US Federal Deposit Insurance Corporation Issues Final Rule Amending International Banking Regulations
The FDIC adopted amendments to its international banking regulations that primarily impact the asset pledge requirements applicable to FDIC-insured branch offices of non-U.S. banks (of which there are only 10) as well as certain securities-related powers of foreign branch offices of state nonmember banks, which depend in part on whether the branch is transacting in investment grade securities. The amendments implement Section 939A of the Dodd-Frank Act, which generally requires the removal of reliance on credit ratings in banking (and other) regulations for determining the creditworthiness of a security or money market instrument. Under the amended regulation, an investment grade security is one “whose issuer has adequate capacity to meet all financial commitments under the security for the projected life of the exposure.” This means that the risk of default by the obligor is low and that full and timely repayment of principal and interest is expected. FDIC-insured branch offices of foreign banks are required to pledge investment grade assets to the FDIC, and such assets must meet the new standard. In addition, in light of lessons learned from the financial crisis, the FDIC has added a liquidity standard and a fair value haircut requirement for pledged assets. The FDIC noted that the haircut requirement could require foreign banks that pledge a predominance of bank notes and CDs to pledge additional collateral, but that the overall impact on FDIC-insured branches is expected to be minimal. Interestingly, the FDIC will also now permit cash to be pledged, but only if the depository institution holding the cash holds it separate from the general funds of the bank and does not commingle it with any cash or other property of the depository institution. No interest may be paid on the cash because the depository may not lend, invest or otherwise use the cash in its operations. The FDIC noted that it is reviewing pledge agreements to determine what modifications may be needed (if any) in light of the amendments. The final rule takes effect on April 1, 2018.
View full text of the final rule.