Federal Reserve Policy on Payment System Risk; U.S. Branches and Agencies of Foreign Banking Organizations

Citation84 FR 12049
Record Number2019-06063
Published date01 April 2019
SectionRules and Regulations
CourtFederal Reserve System
Federal Register, Volume 84 Issue 62 (Monday, April 1, 2019)
[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]
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                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.
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                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
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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.
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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\
                ---------------------------------------------------------------------------
                 \29\ See, e.g., International Banking Act of 1978, Public Law
                95-369, 12 U.S.C. 3101 et seq; S. Rep. No. 95-1073 (Aug. 8, 1978)
                (legislative history of the International Banking Act of 1978);
                Gramm-Leach-Bliley Act of 1999, Public Law 106-102, section 141, 12
                U.S.C. 3106(c); Dodd-Frank Act, Public Law 111-203, section
                165(b)(2), 12 U.S.C. 5365(b)(2).
                ---------------------------------------------------------------------------
                 The commenter argued that because a U.S. branch is an office of a
                foreign bank, it can draw on the global resources of the foreign bank
                to support its liabilities, including intraday credit that it receives
                from a Reserve Bank. As described in the proposal, however, FBOs that
                incur daylight overdrafts present special legal risks to the Reserve
                Banks because of differences in insolvency laws in the various FBOs'
                home countries. In particular, the proposal quoted a 2001 Federal
                Register notice in which the Board explained that insolvent FBOs posed
                a heightened risk to the Reserve Banks because ``[t]he insolvent
                party's national law . . . may permit the liquidator to subordinate
                other parties' claims (such as by permitting the home country tax
                authorities to have first priority in bankruptcy), may reclassify or
                impose a stay on the right the nondefaulting party has to collateral
                pledged by the defaulting party in support of a particular transaction,
                or may require a separate proceeding to be initiated against the head
                office in addition to any proceeding against the branch.'' \30\ The
                2001 Federal Register notice further stated that ``[i]t is not
                practicable for the Federal Reserve to undertake and keep current
                extensive analysis of the legal risks presented by the insolvency
                law(s) applicable to each FBO with a Federal Reserve account in order
                to quantify precisely the legal risk that the Federal Reserve incurs by
                providing intraday credit to that institution. It is reasonable,
                however, for the Federal Reserve to recognize that FBOs generally
                present additional legal risks to the payments system and, accordingly,
                limit its exposure to these institutions.'' \31\
                ---------------------------------------------------------------------------
                 \30\ 82 FR at 58769 (quoting 66 FR 30205, 30206 (Aug. 6, 2001)).
                 \31\ Id.
                ---------------------------------------------------------------------------
                 The Board continues to believe that FBOs may pose heightened risks
                to the Reserve Banks relative to domestic institutions, and that it is
                reasonable to calculate an FBO's capital measure as a fraction of its
                worldwide capital, notwithstanding that the capital measure of a
                domestic institution generally equals 100 percent of the institution's
                risk-based capital. The Board also notes that, although Federal Reserve
                supervisors have gained access to new internal and external resources
                since 2002 (when the Board adopted the current capital measure
                calculation) that allow the Federal Reserve to better monitor FBOs on
                an ongoing basis, the Board's authority over FBOs generally extends
                only to FBOs' U.S. operations. As a result, Federal Reserve supervisors
                have less insight into the financial health of FBOs compared to
                domestic bank holding companies, for which the Board serves as the
                global supervisory authority. Nevertheless, as discussed above, the
                Board believes that FBOs'
                [[Page 12054]]
                projected net debit caps would be well tailored to FBOs' actual usage
                of intraday credit and would not constrain most FBOs' U.S. operations
                under a wide range of scenarios.
                 The Board further notes that, as discussed in the proposal, FBO net
                debit caps are currently large when compared to the net debit caps of
                peer domestic institutions. For example, the average net debit cap of
                an FBO with between $1 billion and $10 billion in U.S.-based assets is
                $3.9 billion, while the average net debit cap of a domestic institution
                with between $1 billion and $10 billion in assets is $209 million; the
                average net debit cap of an FBO with between $10 billion and $50
                billion in U.S.-based assets is $7.7 billion, while the average net
                debit cap of a domestic institution with between $10 billion and $50
                billion in assets is $1.4 billion; and the average net debit cap of an
                FBO with between $50 billion and $150 billion in U.S.-based assets is
                $24.5 billion, while the average net debit cap of a domestic
                institution with between $50 billion and $150 billion in assets is
                $11.3 billion.\32\ After the changes adopted in this Federal Register
                notice take effect, the average net debit cap of an FBO with between $1
                billion and $10 billion would be $1.4 billion, the average net debit
                cap of an FBO with between $10 billion and $50 billion in U.S.-based
                assets would be $2.8 billion, and the average net debit cap of an FBO
                with between $50 billion and $150 billion in U.S.-based assets would be
                $7.7 billion.\33\ As discussed above, the Board's analysis indicates
                that these projected net debit caps would provide most FBOs with
                sufficient daylight overdraft capacity even when reserves are low and
                liquidity pressures are high.\34\
                ---------------------------------------------------------------------------
                 \32\ The Board excluded institutions with a cap category of
                exempt-from-filing from these comparisons because these institutions
                are limited to a $10 million net debit cap. No FBO currently has
                U.S.-based assets above $150 billion. Data current as of Q4 2018.
                 \33\ The Board recognizes that, based on certain FBOs' business
                models, the volume and value of payments flowing through an FBO with
                a particular level of U.S.-based assets may be higher than that of a
                domestic institution with a similar level of assets.
                 \34\ As the Board further explained above, certain FBOs may
                request additional daylight overdraft capacity by applying for a
                self-assessed cap and/or a max cap.
                ---------------------------------------------------------------------------
                3. Other Concerns About Reducing FBO Net Debit Caps
                 The commenter raised a number of other concerns regarding the
                proposal to set the capital measures of all FBOs at 10 percent of an
                FBO's worldwide capital. The commenter argued that the proposal would
                effectively penalize those FBOs that, under the current, tiered system
                for determining FBO capital measures, ``are considered to present the
                lesser risk to the Federal Reserve.'' The Board notes that, even after
                the changes to the capital measure calculation take effect, FBOs that
                are more creditworthy will continue to be eligible for more daylight
                overdraft capacity than FBOs that are less creditworthy--specifically,
                an FBO's cap category will continue to be based, in part, on the FBO's
                creditworthiness, which (as described above) will be determined based
                on the FBO's U.S. Operations Supervisory Composite Rating and its FBO
                PSR capital category. The Board also emphasizes that the intent of this
                policy change is not to penalize FBOs or constrain FBOs' U.S.
                operations. Rather, the Board believes that FBOs may pose heightened
                risks to the Reserve Banks relative to domestic institutions, and that
                it is prudent to manage these risks by limiting FBOs' net debit caps to
                levels that are better tailored to FBOs' actual usage of intraday
                credit.
                 The commenter also argued that the proposal does not consider the
                protections that the Reserve Banks receive under federal and state laws
                that ``ringfence'' FBO assets for the benefit of third-party creditors.
                Federal and state laws require that U.S. branches and agencies of
                foreign banks pledge assets in segregated accounts that are intended to
                benefit the creditors of such branches and agencies.\35\ Publicly
                reported data show that U.S. branches and agencies of foreign banks
                generally pledge assets equal only to a small percentage of their
                liabilities in such segregated accounts.\36\ For example, only 2 of 44
                FBOs with a positive net debit cap have pledged sufficient assets to
                cover all of their liabilities to nonrelated parties, while 36 of these
                FBOs have pledged assets equal to less than 10 percent of their
                liabilities to nonrelated parties.\37\ Similarly, only 1 of 27 FBOs
                that currently maintain a cap category higher than exempt-from-filing
                \38\ has pledged sufficient assets to cover its net debit cap, 6 have
                pledged assets that would cover between 10 percent and 60 percent of
                their net debit caps, and 20 have pledged assets that would cover less
                than 10 percent of their net debit caps.\39\ Accordingly, if an FBO
                becomes insolvent during a period in which a Reserve Bank has extended
                intraday credit to that FBO, the pledged assets of the FBO's U.S.
                branches and agencies would very likely be insufficient to repay the
                Reserve Banks and other unsecured creditors.
                ---------------------------------------------------------------------------
                 \35\ For example, an uninsured New York state-licensed branch is
                required to deposit an amount of high-quality assets in a segregated
                account that is pledged to the state to cover the cost of the
                branch's liquidation and to repay creditors. N.Y. Banking Law Sec.
                202-b(1); 3 NYCRR 51. The amount of the required deposit is the
                greater of (1) $2 million or (2) one percent of average total
                liabilities of the branch or agency for the previous month, subject
                to certain caps for well-rated foreign banking corporations. 3 NYCRR
                322.1. The New York Superintendent of Financial Services may also
                require a New York state branch to maintain additional assets
                relative to some percentage of liabilities if the Superintendent
                deems it necessary or desirable for the maintenance of a sound
                financial condition, the protection of depositors and the public
                interest, and to maintain public confidence in the branch. N.Y.
                Banking Law Sec. 202-b(1). See also 12 U.S.C. 3102(g); 12 CFR 28.15
                and 28.20.
                 \36\ See Reporting Form FFIEC 002, ``Report of Assets and
                Liabilities of U.S. Branches and Agencies of Foreign Banks,''
                Schedule RAL, Items S.1 and S.2.
                 \37\ Data current as of Q4 2018.
                 \38\ The Board has excluded institutions with a cap category of
                exempt-from-filing from this analysis because such institutions' net
                debit caps are limited to a maximum of $10 million.
                 \39\ Data current as of Q4 2018.
                ---------------------------------------------------------------------------
                 The Board recognizes that, in some jurisdictions, a U.S.
                supervisory authority (or a receiver appointed by a U.S. supervisory
                authority) that liquidates a U.S. branch or agency of an insolvent
                foreign bank may take possession of all assets of the foreign bank--
                including non-branch assets of the foreign bank--located in the
                jurisdiction of that supervisory authority.\40\ These provisions may
                expand the pool of assets available to repay the creditors of a U.S.
                branch or agency if the foreign bank maintains other assets in the
                United States (if the branch is federally licensed) or in the state in
                which the branch is located (if the branch is state-licensed). The
                Board notes, however, that it is uncertain whether available assets
                will be sufficient to repay creditors when a supervisory authority or
                receiver takes possession of such U.S. branches and agencies.
                ---------------------------------------------------------------------------
                 \40\ See, e.g., 12 U.S.C. 3102(j)(1); N.Y. Banking Law section
                606(4)(a).
                ---------------------------------------------------------------------------
                 Finally, the commenter argued that there is no compelling reason to
                reduce FBO net debit caps at this time. The commenter noted, in this
                regard, that the special legal risks that FBOs pose to the Reserve
                Banks have not changed since 2001, when the Board established the
                current method for calculating FBO capital measures. The commenter also
                noted that U.S. and foreign regulators have improved their supervision
                and regulation of foreign banks and their U.S. branches since 2001,
                suggesting that these efforts have enhanced foreign banks' resiliency
                and resolvability and should provide the Reserve Banks with more
                comfort that U.S. branches are creditworthy. The Board recognizes that
                [[Page 12055]]
                foreign banks (including U.S. branches of foreign banks) are--like
                U.S.-chartered institutions--subject to more robust oversight than they
                were in 2001.\41\ The Board also appreciates that intraday credit helps
                to facilitate payments by Reserve Bank accountholders and can promote
                the smooth functioning of the payment system. Nevertheless, because
                intraday credit to FBOs (relative to domestic institutions) may pose
                heightened risks to the Reserve Banks, the Board believes that the
                Reserve Banks should tailor FBO net debit caps more closely to FBOs'
                actual usage of intraday credit and should not provide unnecessarily
                large net debit caps to FBOs. Setting the capital measures of all FBOs
                at 10 percent of an FBO's worldwide capital would better tailor FBO net
                debit caps to FBOs' actual usage of intraday credit.
                ---------------------------------------------------------------------------
                 \41\ See, e.g., Dodd-Frank Act, Public Law 111-203, section 165,
                12 U.S.C. 5365 (requiring enhanced supervision and prudential
                standards for certain bank holding companies, including certain
                FBOs).
                ---------------------------------------------------------------------------
                B. Use of Home-Country Leverage Ratio
                 Under Regulation H, a bank's PCA designation is determined by four
                capital measures: Total risk-based capital, tier 1 risk-based capital,
                common equity tier 1 risk-based capital, and leverage.\42\ The leverage
                measure utilizes two ratios: The leverage ratio (``U.S. leverage
                ratio'') and the supplementary leverage ratio (``SLR''). The key
                difference between the two ratios is that the U.S. leverage ratio
                calculation incorporates only on-balance-sheet activity, while the SLR
                calculation incorporates both on-balance-sheet assets and certain off-
                balance-sheet exposures.\43\ Under Regulation H, banks must meet a
                minimum U.S. leverage ratio of 4 or 5 percent to qualify as,
                respectively, adequately capitalized or well capitalized.\44\
                Regulation H also requires that certain banks meet additional SLR
                standards to qualify as adequately or well capitalized.\45\ Finally,
                Regulation H establishes leverage measures for the undercapitalized and
                significantly undercapitalized PCA categories.\46\
                ---------------------------------------------------------------------------
                 \42\ The Board's Regulation H applies to state member banks. The
                Office of the Comptroller of the Currency (OCC) and the Federal
                Deposit Insurance Corporation (FDIC) have promulgated functionally
                identical PCA regulations applicable to OCC-regulated and FDIC-
                regulated institutions, respectively. See 12 CFR part 6 (OCC); 12
                CFR part 324, subpart H (FDIC).
                 \43\ See 12 CFR 208.41(h) and (j); 12 CFR 217.10(b)(4) and
                (c)(4).
                 \44\ 12 CFR 208.43(b)(2)(iv)(A) and (b)(1)(iv)(A).
                 \45\ Specifically, a bank that qualifies as an ``advanced
                approaches bank'' must meet a minimum SLR of 3 percent to qualify as
                adequately capitalized and a bank that is a subsidiary of a global
                systemically important bank holding company (GSIB) must maintain an
                SLR of at least 6 percent to qualify as well capitalized. See 12 CFR
                208.41(a) and 217.100(b)(1) (definition of ``advanced approaches
                bank''); 12 CFR 208.41(g), 217.2, and 217.402 (definition of GSIB);
                12 CFR 208.43(b)(1)(iv)(B) and 208.43(b)(2)(iv)(B) (Regulation H SLR
                standards). The Board has issued a proposal to change the 6 percent
                SLR requirement for banks that are subsidiaries of GSIBs to equal 3
                percent plus 50 percent of the GSIB risk-based surcharge applicable
                to such a bank's top-tier holding company. 83 FR 17317 (April 19,
                2018).
                 \46\ Under Regulation H, a bank is deemed to be undercapitalized
                if its U.S. leverage ratio is less than 4 percent or, if applicable,
                its SLR is less than 3 percent. A bank is deemed to be significantly
                undercapitalized if its U.S. leverage ratio is less than 3 percent,
                i.e., more than 100 basis points lower than the U.S. leverage ratio
                needed to qualify as adequately capitalized.
                ---------------------------------------------------------------------------
                 The commenter argued that ``in determining an FBO's equivalent PCA
                designation, reference should be made only to the [SLR] and not to the
                U.S. leverage ratio, and, consistent with that approach, the leverage
                measure under the PCA regime should be calibrated by reference to the
                home country leverage ratio.'' The commenter noted that under
                Regulation H, ``PCA categories apply various combinations of the U.S.
                leverage ratio and the U.S. supplementary ratio, whereas the
                corresponding measure for FBOs'' from Basel jurisdictions is the SLR.
                The commenter therefore argued that, for purposes of calculating an
                FBO's equivalent PCA designation, the leverage measure should be based
                solely on the FBO's leverage ratio as calculated under home-country
                standards (``home-country leverage ratio'')--i.e., that the U.S.
                leverage ratio, as distinct from the SLR, should have ``no relevance to
                the determination.'' The commenter also suggested that an FBO should be
                able to qualify as well capitalized or adequately capitalized if it
                meets its home country's 3 percent leverage ratio expectation (assuming
                the FBO also meets the relevant risk-based capital ratios in Regulation
                H).
                 FBOs currently report their tier 1 capital and total consolidated
                assets to the Federal Reserve on the Capital and Asset Report for
                Foreign Banking Organizations (FR Y-7Q). The Board recognizes, however,
                that it might be burdensome for an FBO to calculate a functional
                equivalent to the U.S. leverage ratio due to differences between home-
                country accounting standards and U.S. accounting standards.
                Additionally, the Board recognizes that, because of definitional
                ambiguities in Regulation H, it might be difficult for an FBO to
                determine the precise SLR standards to which it is subject.
                 Accordingly, the Board is clarifying the manner in which an FBO
                will determine its FBO PSR capital category.\47\ The four PSR capital
                categories for FBOs will be ``highly capitalized,'' ``sufficiently
                capitalized,'' ``undercapitalized,'' and ``intraday credit
                ineligible.'' To assess whether it is highly capitalized or
                sufficiently capitalized, an FBO would compare its risk-based capital
                ratios to the corresponding ratios in Regulation H for, respectively,
                well-capitalized and adequately capitalized banks. Additionally, an FBO
                would need a home-country leverage ratio of 4 percent or 3 percent to
                qualify as, respectively, highly capitalized or sufficiently
                capitalized. Under Regulation H, a bank must meet a minimum U.S.
                leverage ratio of 5 percent to qualify as well capitalized, which is
                100 basis points higher than the 4 percent U.S. leverage ratio required
                to qualify as adequately capitalized. Similarly, in order for an FBO to
                be considered highly capitalized for purposes of the PSR policy, it
                will need to meet a home-country leverage ratio (which, as noted above,
                corresponds to the SLR) of 4 percent, which is 100 basis points higher
                than the 3 percent home-country leverage ratio needed to be considered
                sufficiently capitalized. The Board believes that this approach will
                treat FBOs and U.S. institutions equivalently.
                ---------------------------------------------------------------------------
                 \47\ As noted above, the Board is replacing the term
                ``equivalent PCA designation'' with ``FBO PSR capital category.'' An
                FBO not based in a Basel jurisdiction would be required to perform a
                full assessment of its creditworthiness instead of using the matrix
                approach to assessing creditworthiness.
                ---------------------------------------------------------------------------
                 To determine whether its FBO PSR capital category is
                undercapitalized, an FBO would compare its risk-based capital ratios to
                the corresponding ratios in Regulation H. Additionally, an FBO would be
                deemed undercapitalized if its home-country leverage ratio is less than
                3 percent. Some undercapitalized FBOs with supervisory composite
                ratings of ``strong'' or ``satisfactory'' may qualify for positive net
                debit caps.
                 Finally, to determine whether its FBO PSR capital category is
                ``intraday credit ineligible,'' an FBO would compare its risk-based
                capital ratios to the corresponding Regulation H ratios for
                significantly undercapitalized banks. Stated differently, an FBO with
                risk-based capital thresholds below the levels required to qualify as
                undercapitalized will be deemed ineligible for intraday credit.
                Additionally, an FBO will be deemed ineligible for intraday credit if
                its home-country leverage ratio is less than 2 percent.\48\
                ---------------------------------------------------------------------------
                 \48\ Under Regulation H, a bank is deemed to be significantly
                undercapitalized if its U.S. leverage ratio is less than 3 percent
                (i.e., more than 100 basis points lower than the 4 percent U.S.
                leverage ratio required to qualify as adequately capitalized). Under
                the PSR policy, a significantly undercapitalized institution is
                ineligible for intraday credit. The Board believes that deeming an
                FBO ineligible for intraday credit if its home-country leverage
                ratio is less than 2 percent--which would be more than 100 basis
                points lower than the 3 percent home-country leverage ratio needed
                to qualify as sufficiently capitalized--would treat FBOs and U.S.
                institutions equivalently.
                ---------------------------------------------------------------------------
                [[Page 12056]]
                 The following table illustrates the capital ratios that an FBO will
                use to determine its FBO PSR capital category.\49\
                ---------------------------------------------------------------------------
                 \49\ The risk-based capital ratios in the table are based on the
                ratios currently codified in Regulation H and will change
                correspondingly with any future revisions to Regulation H.
                ----------------------------------------------------------------------------------------------------------------
                 Total risk- Tier 1 risk- Home-country
                 FBO PSR capital category based capital based capital Common equity leverage ratio
                 (%) (%) (%) (%)
                ----------------------------------------------------------------------------------------------------------------
                Highly capitalized.............................. 10 8 6.5 4
                Sufficiently capitalized........................ 8 6 4.5 3
                Undercapitalized................................ [email protected], Attention, Federal Banking Agency Desk
                Officer.
                ---------------------------------------------------------------------------
                 \56\ 44 U.S.C. 3501-3521.
                ---------------------------------------------------------------------------
                 Proposed Revision, With Extension for Three Years, of the Following
                Information Collection:
                 Title of Information Collection: Annual Report of Net Debit Cap.
                 Agency Form Number: FR 2226.
                 OMB Control Number: 7100-0217.
                 Frequency of Response: Annually.
                 Respondents: Depository institutions' board of directors.
                [[Page 12058]]
                 Abstract: Federal Reserve Banks collect these data annually to
                provide information that is essential for their administration of the
                PSR policy. The reporting panel includes all financially healthy
                depository institutions with access to the discount window. The Report
                of Net Debit Cap comprises three resolutions, which are filed by a
                depository institution's board of directors depending on its needs. The
                first resolution is used to establish a de minimis net debit cap and
                the second resolution is used to establish a self-assessed net debit
                cap.\57\ The third resolution is used to establish simultaneously a
                self-assessed net debit cap and maximum daylight overdraft capacity.
                ---------------------------------------------------------------------------
                 \57\ Institutions use these two resolutions to establish a
                capacity for daylight overdrafts above the lesser of $10 million or
                20 percent of the institution's capital measure. Financially healthy
                U.S. chartered institutions that rarely incur daylight overdrafts in
                excess of the lesser of $10 million or 20 percent of the
                institution's capital measure do not need to file board of
                directors' resolutions or self-assessments with their Reserve Bank.
                ---------------------------------------------------------------------------
                 Under the PSR policy, an FBO's SOSA ranking can affect its
                eligibility for a positive net debit cap, the size of its net debit
                cap, and its eligibility to request a streamlined procedure to obtain
                maximum daylight overdraft capacity. Additionally, an FBO's status as
                an FHC can affect the size of its net debit cap and its eligibility to
                request a streamlined procedure to obtain maximum daylight overdraft
                capacity. The amendments to the PSR policy adopted in this notice (1)
                remove references to the SOSA ranking, (2) remove references to FBOs'
                FHC status, and (3) adopt alternative methods for determining an FBO's
                eligibility for a positive net debit cap, the size of its net debit
                cap, and its eligibility to request a streamlined procedure to obtain
                maximum daylight overdraft capacity. The amendments will increase the
                estimated average hours per response for FR 2226 self-assessment and de
                minimis respondents that are FBOs by half an hour.
                 Estimated number of respondents: De Minimis Cap: Non-FBOs, 893
                respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs,
                106 respondents and FBOs, 9 respondents; and Maximum Daylight Overdraft
                Capacity, 2 respondents.
                 Estimated average hours per response: De Minimis Cap--Non-FBOs, 1
                hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and
                FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
                 Estimated annual burden hours: De Minimis Cap: Non-FBOs, 893 hours
                and FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs,
                13.5 hours; and Maximum Daylight Overdraft Capacity, 2 hours.
                VI. Federal Reserve Policy on Payment System Risk
                Revisions to Section II.D of the PSR Policy
                 Section II.D of the PSR policy is revised as follows:
                D. Net debit caps
                * * * * *
                2. Cap Categories
                * * * * *
                a. Self-Assessed
                 In order to establish a net debit cap category of high, above
                average, or average, an institution must perform a self-assessment of
                its own creditworthiness, intraday funds management and control,
                customer credit policies and controls, and operating controls and
                contingency procedures.\61\ For domestic institutions, the assessment
                of creditworthiness is based on the institution's supervisory rating
                and Prompt Corrective Action (PCA) designation.\62\ For U.S. branches
                and agencies of FBOs that are based in jurisdictions that have
                implemented capital standards substantially consistent with those
                established by the Basel Committee on Banking Supervision, the
                assessment of creditworthiness is based on the institution's
                supervisory rating and its FBO PSR capital category.\63\ An institution
                may perform a full assessment of its creditworthiness in certain
                limited circumstances--for example, if its condition has changed
                significantly since its last examination or if it possesses additional
                substantive information regarding its financial condition.
                Additionally, U.S. branches and agencies of FBOs based in jurisdictions
                that have not implemented capital standards substantially consistent
                with those established by the Basel Committee on Banking Supervision
                are required to perform a full assessment of creditworthiness to
                determine their ratings for the creditworthiness component. An
                institution performing a self-assessment must also evaluate its
                intraday funds-management procedures and its procedures for evaluating
                the financial condition of and establishing intraday credit limits for
                its customers. Finally, the institution must evaluate its operating
                controls and contingency procedures to determine if they are sufficient
                to prevent losses due to fraud or system failures. The Guide includes a
                detailed explanation of the self-assessment process. * * *
                ---------------------------------------------------------------------------
                 \61\ This assessment should be done on an individual-institution
                basis, treating as separate entities each commercial bank, each Edge
                corporation (and its branches), each thrift institution, and so on.
                An exception is made in the case of U.S. branches and agencies of
                FBOs. Because these entities have no existence separate from the
                FBO, all the U.S. offices of FBOs (excluding U.S.-chartered bank
                subsidiaries and U.S.-chartered Edge subsidiaries) should be treated
                as a consolidated family relying on the FBO's capital.
                 \62\ An insured depository institution is (1) ``well
                capitalized'' if it significantly exceeds the required minimum level
                for each relevant capital measure, (2) ``adequately capitalized'' if
                it meets the required minimum level for each relevant capital
                measure, (3) ``undercapitalized'' if it fails to meet the required
                minimum level for any relevant capital measure, (4) ``significantly
                undercapitalized'' if it is significantly below the required minimum
                level for any relevant capital measure, or (5) ``critically
                undercapitalized'' if it fails to meet any leverage limit (the ratio
                of tangible equity to total assets) specified by the appropriate
                federal banking agency, in consultation with the FDIC, or any other
                relevant capital measure established by the agency to determine when
                an institution is critically undercapitalized (12 U.S.C. 1831o).
                 \63\ The four FBO PSR capital categories for FBOs are ``highly
                capitalized,'' ``sufficiently capitalized,'' ``undercapitalized,''
                and ``intraday credit ineligible.'' To determine whether it is
                highly capitalized or sufficiently capitalized, an FBO should
                compare its risk-based capital ratios to the corresponding ratios in
                Regulation H for well-capitalized and adequately capitalized banks.
                12 CFR 208.43(b). Additionally, an FBO must have a leverage ratio of
                4 percent or 3 percent (calculated under home-country standards) to
                qualify as, respectively, highly capitalized or sufficiently
                capitalized. To determine whether it is undercapitalized, an FBO
                would compare its risk-based capital ratios to the corresponding
                ratios in Regulation H. Additionally, an FBO would be deemed
                undercapitalized if its home-country leverage ratio is less than 3
                percent. Finally, to determine whether it is intraday credit
                ineligible, an FBO should compare its risk-based capital ratios to
                the corresponding ratios in Regulation H for significantly
                undercapitalized banks. Additionally, an FBO would be deemed
                intraday credit ineligible if its home-country leverage ratio is
                less than 2 percent.
                ---------------------------------------------------------------------------
                * * * * *
                b. De Minimis
                 Many institutions incur relatively small overdrafts and thus pose
                little risk to the Federal Reserve. To ease the burden on these small
                overdrafters of engaging in the self-assessment process and to ease the
                burden on the Federal Reserve of administering caps, the Board allows
                institutions that meet reasonable safety and soundness standards to
                incur de minimis amounts of daylight overdrafts without performing a
                self-assessment.\67\ An
                [[Page 12059]]
                institution may incur daylight overdrafts of up to 40 percent of its
                capital measure if the institution submits a board of directors
                resolution. * * *
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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.
                ---------------------------------------------------------------------------
                * * * * *
                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==.
                ---------------------------------------------------------------------------
                 An FBO that is highly capitalized \71\ may be eligible for a
                streamlined procedure (see section II.E.) for obtaining additional
                collateralized intraday credit under the maximum daylight overdraft
                capacity provision.
                ---------------------------------------------------------------------------
                 \71\ See n. 63, supra.
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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.
                ---------------------------------------------------------------------------
                 \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
                

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