Alert December 04, 2012

FRB Governor Tarullo Outlines Potential Revisions to U.S. Regulation of Foreign Banking Organizations

FRB Governor Daniel K. Tarullo discussed potential significant changes to how the FRB regulates U.S. operations of foreign banks in a speech that Governor Tarullo presented at the Yale School of Management on November 28, 2012.  Governor Tarullo stated that he expected the FRB, in the coming weeks, to issue a Notice of Proposed Rulemaking (the “NPR”) that would modify FRB supervision of large foreign banking organizations (“FBs”) to reflect the change in their activities in the U.S. and the risks attendant to those changes and to implement the enhanced prudential standards mandated by the Dodd-Frank Act.  Governor Tarullo described three modifications to FRB supervision of U.S. FBs that the FRB is likely to include in the NPR:

  1. FBs with the largest level of U.S. operations would be required to establish a top-tier U.S. intermediate holding company (“IHC”) over all of its U.S. bank and nonbank subsidiaries (but not the applicable FB’s U.S. branches and agencies that are part of the foreign bank itself).
  2. The same capital rules that apply to U.S. bank holding companies would apply to IHCs.  Moreover, enhanced prudential standards required by the Dodd-Frank Act such as stress testing requirements, risk management requirements and single counterparty credit limits would be applied to the U.S. operations of FBs.
  3. IHCs would be subject to liquidity requirements that are consistent with those proposed for large U.S. bank holding companies, and branch and agency networks of foreign banks with large U.S. operations would also be subject to liquidity requirements.

In concluding his remarks, Governor Tarullo noted that his remarks are only an outline of the proposed changes that the FRB is discussing and that the “all-important details” would be provided in the NPR.