Holding companies are  legally separate entities from their subsidiary banks, are subject to  separate capital requirements, and are supervised and regulated by the  Federal Reserve. For example,  most foreign banks’ operations are conducted through branches, and they  generally can engage in the same activities as branches of U.S. banks. The Federal Reserve’s supervisory letter  stated that this action was consistent with its treatment of domestic banks  and financial holding companies. FDIC and  some market participants have noted that the elimination of the  exemption enhances the equal treatment of U.S. and foreign-owned  holding companies by requiring both types of companies to hold similar  capital levels in the United States. Stricter Capital Adequacy Standards Also Will Apply to Foreign and U.S. Holding Companies

In addition to eliminating the capital exemption for certain foreign-owned  intermediate holding companies, the Dodd-Frank Act requires that bank  and thrift holding companies—domestic or foreign—meet minimum risk- based capital and leverage requirements that are not less than those that  apply to insured depository institutions. Overall Effects of Capital Changes for Exempt Foreign- owned Intermediate Holding Companies Likely to Be Limited

The elimination of the Federal Reserve’s capital exemption for foreign- owned intermediate holding companies likely will result in exempt holding  companies restructuring or taking other actions, but the overall effects of  this change on competition among bank holding companies and cost and  availability of credit are likely to be small for various reasons. First, our  analysis of loan markets suggests that eliminating the exemption likely  would have a limited effect on the price and quantity of credit available  because the four banks most affected have relatively small shares of  relatively competitive U.S. loan markets. Second, our review of the  academic literature and our econometric analysis suggest that changes in  capital rules that could affect certain foreign-owned intermediate holding  companies would have a limited effect on loan volumes, and the increase  in the cost of credit likely will add minimally to the cumulative cost of new  financial regulations. These exempt holding companies accounted for about 3.1 percent of the  loans on the balance sheets of all bank holding companies in the United  States (see table 3). While the impact on the price and  quantity of credit available may vary across regions, modeling limitations  restrict our ability to estimate potential regional differences. Market Participants Concerned about Differing Capital Regimes and Competitive Effects Abroad

Market participants expressed uncertainty about how changes in capital  requirements might affect the competitiveness of U.S. banks operating  abroad, partly because the international regulatory landscape remains  unsettled. The largest internationally active U.S. banks derive a significant  portion of their revenues from their operations abroad and are subject to  multiple regulatory regimes. However, bank officials we  contacted were uncertain how changes in capital requirements might  affect their competitiveness abroad and were monitoring U.S. and  international reforms closely to assess any impact on their cost of capital,  lending ability, and business competitiveness. Internationally active U.S. banks have  varying lines of business. In addition to the specific concerns related to the implementation of Basel  III, both U.S. and foreign bank officials we interviewed told us that they  were concerned that fragmented or conflicting regulations in the United  States and other jurisdictions might restrict banks’ ability to use capital  efficiently. Many U.S. banks GAO interviewed expressed concerns  about the added costs of compliance with multiple regulatory regimes and  the impact of the Dodd-Frank Act on the global competitiveness of U.S.  banks, but these concerns would need to be considered against the  potential benefits of a safer and sounder financial system. Agency Comments

We provided a draft of this report to the FDIC, the Federal Reserve and  OCC for their review and comment. Each of the federal banking  regulators provided technical comments that were incorporated in the  report, as appropriate. Appendix I: Objectives, Scope, and Methodology

The objectives of the report were to examine (1) the regulation of foreign- owned intermediate holding companies in the United States, (2) the  potential effects of changes in U.S. capital requirements on foreign- owned intermediate holding companies, and (3) banks’ views on the  potential effects of changes in U.S. capital requirements on U.S.-owned  banks operating abroad. Appendix II: Impact of Reducing the Risk-Weighted Assets of Exempt Holding Companies to Comply with New Requirements

Bank holding companies can take different approaches to comply with the  new capital requirement in the Dodd-Frank Wall Street Reform and  Consumer Protection Act. As of the end of 2010, four foreign-owned  intermediate holding companies continued to rely on a capital exemption  from the Federal Reserve. The Dodd-Frank Act eliminated this  exemption, and these exempt holding companies must now meet new  capital requirements.
Why GAO Did This Study

During the 2007-2009 financial crisis, many U.S. and international financial institutions lacked capital of sufficient quality and quantity to absorb substantial losses. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) introduced new minimum capital requirements for bank and savings and loan (thrift) holding companiesincluding intermediate holding companies of foreign banks. Intermediate holding companies are the entities located between foreign parent banks and their U.S. subsidiary banks. These companies held about 9 percent of total U.S. bank holding companies assets as of September 2011. The Dodd-Frank Act also required GAO to examine (1) regulation of foreign-owned intermediate holding companies in the United States, (2) potential effects of changes in U.S. capital requirements on foreign-owned intermediate holding companies, and (3) banks views on the potential effects of changes in U.S. capital requirements on U.S. banks operating abroad. To conduct this work, GAO reviewed legal, regulatory, and academic documents; analyzed bank financial data; and interviewed regulatory and banking officials and market participants.
GAO makes no recommendations in this report. GAO provided a draft to the federal banking regulators (Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency) for their review and comment. They provided technical comments that were incorporated, as appropriate.

What GAO Found

Foreign-owned intermediate holding companies can engage in the same activities as and generally are regulated similarly to their U.S. counterparts. The Board of Governors of the Federal Reserve System (Federal Reserve) oversees the regulation, supervision, and examination of foreign and U.S. bank and thrift holding companies. As of the end of 2010, four qualifying foreign-owned intermediate holding companies (exempt holding companies) were relying on a capital exemption, which allowed them to operate with significantly lower capital than U.S. peers. Federal Reserve officials noted that allowing capital to be held at the foreign parent bank (consolidated) level was consistent with its supervision for U.S. bank holding companies and met international standards for home-host supervision. The Dodd-Frank Act eliminated the capital exemption in order to enhance equal treatment of U.S.- and foreign-owned holding companies by requiring both types of companies to hold similar capital levels in the United States. As a result, these exempt holding companies must meet minimum capital standards that are not less than those applicable to Federal Deposit Insurance Corporation-insured depository institutions by July 2015.
The four exempt holding companies have been considering various actions to comply with new capital requirements, and the effects of eliminating the capital exemption on competition and credit cost and availability likely would be small. Specifically, these companies are considering raising capital, decreasing their holdings of risky assets, restructuring, or adopting a combination of these actions. GAOs analysis of loan markets suggests that the elimination of the capital exemption likely would have a limited effect on the price and quantity of credit available because the affected banks have relatively small shares of U.S. loan markets, which are competitive. These four companies accounted for about 3.1 percent of the loans on the balance sheets of all bank holding companies in the United States as of year end 2010. In addition, GAOs review of the academic literature and econometric analysis both suggest that changes in capital rules that affect the exempt companies would have a limited effect on loan volumes and the cost of credit and add minimally to the cumulative cost of new financial regulations. Although the impact on the price and quantity of credit available may vary across regions, modeling limitations restricted GAOs ability to identify regional differences.
Market participants expressed uncertainty about how changes in capital requirements might affect the competitiveness of U.S. banks operating abroad, partly because international regulatory capital requirements have yet to be implemented. The largest internationally active U.S. banks derived about one-third of their 2010 revenues from operations abroad. They face a variety of domestic and foreign competitors and are subject to multiple regulatory regimes. Bank officials expressed uncertainty about how changes in capital requirements will affect their cost of capital, lending ability, and competitiveness. Furthermore, they were concerned that fragmented or conflicting regulations across national jurisdictions might restrict banks ability to use capital efficiently. Many U.S. banks GAO interviewed expressed concerns about the added costs of compliance with multiple regulatory regimes and the impact of the Act on the global competitiveness of U.S. banks, but these concerns would need to be considered against the potential benefits of a safer and sounder financial system.