Fed Proposes Major Shift in Regulation of Foreign Banks

On December 14, 2012, the US Federal Reserve released a proposed rule that would significantly alter the regulatory approach for the US operations of non-US banking groups.

It would require foreign banking organizations to organize all US entities (except for foreign bank branches and agencies) into an Intermediate Holding Company (IHC) that would be supervised on a consolidated basis by the Fed, and would apply US prudential rules on capital, liquidity, and stress testing to the IHC (with supplemental rules on liquidity buffers and risk management applicable to branches and agencies). This would have significant economic, operational, and structural implications for large foreign banks with a US presence.

In our note, Fed Proposes Major Shift in Regulation of Foreign Banks, we summarize the major requirements of the proposed rule, outline the reasons the Fed has undertaken such a substantial shift in regulatory policy as well as some of the potential unintended consequences, and assess the implications for affected institutions. Given the importance of this proposed policy, we recommend that affected institutions begin work now to respond and to account for the proposed regime's potential long-term implications as they set strategy, make investments, and re-align businesses.

Fed Proposes Major Shift in Regulation of Foreign Banks