Fed Approves a Foreign Affiliate Transaction Exemption
The Federal Reserve Board approved an exemption under the Federal Reserve Act to allow a U.S. bank to complete a one-time internal reorganization involving a foreign affiliate engaged in securities activities.
In a letter to the Office of the Comptroller of the Currency, the Fed said the exemption request was in the public interest and consistent with the purpose of Section 23A ("Reg. W: Transactions between Member Banks and Their Affiliates") to limit affiliate risk and prevent misuse of the federal safety net. The bank had argued that the reorganization would strengthen its operations by diversifying revenue streams, improving efficiency, and creating a more balanced risk profile, while also responding to changes in foreign regulatory requirements.
In approving the request, the Fed explained that the transaction involved the parent holding company transferring the foreign securities subsidiary to the bank for no consideration. Because the bank would acquire the subsidiary’s assets and assume its liabilities, the Fed found that the transfer (i) qualifies as a covered transaction under Federal Reserve Act section 23A and (ii) exceeds statutory limits on transactions with affiliates, thus requiring an exemption.
The Fed’s approval relied on a series of commitments designed to protect the bank from losses. The parent company committed to cover "the book value of any low-quality assets" transferred in the transaction and, for a two-year period, to either make periodic payments to the bank or repurchase assets that subsequently become low-quality. The bank is also required to hold sufficient risk-based capital against such assets and to remain well-capitalized. In addition, the transaction must be reviewed and approved by a majority of the bank’s board of directors prior to completion.
The exemption is also subject to non-objection by the Federal Deposit Insurance Corporation within the applicable review period.
Statements
FRB Vice Chair for Supervision Michelle W. Bowman supported the Board’s decision, framing it as consistent with longstanding legal frameworks and supervisory practice. She emphasized that the action aligns with existing options for organizing such activities under U.S. law and reflects choices already made by peer institutions. She noted that similar structures have operated without raising "safety and soundness" or financial stability concerns under existing supervision. She also highlighted that the transaction supports competitiveness and business diversification while incorporating safeguards and agency determinations that limit risk to the insured depository institution and the broader system.
FRB Vice Chair Philip N. Jefferson dissented from the Board’s decision, arguing that the action raises broader policy and systemic concerns. He emphasized that (i) the exemption should have been addressed through a rulemaking of general applicability to capture industry-wide implications and incorporate public input, (ii) the competitive considerations cited may extend to other firms and warrant a more comprehensive approach, and (iii) the decision could set a precedent enabling large banks to move foreign broker-dealer activities into insured depository institutions, thereby expanding the federal safety net to higher-risk activities without fully assessing the potential systemic impact.
FRB Governor Michael S. Barr dissented from the Board’s decision, characterizing it as a departure from core safeguards that protect bank safety and the deposit insurance fund. He argued that (i) the exemption was inconsistent with section 23A's requirements and would allow insured deposits to fund higher-risk foreign nonbank activities, (ii) the proposed reorganization would expand the federal safety net and expose the bank and deposit insurance fund to greater losses while increasing operational complexity, (iii) the decision could set a significant precedent encouraging other large banks to pursue similar structures, compounding systemic risk, and (iv) the matter raises significant policy concerns that should not be addressed through an ad hoc exemption for a single firm.
FRB Governor Lisa D. Cook dissented from the Board’s decision, arguing that it undermines section 23A's core purpose of limiting risk to insured banks and the Deposit Insurance Fund. She emphasized that the transaction would move foreign trading activities under a U.S. bank in a way that places them outside key safeguards and creates a more direct channel for stress to transmit to the insured institution. She further noted that the firm remains "competitive without [the] exemption" and that there is no clear public benefit to justify the increased risk. She also expressed concern that the decision could be viewed as precedent-setting, potentially encouraging similar requests in the future.