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"Clean" Holding Company Requirements Now Fully Effective

mark.chorazak@cwt.com's picture
Commentary by Mark Chorazak

The Federal Reserve Board's ("FRB") "clean holding company" requirements - which apply to the eight U.S. globally systemically important banks and the U.S. intermediate holding companies of the largest foreign banks operating in the United States - became effective on January 1, 2019. The requirements are applicable only to the legal entity that is the top-tier U.S. holding company and do not apply to its affiliates or subsidiaries.

According to the final rule adopted by the FRB, covered holding companies generally are barred from:

  • issuing guarantees of a subsidiary's liabilities with cross-default rights regarding the covered holding company's insolvency/resolution;

  • entering into qualified financial contracts with a third party;

  • providing short-term debt instruments to a third party; and

  • participating in upstream guarantees.

The prohibitions are applicable only to instruments or arrangements issued or entered into on or after January 1, 2019.

Commentary

The purpose of these "clean" holding company requirements is to facilitate the U.S. banking regulators' "single point of entry" strategy, which is designed to ensure the regulators' ability to resolve the top-tier U.S. entity of a complex banking organization, without adversely impacting the economic viability of the lower-tier insured depository institution. Even before full compliance with these requirements went into effect, regulators were emphasizing the need for covered institutions to cease various practices (upstream guarantees, entering into QFCs with third parties, etc.) that create obstacles to an orderly resolution.

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