Enhanced Prudential Standards for Foreign Banking Organizations

An impact assessment.

On December 14, 2012, the Federal Reserve formally proposed new structural requirements and enhanced prudential standards for Foreign Banking Organizations (FBOs) under Sections 165 and 166 of the Dodd-Frank Act (DFA). This study assesses the potential impact of the proposed rule on the US capital markets, focusing on the requirement to establish a US intermediate holding company (IHC) as the umbrella organization for all US operations conducted outside US branches and agencies.

 Our analysis draws on proprietary data collected from 17 FBOs to present new insights into the level and nature of FBO participation in the US financial system, previously unavailable in the public domain.

We find that the proposed IHC requirements would increase costs and reduce profitability for affected FBOs, likely resulting in significant capacity withdrawals from US capital markets. US repo markets--which help to facilitate trading and market-making in US Treasuries, Agency debt and MBS, equities, and other major US securities markets--would be particularly affected, as FBO subsidiaries provide much of the intermediation and market-making at the core of the US repo market. We estimate that the proposed rule could lead FBOs to withdraw approximately $330 BN of capacity from US repo markets, with cascading negative effects on the efficiency and liquidity of all US financial markets.

Enhanced Prudential Standards for Foreign Banking Organizations