May 2, 2013
The comment period has now closed on the controversial proposed rule (FBO Proposal) of the Board of Governors of the Federal Reserve System (Board) implementing Sections 165 and 166 of the Dodd-Frank Act (Dodd-Frank) for foreign banking organizations (FBOs) and foreign nonbank financial companies supervised by the Board.
If the FBO Proposal becomes final in the manner proposed, it will mark a sea change in the regulation of the U.S. operations of FBOs, by requiring FBOs with $50 billion or more in total global consolidated assets and $10 billion or more in total U.S. nonbranch assets to form an intermediate holding company (IHC) for almost all of their U.S. subsidiaries.
In our view, the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.
In addition, by signaling concern with the ability of home country supervisors to cooperate on issues relevant to the regulation of cross-border banking organizations, the IHC requirement threatens to lead to retaliation against U.S. banking organizations with significant international operations, thus making the IHC requirement relevant to U.S. banking organizations as well as FBOs.
As a matter of statutory interpretation, the IHC requirement reflects the following failings:
As a matter of policy, the IHC requirement will tend to increase financial instability and threaten other adverse effects, some of which are, under other provisions of federal banking law, adverse effects the Board is explicitly charged with avoiding:
The IHC requirement is also an overbroad response to what the Board views as changed business practices at the U.S. operations of FBOs; in particular, it does not at all address what the Board itself views as the most destabilizing practice – an overreliance on short-term dollar funding used to support FBOs’ non-U.S. operations.
Due to the controversial nature of the FBO Proposal, the Board is likely to have received numerous and detailed comments, including from foreign supervisory bodies. It is hoped that reflection on the public record will lead the Board to a more tailored application of Sections 165 and 166 of Dodd-Frank, one that gives appropriate consideration to the factors that Congress required the Board to consider in implementing those sections, and one that focuses on the specific financial stability risks raised by particular FBOs with U.S. operations.
To view Gibson Dunn’s Comment Letter, click here.
Gibson, Dunn & Crutcher’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these areas. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you normally work, or the following:
Arthur Long – New York (212-351-2426, firstname.lastname@example.org)
Chuck Muckenfuss – Washington, D.C. (202-955-8514, email@example.com)
Michael D. Bopp – Washington, D.C. (202-955-8256, firstname.lastname@example.org)
Kimble Cannon – Washington, D.C. (202-887-3652, email@example.com)
Alex Acree – Washington, D.C. (202-887-3725, firstname.lastname@example.org)
Colin Richard – Washington, D.C. (202-887-3732, email@example.com)
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