Kathleen A. Scott
Kathleen A. Scott ()

In my March 2017 column, various executive orders emanating from the Trump White House starting shortly after inauguration that began the president’s deregulation initiative were discussed.1 Executive Order 13772 sets out administration policy to regulate the U.S. financial system consistent with seven “core principles,” and tasked the Secretary of the Treasury to report to the President on the extent to which current U.S. financial regulatory requirements promote and support the core principles or are inconsistent with them.2 On June 12, 2017, Treasury Secretary Steven Mnuchin issued his report.3

While the report has something for banks large and small, this column will focus on the recommendations that would appear to be more relevant to non-U.S. bank operations in the United States. A non-U.S. bank with U.S. banking operations, such as a direct branch or agency, or commercial bank subsidiary, generally is treated as a U.S. holding company under most U.S. bank holding company laws and regulations.

As with the executive orders, it should be noted that mere issuance of this report does not change the current regulatory landscape. Any changes based on the report will need statutory or regulatory changes.


In compiling the report, Treasury consulted with U.S. and non-U.S. financial services regulators, trade groups (including the Institute of International Bankers, the trade group for non-U.S. banks operating in the United States), U.S. and non-U.S. financial institutions, law firms and academics. The report focuses on the U.S. depository system. Subsequent reports will cover such topics as capital markets, the asset management and insurance industry, nonbank financial institutions, and financial technology and innovation.

In providing an overall description of the U.S. depository sector, Treasury noted non-U.S. banks’ “meaningful role in the U.S. banking system, in part by helping connect consumers and businesses to global economic opportunities.”4 The report goes on to note that the U.S. operations of non-U.S. banking organizations, including direct offices, and bank and non-bank subsidiaries, represent approximately 20 percent of the U.S. banking system, and play a large role in business lending and infrastructure finance and as primary dealers.5

It should not be surprising that most of the recommendations revolve around the major changes to the U.S. financial system brought about by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).6

Specific Recommendations

Prudential Standards Threshold. Treasury recommends revising the $50 billion consolidated global assets threshold for the application of enhanced prudential standard to more appropriately reflect the risk profile of bank holding companies.

The rise in threshold also applies to non-U.S. banks treated as U.S. bank holding companies. Currently, the threshold for application of enhanced prudential standards to these non-U.S. banks is $50 billion in total global consolidated assets, the same as for U.S. domestic holding companies. Treasury recommends that the threshold be calculated on its U.S. risk profile and not global consolidated assets.

Living Will Process. Treasury recommends a two-year submission cycle (a one-year increase) for the resolution plans (popularly called “living wills”) that are required to be submitted by bank holding companies (and non-U.S. banks with U.S. banking operations) with total consolidated assets of $50 billion or more as well as a rise in that threshold to match the threshold to which the prudential standards are raised and, for non-U.S. banks, calculated on its U.S. risk profile.

Volcker Rule. Treasury also recommends several changes to the so-called Volcker Rule, which places prohibitions on banking entities being able to engage in proprietary trading or sponsor or invest in certain types of private equity funds (“covered funds”). “Banking entities” include non-U.S. banks with U.S. banking operations.

Treasury recommends that banking entities with $10 billion or less in assets should not be subject to the Volcker Rule. Banking entities with $10 billion or more in assets should be exempt from the proprietary trading restrictions if they have less than $1 billion in trading assets and liabilities and those trading assets and liabilities represent 10 percent or less of total assets. However, banking entities with $10 billion or more in assets would continue to be subject to the restrictions on sponsoring or investing in Volcker Rule-covered funds.

Treasury also recommends flexibility in several of the Volcker Rule requirements, including the following:

• Consider eliminating the “purpose test” part of the definition of “proprietary trading.”7

• Eliminate the rebuttable presumption that the purchase or sale of a covered financial instrument by a banking entity is presumed to be for the trading account of the banking entity if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk of the financial instrument within 60 days of the purchase or sale.

• Provide more flexibility to banking entities in conducting permissible risk-mitigating hedging and market making activities in meeting the requirement on assets being maintained for the purpose of meeting the reasonably expected near term needs of its clients, customers, and counterparties.

• Increase the permissible amount of time available to a banking entity for investing in a covered fund that it has organized and offered to three years (the “seeding period”) from one year.

• Allow the exemptions of Section 23A, which imposes qualitative and quantitative restrictions on a bank’s transactions with its affiliates, to apply in imposing the so-called “Super 23A” restrictions on a banking entity’s transactions with a covered fund

• Revise the Solely Outside the United States exemption for a banking entity’s sponsoring or investing in a covered fund to exempt non-U.S. funds owned or controlled by a non-U.S. bank or a non-U.S. bank with U.S. banking operations

International Standards. Treasury recommends increased transparency and accountability in international financial regulatory standard setting bodies such as the Bank for International Settlement’s Basel Committee, which promulgates international risk-based capital standards. As I have explained before, the Basel Committee develops the standards and then each jurisdiction must separately implement the standards. In the United States, in some instances, this has led to standards stricter than Basel being implemented, such as the capital surcharge on the most systemically important U.S. banks.

Treasury recommends generally recalibrating U.S. standards to the international standards, noting “U.S. regulatory requirements that exceed the applicable international standard can sometimes create an undue burden of higher costs to our economy, and risk making U.S. firms less competitive internationally.”8

Intermediate Holding Company. Treasury does not recommend eliminating the intermediate holding company requirement for non-U.S. banks with $50 billion or more in global consolidated assets and $50 billion or more in U.S. non-branch/agency assets. It instead recommends that the thresholds for various intermediate holding company prudential requirements be revised to match any changes made to the same requirements for a U.S. bank holding company. In addition, Treasury recommends that greater consideration be given to whether intermediate holding companies could be allowed to meet certain U.S. requirements by complying with its home country laws if they are found to be comparable to U.S. bank regulation.

Total Loss-Absorbing Capacity. Under current Federal Reserve Board regulations, certain bank holding companies and intermediate holding companies with total consolidated assets of $50 billion or more are subject to a “total loss-absorbing capacity,” or TLAC, requirement, which would provide needed capital during a resolution process. Treasury recommends that the Federal Reserve Board recalibrate one of the TLAC requirements for intermediate holding companies by taking into consideration the non-U.S. parent’s ability to provide the necessary capital and liquidity resources to the U.S. intermediate holding company, and enter into agreements with home country supervisors in order to allow those resources to be deployed when necessary.


The report’s recommendations cover a wide regulatory area. This column focuses on those that might be of more interest to non-U.S. banks operating in the United States. As noted above, this report requires further action and it will be interesting to see where such regulatory reform fits within the legislative and regulatory agenda of the Administration.


1. “Trump Deregulation: What’s in It for non-U.S. Banks?, New York Law Journal, March 13, 2017.

2. Core Principles for Regulating the United States Financial System, February 3, 2017, 82 Fed. Reg. 9965, February 8, 2017.

3. U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities” (the Report), June 2017.4. The Report, page 5.

5. The Report, page 5.

6. Pub. Law 111-203, July 21, 2010.

7. The “purpose test:” purchases or sales of financial instruments subject to the Volcker Rule (“covered financial instruments”) must principally be for the purpose of: (a) short-term resale; (b) benefitting from actual or expected short-term price movements; (c) realizing short-term arbitrage profits; or (d) hedging one or more positions resulting from one of the foregoing purchases or sales.

8. The Report, pages 54-56.