Federal Reserve Policy on Payment System Risk; U.S. Branches and Agencies of Foreign Banking Organizations, 12049-12059 [2019-06063]
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officers of State, local, and Tribal
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requires an agency plan for giving notice
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potentially affected small governments
before establishing any requirements
that might significantly or uniquely
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UMRA (62 FR 12820) (also available at
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Section 654 of the Treasury and
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Act, 1999 (Pub. L. 105–277) requires
Federal agencies to issue a Family
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final rule would not have any impact on
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Assessment.
J. Review Under Executive Order 12630,
‘‘Governmental Actions and
Interference with Constitutionally
Protected Property Rights’’
The Department has determined,
under Executive Order 12630,
‘‘Governmental Actions and Interference
with Constitutionally Protected Property
Rights,’’ 53 FR 8859 (March 18, 1988),
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each agency pursuant to general
guidelines issued by OMB. OMB’s
guidelines were published at 67 FR
8452 (February 22, 2002), and DOE’s
guidelines were published at 67 FR
62446 (October 7, 2002). DOE has
reviewed this final rule under the OMB
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that it is consistent with applicable
policies in those guidelines.
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‘‘Actions Concerning Regulations That
Significantly Affect Energy Supply,
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Executive Order 13211, ‘‘Actions
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As required by 5 U.S.C. 801, DOE will
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The Secretary of Energy has approved
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List of Subjects in 2 CFR Part 910
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and procedure, Grant programs,
Reporting and recordkeeping
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Signed in Washington, DC, on March 26,
2019.
John R. Bashista,
Director, Office of Acquisition Management,
Department of Energy.
S. Keith Hamilton,
Deputy Associate Administrator, Acquisition
and Project Management, National Nuclear
Security Administration.
For the reasons set forth in the
preamble, DOE hereby amends chapter
IX, subchapter B, of title 2 of the Code
of Federal Regulations as set forth
below:
PART 910—UNIFORM
ADMINISTRATION REQUIREMENTS,
COST PRINCIPLES, AND AUDIT
REQUIREMENTS FOR FEDERAL
AWARDS
1. The authority citation for part 910
continues to read as follows:
■
Authority: 42 U.S.C. 7101, et seq.; 31
U.S.C. 6301–6308; 50 U.S.C. 2401 et seq.; 2
CFR part 200.
2. Section 910.130 is amended by:
a. Removing the word ‘‘or’’ at the end
of paragraph (b)(1).
■ b. Removing the period at the end of
paragraph (b)(2) and adding in its place
‘‘; or’’.
■ c. Adding paragraph (b)(3).
The addition reads as follows:
■
■
§ 910.130
Cost sharing (EPACT).
*
*
*
*
*
(b) * * *
(3) The research or development
activity is to be performed by an
institution of higher education or
nonprofit institution (as defined in
section 4 of the Stevenson–Wydler
Technology Innovation Act of 1980 (15
U.S.C. 3703)) during the two-year period
ending September 27, 2020.
*
*
*
*
*
[FR Doc. 2019–06263 Filed 3–29–19; 8:45 am]
BILLING CODE 6450–01–P
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
Board of Governors of the
Federal Reserve System.
ACTION: Policy statement.
AGENCY:
The Board of Governors of the
Federal Reserve System (‘‘Board’’) has
approved changes to part II of the
SUMMARY:
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Federal Register / Vol. 84, No. 62 / Monday, April 1, 2019 / Rules and Regulations
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.
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.
1 82
FR 58764 (Dec. 14, 2017).
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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
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.
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
(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, exemptfrom-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
2 See
Part II.D.1 of the PSR policy.
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.
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.
6 In contrast, the FHC status of a domestic bank
holding company does not affect its capital
measure.
3 The
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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.
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
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.
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.
9 Under Section 38 of the Federal Deposit
Insurance Act, 12 U.S.C. 1831o, PCA designations
apply only to insured depository institutions.
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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 selfassessment 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
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
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).
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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 riskreducing 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 selfassessed cap multiple.14
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
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.
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
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12051
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.
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 riskbased 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
window loans. See https://
www.frbdiscountwindow.org/en/Pages/GeneralInformation/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.
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and are generally ineligible for a
positive net debit cap.17
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
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
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
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.
18 See 12 CFR 208.43(b).
19 See Table VII–1 of the Guide.
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.
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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.
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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
22 In this context, average cap utilization equals
an institution’s average daily peak daylight
overdraft divided by the FBO’s net debit cap.
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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.
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
The Board recognizes that setting the
capital measures of all FBOs at 10
23 Most FBOs with a cap category of exempt-fromfiling 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.
25 Data current as of Q4 2018.
26 The projected net debit caps under the singlerate 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-fromfiling 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.
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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.
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
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
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%20
Collateral%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).
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); GrammLeach-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).
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12053
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
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’
30 82 FR at 58769 (quoting 66 FR 30205, 30206
(Aug. 6, 2001)).
31 Id.
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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
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
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.
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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
35 For example, an uninsured New York statelicensed 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 § 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 § 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.
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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-fromfiling 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.
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.
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
37 Data
current as of Q4 2018.
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.
40 See, e.g., 12 U.S.C. 3102(j)(1); N.Y. Banking
Law section 606(4)(a).
38 The
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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.
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 onbalance-sheet activity, while the SLR
calculation incorporates both onbalance-sheet assets and certain offbalance-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
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).
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 OCCregulated 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),
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establishes leverage measures for the
undercapitalized and significantly
undercapitalized PCA categories.46
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 (‘‘homecountry 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
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.
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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.
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 riskbased 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 homecountry leverage ratio is less than 2
percent.48
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.
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
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The following table illustrates the
capital ratios that an FBO will use to
determine its FBO PSR capital
category.49
Total riskbased capital
(%)
FBO PSR capital category
Highly capitalized .............................................................................................
Sufficiently capitalized .....................................................................................
Undercapitalized ..............................................................................................
Intraday credit ineligible ...................................................................................
As noted above, the Board proposed
to incorporate FBO creditworthiness
self-assessments into the Guide’s
Tier 1 riskbased capital
(%)
10
8
<8
<6
existing matrix for assessing domestic
institutions’ creditworthiness. The
Common
equity
(%)
8
6
<6
<4
Home-country
leverage ratio
(%)
6.5
4.5
<4.5
<3
4
3
2
<2
revised creditworthiness self-assessment
matrix will appear as follows:
Supervisory composite rating 50
Domestic capital category/
FBO PSR capital category
Well capitalized/Highly capitalized ....................................
Adequately capitalized/Sufficiently capitalized ..................
Undercapitalized ................................................................
Significantly or critically 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.
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
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 homecountry 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.
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Strong
Satisfactory
Fair
Excellent ..............
Very good ............
** 51 ......................
Below standard ....
Very good ............
Very good ............
** 52 ......................
Below standard ....
Adequate .............
Adequate .............
Below standard ....
Below standard ....
Marginal or
unsatisfactory
Below
Below
Below
Below
standard.
standard.
standard.
standard.
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
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
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.
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.
53 Data current as of Q4 2018.
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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.
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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
Finally, the Board has replaced SOSA
rankings in the creditworthiness selfassessment 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 homecountry 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.
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
54 See
sections I.B.3 and I.B.4, supra.
Reserve Regulatory Service, 9–1558.
55 Federal
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12057
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: oira_submission@
omb.eop.gov, Attention, Federal
Banking Agency Desk Officer.
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.
56 44
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Federal Register / Vol. 84, No. 62 / Monday, April 1, 2019 / Rules and Regulations
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 selfassessed net debit cap.57 The third
resolution is used to establish
simultaneously a self-assessed net debit
cap and maximum daylight overdraft
capacity.
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
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.
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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
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
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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 fundsmanagement 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 selfassessment process. * * *
*
*
*
*
*
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
capitalized or sufficiently capitalized, an FBO
should compare its risk-based capital ratios to the
corresponding ratios in Regulation H for wellcapitalized 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 riskbased 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.
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
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institution may incur daylight
overdrafts of up to 40 percent of its
capital measure if the institution
submits a board of directors resolution.
* * *
*
*
*
*
*
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 lowdollar risks to the Reserve Banks and
that incur small overdrafts relative to
their capital measure. * * *
*
*
*
*
*
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
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.
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.
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.
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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.
*
*
*
*
*
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
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==.
71 See n. 63, supra.
75 See n. 63, supra.
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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.
*
*
*
*
*
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
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 107, 120, 142, and 146
RIN 3245–AH03
Civil Monetary Penalties Inflation
Adjustments
U.S. Small Business
Administration.
ACTION: Final rule.
AGENCY:
The U.S. Small Business
Administration (SBA) is amending its
regulations to adjust for inflation the
amount of certain civil monetary
penalties that are within the jurisdiction
of the agency. These adjustments
comply with the requirement in the
Federal Civil Penalties Inflation
Adjustment Act of 1990, as amended by
the Federal Civil Penalties Inflation
Adjustment Act Improvements Act of
2015, to make annual adjustments to the
penalties. The rule also makes a
technical amendment to ensure that a
reference to the penalty amount
imposed on SBA Supervised Lenders for
failure to file reports is consistent with
current and future adjustments.
DATES: Effective Date: This rule is
effective April 1, 2019.
SUMMARY:
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.
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01APR1
]]>Agencies
[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.
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\1\ 82 FR 58764 (Dec. 14, 2017).
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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\
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\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.
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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.
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\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.
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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\
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\6\ In contrast, the FHC status of a domestic bank holding
company does not affect its capital measure.
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(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.
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\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.
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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\
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\9\ Under Section 38 of the Federal Deposit Insurance Act, 12
U.S.C. 1831o, PCA designations apply only to insured depository
institutions.
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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\
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\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).
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\18\ See 12 CFR 208.43(b).
\19\ See Table VII-1 of the Guide.
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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.
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\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).
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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\
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\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).
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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\
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\30\ 82 FR at 58769 (quoting 66 FR 30205, 30206 (Aug. 6, 2001)).
\31\ Id.
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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\
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\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.
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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.
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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).
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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\
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\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.
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\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\
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\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.
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[[Page 12056]]
The following table illustrates the capital ratios that an FBO will
use to determine its FBO PSR capital category.\49\
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\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.
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\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.
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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\
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\53\ Data current as of Q4 2018.
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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\
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\54\ See sections I.B.3 and I.B.4, supra.
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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.
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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.
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\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.
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\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.
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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. * * *
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\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.
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* * * * *
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. * * *
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\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.
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* * * * *
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. * * *
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\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.
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* * * * *
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\
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\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==.
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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.
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\71\ See n. 63, supra.
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* * * * *
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.
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\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.
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* * * * *
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
