Since 2014, foreign banks[1] with at least $50 billion in U.S. non-branch assets have been required to consolidate their U.S. subsidiaries under a single legal entity, called an intermediate holding company (IHC). The IHC construct allows the Federal Reserve to regulate and supervise the U.S. subsidiaries of foreign banks like a domestic bank holding company. However, applying rules designed for the top-tier parent level of a banking organization at the intermediate, subsidiary level, as is the case for IHCs, can result in unintended and suboptimal outcomes. Regulators should factor in these dynamics and calibrate a tailored regulatory framework.
What is an IHC?
The requirement for an IHC originates from Section 165 of the Dodd‑Frank Wall Street Reform and Consumer Protection Act, which authorizes the Federal Reserve to impose enhanced prudential standards on large bank holding companies and foreign banks[2] with significant U.S. operations. Although not mentioned in the Dodd-Frank Act, the Federal Reserve required an IHC structure in order to implement those standards across the U.S. subsidiaries controlled by foreign banks.[3]
Today, a foreign bank with at least $50 billion in U.S. non-branch assets must place virtually all its U.S. subsidiaries under the IHC, which then serves as the top-tier U.S. entity for application of U.S. bank regulation and supervision. Through the IHC, the Federal Reserve regulates and supervises IHCs in generally the same manner as bank holding companies, with the IHC having its own board of directors and often being subject to the same capital, liquidity, stress-testing, risk management and other requirements as a U.S. bank holding company.[4]
In addition, the Federal Reserve maintains supervisory authority over any other entity owned by the foreign bank that is operating in the U.S., including a branch.[5] Branches of a foreign bank are also subject to certain enhanced prudential standards including requirements on risk management, capital and liquidity.
Notably, oversight of the foreign bank on a consolidated global basis, including its entities operating in the U.S., remains the responsibility of the home‑country supervisory authority. In this way, foreign bank subsidiaries operating in the U.S. are subject to consolidated oversight under two regulatory regimes: one through their host-country regulators, such as the Federal Reserve, and one through their home-country regulator and supervisor.
The Role of FBOs in the U.S. Financial System
Foreign banks make substantial contributions to the U.S. economy by providing credit, investment and financial services to households, businesses and institutional clients. Through their U.S. branches and subsidiaries, they support corporate lending, trade finance, project finance, commercial real estate and a wide range of capital markets activity. They also help connect U.S. companies and investors to global pools of capital, facilitating cross-border commerce, foreign direct investment and the financing of large-scale business activity. In doing so, foreign banks support employment, business expansion and economic growth across the United States.
Foreign banks also help to strengthen the U.S. financial system by increasing market depth and competition. They are active participants in key markets including U.S. Treasuries, repo, foreign exchange, derivatives, securities financing and debt and equity underwriting, helping to improve liquidity, price discovery and risk intermediation. Their presence broadens the range of counterparties and funding channels available in the market, which can make the system more adaptable and less dependent on a narrower set of institutions. In normal times, this supports more efficient capital allocation; in periods of stress, it can help preserve market functioning and the continued flow of credit to the real economy. According to an IIB study, international banks underwrote more than $11 trillion of financing in U.S. markets between 2020 and 2024, representing over 40 percent of total financing raised during that period, illustrating the significant role foreign banks play in supporting U.S. capital formation.[6]
Modernizing the IHC Framework
While the IHC framework serves an important safety and soundness function, prudential rules designed for a BHC do not always translate effectively to an IHC. A BHC is the ultimate parent of a banking group and is supervised on a consolidated basis. By contrast, an IHC is a subsidiary of a global parent that is already subject to home country oversight. In some cases, rules that are appropriate for a BHC may produce unintended consequences when imposed on an IHC, increasing costs and reducing the efficiency of U.S. operations, without delivering commensurate benefits to safety and soundness.
The case studies below identify practical, targeted reforms that would preserve safety and soundness while better reflecting the structure and risk profile of IHCs.
TLAC and LTD
Total loss-absorbing capacity (TLAC) and long‑term debt (LTD) requirements are key components of the large bank resolution framework. For FBOs that are global GSIBs, these requirements are meant to ensure that U.S. operations can be resolved without taxpayer support and without disrupting U.S. financial markets. Internal TLAC requirements (that is, equity or debt owed to the home country parent by the IHC) are intended to transmit parent‑level loss‑absorbing capacity to the host country and, relatedly, give the host country a strong financial incentive to keep its U.S. operations open and operating as part of any resolution at the home country level.
Nonetheless, current calibration can result in duplicative requirements, and rigid pre-positioning of capital can make the global firm less rather than more resolvable. Indeed for this reason, the FSB’s TLAC Term Sheet (November 2015) and Guiding Principles on Internal TLAC (July 2017)[7] set a range for internal TLAC of 75 to 90 percent of the TLAC requirements that apply at the parent level and required the host country to consult the home country before imposing the requirement. The United States immediately imposed a 90 percent requirement on every FBO.[8]
The issue is magnified by the TLAC scalar, which increases the amount of internal loss‑absorbing capacity IHCs must hold relative to estimated resolution needs. The scalar can push required internal TLAC to levels that exceed what is necessary to support an orderly U.S. resolution. For example, if a firm’s U.S. operations would require only a defined amount of loss-absorbing resources to execute an orderly resolution strategy, application of the scalar can require materially more internal TLAC to be pre-positioned in the IHC even where the parent already holds substantial external TLAC to absorb losses at the group level. In those circumstances, additional resources are effectively trapped within the U.S. subsidiary structure without a corresponding improvement in resolvability.
Thus, TLAC requirements can make U.S. activities disproportionately balance‑sheet‑intensive, encouraging firms to scale back certain businesses, limit growth or relocate activity to branches or non‑U.S. entities. These responses reflect structural optimization rather than risk reduction and may weaken the depth of U.S. markets over time.
Regulators should reassess the calibration of internal TLAC, including the role of the TLAC scalar, and reduce internal LTD requirements consistent with well-developed global resolution frameworks, assuming a firm can demonstrate a credible global single-point-of entry resolution plan. The current requirement appears to presume conclusively that there is no such strategy, and that a U.S. IHC would be resolved using a multiple-point-of-entry strategy.
It is noteworthy that the FSB does not include any expectation or recommendation that any portion of internal TLAC consist of long-term debt instruments.
Treatment of Inter‑Affiliate Exposures
As with all banks, foreign banks often interact with their affiliates in various ways to support low-risk or regulatory-driven activities. These activities can range from intercompany receivables and cash deposits to managing inter-company liquidity flows. For U.S. domestic bank holding companies, these exposures are often eliminated in consolidation. However, for foreign banks, regulators currently treat those activities as activities between an IHC and an unaffiliated third party, which often results in regulatory treatments that are not commensurate with the risk of the activity. Below are some examples of this dynamic:
- Tailoring Framework – Not drawing a distinction between intragroup and third-party activities in the tailoring framework can artificially inflate the risk-based indicators (RBI), which determine the stringency of certain enhanced prudential standards on IHCs. For instance, the weighted short-term wholesale funding RBI does not differentiate by funding source, which can affect foreign banks’ ability to intermediate in the U.S. Treasury market and provide other market making activities.
- Credit Risk – The banking agencies’ proposed Basel-based “expanded risk-based approach” (ERBA) also fails to appropriately account for the unique structural aspects of an IHC by treating transactions between an IHC and its foreign parent in the same manner as transactions with unaffiliated third-party banks. This can result in a more punitive risk weight for intercompany receivables and cash deposits or for when an IHC clears trades in the US on behalf of its foreign affiliate.
- Recharge Income in the Operational Risk Framework – The ERBA proposal also would penalize income received by an IHC related to non-financial activities provided by a foreign affiliate (recharge income). Foreign banks often receive recharge income in connection with corporate or shared services, such as those relating to information technology or human resources. However, the recently proposed operational risk requirement would require firms to account for recharge income,[9] which creates a disincentive to locate service company operations in the U.S, even while the proposal excludes expenses for the same non-financial activities.
- Transfer Pricing in the Stress Test Framework – The recent proposal to revise the stress test framework would be overly punitive to IHCs because it does not adequately account for standard transfer pricing practices.[10] The proposal would consolidate transfer pricing revenue under the larger net interest revenue (NIR) component, which includes other activities including trading and market making, and then uses a single discount factor to determine how the NIR would fare under stress. That discount factor, however, is based on consolidated industry data dominated by U.S. GSIBs, which distorts calibration and understates the stability of transfer pricing, which has proven to be historically resilient.
Global Market Shock
The Federal Reserve applies the Global Market Shock (GMS) to firms with “significant trading activity” in the supervisory stress test. GMS imposes substantial fixed costs for calculations, reporting, systems and governance, diverting resources from more productive risk management and lending activity, and for Category III IHCs, the current scope may be overly broad given their size and risk profile. The Federal Reserve should revisit whether the GMS should apply to Category III firms in the same way as larger firms. Notably the two Category III firms, as of June 30, 2026, together represented less than 2 percent of total U.S. BHC trading assets and trading liabilities, despite being subject to the same GMS framework. By contrast, as of the same date, the other six firms subject to the GMS – all U.S. GSIBs – represented more than 93 percent of total U.S. BHC trading assets and trading liabilities.
Dividend Add-On
The dividend add-on, which requires firms to hold capital for four quarters of planned dividends, is especially ill-suited for IHCs. Because IHCs are wholly owned by their FBO parent, they generally cannot distribute capital through share repurchases. Dividends instead serve as the primary mechanism for upstreaming surplus capital within the group. As a result, the SCB framework’s distinction between dividends and share repurchases – which was designed to address potential capital actions at top-tier domestic bank holding companies – does not reflect the practical realities of IHC capital management, where shares are not issued publicly, and thus does not support the principal rationale for the dividend add-on as a market-signaling mechanism associated with reducing public dividends. The Federal Reserve should exempt IHCs from the dividend add-on or modify the framework so that routine upstream dividends to a foreign parent are treated more consistently with share repurchases for domestic firms. Such a change would maintain capital adequacy while eliminating an unnecessary constraint on routine internal capital management.
Conclusion
The IHC framework remains an important part of the post-crisis supervisory architecture and supports the Federal Reserve’s ability to oversee the U.S. operations of foreign banks. But after more than a decade of experience, certain rules designed for top-tier public bank holding companies can produce unintended consequences when applied to subsidiaries of parent affiliates, and these requirements should be recalibrated to better reflect the current structure, risk profile and business model of IHCs.
A more tailored framework would strengthen – not compromise – the U.S. regulatory regime. By better reflecting the distinct role of FBOs and IHCs, the Federal Reserve can maintain robust oversight while supporting market depth, liquidity, competition and the continued flow of credit to U.S. businesses and households. The objective should be a framework that is strong, proportionate and durable: one that safeguards financial stability while preserving the benefits that globally active banks bring to the U.S. financial system.
[1] The terms “foreign banks” and “foreign banking organizations” (FBOs) are often used interchangeably, with the latter technically meaning a foreign bank that operates a branch, agency or commercial lending company subsidiary in the U.S., controls a bank in the U.S. or controls an Edge corporation.
[2] Under Regulation YY, an FBO with average U.S. non‑branch assets of at least $50 billion is required to establish a U.S. IHC or designate an existing qualifying subsidiary as its IHC. U.S. non‑branch assets are measured as the consolidated assets of each top‑tier U.S. subsidiary of the FBO, excluding branches and agencies, which continue to operate as parts of the foreign bank rather than under the IHC. 12 C.F.R. 252.147 and 153.
[3] The Federal Reserve implemented the IHC requirement in its enhanced prudential standards rule, codified in 12 CFR part 252 (Regulation YY), through provisions such as § 252.153 and related sections.
[4] The Fed’s SR 15‑18 and 15‑19 guidance on capital planning (governance, risk identification, scenario design, methodologies and internal controls) applies to IHCs in the same way it applies to similarly situated U.S. BHCs.
[5] The combined U.S. operations (or CUSO) of a foreign bank includes the IHC and branches of a foreign bank. Within this framework, the Federal Reserve ultimately supervises and regulates any entity of a foreign bank operating in the U.S.
[6] https://cdn.ymaws.com/www.iib.org/resource/resmgr/2024_comms/IIB_Importance_of_FBOs_Final.pdf?bcs-agent-scanner=9c273925-e86a-684c-96e3-11552c4ede0a
[7] fsb.org/wp-content/uploads/P060717-1.pdf
[8] The Federal Reserve calibrated the leverage-based component of internal TLAC for covered IHCs at exactly 90% of the external requirement (the top of the FSB’s 75–90% range) while leaving the RWA-based component undiscounted (100%) relative to the external standard.
[9] The agencies’ 2026 ERBA proposal would not exclude income relating to non-financial activities provided by a firm to foreign affiliates or parents (recharge income) from the business indicator. Inclusion of recharge income results in excessive operational risk capital requirements for the IHCs of foreign banks, which would have to include income received from affiliates in connection with corporate or shared services, such as those relating to information technology or human resources (non-financial activity). Further, inclusion of recharge income materially overstates operational risk for firms—particularly foreign banking organizations—without reflecting genuine risk. Including such intra-group cost allocations inflates the business indicator and operational risk RWAs despite the fact that the underlying operational risks are already managed, controlled, and often capitalized at the group level.
[10] Transfer pricing arrangements are a commercial necessity to ensure that revenues, costs, and taxes are accounted for in the appropriate jurisdiction when work is performed jointly by cross-jurisdictional affiliates within a firm.
