Federal Banking Agencies Release Foreign Bank Tailoring Proposals

April 17, 2019

Last week, the federal banking agencies released much-anticipated proposals to tailor the application of enhanced prudential standards and capital and liquidity requirements for the U.S. operations of foreign banks.

The agencies issued related proposals for U.S. banking organizations in October of last year, and so far it appears that the agencies will look to finalize the proposals on the same timetable.  The agencies also requested comment on whether to impose standardized liquidity requirements on the U.S. branches and agencies of foreign banks, an idea likely to generate significant controversy.

The foreign bank proposals would use a categorization system based on size and risk-based indicators that is similar in many respects to the categorization system previously proposed for U.S. banking organizations.  However, the way the thresholds for the categories would be measured and applied to foreign banks’ U.S. operations raises significant issues.  The proposal would reduce EPS requirements for some foreign banks that have smaller U.S. footprints or whose business mix does not implicate the proposed risk-based indicators as significantly.  Some other foreign banks may actually see increased regulatory requirements.

In this memorandum we have summarized the highlights of the proposal and questions posed by the agencies, and we offer our observations on some of the key considerations that the proposals present for foreign banks and other market participants.