# Changes to Applicability Thresholds for Regulatory Capital Requirements for Certain U.S. Subsidiaries of Foreign Banking Organizations and Application of Liquidity Requirements to Foreign Banking Organizations, Certain U.S. Depository Institution Holding Companies, and Certain Depository Institution Subsidiaries > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-09245 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** May 24, 2019 - **Citation:** 84 FR 24296 ## Text DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 3 and 50 [Docket ID OCC-2019-0009] RIN 1557-AE63 FEDERAL RESERVE SYSTEM 12 CFR Parts 217 and 249 [Regulations Q, WW; Docket No. R-1628B] RIN 7100-AF21 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 324 and 329 RIN 3064-AE96 Changes to Applicability Thresholds for Regulatory Capital Requirements for Certain U.S. Subsidiaries of Foreign Banking Organizations and Application of Liquidity Requirements to Foreign Banking Organizations, Certain U.S. Depository Institution Holding Companies, and Certain Depository Institution Subsidiaries AGENCY: Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Notice of proposed rulemaking with request for public comment. SUMMARY: The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (collectively, the agencies) are inviting comment on a proposal that would determine the application of regulatory capital requirements to certain U.S. intermediate holding companies of foreign banking organizations and their depository institution subsidiaries and the application of standardized liquidity requirements with respect to certain U.S. operations of large foreign banking organizations and certain of their depository institution subsidiaries, each according to risk-based categories. For liquidity, the proposal would require a foreign banking organization that meets certain criteria to comply with liquidity coverage ratio and net stable funding ratio requirements with respect to any U.S. intermediate holding company and certain depository institution subsidiaries thereof; in addition, the Board is not proposing but is requesting comment on whether it should impose standardized liquidity requirements on such foreign banking organizations with respect to their U.S. branch and agency networks, as well as possible approaches for doing so. The proposal is consistent with a separate proposal issued by the Board that would apply certain prudential standards to foreign banking organizations based on the same categories, and is similar to a proposal issued by the agencies in 2018 that would determine the application of regulatory capital and standardized liquidity requirements for large U.S. banking organizations according to risk-based categories (the domestic interagency proposal). In addition, the Board is modifying one aspect of the proposed requirements under the domestic interagency proposal with respect to certain banking organizations; specifically, to propose the application of a standardized liquidity requirement to certain U.S. depository institution holding companies that meet specified criteria relating to their liquidity risk profile. The agencies are also making technical amendments to certain provisions of the domestic interagency proposal. DATES: Comments on the proposal, including the Board's proposal to apply liquidity requirements to certain domestic holding companies discussed in section VI of the SUPPLEMENTARY INFORMATION , must be received by June 21, 2019. ADDRESSES: Comments should be directed to: OCC: You may submit comments to the OCC by any of the methods set forth below. Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title “Proposed changes to applicability thresholds for regulatory capital requirements for certain U.S. subsidiaries of foreign banking organizations and application of liquidity requirements for foreign banking organizations” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal—“regulations.gov”: Go to www.regulations.gov. Enter “Docket ID OCC-2019-0009” in the Search Box and click “Search.” Click on “Comment Now” to submit public comments. Click on the “Help” tab on the Regulations.gov home page to get information on using Regulations.gov , including instructions for submitting public comments. • Email: regs.comments@occ.treas.gov. • Mail: Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, Washington, DC 20219. • Fax: (571) 465-4326. Instructions: You must include “OCC” as the agency name and “Docket ID OCC-2019-0009” in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov website without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this rulemaking action by any of the following methods: • Viewing Comments Electronically: Go to www.regulations.gov. Enter “Docket ID OCC-2019-0009” in the Search box and click “Search.” Click on “Open Docket Folder” on the right side of the screen and then “Comments.” Comments and supporting materials can be filtered by clicking on “View all documents and comments in this docket” and then using the filtering tools on the left side of the screen. Click on the “Help” tab on the Regulations.gov home page to get information on using Regulations.gov . The docket may be viewed after the close of the comment period in the same manner as during the comment period. • Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are hearing impaired, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments. Board: You may submit comments, identified by Docket No. R-1628, by any of the following methods: • Agency Website: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. • Email: regs.comments@federalreserve.gov. Include docket number in the subject line of the message. • Fax: (202) 452-3819 or (202) 452-3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. All public comments will be made available on the Board's website at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or to remove personally identifiable information at the commenter's request. Accordingly, 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 146, 1709 New York Avenue, Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays. FDIC: You may submit comments, identified by RIN 3064-AE96, by any of the following methods: • Agency Website: http://www.FDIC.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on the FDIC website. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. • Hand Delivered/Courier: Comments may be hand-delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m. • Email: comments@FDIC.gov. Include RIN 3064-AE96 on the subject line of the message. • Public Inspection: All comments received must include the agency name and RIN 3064-AE96 for this rulemaking. All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. Paper copies of public comments may be ordered from the FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, VA 22226, or by telephone at (877) 275-3342 or (703) 562-2200. FOR FURTHER INFORMATION CONTACT: OCC: Mark Ginsberg, Senior Risk Expert, or Venus Fan, Risk Expert, Capital and Regulatory Policy, (202) 649-6370; James Weinberger, Technical Expert, Treasury & Market Risk Policy, (202) 649-6360; or Carl Kaminski, Special Counsel, Henry Barkhausen, Counsel, or Daniel Perez, Attorney, Chief Counsel's Office, (202) 649-5490, or for persons who are hearing impaired, TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. Board: Constance M. Horsley, Deputy Associate Director, (202) 452-5239; Elizabeth MacDonald, Manager, (202) 475-6216; Brian Chernoff, Lead Financial Institution Policy Analyst, (202) 452-2952; J. Kevin Littler, Lead Financial Institution Policy Analyst, (202) 475-6677; Mark Handzlik, Lead Financial Institution Policy Analyst, (202) 475-6636; Matthew McQueeney, Senior Financial Institution Policy Analyst, (202) 452-2942; Christopher Powell, Senior Financial Institution Policy Analyst, (202) 452-3442, Division of Supervision and Regulation; or Benjamin McDonough, Assistant General Counsel, (202) 452-2036; Asad Kudiya, Counsel, (202) 475-6358; Jason Shafer, Counsel (202) 728-5811; Mary Watkins, Senior Attorney, (202) 452-3722; Joshua Strazanac, Attorney, (202) 452-2457; Alyssa O'Connor, Attorney, (202) 452-3886, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869. FDIC: Benedetto Bosco, Chief, Capital Policy Section, bbosco@fdic.gov; Michael Maloney, Senior Policy Analyst, mmaloney@fdic.gov; regulatorycapital@fdic.gov; Michael E. Spencer, Chief, Capital Markets Strategies Section, michspencer@fdic.gov; Eric W. Schatten, Senior Policy Analyst, eschatten@fdic.gov; Andrew D. Carayiannis, Senior Policy Analyst, acarayiannis@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; Michael Phillips, Counsel, mphillips@fdic.gov; Catherine Wood, Acting Supervisory Counsel, cawood@fdic.gov; Suzanne Dawley, Counsel, sudawley@fdic.gov; Andrew B. Williams II, Counsel, andwilliams@fdic.gov; or Gregory Feder, Counsel, gfeder@fdic.gov; Supervision and Legislation Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (800) 925-4618. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Background A. Current Prudential Regulatory Regime B. Tailoring in the Current Prudential Regulatory Regime C. Structure and Activities of Foreign Banking Organizations III. Overview of the Proposal A. Categories of Standards B. Scoping Criteria C. Determination of Applicable Category of Standards IV. Capital Requirements A. Category II Standards B. Category III Standards C. Category IV Standards V. Liquidity Requirements A. Categories of Liquidity Requirements for a Foreign Banking Organization B. LCR Requirement With Respect to Foreign Banking Organizations C. NSFR Requirement With Respect to Foreign Banking Organizations D. LCR and NSFR Public Disclosure for Foreign Banking Organizations and U.S. Banking Organizations E. Request for Comment on Standardized Liquidity Requirements With Respect to U.S. Branches and Agencies of a Foreign Banking Organization F. LCR and NSFR Requirements for Certain Depository Institution Subsidiaries of a Foreign Banking Organization G. Transition Period; Cessation of Applicability VI. Re-Proposal of Standardized Liquidity Requirements for Certain U.S. Depository Institution Holding Companies Subject to Category IV Standards VII. Technical Amendments VIII. Impact Assessment IX. Administrative Law Matters A. Solicitation of Comments and Use of Plain Language B. Paperwork Reduction Act Analysis C. Regulatory Flexibility Act Analysis D. Riegle Community Development and Regulatory Improvement Act of 1994 E. OCC Unfunded Mandates Reform Act of 1995 Determination I. Introduction The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are inviting comment on a proposed rule (the proposal) that would apply regulatory capital and standardized liquidity requirements with respect to the U.S. operations of foreign banking organizations according to risk-based categories. 1 U.S. law permits foreign banking organizations to operate in the United States through a variety of structures. For example, a foreign banking organization might conduct U.S. banking activities through a U.S. branch or agency, 2 a U.S. depository institution, or both. In addition, many foreign banking organizations conduct a range of nonbank activities through separately incorporated U.S. subsidiaries. 1 Foreign banking organization means a foreign bank that operates a branch, agency, or commercial lending company subsidiary in the United States; controls a bank in the United States; or controls an Edge corporation acquired after March 5, 1987; and any company of which the foreign bank is a subsidiary. See 12 CFR 211.21(o); 12 CFR 252.2(k). 2 An agency is place of business of a foreign bank, located in any state, at which credit balances are maintained, checks are paid, money is lent, or, to the extent not prohibited by state or federal law, deposits are accepted from a person or entity that is not a citizen or resident of the United States. A branch is a place of business of a foreign bank, located in any state, at which deposits are received and that is not an agency. See 12 CFR 211.21(b) and (e). For capital requirements, the Board is proposing to modify the capital requirements applicable to large U.S. intermediate holding companies of foreign banking organizations 3 —specifically, those with at least $100 billion in total consolidated assets—and the agencies are proposing to modify the capital requirements applicable to depository institution subsidiaries of these U.S. intermediate holding companies according to the proposed risk-based categories. 3 A foreign banking organization with U.S. non-branch assets of $50 billion or more must establish a U.S. intermediate holding company. 12 CFR 252.153. For liquidity requirements, the proposed framework would apply standardized liquidity requirements to foreign banking organizations with respect to their combined U.S. operations 4 according to the proposed risk-based categories. Specifically, the Board is proposing to require a foreign banking organization that meets certain criteria—including having combined U.S. assets 5 of $100 billion or more—to comply with liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) requirements with respect to any U.S. intermediate holding company. The Board is not currently proposing but is requesting comment on whether it should impose standardized liquidity requirements on foreign banking organizations with respect to their U.S. branch and agency networks, as well as possible approaches for doing so. 6 In addition, the agencies are proposing to determine the application of LCR and NSFR requirements to certain depository institution subsidiaries of a foreign banking organization according to the proposed risk-based categories. 4 The combined U.S. operations of a foreign banking organization include any U.S. subsidiaries (including any U.S. intermediate holding company, which would reflect on a consolidated basis any U.S. depository institution subsidiaries thereof), U.S. branches, and U.S. agencies. See section II.C of this SUPPLEMENTARY INFORMATION section. 5 Combined U.S. assets means the sum of the consolidated assets of each top-tier U.S. subsidiary of the foreign banking organization (excluding any company whose assets are held pursuant to section 2(h)(2) of the Bank Holding Company Act, 12 U.S.C. 1841(h)(2), if applicable) and the total assets of each U.S. branch and U.S. agency of the foreign banking organization, as reported by the foreign banking organization on the Capital and Asset Report for Foreign Banking Organizations (FR Y-7Q). 6 This Supplementary Information section uses the term “U.S. branch and agency network” to refer to the U.S. branches and agencies of a foreign banking organization in the aggregate, including any consolidated subsidiaries thereof. The proposal would generally align with the framework the agencies proposed for large U.S. banking organizations (the domestic interagency proposal). 7 The agencies noted in the domestic interagency proposal that they were not at that time proposing to amend the capital and liquidity requirements currently applicable to a U.S. intermediate holding company of a foreign banking organization or to its depository institution subsidiaries. This proposal would tailor the agencies' capital and liquidity requirements for foreign banking organizations and their U.S. subsidiaries. 7 Proposed Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements, 83 FR 66024 (December 21, 2018). The Board is also modifying one aspect of the domestic interagency proposal with respect to certain banking organizations. 8 Specifically, the Board is proposing to apply standardized liquidity requirements to a U.S. depository institution holding company that would be subject to Category IV standards under the domestic interagency proposal if the depository institution holding company significantly relies on short-term wholesale funding relative to its total consolidated assets. 9 The proposed requirement for such Category IV U.S. depository institution holding companies would align with a similar requirement for foreign banking organizations under this proposal. 8 The agencies are also making a technical amendment to the proposed regulation text included in the domestic interagency proposal, discussed in section VII of this SUPPLEMENTARY INFORMATION section. 9 Currently, no U.S. depository institution holding company that would be subject to Category IV standards has a risk profile that would meet the proposed criteria. Concurrently with this proposal, the Board is separately inviting comment on a proposed rule (the Board-only foreign banking organization enhanced prudential standards proposal) that would revise the framework for determining the applicability of enhanced prudential standards for foreign banking organizations with total consolidated assets of $100 billion or more, based on the risk profile of their U.S. operations. The agencies encourage commenters to review this proposal together with the Board-only foreign banking organization enhanced prudential standards proposal. II. Background A. Current Prudential Regulatory Regime In 2013, the agencies adopted a revised regulatory capital rule (the capital rule) that, among other things, addressed weaknesses in the regulatory framework that became apparent in the 2007-2009 financial crisis. 10 The capital rule strengthened the capital requirements applicable to banking organizations, 11 including U.S. banking organization subsidiaries of foreign banking organizations, by improving both the quality and quantity of regulatory capital and increasing the risk-sensitivity of capital requirements. In addition, to improve the banking sector's resiliency to liquidity stress and the ability of large and internationally active banking organizations to monitor and manage liquidity risk, in 2014, the agencies adopted the liquidity coverage ratio rule (LCR rule). 12 Banking organizations subject to the LCR rule must maintain an amount of high-quality liquid assets (HQLA) equal to or greater than their projected total net cash outflows over a prospective 30-calendar-day period. 13 Finally, on June 1, 2016, the agencies invited comment on a proposed rule to implement an NSFR requirement for large and internationally active banking organizations (the NSFR proposed rule). 14 The NSFR proposed rule would establish a quantitative metric to measure and help ensure the stability of the funding profile of a banking organization over a one-year time horizon. During this period, the Board also implemented further enhanced capital and liquidity standards for the largest bank holding companies and foreign banking organizations, such as capital planning requirements and liquidity risk-management standards. 15 10 The Board and OCC issued a joint final rule on October 11, 2013 (78 FR 62018), and the FDIC issued a substantially identical interim final rule on September 10, 2013 (78 FR 55340). On April 14, 2014 (79 FR 20754), the FDIC adopted the interim final rule as a final rule with no substantive changes. 11 Banking organizations subject to the agencies' capital rule include national banks, state member banks, insured state nonmember banks, federal and state savings associations, and top-tier bank holding companies and savings and loan holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (12 CFR part 225, appendix C, and 12 CFR 238.9), excluding certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities or that are estate trusts, and bank holding companies and savings and loan holding companies that are employee stock ownership plans. 12 See Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 FR 61440 (October 10, 2014) (LCR FR rule), codified at 12 CFR part 50 (OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC). 13 For depository institution holding companies with $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in on-balance sheet foreign exposure, the Board separately adopted a modified LCR requirement, described further below. 12 CFR part 249, subpart G. 14 “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements; Proposed Rule,” 81 FR 35124 (June 1, 2016). For depository institution holding companies with $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure, the Board separately proposed a modified NSFR requirement. 15 See Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 79 FR 17240 (March 27, 2014) (the enhanced prudential standards rule), codified at 12 CFR part 252. B. Tailoring in the Current Prudential Regulatory Regime Many of the agencies' current rules, including the capital rule, the LCR rule, and the NSFR proposed rule, differentiate requirements among banking organizations, including U.S. intermediate holding companies of foreign banking organizations, based on one or more risk indicators, such as total asset size and on-balance sheet foreign exposure. All banking organizations subject to the capital rule must meet minimum risk-based and leverage capital requirements, among other requirements. 16 All banking organizations must calculate risk-weighted assets for purposes of their risk-based capital requirements using the generally applicable capital rule and calculate a leverage ratio that measures regulatory capital relative to on-balance sheet assets. 17 In addition, banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure (the advanced approaches thresholds), together with depository institution subsidiaries of banking organizations meeting those thresholds (advanced approaches banking organizations), 18 are subject to additional requirements. A U.S. advanced approaches banking organization must calculate its risk-weighted assets using the advanced approaches, 19 and all advanced approaches banking organizations must calculate a supplementary leverage ratio, which measures regulatory capital relative to on-balance sheet and certain off-balance sheet exposures, in addition to the leverage ratio described above. 20 In addition, when calculating their regulatory capital levels, advanced approaches banking organizations are required to include most elements of accumulated other comprehensive income (AOCI) in regulatory capital, which better reflects the loss-absorbing capacity of a banking organization at a specific point in time, but can also result in regulatory capital volatility and require more sophisticated capital planning and asset-liability management. Advanced approaches banking organizations must also increase their capital conservation buffers by the amount of a countercyclical capital buffer under certain circumstances. 16 See 12 CFR part 217 (Board); 12 CFR part 3 (OCC); 12 CFR part 324 (FDIC). 17 See Subpart D of the regulatory capital rule, 12 CFR part 217 (Board); 12 CFR part 3 (OCC); 12 CFR part 324 (FDIC). 18 See 12 CFR 217.1(c), 12 CFR 217.100(b) (Board); 12 CFR 3.1(c), 12 CFR 3.100(b) (OCC); 12 CFR 324.1(c), 12 CFR 324.100(b) (FDIC). U.S. global systemically important bank holding companies (GSIBs) form a sub-category of advanced approaches banking organizations. 19 See Subpart E of the regulatory capital rule, 12 CFR part 217 (Board); 12 CFR part 3 (OCC); 12 CFR part 324 (FDIC). 20 U.S. intermediate holding companies that are advanced approaches banking organizations are not required to calculate risk-weighted assets using the advanced approaches, given the costs associated with maintaining different home country and U.S. models for the calculation. Relatedly, in certain cases, U.S. depository institution subsidiaries of U.S. intermediate holding companies that are advanced approaches banking organizations also have been granted requests to be exempted from the requirement to calculate risk-weighted assets using the U.S. advanced approaches rule. The LCR rule and NSFR proposed rule also distinguish between banking organizations based on total asset size and total on-balance sheet foreign exposure. Under the LCR rule, the full LCR requirement generally applies to depository institution holding companies and depository institutions that meet or exceed the advanced approaches thresholds and to their depository institution subsidiaries that have total consolidated assets of $10 billion or more. 21 The Board's regulations also apply a less stringent, modified LCR requirement to depository institution holding companies that do not meet the advanced approaches thresholds but have more than $50 billion in total consolidated assets. Under the NSFR proposed rule, the proposed NSFR requirement would apply to the same banking organizations as the current full LCR requirement. Similarly, under the NSFR proposed rule, the Board proposed to apply a less stringent, modified NSFR requirement to the same depository institution holding companies that are subject to the modified LCR requirement. 21 See 12 CFR 50.1 (OCC); 12 CFR 249.1 (Board); and 12 CFR 329.1 (FDIC). The full requirements of the LCR rule include the calculation of the LCR on each business day and the inclusion of a maturity mismatch add-on in the total net cash outflow amount. The scoping criteria of the regulations described above rely on a definition of advanced approaches banking organization that the agencies introduced in 2007 in connection with the adoption of the advanced approaches risk-based capital rule. The thresholds established by this definition were designed to include the largest and most internationally active banking organizations. In implementing the liquidity rules, the agencies relied on these same thresholds, recognizing that banking organizations that meet the advanced approaches thresholds have balance sheet compositions, off-balance sheet activities, and funding profiles that lead to larger and more complex liquidity risk profiles. C. Structure and Activities of Foreign Banking Organizations Figure 1 provides a simplified illustration of a how a foreign banking organization may structure its U.S. operations, and depicts the portion of those operations that would comprise its combined U.S. operations for purposes of the proposal. EP24MY19.003 The presence of foreign banking organizations in the United States brings competitive and countercyclical benefits to U.S. markets, as these firms serve as an important source of credit to U.S. households and businesses and contribute materially to the strength and liquidity of U.S. financial markets. Post-crisis financial regulations have resulted in substantial gains in resiliency for individual firms and the financial system as a whole. Foreign banking organizations' U.S. operations have become less fragmented, and these firms maintain greater capital and liquidity in the United States. 22 22 Sources: Consolidated Financial Statements for Holding Companies (FR Y-9C) and Complex Institution Liquidity Monitoring Report (FR 2052a). The U.S. operations of foreign banking organizations vary in their complexity and systemic risk profile. For example, the U.S. operations of some foreign banking organizations are heavily reliant on U.S. dollar-denominated short-term wholesale funding. As demonstrated in the financial crisis, reliance on short-term wholesale funding relative to more stable funding sources (such as capital, long-term debt, and insured deposits) presents significant risks to U.S. financial stability and the safety and soundness of an individual banking organization. Among all foreign banking organizations with combined U.S. assets of $100 billion or more, weighted short-term wholesale funding 23 is equivalent to approximately 30 percent of their U.S. assets in the aggregate, ranging from 10 percent to as much as 60 percent at individual firms. 24 Because the U.S. branches of these foreign banking organizations have limited access to more stable funding through retail deposits, these branches in particular rely more extensively on short-term wholesale funding. 23 Weighted short-term wholesale funding provides a measure of a firm's reliance on certain less stable forms of funding. See section III.B.2.d of this Supplementary Information section. 24 Source: FR 2052a, as of June 30, 2018. In addition, some foreign banking organizations engage in complex activities through broker-dealers in the United States, which are highly interconnected to U.S. and foreign financial intermediaries. Among foreign banking organizations with combined U.S. assets of $100 billion or more, U.S. broker-dealer subsidiaries comprise approximately 25 percent of these banking organizations' U.S. assets in aggregate, with a range of zero to 50 percent at individual firms. 25 Overall, total nonbank assets, including broker-dealer subsidiaries, in aggregate comprise approximately 25 percent of the combined U.S. assets of foreign banking organizations with combined U.S. assets of $100 billion or more, with a range of zero to 70 percent at individual firms. 26 25 Sources: Parent Company Only Financial Statements for Large Holding Companies (FR Y-9LP), FR Y-7Q, and the Securities Exchange Commission's Financial and Operational Combined Uniform Single Report, as of September 30, 2018. 26 Id. The U.S. operations of some foreign banking organizations also exhibit greater complexity and face risks due to significant levels of cross-jurisdictional activity and off-balance sheet exposure. Among foreign banking organizations with combined U.S. assets of $100 billion or more, cross-jurisdictional activity (excluding cross-jurisdictional liabilities to non-U.S. affiliates) 27 is equivalent to approximately 30 percent of the combined U.S. assets of these firms in the aggregate, ranging from 13 percent to as much as 81 percent at individual firms, whereas off-balance sheet exposure is equivalent to approximately 30 percent of the combined U.S. assets of these firms in the aggregate, ranging from 10 percent to as much as 51 percent at individual firms. 28 As discussed below, both cross-jurisdictional activity and off-balance sheet exposure provide a measure of a banking organization's interconnectedness, as well as other risks. 27 See section III.B.2.a of this SUPPLEMENTARY INFORMATION section. In addition, while the proposal would allow recognition of financial collateral in calculating intercompany claims, recognition of financial collateral is not reflected in this analysis. 28 This analysis was based on data compiled from the FR Y-7Q, as well as information collected from certain foreign banking organizations supervised by the Board as of September 30, 2018. The agencies are proposing to modify the regulatory framework applicable to foreign banking organizations in a manner commensurate with the risks such organizations pose to U.S. financial stability, based on the factors set forth in this proposal. The proposal is designed to better address the risks presented by the U.S. operations of foreign banking organizations to U.S. financial stability. The proposed framework would be consistent with the framework the agencies proposed for large U.S. banking organizations, using consistent indicators of risk. III. Overview of the Proposal The proposal builds on the agencies' existing practice of tailoring capital, liquidity, and other requirements based on the size, complexity, and overall risk profile of banking organizations. Specifically, the proposal would establish categories of capital and liquidity standards to align requirements with a banking organization's risk profile and apply consistent standards to foreign banking organizations with similar risk profiles in the United States. The proposal generally aligns with the framework set forth in the domestic interagency proposal, with modifications to address the fact that foreign banking organizations may operate in the United States directly through U.S. branches and agencies or through subsidiaries. For capital, the proposal would determine the application of requirements for U.S. intermediate holding companies with total consolidated assets of $100 billion or more and their depository institution subsidiaries. For liquidity, the proposal would apply LCR and NSFR requirements to certain foreign banking organizations with combined U.S. assets of $100 billion or more with respect to any U.S. intermediate holding company and to certain large depository institution subsidiaries thereof. 29 The Board is also not currently proposing but is requesting comment on whether it should impose a standardized liquidity requirement on foreign banking organizations with respect to their U.S. branch and agency networks, as well as possible approaches for doing so. 29 As discussed in section V of this Supplementary Information section, the proposal would require a foreign banking organization to calculate and maintain an LCR and NSFR for any U.S. intermediate holding company. The proposal also includes a modification to the proposed standardized liquidity requirements that would apply under the domestic interagency proposal to U.S. depository institution holding companies that meet certain criteria. Specifically, the Board is proposing to apply LCR and NSFR requirements to U.S. depository institution holding companies that meet the requirements for Category IV standards under the domestic interagency proposal and have $50 billion or more in weighted short-term wholesale funding. This modification would reflect the liquidity risks of U.S. depository institution holding companies that meet these criteria and align with the liquidity requirements the Board is currently proposing for foreign banking organizations that meet the same risk-based criteria. No U.S. depository institution holding company that currently meets the criteria for Category IV standards, however, meets the proposed $50 billion weighted short-term wholesale funding threshold. A. Categories of Standards The proposal would establish risk-based categories for determining the application of regulatory capital and standardized liquidity requirements to the U.S. operations of foreign banking organizations. Specifically, the proposal would establish three categories of standards for foreign banking organizations with large U.S. operations—Categories II, III, and IV. 30 Capital standards would apply based on the risk profile of a foreign banking organization's U.S. intermediate holding company and liquidity standards would apply based on the risk profile of a foreign banking organization's combined U.S. operations, 31 in each case measured based on size, cross-jurisdictional activity, weighted short-term wholesale funding, off-balance sheet exposure, and nonbank assets. 32 30 The domestic interagency proposal also included a fourth category of standards, Category I, that would apply to U.S. GSIBs. As discussed below, the proposal would not include this category for foreign banking organizations. 31 Accordingly, the category of capital standards that applies to a U.S. intermediate holding company of a foreign banking organization may be different from the category of liquidity standards that applies to the foreign banking organization. 32 As an alternative, the Board is also requesting comment on a score-based approach, which would differentiate requirements for firms using an aggregated “score” across multiple measures of risk. See section III.B.3 of this Supplementary Information section. For capital, a U.S. intermediate holding company with $100 billion or more in total consolidated assets and each of its depository institution subsidiaries would be subject to Category II, Category III, or Category IV capital standards. The proposal would determine the applicable category of capital standards based on the size, cross-jurisdictional activity, weighted short-term wholesale funding, off-balance sheet exposure, and nonbank assets of the U.S. intermediate holding company. The agencies are not proposing to apply regulatory capital standards to U.S. branches and agencies of a foreign banking organization because these branches and agencies do not maintain regulatory capital separate from their foreign parents. For purposes of liquidity, a foreign banking organization would determine the applicable category of standards based on the risk profile of its combined U.S. operations. Therefore, a foreign banking organization with $100 billion or more in combined U.S. assets would be subject to Category II, Category III, or Category IV liquidity standards, based on the size, cross-jurisdictional activity, weighted short-term wholesale funding, off-balance sheet exposure, and nonbank assets of the foreign banking organization's combined U.S. operations, including, if applicable, any U.S. intermediate holding company and any U.S. branches and agencies. The proposal would apply LCR and NSFR requirements to a foreign banking organization with respect to a U.S. intermediate holding company, and the same category of liquidity standards would apply to any depository institution subsidiary that has $10 billion or more in assets and is a subsidiary of a U.S. intermediate holding company (covered depository institution subsidiary). In addition, the Board is not currently proposing but is requesting comment on whether it should impose standardized liquidity requirements on a foreign banking organization with respect to its U.S. branch and agency network, as well as possible approaches for doing so. During stress conditions, liquidity needs can arise suddenly and tend to manifest in all parts of an organization. For instance, funding vulnerabilities at the U.S. branches and agencies of a foreign banking organization can cause heightened liquidity risk exposure not only at the branches and agencies themselves, but also at the foreign banking organization's U.S. subsidiary operations, and vice versa. For these reasons, funding vulnerabilities at the U.S. branches and agencies of a foreign banking organization may also have an impact on broader U.S. financial stability. Accordingly, the proposal would apply liquidity standards based on the combined U.S. operations of a foreign banking organization. The proposed categories of capital standards that would apply to a U.S. intermediate holding company with total consolidated assets of $100 billion or more and its depository institution subsidiaries, and the proposed categories of liquidity standards that would apply to a foreign banking organization with combined U.S. assets of $100 billion or more and to its covered depository institution subsidiaries, are described below. Capital Standards • Category II capital standards would apply to a U.S. intermediate holding company (and any depository institution subsidiary thereof) that has $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity. For purposes of determining categories of capital (and liquidity) standards, cross-jurisdictional activity would be measured excluding cross-jurisdictional liabilities to non-U.S. affiliates and cross-jurisdictional claims on non-U.S. affiliates to the extent that these claims are secured by eligible financial collateral. 33 In addition to the generally applicable capital requirements, these standards would include the supplementary leverage ratio; countercyclical capital buffer, if applicable; and the requirement to recognize most elements of AOCI in regulatory capital. 34 33 See section III.B.2 of the Supplementary Information for discussion of the proposed cross-jurisdictional activity indicator. 34 In the domestic interagency proposal, the agencies proposed to require U.S. banking organizations that are subject to Category II capital standards to calculate risk-based capital ratios using both the advanced approaches and the standardized approach. See domestic interagency proposal, 83 FR at 66034. Consistent with current requirements, a U.S. intermediate holding company (and depository institution subsidiaries thereof) would not be required to calculate risk-based capital requirements using the advanced approaches under the capital rule, and would instead use the generally applicable capital requirements for calculating risk-weighted assets. See section IV.A of this Supplementary Information section. • Category III capital standards would apply to a U.S. intermediate holding company (and any depository institution subsidiary thereof) that is not subject to Category II standards and that has $250 billion or more in total consolidated assets or $75 billion or more in any of the following indicators: Nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposure. 35 In addition to the generally applicable capital requirements, these standards would include the supplementary leverage ratio and, if applicable, the countercyclical capital buffer. 35 For purposes of determining categories of capital and liquidity standards, weighted short-term wholesale funding would be measured including transactions with non-U.S. affiliates. See section III.B.2 of the Supplementary Information . • Category IV capital standards would apply to a U.S. intermediate holding company (and any depository institution subsidiary thereof) that has at least $100 billion in total consolidated assets and does not meet any of the thresholds specified for Category II or III capital standards. Category IV capital standards include the generally applicable capital requirements. 36 36 U.S. intermediate holding companies with total consolidated assets of less than $100 billion and their depository institutions subsidiaries would also remain subject to the generally applicable capital requirements. Liquidity Standards • Category II liquidity standards would apply to a foreign banking organization (and any covered depository institution subsidiary thereof) with $700 billion or more in combined U.S. assets, or $75 billion or more in cross-jurisdictional activity. For purposes of determining categories of liquidity (and capital) standards, cross-jurisdictional activity would be measured excluding cross-jurisdictional liabilities to non-U.S. affiliates and cross-jurisdictional claims on non-U.S. affiliates to the extent that these claims are secured by eligible financial collateral. 37 These standards would include full LCR and NSFR requirements for a foreign banking organization with respect to any U.S. intermediate holding company. In addition, the full LCR and NSFR requirements would apply to any covered depository institution subsidiary of a foreign banking organization subject to Category II liquidity standards. 37 See section III.B.2 of the Supplementary Information for discussion of the proposed cross-jurisdictional activity indicator. • Category III liquidity standards would apply to a foreign banking organization (and any covered depository institution subsidiary thereof) that is not subject to Category II liquidity standards and that has $250 billion or more in combined U.S. assets or $75 billion or more in any of the following indicators: Nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposures. To the extent the combined U.S. operations of the foreign banking organization have $75 billion or more in weighted short-term wholesale funding, the foreign banking organization would be subject to the same standardized liquidity requirements as would apply under Category II liquidity standards, specifically, full LCR and NSFR requirements with respect to any U.S. intermediate holding company. To the extent the combined U.S. operations of the foreign banking organization have less than $75 billion in weighted short-term wholesale funding, the foreign banking organization would be subject to reduced LCR and NSFR requirements with respect to any U.S. intermediate holding company. 38 Full or reduced LCR and NSFR requirements would also apply to any covered depository institution subsidiary of a foreign banking organization subject to Category III liquidity standards, at the same calibration ( i.e., full or reduced) that would apply to the foreign banking organization for a U.S. intermediate holding company. 38 The agencies requested comment in the domestic interagency proposal regarding the appropriate calibration of the minimum LCR and proposed NSFR requirements within a range of 70 to 85 percent of the full liquidity requirements. This proposal would apply a calibration to foreign banking organizations that is consistent with the calibration that would apply to U.S. banking organizations, and similarly requests comment regarding the appropriate calibration. • Category IV liquidity standards would apply to a foreign banking organization that has combined U.S. assets of $100 billion or more and is not subject to Category II or III liquidity standards. Category IV liquidity standards would include reduced LCR and NSFR requirements only if the combined U.S. operations of a foreign banking organization have $50 billion or more in weighted short-term wholesale funding. 39 These reduced requirements would apply to the foreign banking organization, which would calculate and maintain an LCR and NSFR for any U.S. intermediate holding company. No LCR or NSFR requirement would apply to depository institution subsidiaries of foreign banking organizations subject to Category IV liquidity standards. A foreign banking organization that is not subject to Category II or III liquidity standards but has combined U.S. assets of $100 billion or more and weighted short-term wholesale funding within its U.S. operations of less than $50 billion would not be subject to standardized liquidity requirements under this proposal (but would remain subject under the Board-only foreign banking organization enhanced prudential standards proposal to enhanced liquidity requirements in the Board's enhanced prudential standards rule). 39 As discussed in section VI of this Supplementary Information section, the Board is also proposing to apply reduced LCR and NSFR requirements to a U.S. depository institution holding company that would be subject to Category IV standards under the domestic interagency proposal and has $100 billion or more in total consolidated assets and $50 billion or more in weighted short-term wholesale funding. Similar to the domestic interagency proposal, the proposed approach with respect to foreign banking organizations would allow these firms to identify and predict what requirements would apply based on the current characteristics of a foreign banking organization's U.S. operations, and what requirements would apply if the characteristics of the foreign banking organization's operations were to change. By taking into consideration the materiality of each proposed risk-based indicator, the proposal would provide a basis for assessing the financial stability and safety and soundness risks of a foreign banking organization's U.S. operations. In general, the proposed categories of capital and liquidity standards align with the categories of standards that would apply under the domestic interagency proposal to U.S. banking organizations. The domestic interagency proposal includes an additional category of standards—Category I—that would apply to U.S. global systemically important bank holding companies (U.S. GSIBs), identified using the methodology under the Board's GSIB surcharge rule. 40 Because the U.S. GSIB surcharge rule would not identify a foreign banking organization or U.S. intermediate holding company as a U.S. GSIB, Category I liquidity and capital standards would not apply to any foreign banking organization or U.S. intermediate holding company under this proposal. 40 See 12 CFR part 217, subpart H; see also Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharge for Global Systemically Important Bank Holding Companies, 80 FR 49082 (August 14, 2015). Question 1: What would be the advantages and disadvantages of applying capital and liquidity standards that are more stringent than those in Category II under the proposed framework for foreign banking organizations, comparable to those of Category I under the domestic interagency proposal, to a U.S. intermediate holding company or combined U.S. operations of the foreign banking organization with comparable systemic risk profile to a U.S. GSIB? What other or different capital or liquidity standards would be appropriate to apply to such a U.S. intermediate holding company or foreign banking organization with respect to its U.S. operations, relative to the standards that would already apply under the proposal? B. Scoping Criteria 1. Size The proposal would tailor the application of capital and liquidity requirements based on the asset size of either a U.S. intermediate holding company or the combined U.S. operations of a foreign banking organization, as applicable. Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), 41 as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), 42 requires the Board to apply enhanced prudential standards to foreign banking organizations based on their total consolidated asset size. 43 Section 165 also directs the Board, in its application of enhanced prudential standards to foreign banking organizations, to give due regard to the principles of national treatment and equality of competitive opportunity and to take into account the extent to which a foreign banking organization is subject, on a consolidated basis, to home-country standards that are comparable to those applied to financial companies in the United States. 44 The agencies believe a size threshold based on a foreign banking organization's U.S. presence is appropriate for differentiating among foreign banking organizations in view of the statutory purpose, which is to prevent or mitigate risks to U.S. financial stability. 45 The agencies have also previously used size as a simple measure of a U.S. banking organization's potential systemic impact as well as safety and soundness risks. 46 The asset size thresholds set forth in this proposal are generally consistent with those that would apply to large U.S. banking organizations under the domestic interagency proposal for Categories II through IV. 41 Public Law 111-203, 124 Stat. 1376 (2010), sec. 165, codified at 12 U.S.C. 5365. 42 Public Law 115-174, 132 Stat. 1296 (2018). 43 See generally 12 U.S.C. 5635 and EGRRCPA sec. 401. 44 12 U.S.C. 5365(b)(2). 45 12 U.S.C. 5365(a)(1). 46 For example, the supplementary leverage ratio and countercyclical capital buffer generally apply to U.S. intermediate holding companies with total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposure of $10 billion or more. See 12 CFR 217.10(a), 217.11(b), and 217.100(b); 252.153(e)(2)(i). In developing the asset size thresholds for the domestic interagency proposal, the Board reviewed current supervisory reports and considered the requirements of section 165 of the Dodd-Frank Act, as amended by EGRRCPA, together with historical examples of large domestic banking organizations that experienced significant distress or failure during the financial crisis. Analysis conducted by the Board found that the crisis experience of domestic banking organizations with total consolidated assets on the order of $100 billion, $250 billion, and $700 billion presented materially different risks to U.S. financial stability and the U.S. economy more broadly, and thus would support the differentiation of enhanced prudential standards for banking organizations included within those size groupings. 47 In addition, such significant size thresholds reflected observed differences in structural and operational complexity, and in the range and scale of financial services a banking organization provides. 47 See domestic interagency proposal, 83 FR at 66028-66030. To maintain comparability in the application of capital and liquidity standards to both domestic and foreign banking organizations, the agencies are proposing to use similar asset thresholds (in addition to the other risk-based indicators discussed below) to those used in the domestic interagency proposal to tailor the application of capital and liquidity standards under this proposal. Although the agencies recognize that the U.S. operations of foreign banking organizations are structured differently than domestic banking organizations, the risks to financial stability and safety and soundness that stem from size are present regardless of structure. Like total asset size for U.S. banking organizations, the size of the U.S. operations of a foreign banking organization provides a measure of the extent to which customers or counterparties may be exposed to a risk of loss or suffer a disruption in the provision of services in the event that those operations are subject to an idiosyncratic stress or are affected by a systemic stress event. During the financial crisis, some large foreign banking organizations rapidly deleveraged their U.S. operations to address capital deficiencies, leaving commercial borrowers without a primary source of funding and contributing to large-scale asset fire sales. For foreign banking organizations with the largest U.S. operations, stress among those operations could be disruptive to U.S. markets and present significant risks to U.S. financial stability. For liquidity requirements, the proposal would measure size based on the combined U.S. assets of a foreign banking organization. For capital requirements, the proposal would measure size based on the total consolidated assets of a U.S. intermediate holding company. 48 The proposal would use an asset size threshold of $700 billion or more for Category II standards; $250 billion or more but less than $700 billion for Category III standards; and $100 billion or more but less than $250 billion for Category IV standards. 48 Combined U.S. assets are reported on the Annual Report of Foreign Banking Organizations (FR Y-7) or FR Y-7Q. Total consolidated assets of a U.S. intermediate holding company are reported on the Consolidated Statements for Holding Companies, under Form FR Y-9C. If a foreign banking organization that is required to report the FR Y-7 or Y-7Q has not filed an FR Y-7 or Y-7Q for each of the four most recent consecutive quarters, it would be required to use the most recent quarter or consecutive quarters as reported on FR Y-7 or FR Y-7Q. Similarly, if the U.S. intermediate holding company has not filed an FR Y-9C for each of the four most recent consecutive quarters, it would be required to 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 has been filed). Question 2: What are the advantages and disadvantages of using asset size thresholds to tailor capital and liquidity requirements? In what ways, if any, does the inclusion of asset size thresholds in capital and liquidity standards drive changes in foreign banking organizations' business models and risk profiles in ways that differ from the effects of thresholds based on other risk-based indicators? As an alternative to size thresholds, what other factors should the agencies consider to differentiate among the risk profiles of foreign banking organizations and serve as tools to tailor capital and liquidity requirements, and why? 2. Other Risk-Based Indicators Consistent with the domestic interagency proposal, this proposal also would consider the level of cross-jurisdictional activity, nonbank assets, off-balance sheet exposure, and weighted short-term wholesale funding of the combined U.S. operations of a foreign banking organization and of any U.S. intermediate holding company to determine the applicable category of standards for liquidity and capital, respectively. 49 Each indicator would be measured as the average amount of the indicator for the four most recent calendar quarters, generally calculated in accordance with the instructions to the Banking Organization Systemic Risk Report (FR Y-15) or equivalent reporting form. 50 The agencies are proposing to apply a uniform threshold of $75 billion for each of these risk-based indicators. A threshold of $75 billion would represent at least 30 percent and as much as 75 percent of the size of the U.S. operations of a foreign banking organization or a U.S. intermediate holding company with combined U.S. assets or total consolidated assets, respectively, of between $100 billion and $250 billion. The agencies also proposed a $75 billion threshold for these indicators in the domestic interagency proposal. Under this proposal and the domestic interagency proposal, setting the thresholds for these risk-based indicators at $75 billion would ensure that domestic banking organizations and the U.S. operations of foreign banking organizations that account for the vast majority—over 70 percent—of the total amount of each risk-based indicator would be subject to liquidity and capital requirements. To the extent the levels and distribution of an indicator substantially change in the future, the agencies may consider modifications, if appropriate. 49 For the discussion in the domestic interagency proposal on the other risk-based indicators, see 83 FR at 66030-66031. 50 The Board is separately proposing to amend the FR Y-15 to collect risk-indicator data for the combined U.S. operations of foreign banking organizations, including any U.S. intermediate holding company. The FR Y-15 Banking Organization Systemic Risk Report is proposed to be renamed FR Y-15 Systemic Risk Report. a. Cross-Jurisdictional Activity Foreign banking organizations with U.S. operations that engage in significant cross-jurisdictional activity present complexities that support the application of more stringent standards. For example, significant cross-border activity of the U.S. operations of a foreign banking organization may require more sophisticated risk management to appropriately address the heightened interconnectivity and complexity of those operations and the diversity of risks across all jurisdictions in which the foreign banking organization provides financial services. In addition, cross-jurisdictional activity may present increased challenges in resolution because there could be legal or regulatory restrictions that prevent the transfer of financial resources across borders where multiple jurisdictions and regulatory authorities are involved. The use of a threshold based on cross-jurisdictional activity to differentiate the capital and liquidity requirements applicable to foreign banking organizations is also intended to maintain consistency with the thresholds proposed for large U.S. banking organizations under the domestic interagency proposal. The agencies' capital and liquidity regulations currently use total on- balance sheet foreign exposure, as reported on the Country Exposure Report (FFIEC 009), to determine the application of certain requirements for depository institution holding companies and certain of their depository institution subsidiaries, such as the supplementary leverage ratio and countercyclical capital buffer. 51 51 See 12 CFR 217.10 (requiring advanced approaches Board-regulated institutions to maintain a supplementary leverage ratio); 217.11(b) (requiring advanced approaches Board-regulated institutions to maintain a countercyclical capital buffer); 217.100(b)(1) (describing the size and on-balance sheet foreign exposure thresholds for determining an advanced approaches Board-regulated institution). For purposes of determining the application of capital and liquidity requirements under the proposal, a foreign banking organization would measure cross-jurisdictional activity as the sum of the cross-jurisdictional assets and liabilities of its combined U.S. operations or its U.S. intermediate holding company, as applicable, excluding intercompany liabilities and collateralized intercompany claims. Measuring cross-jurisdictional activity taking into account both assets and liabilities—instead of just assets—would provide a broader gauge of the scale of cross-border operations and associated risks, as it includes both borrowing and lending activities outside of the United States. 52 The proposal would adjust the measurement of cross-jurisdictional activity to exclude intercompany liabilities and to recognize collateral in calculating intercompany claims in order to reflect the structural differences between foreign banking organizations' operations in the United States and domestic holding companies. 52 The Basel Committee on Banking Supervision (BCBS) recently amended its measurement of cross-border activity to more consistently reflect derivatives, and the Board anticipates it will separately propose changes to the FR Y-15 in a manner consistent with this change. Any related changes to the proposed cross-jurisdictional activity indicator would be updated through those separately proposed changes to the FR Y-15. Specifically, the proposed cross-jurisdictional activity indicator would exclude liabilities of the combined U.S. operations or U.S. intermediate holding company that reflect transactions with non-U.S. affiliates. Intercompany liabilities generally represent funding from the foreign banking organization to its U.S. operations and, in the case of certain long-term debt instruments, may be required by regulation. 53 The proposed exclusion recognizes the benefit of the foreign banking organization providing support to its U.S. operations. Short-term funding from affiliates, which may pose heightened liquidity risks to the U.S. operations, would be captured in the proposal's measure of weighted short-term wholesale funding. 53 See 12 CFR 252.162 and 12 CFR 252.165. Foreign banking organizations' U.S. operations often intermediate transactions between U.S. clients and foreign markets, including by facilitating access for foreign clients to U.S. markets, and clearing and settling U.S. dollar-denominated transactions. In addition, they engage in transactions to manage enterprise-wide risks. In these roles, they engage in substantial and regular transactions with non-U.S. affiliates. In recognition that the U.S. operations have increased cross-jurisdictional activity as a result of these activities, the proposal would include in cross-jurisdictional claims only the net exposure ( i.e., net of collateral value subject to haircuts) of all secured transactions with non-U.S. affiliates to the extent that these claims are collateralized by financial collateral. 54 54 See the definition of “financial collateral” at 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). The proposed recognition of financial collateral would apply to all types of claims, including repurchase agreements and securities lending agreements. Specifically, claims on non-U.S. affiliates would be reduced by the value of any financial collateral in a manner consistent with the agencies' capital rule, 55 which permits, for example, banking organizations to recognize financial collateral when measuring the exposure amount of repurchase agreements and securities borrowing and securities lending transactions (together, repo-style transactions). 56 The capital rule recognizes as financial collateral certain types of high-quality collateral, including cash on deposit and securities issued by the U.S. government, as well as certain types of equity securities and debt. With the exception of cash on deposit, the banking organization also is required to have a perfected, first-priority interest in the collateral or, outside of the United States, the legal equivalent thereof. 57 Permitting the reduction of certain claims on non-U.S. affiliates if the collateral meets the definition of financial collateral would ensure that the collateral is liquid, while the use of supervisory haircuts would also limit risk associated with price volatility. In addition, relying on the capital rule's definition of financial collateral would provide clarity regarding the types of collateral eligible to reduce the amount of cross-jurisdictional claims under this approach. 55 See 12 CFR 3.37 (OCC); 12 CFR 217.37 (Board); 12 CFR 324.37 (FDIC). 56 See the definition of “repo-style transaction” at 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). 57 See 12 CFR 217.2. The proposal would differ from the FFIEC 009, on which U.S. intermediate holding companies report cross-border claims, in two respects. The FFIEC 009 uses different rules to recognize collateral, using the term “eligible collateral,” which includes cash as well as investment grade debt or marketable equity securities. In addition, the FFIEC 009 requires reporting of repurchase agreements, securities lending agreements and other similar financing agreements at the value of the outstanding claim, regardless of the amount of collateral provided. See Instructions for the Preparation of the Country Exposure Report (FFIEC 009) at 12-13 (effective September 2016). The proposal would use the concept of financial collateral from the agencies' capital rule and would recognize collateral for any claim, including claims to which the collateral haircut approach applies under the agencies' capital rule. In addition, the FFIEC 009 measures cross-jurisdictional activity on an ultimate-risk basis, whereby claims are allocated based on the country of residence of the ultimate obligor, which, in certain cases, can mean the country or residence of the collateral provided. Securities lending agreements and repurchase agreements, however, are allocated based on the residence of the counterparty, without taking into consideration the location of the collateral. The proposal would require allocation of exposures on an ultimate-risk basis (subject to the netting described above). As an example of how the proposed financial collateral recognition would operate, if the U.S. operations of a foreign banking organization placed cash with the parent foreign banking organization through a reverse repurchase agreement, and the parent foreign banking organization provided securities that qualified as financial collateral, the exposure of the U.S. operations would be reduced by the value of the securities in a manner consistent with the capital rule's collateral haircut approach. If the value of the claim exceeds the value of the financial collateral after taking into account supervisory haircuts, then the uncollateralized portion of the claim would be included in the foreign banking organization's measure of cross-jurisdictional activity. Conversely, if the value of the collateral after taking into account supervisory haircuts exceeds the value of the claim, the exposure to the non-U.S. affiliate would be excluded from the measure of cross-jurisdictional activity. In addition to the proposal to exclude intercompany liabilities and certain collateralized intercompany claims from the measure of cross-jurisdictional activity, the agencies are requesting comment on alternatives to adjusting the measure for cross-jurisdictional activity to recognize that the U.S. intermediate holding company or combined U.S. operations engage in substantial and regular transactions with non-U.S. affiliates. Under the first alternative, the agencies would exclude all transactions with non-U.S. affiliates from the computation of the cross-jurisdictional activity of a U.S. intermediate holding company or the combined U.S. operations of a foreign banking organization. This alternative would focus only on third-party assets and liabilities and may be a less burdensome way to account for the structural differences between foreign banking organizations' operations in the United States and large domestic holding companies. Under the second alternative, the agencies would adjust the $75 billion threshold for the cross-jurisdictional activity indicator. For example, the agencies could apply a threshold of $100 billion for cross-jurisdictional activity such that the U.S. intermediate holding company or combined U.S. operations of a foreign banking organization would be subject to Category II capital or liquidity standards if it exceeded this threshold. This alternative would recognize the flows between a foreign banking organization's U.S. operations and its foreign affiliates without making any additional adjustments to address intercompany liabilities or collateralized intercompany claims. This alternative would not require a foreign banking organization to monitor collateral transfers or calculate supervisory haircuts in measuring its cross-jurisdictional activity. Question 3: What are the advantages and disadvantages of recognizing the value of collateral for certain transactions with non-U.S. affiliates in the computation of the cross-jurisdictional activity of a U.S. intermediate holding company or the combined U.S. operations of a foreign banking organization? How would this recognition align with the objectives of the proposed indicator as a measure of operational complexity, scope, and risks associated with operations and activities in foreign jurisdictions and with principles of national treatment and equality of competitive opportunity? Question 4: What would be the advantages and disadvantages of excluding from the measure of cross-jurisdictional activity liabilities to non-U.S. affiliates? How would this exclusion align with the objectives of the proposed indicator as a measure of operational complexity, scope, and risks associated with operations and activities in foreign jurisdictions and with principles of national treatment and equality of competitive opportunity? Question 5: What are the advantages and disadvantages of recognizing collateral for all repo-style transactions and other collateralized positions? To what extent should the type of transaction determine whether collateral is recognized? Question 6: What are the advantages and disadvantages of relying on the definition of financial collateral in the agencies' capital rule and applying supervisory haircuts in calculating the amount of cross-jurisdictional claims? What are the burdens associated with this approach and how do these burdens compare with the benefits? Are there other criteria that the agencies should consider in addition to this approach (e.g., the amount of time that would be needed to monetize the collateral) and why? Question 7: What would be the advantages and disadvantages of other ways to define eligible collateral, such relying on the definition of HQLA in the LCR rule? Under this alternative approach, collateral would be recognized in the calculation of the exposure if the collateral is HQLA. Would relying on the definition of HQLA help ensure the collateral is liquid and provide greater clarity on the types of collateral that could be recognized? What are the burdens associated with this approach and how do these burdens compare with the benefits? Question 8: As discussed above, measuring cross-jurisdictional activity on an ultimate risk basis takes into consideration both the type of collateral, and the location of the collateral or issuer. On the FFIEC 009, if collateral is in the form of investment grade debt or marketable securities, risk is allocated based on the residence of the issuer of the security, while cash collateral is allocated based on the residence of the legal entity where the cash is held. What would be the advantages and disadvantages of allocating cross-jurisdictional claims based on the location of the entity holding the collateral for securities and cash? Question 9: On the FFIEC 009, repurchase agreements, securities lending agreements, and other similar financial transactions cannot be re-allocated or “transferred” to a different jurisdiction based on the location of the collateral or issuer. What would be the advantages and disadvantages of allowing repurchase agreements, securities financing transactions, and other similar agreements to be excluded from the measure of cross-jurisdictional activity if the collateral was issued by a U.S. entity or, for cash collateral, located in the United States? How would such treatment align with the objectives of the proposed indicator as a measure of operational complexity, scope, and risks associated with operations and activities in foreign jurisdictions and with principles of national treatment and equality of competitive opportunity? Question 10: What are the advantages and disadvantages of measuring cross-jurisdictional activity on an immediate-counterparty basis (i.e., on the basis of the country of residence of the borrower) rather than on an ultimate-risk basis? What, if any, clarifications could be made to the measurement of cross-jurisdictional activity on an ultimate-risk basis to ensure consistency across banking organizations and more accurate assessment of risk? Question 11: What is the most appropriate way in which the proposed cross-jurisdictional activity indicator could account for the risk of transactions with a delayed settlement date, and why? What are the advantages and disadvantages of the use of settlement date accounting versus trade date accounting for purposes of the cross-jurisdictional activity indicator? Question 12: What are the advantages or disadvantages of the alternative approaches to measuring non-U.S. affiliate transactions for purposes of the cross-jurisdictional activity indicator? How do these alternatives compare to the proposal? Question 13: What other positions, if any, should be excluded from or included in the cross-jurisdictional activity indicator for purposes of determining capital and liquidity standards, and why? How would excluding from the cross-jurisdictional activity measure a broader or narrower set of intercompany assets and liabilities align with the objectives of the proposed indicator as a measure of operational complexity, scope, and risks associated with operations and activities in foreign jurisdictions and with principles of national treatment and equality of competitive opportunity? Question 14: What would be the advantages and disadvantages of including in or excluding from the proposed cross-jurisdictional activity indicator positions of the U.S. branches and agencies of a foreign banking organization with the parent foreign banking organization or other non-U.S. affiliates? For example, what would be the advantages or disadvantages of including or excluding reported gross due from and gross due to the parent foreign banking organization or other non-U.S. affiliates? Question 15: What modifications to the proposed cross-jurisdictional activity measure should the agencies consider to better align it with the proposed treatment for U.S. banking organizations under the domestic interagency proposal and promote consistency in the measurement of assets and liabilities across the agencies' regulatory capital and liquidity framework and applicable accounting standards, and why? How would any such modification more appropriately account for the risks of cross-jurisdictional activity for foreign banking organizations and mitigate risks to U.S. financial stability? Question 16: To what extent would using a particular measure of cross-jurisdictional activity create incentives for foreign banking organizations to restructure relationships between U.S. subsidiaries, U.S. branches and agencies, and non-U.S. affiliates? Question 17: What alternative indicators should the agencies consider to the proposed cross-jurisdictional activity indicator as a measure of cross-border activity of a foreign banking organization? How would any alternative indicator align with the proposed cross-jurisdictional activity measure for U.S. banking organizations under the domestic interagency proposal? Question 18: What are the advantages and disadvantages of the proposal or the alternatives in combination with other potential changes to the measurement and reporting of cross-jurisdictional activity discussed above (e.g., ultimate-risk basis)? How would changes to the measurement and reporting of cross-jurisdictional activity in combination with the proposal or alternatives align with the objectives of the proposed indicator as a measure of operational complexity, scope, and risks associated with operations and activities in foreign jurisdictions and with principles of national treatment and equality of competitive opportunity? Question 19: Data reported on the FR Y-15 is used to measure the systemic risk of large banking organizations, including to identify and calibrate surcharges applied to U.S. GSIBs. The Board may amend the FR Y-15 in this context, and would seek comment on the effect of any changes on the U.S. GSIB surcharge framework as well as on the advantages and disadvantages of incorporating these changes into the calculation of risk indicators. The Board also may separately amend the FR Y-15 in the context of the calculation of risk indicators. What are the advantages and disadvantages of the risk-based indicator definitions tracking the inputs to the U.S. GSIB surcharge framework? b. Nonbank Assets The amount of a banking organization's investment in nonbank subsidiaries provides a measure of the organization's business and operational complexity. Specifically, banking organizations with significant investments in nonbank subsidiaries are more likely to have complex corporate structures and funding relationships, and substantial inter-affiliate transactions that can add operational challenges. A banking organization's complexity is positively correlated with the impact of the organization's failure or distress. 58 U.S. intermediate holding companies can maintain significant investments in nonbank subsidiaries, and therefore may present attendant risks. 58 See Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies, 80 FR 49082 (August 14, 2015). See also “Global systemically important banks: Updated assessment methodology and the higher loss absorbency requirement” (paragraph 25), available at http://www.bis.org/publ/bcbs255.htm. Nonbank activities may involve a broader range of risks than those associated with banking activities, and can increase interconnectedness with other financial firms, requiring sophisticated risk management and governance, including capital planning, stress testing, and liquidity risk management. If not adequately managed, the risks associated with nonbank activities could present significant safety and soundness concerns and increase financial stability risks. The distress or failure of a nonbank subsidiary could be destabilizing to the U.S. operations of a foreign banking organization and the foreign banking organization itself, and cause counterparties and creditors to lose confidence in the organization's U.S. or global operations. Nonbank assets also reflect the degree to which a foreign banking organization and its U.S. operations may be engaged in activities through legal entities that are not subject to separate capital or liquidity requirements or to the direct regulation and supervision applicable to a regulated banking entity. Under the proposal, nonbank assets would be measured as the average amount of assets in consolidated nonbank subsidiaries 59 and any direct investments in unconsolidated nonbank subsidiaries. 60 The proposed nonbank assets indicator would align with the nonbank assets indicator in the domestic interagency proposal, as well as with the Board's capital plan rule. 61 59 The proposed measure of nonbank assets would exclude assets in a national bank, state member bank, and state nonmember bank, as well as assets in other depository institutions, including a federal savings association, federal savings bank, or state savings association. The nonbank assets measure also would exclude the assets in each Edge or Agreement Corporation that is held through a banking subsidiary. 60 The proposed measure of nonbank assets would include the assets in each Edge or Agreement Corporation not held through a banking subsidiary, and would exclude assets in a federal savings association, federal savings bank, or state savings association. 61 See 12 CFR 225.8. The capital plan rule defines “average total nonbank assets” with respect to a U.S. intermediate holding company subject to the capital plan rule as the average of the total nonbank assets of the U.S. intermediate holding company, calculated in accordance with the instructions to the FR Y-9LP, for the four most recent consecutive quarters or, if the U.S. intermediate holding company has not filed the FR Y-9LP for each of the four most recent consecutive quarters, for the most recent quarter or consecutive quarters, as applicable. 12 CFR 225.8(d)(2). c. Off-Balance Sheet Exposure Off-balance sheet exposure complements the measure of size by taking into consideration financial and banking activities not reflected on the balance sheet of a foreign banking organization's U.S. operations. Like size, off-balance sheet exposure provides a measure of the extent to which customers or counterparties may be exposed to a risk of loss or suffer a disruption in the provision of services. In addition, off-balance sheet exposure can lead to significant future draws on liquidity, particularly in times of stress. In the financial crisis, for example, vulnerabilities among the U.S. operations of foreign banking organizations were exacerbated by draws on commitments. These types of exposures can be a source of safety and soundness risk, as organizations with significant off-balance sheet exposure may have to fund these positions in the market in a time of stress. The nature of these risks for foreign banking organizations of significant size and complexity can also lead to financial stability risk, as they can manifest rapidly and with less transparency to other market participants. In addition, because draws on off-balance sheet exposures such as committed credit and liquidity facilities tend to increase in times of stress, they can exacerbate the effects of stress conditions. 62 62 See William F. Bassett, Simon Gilchrist, Gretchen C. Weinbach, Egon Zakrajšek, “Improving Our Ability to Monitor Bank Lending,” in Risk Topography: Systemic Risk and Macro Modeling 149-161 (Markus Brunnermeier and Arvind Krishnamurthy, eds. 2014), available at: http://www.nber.org/chapters/c12554. Off-balance sheet exposure may also amplify contagion effects. Some off-balance sheet exposures, such as derivatives, are concentrated among the largest financial firms. 63 The distress or failure of one party to a financial contract, such as a derivative or securities financing transaction, can trigger disruptive terminations of these contracts that destabilize the defaulting party's otherwise solvent affiliates. 64 Such a default also can lead to disruptions in markets for financial contracts, including by resulting in rapid market-wide unwinding of trading positions. 65 In this way, the effects of one party's failure or distress can be amplified by its off-balance sheet connections with other financial market participants. 63 See, e.g., Sheri M. Markose, Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and its Mitigation with Super-Spreader Tax, IMF Working Papers (Nov. 30, 2012), available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Systemic-Risk-from-Global-Financial-Derivatives-A-Network-Analysis-of-Contagion-and-Its-40130. 64 To address these risks at the largest and most systemically risky firms, the agencies have established restrictions relating to the qualified financial contracts of U.S. GSIBs, the depository institution subsidiaries of U.S. GSIBs, and the U.S. operations of systemically important foreign banking organizations. See 12 CFR part 252, subpart I (Board); 12 CFR part 47 (OCC); and 12 CFR part 382 (FDIC). 65 See, e.g., The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act, 5 FDIC Quarterly No. 2, 31 (2011), https://www.fdic.gov/bank/analytical/quarterly/2011-vol5-2/article2.pdf. Under the proposal, off-balance sheet exposure would be measured as the difference between total exposure and on-balance sheet assets. Total exposure includes on-balance sheet assets plus certain off-balance sheet exposures, including derivative exposures, repo-style transactions, and other off-balance sheet exposures (such as commitments). d. Weighted Short-Term Wholesale Funding The proposed weighted short-term wholesale funding indicator would measure the level of reliance on short-term wholesale funding sources. 66 This indicator provides a measure of liquidity risk, as reliance on short-term, generally uninsured funding from more sophisticated counterparties can make those operations vulnerable to large-scale funding runs. In particular, foreign banking organizations that fund long-term assets with short-term liabilities from financial intermediaries such as investment funds may need to rapidly sell less liquid assets to meet withdrawals and maintain their operations in a time of stress, which they may be able to do only at “fire sale” prices. Such asset fire sales can cause rapid deterioration in a foreign banking organization's financial condition and negatively affect broader financial stability by driving down asset prices across the market. As a result, weighted short-term wholesale funding reflects both safety and soundness and financial stability risks. Short-term wholesale funding also provides a measure of interconnectedness among market participants, including other financial sector entities, which can provide a mechanism for transmission of distress. Weighted short-term wholesale funding would include exposures between the U.S. operations of a foreign banking organization and its non-U.S. affiliates, as reliance on short-term wholesale funding from foreign affiliates can contribute to the funding vulnerability of a foreign banking organization's U.S. operations in times of stress. 66 Specifically, short-term wholesale funding is the amount of a firm's funding obtained from wholesale counterparties or retail brokered deposits and sweeps with a remaining maturity of one year or less. Categories of short-term wholesale funding are then weighted based on four residual maturity buckets; the asset class of collateral, if any, backing the funding; and characteristics of the counterparty. Weightings reflect risk of runs and attendant fire sales. See 12 CFR 217.406 and Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies, 80 FR 49082 (August 14, 2015). Question 20: What are the advantages and disadvantages of the proposed risk-based indicators? What different indicators should the agencies consider, and why? Question 21: At what level should the threshold for each indicator be set, and why? Commenters are encouraged to provide data supporting their recommendations. Question 22: The agencies are considering whether Category II standards should apply based on a banking organization's weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure, using a higher threshold than the $75 billion that would apply for Category III standards, in addition to the thresholds discussed above based on asset size and cross-jurisdictional activity. For example, a foreign banking organization's combined U.S. operations and its depository institution subsidiaries could be subject to Category II standards if one or more of these indicators equaled or exceeded a level such as $100 billion or $200 billion. A threshold of $200 billion would represent at least 30 percent and as much as 80 percent of the combined U.S. assets of a foreign banking organization with between $250 billion and $700 billion in combined U.S. assets. If the agencies were to adopt additional indicators for purposes of identifying foreign banking organizations with U.S. operations that should be subject to Category II standards, at what level should the threshold for each indicator be set, and why? Commenters are encouraged to provide data supporting their recommendations. 3. Alternative Scoping Criteria An alternative approach for tailoring the application of enhanced prudential standards to a foreign banking organization would be to use a single, comprehensive score to assess the risk profile and systemic footprint of a foreign banking organization's combined U.S. operations or U.S. intermediate holding company. The Board uses such an identification methodology (scoring methodology) to identify a U.S. GSIB and apply risk-based capital surcharges to these firms. As an alternative in the domestic interagency proposal, the agencies described a scoring methodology that could be used to tailor prudential standards for domestic banking organizations. The scoring methodology in the Board's regulations is used to calculate a U.S. GSIB's capital surcharge under two methods. 67 The first method is based on the sum of a bank holding company's systemic indicator scores reflecting its size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity (method 1). The second method is based on the sum of these same measures of risk, except that the substitutability measures are replaced with a measure of the bank holding company's reliance on short-term wholesale funding (method 2). 68 Consistent with the domestic interagency proposal and as an alternative to the threshold approach under this proposal, the agencies are seeking comment on use of the scoring methodology to tailor the application of enhanced prudential standards to the U.S. operations of foreign banking organizations. 67 Application of a U.S. GSIB's capital surcharge is determined based on an annual calculation. Similarly, the alternative scoping criteria under this proposal would be based on an annual calculation. See 12 CFR part 217, subpart H. 68 For more discussion relating to the scoring methodology, please see the Board's final rule establishing the scoring methodology. See Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies, 80 FR 49082 (Aug. 14, 2015). The scoring methodology was designed to identify and assess the systemic risk of large U.S. banking organizations, and similarly can be used to measure the risks posed by the U.S. operations of foreign banking organizations. The component measures of the scoring methodology identify banking organizations that have heightened risk profiles, and provide a basis for assessing risk to safety and soundness and U.S. financial stability. Size, interconnectedness, cross-jurisdictional activity, substitutability, complexity, and short-term wholesale funding are indicators of risk for both foreign and domestic banking organizations. Similar to the thresholds-based approach set forth in this proposal, the indicators used in the scoring methodology closely align with the risk-based factors specified in section 165 of the Dodd-Frank Act for applying enhanced prudential standards. Because this information would be reported publicly, use of the scoring methodology would promote transparency in the application of such standards to foreign banking organizations. The Board has previously used the scoring methodology and global methodology 69 to identify and apply enhanced prudential standards to U.S. subsidiaries and operations of foreign global systemically important banking organizations (foreign GSIBs). For example, the Board's restrictions on qualified financial contracts and total loss-absorbing capacity requirements apply to U.S. GSIBs and the U.S. operations of foreign GSIBs, with the latter identified under the Board's scoring methodology or the global methodology. 70 69 Global methodology means the assessment methodology and the higher loss absorbency requirement for global systemically important banks issued by the BCBS, as updated from time to time. 12 CFR 252.2. 70 See 12 CFR 252.82(b) (definition of “covered entity” with regard to restrictions on qualified financial contracts); 12 CFR 252.160 (definition of “covered IHC” with regard to total loss-absorbing capacity requirements). See also, 12 CFR 252.153(b) (identification of foreign GSIBs in the enhanced prudential standards rule; 12 CFR 252.170(a)(2)(ii) (definition of “major foreign banking organization” in single counterparty credit limits rule). Under the alternative scoring approach, the size of a foreign banking organization's combined U.S. assets, together with the method 1 or method 2 score of its U.S. operations under the scoring methodology, would be used to determine which category of liquidity standards would apply. Consistent with the proposal, most enhanced prudential standards would be based on the method 1 or method 2 score applicable to a foreign banking organization's combined U.S. operations. The application of capital standards, however, would apply based on the method 1 or method 2 score of a foreign banking organization's U.S. intermediate holding company depository institution subsidiary. U.S. intermediate holding companies already report information required to calculate method 1 and method 2 scores, and in connection with this proposal, those reporting requirements would be extended to include a foreign banking organization's combined U.S. operations. 71 71 As discussed above, the Board is separately proposing to amend the FR Y-15 to collect risk-indicator data for the combined U.S. operations of foreign banking organizations. To determine which category of standards would apply under the alternative scoring methodology, the Board considered the distribution of method 1 and method 2 scores of the U.S. operations of foreign banking organizations, U.S. intermediate holding companies, domestic bank holding companies, and certain savings and loan holding companies with at least $100 billion in total consolidated assets. 72 As discussed below, the agencies are providing ranges of scores for the application of Category II and Category III standards. If the agencies adopt a final rule that uses the scoring methodology to establish tailoring thresholds, the agencies would set a single score within the listed ranges for the application of Category II and Category III standards. Like under the indicators-based approach, a subsidiary depository institution of a foreign banking organization would be subject to the same category of standards as the foreign banking organization. 72 In conducting its analysis, the Board considered method 1 and method 2 scores as of September 30, 2018. Category II. In selecting the ranges of method 1 or method 2 scores that could define the application of Category II standards, the Board considered the potential of a banking organization's material distress or failure to disrupt the U.S. financial system or economy. The Board estimated method 1 and method 2 scores for domestic banking organizations with more than $250 billion in total consolidated assets, and foreign banking organizations with more than $250 billion in combined U.S. assets. To this sample, the Board added estimates of method 1 and method 2 scores for a banking organization whose distress impacted U.S. financial stability during the crisis (Wachovia), and estimated method 1 and method 2 scores assuming significant growth in operations ( e.g., if one or more U.S. intermediate holding companies each had $700 billion in assets). The Board also considered the outlier method 1 and method 2 scores for domestic and foreign banking organizations with more than $250 billion in total consolidated assets that are not U.S. GSIBs. 73 73 Outliers can be determined by a number of statistical methods. For these purposes, the Board computed an outlier as the third quartile plus three times the interquartile range of method 1 and method 2 scores of these U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies, and the combined U.S. operations of foreign banking organizations. Based on this analysis and to maintain comparability to the domestic interagency proposal, under the alternative scoring approach the agencies would apply Category II liquidity standards to any foreign banking organization with at least $100 billion in combined U.S. assets and whose combined U.S. operations have (a) a method 1 score that meets or exceeds a minimum score between 60 and 80, or (b) a method 2 score that meets or exceeds a minimum score between 100 to 150. These same size thresholds and score ranges would apply to U.S. intermediate holding companies for the application of capital standards. Category III. Under the proposal, the agencies would apply Category III liquidity standards to a foreign banking organization with combined U.S. assets of $250 billion or more, or, for capital standards, a U.S. intermediate holding company with total consolidated assets of $250 billion or more that does not meet the criteria for Category II. This reflects, among other things, the crisis experience of domestic banking organizations with total consolidated assets of $250 billion or more, which presented materially different risks to U.S. financial stability relative to banking organizations with less than $250 billion in assets. Similarly, under the domestic interagency proposal, the agencies would at a minimum apply Category III standards to a banking organization with assets of $250 billion or more, reflecting the threshold above which the Board must apply enhanced prudential standards under section 165. The domestic interagency proposal seeks comment on an alternative scoring approach under which a banking organization with total consolidated assets between $100 billion and $250 billion that has a method 1 or method 2 score within a specified range would be subject to Category III standards. Specifically, the agencies proposed selecting a minimum score for application of Category III standards between 25 and 45 under method 1, or of between 50 and 85 under method 2. The maximum score for application of the Category III standards would be one point lower than the minimum score selected for application of Category II standards. In selecting these ranges, the Board compared the scores of domestic banking organizations with total consolidated assets of between $100 billion and $250 billion with those of banking organizations with total consolidated assets greater than $250 billion. The Board performed a similar analysis including the scores of foreign banking organizations and found similar results. The agencies are therefore considering the same thresholds for application of Category III standards to foreign banking organizations under the alternative scoring approach. Use of these thresholds would maintain comparable treatment between domestic banking organizations and the U.S. operations of foreign banking organizations under the alternative scoring approach. Specifically, under the alternative scoring approach, Category III standards would apply to a foreign banking organization with combined U.S. assets between $100 billion and $250 billion with a method 1 score that meets or exceeds a minimum score between 25 and 45, or a method 2 score that meets or exceeds a minimum score between 50 and 85, and in either case is below the score threshold for Category II standards. These same size thresholds and score ranges would apply to U.S. intermediate holding companies for the application of capital standards. Category IV: Under the alternative scoring approach, Category IV liquidity standards would apply to a foreign banking organization with at least $100 billion in combined U.S. assets whose method 1 or method 2 score for its combined U.S. operations is below the minimum score threshold for Category III. Likewise, Category IV capital standards would apply to a foreign banking organization with a U.S. intermediate holding company that has at least $100 billion in total assets and does not meet any threshold specified for Category III. Question 23: What are the advantages and disadvantages to the use of the alternative scoring approach and category thresholds described above instead of the proposed thresholds for foreign banking organizations? Question 24: If the agencies were to use the alternative scoring approach to differentiate foreign banking organizations' U.S. operations for purposes of tailoring prudential standards, should the agencies use method 1 scores, method 2 scores, or both? What are the challenges of applying the alternative scoring approach to the combined U.S. operations or U.S. intermediate holding company of a foreign banking organization? What modifications to the alternative scoring approach, if any, should the agencies consider (e.g., should intercompany transactions be reflected in the calculation of indicators)? Question 25: If the agencies adopted the alternative scoring approach, what would be the advantages or disadvantages of requiring scores to be calculated for the U.S. operations of a foreign banking organization at a frequency greater than annually, including, for example, requiring scores to be calculated on a quarterly basis? Question 26: With respect to each category of standards described above, at what level should the method 1 or method 2 score thresholds be set for the combined U.S. operations or U.S. intermediate holding company of a foreign banking organization and why? Commenters are encouraged to provide data supporting their recommendations. Question 27: What other approaches should the agencies consider in setting thresholds for tailored prudential standards for foreign banking organizations and why? How would any such approach affect the comparability of requirements across domestic banking organizations and foreign banking organizations with U.S. operations? C. Determination of Applicable Category of Standards Under the proposal, a U.S. intermediate holding company with $100 billion or more in total consolidated assets, and a depository institution subsidiary thereof, would be required to determine its applicable category of capital standards based on the risk-based indicators applicable to the U.S. intermediate holding company. Similarly, the proposal would require a foreign banking organization with combined U.S. assets of $100 billion or more, and covered depository institution subsidiaries thereof, to determine the applicable category of liquidity standards based on the risk-based indicators of the combined U.S. operations. In order to capture significant changes, rather than temporary fluctuations, in the risk profile of the U.S. intermediate holding company or the foreign banking organization's combined U.S. operations, a category of standards would apply based on the levels of each risk-based indicator over the preceding four calendar quarters. For capital standards, a category of standards would apply to a U.S. intermediate holding company and any depository institution subsidiary thereof based on the average levels of each indicator over the preceding four calendar quarters for the U.S. intermediate holding company. 74 A U.S. intermediate holding company and any depository institution subsidiary would remain subject to a category of standards until it no longer meets the indicators for that category in each of the four most recent calendar quarters, or until the U.S. intermediate holding company meets the criteria for another category of standards based on an increase in the average value of one or more risk-based indicator over the preceding four calendar quarters. 74 With respect to a U.S. intermediate holding company that has reported a risk-based indicator for less than four quarters, the proposal would refer to the average of the most recent quarter or quarters. For liquidity standards, the category of standards applicable to a foreign banking organization and any covered depository institution subsidiary thereof would be based on the average levels of each indicator over the preceding four calendar quarters for the combined U.S. operations. 75 A foreign banking organization and any covered depository institution subsidiary thereof would remain subject to a category of standards until the foreign banking organization's combined U.S. operations no longer meet the indicators for that category in each of the four most recent calendar quarters, or until the foreign banking organization meets the criteria for another category of standards based on an increase in the average value of one or more risk-based indicator for the preceding four calendar quarters. 76 75 With respect to a foreign banking organization that has reported a risk-based indicator for less than four quarters, the proposal would refer to the average of the most recent quarter or quarters. 76 In addition, as discussed in section V.G of this Supplementary Information section, consistent with the LCR rule and NSFR proposed rule and the domestic interagency proposal, once a foreign banking organization or any covered depository institution subsidiary is subject to LCR or NSFR requirements under the proposal, it would remain subject to the rule until the applicable agency determines that application of the rule is not appropriate in light of its asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. Changes in capital or liquidity requirements that result from a change in category of capital or liquidity standards, respectively, would take effect on the first day of the second quarter following the change in the applicable category. For example, a U.S. intermediate holding company that changes from Category IV to Category III capital standards based on an increase in the average value of its risk-based indicators over the first, second, third, and fourth quarters of a calendar year would be subject to Category III capital standards beginning on the first day of the second quarter of the following year (April, in this example). Under the proposal, a U.S. intermediate holding company or depository institution subsidiary of a foreign banking organization could be subject to different categories of standards for capital and liquidity. Consider, for example, a foreign banking organization with combined U.S. assets of $400 billion, cross-jurisdictional activity of $80 billion at its combined U.S. operations, and a U.S. intermediate holding company with consolidated total assets of $260 billion and cross-jurisdictional activity of $40 billion. In this example, the foreign banking organization would be subject to Category II liquidity standards, including with respect to its LCR and NSFR calculation for any U.S. intermediate holding company, because the combined U.S. operations have more than $75 billion in cross-jurisdictional activity. Any covered depository institution subsidiary of the foreign banking organization in this example would likewise be subject to Category II liquidity standards. However, the U.S. intermediate holding company and any depository institution subsidiary thereof would be subject to Category III capital standards based on the U.S. intermediate holding company's total consolidated assets, which are more than $250 billion but less than $700 billion, and cross-jurisdictional activity, which is less than $75 billion. Question 28: What are the advantages and disadvantages of determining the category of standards applicable to a foreign banking organization's combined U.S. operations, its U.S. intermediate holding company, or its depository institution subsidiary on a quarterly basis? Discuss whether determination on an annual basis would be more appropriate and why. Question 29: What are the advantages and disadvantages of the proposed transition period for a foreign banking organization to comply with a change in its applicable requirements due to changes in its U.S. risk profile? What would be the advantages or disadvantages of providing additional time to conform to new requirements? IV. Capital Requirements Under the proposal, capital requirements would continue to apply to U.S. intermediate holding companies and depository institution subsidiaries of foreign banking organizations. Applying generally applicable and tailored capital requirements to U.S. intermediate holding companies and depository institution subsidiaries of foreign banking organizations both strengthens the capital position of U.S. subsidiaries of foreign banking organizations and provides parity in the capital treatment for U.S. bank holding companies and the U.S. subsidiaries of foreign banking organizations. In addition, aligning the capital requirements between U.S. subsidiaries of foreign banking organizations and U.S. bank holding companies is consistent with international capital standards published by the BCBS. 77 77 See, e.g., BCBS, “International Convergence of Capital Measurement and Capital Standards,” Sec. 781 (June 2006). A. Category II Standards In addition to the generally applicable capital requirements, the proposal would require a U.S. intermediate holding company and any depository institution subsidiary thereof subject to Category II standards to maintain a minimum supplementary leverage ratio of 3 percent of tier 1 capital to on-balance-sheet assets and certain off-balance sheet exposures. These banking organizations would also be required to recognize most elements of AOCI in regulatory capital. Reflecting AOCI in regulatory capital results in a more sensitive measure of capital, which is important for maintaining the resilience of these banking organizations. Additionally, these banking organizations would be subject to the countercyclical capital buffer, if applicable. Consistent with current requirements, the U.S. intermediate holding company (and depository institution subsidiaries thereof) would not be required to calculate risk-based capital requirements using the advanced approaches under the capital rule, and would instead use the generally applicable capital requirements for calculating risk-weighted assets. The BCBS recently completed revisions to its capital standards, revising the methodologies for credit risk, operational risk, and market risk. The agencies are considering how to most appropriately implement these standards in the United States, including potentially replacing the advanced approaches with risk-based capital requirements based on the Basel standardized approaches for credit risk and operational risk. Any such changes to applicable risk-based capital requirements would be subject to notice and comment through a future rulemaking. The agencies note that there are currently additional outstanding notices of proposed rulemaking that make reference to the advanced approaches thresholds to set the scope of application. First, in October 2017, the agencies proposed simplifications to the capital rule (simplifications proposal), proposing a simplified capital treatment for mortgage servicing assets, deferred tax assets arising from temporary differences that an institution could not realize through net operating loss carrybacks, investments in the capital of unconsolidated financial institutions, and minority interest. 78 For purposes of that pending notice, the requirements that would apply to “advanced approaches banking organizations” would be included as Category II capital standards under this proposal. 78 See Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction; Proposed Rule, 82 FR 49984, 49985 (October 27, 2017). In addition, the agencies have separately proposed to adopt the standardized approach for counterparty credit risk for derivatives exposures (SA-CCR) and to require advanced approaches banking organizations to use SA-CCR for calculating their risk-based capital ratios and a modified version of SA-CCR for calculating total leverage exposure under the supplementary leverage ratio. 79 For purposes of the SA-CCR proposal, the requirements that would apply to “advanced approaches banking organizations” would be included as Category II capital standards under this proposal. 79 See Standardized Approach for Calculating the Exposure Amount of Derivative Contracts; Proposed Rule, 83 FR 64660 (December 17, 2018). Question 30: What modifications, if any, should the agencies consider to the proposed Category II capital standards for foreign banking organizations, and why? B. Category III Standards In addition to the generally applicable capital requirements, the proposal would require a U.S. intermediate holding company subject to Category III standards to maintain a minimum supplementary leverage ratio of 3 percent given its size and risk profile. For example, a U.S. intermediate holding company subject to Category III standards could include a U.S. intermediate holding company with material off-balance sheet exposures that are not accounted for in the traditional U.S. tier 1 leverage ratio but are included in the supplementary leverage ratio. The supplementary leverage ratio is important for these banking organizations to constrain the build-up of off-balance sheet exposures, which can contribute to instability and undermine safety and soundness of individual banking organizations. Category III standards also would include the countercyclical capital buffer, given these banking organizations' significant role in financial intermediation in the United States individually and as a group. The operations of U.S. intermediate holding companies that would be subject to Category III standards have a substantial enough footprint that the capital conservation buffer expanded to include the countercyclical capital buffer would support the prudential goals of the capital buffer requirements. Any depository institution subsidiary of a U.S. intermediate holding company that is subject to Category III capital standards would likewise be subject to Category III capital standards. As noted above, there are currently additional outstanding notices of proposed rulemaking that make reference to the advanced approaches thresholds to set the scope of application. With respect to the simplifications proposal described in section IV.A of this Supplementary Information section, the requirements that would apply to “non-advanced approaches banking organizations” would be included as Category III or IV capital standards under this proposal. 80 For purposes of determining its counterparty credit risk for derivatives under the proposed SA-CCR (described above in section IV.A of this SUPPLEMENTARY INFORMATION section), if adopted, a U.S. intermediate holding company and its depository institution subsidiaries that are not advanced approaches banking organizations (under this proposal, that are not subject to Category II standards) could elect to use SA-CCR for calculating derivatives exposure in connection with their risk-based capital ratios and supplementary leverage ratios or to continue to use the current exposure method. 80 See Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction; Proposed Rule, 82 FR 49984 (October 27, 2017). Question 31: Under the capital rule, the agencies apply certain provisions, such as the supplementary leverage ratio and countercyclical capital buffer, based on the same thresholds as advanced approaches capital requirements. The proposal would establish different applicability thresholds for the supplementary leverage ratio and countercyclical capital buffer by including these requirements as Category III standards. This approach would increase the risk-sensitivity of the framework and allow for the retention of key elements of the capital rule for U.S. intermediate holding companies and their depository institution subsidiaries subject to Category III standards. However, it would also increase the complexity of the capital rule. To what extent, if any, would this additional complexity increase compliance costs for large banking organizations (for example, by requiring banking organizations to monitor and manage the proposed risk-based indicator thresholds)? To what extent, if any, would the proposed approach add complexity for market participants when comparing the capital adequacy of U.S. intermediate holding companies and their depository institution subsidiaries in different categories? The agencies request comment on the advantages and disadvantages of establishing separate Category III capital standards for U.S. intermediate holding companies and their depository institution subsidiaries that are different from either Category II or [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-09245. Public record. Not legal advice.