization
conducts such stress tests and meets the
minimum standards set by its home
country supervisor with respect to the
stress tests;
(3) The foreign banking organization
provides information required under
paragraph (b) of this section, as
applicable; and
(4) The foreign banking organization
demonstrates to the Board that it has
adequate capital to withstand stressed
conditions if, on a net basis, its U.S.
branch and agency network provides
funding to its foreign banking
organization’s non-U.S. offices and its
non-U.S. affiliates, calculated as the
average daily position over a stress test
cycle for a given year.
(b) Information requirements. (1) In
general. A foreign banking organization
with total consolidated assets of $50
billion or more must report summary
information to the Board by January 5 of
each calendar year, unless extended by
the Board, about its stress testing
activities and results, including the
following quantitative and qualitative
information:
(i) A description of the types of risks
included in the stress test;
(ii) A description of the conditions or
scenarios used in the stress test;
(iii) A summary description of the
methodologies used in the stress test;
(iv) Estimates of:
(A) Aggregate losses;
(B) Pre-provision net revenue;
(C) Total loan loss provisions;
(D) Net income before taxes; and
(E) Pro forma regulatory capital ratios
required to be computed by the home
country supervisor of the foreign
banking organization and any other
relevant capital ratios; and
(v) An explanation of the most
significant causes for the changes in
regulatory capital ratios.

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(2) Additional information required
for foreign banking organizations in a
net due from position. If, on a net basis,
its U.S. branch and agency network
provides funding to its foreign banking
organization’s non-U.S. offices and its
non-U.S. affiliates, calculated as the
average daily position over a stress test
cycle for a given year, the foreign
banking must report the following
information to the Board by the
following January 5 of each calendar
year, unless extended by the Board:
(i) A detailed description of the
methodologies used in the stress test,
including those employed to estimate
losses, revenues, total loan loss
provisions, and changes in capital
positions over the planning horizon;
(ii) Estimates of realized losses or
gains on available-for-sale and held-tomaturity securities, trading and
counterparty losses, if applicable; loan
losses (dollar amount and as a
percentage of average portfolio balance)
in the aggregate and by sub-portfolio;
and
(iii) Any additional information that
the Board requests in order to evaluate
the ability of the foreign banking
organization to absorb losses in stressed
conditions and thereby continue to
support its combined U.S. operations.
(c) Imposition of additional standards
for capital stress tests. A foreign banking
organization that does not meet each of
the requirements in paragraph (a)(1)
through (4) of this section is subject to
the following requirements:
(1) Asset maintenance requirement.
The U.S. branch and agency network
must maintain on a daily basis eligible
assets in an amount not less than 108
percent of the preceding quarter’s
average value of the liabilities of the
branch and agency network;
(2) Stress test requirement. The
foreign banking organization must
separately or as part of an enterprisewide stress test conduct an annual stress
test of its U.S. subsidiaries not
organized under a U.S. intermediate
holding company (other than a section
2(h)(2) company) to determine whether
those subsidiaries have the capital
necessary to absorb losses as a result of
adverse economic conditions. The
foreign banking organization must
report a summary of the results of the
stress test to the Board on an annual
basis that includes the information
required under paragraph (b)(1) of this
section or as otherwise specified by the
Board.
(3) Intragroup funding restrictions or
liquidity requirements for U.S.
operations. The U.S. branch and agency
network of the foreign banking
organization and any U.S. subsidiary of

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

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

(a) In general. Unless otherwise
determined in writing by the Board, a
foreign banking organization with total
consolidated assets of more than $10
billion that has combined U.S. assets of
less than $50 billion and a foreign
savings and loan holding company with
average total consolidated assets of more
than $10 billion will be subject to the
standards in paragraph (b) of this
section, as applicable, unless:
(1) The company is subject to a stress
testing regime by its home country
supervisor that includes:
(i) An annual supervisory capital
stress test conducted by the company’s
home country supervisor or an annual
evaluation and review by the home
country supervisor of an internal capital
adequacy stress test conducted by the
company; and
(ii) Requirements for governance and
controls of the stress testing practices by
relevant management and the board of
directors (or equivalent thereof) of the
foreign banking organization; and
(2) The company conducts such stress
tests and meets the minimum standards
set by its home country supervisor with
respect to the stress tests.
(b) Additional standards. A foreign
banking organization or a foreign
savings and loan holding company that
does not meet each of the requirements
in paragraph (a)(1) and (2) of this
section is subject to the following
requirements, as applicable:

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(1) Asset maintenance requirement. A
U.S. branch and agency network, if any,
of the foreign banking organization must
maintain on a daily basis eligible assets
in an amount not less than 105 percent
of the preceding quarter’s average value
of the branch and agency network’s
liabilities.
(2) Stress test requirement. A foreign
banking organization or a foreign
savings and loan holding company must
separately, or as part of an enterprisewide stress test, conduct an annual
stress test of its U.S. subsidiaries not
organized under a U.S. intermediate
holding company (other than a section
2(h)(2) company) to determine whether
those subsidiaries have the capital
necessary to absorb losses as a result of
adverse economic conditions. The
foreign banking organization or foreign
savings and loan holding company must
report a summary of the results of the
stress test to the Board on an annual
basis that includes the information
required under paragraph
§ 252.263(b)(1) of this subpart.
10. Add subpart Q to read as follows:
Subpart Q—Debt-to-Equity Limits for
Certain Covered Foreign Banking
Organizations
Sec.
252.270 Definitions.
252.271 Debt-to-equity ratio limitation.

Subpart Q—Debt-to-Equity Limits for
Certain Covered Foreign Banking
Organization
§ 252.270

Definitions.

Debt and equity have the same
meaning as ‘‘total liabilities’’ and ‘‘total
equity capital,’’ respectively, as reported
by a U.S. intermediate holding company
or U.S. subsidiary on the FR Y–9C, or
other reporting form prescribed by the
Board.
Debt to equity ratio means the ratio of
total liabilities to total equity capital
less goodwill.
Eligible assets and liabilities of a U.S.
branch and agency network have the
same meaning as in subpart P of this
part.
§ 252.271

Debt-to-equity ratio limitation.

(a) Notice and maximum debt-toequity 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 DoddFrank 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—

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

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Subpart R—Early Remediation
Framework for Covered Foreign
Banking Organizations

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§ 252.280

Definitions.

For purposes of this subpart, the
following definitions apply:
Capital distribution means a
redemption or repurchase of any debt or
equity capital instrument, a payment of
common or preferred stock dividends, a
payment that may be temporarily or
permanently suspended by the issuer on
any instrument that is eligible for
inclusion in the numerator of any
minimum regulatory capital ratio, and
any similar transaction that the Board
determines to be in substance a
distribution of capital.
Eligible assets has the same meaning
as in subpart P of this part.
Liabilities of U.S. branch and agency
network has the same meaning as in
subpart P of this part.
Net income means the net income as
reported on line 14 of schedule HI of the
U.S. intermediate holding company’s FR
Y–9C.
Planning horizon means the period of
at least nine quarters, beginning on the
first day of a stress test cycle under
subpart F of this part (on October 1 of
each calendar year) over which the
stress testing projections extend.
Risk-weighted assets means, for the
combined U.S. operations:
(1) Total risk-weighted assets of the
U.S. intermediate holding company, as
determined under the minimum riskbased capital requirements applicable to
the U.S. intermediate holding company
under subpart L of this part and as
reported on the FR Y–9C, or
(2) If the foreign banking organization
has not established a U.S. intermediate
holding company, total risk-weighted
assets of any U.S. subsidiary of the
foreign banking organization that is not
a section 2(h)(2) company, as
determined in accordance with the
minimum risk-based capital
requirements applicable to the foreign
banking organization under subpart L of
this part and as reported on the FR Y–
7 or as otherwise required by the Board;
and
(3) Total risk-weighted assets of a U.S.
branch or U.S. agency, as determined
under the minimum risk-based capital
requirements applicable to the foreign
banking organization under subpart L of
this part and as reported on the FR Y–
7 or as otherwise reported by the Board.
Severely adverse scenario has the
same meaning as in subpart G of this
part.
§ 252.281

Applicability.

(a) Foreign banking organizations
with combined U.S. assets of $50 billion

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or more. A foreign banking organization
with combined U.S. assets of $50 billion
or more is subject to the requirements of
§§ 252.282 through 252.284 of this
subpart.
(1) Combined U.S. assets. For
purposes of this subpart, combined U.S.
assets is equal to the sum of:
(i) The average of the total assets of
each U.S. branch and U.S. agency of the
foreign banking organization:
(A) For the four most recent
consecutive quarters as reported to the
Board on the FFIEC 002, or
(B) If the foreign banking organization
has not filed the FFIEC 002 for a U.S.
branch or U.S. agency for each of the
four most recent consecutive quarters,
for the most recent quarter or
consecutive quarters as reported on the
FFIEC 002, or
(C) If the foreign banking organization
has not yet filed a FFIEC 002 for a U.S.
branch or U.S. agency, as determined
under applicable accounting standards.
(ii) If a U.S. intermediate holding
company has been established, the
average of the total consolidated assets
of the U.S. intermediate holding
company:
(A) For the four most recent
consecutive quarters, as reported to the
Board on the U.S. intermediate holding
company’s FR Y–9C, or
(B) If the U.S. intermediate holding
company has not filed the FR Y–9C for
each of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–9C, or
(C) If the U.S. intermediate holding
company has not yet filed an FR Y–9C,
as determined under applicable
accounting standards; and
(iii) If a U.S. intermediate holding
company has not been established, the
average of the total consolidated assets
of each top-tier U.S. subsidiary of the
foreign banking organization (excluding
any section 2(h)(2) company):
(A) For the four most recent
consecutive quarters, as reported to the
Board on the Capital and Asset Report
for Foreign Banking Organizations (FR
Y–7Q); or
(B) If the foreign banking organization
has not yet filed the FR Y–7Q for each
of the four most recent consecutive
quarters, for the most recent quarter or
consecutive quarters as reported on the
FR Y–7Q; or
(C) If the foreign banking organization
has not yet filed an FR Y–7Q, as
determined under applicable accounting
standards.
(2) U.S. intercompany transactions.
The company may reduce its combined
U.S. assets calculated under this
paragraph by the amount corresponding

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

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

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

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76701

foreign banking organization under
subpart L of this part; or
(2) Any leverage ratio of the foreign
banking organization is below the
applicable minimum leverage
requirements for the foreign banking
organization under subpart L of this
part.
(ii) U.S. intermediate holding
companies. The combined U.S.
operations of a foreign banking
organization are subject to level 3
remediation (recovery) if:
(A) For two complete consecutive
quarters:
(1) Any risk-based capital ratio of the
U.S. intermediate holding company is
less than [200–250] basis points above
the applicable minimum risk-based
capital requirements for the U.S.
intermediate holding company under
subpart L of this part;
(2) Any leverage ratio of the U.S.
intermediate holding company is less
than [75–125] basis points above the
minimum applicable leverage
requirements for the U.S. intermediate
holding company under subpart L of
this part; or
(B)(1) Any risk-based capital ratio of
the U.S. intermediate holding company
is below the applicable minimum riskbased capital requirements for the U.S.
intermediate holding company under
subpart L of this part; or
(2) Any leverage ratio of the U.S.
intermediate holding company is below
the applicable minimum leverage
requirements for the U.S. intermediate
holding company under subpart L of
this part.
(4) Level 4 remediation triggering
events. (i) Foreign banking
organizations. The combined U.S.
operations of a foreign banking
organization are subject to level 4
remediation (resolution assessment) if:
(A) Any risk-based capital ratio of the
foreign banking organization is [100–
250] basis points or more below the
applicable minimum risk-based capital
requirements for the foreign banking
organization under subpart L of this
part; or
(B) Any leverage ratio of the foreign
banking organization is [50–150] basis
points or more below the applicable
minimum leverage requirements for the
foreign banking organization under
subpart L of this part.
(ii) U.S. intermediate holding
companies. The combined U.S.
operations of a foreign banking
organization are subject to level 4
remediation (resolution assessment) if:
(A) Any risk-based capital ratio of the
U.S. intermediate holding company is
[100–250] basis points or more below
the applicable minimum risk-based

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capital requirements for the U.S.
intermediate holding company under
subpart L of this part; or
(B) Any leverage ratio of the U.S.
intermediate holding company is [50–
150] basis points or more below the
applicable minimum leverage
requirements for the U.S. intermediate
holding company under subpart L of
this part.
(b) Stress Tests. (1) Level 1
remediation triggering events. The
combined U.S. operations of a foreign
banking organization are subject to level
1 remediation if the foreign banking
organization or its U.S. intermediate
holding company is not in compliance
with rules regarding stress tests
pursuant to subpart P of this part.
(2) Level 2 remediation triggering
events. The combined U.S. operations of
a foreign banking organization are
subject to level 2 remediation if the
results of a supervisory stress test of its
U.S. intermediate holding company
conducted under subpart P of this part
reflect a tier 1 common ratio of less than
5.0 percent under the severely adverse
scenario during any quarter of the
planning horizon.
(3) Level 3 remediation triggering
events. The combined U.S. operations of
a foreign banking organization are
subject to level 3 remediation if the
results of a supervisory stress test of its
U.S. intermediate holding company
conducted under subpart P of this part
reflect a tier 1 common ratio of less than
3.0 percent under the severely adverse
scenario during any quarter of the
planning horizon.
(c) Risk management. (1) Level 1
remediation triggering events. The
combined U.S. operations of a foreign
banking organization are subject to level
1 remediation if the Board determines
that any part of the combined U.S.
operations has manifested signs of
weakness in meeting the enhanced risk
management and risk committee
requirements under subpart O of this
part.
(2) Level 2 remediation triggering
events. The combined U.S. operations of
a foreign banking organization are
subject to level 2 remediation if the
Board determines that any part of the
combined U.S. operations has
demonstrated multiple deficiencies in
meeting the enhanced risk management
or risk committee requirements under
subpart O of this part.
(3) Level 3 remediation triggering
events. The combined U.S. operations of
a foreign banking organization are
subject to level 3 remediation if the
Board determines that any part of the
combined U.S. operations is in
substantial noncompliance with the

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enhanced risk management and risk
committee requirements under subpart
O of this part.
(d) Liquidity. (1) Level 1 remediation
triggering event. The combined U.S.
operations of a foreign banking
organization are subject to level 1
remediation if the Board determines that
any part of the combined U.S.
operations has manifested signs of
weakness in meeting the enhanced
liquidity risk management requirements
under subpart M of this part.
(2) Level 2 remediation triggering
event. The combined U.S. operations of
a foreign banking organization are
subject to level 2 remediation if the
Board determines that any part of the
combined U.S. operations has
demonstrated multiple deficiencies in
meeting the enhanced liquidity risk
management requirements under
subpart M of this part.
(3) Level 3 remediation triggering
events. The combined U.S. operations of
a foreign banking organization are
subject to level 3 remediation if the
Board determines that any part of the
combined U.S. operations is in
substantial noncompliance with the
enhanced liquidity risk management
requirements under subpart M of this
part.
(e) Market indicators. (1) Publication.
The Board will publish for comment
annually, or less frequently as
appropriate, a list of market indicators
based on publicly available market data,
market indicator thresholds, and breach
periods that will be used to indicate
when the market views a firm to be in
financial distress.
(2) Period of application. Those
market indicators will be referenced for
purposes of applying this subparagraph
during the twelve-month period
beginning at the end of the first full
calendar quarter after publication by the
Board of the final market indicators,
market indicator thresholds, and breach
periods.
(3) Level 1 remediation. The
combined U.S. operations of a foreign
banking organization will be subject to
level 1 remediation upon receipt of a
notice indicating that the Board has
found that, with respect to the foreign
banking organization or U.S.
intermediate holding company, any
market indicator has exceeded the
market indicator threshold for the
breach period.
(f) Measurement and timing of
remediation action events. (1) Capital.
For the purposes of this subpart, the
capital of a foreign banking organization
or U.S. intermediate holding company is
deemed to have been calculated as of
the most recent of the following:

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(i) The date on which the FR Y–9C for
the U.S. intermediate holding company
or the FR Y–7 for the foreign banking
organization is due;
(ii) The as-of date of any calculations
of capital by the foreign banking
organization or U.S. intermediate
holding company submitted to the
Board, pursuant to a Board request to
the foreign banking organization or U.S.
intermediate holding company to
calculate its ratios; or
(iii) A final inspection report is
delivered to the U.S. intermediate
holding company that includes capital
ratios calculated more recently than the
most recent FR Y–9C submitted by the
U.S. intermediate holding company to
the Board.
(2) Stress tests. For purposes of this
paragraph, the ratios calculated under
the supervisory stress test apply as of
the date the Board reports the
supervisory stress test results to the U.S.
intermediate holding company pursuant
to subpart P of this part.
§ 252.283

Notice and remedies.

(a) Notice to foreign banking
organization of remediation action
event. If the Board determines that a
remediation triggering event set forth in
§ 252.282 of this subpart has occurred
with respect to a foreign banking
organization, the Board will notify the
foreign banking organization of the
event and the remediation actions under
§ 252.284 or § 252.285 of this subpart
applicable to the foreign banking
organization as a result of the event. The
applicable remediation actions will
apply from the date such notice is
issued.
(b) Notification of change in status. A
foreign banking organization must
provide notice to the Board within 5
business days of the date it determines
that one or more triggering events set
forth in § 252.282 of this subpart has
occurred, identifying the nature of the
triggering event or change in
circumstances.
(c) Termination of remediation action.
A foreign banking organization subject
to one or more remediation actions
under this subpart will remain subject
to the remediation action until the
Board provides written notice to the
foreign banking organization that its
financial condition or risk management
no longer warrants application of the
requirement.
§ 252.284 Remediation actions for U.S.
operations of foreign banking organizations
with combined U.S. assets of $50 billion or
more.

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

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remediation, the Board will conduct a
targeted supervisory review of the
combined U.S. operations of a foreign
banking organization with combined
U.S. assets of $50 billion or more, to
evaluate whether the combined U.S.
operations are experiencing financial
distress or material risk management
weaknesses, including with respect to
exposures that the combined operations
have to the foreign banking
organization, such that further decline
of the combined U.S. operations is
probable.
(2) If, upon completion of the review,
the Board determines that the combined
U.S. operations of a foreign banking
organization are experiencing financial
distress or material risk management
weaknesses such that further decline of
the combined U.S. operations is
probable, the Board may determine to
subject the foreign banking organization
to initial remediation (level 2
remediation).
(b) Level 2 remediation (initial
remediation). (1) The U.S. intermediate
holding company of a foreign banking
organization with combined U.S. assets
of $50 billion or more that is subject to
level 2 remediation may not make
capital distributions during any
calendar quarter in an amount that
exceeds 50 percent of the average of the
U.S. intermediate holding company’s
net income in the preceding two
calendar quarters.
(2) The U.S. branch and agency
network of a foreign banking
organization subject to level 2
remediation:
(i) Must not provide funding on a net
basis to its foreign banking
organization’s non-U.S. offices and its
non-U.S. affiliates, calculated on a daily
basis; and
(ii) Must maintain in accounts in the
United States highly liquid assets in an
amount sufficient to cover the 30-day
net stressed cash flow need calculated
under § 252.227 of this part; provided
that this requirement would cease to
apply were the foreign banking
organization to become subject to level
3 remediation.
(3) The combined U.S. operations of
a foreign banking organization subject to
level 2 remediation may not:
(i) Permit its average daily combined
U.S. assets during any calendar quarter
to exceed its average daily combined
U.S. assets during the preceding
calendar quarter by more than 5 percent;
(ii) Permit its average daily combined
U.S. assets during any calendar year to
exceed its average daily combined U.S.
assets during the preceding calendar
year by more than 5 percent;

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(iii) Permit its average daily riskweighted assets during any calendar
quarter to exceed its average daily riskweighted assets during the preceding
calendar quarter by more than 5 percent;
or
(iv) Permit its average daily riskweighted assets during any calendar
year to exceed its average daily riskweighted assets during the preceding
calendar year by more than 5 percent.
(4) A foreign banking organization
subject to level 2 remediation:
(i) May not directly or indirectly
acquire any controlling interest in any
U.S. company (including an insured
depository institution), establish or
acquire any U.S. branch, U.S. agency, or
representative office in the United
States, or engage in any new line of
business in the United States, without
the prior approval of the Board; and
(ii) Must enter into a non-public
memorandum of understanding or other
enforcement action acceptable to the
Board to improve its financial and
managerial condition in the United
States.
(5) The Board may, in its discretion,
impose additional limitations or
conditions on the conduct or activities
of the combined U.S. operations of a
foreign banking organization subject to
level 2 remediation that the Board finds
to be appropriate and consistent with
the purposes of Title I of the DoddFrank Act.
(c) Level 3 remediation (recovery). (1)
A foreign banking organization with
combined U.S. assets of $50 billion or
more that is subject to level 3
remediation and its U.S. intermediate
holding company must enter into a
written agreement or other formal
enforcement action with the Board that
specifies that the U.S. intermediate
holding company must take appropriate
actions to restore its capital to or above
the applicable minimum risk-based and
leverage requirements under subpart L
of this part and take such other remedial
actions as prescribed by the Board. If the
company fails to satisfy the
requirements of such a written
agreement, the company may be
required to divest assets identified by
the Board as contributing to the
financial decline or posing substantial
risk of contributing to further financial
decline of the company.
(2) The U.S. intermediate holding
company and any other U.S. subsidiary
of the foreign banking organization may
not make capital distributions.
(3) The combined U.S. operations of
a foreign banking organization subject to
level 3 remediation may not:
(i) Permit its average daily combined
U.S. assets during any calendar quarter

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to exceed its average daily combined
U.S. assets during the preceding
calendar quarter;
(ii) Permit its average daily combined
U.S. assets during any calendar year to
exceed its average daily combined U.S.
assets during the preceding calendar
year;
(iii) Permit its average daily riskweighted assets during any calendar
quarter to exceed its average daily riskweighted assets during the preceding
calendar quarter; or
(iv) Permit its average daily riskweighted assets during any calendar
year to exceed its average daily riskweighted assets during the preceding
calendar year.
(4) A foreign banking organization
subject to level 3 remediation may not
directly or indirectly acquire any
controlling interest in any U.S. company
(including an insured depository
institution), establish or acquire any
U.S. branch, U.S. agency, office, or other
place of business in the United States,
or engage in any new line of business in
the United States, without the prior
approval of the Board.
(5) A foreign banking organization
subject to level 3 remediation and its
U.S. intermediate holding company may
not increase the compensation of, or pay
any bonus to, an executive officer whose
primary responsibility pertains to any
part of the combined U.S. operations, or
any member of the board of directors (or
its equivalent) of the U.S. intermediate
holding company.
(6) The U.S. intermediate holding
company of a foreign banking
organization subject to level 3
remediation may also be required by the
Board to:
(i) Replace the U.S. intermediate
holding company’s board of directors;
(ii) Dismiss from office any executive
officer whose primary responsibility
pertains to any part of the combined
U.S. operations or member of the U.S.
intermediate holding company’s board
of directors who held office for more
than 180 days immediately prior to
receipt of notice pursuant to § 252.283
of this subpart that the foreign banking
organization is subject to level 3
remediation; or
(iii) Add qualified U.S. senior
executive officers subject to approval by
the Board.
(7) The U.S. branch and agency
network of a foreign banking
organization subject to level 3
remediation must not provide funding
to the foreign banking organization’s
non-U.S. offices and its non-U.S.
affiliates, calculated on a daily basis,
and must maintain on a daily basis
eligible assets in an amount not less

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than 108 percent of the preceding
quarter’s average value of the U.S.
branch and agency network’s liabilities.
(8) The Board may, in its discretion,
impose additional limitations or
conditions on the conduct or activities
of the combined U.S. operations of a
foreign banking organization subject to
level 3 remediation that the Board finds
to be appropriate and consistent with
the purposes of Title I of the DoddFrank Act, including restrictions on
transactions with affiliates.
(d) Level 4 remediation (resolution
assessment). The Board will consider
whether the combined U.S. operations
of the foreign banking organization
warrant termination or resolution based
on the financial decline of the combined
U.S. operations, the factors contained in
section 203 of the Dodd-Frank Act as
applicable, or any other relevant factor.
If such a determination is made, the
Board will take actions that include
recommending to the appropriate
financial regulatory agencies that an
entity within the U.S. branch and
agency network be terminated or that a
U.S. subsidiary be resolved.
§ 252.285 Remediation actions for foreign
banking organizations with total
consolidated assets of $50 billion or more
and with combined U.S. assets of less than
$50 billion.

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supervisory review). (1) Under level 1

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remediation, the Board will determine
whether to conduct a targeted
supervisory review of the combined
U.S. operations of a foreign banking
organization with total consolidated
assets of $50 billion or more and with
combined U.S. assets of less than $50
billion that takes into account the
condition of the foreign banking
organization on a consolidated basis, as
appropriate, to evaluate whether the
combined U.S. operations are
experiencing financial distress or
material risk management weaknesses
such that further decline of the
combined U.S. operations is probable.
(2) If, upon completion of the review,
the Board determines that the combined
U.S. operations are experiencing
financial distress or material risk
management weaknesses such that
further decline of the combined U.S.
operations is probable, the Board may
subject the foreign banking organization
to initial remediation (level 2
remediation) or other remedial actions
as the Board determines appropriate.
(b) Level 2 remediation (initial
remediation). The Board will determine,
in its discretion, whether to impose any
of the standards set forth in
§ 252.284(b)(1) through (5) of this
subpart on any part of the combined
U.S. operations of a foreign banking
organization with total consolidated
assets of $50 billion or more and with
combined U.S. assets of less than $50

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billion that is subject to level 2
remediation.
(c) Level 3 remediation (recovery). The
Board will determine, in its discretion,
whether to impose any of the standards
set forth in § 252.284(c)(1) through (8) of
this subpart on any part of the U.S.
operations of a foreign banking
organization with total consolidated
assets of $50 billion or more and with
combined U.S. assets of less than $50
billion that is subject to level 3
remediation.
(d) Level 4 remediation (resolution
assessment). The Board will consider
whether the combined U.S. operations
of the foreign banking organization
warrant termination or resolution based
on the financial decline of the combined
U.S. operations, the factors contained in
section 203 of the Dodd-Frank Act as
applicable, or any other relevant factor.
If such a determination is made, the
Board will take actions that include
recommending to the appropriate
financial regulatory agencies that an
entity within the U.S. branch and
agency network be terminated or that a
U.S. subsidiary be resolved.
By order of the Board of Governors of the
Federal Reserve System, December 17, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012–30734 Filed 12–27–12; 8:45 am]
BILLING CODE 6210–01–P

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28DEP2