[Federal Register Volume 84, Number 62 (Monday, April 1, 2019)]
[Rules and Regulations]
[Pages 12049-12059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06063]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
[Docket No. OP-1589]
Federal Reserve Policy on Payment System Risk; U.S. Branches and
Agencies of Foreign Banking Organizations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy statement.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System
(``Board'') has approved changes to part II of the
[[Page 12050]]
Federal Reserve Policy on Payment System Risk (``PSR policy'') related
to procedures for determining the net debit cap and maximum daylight
overdraft capacity of a U.S. branch or agency of a foreign banking
organization (``FBO''). The changes remove references to the Strength
of Support Assessment (``SOSA'') ranking; remove references to FBOs'
financial holding company (``FHC'') status; and adopt alternative
methods for determining an FBO's eligibility for a positive net debit
cap, the size of its net debit cap, and its eligibility to request a
streamlined procedure to obtain maximum daylight overdraft capacity.
DATES: The changes are effective April 1, 2020.
FOR FURTHER INFORMATION CONTACT: Jeffrey Walker, Deputy Associate
Director (202-721-4559); Jason Hinkle, Manager (202-912-7805); Alex So,
Senior Financial Institution and Policy Analyst (202-452-2230); Brajan
Kola, Senior Financial Institution and Policy Analyst (202-736-5683),
Division of Reserve Bank Operations and Payment Systems; or Evan
Winerman, Senior Counsel (202-872-7578), Legal Division, Board of
Governors of the Federal Reserve System. For users of
Telecommunications Device for the Deaf (TDD) only, please call 202-263-
4869.
SUPPLEMENTARY INFORMATION:
I. Background
On December 14, 2017, the Board requested comment on potential
changes to Part II of the PSR policy, which establishes the maximum
levels of daylight overdrafts that depository institutions
(``institutions'') may incur in their Federal Reserve accounts.\1\
Under Part II of the PSR policy, an FBO's SOSA ranking--which assesses
an FBO's ability to provide financial, liquidity, and management
support to its U.S. operations--can affect an FBO's daylight overdraft
capacity. Similarly, an FBO's status as an FHC can affect its daylight
overdraft capacity. As described further below, the Board proposed to
(1) remove references in the PSR policy to SOSA rankings and FHC status
and (2) adopt alternative methods for determining an FBO's daylight
overdraft capacity.
---------------------------------------------------------------------------
\1\ 82 FR 58764 (Dec. 14, 2017).
---------------------------------------------------------------------------
A. Current Use of SOSA Ranking and FHC Status in the PSR Policy
1. Net Debit Caps
An institution's net debit cap is the maximum value of
uncollateralized daylight overdrafts that the institution can incur in
its Federal Reserve account. The PSR policy generally requires that an
institution be ``financially healthy'' to be eligible for a positive
net debit cap.\2\ To that end, the Guide to the Federal Reserve's
Payment System Risk Policy (``Guide'') \3\ clarifies that most FBOs
with a SOSA ranking of 3 or a U.S. Operations Supervisory Composite
Rating of marginal or unsatisfactory do not qualify for a positive net
debit cap.\4\
---------------------------------------------------------------------------
\2\ See Part II.D.1 of the PSR policy.
\3\ The Guide to the Federal Reserve's Payment System Risk
Policy (the Guide) contains detailed information on the steps
necessary for institutions to comply with the Federal Reserve's
intraday credit policies.
\4\ Section VI.A.1 of the Guide states that most SOSA 3-ranked
institutions do not qualify for a positive net debit cap, though it
clarifies that ``[i]n limited circumstances, a Reserve Bank may
grant a net debit cap or extend intraday credit to a financially
healthy SOSA 3-ranked FBO.'' Separately, Table VII-2 of the Guide
states that SOSA 3-ranked FBOs and FBOs that receive a U.S.
Operations Supervisory Composite Rating of marginal or
unsatisfactory have ``below standard'' creditworthiness, and Table
VII-3 of the Guide states that institutions with below standard
creditworthiness cannot incur daylight overdrafts.
---------------------------------------------------------------------------
Assuming that an institution qualifies for a positive net debit
cap, the size of its net debit cap equals the institution's ``capital
measure'' multiplied by its ``cap multiple.'' \5\ As described further
below, an institution's capital measure is a number derived (under most
circumstances) from the size of its capital base. An institution's cap
multiple is determined by the institution's ``cap category,'' which
generally reflects, among other things, the institution's financial
condition. An institution with a higher capital measure or a higher cap
category (and thus a higher cap multiple) will qualify for a higher net
debit cap than an institution with a lower capital measure or lower cap
category.
---------------------------------------------------------------------------
\5\ See Part II.D.1 of the PSR policy. All net debit caps are
granted at the discretion of the institution's administrative
Reserve Bank, which is the Reserve Bank that is responsible for
managing an institution's account relationship with the Federal
Reserve.
---------------------------------------------------------------------------
An FBO's SOSA ranking can affect both its cap category and its
capital measure. An FBO's status as an FHC can affect its capital
measure.\6\
---------------------------------------------------------------------------
\6\ In contrast, the FHC status of a domestic bank holding
company does not affect its capital measure.
---------------------------------------------------------------------------
(a) Cap Categories and Cap Multiples
Under Section II.D.2 of the PSR policy, an institution's ``cap
category'' is one of six classifications--high, above average, average,
de minimis, exempt-from-filing, and zero. In order to establish a cap
category of high, above average, or average, an institution must
perform a self-assessment of its own creditworthiness, intraday funds
management and control, customer credit policies and controls, and
operating controls and contingency procedures. Other cap categories do
not require a self-assessment.\7\ Each cap category corresponds to a
``cap multiple.'' \8\ As noted above, an institution's net debit cap
generally equals its capital measure multiplied by its cap multiple.
---------------------------------------------------------------------------
\7\ An institution that meets reasonable safety and soundness
standards can request a de minimis cap category, without performing
a self-assessment, by submitting a board of directors resolution to
its administrative Reserve Bank. An institution that only rarely
incurs daylight overdrafts in its Federal Reserve account that
exceed the lesser of $10 million or 20 percent of its capital
measure can be assigned an ``exempt-from-filing'' cap category
without performing a self-assessment or filing a board of directors
resolution with its administrative Reserve Bank.
\8\ Under Section II.D.1 of the PSR policy, the cap multiple for
the ``high'' category is 2.25, for the ``above average'' category is
1.875, for the ``average'' category is 1.125, for the ``de minimis''
category is 0.4, for the ``exempt-from-filing'' category is 0.2 or
$10 million, and for the ``zero'' category is 0. Note that the net
debit cap for the exempt-from-filing category is equal to the lesser
of $10 million or 0.2 multiplied by the capital measure.
---------------------------------------------------------------------------
An FBO's SOSA ranking can affect its cap category (and thus its cap
multiple). As noted above, an institution that wishes to establish a
net debit cap category of high, above average, or average must perform
a self-assessment of, among other things, its own creditworthiness.
Under Part II.D.2.a of the PSR policy, ``[t]he assessment of
creditworthiness is based on the institution's supervisory rating and
Prompt Corrective Action (PCA) designation.'' Part VII.A of the Guide
includes a matrix for assessing domestic institutions' creditworthiness
that incorporates an institution's supervisory rating and PCA
designation. Because FBOs do not receive PCA designations, however,
Part VII.A of the Guide includes a separate matrix for assessing FBO
creditworthiness that incorporates an FBO's U.S. Operations Supervisory
Composite Rating and--in lieu of a PCA designation--SOSA ranking.\9\
---------------------------------------------------------------------------
\9\ Under Section 38 of the Federal Deposit Insurance Act, 12
U.S.C. 1831o, PCA designations apply only to insured depository
institutions.
---------------------------------------------------------------------------
Similarly, while an FBO is not required to perform a self-
assessment if it requests a cap category of de minimis or wishes to be
assigned a cap category of exempt-from-filing by the Reserve Bank, the
Reserve Banks rely on the minimum standards set by the creditworthiness
matrix when they evaluate FBO requests for any cap category greater
than zero. Accordingly, the Reserve Banks generally do not allow FBOs
to qualify for a positive net debit cap, including the de minimis or
exempt-from-filing cap category, if the FBO has a SOSA ranking of 3 or
a U.S.
[[Page 12051]]
Operations Supervisory Composite Rating of marginal or unsatisfactory.
In certain situations, the Reserve Banks require institutions to
perform a full assessment of their creditworthiness instead of using
the relevant self-assessment matrix (e.g., when an institution has
experienced a significant development that may materially affect its
financial condition). The Guide includes procedures for full
assessments of creditworthiness.
(b) Capital Measures
Under Section II.D.3 of the PSR policy, an institution's ``capital
measure'' is a number derived (under most circumstances) from the size
of its capital base. The determination of the capital measure, however,
differs between domestic institutions and FBOs. A domestic
institution's capital measure equals 100 percent of the institution's
risk-based capital. Conversely, an FBO's capital measure (also called
``U.S. capital equivalency'') \10\ equals a percentage of (under most
circumstances) the FBO's worldwide capital base \11\ ranging from 5
percent to 35 percent, with the exact percentage depending on (1) the
FBO's SOSA ranking and (2) whether the FBO is an FHC. Specifically, the
capital measure of an FBO that is an FHC is 35 percent of its capital;
an FBO that is not an FHC and has a SOSA ranking of 1 is 25 percent of
its capital; and an FBO that is not an FHC and has a SOSA ranking of 2
is 10 percent of its capital. The capital measure of an FBO that is not
an FHC and has a SOSA ranking of 3 equals 5 percent of its ``net due to
related depository institutions'' (although, as noted above, FBOs with
a SOSA ranking of 3 generally do not qualify for a positive net debit
cap).\12\
---------------------------------------------------------------------------
\10\ The term ``U.S. capital equivalency'' is used in this
context to refer to the particular capital measure used to calculate
net debit caps and does not necessarily represent an appropriate
capital measure for supervisory or other purposes.
\11\ FBOs that wish to establish a non-zero net debit cap must
report their worldwide capital on the Annual Daylight Overdraft
Capital Report for U.S. Branches and Agencies of Foreign Banks (FR
2225). The instructions for FR 2225 explain how FBOs should
calculate their worldwide capital. See https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZ1kLYTc+ZpEQ==.
\12\ An FBO reports its ``net due to related depository
institutions'' on the Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks (FFIEC 002).
---------------------------------------------------------------------------
2. Maximum Daylight Overdraft Capacity
Section II.E of the PSR policy allows certain institutions with
self-assessed net debit caps to pledge collateral to their
administrative Reserve Bank to secure daylight overdraft capacity in
excess of their net debit caps. An institution's maximum daylight
overdraft capacity (``max cap'') equals its net debit cap plus its
additional collateralized capacity. Section II.E of the PSR policy
states that max caps are ``intended to provide extra liquidity through
the pledge of collateral by the few institutions that might otherwise
be constrained from participating in risk-reducing payment system
initiatives.''
Institutions that wish to obtain a max cap must generally provide
(1) documentation of the business need for collateralized capacity and
(2) an annual board of directors' resolution approving any
collateralized capacity. Under Section II.E.2 of the PSR policy,
however, an FBO that has a SOSA ranking of 1 or is an FHC may request a
streamlined procedure for obtaining a max cap.\13\ Such an FBO is not
required to document its business need for collateralized capacity, nor
is it required to obtain a board of directors' resolution approving
collateralized capacity, as long as the FBO requests a max cap that is
100 percent or less of the FBO's worldwide capital multiplied by its
self-assessed cap multiple.\14\
---------------------------------------------------------------------------
\13\ Even under the streamlined procedure, the administrative
Reserve Bank retains the right to assess an FBO's financial and
supervisory information, including the FBO's ability to manage
intraday credit.
\14\ As described above, for example, the capital measure of an
FBO that is not an FHC and has a SOSA ranking of 1 is currently 25
percent of worldwide capital. The net debit cap of such an FBO
equals its capital measure times the cap multiple that corresponds
to its cap category. The streamlined max cap procedure therefore
allows the FBO to request additional collateralized capacity of 75
percent of worldwide capital times its cap multiple. If the FBO
requests a max cap in excess of 100 percent of worldwide capital
times its cap multiple, the FBO would be ineligible for the
streamlined max cap procedure.
---------------------------------------------------------------------------
B. Proposed Changes
The Board proposed to remove references to the SOSA ranking in the
PSR policy. The SOSA ranking was originally established for supervisory
purposes, but Federal Reserve supervisory staff now have more timely
access to information regarding FBO parent banks, home-country
accounting practices and financial systems, and international
supervisory and regulatory developments.\15\ The Federal Reserve
currently uses SOSA rankings only in setting guidelines related to FBO
access to Reserve Bank intraday credit and the discount window.\16\ The
Board explained in the proposal that providing SOSA rankings for these
purposes is an inefficient use of the Federal Reserve's supervisory
resources. The Board proposed that the Federal Reserve would continue
to provide SOSA rankings until the Board removes references to SOSA
rankings in the PSR policy.
---------------------------------------------------------------------------
\15\ See SR 17-13 (Dec. 7, 2017) https://www.federalreserve.gov/supervisionreg/srletters/sr1713.pdf (explaining why the Board
intends to eliminate the SOSA ranking).
\16\ In addition to the PSR policy's use of SOSA rankings, the
Reserve Banks use SOSA rankings to determine whether an FBO can
receive discount window loans. See https://www.frbdiscountwindow.org/en/Pages/General-Information/The-Discount-Window.aspx. The Reserve Banks will adjust their standards for
determining FBO access to primary credit before the SOSA ranking is
discontinued on January 1, 2020.
---------------------------------------------------------------------------
The Board also proposed to remove references to FBOs' FHC status in
the PSR policy. The Board explained in the proposal that, when it
incorporated FHC status into the PSR policy, it believed that an FBO's
status as an FHC indicated that the FBO was financially and
managerially strong. The Board further explained that it now recognizes
the limitations of FHC status in measuring an FBO's health--in
particular, FBOs can maintain nominal FHC status (though with reduced
ability to use their FHC powers) even when they are out of compliance
with the requirement that they remain well capitalized. Accordingly,
the Board explained that it no longer believes an FBO's status as an
FHC should increase the FBO's capital measure or allow the FBO to
request a streamlined procedure to obtain a max cap.
The Board proposed alternative methods for determining an FBO's
eligibility for a positive net debit cap, the size of its net debit
cap, and its eligibility to request a streamlined procedure to obtain a
max cap. The Board requested comment on all aspects of the proposal,
including whether FBOs would require a transition period to adjust to
the proposed changes.
1. Net Debit Cap Eligibility
The Board proposed that many undercapitalized FBOs, and all
significantly or critically undercapitalized FBOs, would have ``below
standard'' creditworthiness and on that basis would generally be
ineligible for a positive net debit cap. To assess whether it is
undercapitalized, significantly undercapitalized, or critically
undercapitalized, an FBO would compare the Regulation H ratios for
total risk-based capital, tier 1 risk-based capital, common equity tier
1 risk-based capital, and leverage to the equivalent ratios that the
FBO has calculated under its home-country standards or on a pro forma
basis. Currently, SOSA-3 ranked institutions have ``below standard''
creditworthiness
[[Page 12052]]
and are generally ineligible for a positive net debit cap.\17\
---------------------------------------------------------------------------
\17\ See n. 4, supra. The PSR policy and the Guide would
continue to provide that FBOs that have U.S. Operations Supervisory
Composite Ratings of ``marginal'' or ``unsatisfactory'' have ``below
standard'' creditworthiness and are generally ineligible for a
positive net debit cap.
---------------------------------------------------------------------------
2. Creditworthiness Self-Assessment
The Board proposed that an FBO's creditworthiness self-assessment
would generally be based on the FBO's U.S. Operations Supervisory
Composite Rating and (in lieu of the FBO's SOSA ranking) the PCA
designation that would apply to the FBO if it were subject to the
Board's Regulation H (an ``equivalent PCA designation'').\18\ The Board
noted that replacing the SOSA ranking with an equivalent PCA
designation would align the creditworthiness self-assessment for FBOs
with the existing creditworthiness self-assessment for domestic
institutions, which is based on an institution's PCA designation and
supervisory rating. The Board proposed to implement this change by
incorporating FBO creditworthiness self-assessments into the Guide's
existing matrix for assessing domestic institutions'
creditworthiness.\19\
---------------------------------------------------------------------------
\18\ See 12 CFR 208.43(b).
\19\ See Table VII-1 of the Guide.
---------------------------------------------------------------------------
The Board proposed that an FBO that is not based in a country that
has implemented capital standards substantially consistent with those
established by the Basel Committee on Banking Supervision \20\ (a
``Basel jurisdiction'') would be required to perform a full assessment
of its creditworthiness instead of using the matrix approach to
assessing creditworthiness.\21\
---------------------------------------------------------------------------
\20\ The proposal referred in a number of places to
jurisdictions that adhere to the Basel Capital Accords (BCA)'' or
``adhere to BCA-based standards, while the amendments adopted in
this Federal Register notice instead refer to jurisdictions that
have implemented capital standards substantially consistent with
those established by the Basel Committee on Banking Supervision. The
Board does not intend for this change to have any substantive
effect.
\21\ The requirement to perform a full assessment of
creditworthiness would apply to FBOs based in non-Basel
jurisdictions that request any net debit cap greater than the
exempt-from-filing category, including FBOs that request a de
minimis cap category. Additionally, a Reserve Bank could request
that an FBO based in a non-Basel jurisdiction perform a full
assessment of creditworthiness before assigning the FBO an exempt-
from-filing cap category.
---------------------------------------------------------------------------
3. Capital Measures
The Board proposed that the capital measure of an FBO would equal
10 percent of its worldwide capital, in lieu of the current tiered
system in which an FBO's capital measure depends on its SOSA ranking
and FHC status. The Board explained in the proposal that it believed it
was unnecessary to replace the SOSA ranking with an alternative
supervisory rating in the capital measure calculation, noting that (1)
including a point-in-time supervisory rating such as SOSA is less
important than in the past because the Reserve Banks now receive, on an
ongoing basis, better supervisory information regarding FBOs and (2)
other elements of the net debit cap calculation already consider an
FBO's supervisory ratings and overall financial condition.
4. Max Caps
The Board proposed that an FBO that is well capitalized could
request the streamlined procedure for obtaining a max cap. Currently,
the PSR policy allows SOSA-1 ranked FBOs and FBOs that are FHCs to
request the streamlined procedure. The Board explained in the proposal
that it believed it would not be appropriate to substitute another
supervisory rating for the SOSA-1 ranking in determining FBO
eligibility for the streamlined max cap procedure, because non-SOSA
supervisory ratings focus only on the U.S. operations of FBOs.
II. Discussion of Public Comments
The Board received one responsive comment, from an association of
international banks. The commenter did not object to removing
references to the SOSA rankings and FHC status from the PSR policy, nor
did the commenter object to incorporating equivalent PCA designations
into the PSR policy. The commenter believed, however, that the Board
should not implement these changes in a manner that reduces FBOs'
current net debit caps. The commenter also argued that, when an FBO
determines its equivalent PCA designation, the FBO should be able to
rely on home-country standards for the leverage measure component of
that determination. Finally, the commenter requested that the Board
delay the effective date of the proposed changes by at least 12 months
from the date of publication in the Federal Register.
For the reasons set forth below, the Board has adopted the changes
substantially as proposed. However, the Board has (1) replaced the term
``equivalent PCA designation'' with ``FBO PSR capital category'' and
(2) clarified the manner in which an FBO will determine its FBO PSR
capital category.
The changes will be effective on April 1, 2020.
A. Reductions in FBO Capital Measures/Net Debit Caps
The commenter raised a number of concerns regarding the Board's
proposal to set the capital measure of all FBOs at 10 percent of an
FBO's worldwide capital.
1. Effects on U.S.-Dollar Clearing Activities of FBOs
The commenter argued that the proposal to set the capital measures
of all FBOs at 10 percent of an FBO's worldwide capital would reduce
FBOs' net debit caps and would negatively affect FBOs' U.S.-dollar
clearing activity. The commenter suggested that the Board may have
underestimated the proposal's effects on FBOs by assuming that payment
levels from 2003 to 2007 would be predictive of future payment levels
and that reserve levels will revert to those from 2003 to 2007, stating
that ``if events prove contrary to the [Board's] assumption the results
could significantly alter the analysis and related policy
conclusions.'' The commenter further suggested that lower net debit
caps might cause an FBO to ``throttle'' payments during the day (i.e.,
restrict and delay funds transfers until sufficient funds are
available) to ensure that it stays within its net debit cap, which
would diminish liquidity. Finally, the commenter argued that relying on
collateral to cover intraday exposure to a Reserve Bank would be costly
to an FBO and might result in (1) increased transaction costs to
customers and (2) an increase in ``systemic operational risk'' in the
event of constraints on the availability of ``sufficiently high-quality
liquid assets.''
The Board has evaluated FBOs' intraday credit usage under a wide
range of scenarios, including the current high reserves environment
(2015-present), an extreme stress environment (2007-2009), and a low
reserves environment (2003-2007). The Board's analysis indicates that
most FBOs would retain sufficient daylight overdraft capacity even when
reserves are low and liquidity pressures are high. For example, during
the 2007-09 financial crisis, when the use of intraday credit spiked
amid the market turmoil near the end of 2008, 51 of 58 FBOs with a
positive net debit cap used overdraft capacity, the highest average cap
utilization was 65 percent, and only 7 FBOs had an average cap
utilization greater than 25 percent.\22\ During the same period, 1 of
27 FBOs that currently maintain a cap category higher than
[[Page 12053]]
exempt-from-filing \23\ regularly incurred daylight overdrafts that
would have exceeded its projected net debit cap under the single-rate
capital measure calculation that the Board is adopting, 7 of 27
incurred daylight overdrafts that would have exceeded their projected
net debit caps in limited instances, and 19 of 27 never incurred
daylight overdrafts that would have exceeded their projected caps.\24\
Accordingly, the Board believes that the projected net debit caps would
have provided most FBOs with sufficient capacity during the financial
crisis.
---------------------------------------------------------------------------
\22\ In this context, average cap utilization equals an
institution's average daily peak daylight overdraft divided by the
FBO's net debit cap.
\23\ Most FBOs with a cap category of exempt-from-filing receive
the maximum net debit cap of $10 million and would not be affected
by the changes to the FBO capital measure calculation that the Board
is adopting in the notice.
\24\ In this context, ``regularly incurred daylight overdrafts
that would have exceeded its projected net debit cap'' means that an
FBO's daylight overdrafts would have exceeded its projected net
debit cap, on average, more than once per two-week reserve
maintenance period (``RMP'') over the period; ``limited instances''
means that an FBO's daylight overdrafts would have exceeded its
projected net debit cap, on average, less than once per every six
two-week RMPs over the period. Data current as of Q4 2018.
---------------------------------------------------------------------------
Similarly, between 2003 and 2007, when FBOs generally maintained
lower reserves, 51 of 57 FBOs with a positive net debit cap used
overdraft capacity, the highest average cap utilization was 44 percent,
and only 7 FBOs had an average cap utilization greater than 25 percent.
During the same period, 2 of 27 FBOs that currently maintain a cap
category higher than exempt-from-filing regularly incurred daylight
overdrafts that would have exceeded their projected net debit caps
under the single-rate capital measure calculation that the Board is
adopting, 5 of 27 incurred daylight overdrafts that would have exceeded
their projected net debit caps in limited instances, and 20 of 27 never
incurred daylight overdrafts that would have exceeded their projected
caps.\25\ Accordingly, the Board believes that the projected net debit
caps would have provided most FBOs with sufficient capacity during the
low reserves environment from 2003-2007.\26\
---------------------------------------------------------------------------
\25\ Data current as of Q4 2018.
\26\ The projected net debit caps under the single-rate capital
measure calculation that the Board is adopting would also provide
FBOs with sufficient capacity in the current high-reserves
environment. Since 2015, none of the 27 FBOs that currently maintain
a cap category higher than exempt-from-filing have regularly
incurred daylight overdrafts that would have exceeded their
projected net debit caps, 1 of 27 incurred daylight overdrafts that
would have exceeded its projected net debit caps in limited
instances, and 26 of 27 never incurred daylight overdrafts that
would have exceeded their projected caps.
---------------------------------------------------------------------------
The Board recognizes that setting the capital measures of all FBOs
at 10 percent of an FBO's worldwide capital may increase the instances
in which FBOs need additional daylight overdraft capacity, but the
Board believes that FBOs' projected net debit caps would be better
tailored to their actual usage of intraday credit. Additionally, as the
Board noted in the proposal, an FBO with a de minimis cap could also
request a higher net debit cap by applying for a self-assessed cap.\27\
Similarly, an FBO with a self-assessed cap could apply for a max cap in
order to obtain additional collateralized capacity. While the Board
recognizes that relying on collateralized overdrafts might be more
operationally complex for FBOs than relying on uncollateralized
overdrafts, the Board notes that the Reserve Banks allow accountholders
to post a wide array of collateral of varying degrees of liquidity,
including various types of loans.\28\ Importantly, the Board also notes
that relying on collateralized intraday credit would reduce the credit
risk that the Reserve Banks incur when they provide intraday credit to
FBOs.
---------------------------------------------------------------------------
\27\ As noted above, most FBOs with a cap category of exempt-
from-filing receive the maximum net debit cap of $10 million and
would not be affected by the changes to the FBO capital measure
calculation that the Board is adopting in this notice.
\28\ See the Federal Reserve's Discount Window Margins and
Collateral Guidelines, https://www.frbdiscountwindow.org/en/Pages/Collateral/Discount%20Window%20Margins%20and%20Collateral%20Guidelines.aspx.
These margin and collateral guidelines apply to discount window
loans and intraday credit under the PSR policy. Currently, more than
half of the collateral posted at the Reserve Banks are loans, none
of which would qualify as high-quality liquid assets for purposes of
the Federal banking regulators' rules establishing a liquidity
coverage ratio for banking organizations. See, e.g., 12 CFR 249.20
(Board regulation establishing high-quality liquid asset criteria).
---------------------------------------------------------------------------
2. National Treatment Considerations
The commenter further argued that the proposal to set the capital
measures of all FBOs at 10 percent of an FBO's worldwide capital is
inconsistent with the principle of national treatment. Under the
principle of national treatment, FBOs operating in the United States
should be, generally, treated no less favorably than similarly situated
U.S. banking organizations.\29\
---------------------------------------------------------------------------
\29\ See, e.g., International Banking Act of 1978, Public Law
95-369, 12 U.S.C. 3101 et seq; S. Rep. No. 95-1073 (Aug. 8, 1978)
(legislative history of the International Banking Act of 1978);
Gramm-Leach-Bliley Act of 1999, Public Law 106-102, section 141, 12
U.S.C. 3106(c); Dodd-Frank Act, Public Law 111-203, section
165(b)(2), 12 U.S.C. 5365(b)(2).
---------------------------------------------------------------------------
The commenter argued that because a U.S. branch is an office of a
foreign bank, it can draw on the global resources of the foreign bank
to support its liabilities, including intraday credit that it receives
from a Reserve Bank. As described in the proposal, however, FBOs that
incur daylight overdrafts present special legal risks to the Reserve
Banks because of differences in insolvency laws in the various FBOs'
home countries. In particular, the proposal quoted a 2001 Federal
Register notice in which the Board explained that insolvent FBOs posed
a heightened risk to the Reserve Banks because ``[t]he insolvent
party's national law . . . may permit the liquidator to subordinate
other parties' claims (such as by permitting the home country tax
authorities to have first priority in bankruptcy), may reclassify or
impose a stay on the right the nondefaulting party has to collateral
pledged by the defaulting party in support of a particular transaction,
or may require a separate proceeding to be initiated against the head
office in addition to any proceeding against the branch.'' \30\ The
2001 Federal Register notice further stated that ``[i]t is not
practicable for the Federal Reserve to undertake and keep current
extensive analysis of the legal risks presented by the insolvency
law(s) applicable to each FBO with a Federal Reserve account in order
to quantify precisely the legal risk that the Federal Reserve incurs by
providing intraday credit to that institution. It is reasonable,
however, for the Federal Reserve to recognize that FBOs generally
present additional legal risks to the payments system and, accordingly,
limit its exposure to these institutions.'' \31\
---------------------------------------------------------------------------
\30\ 82 FR at 58769 (quoting 66 FR 30205, 30206 (Aug. 6, 2001)).
\31\ Id.
---------------------------------------------------------------------------
The Board continues to believe that FBOs may pose heightened risks
to the Reserve Banks relative to domestic institutions, and that it is
reasonable to calculate an FBO's capital measure as a fraction of its
worldwide capital, notwithstanding that the capital measure of a
domestic institution generally equals 100 percent of the institution's
risk-based capital. The Board also notes that, although Federal Reserve
supervisors have gained access to new internal and external resources
since 2002 (when the Board adopted the current capital measure
calculation) that allow the Federal Reserve to better monitor FBOs on
an ongoing basis, the Board's authority over FBOs generally extends
only to FBOs' U.S. operations. As a result, Federal Reserve supervisors
have less insight into the financial health of FBOs compared to
domestic bank holding companies, for which the Board serves as the
global supervisory authority. Nevertheless, as discussed above, the
Board believes that FBOs'
[[Page 12054]]
projected net debit caps would be well tailored to FBOs' actual usage
of intraday credit and would not constrain most FBOs' U.S. operations
under a wide range of scenarios.
The Board further notes that, as discussed in the proposal, FBO net
debit caps are currently large when compared to the net debit caps of
peer domestic institutions. For example, the average net debit cap of
an FBO with between $1 billion and $10 billion in U.S.-based assets is
$3.9 billion, while the average net debit cap of a domestic institution
with between $1 billion and $10 billion in assets is $209 million; the
average net debit cap of an FBO with between $10 billion and $50
billion in U.S.-based assets is $7.7 billion, while the average net
debit cap of a domestic institution with between $10 billion and $50
billion in assets is $1.4 billion; and the average net debit cap of an
FBO with between $50 billion and $150 billion in U.S.-based assets is
$24.5 billion, while the average net debit cap of a domestic
institution with between $50 billion and $150 billion in assets is
$11.3 billion.\32\ After the changes adopted in this Federal Register
notice take effect, the average net debit cap of an FBO with between $1
billion and $10 billion would be $1.4 billion, the average net debit
cap of an FBO with between $10 billion and $50 billion in U.S.-based
assets would be $2.8 billion, and the average net debit cap of an FBO
with between $50 billion and $150 billion in U.S.-based assets would be
$7.7 billion.\33\ As discussed above, the Board's analysis indicates
that these projected net debit caps would provide most FBOs with
sufficient daylight overdraft capacity even when reserves are low and
liquidity pressures are high.\34\
---------------------------------------------------------------------------
\32\ The Board excluded institutions with a cap category of
exempt-from-filing from these comparisons because these institutions
are limited to a $10 million net debit cap. No FBO currently has
U.S.-based assets above $150 billion. Data current as of Q4 2018.
\33\ The Board recognizes that, based on certain FBOs' business
models, the volume and value of payments flowing through an FBO with
a particular level of U.S.-based assets may be higher than that of a
domestic institution with a similar level of assets.
\34\ As the Board further explained above, certain FBOs may
request additional daylight overdraft capacity by applying for a
self-assessed cap and/or a max cap.
---------------------------------------------------------------------------
3. Other Concerns About Reducing FBO Net Debit Caps
The commenter raised a number of other concerns regarding the
proposal to set the capital measures of all FBOs at 10 percent of an
FBO's worldwide capital. The commenter argued that the proposal would
effectively penalize those FBOs that, under the current, tiered system
for determining FBO capital measures, ``are considered to present the
lesser risk to the Federal Reserve.'' The Board notes that, even after
the changes to the capital measure calculation take effect, FBOs that
are more creditworthy will continue to be eligible for more daylight
overdraft capacity than FBOs that are less creditworthy--specifically,
an FBO's cap category will continue to be based, in part, on the FBO's
creditworthiness, which (as described above) will be determined based
on the FBO's U.S. Operations Supervisory Composite Rating and its FBO
PSR capital category. The Board also emphasizes that the intent of this
policy change is not to penalize FBOs or constrain FBOs' U.S.
operations. Rather, the Board believes that FBOs may pose heightened
risks to the Reserve Banks relative to domestic institutions, and that
it is prudent to manage these risks by limiting FBOs' net debit caps to
levels that are better tailored to FBOs' actual usage of intraday
credit.
The commenter also argued that the proposal does not consider the
protections that the Reserve Banks receive under federal and state laws
that ``ringfence'' FBO assets for the benefit of third-party creditors.
Federal and state laws require that U.S. branches and agencies of
foreign banks pledge assets in segregated accounts that are intended to
benefit the creditors of such branches and agencies.\35\ Publicly
reported data show that U.S. branches and agencies of foreign banks
generally pledge assets equal only to a small percentage of their
liabilities in such segregated accounts.\36\ For example, only 2 of 44
FBOs with a positive net debit cap have pledged sufficient assets to
cover all of their liabilities to nonrelated parties, while 36 of these
FBOs have pledged assets equal to less than 10 percent of their
liabilities to nonrelated parties.\37\ Similarly, only 1 of 27 FBOs
that currently maintain a cap category higher than exempt-from-filing
\38\ has pledged sufficient assets to cover its net debit cap, 6 have
pledged assets that would cover between 10 percent and 60 percent of
their net debit caps, and 20 have pledged assets that would cover less
than 10 percent of their net debit caps.\39\ Accordingly, if an FBO
becomes insolvent during a period in which a Reserve Bank has extended
intraday credit to that FBO, the pledged assets of the FBO's U.S.
branches and agencies would very likely be insufficient to repay the
Reserve Banks and other unsecured creditors.
---------------------------------------------------------------------------
\35\ For example, an uninsured New York state-licensed branch is
required to deposit an amount of high-quality assets in a segregated
account that is pledged to the state to cover the cost of the
branch's liquidation and to repay creditors. N.Y. Banking Law Sec.
202-b(1); 3 NYCRR 51. The amount of the required deposit is the
greater of (1) $2 million or (2) one percent of average total
liabilities of the branch or agency for the previous month, subject
to certain caps for well-rated foreign banking corporations. 3 NYCRR
322.1. The New York Superintendent of Financial Services may also
require a New York state branch to maintain additional assets
relative to some percentage of liabilities if the Superintendent
deems it necessary or desirable for the maintenance of a sound
financial condition, the protection of depositors and the public
interest, and to maintain public confidence in the branch. N.Y.
Banking Law Sec. 202-b(1). See also 12 U.S.C. 3102(g); 12 CFR 28.15
and 28.20.
\36\ See Reporting Form FFIEC 002, ``Report of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks,''
Schedule RAL, Items S.1 and S.2.
\37\ Data current as of Q4 2018.
\38\ The Board has excluded institutions with a cap category of
exempt-from-filing from this analysis because such institutions' net
debit caps are limited to a maximum of $10 million.
\39\ Data current as of Q4 2018.
---------------------------------------------------------------------------
The Board recognizes that, in some jurisdictions, a U.S.
supervisory authority (or a receiver appointed by a U.S. supervisory
authority) that liquidates a U.S. branch or agency of an insolvent
foreign bank may take possession of all assets of the foreign bank--
including non-branch assets of the foreign bank--located in the
jurisdiction of that supervisory authority.\40\ These provisions may
expand the pool of assets available to repay the creditors of a U.S.
branch or agency if the foreign bank maintains other assets in the
United States (if the branch is federally licensed) or in the state in
which the branch is located (if the branch is state-licensed). The
Board notes, however, that it is uncertain whether available assets
will be sufficient to repay creditors when a supervisory authority or
receiver takes possession of such U.S. branches and agencies.
---------------------------------------------------------------------------
\40\ See, e.g., 12 U.S.C. 3102(j)(1); N.Y. Banking Law section
606(4)(a).
---------------------------------------------------------------------------
Finally, the commenter argued that there is no compelling reason to
reduce FBO net debit caps at this time. The commenter noted, in this
regard, that the special legal risks that FBOs pose to the Reserve
Banks have not changed since 2001, when the Board established the
current method for calculating FBO capital measures. The commenter also
noted that U.S. and foreign regulators have improved their supervision
and regulation of foreign banks and their U.S. branches since 2001,
suggesting that these efforts have enhanced foreign banks' resiliency
and resolvability and should provide the Reserve Banks with more
comfort that U.S. branches are creditworthy. The Board recognizes that
[[Page 12055]]
foreign banks (including U.S. branches of foreign banks) are--like
U.S.-chartered institutions--subject to more robust oversight than they
were in 2001.\41\ The Board also appreciates that intraday credit helps
to facilitate payments by Reserve Bank accountholders and can promote
the smooth functioning of the payment system. Nevertheless, because
intraday credit to FBOs (relative to domestic institutions) may pose
heightened risks to the Reserve Banks, the Board believes that the
Reserve Banks should tailor FBO net debit caps more closely to FBOs'
actual usage of intraday credit and should not provide unnecessarily
large net debit caps to FBOs. Setting the capital measures of all FBOs
at 10 percent of an FBO's worldwide capital would better tailor FBO net
debit caps to FBOs' actual usage of intraday credit.
---------------------------------------------------------------------------
\41\ See, e.g., Dodd-Frank Act, Public Law 111-203, section 165,
12 U.S.C. 5365 (requiring enhanced supervision and prudential
standards for certain bank holding companies, including certain
FBOs).
---------------------------------------------------------------------------
B. Use of Home-Country Leverage Ratio
Under Regulation H, a bank's PCA designation is determined by four
capital measures: Total risk-based capital, tier 1 risk-based capital,
common equity tier 1 risk-based capital, and leverage.\42\ The leverage
measure utilizes two ratios: The leverage ratio (``U.S. leverage
ratio'') and the supplementary leverage ratio (``SLR''). The key
difference between the two ratios is that the U.S. leverage ratio
calculation incorporates only on-balance-sheet activity, while the SLR
calculation incorporates both on-balance-sheet assets and certain off-
balance-sheet exposures.\43\ Under Regulation H, banks must meet a
minimum U.S. leverage ratio of 4 or 5 percent to qualify as,
respectively, adequately capitalized or well capitalized.\44\
Regulation H also requires that certain banks meet additional SLR
standards to qualify as adequately or well capitalized.\45\ Finally,
Regulation H establishes leverage measures for the undercapitalized and
significantly undercapitalized PCA categories.\46\
---------------------------------------------------------------------------
\42\ The Board's Regulation H applies to state member banks. The
Office of the Comptroller of the Currency (OCC) and the Federal
Deposit Insurance Corporation (FDIC) have promulgated functionally
identical PCA regulations applicable to OCC-regulated and FDIC-
regulated institutions, respectively. See 12 CFR part 6 (OCC); 12
CFR part 324, subpart H (FDIC).
\43\ See 12 CFR 208.41(h) and (j); 12 CFR 217.10(b)(4) and
(c)(4).
\44\ 12 CFR 208.43(b)(2)(iv)(A) and (b)(1)(iv)(A).
\45\ Specifically, a bank that qualifies as an ``advanced
approaches bank'' must meet a minimum SLR of 3 percent to qualify as
adequately capitalized and a bank that is a subsidiary of a global
systemically important bank holding company (GSIB) must maintain an
SLR of at least 6 percent to qualify as well capitalized. See 12 CFR
208.41(a) and 217.100(b)(1) (definition of ``advanced approaches
bank''); 12 CFR 208.41(g), 217.2, and 217.402 (definition of GSIB);
12 CFR 208.43(b)(1)(iv)(B) and 208.43(b)(2)(iv)(B) (Regulation H SLR
standards). The Board has issued a proposal to change the 6 percent
SLR requirement for banks that are subsidiaries of GSIBs to equal 3
percent plus 50 percent of the GSIB risk-based surcharge applicable
to such a bank's top-tier holding company. 83 FR 17317 (April 19,
2018).
\46\ Under Regulation H, a bank is deemed to be undercapitalized
if its U.S. leverage ratio is less than 4 percent or, if applicable,
its SLR is less than 3 percent. A bank is deemed to be significantly
undercapitalized if its U.S. leverage ratio is less than 3 percent,
i.e., more than 100 basis points lower than the U.S. leverage ratio
needed to qualify as adequately capitalized.
---------------------------------------------------------------------------
The commenter argued that ``in determining an FBO's equivalent PCA
designation, reference should be made only to the [SLR] and not to the
U.S. leverage ratio, and, consistent with that approach, the leverage
measure under the PCA regime should be calibrated by reference to the
home country leverage ratio.'' The commenter noted that under
Regulation H, ``PCA categories apply various combinations of the U.S.
leverage ratio and the U.S. supplementary ratio, whereas the
corresponding measure for FBOs'' from Basel jurisdictions is the SLR.
The commenter therefore argued that, for purposes of calculating an
FBO's equivalent PCA designation, the leverage measure should be based
solely on the FBO's leverage ratio as calculated under home-country
standards (``home-country leverage ratio'')--i.e., that the U.S.
leverage ratio, as distinct from the SLR, should have ``no relevance to
the determination.'' The commenter also suggested that an FBO should be
able to qualify as well capitalized or adequately capitalized if it
meets its home country's 3 percent leverage ratio expectation (assuming
the FBO also meets the relevant risk-based capital ratios in Regulation
H).
FBOs currently report their tier 1 capital and total consolidated
assets to the Federal Reserve on the Capital and Asset Report for
Foreign Banking Organizations (FR Y-7Q). The Board recognizes, however,
that it might be burdensome for an FBO to calculate a functional
equivalent to the U.S. leverage ratio due to differences between home-
country accounting standards and U.S. accounting standards.
Additionally, the Board recognizes that, because of definitional
ambiguities in Regulation H, it might be difficult for an FBO to
determine the precise SLR standards to which it is subject.
Accordingly, the Board is clarifying the manner in which an FBO
will determine its FBO PSR capital category.\47\ The four PSR capital
categories for FBOs will be ``highly capitalized,'' ``sufficiently
capitalized,'' ``undercapitalized,'' and ``intraday credit
ineligible.'' To assess whether it is highly capitalized or
sufficiently capitalized, an FBO would compare its risk-based capital
ratios to the corresponding ratios in Regulation H for, respectively,
well-capitalized and adequately capitalized banks. Additionally, an FBO
would need a home-country leverage ratio of 4 percent or 3 percent to
qualify as, respectively, highly capitalized or sufficiently
capitalized. Under Regulation H, a bank must meet a minimum U.S.
leverage ratio of 5 percent to qualify as well capitalized, which is
100 basis points higher than the 4 percent U.S. leverage ratio required
to qualify as adequately capitalized. Similarly, in order for an FBO to
be considered highly capitalized for purposes of the PSR policy, it
will need to meet a home-country leverage ratio (which, as noted above,
corresponds to the SLR) of 4 percent, which is 100 basis points higher
than the 3 percent home-country leverage ratio needed to be considered
sufficiently capitalized. The Board believes that this approach will
treat FBOs and U.S. institutions equivalently.
---------------------------------------------------------------------------
\47\ As noted above, the Board is replacing the term
``equivalent PCA designation'' with ``FBO PSR capital category.'' An
FBO not based in a Basel jurisdiction would be required to perform a
full assessment of its creditworthiness instead of using the matrix
approach to assessing creditworthiness.
---------------------------------------------------------------------------
To determine whether its FBO PSR capital category is
undercapitalized, an FBO would compare its risk-based capital ratios to
the corresponding ratios in Regulation H. Additionally, an FBO would be
deemed undercapitalized if its home-country leverage ratio is less than
3 percent. Some undercapitalized FBOs with supervisory composite
ratings of ``strong'' or ``satisfactory'' may qualify for positive net
debit caps.
Finally, to determine whether its FBO PSR capital category is
``intraday credit ineligible,'' an FBO would compare its risk-based
capital ratios to the corresponding Regulation H ratios for
significantly undercapitalized banks. Stated differently, an FBO with
risk-based capital thresholds below the levels required to qualify as
undercapitalized will be deemed ineligible for intraday credit.
Additionally, an FBO will be deemed ineligible for intraday credit if
its home-country leverage ratio is less than 2 percent.\48\
---------------------------------------------------------------------------
\48\ Under Regulation H, a bank is deemed to be significantly
undercapitalized if its U.S. leverage ratio is less than 3 percent
(i.e., more than 100 basis points lower than the 4 percent U.S.
leverage ratio required to qualify as adequately capitalized). Under
the PSR policy, a significantly undercapitalized institution is
ineligible for intraday credit. The Board believes that deeming an
FBO ineligible for intraday credit if its home-country leverage
ratio is less than 2 percent--which would be more than 100 basis
points lower than the 3 percent home-country leverage ratio needed
to qualify as sufficiently capitalized--would treat FBOs and U.S.
institutions equivalently.
---------------------------------------------------------------------------
[[Page 12056]]
The following table illustrates the capital ratios that an FBO will
use to determine its FBO PSR capital category.\49\
---------------------------------------------------------------------------
\49\ The risk-based capital ratios in the table are based on the
ratios currently codified in Regulation H and will change
correspondingly with any future revisions to Regulation H.
----------------------------------------------------------------------------------------------------------------
Total risk- Tier 1 risk- Home-country
FBO PSR capital category based capital based capital Common equity leverage ratio
(%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
Highly capitalized.............................. 10 8 6.5 4
Sufficiently capitalized........................ 8 6 4.5 3
Undercapitalized................................ <8 <6 <4.5 2
Intraday credit ineligible...................... <6 <4 <3 <2
----------------------------------------------------------------------------------------------------------------
As noted above, the Board proposed to incorporate FBO
creditworthiness self-assessments into the Guide's existing matrix for
assessing domestic institutions' creditworthiness. The revised
creditworthiness self-assessment matrix will appear as follows:
----------------------------------------------------------------------------------------------------------------
Supervisory composite rating \50\
Domestic capital category/ ----------------------------------------------------------------------------------
FBO PSR capital category Strong Satisfactory Fair Marginal or unsatisfactory
----------------------------------------------------------------------------------------------------------------
Well capitalized/Highly Excellent....... Very good....... Adequate........ Below standard.
capitalized.
Adequately capitalized/ Very good....... Very good....... Adequate........ Below standard.
Sufficiently capitalized.
Undercapitalized............. ** \51\......... ** \52\......... Below standard.. Below standard.
Significantly or critically Below standard.. Below standard.. Below standard.. Below standard.
undercapitalized/Intraday
credit ineligible.
----------------------------------------------------------------------------------------------------------------
Relatedly, as discussed above, the Board proposed that a well-
capitalized FBO would be eligible to request the streamlined max cap
procedure. The amendments adopted in this notice use the new
nomenclature discussed above and instead provide that a highly
capitalized FBO will be eligible to request the streamlined max cap
procedure.
---------------------------------------------------------------------------
\50\ Supervisory composite ratings, such as the Uniform Bank
Rating System (CAMELS), are generally assigned on a scale from 1 to
5, with 1 being the strongest rating. Thus, for the purposes of the
Creditworthiness Matrix, a supervisory rating of 1 is considered
Strong; a rating of 2 is considered Satisfactory; a rating of 3 is
considered Fair; and so on.
\51\ Institutions that fall into this category should perform a
full assessment of creditworthiness. A full assessment of
creditworthiness includes an assessment of capital adequacy, key
performance measures (including asset quality, earnings performance,
and liquidity), and the condition of affiliated institutions.
\52\ Id.
---------------------------------------------------------------------------
C. Delay in Effective Date
The commenter requested that the Board delay the effective date of
any changes to the PSR policy by at least 12 months. The Board believes
that a transition period would help FBOs adjust to these changes.
Accordingly, the changes will be effective on April 1, 2020. The
Federal Reserve will continue to provide SOSA rankings until that date.
III. Regulatory Flexibility Act
Congress enacted the Regulatory Flexibility Act (``RFA'') (5 U.S.C.
601 et seq.) to address concerns related to the effects of agency rules
on small entities, and the Board is sensitive to the impact its rules
may impose on small entities. The RFA requires agencies either to
provide a final regulatory flexibility analysis with a final rule or to
certify that the final rule will not have a significant economic impact
on a substantial number of small entities. In this case, the relevant
provisions of the PSR policy apply to all FBOs that maintain accounts
at Federal Reserve Banks. While the Board does not believe that the
changes adopted in this notice would have a significant impact on small
entities, and regardless of whether the RFA applies to the PSR policy
per se, the Board has nevertheless prepared the following Final
Regulatory Flexibility analysis in accordance with 5 U.S.C. 604.
1. Statement of the need for, and objectives of, the rule. As
discussed above, the Board is removing references to the SOSA ranking
and FBOs' FHC status in the PSR policy. Discontinuing the SOSA ranking
will streamline the Federal Reserve's FBO supervision program by
eliminating the need for Federal Reserve supervisors to provide
supervisory rankings that only serve a purpose for Reserve Bank credit
decisions. Removing references to FHC status in the PSR policy will
align the policy with the Board's view that an FBO's status as an FHC
is not a suitable factor for determining the FBO's eligibility for
intraday credit.
2. Description of comments. The Board did not receive any comments
on the Initial Regulatory Flexibility analysis from members of the
public or from the Chief Counsel for Advocacy of the Small Business
Administration (``SBA'').
3. Small entities affected by the proposed rule. Pursuant to
regulations issued by the SBA (13 CFR 121.201), a ``small entity''
includes an entity that engages in commercial banking and has assets of
$550 million or less (NAICS code 522110). Forty-one FBOs that maintain
Federal Reserve accounts are small entities. Six of those FBOs maintain
positive net debit caps.\53\
---------------------------------------------------------------------------
\53\ Data current as of Q4 2018.
---------------------------------------------------------------------------
4. Projected reporting, recordkeeping, and other compliance
requirements. The changes to the PSR policy will alter the procedures
by which FBOs obtain intraday credit from the Reserve Banks. The most
important new requirement is that an FBO will need to determine an FBO
PSR capital category, based on its worldwide capital ratios, to
establish its
[[Page 12057]]
creditworthiness under the PSR policy. Additionally, an FBO will need
to determine that it is highly capitalized, based on worldwide capital
ratios, in order to qualify for a streamlined procedure for requesting
collateralized intraday credit.
The Board does not believe that it will be burdensome for an FBO to
calculate its FBO PSR capital category or determine whether it is
highly capitalized, nor does it believe that FBO employees will need
any specialized professional skills to prepare such calculations. The
Board's FR Y-7Q report currently requires that FBOs with total
consolidated assets of $50 billion or more report the numerators and
denominators needed to calculate all of the risk-based capital ratios
in the FBO PSR capital category determination. The FR Y-7Q report also
requires that FBOs with total consolidated assets below $50 billion
report the numerators and denominators needed to calculate all ratios
in the FBO PSR capital category determination except the common equity
tier 1 capital ratio. FBOs with total consolidated assets below $50
billion that are based in Basel jurisdictions already calculate their
common equity tier 1 capital ratios under home-country standards.
Additionally, as discussed above, the Board has clarified that the
leverage measure component of the FBO PSR capital category will be
based solely on the FBO's leverage ratio as calculated under home-
country standards.
5. Steps taken to minimize economic impact and discussion of
significant alternatives. The Board does not believe that alternatives
to these changes would better accomplish the objectives of limiting
credit risk to the Reserve Banks while minimizing any economic impact
on small entities. The Board believes, as described above, that the
revised procedures will allow FBOs to maintain net debit caps that are
well tailored to FBOs' actual usage of intraday credit and will not
constrain most FBOs' U.S. operations under a wide range of scenarios.
While one alternative would be to continue providing SOSA rankings
to FBOs and leave the PSR policy in its present form, the Board
believes that Federal Reserve supervisory resources should be allocated
to other matters. Similarly, the Board could continue to allow FBOs
that are FHCs to qualify for higher levels of intraday credit than FBOs
that are not FHCs, but (as described above) the Board does not believe
that an FBO's status as an FHC should determine the FBO's eligibility
for intraday credit.
In two places--specifically, in the capital measure calculation
process and in the eligibility criteria for a streamlined max cap
procedure--the Board has deleted references to SOSA without replacing
those references with an alternative supervisory rating. As described
above, the Board believes that it is unnecessary to substitute another
supervisory rating in either area.\54\
---------------------------------------------------------------------------
\54\ See sections I.B.3 and I.B.4, supra.
---------------------------------------------------------------------------
Finally, the Board has replaced SOSA rankings in the
creditworthiness self-assessment matrix with the FBO PSR capital
category. This change will require an FBO to calculate its FBO PSR
capital category using worldwide capital ratios. Alternatively, the
Board could have simply deleted the SOSA ranking and provided that an
FBO's creditworthiness would depend solely on its U.S. operations
supervisory composite rating. The Board believes, however, that using
the FBO PSR capital category in conjunction with an FBO's supervisory
ratings will better protect the Reserve Banks from credit risk, because
the FBO PSR capital category will provide insight into an FBO's
worldwide financial profile and its ability to support its U.S.
branches and agencies. As discussed above, the Board has clarified that
an FBO will calculate the leverage measure component of the FBO PSR
capital category under home-country standards.
IV. Competitive Impact Analysis
The Board conducts a competitive impact analysis when it considers
a rule or policy change that may have a substantial effect on payment
system participants. Specifically, the Board determines whether there
would be a direct or material adverse effect on the ability of other
service providers to compete with the Federal Reserve due to differing
legal powers or due to the Federal Reserve's dominant market position
deriving from such legal differences.\55\ The Board did not receive any
comments regarding its competitive impact analysis in the proposal.
---------------------------------------------------------------------------
\55\ Federal Reserve Regulatory Service, 9-1558.
---------------------------------------------------------------------------
The Board believes that the modifications to the PSR policy will
have no adverse effect on the ability of other service providers to
compete with the Reserve Banks in providing similar services. While the
Board expects that the modifications will reduce net debit caps for
many FBOs, the Board does not believe this will have a significant
effect on FBOs because (as explained above) the Board believes that
most FBOs would retain access to sufficient amounts of Reserve Bank
intraday credit. Accordingly, the Board not expect the modifications
will have a significant effect on FBOs' use of Federal Reserve Bank
services. Additionally, the proposed modifications will have no effect
on intraday credit access for domestic institutions, which comprise the
vast majority of Reserve Bank account holders.
V. Paperwork Reduction Act
Certain provisions of the PSR policy contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\56\ In accordance with the
requirements of the PRA, the Board may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(``OMB'') control number. The Board has reviewed the amendments to the
PSR policy adopted in this notice under the authority delegated to the
Board by OMB. The amendments require revisions to the Annual Report of
Net Debit Cap (FR 2226; OMB No. 7100-0217). In addition, as permitted
by the PRA, the Board proposes to extend for three years, with
revision, the Annual Report of Net Debit Cap (FR 2226; OMB No. 7100-
0217). The Board received no comments on the PRA analysis in the
proposal. The Board has a continuing interest in the public's opinions
of collections of information. At any time, commenters may submit
comments regarding the burden estimate, or any other aspect of this
collection of information, including suggestions for reducing the
burden, to Nuha Elmaghrabi, Federal Reserve Board Clearance Officer,
Office of the Chief Data Officer, Board of Governors of the Federal
Reserve System, Washington, DC 20551. A copy of the comments may also
be submitted to the OMB desk officer: By mail to U.S. Office of
Management and Budget, 725 17th Street NW, # 10235, Washington, DC
20503; by facsimile to (202) 395-5806; or by email to:
[email protected], Attention, Federal Banking Agency Desk
Officer.
---------------------------------------------------------------------------
\56\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
Proposed Revision, With Extension for Three Years, of the Following
Information Collection:
Title of Information Collection: Annual Report of Net Debit Cap.
Agency Form Number: FR 2226.
OMB Control Number: 7100-0217.
Frequency of Response: Annually.
Respondents: Depository institutions' board of directors.
[[Page 12058]]
Abstract: Federal Reserve Banks collect these data annually to
provide information that is essential for their administration of the
PSR policy. The reporting panel includes all financially healthy
depository institutions with access to the discount window. The Report
of Net Debit Cap comprises three resolutions, which are filed by a
depository institution's board of directors depending on its needs. The
first resolution is used to establish a de minimis net debit cap and
the second resolution is used to establish a self-assessed net debit
cap.\57\ The third resolution is used to establish simultaneously a
self-assessed net debit cap and maximum daylight overdraft capacity.
---------------------------------------------------------------------------
\57\ Institutions use these two resolutions to establish a
capacity for daylight overdrafts above the lesser of $10 million or
20 percent of the institution's capital measure. Financially healthy
U.S. chartered institutions that rarely incur daylight overdrafts in
excess of the lesser of $10 million or 20 percent of the
institution's capital measure do not need to file board of
directors' resolutions or self-assessments with their Reserve Bank.
---------------------------------------------------------------------------
Under the PSR policy, an FBO's SOSA ranking can affect its
eligibility for a positive net debit cap, the size of its net debit
cap, and its eligibility to request a streamlined procedure to obtain
maximum daylight overdraft capacity. Additionally, an FBO's status as
an FHC can affect the size of its net debit cap and its eligibility to
request a streamlined procedure to obtain maximum daylight overdraft
capacity. The amendments to the PSR policy adopted in this notice (1)
remove references to the SOSA ranking, (2) remove references to FBOs'
FHC status, and (3) adopt alternative methods for determining an FBO's
eligibility for a positive net debit cap, the size of its net debit
cap, and its eligibility to request a streamlined procedure to obtain
maximum daylight overdraft capacity. The amendments will increase the
estimated average hours per response for FR 2226 self-assessment and de
minimis respondents that are FBOs by half an hour.
Estimated number of respondents: De Minimis Cap: Non-FBOs, 893
respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs,
106 respondents and FBOs, 9 respondents; and Maximum Daylight Overdraft
Capacity, 2 respondents.
Estimated average hours per response: De Minimis Cap--Non-FBOs, 1
hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and
FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
Estimated annual burden hours: De Minimis Cap: Non-FBOs, 893 hours
and FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs,
13.5 hours; and Maximum Daylight Overdraft Capacity, 2 hours.
VI. Federal Reserve Policy on Payment System Risk
Revisions to Section II.D of the PSR Policy
Section II.D of the PSR policy is revised as follows:
D. Net debit caps
* * * * *
2. Cap Categories
* * * * *
a. Self-Assessed
In order to establish a net debit cap category of high, above
average, or average, an institution must perform a self-assessment of
its own creditworthiness, intraday funds management and control,
customer credit policies and controls, and operating controls and
contingency procedures.\61\ For domestic institutions, the assessment
of creditworthiness is based on the institution's supervisory rating
and Prompt Corrective Action (PCA) designation.\62\ For U.S. branches
and agencies of FBOs that are based in jurisdictions that have
implemented capital standards substantially consistent with those
established by the Basel Committee on Banking Supervision, the
assessment of creditworthiness is based on the institution's
supervisory rating and its FBO PSR capital category.\63\ An institution
may perform a full assessment of its creditworthiness in certain
limited circumstances--for example, if its condition has changed
significantly since its last examination or if it possesses additional
substantive information regarding its financial condition.
Additionally, U.S. branches and agencies of FBOs based in jurisdictions
that have not implemented capital standards substantially consistent
with those established by the Basel Committee on Banking Supervision
are required to perform a full assessment of creditworthiness to
determine their ratings for the creditworthiness component. An
institution performing a self-assessment must also evaluate its
intraday funds-management procedures and its procedures for evaluating
the financial condition of and establishing intraday credit limits for
its customers. Finally, the institution must evaluate its operating
controls and contingency procedures to determine if they are sufficient
to prevent losses due to fraud or system failures. The Guide includes a
detailed explanation of the self-assessment process. * * *
---------------------------------------------------------------------------
\61\ This assessment should be done on an individual-institution
basis, treating as separate entities each commercial bank, each Edge
corporation (and its branches), each thrift institution, and so on.
An exception is made in the case of U.S. branches and agencies of
FBOs. Because these entities have no existence separate from the
FBO, all the U.S. offices of FBOs (excluding U.S.-chartered bank
subsidiaries and U.S.-chartered Edge subsidiaries) should be treated
as a consolidated family relying on the FBO's capital.
\62\ An insured depository institution is (1) ``well
capitalized'' if it significantly exceeds the required minimum level
for each relevant capital measure, (2) ``adequately capitalized'' if
it meets the required minimum level for each relevant capital
measure, (3) ``undercapitalized'' if it fails to meet the required
minimum level for any relevant capital measure, (4) ``significantly
undercapitalized'' if it is significantly below the required minimum
level for any relevant capital measure, or (5) ``critically
undercapitalized'' if it fails to meet any leverage limit (the ratio
of tangible equity to total assets) specified by the appropriate
federal banking agency, in consultation with the FDIC, or any other
relevant capital measure established by the agency to determine when
an institution is critically undercapitalized (12 U.S.C. 1831o).
\63\ The four FBO PSR capital categories for FBOs are ``highly
capitalized,'' ``sufficiently capitalized,'' ``undercapitalized,''
and ``intraday credit ineligible.'' To determine whether it is
highly capitalized or sufficiently capitalized, an FBO should
compare its risk-based capital ratios to the corresponding ratios in
Regulation H for well-capitalized and adequately capitalized banks.
12 CFR 208.43(b). Additionally, an FBO must have a leverage ratio of
4 percent or 3 percent (calculated under home-country standards) to
qualify as, respectively, highly capitalized or sufficiently
capitalized. To determine whether it is undercapitalized, an FBO
would compare its risk-based capital ratios to the corresponding
ratios in Regulation H. Additionally, an FBO would be deemed
undercapitalized if its home-country leverage ratio is less than 3
percent. Finally, to determine whether it is intraday credit
ineligible, an FBO should compare its risk-based capital ratios to
the corresponding ratios in Regulation H for significantly
undercapitalized banks. Additionally, an FBO would be deemed
intraday credit ineligible if its home-country leverage ratio is
less than 2 percent.
---------------------------------------------------------------------------
* * * * *
b. De Minimis
Many institutions incur relatively small overdrafts and thus pose
little risk to the Federal Reserve. To ease the burden on these small
overdrafters of engaging in the self-assessment process and to ease the
burden on the Federal Reserve of administering caps, the Board allows
institutions that meet reasonable safety and soundness standards to
incur de minimis amounts of daylight overdrafts without performing a
self-assessment.\67\ An
[[Page 12059]]
institution may incur daylight overdrafts of up to 40 percent of its
capital measure if the institution submits a board of directors
resolution. * * *
---------------------------------------------------------------------------
\67\ U.S. branches and agencies of FBOs that are based in
jurisdictions that have not implemented capital standards
substantially consistent with those established by the Basel
Committee on Banking Supervision are required to perform a full
assessment of creditworthiness to determine whether they meet
reasonable safety and soundness standards. These FBOs must submit an
assessment of creditworthiness with their board of directors
resolution requesting a de minimis cap category. U.S. branches and
agencies of FBOs that are based in jurisdictions that have
implemented capital standards substantially consistent with those
established by the Basel Committee on Banking Supervision are not
required to complete an assessment of creditworthiness, but Reserve
Banks will assess such an FBO's creditworthiness based on the FBO's
supervisory rating and its FBO PSR capital category.
---------------------------------------------------------------------------
* * * * *
c. Exempt-From-Filing
Institutions that only rarely incur daylight overdrafts in their
Federal Reserve accounts that exceed the lesser of $10 million or 20
percent of their capital measure are excused from performing self-
assessments and filing board of directors resolutions with their
Reserve Banks.\68\ This dual test of dollar amount and percent of
capital measure is designed to limit the filing exemption to
institutions that create only low-dollar risks to the Reserve Banks and
that incur small overdrafts relative to their capital measure. * * *
---------------------------------------------------------------------------
\68\ The Reserve Bank may require U.S. branches and agencies of
FBOs that are based in jurisdictions that have not implemented
capital standards substantially consistent with those established by
the Basel Committee on Banking Supervision to perform a full
assessment of creditworthiness to determine whether the FBO meets
reasonable safety and soundness standards. U.S. branches and
agencies of FBOs that are based in jurisdictions that have
implemented capital standards substantially consistent with those
established by the Basel Committee on Banking Supervision will not
be required to complete an assessment of creditworthiness, but
Reserve Banks will assess such an FBO's creditworthiness based on
the FBO's supervisory rating and the FBO PSR capital category.
---------------------------------------------------------------------------
* * * * *
3. Capital Measure
* * * * *
b. U.S. Branches and Agencies for Foreign Banks
For U.S. branches and agencies of foreign banks, net debit caps on
daylight overdrafts in Federal Reserve accounts are calculated by
applying the cap multiples for each cap category to the FBO's U.S.
capital equivalency measure.\69\ U.S. capital equivalency is equal to
10 percent of worldwide capital for FBOs.\70\
---------------------------------------------------------------------------
\69\ The term ``U.S. capital equivalency'' is used in this
context to refer the particular measure calculate net debit caps and
does not necessarily represent an appropriate for supervisory or
other purposes.
\70\ FBOs that wish to establish a non-zero net debit cap must
report their worldwide capital on the Annual Daylight Overdraft
Capital Report for U.S. Branches and Agencies of Foreign Banks (FR
2225). The instructions for FR explain how FBOs should calculate
their worldwide capital. See https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZ1kLYTc+ZpEQ==.
---------------------------------------------------------------------------
An FBO that is highly capitalized \71\ may be eligible for a
streamlined procedure (see section II.E.) for obtaining additional
collateralized intraday credit under the maximum daylight overdraft
capacity provision.
---------------------------------------------------------------------------
\71\ See n. 63, supra.
---------------------------------------------------------------------------
* * * * *
Revisions to Section II.E of the PSR Policy
The Board will revise Section II.E of the PSR policy as follows:
E. Maximum Daylight Overdraft Capacity
* * * * *
1. General Procedure
An institution with a self-assessed net debit cap that wishes to
expand its daylight overdraft capacity by pledging collateral should
consult with its administrative Reserve Bank. The Reserve Bank will
work with an institution that requests additional daylight overdraft
capacity to determine the appropriate maximum daylight overdraft
capacity level. In considering the institution's request, the Reserve
Bank will evaluate the institution's rationale for requesting
additional daylight overdraft capacity as well as its financial and
supervisory information. The financial and supervisory information
considered may include, but is not limited to, capital and liquidity
ratios, the composition of balance sheet assets, and CAMELS or other
supervisory ratings and assessments. An institution approved for a
maximum daylight overdraft capacity level must submit at least once in
each twelve-month period a board of directors resolution indicating its
board's approval of that level. * * *
* * * * *
2. Streamlined Procedure for Certain FBOs
An FBO that is highly capitalized \75\ and has a self-assessed net
debit cap may request from its Reserve Bank a streamlined procedure to
obtain a maximum daylight overdraft capacity. These FBOs are not
required to provide documentation of the business need or obtain the
board of directors' resolution for collateralized capacity in an amount
that exceeds its current net debit cap (which is based on 10 percent
worldwide capital times its cap multiple), as long as the requested
total capacity is 100 percent or less of worldwide capital times a
self-assessed cap multiple.\76\ In order to ensure that intraday
liquidity risk is managed appropriately and that the FBO will be able
to repay daylight overdrafts, eligible FBOs under the streamlined
procedure will be subject to initial and periodic reviews of liquidity
plans that are analogous to the liquidity reviews undergone by U.S.
institutions.\77\ If an eligible FBO requests capacity in excess of 100
percent of worldwide capital times the self-assessed cap multiple, it
would be subject to the general procedure.
---------------------------------------------------------------------------
\75\ See n. 63, supra.
\76\ For example, an FBO that is well capitalized is eligible
for uncollateralized capacity of 10 percent of worldwide capital
times the cap multiple. The streamlined max cap procedure would
provide such an institution with additional collateralized capacity
of 90 percent of worldwide capital times the cap multiple. As noted
above, FBOs report their worldwide capital on the Annual Daylight
Overdraft Capital Report for U.S. Branches and Agencies of Foreign
Banks (FR 2225).
\77\ The liquidity reviews will be conducted by the
administrative Reserve Bank, in consultation with each FBO's home
country supervisor.
---------------------------------------------------------------------------
* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 26, 2019.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2019-06063 Filed 3-29-19; 8:45 am]
BILLING CODE 6210-01-P