Navigating “Year Two”: Regulatory landscape and challenges for foreign banks and their IHCs

After the July 1, 2016 compliance deadline for foreign banking organizations (FBOs) to establish US intermediate holding companies (IHCs) and implement the enhanced prudential standards,1 we noted that, although the effective date marked a key milestone on the journey toward effective compliance, the “long road to operationalizing run-the-bank (RtB) functions has just begun.”2 Heading into Year Two, FBOs with their US IHCs and broader combined US operations (CUSO) contend with the reality that there is a significant road yet to be traveled in a regulatory environment focused on local/jurisdictional implementation that challenges the global model.

Four key focus areas underpinning the supervisory strategy

Although FBOs have made notable progress leading up to and after last year’s “go-live” date under Regulation YY, they continue to face substantial challenges across aspects of the Federal Reserve Board’s (FRB) four key supervisory focus areas:

  1. Capital adequacy under normal and stressed conditions,
  2. Liquidity positions and risk management practices,
  3. Recovery and resolution preparedness, and
  4. Governance and controls (including risk management).

The imperative to address these challenges has only intensified in light of a recent FRB proposal to establish a new rating system for large financial institutions, including IHCs, based on three of these four criteria (resolution would not be included.)3

  • Capital planning/stress testing – For the first time in the seven-year history of the Comprehensive Capital Analysis and Review (CCAR) program, the FRB did not object to any of the capital plans or capital distributions of participating firms. However, recently formed IHCs did not participate in the full CCAR process in 2017, but each submitted a capital plan that was subject to a confidential review process.  As they prepare for their first public CCAR filings in 2018, the firms should carefully consider the feedback they received during their nonpublic CCAR and construct remediation plans geared toward material and substantive improvements for 2018 and beyond.  As longer-term CCAR filers have learned over time, remediation efforts generally take more than one planning cycle to fully complete.  Consequently, providing the Board a fair accounting of the strengths, weaknesses, and limitations of the current state of remediation efforts and results is a critical component to be considered in capital plan recommendations and decision making.
  • Liquidity – As the FRB continues to emphasize issues related to the FR 2052a (Complex Institution Liquidity Monitoring Report), FBOs should address data quality concerns and data infrastructure issues related to these submissions. In addition, they should continue to integrate liquidity risk management into business-as-usual capabilities as well as stress testing.  Addressing these issues is particularly important for the four FBOs in the FRB’s Large Institution Supervision Coordinating Committee (LISCC) portfolio, which are subject to generally heightened expectations as well as the Comprehensive Liquidity Analysis and Review (CLAR), an annual horizontal program evaluating liquidity positions and liquidity risk management.
  • Recovery and resolution planning – Although resolution planning is not a component of the new rating system, the issue remains critically important for FBOs.  As the FRB and Federal Deposit Insurance Corporation (FDIC) move in practice to a two-year resolution planning submission cycle,4 FBOs must not interpret this flexibility as a sign that regulatory expectations have diminished; conversely, the extra time given to firms—as well as the detailed guidance for their next submissions—suggests that the FRB and FDIC will expect thorough plans supported by credible assumptions.  The four LISCC FBOs must submit their next resolution plans by July 1, 2018 and adhere to the targeted guidance provided to them in March 2017.5 Large FBOs that are not part of the LISCC portfolio (i.e., those in the Large Financial Institution (LFI) portfolio) must submit their next resolution plans by December 31, 2018.6
  • Governance and controls –  With respect to governance, FBOs must demonstrate the ability to operate with sufficient decision-making and accountability across CUSO, with clear delegation of authority from their parent companies.  As FBOs fine tune their operating models for their Boards, senior management, and three lines of defense, they must continue to monitor and analyze forthcoming FRB guidance on expectations for Boards, senior management, management of core business lines, and independent risk management and controls, including internal audit.  These refined expectations will comprise a component of the governance and controls rating under the new rating system, underscoring the importance of addressing these issues. Demonstrating legal entity decision making, challenge and cross-functional execution against strategy, risk appetite and day-to-day operations will be critical.  Can CUSO show that, within appropriate limitations of its delegated authority, it has the ability to govern independently from its parent? Regulators will continue to look at evidence and output that can demonstrate and support these assertions (e.g., key Board decisions, what role the Board had in reviewing overall Group strategy, and the Board’s level of engagement, among other things).

One additional theme serves as a foundational element for the IHCs and CUSO going forward:

  • Booking model and overall business strategy – As the financials and performance of the US IHCs begin to normalize—and additional trend/performance data is available via the FR Y-9C (Consolidated Financial Statements for Holding Companies) and FR Y-15 (Banking Organization Systemic Risk Report)shareholders, analysts, and parent banks will further challenge the profitability and business model of large FBOs operating in the US, especially those that are subject to the IHC requirements.  A closer look at cost/income ratios, staffing expenses, and revenue sharing between the IHC and other legal entities within the organization will come into focus.

FBOs should reassess the sustainability of their US business strategy and booking models across IHC/branches, as well as the global impact.  FBOs should then identify the markets and business lines across CUSO that will continue to be profitable to support the IHC.  Further, FBOs should look to improve the rationale and documentation of what is originated, booked, and managed from CUSO and understand the inbound and outbound business flows (beyond simple intercompany processes that cross balance sheet and revenue/expense).

Year Two focus

It is critical to stress that the Year Two focus must go beyond simply remediating regulatory feedback not fully addressed during Year One.  IHCs should strive to go much further and more fully operate as an integrated IHC structure with a more proactive and forward-looking approach.  In particular, they should (1) reassess the effectiveness of newly designed processes and compliance with these new requirements, (2) refine and optimize their US business strategies and booking models across the IHC and branches, and (3) operate with a sustainable model that helps achieve ongoing balanced risk taking and compliance.  Overall, we view these areas as near-term focus areas for management of CUSO, the IHC Board, and parent governance processes:

  • Push forward on addressing first year examiner findings, especially feedback relating to CCAR and liquidity, with specific milestones and plans,
  • Calibrate and prioritize outstanding remediation efforts and demonstrate appropriate Board governance and oversight,
  • Continue to build regional management capabilities for self-identifying, remediating, and monitoring risk and compliance issues,
  • Analyze the FRB’s August 2017 proposal to establish a new rating system for large financial institutions and consider adjustments if appropriate,
  • Analyze impact of a three lines of defense model to support CUSO within the parent bank structure,
  • Evaluate related proposal regarding Board effectiveness for large US banks in preparation for the expected parallel proposal for IHCs and CUSO,
  • Prepare for a regulatory reporting examination that holistically reviews reporting capabilities as a follow-up to the MIS/reporting reviews,
  • Enhance regulatory reporting infrastructure—linking data architectures to deliver on-demand, streamlined, and granular reporting—addressing outstanding remediation issues, and ensuring appropriate governance and oversight is provided by the Board, particularly for those reports that are publicly available, and
  • Maintain momentum on resolution plans and be prepared to digest and learn from regulatory feedback on July 2017 plans submitted by the eight US global systemically important banks.


Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

David Wright
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Michele Crish
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Aaron Bhardwaj
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Richard Rosenthal
Senior Manager| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1Board of Governors of the Federal Reserve System, “Federal Reserve Board approves final rule strengthening supervision and regulation of large US bank holding companies and foreign banking organizations,” (February 18, 2014), available at
2Deloitte, “Enhanced Prudential Standards for Foreign Banks: What’s after the compliance deadline?”, (July 13, 2016), available at
3Board of Governors of the Federal Reserve System, “Federal Reserve Board invites public comment on two proposals; corporate governance and rating system for large financial institutions,” (August 3, 2017), available at Deloitte’s initial reaction to the proposal is available at
4See Board of Governors of the Federal Reserve System, “Agencies extend next resolution plan filing deadline for certain domestic and foreign banks,” (September 28, 2017), available at “The agencies continue to explore ways to improve the resolution planning process and believe it is worthwhile to consider extending the cycle for living will submissions from annual to once every two years.”
5Board of Governors of the Federal Reserve System, “Agencies complete resolution plan evaluation of 16 domestic firms; provide resolution plan guidance to four foreign banking organizations, (March 24, 2017), available at
6Board of Governors of the Federal Reserve System,” Agencies extend resolution plan filing deadline for certain foreign and domestic banks,” (August 8, 2017), available at

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP.  Please see for a detailed description of our legal structure.  Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2017 Deloitte Development LLC. All rights reserved.

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