The Federal Reserve has proposed a complete overhaul of the manner in which foreign banking organizations (FBOs) are governed in the U.S., for the first time requiring an array of rules that significantly differentiate their activities from parent banking organizations and impose unique requirements as a condition of doing business in the U.S. These include a new requirement for formation of intermediate holding companies (IHCs) to impose U.S. standards across large, non-branch FBO operations. Although foreign branches and agencies need not be subsumed within these IHCs, they would be subject to additional standards, especially with regard to stress-testing and liquidity within the U.S. that may effectively “subsidiarize” branch-and-agency operations. The IHC would not necessarily apply to foreign nonbank financial companies designated as systemic, but it might and, in concert with other standards, would redefine many U.S. activities of affected firms. In response to the NPR, some have argued that these standards are unduly extraterritorial, discriminate against foreign banks and/or would isolate the U.S. from the global financial system, perhaps endangering U.S. competitiveness or even the status of the dollar as a reserve currency. However, the FRB here describes the inability of parent banks and home countries to support U.S. operations during the crisis, an experience that led it to revise its entire approach since the source-of-strength assumptions on which it was premised proved fragile under stress. Most FBOs and foreign branches would need to change their U.S. activities in significant fashion to comply with this proposal, perhaps leading some to abandon the U.S. or otherwise curtail their activities here. U.S. banks doing business abroad may also fear new host-country rules that seek to retaliate in response to the FRB’s approach.

The full report is available to retainer clients. To find out how you can sign up for the service, click here