In December 2012, the Federal Reserve published a proposal describing how enhanced standards mandated by the Dodd-Frank Act would be applied to Foreign Banking Organizations. It would be the most significant regulatory development for FBOs since the passage of the International Banking Act of 1978, which introduced the principle of national treatment for FBOs.
In terms of global financial risk management, the proposal contains serious flaws, particularly by inhibiting the flow of capital to situations where it’s needed most.
The proposed rulemaking would compel larger FBOs with U.S. operations to set up International Holding Company (IHCs) for virtually all of their U.S subsidiaries. That would essentially end the Fed’s willingness to rely on the parent company for financial support of an FBO’s U.S. operations.
U.S. capital, liquidity and other regulatory mandates will have to be met in the United States. U.S. branches and agencies of FBOs would remain outside of the IHC structure, but would nevertheless have to comply with enhanced liquidity requirements.
The recent plan to regulate and supervise FBOs in the United States marks a significant change in the approach taken historically by the Fed. TD Bank, a chartered bank subject to the provisions of the Bank Act of Canada, provides a good case in point.
It’s the second largest banking organization in Canada, with total consolidated assets of about $ 818 billion as of January 31. TD Bank U.S. Holding Company, headquartered in Portland, Maine, is the tenth largest bank holding company in the United States, with total consolidated assets of $ 216 billion as of January 31.
Not surprisingly, TD Bank is balking at the sweeping rule change, and we think that it has a powerful case to make in terms of global financial risk management. “The one size fits all mandate requiring FBOs to operate through an intermediate level holding company neither differentiates the risk profiles presented by the various FBOs doing business in the U.S. nor does it take into account the various forms of doing business in the United States that the Federal Reserve has long permitted FBOs to adopt,” Riaz Ahmed, head of corporate development, enterprise strategy and treasury at TD Bank Group, wrote to the Fed Board of Governors on April 30.
The requirement would also put FBOs “at a competitive disadvantage to U.S. domestic banks doing business in the U.S.,” he contended.
Further, curbs on capital and liquidity in the proposal “will make efficient and effective global risk management and funding much more difficult to accomplish and will also lead to inconsistent and conflicting standards,” Ahmed noted, adding that “TD is not alone in making this observation.”